TV Network Production Hurts Indies Lilly, Rich: Rejected by networks, their “State of Grace” went to the Family Channel. By CARLOS MARTINEZ Staff Reporter In what he considers the old days, John Newton pitched countless shows to television networks. It wasn’t easy, but it was a living. Today, Newton is still pitching, but now it’s to buttoned-down corporate types who want business videos or service organizations looking for an occasional public service announcement on local channels. At 58, the Studio City-based Newton has given up on the major television networks. “If you’re an independent producer, there’s no way you’re going to get a chance to pitch your project to network,” he said. Ten years ago, the U.S. Congress passed the Cable TV Act of 1992 as a way to respond to networks’ fears of eventually losing market share to growing cable television networks. The measure lifted regulations barring the major television networks from owning the shows they aired, said Andrew Schwartzman, president of the Washington D.C.-based Media Access Project. In the decade since the law was enacted, the networks have established their own production arms to develop and create shows for the parent network, reducing production costs and giving the network a chance at syndication profits it never had before when a show ends its run. At the same time, many independent producers were locked out of a system that favored programs produced by the networks themselves. Today, lawmakers are considering putting restrictions back on the networks to limit their ability to produce, syndicate and have a financial stake in the programs they carry. But so far no measure has been drafted, according to a spokesman for U.S. Sen. Ernest Hollings, D-South Carolina, who is said to be researching the issue. Meanwhile, things appear to only get worse for independent producers. The fall schedule released last month by NBC-TV showed none of its five new primetime shows were produced by an independent production company. The same is true for the Fox Broadcasting Co.’s fall schedule. Newton, like other independent television producers in the Valley, is finding other ways to practice his craft, although he says he hasn’t completely given up on television. “I still talk to people and help some friends out on occasion on their shows,” he said. Northridge-based producer Hollis Rich knows all about the issues facing independent producers. Two years ago, she and her partner Brenda Lilly of Sherman Oaks quickly realized the networks were not interested in their project, the family drama “State of Grace.” “We just went over to cable and they thought it was a great show,” she said. The show, now in its second season on the ABC Family Channel, is produced on a shoestring budget: one staff writer instead of the three or four that typically work on a network show, and there has to be a very good reason to justify an expensive exterior shot. “We can’t really afford to go on location, but at least we’re shooting in Los Angeles and not in Canada,” Rich said. Lilly, who had previously worked on CBS’ “Christy” and “Parker Lewis Can’t Lose,” said moving to cable has been a challenge, but one she gladly takes. “You don’t have as big a budget and you don’t have as many people, but you can do a lot more things creatively,” she said. “You don’t have the network people telling you what to do all the time.” Marty Krofft, of Sid & Marty Krofft Pictures Corp. in Studio City, has adjusted to the difficult business environment by producing children’s shows directly for the video market. “What am I gonna do, move to Poland?” he asked. Krofft, who along with his brother Sid created “H.R. Pufnstuf” and “The Donny and Marie Show,” has also begun marketing his old shows on video. But last month, the Kroffts’ pilot of a remake of the 1960s situation comedy “Family Affair” was picked up by Burbank’s WB Network for its fall schedule. “We’re pleased about the show, but it’s still a very difficult time for independent producers who want to get their shows on the air,” he said. Newton, who produced “Temperature’s Rising” for ABC in the 1970s and several pilots during the 1980s, said he has gotten used to producing corporate videos for $50,000 and $80,000 apiece instead of television pilots for $1million to $2 million. “I’m just as busy now, but this time my meetings are with insurance people and software people instead of network people,” he said, noting that he averages about 10 to 15 corporate videos a year. “It’s less money and you have to work more for it, but you make a living.” Likewise, Lilly is making do with a per-episode budget that is about half of the $1 million typically spent on a network TV episode. “You make a little less money on cable, but it’s really about putting together a quality show,” she said. “That’s the bottom line.”

