Who Makes Us Tick

To the rest of the world, California still is as much conceptual as real, still largely viewed as a “Baywatch”-like land of perpetual sun and fun, glorious natural beauty and occasional violent shaking.

It must seem implausible to many outsiders that anybody actually works here.

Ha.

We all know better, of course, and the section you are holding--The Times’ 10th annual listing of the most prominent, and promising, businesses that call the Golden State home--is designed to tell that story, to chronicle some of the fascinating ways that California works.

If the rest of the world knows us as inherently creative and resourceful--but perhaps only insofar as those qualities are channeled into movies, theme parks and computers--this special section should open a few minds.

As a state, we’re all that--and a lot more, as the lists and company profiles in this section show:

* Up in Redwood City, far from the major East Coast medical centers, Heartport Inc. is developing its Port-Access system, a very un-Hollywood-like way to perform major heart surgery.

Instead of splitting open a patient’s chest cavity--the preferred method for medical TV dramas--Port-Access allows surgeons to operate through relatively small incisions in the chest, saving patients terrible trauma and potentially saving the health-care system vast sums of money.

* While mutual fund kingpin Fidelity Investments struggles in Boston with management problems, San Mateo-based Franklin Resources Inc. has rapidly built itself into one of the premier names in the booming fund business and now manages $135 billion in customer assets, making it the fifth-largest U.S. fund company overall.

Franklin’s most recent big move: acquiring the New Jersey-based Mutual Series funds last year, which brought star stock picker Michael Price under the Franklin roof.

* In Pasadena, Avery Dennison Corp. racked up $3.2 billion in revenue last year by continuing to expand its sales of self-adhesive labels and postage stamps, office products and specialty chemicals to the global market.

Mundane businesses? Maybe. But they’ve been terrifically profitable for Avery, which earned $176 million last year, double its 1993 profit.

* In San Diego, Remec Inc.’s modules used in microwave transmission systems are finding a new market in commercial wireless telecommunications applications, where once the defense establishment had been the only buyer. The company’s total sales last year were $86 million, up from $46 million two years earlier.

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Oh yes--Californians make a few computers and related parts too.

Silicon Valley companies continue to dominate many of the lists in this section, as they have for 10 years, because California continues to define and power the global technology juggernaut.

Of the 100 publicly held California companies with the highest total sales in 1996, 40% were directly involved in the technology field.

And the grand total of sales for that top 100 list was $507 billion in 1996, up 10% from 1995--a growth rate that, adjusted for inflation, was more than twice as fast as that of the U.S. economy as a whole.

Within California’s technology fraternity, there is no better-known name than Intel Corp. The company whose microprocessors are the brains of more than 80% of the world’s personal computers saw its sales surge 31% to $22.7 billion over the most recent four quarters, and its market capitalization reach $112 billion--making it by far the state’s most valuable enterprise in Wall Street’s eyes.

Yet Intel is but one manifestation of California’s technological prowess.

In Irvine, Western Digital Corp. is thriving in the extraordinarily competitive business of hard disk drives, the storage device in a computer. The company’s shares have more than tripled from their 1996 low as sales have boomed.

Pleasanton-based PeopleSoft Inc. has boosted sales sevenfold since 1993, to $450 million last year, thanks to its innovative software used to manage corporate data networks.

And across the state, an army of companies have rocketed to prominence in recent years by solving the problem of getting different computers to talk to one another. Networking firms such as 3Com Corp., Cisco Systems Inc., Xylan Corp. and Ascend Communications Inc. form a huge industry that barely existed 10 years ago.

Even more fascinating are the California companies at the forefront of what may be the next century’s major technology-based industries.

In Santa Clara, for example, Affymetrix Inc. is developing the “GeneChip” system, by which doctors can tailor therapy to the specific genetic makeup of a patient and the disease afflicting the person.

In Thousand Oaks, Amgen Inc. remains by far the most successful U.S. biotechnology company, with $2.2 billion in sales last year. It now has plans to add 1,000 employees, the vast majority of whom will work in research and development, seeking tomorrow’s wonder drugs.

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So many interesting businesses. But as readers will notice in perusing our lists and the individual company profiles, there are the businesses--and then there are the businesses’ stocks. The two don’t always track.

As judged by the market, many California companies are valued substantially higher than they were a year ago--but well below their 1996 or early-1997 peaks.

