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Gone

For Quarterdeck Corp., it was the kind of growth many companies dream of but few actually experience.

The Marina Del Rey-based high-tech company had developed a reputation for its computer memory software, and was looking to stake a claim in the volatile world of PC and Internet computing. So in 1995, Quarterdeck began a buying tear, gobbling up 10 smaller firms in a period of 20 months, adding an array of new technologies to its offerings.

Quarterdeck’s bottom line reflected that shopping spree: Between July 1995 and June 1996, company revenues grew by a blistering 133 percent.

Then it came time to integrate the new acquisitions into the company’s operations. And that’s when Quarterdeck hit a wall.

By the end of calendar year 1996, the company’s rate of revenue growth had slowed to 13 percent. It posted a loss of $75 million and its stock price tumbled to as low as $2.69 after reaching a 52-week high of more than $14.

The pace of acquisitions was “too rapid,” said Quarterdeck’s chief executive, Curt Hessler, a former Times Mirror executive who was brought to the firm in February to help get it back on track.

“It was too much to digest,” Hessler said.

Quarterdeck’s story, while dramatic, is typical of many fast-growing firms that expand at breakneck speed only to screech to a halt by unforeseen circumstances.

Last year, the software company came in at No. 9 on the Business Journal’s List of the 100 fastest growing public companies in L.A. County; this year, the company has dropped off the List entirely.

Quarterdeck was not alone. More than half of the companies on last year’s List did not make it back this year powerful evidence of how challenging it is for fast-expanding businesses to sustain their rapid rates of growth.

While most investors tend to salivate at the sight of triple-digit revenue growth, such rapid expansion often is a “mixed blessing,” said Linda D’Angelo, a professor of business and management at USC.

“Many companies get surprised,” she said. “The growth is faster than anticipated and faster than management can keep up with.”

Consider the case of Diodes Inc., a Westlake Village-based manufacturer of semiconductor components.

In 1995, with demand for personal computers skyrocketing, the company saw its revenues expand by 52 percent, rising to $58.2 million from $38.3 million in 1994. Net income jumped from $2.4 million to $4.7 million over the same period. The company came in at No. 32 on last year’s List of fast-growing public companies.

But in 1996, the entire PC industry began to slump. Computer-makers had built up large inventories of supplies, prices for components dropped, orders fell off and firms like Diodes were hit hard nationwide. Company revenues that year slumped to $56 million and net income dropped to $3 million.

“The whole industry got ahead of itself,” said Diodes spokesman Phillip Bourdillon. “It could not last. These companies did so well in 1995, there’s no way they could match it in 1996. It was such a high bar to compete against.”

Sports Club Co., a West L.A. operator of a dozen tony fitness clubs nationwide, also has been coping with volatile growth rates although for different reasons.

In 1995, the firm’s revenues almost doubled, rising to $36.1 million from $18.8 million a year earlier. Net income edged up slightly, from $1.8 million to $2.0 million over the same period.

But in 1996, Sports Club began to slow. Revenues rose a mere 3 percent, to $37.4 million, while net income for the year dropped to $1.7 million.

The company’s growth in 1995 reflected the fact that it acquired two new clubs that year, said Timothy O’Brien, Sports Club’s chief financial officer. In 1996, no new clubs were opened or acquired.

This year, the company is poised to add three new clubs to its roster in Houston, San Francisco and Washington, D.C. and O’Brien said Sports Club expects to see revenues of some $60 million.

“We’ve gone through a process of building a corporate structure and investing in our systems,” O’Brien said. “We’re poised to add several new clubs without increasing our administrative or general expenses at all.”

Far more dramatic than Sports Club’s story is that of Cinergi Pictures Entertainment a Santa Monica-based motion picture production company. Cinergi, which posted revenues of $192.9 million in 1995 (a 76 percent leap from the year before), is in the process of being liquidated and will cease to exist as a public company by the end of the year.

What sunk the company? The same thing that has sunk movie studios since Hollywood’s inception a series of bombs.

In Cinergi’s case, it was “Judge Dredd,” “The Scarlet Letter” and “Nixon,” all of which tanked at the box office.

“Those three pictures buried them,” said Arthur E. Rockwell, an analyst at Yaeger Capital Markets. “Their credibility disappeared because of their poor track record.”

Indeed, the issue of credibility fast becomes the central concern for any publicly held company after a period of volatile revenue growth.

Quarterdeck’s Hessler, for example, has been spending much of his time on the road, meeting with investors, industry executives and analysts in an effort to reassure them that the company’s strategy is sound.

“We’ve changed our focus from one of growing through acquisition,” Hessler said. “The focus is on integrating (those acquisitions) and developing new products.”

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