Relying Heavily on Income From Firm Can Hurt Family By ERNEST A. DOUD JR. If yours is like most family businesses, it is both your principal source of income and your single most valuable tangible assets. If that is the case, then the short version of this rule is: If you live high off the hog take care not to butcher it … because you don’t have another one. Recently we’ve been working with the four members of the second generation of a family business. It is a difficult situation that, originally, was not of their making. It is, in fact, part of the legacy from their parents. The trouble is, it has turned out to be anything but positive and seemingly not the result the parents (who are now both deceased) ever intended. Dad founded the business, and for years it was going, growing and very profitable. As a result, it made it possible for Dad and Mom to enjoy a very nice life. They raised four children and they, too, became accustomed to the good life. The kids grew up and one son and one daughter came into the business. They earned their keep, the business continued to thrive, and they received very attractive compensation . Mom and Dad agreed it was important to treat each member of their family equally. One way they tried to accomplish this was that over the years they gave each of the children equal shares in the business which is an S Corporation. Neither of the other two children was interested in the business. However, to preserve for the inactive children the lifestyle everyone had always enjoyed, Mom and Dad made sure that substantial S Corporation distributions were paid every year. After Dad died, Mom continued the practice. Then two things happened almost simultaneously. Some tough new competition came into the area, and Mom died. The two active siblings were faced with having to invest in the business to meet the new competitive threat That meant drastic reductions in distributions. The two inactive siblings were faced with a substantially reduced level of income. They didn’t want to sell away what they considered their “birthright” to the business. On the other hand, they weren’t ready to accept smaller distributions without a fight. Soon the siblings stopped talking to each other and it was lawyers talking to lawyers. Legal bills mounted while suits and countersuits were threatened. This true story is a tragic example of what can happen when family members are allowed to become too dependent on the business. When everything is going well, it can seem harmless. However, when the financial demands of the business conflict with the financial demands of family members … watch out! When your business is financially strong, think twice about any financial decisions you make that set the precedent of taking substantial cash out of the business. It can be a tough habit to break. Sooner or later you are going to have to reinvest in the business. If you’ve not only lived off the “fat”, but stripped away at its financial “muscle” as well, you can make it very difficult, if not impossible, to sustain the business as a viable entity. Then everyone suffers. Ernest A. Doud Jr. is the managing partner of DoudHausnerVistar, a consulting practice focusing on assisting clients to successfully manage family/business dynamics.

Valley Briefs Bank Gains First California Bank recorded a 42 percent increase in net income to $623,000 or $0.31 per share for the third quarter of 2003, compared with earnings of $438,000 for the third quarter last year. First California, based in Camarillo, said net interest income in the period increased 15 percent to $2.8 million and non-interest income increased to $418,000 from $301,000 in the year ago quarter. Loans increased 10 percent to $150.2 million and deposits rose to $196.6 million from $185.6 million a year ago. First California’s assets reached $242.6 million, up from $202.6 million in the like period last year. Last month, the bank, with locations in Oxnard, Ventura and Westlake Village, opened its fourth full service office in Thousand Oaks. Centers Recognized Glendale Galleria was one of four Los Angeles area shopping centers to be recognized for marketing excellence by the International Council of Shopping Centers in its 32nd annual MAXI Awards. The Galleria won a merit award from a field of 413 entries for its promotion, “Ultimate Summer Jam.” Those receiving the award included: Annette Bethers, former senior marketing manager; Jeannie Lonnquist, who had been marketing manager for the Galleria at the time of the promotion, and JoAnne Brosi, general manager for the shopping center. The marketing department staff has changed at the mall since the Galleria, formerly managed by Donahue Schriber, was acquired by General Growth Properties Inc., which now manages the Galleria as well. Bethers is currently senior manager of strategic partnerships for Macerich Co. Lonnquist is now an independent consultant. Gold’s Gym Opens Gold’s Gym held its grand opening in Thousand Oaks earlier this month. The fitness club is the second in the greater San Fernando Valley and the fourth in the Los Angeles owned by Angel and Willy Banos. Other locations for Banos’ owned Gold’s clubs are Hollywood, North Hollywood and downtown Los Angeles. It is located at the Janss Marketplace at 197 North Moorpark Rd. PerfectData Improves PerfectData Corp. shored up its losses in the company’s fiscal second quarter ended Sept. 30, 2003. The Simi Valley-based marketer of computer, office care and maintenance products lost $166,000 or $0.03 per share in the period, compared to a net loss of $367,000 or $0.06 in the comparable period last year. PerfectData sales soared 44 percent to $708,000 in the fiscal second quarter, from $490,000 in the second quarter of last year. PerfectData has reached an agreement to acquire the assets of Spray Products Corp., and earlier the company reported it has reached an agreement to acquire SuperCom Ltd., an Israeli company. Both deals are subject to certain approvals. THQ Ranked 2nd Calabasas-based video-game maker THQ Inc. has been named the No. 2 independent video game publisher of the year by NPD Group Inc., a consultant to the videogame industry. It was ranked No. 3 overall, with a 7.7 percent share of the market during October, behind Santa Monica-based Electronic Arts and Japan-based Nintendo.