Investors See Promise in Salem’s Acquisition Strategy Corporate Focus By MICHAEL HART Staff Reporter If Salem Communications Corp. isn’t the first company whose name comes to mind when you think of those who have benefited most from the Telecommunications Act of 1996, you wouldn’t be alone. Until recently, the Camarillo-based company that started out with one tiny AM radio station in Oxnard in 1974 has not attracted the kind of attention bigger competitors like Clear Channel Communications Inc. or Cumulus Media Inc. have unless perhaps you were already a fan of contemporary Christian music. Early on, Salem began its strategy of buying up what its executives gladly call “sick” stations and transforming them into Christian “teaching and talking” formats. By 1980, it owned 10 stations and, by 1995, 31. But when, in 1996, new regulations allowed it to own up to eight radio stations in a single market, its acquisitions strategy really took off. Today, Salem owns 82 stations, 57 of them in 22 of the nation’s 25 largest media markets. It also offers syndicated religious programming to 1,400 other radio stations and provides on-demand audio streaming online at OnePlace.com. It has spent $300 million on acquisitions in the last two and a half years ($126 million in 2001) and will probably fork over another $45 million before this year’s over. And even if Salem, with a market cap of $155.6 million, is carrying $307.6 million in long-term debt, investors are nothing if not optimistic about its future. Salem was trading at $28.87 on June 7, a 10.2% increase over the same day a year ago and a 28.3% increase since the beginning of the year. “We have been correctly perceived as a hedge against recession,” said Salem CEO Edward Atsinger III. He also said, “In a recovery economy, investors are looking for growth opportunities.” Salem has convinced investors and stock analysts (three of them have initiated coverage of the company in the last month, all with “buy” recommendations) alike that it can be both a hedge and a growth stock. Most of the company’s 25 AM stations are devoted to block programming, selling blocks of air time primarily to nonprofit religious organizations, contributing 40 percent of Salem’s revenue. “That kind of business doesn’t have a lot of expense attached to it,” said Victor Miller, an analyst with Bear Stearns & Co. Inc. “They’re not dependent on advertising,” which was helpful through much of 2001 when an economic slowdown compelled advertisers to slash spending. Even the radio industry, more recession-resistant than other media outlets, saw ad sales drop roughly 8 percent last year. Salem’s block programming revenue, however, rises 5 to 7 percent annually. Meanwhile, Salem has launched its contemporary Christian music format, branded “The Fish” after flagship station KFSH-FM in Los Angeles, at 11 other stations in the last year. Those and its other stations where revenue is primarily driven by advertising account for another 40 percent of the company’s revenue. Its syndication, publishing and online businesses account for the remainder of its revenue. Salem has apparently benefited from a surge of interest in the contemporary Christian format in recent years. “And there’s some evidence to suggest that since Sept. 11 that has increased,” said Paul Sweeney, an analyst with Credit Suisse First Boston Corp. “Last year, it was the only niche to grow in terms of album sales.” For the first quarter of 2002, Salem reported a net loss of $1.8 million on revenues of $37.2 million, compared to a net loss of $4.7 million on $32.0 million revenues in the same quarter a year earlier. Most of the radio stations Salem has acquired in recent years have been either poor performers that have since undergone format transformations or stations owned by churches or other religious organizations that didn’t necessarily use them to generate revenue. “We have targeted stations without cash flow,” Atsinger said, “but the launches that have involved considerable start-up costs are behind us now.” He said Salem will continue to look for opportunities for acquisitions, but will also spend some time “digesting” what it already has. The promise, he and analysts say, is in the revenue growth expected from those stations over the next few years. “They have a bunch of stations that generate no cash flow whatsoever right now,” Miller said. “Those stations are where their growth will be. Those acquisitions are their fuel for growth.”

New Players Join the Game With new contracts from Microsoft, a couple of small Valley-based video game developers may give THQ and Electronic Arts a run for their money. By CARLOS MARTINEZ Staff Reporter Ask anyone. For the last year, the only two players in the video game business have been Calabasas-based THQ Inc. and Santa Monica-based Electronic Arts Inc. But a couple of Valley video game makers, Novalogic Inc. and Tremor Entertainment Inc., who have both signed licensing and partnership agreements with Microsoft Corp. for new console games, may be in a position to make it a small crowd at the top. “We could be seeing the start of what could be competition for THQ, EA (Electronic Arts) and some of the other game makers out there,” said Crispin Boyer, features editor of Electronic Gaming magazine. “This is an industry where one game can bring phenomenal growth.” Burbank-based Tremor figures to score big with its one new game for Microsoft’s Xbox console, Boyer said. “It could really propel the company into a larger market than it has ever seen before,” Boyer said. “The game for Xbox could become big just by the sheer demand for games for that console.” With the Microsoft deal, Tremor, which also develops games for Sega Corp. and Sony Corp., will develop games under its own label for the first time. Andrea Miloro, vice president of production at Tremor, said the horror-themed “The Unseen” should prove to be the company’s most successful game yet. “The platform is a real attention-grabber and it represents an unbelievable advancement in terms of graphics, which is what this game shows,” she said. Boyer, who has seen a game demo, agreed. “It looks like it will be a big seller, just from the looks and feel of the game,” he said. Under the deal with Microsoft, the company will receive $4.5 million for developing the game, expected to be ready next year, plus royalties figured on a per-unit basis. But more importantly, Tremor will develop other games for that platform which could be ready by 2003 or 2004. Last year, the two-year-old company lost $321,883 on revenues of $1.7 million, compared to a year earlier when it lost $351,099 on revenues of $1.2 million. John Black, a fund manager with Spellman Investments Inc., said, if “The Unseen” develops into the major hit many expect, it could be the franchise Tremor needs to propel itself into a league with THQ and EA. Black said, as the video game market continues to grow, now-small companies like Tremor could grow rapidly without significantly impacting game makers like THQ and EA, which produce games based on wrestling, sports and popular films. “They can cater to people who like horror and still find a big audience in that realm,” he said. Calabasas-based Novalogic is banking on its new “Delta Force Black Hawk Down” game for the Xbox to fuel its push into the console market. The maker of PC-oriented games is moving into consoles for the first time and its president, Lee Milligan, projects improved revenue for the company as a result. “Obviously, we believe the game is a breakthrough product for us, and the graphic flair and overall structure of the game is going to make it a top title,” he said. The game is an extension of the company’s popular “Delta Force” PC series, its biggest seller so far. Novalogic’s “Delta Force 2” game, for instance, was so realistic that the U.S. Army adopted it in 2000 to train soldiers in using battlefield communications systems. The privately held company, whose revenues last year were about $10 million, according to Electronic Gaming Magazine, could see a 30-percent revenue jump due to the new Xbox Delta Force game, Milligan said. Milligan said the slow growth in PC games forced the company to consider a move into the popular Xbox console after it licensed its Delta Force game to Rebellion, a British game maker last year, which developed the popular “Delta Force: Urban Combat” for the Sony PlayStation. But developing such high-end games means higher costs for more sophisticated graphics and more realism. Already, the company is considering developing games for the Nintendo Co.’s GameCube, but no decision has yet been made. Likewise, Tremor has begun assembling a second team of game designers for a next-generation series of yet-untitled games geared for the Xbox, while its current designers complete work on “The Unseen” game. “If Tremor sells just 100,000 of those games, they’ll have a hit on their hands, but they’ll probably sell a lot more than that,” Boyer said. Last year’s biggest game was Maryland-based Rockstar Games Inc.’s Grand Theft Auto III, which sold 6 million units, although 100,000 or more units is considered a “hit,” Boyer added.