In fact, shares of more than a few smaller technology companies have lost more than half their value in recent months, victims of Wall Street’s sudden general aversion to smaller, higher-risk issues.

Mountain View-based Netscape Communications Corp., for now the king of Internet browser technology, continues to score dramatic sales gains. But investors are far more conservative in the price they’re willing to pay for those gains. Netscape shares have plummeted 67% from their 1996 peak, to $28 recently.

Even some of the state’s tech giants, such as Cisco Systems and Sun Microsystems Inc., have seen their stocks pummeled in recent months, despite generally robust first-quarter earnings.

On a fundamental level, what troubles many investors is the possibility that the spectacular growth of technology equipment sales worldwide over the last six years might be ebbing. There have been signs of that in certain segments of the computer-networking business, for example.

Have investors overreacted? There is a saying on Wall Street that the market is never wrong--the market just “is.” In other words, at any given moment the price of a stock is exactly what it should be for the amount of risk investors at that moment perceive they’re taking, versus the expected return.

If perceptions change tomorrow, the stocks will change with them--for better or for worse.

Volatile stocks just go with the territory in California. This is, after all, a state where people are used to living on the edge and taking outsize risks for what they hope will be outsize returns.

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In part because of the vagaries of the marketplace, The Times sought a year ago to devise a proprietary rating system that would produce a snapshot of the “most successful” California companies at any given point, with stock price performance just one of the gauges of success.

That rating system is the basis for the official Times 100 list that accompanies this story.

Five variables were used to determine the Times 100 ranking:

* Market capitalization as of April 18. This is the total value of a company’s stock (share price times number of shares outstanding). The capitalization figure tells what investors collectively think a company is worth at a given moment, however inflated or deflated that judgment might appear.

* Total sales in 1996 or the most recent four quarters available, which may include first-quarter 1997. We included sales because that figure provides the most basic indication of a company’s success.

* Percentage change in sales over the past year. The fastest-growing companies rank highest in our rating system, regardless of whether that growth was internal or by acquisition.

* Stock price change over the previous 52 weeks, to April 18. From investors’ point of view, how the stock has performed obviously speaks volumes about a company’s success.

* Two-year average percentage return on equity. Return on equity is a key measure of a company’s profitability. It tells how well shareholders’ invested capital is being put to work by a company’s management. We use a two-year average figure (1995 and 1996) to avoid giving too much weight to a single year’s return, which can be skewed by write-offs or one-time earnings gains.

Using data on 1,117 publicly traded California companies, as tracked by Market Guide Inc. of Lake Success, N.Y., we then narrowed the universe to companies that had a certain critical mass: a minimum $50 million in annual sales, $25 million in shareholder equity and two years of positive return on equity.

For companies that made that cut, each was then ranked in each of the five categories above. Those rankings were equally weighted and averaged to produce a single overall score.

The final Times 100 list comprises the companies with the best overall scores (lowest scores being best).

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While a different set of variables would, of course, produce a different Times 100 list, the names topping this year’s list would almost certainly be on anyone’s subjective list of highly successful California companies.

Intel takes the top position this year, up from No. 11 last year, on the strength of its stellar performances in each of the five categories.

Meanwhile, last year’s No. 1 company, Cisco Systems, eases to the No. 3 spot.

Western Digital rocketed to No. 2 this year from No. 47 last year, thanks to the surge in its stock and its high return on equity.

Also climbing dramatically: Los Angeles-based financial services firm SunAmerica Inc., No. 4 this year versus No. 42 last year. The company’s booming life insurance and annuity businesses have fueled rapid earnings growth and made SunAmerica something of a Wall Street darling.

Within the top 25 companies on the list are quite a few household names: Walt Disney Co., grocery giant Safeway Inc., discount brokerage Charles Schwab Corp. and ubiquitous retailer Gap Inc.

But you’ll also find many smaller companies whose products or services enjoyed brisk demand last year: anti-virus software designer McAfee Associates Inc.; computer-networking products producer Adaptec Inc.; and Sanmina Corp., a fast-growing contract manufacturer of printed circuit boards for major computer makers.

We know that this list, and the other lists in this section, really just begin to tell the story of the rich diversity of California businesses. There are many thousands of companies that are equally as interesting but aren’t included here simply because they are privately owned.

Likewise, the California operations of companies headquartered elsewhere don’t get covered here.

Nonetheless, we present this section as a genuinely representative sampling of California’s leading businesses--the enterprises that give the state economy its legendary dynamism and define how we work.