Gazelles Break the Sales Speed Limit--for Now

An audio chip that creates 3-D surround sound in TVs. A new drug that could prevent blindness, activated by a red light. Switches that can handle 10,000 phone calls at a time.

Adapting quickly to change or reinventing themselves, small California companies are behind these and other promising products that have burst onto the marketplace in the last year. Many of these companies are trying to position themselves as leaders of the next great niche industries--though the odds of long-term success are difficult.

The Times’ annual Gazelle 100 list of publicly traded smaller companies identifies those California firms with the fastest sales growth over the last year. The list is limited to companies with annual sales of between $10 million and $50 million--so-called gazelles.

Some of these companies produce the cutting-edge technology the world has come to expect from California. Many, whether in technology or other fields, have bet the business on a new idea. Some will succeed, but as previous years’ gazelle lists have shown, many others will ultimately stumble.

That inevitably means the stocks of these firms are very high-risk. Still, their fast growth naturally attracts investors.

Whereas the U.S. gross domestic product has been growing at 4.1% annually and major manufacturers hope their sales will nudge up, on average, 4.3% this year, every company on the Gazelle 100 list has seen sales jump at least 20% in the last year--and almost one-third saw sales double.

Most companies on the gazelle list have either swiftly adapted to changes in their industries or have taken a sharp detour and jumped into another field that offers more promise.

Indeed, most of the ’99 gazelles are new to the list: Only 14 companies are repeats from last year’s Gazelle 100 list. (The 1999 and ’98 lists, with additional information on the companies, can be found on The Times’ Web site: https://www.latimes.com/times100.)

The 1999 gazelles are a mosaic of California’s varied economic landscape. Industries represented range from computers and telecommunications to apparel, biotechnology, restaurants, publishing, medicine and, predictably, the Internet.

Heady sales growth doesn’t ensure booming stock prices or even profits. Many of these companies are stuck in the profitless prosperity stage: Fifty-eight of the 100 failed to turn a profit for all of last year, and some haven’t made it through a full year since going public.

Beneath the numbers are many different stories. One company on the list was in bankruptcy only five years ago; another has been in business since Woodrow Wilson was president.

“What you sense in business is a period of rapid change. Nobody likes it. It’s very unsettling,” said economist Jack Kyser of the Los Angeles County Economic Development Corp. “A small technology firm may have a hot product or service, and three months down the road it may be obsolete.”

Some yearn for a past when companies remained dominant in their fields for long periods, Kyser said. “But we’re not going back to the ‘Leave It to Beaver’ era.”

For management, it’s a constant challenge to cope with change and sustain growth. Adaptability and flexibility remain keys to business success, said William B. Gartner, professor at USC’s Marshall School of Business. “And let’s not discount luck,” he added.

Sitting atop the 1999 Gazelle 100 list is Covad Communications Group Inc., a Santa Clara company that sells high-speed digital communications devices used by corporate clients and Internet firms. Covad opened its doors in October 1996, and it raised $154 million with an initial public offering in January. Sales spurted nearly 5,000% to $10.7 million in the last 12 months.

Covad has 230 Internet service clients who use its technology so their customers can quickly access the Net. Covad also has 60 corporate clients, such as Oracle Corp., Cisco Systems Inc. and Intel Corp., which use Covad’s digital communications devices to give telecommuters and other staff members remote access to corporate networks. Covad also is the primary broadband access to Healtheon/WebMD, an Internet medical information service with physicians as subscribers.

Covad stock, at $49.50 currently, is up from $18 at its IPO price. But the stock had been as high as $81.

Many other gazelles climbed onto the list because of new technology products.

No. 2 is Coyote Network Systems Inc., a seller of switching devices to small phone companies that want to handle larger volumes of calls. Westlake Village-based Coyote has a couple of dozen clients that previously bought time on larger phone networks but now want to boost profit margins by taking care of the calls themselves. Coyote’s line of switches can handle from 100 to 10,000 calls at a time and cost a couple of hundred thousand dollars to several million dollars each. Coyote also sells gateway switches to transmit voice and fax data sent from a phone line to the Internet.