Genesis Bust Leads to HQ Sale, Lawsuit By SHELLY GARCIA Senior Reporter A Van Nuys building, one of the San Fernando Valley’s last remaining vestiges of the dot-com bubble, has been sold to a private investor as its seller faces millions of dollars in lawsuits and an investigation by the Securities and Exchange Commission. The property, at 5805 Sepulveda Blvd., was sold to a private investment group headed by David Weiner for $10,069,000. The seller, GenesisIntermedia, bought the 87,665-square-foot property just short of three years ago for $11.1 million, when its star was rising amid the market run-up of Internet stocks. The company’s name is still displayed prominently at the top of the high rise. Now all but defunct, GenesisIntermedia has defaulted on its loan for the property. Last month, a U.S. District Court appointed the law firm of Berman DeValerio Pease Tabacco Burt & Pucillo lead counsel in a class action lawsuit that charges the company and its principals with bilking what may amount to thousands of investors by manipulating its stock price. GenesisIntermedia, which owed $7.8 million on the building, stands to come away with some proceeds from its sale. The lawsuit charges that the company’s principals walked away from the firm with millions. But in what lawyers say may be a sign of the times, it is possible that investors will not reap a dime from those proceeds. “It’s unfortunate that some of the most egregious frauds are committed by the least collectible defendants,” said Michael Lange, a partner with Berman DeValerio Pease Tabacco Burt & Pucillo, who is based in Boston. Lange said some defendants in the case have already been served with the complaint, but it may take longer to serve some of the other players. Among them are Adnan Khashoggi, the Saudi arms broker at the center of the Iran-Contra scandal during the Reagan administration, and Courtney Smith, a onetime investment analyst and financial commentator. According to the lawsuit, Khashoggi funneled $5 million in “illegal profits” through questionable trading practices to his Bermuda company, Ultimate Holdings Ltd., and it charges that Smith received some $3 million for talking up the stock. The central figure in GenesisIntermedia, Ramy El-Batrawi, who founded the company in 1993 and was its CEO until he resigned in October, sold $1.7 million worth of the company’s stock before trading was halted in September, according to the lawsuit. It was El-Batrawi, 41, who took GenesisIntermedia from a private telemarketer selling self-help videos to a publicly traded company that, at its height, had a market cap of more than $300 million despite huge operating losses. Although the largest share of the company’s revenues came from telemarketing sales, it began in 1999 to develop a chain of Internet kiosks in shopping malls owned by Urban Retail Properties Co. and, for a time, its name bore a dot-com suffix. In an interview with the Business Journal in 1999, El-Batrawi said he dropped out of school and left his home in Canada as a teenager after reading “Think and Grow Rich,” a book written in 1937 by Napoleon Hill and still considered one of the classics of motivational literature. The author, who himself had risen from an impoverished childhood to wealth, was at one time commissioned by Andrew Carnegie to study 500 millionaires and analyze the reasons they became so successful financially. “I believed I was going to become one of the richest men in the world, and the book said don’t procrastinate,” El-Batrawi said during the interview. One day while watching the TV show, “Lifestyles of the Rich and Famous,” El-Batrawi learned of Adnan Khashoggi, who in the 1980s claimed to be the richest man in the world, and set out to learn at the proverbial master’s feet. Supporting himself with money he had made through a series of earlier ventures, including a key duplicating service and a car dealership, El-Batrawi said he began following Khashoggi around the world, showing up at hotels and trying to make himself useful to the Saudi magnate. “He told me to get lost at least 200 times and I just wore him down,” El-Batrawi told the Journal in 1999. El-Batrawi said he eventually secured a job assisting Khashoggi, who also has legitimate interests in a variety of industries. According to the lawsuit, the relationship he ultimately struck with Khashoggi played a pivotal role in the undoing of GenesisIntermedia. According to the complaint filed in October, El-Batrawi and Khashoggi (who by 1999 had acquired a significant stake in GenesisIntermedia through his Bermuda-based Ultimate Holdings Ltd. ultimately he and El-Batrawi together owned more than 90 percent of the company) secretly paid more than $3 million to Courtney Smith “in return for his efforts to tout the Company’s stock during his appearances on CNBC, CNN and Bloomberg Television.” The company’s stock price, which had languished at around $6 per share, began to rise late in 1999 to the $15 to $17 range. At its height, shares in GenesisIntermedia traded at $28. Published reports at the time attributed the run-up to something called a “short squeeze,” a strategy whereby investors borrow shares and sell them at inflated prices, betting that the stock price will go down so they can buy back the shares at lower prices to repay the loan. Brokerages borrow the shares to lend to their investors by providing the cash value of the shares as a kind of collateral. Last September, according to the lawsuit, an unknown person loaned Native Nations Securities Inc., a New Jersey firm owned by Valerie Red-Horse, a Valley businesswoman and filmmaker, 7.2 million shares of GenesisIntermedia. Those shares in turn were loaned to MJK Clearing Inc., another brokerage that then loaned the shares to several other brokerage houses, including E-Trade. El-Batrawi and/or Khashoggi must have been instrumental in setting off the short squeeze chain that ultimately left the brokerages holding the bag for some $60 million worth of stock, the lawsuit charges, because they were the only ones who owned enough shares to make such a loan to Native Nations to begin with. When the Sept. 11 attacks sent the market into a downward spin, investors began buying back the shares to repay their loans. But when MJK came calling on Native Nations to repay the shares in exchange for its cash investment, the brokerage claimed a “rogue employee had doctored its books to hide the identity” of the original lender, and the $60 million was missing, the lawsuit alleges. Trading in GenesisIntermedia shares was halted Sept. 25 when the price had plummeted to about $5.60 a share and the stock has since been delisted. Unable to recover its $60 million, MJK collapsed in what is being called the largest failure of a brokerage house in 30 years, spurring the Securities and Exchange Commission to launch an investigation into the whole affair. (SEC officials would neither confirm nor deny the inquiry.) (Reached last week, Red-Horse said