Mortgage Companies Cut Staffs as Refi’s Plummet By SHELLY GARCIA Senior Reporter It’s official, the refinancing market is dead. So-called refi’s in the fourth quarter are expected to drop to 49 percent of the home mortgage loans originated, down from 68 percent in the third quarter, according to the Mortgage Bankers Association. And by the first quarter of 2004 they are likely to fall further to 39 percent. The steep decline has already forced layoffs and closures of some mortgage loan offices, and more are expected to follow. “I think we saw refi’s disappear very quickly,” said Richard Gale, a director at California Mortgage Bankers Association. “While they may have been 75 percent or 80 percent (of the market) they really disappeared quickly.” E-Loan Inc. laid off 49 employees earlier this month, about 5 percent of its workforce. And earlier Washington Mutual announced it would cut about 4,000 of some 22,000 employees in its mortgage banking business Even mortgage behemoth, Countrywide Financial Corp., has seen refinancing activity fall to $16.6 billion for the month of October, compared to $25.3 billion for the same month last year. The dramatic falloff was not unexpected. Created by a steady decline in interest rates over the past several years, the refinancing market was certain to cool once mortgage rates began to rise. But after a brief spurt up into the low 6 percent range, mortgage rates have once again come down to the high 5 percent range. On Thursday, Nov. 20, the rate for a 30-year fixed mortgage plunged again to an average of 5.83 percent, from 6.03 percent in the previous week. Just as important in putting a damper on refinancing activity as rate changes, many mortgage brokers say, is the fact that, after several years of frenzied activity, anyone who could refinance has already done so. “I’m still doing a few refi’s for various issues, but in general the refinance craze is over, said Aaron DesMarais, a loan officer at APR Mortgage Inc. in Northridge, “because people have already done it.” Larger drop predicted The Mortgage Bankers Association projects even larger declines in the coming year. According to the trade association, refinancing as a percentage of mortgages originated will decline to 25 percent by the second quarter of next year and 22 percent by the third quarter. “We saw wave after wave as rates were coming down and some people refi’ed four or five times over the past few years,” said Gale. “So there’s less people to refi.” Gale said the hardest hit have been direct to consumer Internet and call center mortgage banks. The impact has been less severe on local, brick and mortar mortgage companies who develop relationships with local brokers and builders. “The companies ingrained in local communities that call on realtors and builders, they are probably not impacted as badly,” said Gale, but everybody has reduced their staff to some degree.” Many mortgage companies hired temporary staff to handle the additional workload as the market was on an upward growth trend. “So a lot of the temps are gone,” said Gale, but certainly some of the permanent staff is gone as well.” So far, there has been little letup in the pace of home sales, and that has helped mortgage companies to make the transition to the changing marketplace. But with expectations that mortgage rates will continue to rise through the coming year, another, albeit smaller decline is expected in new home mortgage originations as well. According to the MBA, interest rates on a 30-year fixed mortgage will creep up to 6.1 percent by the second quarter of next year, and 6.5 percent by the fourth quarter of 2004. Loosening up? The slowdown may be good news for those who have difficulty qualifying for a mortgage. With business harder to come by, mortgage bankers are expected to show greater willingness to help those customers find financing solutions. There’s also increasing evidence that consumers will seek alternatives to refinancing’s in order to pull cash out of their homes, and some mortgage companies are gearing up for a boom, or at least a mini-boom, in home equity loans. “People don’t want to touch their first (mortgage), so the home equity market has taken off,” said Gale. Countrywide is also stepping up its loan servicing activities, everything from collecting and processing loan payments to handling inquiries from borrowers, all services that generate fees for the company. Still, the Calabasas-based company is anticipating that its mortgage lending business will fall to about $300 billion next year, from $420 billion this year. “The current year is quite simply an extraordinary year that is not likely to be repeated,” said Angelo Mozilo, Coutnrywide’s chairman and CEO in a conference call to analysts last month.