Coyote’s stock, at $7.06 now, is less than half its 52-week high. The company was attacked late last year by online news service The street.com, which questioned the company’s sales claims.

SRS Labs Inc. in Santa Ana (No. 12) is another dandelion-stage tech company. It sells audio and voice technologies to consumer electronics and telecommunications companies such as Sony Corp., Pioneer, Lucent Technologies Inc. and General Instrument Corp. SRS’ products are in everything from cable converter boxes to TVs. Sony has licensed SRS’ 3-D sound technology for surround sound in its TVs, and Lucent’s cellular phones use SRS to help improve call clarity in noisy environments.

Miravant Medical Technologies (No. 11) in Santa Barbara is another tech company in a completely different field. Its revenue spurt is misleading because none of its developmental drugs are approved for sale. Miravant’s revenue is largely research and development payments from its partner, Pharmacia & Upjohn.

Pharmacia & Upjohn, a $7-billion pharmaceutical behemoth, has an 11% stake in Miravant because of the start-up’s promising photoselective medicines, or drugs activated by exposure to light.

Miravant is in the third stage of human clinical trials with a drug designed to halt a leading cause of blindness called age-related wet macular degeneration, which annually strikes 400,000 people over the age of 50 in the U.S. and Europe. Abnormal blood vessels form beneath the retina and hemorrhage wildly, and the scarring can cause blindness within a few months.

Miravant’s new drug is given by injection in a doctor’s office, and 15 minutes later the patient sits before a low-power red light that is shone into the diseased eye to activate the drug, which selectively destroys diseased cells while sparing healthy ones. The partners hope to submit the drug next year for fast-track FDA approval. Pharmacia & Upjohn would market it and pay Miravant royalties.

But investors have turned cautious: Miravant stock, as high as $28.75 last year, now is at $7.19.

One company that fits the model of buying its way into growth is Easyriders Inc. in Agoura Hills. In September the restaurant operator, then known as Newriders, bought two companies: a veteran publisher of motorcycle and lifestyle magazines and a small restaurant chain called El Paso Bar-B-Que.

The reorganized company gets much of its sales kick from its magazines, which include Easyriders, a monthly with motorcycle stories and nude photos; Tattoo magazine; and Metal Hammer, which covers heavy-metal music.

Easyriders (No. 9) posted a $12.1-million loss after its acquisitions, but it hopes to improve its performance significantly by the third quarter.

Probably the oldest company on the gazelle list is Los Angeles’ Giant Group Ltd., founded in 1913. Once a major player in the cement business, it spun off those operations in 1994 and later jumped into luxury yachts and fast foods by buying about 50% of Rally’s Hamburgers, a Kentucky-based chain. Yacht leasing didn’t catch on though, so last year Giant (No. 5) left that field. Because of tough competition in fast food, it also thinned its Rally’s stake to about 10%.

What to do next? Make another U-turn, Giant decided.

In December, the company paid $6.5 million for a private-label apparel company that designs and markets ladies sportswear and children’s clothing to Kmart Corp., Sears, Roebuck & Co. and Costco.

“It’s a new direction,” Chief Financial Officer William Pennington says with a laugh. And so far, it’s a profitable one. Giant earned $704,000 on $19.4 million in sales in its first quarter.

Of all the companies on the gazelle list, none has gone through as many roller-coaster cycles of growth, decline and newfound success as Cherokee Inc., a Van Nuys clothing company (No. 49).

Cherokee got its start in the 1960s when a Greek immigrant opened a shoe shop in Venice. A few years later, he entered shoemaking full time, then branched into casual clothing. At its peak in the 1980s, Cherokee had 700 employees, a factory in Gardena, a dozen retail stores and was selling its clothing and shoes in major department stores.

During the leveraged-buyout wave of the late ‘80s, Cherokee was snapped up. By 1994 it had sunk into Chapter 11 bankruptcy. A year later Robert Margolis, who helped build Cherokee’s clothing business, bought his way back in and made a big strategy change.

Today Cherokee doesn’t sell clothes or shoes, it merely sells its name. It licenses the brand to the Target discount chain, to catalogs and to a department store chain in Canada that slaps the Cherokee name on T-shirts, jeans, slacks, jewelry, socks, hats and belts.