Native Nations was not involved in the transaction; it was carried out at Freeman Securities prior to Native Nations’ acquisition of Freeman. However, a press release issued by Native Nations on Oct. 15, 2001 states that Freeman was acquired by the company in January 2001 and neither Red-Horse nor the company have had any part in business transacted by Freeman since October 2001. Red-Horse, in the release, said the company is cooperating with the government in its investigation.) Neither Khashoggi nor El-Batrawi could be reached for comment. Douglas Jacobson, chief financial officer for GenesisIntermedia, did not return phone calls. A number of lawsuits ensued, but with the appointment of Berman DeValerio Pease Tabacco Burt & Pucillo as lead counsel, those complaints are likely to be consolidated as the lawsuit moves forward. Attorneys for the class action say they have yet to determine the size of the class or the total amount of money at stake, and, due to the administrative requirements of such lawsuits, it will take some time before they can move forward to discover assets. It’s impossible to know what will happen to, for instance, the proceeds of the building sale by then, Lange said. But Lange added that other assets may be tapped if the lawsuit is successful, including those of the individual defendants and liability insurance carried by directors and officers. Still, Lange said he thinks the legal action is the right thing to do in an environment increasingly tainted by charges of wrongdoing at such corporate powerhouses as Enron, Xerox and others. “If somebody took a gun in your back and took money out of your wallet, you wouldn’t base your decision to go after the bad guy based on his collectibility,” Lange said. “You’re in part doing this to right a wrong and strengthen the system.”

RE Market Is Full of Buyers, Fewer Sellers By SHELLY GARCIA Senior Reporter In a typical year, Stacy Vierheilig, a broker with Charles Dunn Co. Inc., sells three or four office buildings most of her business comes from leasing. But Vierheilig has already sold three buildings this year and has four more deals in escrow. “So I’ll end up with seven, which is double my norm,” Vierheilig said. For a handful of brokers like Vierheilig, building sales are picking up the slack in a lifeless office leasing market, provided, that is, they can find product to sell. “Overall, I definitely think there’s been an uptick in activity and sales, not only from owner/users, but also from investors,” said Trevor Belden, principal with Lee & Associates. “The reason is pretty simple: There’s a lot of people with money they’ve pulled out of the stock market and they’d rather put it in real estate than in Sun Microsystems.” Office real estate has continued to increase in value even as vacancy rates have increased, although prices have dropped somewhat since the attacks of Sept. 11. That has driven a lot of private investors into the market. And with interest rates at rock bottom, companies that previously leased their workspace are finding that buying the property outright can be more cost-effective. Adding to the demand are investors from the multifamily end of the real estate market who have begun to explore commercial properties because demand in that market too is outstripping supply. “A lot of people have refinanced their properties because rates are down low, which means they are sitting on a lot of cash,” said Katherine Bergh, senior investment associate at Marcus & Millichap, who handles multifamily transactions. “They don’t want to put the money in the bank, and they want a higher return.” As a result, brokers say they are inundated with inquiries from prospective buyers. “The faxes come in, the calls come in, they’ve got $10 million, $15 million. We get referrals from lawyers and accountants,” said Jeff Luster, president of Major Properties in Hollywood, who just sold a property at 3255 Cahuenga Blvd. and 3249 Cahuenga Blvd. to Larabee Sound, which is using the building for its studios and for rental property. “I have people putting offers on buildings in escrow, and they want to offer more than it’s in escrow for.” The last quarter of 2001 and the first quarter of 2002 saw little change in office sales activity from the comparable periods a year ago in the San Fernando Valley, according to data from CoStar Group Inc. But if the buying interest isn’t translating into additional sales on an overall basis, it has more to do with the availability of product. “There is very little inventory and what is on the market is quite highly priced,” said Luster. The same dynamics driving buyers are also working to keep supply low: Landlords who sell don’t have a lot of good choices for reinvesting their money. “It’s a vicious cycle,” said Mark Perry, first vice president at CB Richard Ellis. “None of them want to sell because there’s no product, and there’s no product to buy because no one wants to sell. That’s the big hurdle right now.” With demand far exceeding supply, prices are rising steadily. While there is no data that breaks out the Valley, national statistics show office building prices have risen from the $135 a square foot range in early 1999 to an average of nearly $150 per square foot by the end of last year, according to CoStar Group Inc. Asking prices for buildings in the 5,000 square feet to 20,000 square feet range in the Valley are selling for $150 per square foot to $175 per square foot. “Last year, the average purchase price was a lot lower,” said Belden. In the West Valley, some prices have climbed to $200 a square foot and more for smaller buildings in far less desirable areas, such as Canoga Park. “The asking prices on a lot of the smaller building properties are over-inflated,” said Brian Forster, co-owner at TOLD Partners, who also owns a number of office properties. “They only really make sense for the owner/user and not an investor. When you’re looking at, some are over $200 asking prices, they don’t make sense.” But where prices that require rental rates of $2 per square foot don’t make sense in some areas of the Valley, they can still pencil out in many other areas. So while some buyers have been dissuaded, many others have not. “We’re finding there’s a lot more buyers than last year, so when there’s product, it gets gobbled up and we get multiple offers,” said Perry. “Last year we’d have five or 10 offers (on a property), now we’re ending up with 15 or 20.” Those brokers that are finding opportunities to bring properties to market say they are doing so with a lot of digging and cold calling. Then too, some owners are betting that the softness in the market is only going to get worse. “Sellers are starting to see it’s not as rosy as it was two years ago,” said Belden, whose sales transactions this year so far are double what they were in the first half of 2001. “A year ago there was a huge gap between what sellers wanted to get and what buyers wanted to pay. That gap is starting to close.”