Sun Valley Businesses Mount PR Push to Boost Their Image By JACQUELINE FOX Staff Reporter Business owners in Sun Valley, including one of its largest employers, are mobilizing to put a fresh face on perceptions that their operations, largely industrial, are a blight on the community and deterring efforts to improve the quality of life for its residents. Representatives from Waste Management Inc., which operates the widely criticized Bradley Landfill, Vulcan Materials Company and others, as well as the Sun Valley Chamber of Commerce, have begun holding meetings three so far to discuss how to boost their image and show the community that they are just as interested in making the area a better place to work and live. “We are trying to set forth our position with regard to what we are doing here to make improvements,” said Arthur Sweet, head of the chamber’s government affairs committee and owner of Van Nuys-based A & E; Development Co. Inc. The mobilization comes as city officials consider stepping up regulations to address residents’ concerns about chemical pollution coming from the area’s heavily industrialized core. City Councilman Tony Cardenas introduced a motion Nov. 18 to create an “Environmental Justice Improvement Area” for Sun Valley, which would give the city wider authority to enforce environmental regulations and more closely monitor the permitting process for businesses moving into the area, especially those companies handling hazardous waste materials. While on its face the motion seems like a crack down, representatives from the Sun Valley business community say it actually represents a golden opportunity for them to demonstrate that, despite perceptions to the contrary, they aim to be good corporate neighbors. What’s more, Cardenas’ motion also calls for creating the area’s first business improvement district, which, if established, would allow them to collectively and more efficiently address issues of blight,something they say they have long pushed for, but with little success. “This is absolutely a positive,” said David De Pinto, of De Pinto Morales Communications, Inc. De Pinto’s firm represents Waste Management, Inc., which has been embroiled in a bitter rift with a local community groups who are pushing for closure of the Bradley Landfill. “We are a business community who is no longer going to stick its head in the sand. We are willing to undergo the scrutiny and willing to make the transition to being more transparent.” Heavy opposition to Waste Management’s plans to heighten the landfill by roughly 43 feet, said De Pinto, have spurred wider criticism of Sun Valley’s industrial and commercial sector as a whole. So it’s no longer just Waste Management feeling the heat. The Sun Valley Chamber is also sponsoring a survey of local businesses that it intends to use to show the economic impact of industry on the community, including the number of jobs provided as well as civic and charitable involvement. The chamber has also asked the Economic Alliance of the San Fernando Valley to produce a final report once the data is compiled, which it has agreed to do. “We are sponsoring this because we want to make sure that the area that Councilman Cardenas has outlined in his motion is reviewed, and that the opposition groups recognize what we bring to the table,” said Sweet. Quality of life Doug Corcoran, director of operations for the Los Angeles area for Waste Management, said the business community is joining forces to show that it, too, is in favor of improving the quality of life in the community. “We have had several meetings to discuss the heightened awareness of the impacts of the industrial users and the feelings that are out there of the local residents, many of whom are our employees, about wanting to make this a better place to live,” said Corcoran. Mayor James Hahn opposes a Bradley expansion, however Cardenas has not taken a position. He inherited leadership of the Bradley Landfill Community Advisory Council, from his predecessor, former City Councilwoman, Ruth Galanter. He plans to, in his words, “let that forum vet out what the real issues are. “What I’m trying to do with this motion is present a blueprint so that the businesses and heavy industrial companies can apply themselves,” said Cardenas. “I know that a lot of them do have a positive impact on the community and this will take that same good will and put it into a format that’s reasonable and readable and will allow the city to incorporate standards.” Corcoran agreed. He said shining a brighter light on what businesses are doing to be better citizens could only help bridge the divide between an entrenched industrial and commercial core, and a growing residential area. “We want to continue to do business in the area,” said Corcoran. “We recognize the world is changing. It’s a new day for all of us and I think we need to open our eyes to it.” In fact, Waste Management is actually proposing to build a Materials Recycling Facility at Bradley, which would allow the company to essentially recycle more waste and bury less. The problem, however, is that environmental groups in the area want that to be an enclosed facility, and Waste is proposing a three-sided one. Unless the company agrees to make changes to those plans, meetings and reports won’t mean a thing to Ellen Mackey. “They say they are interested in quality of life issues in Sun Valley, but we’ve seen absolutely no evidence of that,” said Mackey, an ecologist, Sun Valley homeowner and member of the East Valley Coalition, the group spearheading the drive to shut Bradley down. “They are mobilizing because they want to keep everything beneath the surface.”

