Ones to watch Featured

6:50am EDT December 17, 2003
Prognostication is not an exact science. When predicting the future, it's important to keep in mind the warning used in the small print of any investment vehicle: "Past performance does not indicate future results."

Despite that, we journalists can't help ourselves. We constantly analyze what companies do and why, then try to forecast what will happen to them and when.

This year, however, Smart Business has taken a different approach to determining its annual Companies to Watch list. Instead of telling you who we think you should keep your eye on, we asked regional experts in the legal, accounting, health care and financial fields to provide their choices. Who better to point out companies of interest than those executives who are on the front lines with their fingers squarely on the pulse of the regional economy?

Here are the results.

Agilysys Inc.
"Agilysys Inc. is one of the top resellers of enterprise computer technology solutions from HP, IBM and Oracle, as well as other leading manufacturers," says Kent Clapp, chairman, president and CEO of Medical Mutual. "In 2003, Agilysys redefined its identity and strategic focus to increase product tools, value and knowledge for their customers."

The company, formerly known as Pioneer-Standard, in April 2003 elected Arthur Rhein as chairman to succeed James Bayman. Rhein had been CEO since April 2002, and under his leadership, the then-Pioneer-Standard completed a comprehensive long-term strategic review that resulted in a new singular focus on its $1.3 billion computer business. As part of the strategic transformation, Pioneer-Standard divested its $1 billion components distribution business in early 2003, and in September, changed its name to Agilysys.

"Agilisys is what was left when Pioneer-Standard sold half of itself -- the components distribution business -- to Arrow Electronics," says Mark Filippell, senior managing director and co-manager, mergers and acquisitions, McDonald Investments. "Now Agilisys is purely a computer systems distributor. This is an example of a local company refocusing and reinventing itself for the new century."

The skinny: This is a company under new leadership with a clear vision. Expect the changes of 2003 to take hold and flourish in 2004. Keep your eyes on Rhein and Agilysys. They have a bright future.

CardinalCommerce
If you've ever bought anything over the Internet, you've probably wondered about the security of your credit card transaction.

"CardinalCommerce is a leader in online authentication technology, and provides a single point of access for consumers to remotely access important and confidential information," says Marc Morgenstern, managing partner of Kahn Kleinman. "Its universal merchant platform (Cardinal Centinel) is one of a handful of authentication technologies approved and certified by VISA and MasterCard for retailers, banks and credit card issuers to use for electronic payment authentication. The company's product is cutting-edge, it has raised four rounds of private equity, the board is world-class, and CEO/founder Michael Keresman is a successful serial entrepreneur."

Since September, Cardinal has inked deals with online merchant suppliers and credit service companies such as Authorize.Net, Alliance Data Systems, Paymetric, TransFirst and USA ePay Partners, expanding its software network exponentially.

Outlook: As Cardinal begins to benefit from the merchant relationships and revenue starts flowing on a regular basis with every online transaction, the company will be a highly visible technology success.

Hyland Software Inc.
Hyland Software's OnBase product continues to drive the company's growth. Founded by Packy Hyland, who retired a few years back, and now run by his brother, A.J. Hyland, Hyland Software is known for its innovative products and employee-friendly workplace.

"Hyland provides software for companies' document management needs," says Filippell. "Its outstanding growth is a testament to the quality of its products and the Hyland family's excellent management. If Cleveland had a few more companies like Hyland Software, this would not be called the Rust Belt."

Jim Cookinham, president of the Northeast Ohio Software Association, and Bob Blackham, managing partner of Roetzel & Andress, see tremendous international growth opportunities for the Westlake-based software company. "Government regulation is also causing growth," says Blackham.

The crystal ball says: One of the region's primary drivers in the high-tech industry. Continued expansion in 2004.

International Steel Group (ISG)
"Wilbur Ross had the audacity to buy into the steel business when many thought he was crazy," says Scott Roulston, senior managing director and CEO of Fairport Asset Management LLC.

But Ross, a turnaround artist with troubled companies, apparently knew what he was doing when he bought the assets of bankrupt LTV Steel.

"Armed with a new labor agreement and operating in an improved steel market, he purchased assets from Bethlehem steel and Acme Steel to create the nation's second largest integrated steel producer," says Filippell.

Now, not even two years later, ISG is not only making steel in Northeast Ohio, it's also making money, and in December, the company went public. Says Roulston, "The IPO will be a milestone event for the Cleveland area business."

Prognosis: ISG's IPO not only strengthened Ross' company, it also provided the first IPO in Cleveland in several years. A feel-good story for an industry that hasn't felt good in this region in a long time.

Diebold Inc.
"The company is a leader in two business segments -- ATMs and voting machines -- in which technology and market forces are stimulating change," says Filippell. "Its ATM business is a world leader and is incorporating new optical reading capabilities. More in the news is its voting machine business, which continues to mushroom as the 2000 Florida election results highlighted the need for sophisticated voting systems."

Blackham says the company has "exciting international growth potential and good national growth if it recovers its position on the election systems product."