Branding Helps Coffin Thrive Amid IR Firm Doldrums By JACQUELINE FOX Staff Reporter Success for a publicly traded company, particularly one that flies below the radar of the Deutschebanks and J.P. Morgans of Wall Street, depends in no small part on how effective the firm is at getting its story out to the investment community. Companies who may not be big enough to afford their own investor relations departments pay top dollar to outside firms, or IRs, to build up their profile on Wall Street and define a corporate brand for themselves. And yet, the last few years have not been kind to many of these IRs. Some have been acquired by larger, more diversified firms who, some in the industry say, often do little more than send out press releases and bill their clients for the work. Others have been dumped as their clients, in fact, have chosen to use in-house marketing and financial teams to save money in times of economic uncertainty. However, while all the shedding and absorbing of IR firms was taking place, one local company was bucking the trend. Sherman Oaks-based Coffin Communications Group is projecting its revenues will jump from $1.4 million in 2001 to $2.4 million by the end of the fiscal year, on June 31. Coffin has doubled its staff in the last year, from 12 to 24, opened a new office in San Francisco and is preparing to open another office in New York by year’s end. In 2000, the six-year-old company launched a marketing campaign it hoped would do for itself what it promises its clients: build up its brand, spread the word about its performance and target a market that suits the size and scope of the business and its plans for future growth. The turning of the tables has paid off. “Up until about a year ago, most of our business was coming from a couple of clients,” said Crocker Coulson, a senior partner with Coffin. Today, the company represents roughly 40 publicly traded companies, including Westlake Village-based semiconductor manufacturer Diodes Inc. and FAO Inc., formerly The Right Start, which purchased the assets of children’s retailers Zany Brainy and FAO Schwarz over the last two years. “That was a very complicated set of acquisitions for us,” said FAO CEO Jerry Welch. “Coffin was very responsive and very aggressive in making sure that every detail regarding those acquisitions was attended to, and that the nuts and bolts were released in a timely way.” That’s exactly what Coffin was hoping to hear as a result of its own campaign for itself. “A lot of CFOs of companies will say, ‘I spend money on IR services and I never really know what I’m paying for,”‘ Coulson said. Coffin concentrates on small to mid-cap companies, which don’t usually garner much attention on The Street, but need more than good placement in the local paper to attract investors. As a result, said Coulson, strong IR firms have to begin where it matters most: the numbers. “First and foremost, we begin by looking at the performance of a company and what’s driving its revenues, either up or down,” said Coulson. While it still helps to get an analyst’s attention, gone are the days when that’s all it took to put a company on the map. Analysts and investors alike are living in a post-Enron world with anticipated changes to the way companies file disclosure statements headed down the pike. “There’s no question that investors are skittish and one thing I can say about some of our clients is that the boards (of directors) are playing a very active role in what’s going on,” said Coulson. The darker side of IR is crisis control. A product tampering scare can be enough to send the stock of the strongest performing soft drink or pain reliever tumbling. But it’s a necessary evil, according to Larraine D. Segil, president and co-founder of the Lared Group, an international business consulting firm in West Los Angeles. “If I were running an IR firm I would be pitching to my client that you have to work on a conflict management program, especially in today’s times, when investors have been given pause and IRs run a risk of being hooked into a chain of liability when a company is telling lies,” Segil said. “That’s the challenge for us,” said Coulson. “We have some clients who are under economic stress because of the current market, so they’ve had to deliver bad news and that’s certainly not a lot of fun for us.”