Improvement Posted in Area Tech Industry By SHELLY GARCIA Senior Reporter The third quarter brought much long awaited improvement to the technology sector, which has been the weakest link in the San Fernando Valley’s economic chain. Many local, publicly held tech companies reported revenue increases in the double digits and more in the third quarter and earnings for a number of those companies rose as well compared to the like period last year. But behind the good news is a more sobering trend. Most of the same companies still fall far short of the revenue and earnings levels reached at the heyday of the tech boom three years ago, and chances are it will be some time before they do. “So far so good relative to the type of recovery we’re in,” said Chuck Hill, director of research at Thomson First Call. “The problem is I think too many people are expecting this recovery is supposed to bounce back and start looking like the traditional recovery. That, I don’t think is going to happen, but slow and steady growth is not all that bad.” Twelve of the Valley’s 15 largest tech companies reported revenue increased in the quarter ended Sept. 30, with growth ranging anywhere from 6 percent to as much as 77 percent for one of the firms. Net income rose for only half of those same 15 companies, although many were still logging the effects of consolidations and layoffs that occurred over the past year or two. The numbers mirror the national landscape, where revenues at tech companies increased an average of 7 percent, the first real growth in many quarters and a sign to many that the momentum will be sustained. Still, the improvements are a far cry from a full recovery, many caution. Most of the technology spending that boosted sales in the quarter was consumer spending, and there is still a great deal of uncertainty over when and by how much corporate America will resume the capital spending needed to reach the sales levels of 1999 and 2000. “1999 and 2000 were just a period of unusually rapid spending in the technology industry that resulted in what we saw as the bubble,” said Bob Pearlman, a partner with BDO Seidman LLP in L.A. “And now that the bubble has burst, the recovery is getting us back to numbers that are more normal.” Consider these examples: -Ixia reported revenues increased more than 28 percent to $21.6 million in the quarter and earnings doubled to $2.4 million or $0.04 per share, compared to the third quarter of 2002. But the company’s revenue levels in the most recent period are essentially flat when compared to revenues in the like period of 2000 $21.3 million. -Diodes Inc., a Westlake Village based maker of semiconductors, reported that earnings soared 45 percent to $2.6 million or $0.26 per share over the comparable period last year on a 15.4 percent increase in revenues to $34.9 million. But net income still fell short of levels in the third quarter of 2000 when Diodes reported earnings of $4.7 million or $0.50 per share on sales of $32.3 million. -California Amplifier Inc., Camarillo-based maker of microwave equipment used in satellite television and wireless and broadband applications, recently said it expects to see its revenues jump more than 75 percent to the range of $41 million to $44 million in its third quarter ending Nov. 30, 2003. But the company’s earnings guidance for the period between $0.13 and $0.17 per share, compares with earnings of $0.16 per share in the quarter ended Nov. 25, 2000. Many other companies are still bleeding red ink, even as revenues rise. Optical Communication Products Inc. in Woodland Hills, reported sales increased more than 17 percent for the company’s fourth fiscal quarter, which ended Sept. 30, to $10.4 million, compared to the fourth quarter of 2002, but at the same time, the fiber optics manufacturer reported a net loss of $2.1 million or $0.02 per share for the current period, compared to net earnings of $858,000 or $0.01 per share in the like period last year. In the quarter ended Dec. 31, 2000, OCP had reported net income of $10.8 million or $0.14 per share on revenues of $41.9 million. Camarillo-based Vitesse Semiconductor Corp. also saw significant improvement in its fourth quarter ended Sept. 30. Revenues at Vitesse rose 20 percent in the period to $42.8 million, but the company posted a net loss of $36 million or $0.17 per share. By comparison, Vitesse earned $16.8 million or $0.22 per share on revenues of $69 million in the quarter ending Sept. 30, 2000. Charges from discontinued operations accounted for much of the loss at Vitesse, which supplies the networking, communications and storage industries. In the most recent period, the company sold one of its product lines and, in the third quarter of fiscal, 2003, it closed a facility in Colorado Springs. Vitesse is not the only company that continued to bring its costs in line with current revenue levels this year. California lost a staggering 540,000 tech jobs in 2000, according to Cyberstates 2003, a report on the industry just released by AeA, an industry trade group. And the report projects that another 234,000 high tech jobs will be lost in the state this year. But there are also signs that the swing toward an upturn has begun. Power-One Inc. registered a 6 percent revenue gain to $63.7 million with a $3.6 million or $0.04 per share loss for the quarter, but that was a dramatic improvement over a loss of $198.5 million or $2.45 per share in the comparable