Cherokee anticipated a shift by retailers to cut out the middleman and sell their own private-label brands. Target signed a licensing deal with the company until 2004. Cherokee also bought the Sideout brand, once a big name in volleyball, and is working the same licensing magic with Mervyn’s and Sportmart stores. And it has followed the trend of exporting American brands by licensing its name in Japan, Mexico and China.

Cherokee has a grand total of 14 employees, but it turned a profit of $6.1 million on $19.3 million in sales in its latest fiscal year. Chief Financial Officer Carol Gratzke, a 13-year company veteran, said, “When you don’t have to worry about having obsolete inventory at the end of every year, it’s really a comfortable feeling.”

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Top of the 1999 Times 100

California’s Leading Companies. Here’s a look at the top 10 California-based companies on each of three key Times 100 lists. The full lists, explanations, links to financial snapshots of eachcompany and additional tables and other data onCalifornia companies are available athttps://www.latimes.com/times100. More tables will be added to the Web site periodically.

Market Capitalization

The 10 largest California-based companies, in terms ofstock market value as of May 7: *--*

Market value, Company (ticker symbol) in billions 1. Intel (INTC) $203 2. Cisco Systems (CSCO) 173 3. Hewlett-Packard (HWP) 81 4. Wells Fargo (WFC) 71 5. Chevron (CHV) 62 6. Walt Disney (DIS) $62 7. AirTouch Comm. (ATI) 54 8. Sun Micro. (SUNW) 45 9. Charles Schwab (SCH) 42 10. Gap (GPS) 36

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Sales

The 10 California companies with the largest totalrevenue over the four quarters most closely resemblingcalendar year 1998.

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1-yr. sales Company (ticker symbol) in billions 1. Hewlett-Pack. (HWP) $47.2 2. Chevron (CHV) 29.6 3. McKesson HBOC (MCK) 29.0 4. Intel (INTC) 27.4 5. Safeway (SWY) 25.2 6. Ingram Micro (IM) $23.6 7. Walt Disney (DIS) 23.5 8. PG&E; (PCG) 19.9 9. Berg. Brunswig (BBC) 19.9 10. Wells Fargo (WFC) 15.8

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Profit

The 10 California companies with the largest after-taxincome over the four quarters most closely resemblingcalendar year 1998.

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Net income, Company (ticker symbol) in billions 1. Intel (INTC) $6.79 2. Hewlett-Packard (HWP) 2.98 3. Wells Fargo (WFC) 2.47 4. Walt Disney (DIS) 1.56 5. Cisco Systems (CSCO) 1.36 6. Chevron (CHV) $1.17 7. Oracle (ORCL) 1.17 8. Amgen (AMGN) 0.92 9. Sun Micro (SUNW) 0.91 10. AirTouch (ATI) 0.85

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Source: Market Guide

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Leading California Gazelles

Here are the 20 fastest-growing publicly traded California companies with sales between $10 million and $50 million in 1998 - so-called gazelles. The complete Gazelles 100 list, with more information on the companies, can be found on The Times’ Web site: https://www.latimes.com/times100.

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Ticker % chg. Name symbol in sales 1. Covad Comm. COVD +4,964% 2. Coyote Netwk. CYOE 1,254 3. Aviron AVIR 1,024 4. Terayon Comm. TERN 889 5. Giant Group GPO 882 6. Immune Resp. IMNR 784 7. Xoom.com XMCM 616 8. St. Barbara Rest. SBRG 559 9. Easyriders EZR 369 10. Molecular Bio. MB 351 11. Miravant Med. MRVT +347% 12. SRS Labs SRSL 344 13. Sangstat Med. SANG 335 14. Inktomi INKT 325 15. Perclose PERC 308 16. SeraCare SRK 304 17. NAB Asset NABC 293 18. Aradigm ARDM 213 19. Sugen SUGN 183 20. Life Financial LFCO 183

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Source: Market Guide

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Times staff writer Barry Stavro covers gazelles and entrepreneurs. He can be reached at barry.stavro@latimes.com.

* TIMES 100 ON THE WEB: The complete Times’ annual review of leading California companies can be found at https://www.latimes.com/ times100. Highlights are on C4.