PROFILE: Design Answers in Three Simple Questions Small Business Profile: Success in the design world, according to RKS founder Ravi Sawhney, can be found in something called psycho-aesthetics. By JACQUELINE FOX Staff Reporter Call it the toy that almost wasn’t. This fall, high-end specialty toy stores will be carrying what Todd Coyle is being led to believe will make Tickle Me Elmo look like a plaything from the Mesozoic period. It’s the Musini, and it’s being manufactured by Coyle’s Long Beach toy manufacturing and distribution company, Neurosmith. It’s a plastic, high-tech gadget that resembles a multi-colored spaceship about 12 inches across and plays varying musical notes every time a child (or adult, cat or family mongrel) stomps, romps or even tiptoes anywhere within about 100 feet of it. “This is a toy you are going to be hearing a lot about this holiday season,” said Coyle, Neurosmith’s CEO. “We are being told by the industry and retailers that it’s likely to be the hottest seller for Christmas this year.” But we wouldn’t be hearing about this exact Musini were it not for Thousand Oaks-based RKS Design, a product design firm whose roots can be traced to the bedroom of a house in Reseda and whose company mantra smacks of all things Zen. “This is inspired design,” says RKS founder and president Ravi Sawhney, as he attempts to explain the meaning of the company’s trademarked design philosophy, ‘Psycho-Aesthetics,” which refers to relationships between consumers and “stuff.” “It’s based on the human thought process, which comes in three parts: is it like me, does it like me and can it make me more?” said Sawhney. According to him, if a consumer doesn’t get those three things when he or she picks up a product or tries to use one, there’s a psycho-aesthetic “disconnect.” “Think of whenever you pull a door handle even though it clearly says to push,” says Sawhney. “That’s a disconnect. It’s a failed product. It’s not making the right connection with the consumer. There is no satisfaction between the product and the user.” But back to the Musini. About a year ago, Neurosmith had a completed design for the toy on the table, done by an RKS competitor. Then one of the company’s executives met up with Sawhney, who convinced Coyle that the design he had paid for was old school. “Three weeks,” said Coyle, when asked how long it took RKS to start over from scratch and come up with a brand-new design. “That was something I’d never done before. My colleagues said I was crazy to give them a shot at it, that I was jeopardizing the product release schedule. In the end, we couldn’t believe the difference. The old product looked just like that: an old toy. Another success story for RKS, whose revenues have gone from $800,000 in 1998 to $5.5 million in 2001 and employee roster from nine to 35 in the same period. Also in 1998, the company moved from the 3,000-square-foot house in Reseda to an 18,000-square-foot facility overlooking the Conejo Valley. About 60 percent of the designs that RKS completes become real products; roughly half that number make it to retail shelves. That track record is expected to increase this year, said Sawhney, who also teaches industrial design part time at Art Center College of Design in Pasadena. “We are ramping up now,” he said. “Since 1998 our brand has taken a quantum leap, so did the quality of our work, and we started getting visits from CEOs of Fortune 500 companies asking us to show us what we’ve done. That was the turning point.” In fall of 2001, RKS was chosen by Amana Appliances to design the firm’s new line of refrigerators. But forget everything you know about white iceboxes. Instead, think burnt-orange-colored refrigerators, complete with a voice messaging system on the front door, a special chill drawer for beverages with a timer, and an optional “kid-zone,” which is a penguin-shaped container for kids to store their own snacks and drinks in. Other clients are Panavision, Medtronic MiniMed, Hewlett-Packard and Rubbermaid. And, according to Coyle, RKS is currently redesigning Neurosmith’s musical block toy line. The toughest challenge for RKS, says Sawhney, goes back to that Zen thing. ‘The biggest obstacle for us is we have to constantly refresh and redesign ourselves,” he said. “We address this firm as one of our own design products every day from every angle.” And, for three days each year, RKS selects seven top design students from around the world to view some of those angles from the inside. Sawhney created the first “Life in the Fast Lane” design workshop three years ago. Participants are put up in a local hotel and, alongside RKS staff, including Sawhney, create a real product from sketch to finish. The third annual workshop was held June 7 to 9. “We all participate as a team because that’s what design is, it’s a team sport,” said Sawhney. SPOTLIGHT: RKS Design Core Business: Product design Revenue in 1998: $800,000 Revenue in 2001: $5.5 million Employees in 1998: 9 Employees in 2001: 35 Goal:To make deep, meaningful connections with consumers through the products we design Driving Force: The eternal desire for something new

A Man With a Long Memory San Fernando Valley Economic Research Center Director Dan Blake has watched the region’s economy for three decades. By MICHAEL HART Staff Reporter Dan Blake feels sometimes like he’s seen it all. Today, he is director of Cal State Northridge’s San Fernando Valley Economic Research Center. But he has been an economics professor at the university for more than three decades. He arrived in the San Fernando Valley with a newly minted Ph.D. in 1971, and has been watching the regional economy ebb and flow, wax and wane, ever since. Blake was here for what he calls the Valley’s “mall phase,” the rise and fall of the aerospace and defense industry, the emergence of a reinvigorated entertainment industry, earthquakes, recessions and more than one economic boom. These days, he does more than just watch the Valley’s economy. As director of the economic research center since January 2001, he’s measuring it as well. To be perfectly clear, Blake says neither he nor the center is in the business of forecasting the local economy’s future. Nevertheless, he shared some of his perspective as a very close observer of more than 30 years with Business Journal editor Michael Hart. Question: How has the recent national economic downturn affected the Valley? Answer: Employment was essentially flat in 2000. We grew .2 percent in 2000, versus 3.5 percent in 1999. Payrolls grew at the same time at 4.7 percent. That means the average paycheck went up, so it wasn’t really hard times. But it was a real slowdown in employment growth and you began to see a sluggish economy. The numbers I’ve seen for 2001, particularly in terms of unemployment, suggest we took our major slowdown in 2000 and really didn’t slow down as much as L.A. and California did in 2001. My recent analysis is we’re still not as sluggish as California overall, or even Los Angeles overall. Q: What kept the Valley from feeling the brunt