period last year. ValueClick Inc., an online marketing and advertising services company based in Westlake Village, recorded a 31 percent increase in revenues to $22.7 million and earnings of $2.0 million or $0.03 per share, compared to a loss of $800,000 in the comparable period last year. Digital Insight Corp. marked its 17th consecutive quarter of revenue growth, posting a 16 percent sales increase to $39.4 million and net income of $4.6 million or $0.14 per share, nearly a two-fold increase over the third quarter of 2002 when Digital Insight recorded earnings of $1.7 million or $0.05 per share. Dave Wood, executive director of the Los Angeles Council of AeA, said his organization sees signs of a sales upturn in computers, software, medical devices as well as IT services, and some of the organization’s members have already begun to do some limited hiring. “I’m looking at a significant growth in 2004,” said Wood. “I think a full recovery is not in the foreseeable future. We’re probably a year or two years out before we get back to a significant recovery.” Digital Insight Buys Cash Services Firm Calabasas-based Digital Insight Corp. has acquired cash management firm, Magnet Communications in a cash and stock deal. Digital Insight would pay $33.5 million in cash and 1.45 million shares of its own common stock for the Atlanta-based firm. Magnet’s revenues for the fiscal year, ending on Sept. 30, were $17 million or about 25 percent more than the year prior. Acquiring Magnet allows Digital Insight to offer market-leading cash management services for the entire business banking market, from small businesses to large corporations, including Bank of America, Silicon Valley Bank, Commerce Bancorp Inc. “This acquisition… will make us a clear market leader in one of the fastest growing segments of the online financial services business and it significantly strengthens our ability serve the country’s largest financial institutions,” said Digital Insight Chairman and CEO Jeff Stiefler. For the quarter ending Sept. 30, the company reported a $5 million profit or $0.14 per share on $39.4 million in sales.

More Companies Paying Dividends For the First Time By SHELLY GARCIA Senior Reporter Several San Fernando Valley companies are joining a growing list of firms that are choosing to pay shareholders dividends for the first time. The moves come as the earnings picture at many companies begins to improve. But the decisions are also tied to several other factors, including a change in the way dividends are taxed and the current investment environment. “I think a lot of companies are looking at ways of adding shareholder value either through stock buybacks or dividends, and the change in the tax law is one significant dynamic that has made more people look at dividends as an alternative,” said Kyle Wescoat, CFO at Cherokee Inc., which earlier this month announced it would pay dividends to shareholders for the first time. Van Nuys-based Cherokee, a marketing company that has, among other things, arranged licensing agreements for retailers including Target and Marshall Field’s, declared a $0.375 per share dividend payable on December 19 to shareholders of record as of Dec. 1. The announcement followed the release of the company’s second quarter financial report in September, revealing a 13 percent increase in earnings and a 15 percent hike in revenues compared to the comparable quarter last year. For the three months, Cherokee reported earnings of $3.7 million or $0.43 per diluted share, compared to net income of $3.3 million or $0.38 per share last year. Revenues rose to $9.9 million from $8.6 million in the comparable period last year. “We are pleased to be able to follow through on our previously stated goal of enhancing shareholder value through a dividend,” said Robert Margolis, chairman and CEO of Cherokee in making the announcement. “Going forward, we will continue to evaluate opportunities to return profits to our shareholders when conditions permit.” Another local company, Diodes Inc. declared a stock dividend earlier this month after an upbeat financial report for the period ended Sept. 30. Diodes, a Westlake Village-based manufacturer of semiconductors, will pay shareholders one additional share of stock for every two shares held as of Nov. 14. As of Thursday, Nov. 20, Diodes shares were trading at $26.66. Diodes saw earnings increase 45 percent to $2.6 million or $0.26 per share in the third quarter of 2003, compared to $1.8 million in the third quarter of 2002. The company’s revenues increased 15.4 percent to $34.9 million in the same period. Diodes officials did not return phone calls for comment on the decision. Both companies join a growing number of firms that have moved to issue dividends to shareholders or to raise the dividends that they issue, passing along more of the company’s profits. Microsoft Corp. and Qualcomm Inc. are among those who began paying dividends for the first time this year. According to Standard & Poor’s, the number of companies that increased their dividend payments in the third quarter increased by 40 percent from the same period in 2002. In part, the moves were fueled by a federal tax cut on dividend income last May. The lower valuations on stock shares, coupled with some of the spotlight that has shone on improprieties in the public company sector, have also made the payment of dividends a more attractive way to reward shareholders.