The upside: If Diebold overcomes questions surrounding shortcomings in its voting machine systems, the company could revolutionize the industry.

PolyOne Corp.
"How many companies do you know that can shrink a three-week production process into days -- with higher quality outcomes?" asks Joe LaGuardia, regional vice president of Anthem Blue Cross and Blue Shield. "PolyOne is a great example of what a company can become when driven by the values of its leadership."

That leader is Tom Waltermire, who has been president and CEO of PolyOne Corp. since its inception in 2001.

"PolyOne was created when MA Hanna and Geon merged to create a plastic and resin concern with world-class scale and product breadth," says Filippell. "During 2003, management has continued to refine operations and realized synergies. PolyOne is especially important because it is a bellwether for our 'Polymer Valley.'"

But the year also had its downside for PolyOne. As Waltermire faced a difficult manufacturing economy, the company bled money as it fought to refine operations and sell off noncore asset subsidiaries. By year's end, former Geon CEO William Patient was lured out of retirement to assume the chairman position and assist Waltermire with restructuring.

The future: PolyOne remains a company with strong products, valuable assets and a solid market position. If Waltermire's moves pay off, the company could surge back in late 2004.

The Lubrizol Corp.
"Sometimes the strength of a company is only apparent after it is challenged," says LaGuardia. "Lubrizol has challenged itself during its 75-year history as one of the few companies able to provide high-performance chemicals, systems and services for transportation and industry in markets throughout the world. I believe that our growing, global economy will increase Lubrizol's visibility and resolve."

But first, Lubrizol must overcome challenges within its industry. High raw material costs, combined with decreased customer demand, forced the company to make several moves in 2003 to increase revenue and decrease expenses. This led to a corporate restructuring program that began early in the year.

Lubrizol addressed its higher raw material costs by increasing prices in its Fluid Technologies for Transportation (FTT) division, restructured its Bromborough, England, manufacturing facility, and delayed salary increases for employees in its India joint venture. In November, it eliminated 150 jobs worldwide.

Prediction: Chairman and CEO William Bares has run Lubrizol with a fiscally conservative eye for years. The company has a strong cash position and remains a market leader. Expect the company's cost-cutting moves to return Wickliffe-based Lubrizol to profitability by the third quarter of 2004.

Sky Financial Group
If you'd mentioned the name Sky Bank or its parent company Sky Financial Group a few years ago to Clevelanders, odds are you'd have been met with blank stares. But that all changed in 2003.

"Sky Financial Group is a diversified financial holding company that provides full-service banking operations, trust, investment and brokerage services, personal and commercial insurance, and dental practice financing," says Clapp. "Sky Financial is focused on growth, diversified products and strengthening client relationships. In the past year, the company has acquired both Metropolitan and GLB Bancorp Inc. Sky Financial provides its clients a strong financial foundation with many diverse products and services."

Why Sky? Under the local leadership of Richard Hollington III, Sky Bank should be a household name by the end of 2004, giving banks such as National City, Key, Fifth Third and Third Federal Savings more competition in an already competitive market.

Parker Hannifin Corp.
Parker Hannifin was in acquisition mode during 2003, when it took advantage of its strong cash position and a flat industrial hydraulics market. The motion and controls technology manufacturer snapped up industrial hydraulic fluids manufacturer Denison International plc, Control By Light Systems Corp.'s aircraft business, Webb Enterprises, T Squared Manufacturing Corp. and MTS Automation as part of its year-long buying spree.

"Parker consistently improves its margin and its performance through organic growth in strong business markets," says LaGuardia, noting the company's internal R&D is just as active as its acquisitions team. "Company leadership is committed to improving internal operations, which increase ROI for the company and its shareholders while they prepare for overall market recovery."

The good word: Parker enters 2004 in an extremely strong position. Expect to see both the company's revenue and its stock soar as its industry improves as the year moves along.

Cleveland-Cliffs
"Cleveland Cliffs is a classic 'old industry' company which is adapting to a changing world by expanding its traditional role in iron ore," says Filippell. "Through internal restructuring and joint ventures in China, Cleveland Cliffs is proving it can compete in today's market."

Among its moves, the company co-acquired the assets of Eveleth Mines LLC with China's Laiwu Steel Group and increased its ownership in Empire Mines.

Industry outlook: Says Filippell, "They may see an 8 percent to 9 percent increase in taconite prices over the next 12 months with increased Chinese iron ore demand, proving once again that fortune favors the bold."

Developers Diversified Realty Corp.
Developers Diversified owns and manages approximately 360 retail operating and development properties in 44 states comprising more than 82 million square feet of real estate. DDR is a self-administered and self-managed real estate investment trust (REIT) operating as a fully integrated real estate company which acquires, develops, leases and manages shopping centers.

"Chairman and CEO Scott Wolstein and his management team are the best in their business at managing a balance sheet," says Roulston.

Wolstein's name has recently been mentioned with regard to redevelopment of the East Bank of the Flats, which has fallen on hard times the past few years.