of the recent recession? A: One thing that’s kept the economy from really going into a deep recession here is consumers willing to spend, and part of that has been increases in the value of homes. In the Valley, you have more homeownership than in parts of Los Angeles that are more dense and concentrated. We’ve seen home prices go up here by 50 percent since 1997. That means people who own homes have experienced growth in their equity. That has given them increased wealth in this period of recession. The increased wealth has allowed these people to spend. Q: What further impact can the Valley expect from this economic downturn? A: One thing the Valley has always been is a port of entry for immigrants, particularly the northeast Valley. I’m anxious to look at some numbers and see if that inflow of workers is responsive to economic hard times. As an economist, I wonder if that’s slowed down. Q: How would Valley secession affect the local economy? A: If secession happens and somehow government became more responsive to needs of residents and businesses in this area, then some years from now we might be able to see the effect of that. Over the years, and that would be a very evolutionary process, we might see some effect and we’ll probably never be able to measure it. The other issue is something like the business tax. It’s expensive to run a big metropolitan area. The gross receipts tax feeds probably $300 million a year or more into the coffers of the city. At the same time, it repels some businesses that have alternatives to locate outside of the Valley. Should a new city here find different and less business-repellant ways to fund itself, then it might foster growth. I think the business tax is something the city of L.A. has to deal with in terms of the signals it sends to businesses. If we have secession, that’s an issue also the new city would have to deal with sooner rather than later. Q: Give me a picture of the Valley economy when you first started observing it back in 1971. A: When I first came here the defense industry was kind of in the doldrums and it was a period of time when there wasn’t a lot of activity. The defense buildup really started in the 1980s with the Reagan administration. That’s when you saw the Valley boom. It was the same companies that were always involved Rockwell, McDonald Douglas, Lockheed, so on but the defense contracts were, by all appearances, huge. Q: Why did the defense/aerospace gravy train eventually end? A: Well, of course, we had peace. With the fall of the Berlin Wall, peace broke out and people called it the end of history. It was certainly a new chapter for the aerospace industry in the Valley. During the ’90s, a lot of big businesses were sort of cherry-picked out of the area by developers from other states. Some of the aerospace businesses went to the East Coast, because that’s where some of the political power went. There was a lot of consolidation, a lot of downsizing. It led the Valley into the recession of 1991. That recession lingered so much longer in the Valley than it did throughout the rest of the United States. If you look at the data, that recession lasted in the Valley through 1993. Q: But the Valley economy has been fairly robust for the past several years. What made the difference? A: Two things happened. First, it was the earthquake and the reconstruction that really finally pulled the Valley out of recession of the 1990s. Second was that the entertainment industry took off. There was an increase in demand for entertainment that seemed to focus on Los Angeles. It was always around here, but it was not as evident. I have numbers that go back to 1990. We show a decrease in the entertainment industry in ’92. Employment in the Valley entertainment industry in 1992 was running below 40,000. By 1999 and 2000, this industry is two and a half times beyond what it was in 1993. So there was a tremendous buildup from ’93 to ’99. Q: And yet you can’t really say today that the Valley economy is dominated by the entertainment industry, can you? A: No. As I see it, the economy is not dominated by huge businesses as it was before, by the Lockheeds, the McDonald-Douglases, the General Motors. There are a number of middle-sized and start-up businesses. It’s true that up until recently the big push was in entertainment, and it’s grown phenomenally. But now you’re seeing a diversity in the economy. Entertainment has slowed down and what’s attracting businesses to the Valley, even though we’re in a recession right now, is really the infrastructure: the training institutions, the skilled labor force we already have here, the financial institutions, the access to venture capital. Q: What kind of long-term economic challenges do you see for the Valley? A: We’re going to continue to attract people to the Valley, and we have to figure out how to deal with population pressures. We’re not doing it right now. We’re not building houses like we did in the ’80s, largely because there isn’t the room left. We’re building farther and farther into the hills. We’ve built the freeways out to the edges. We have to decide on more efficient ways to house people and transport people if the Valley’s going to grow. That’s our major challenge. We’ve got to grow smart, rather than just grow. Q: What role do you see for the economic research center in all that? A: I would like to assist in those kinds of efforts, by helping governments and businesses plan for smart growth by providing data that will help them understand the structure of the economy, so they can make plans that incorporate the realities. I’m interested, and the college is interested, in bringing the expertise we have here to bear on the community, the legislature, all sorts of people who need that. SNAPSHOT: Daniel R. Blake Age: 59 Title: Director, San Fernando Valley Economic Research Center, and economics professor, Cal State Northridge Education: B.A. in economics, University of Montana; M.A. and Ph.D. in economics, University of Oregon Career-turning point: Becoming a college professor and enjoying career flexibility Most admired person(s): Maxine Johnson, economic researcher at the University of Montana during undergraduate years, and Cal State Northridge Prof. Rick Moore Personal: Married, two children and two stepchildren