Prognostication: Wolstein appears to have the Midas touch when it comes to knowing when to buy and sell property. Add that to his balance sheet management, and DDR should continue to provide solid returns for its investors.

Dish One Up Satellite
"(Founder and CEO) Yaz Essa is a 35-year-old doctor who is already a successful serial entrepreneur," says Morgenstern. "His company is among the country's 10 largest independent retailers of DIRECTV and Dish Network systems and products. The 4-year-old chain is already in six states, is adding subscribers every day, and is planning a 2004 launch of a national campaign to expand into all 50 states. Another great Cleveland retail success story."

The skinny: As U.S. consumers crave more television channels to choose from, Essa should continue to benefit greatly.

Embedded Planet
"Embedded Planet is going to be a great turnaround success," Morgenstern says. "They provide single board computing hardware and software solutions. During the tech slowdown, they dealt with difficult operational issues. The company obtained experienced operators and new funding led by private equity tech guru Tim Callahan, and lured Mark Lowdermilk as the new CEO.

"Together, they repositioned the company and achieved revenue growth and profitability, both hallmarks for success for early stage technology companies. More important, the marketplace has validated Embedded's products and services as major electronic manufacturers like Motorola, IBM and Raytheon have become customers."

Outlook: As the technology market recovers this year, so should Embedded Planet.

Athersys Inc.
CEO Gil Van Bokkelen didn't get the tens of millions of dollars he was seeking from the state of Ohio and local investors to stay here and grow his biotech company.

The regions that were wooing Athersys to move have backed away. And then the company cut one-third of its Cleveland staff.

"The company seems to be at a crossroads," says Roulston, and the questions is, "Which road will it take?"

The crystal ball says: Van Bokkelen will take the funding he has received and pour it into his company's products. The sun hasn't set on Athersys yet, and it may still emerge as a poster child for Northeast Ohio's nascent biotech community.

Cole National
Cole National Corp.'s vision business, together with Pearle franchisees, has 2,197 locations in the United States, Canada, Puerto Rico and the Virgin Islands, and includes Cole Managed Vision. The company also owns Things Remembered, with 751 locations nationwide.

"Cole is led by retail expert Larry Pollock, who is also the largest shareholder," says Roulston.

Pollock succeeded Jeffrey Cole as CEO in June after spending the past three years as president, COO and a director in the company.

Roulston calls the company a prime "takeover candidate," alluding to an unsolicited, nonbinding proposal from an unnamed party for $19.65 per share that Cole received in October.

Prediction: Whether or not Cole reaches a deal on the current takeover proposal, it's likely that 2004 could be the last year Cole is owned by its current owners.

DOTS
"DOTS, the price leader in extreme value trend fashion, is a quiet long-term success story whose best days are ahead," says Morgenstern. "CEO Robert Glick has taken the company from start-up to 333 retail stores around the country, offering junior, misses and plus-size fashions and accessories. In 2003, he partnered with William Blair, a sophisticated capital partner with tremendous retail experience, to help accelerate the company's national expansion plans."

Morgenstern points to a "great management team," and believes the company is "well-capitalized" and has a "sophisticated retail concept."

The good word: DOTS should be successful and visible in 2004 and beyond.

In the know
A complete list of the experts' picks for "2004 Companies to Watch."

Bob Blackham, managing partner, Roetzel & Andress

Cardinal Commerce

Five Star Technologies

OverDrive Inc.

Axentis

Hyland Software Inc.

Central Command Inc.

TMW Systems

Invacare

Diebold Inc.

PMC Lonestar

Scott Roulston, senior managing director and CEO, Fairport Asset Management LLC

Developers Diversified Realty

International Steel Group (ISG)

Cole National

Continental Airlines

NextMed

KLI Learning

Cool Cleveland

Nottingham-Spirk

Athersys

Kent Clapp, chairman, president and CEO, Medical Mutual

Paragon Data Systems

Agilysys Inc.

FedEx Custom Critical

National City

John Robert's Hair Studio & Spa

Mainthia Technologies Inc.

Sky Financial Group

Moen Inc.

WRG Services

Pentagon Corp.

Marc Morgenstern, managing partner, Kahn Kleinman

Cardinal Commerce

Dish One Up Satellite

DOTS

Embedded Planet

Equitek Capital

First Interstate Properties

Flashline

PlanSoft

Simbionix

Weston

Joe LaGuardia, regional vice president, Anthem Blue Cross and Blue Shield

Danaher

First Energy

Goodyear Tire & Rubber

Lincoln Electric

Lubrizol

Nordson

Parker Hannifin

PolyOne Corp.

Sherwin-Williams

Swagelok

Mark Filippell, senior managing director and co-manager, mergers & acquisitions,

McDonald Investments

Agilisys

Bronx/Taylor-Wilson

Cleveland Cliffs

Diebold

Hyland Software

International Steel Group

Jenne Distributors

Nylonge Co.

PolyOne Corp.

WW Holdings