CSUN May Tighten Up on Admissions to Make Budget By SHELLY GARCIA Senior Reporter These are frustrating times for officials at Cal State Northridge. More students than ever are clamoring to get into the school and, instead of welcoming them, officials are huddling to find ways to keep at least some of them out. The problem? Cutbacks slated for CSUN, along with the rest of the California State University system, mean there won’t be enough state funding to keep up with the burgeoning student population come next year. Noodling over the so-called May revise, an update to the state’s 2002-2003 budget submitted in January, is not yet complete. But so far it looks as if the California State University system will take a $50 million hit in funding for such things as library books and new computers. And while some additional funds will be made available to accommodate new enrollments, university officials say those increases may not be enough to cover the record number of students who want to get into some schools. “They have to really manage their enrollment,” said Colleen Bentley-Adler, a CSU spokeswoman, said of the system’s schools. “Everybody is shortening their application time period so students have to get their applications in sooner.” Late in May, a contingent from the CSU system that includes CSUN traveled to Sacramento in hopes of winning legislators to their cause. The 2002-2003 budget bill now in committee is expected to be signed by the governor on July 1, the start of the new fiscal year. Oddly enough, the group, which included five representatives from CSUN, wasn’t fighting to reinstate money already earmarked for the schools, but rather to keep the cuts from going any deeper. “The problem we see is, if the legislature and governor can’t agree on the $50 million cut, then everything comes back onto the table. They might look at our budget and say, ‘It’s only $50 million. Let’s cut more,'” said David Honda, a San Fernando Valley businessman and chairman of the board of Cal State University Northridge Foundation. “Realistically, $50 million is probably better than a sharp poke in the eye. We’re not happy, but the reality is we know there’s no money up there.” The proposal now in the hands of legislative committees shaves 2.5 percent off the CSU system budget, bringing funding levels to $2.76 billion in the coming fiscal year. Based on current and anticipated enrollments, that puts the budget gap system-wide at an estimated $158.7 million, officials say. At CSUN the proposal translates to a $2.66 million cut from the original budget proposed in January. That cutback would come on top of a $1.8 million cut taken earlier in the year. CSUN’s operating budget, $203 million in the current year, is expected to increase to $212 million in the 2002-2003 fiscal year. Cuts will affect a variety of ongoing services including maintenance, library materials and computer equipment. But the larger impact of the May revise may be in the area of new admissions. State funding for CSU is divided into two categories ongoing expenses, such as libraries and maintenance, and classroom expenses, such as faculty salaries. In theory, funding changes in the latter should reflect anticipated new admissions. But the 5-percent increase allotted in the proposal for new enrollments trails recent record admissions levels at CSUN Northridge. “When all the dust settles out, the demand created by the additional students that we are expecting is not being funded by the resources we’re getting,” said John Chandler, a CSUN spokesman. CSUN President Jolene Koester was serving jury duty and unavailable to comment for this story. In the current fiscal year, CSUN’s part-time and full-time student population reached a record high of 31,565, or 23,135 full-time equivalents. That represented an 8-percent increase over the prior year when the head count numbered 29,003, or 21,296 full-time equivalents. Before 2000, the state’s funding corresponded pretty closely to the actual increases in enrollment numbers. But beginning in the 2000-01 fiscal year, those two numbers began to diverge. This year, Chandler said, state funding fell about $10 million short of meeting the school’s new enrollment expenses. Consequently, like many schools in the CSU system, CSUN is forced to find ways to limit the number of new admissions so that they align more closely with the funding. If not, students will be unable to register for the classes they require and other services will be strained. “It certainly is going to grow for the year ahead,” Chandler said of the budget deficit. “That’s what’s driving the budget pressure and the president to convene the task force.” Koester several weeks ago appointed an enrollment policy group that will review admissions practices for undergraduate transfer students. The thinking is that, by limiting the time period in which students can apply, the school can limit the number of applications. The school already limits the application period for freshmen to one month in November, the minimum allowed by the state. The demand is low enough at the graduate level that the cuts are not likely to impact that group. But it is in the area of undergraduate transfers that CSUN has the most flexibility, because the current enrollment period for that group is well above the one-month minimum dictated by the state. System-wide, officials say, the revised budget proposal is “manageable,” but just barely. Cuts will eliminate a relatively new program that trains K-12 teachers in the use of technology in the classroom (CSUN had not yet implemented the program) and provide a meager 1-percent salary increase for university employees. “That’s not much for a raise for 40,000 employees,” said Bentley-Adler. Still, Bentley-Adler and others say, the crux of the plan is funding for new admissions, and CSU can live with the 5-percent allowance, especially given the alternatives. “It’s not as much as what we asked for, but it was an increase over our budget,” said Bentley-Adler.

Advertising-Only Site Claims to Be Making a Profit By CARLOS MARTINEZ Staff Reporter Experts may complain the Internet is a terrible place to make a buck, but one Sherman Oaks-based Web site operator, Vendare Group, managed to double its revenue and post a profit last year. Vendare CEO Keith Cohn said he’s not surprised that his four Internet gaming sites pushed the company’s revenue last year to the $14 million mark, doubling the $6 million it took in a year earlier. “People love to play games, so that’s where we felt we could do some business,” said Cohn, who would not release net income figures for the privately held company. “Our plan was simple. We attract people with free games nobody bets or has to put up money and we put up ads for our customers that they can see while they play,” Cohn said. Although the company’s games often resemble Las Vegas-style gambling, the resemblance stopped there. The simple strategy free games seemed ill conceived when it started (and posted a loss) in 2000. But before long, heavy marketing on popular Web sites began attracting a larger crowd and more advertising. With an initial investment of $10 million, mostly from Pasadena’s IdeaLab!, the company was able to weather a rough first year as it developed its initial site with virtual slot machines, poker and solitaire. Henry Blodget, a Merrill Lynch & Co. analyst who covers the Internet, said Internet advertising still represents a small fraction of overall advertising sales, most sites that expected to generate income from advertising alone have failed, only a handful of sites have seen growth, and Vendare is one of them. “They’ve managed to hit upon this niche that is really working for them,” Blodget said, “and it’s not that easy to attract advertisers.” Revenue from online advertising has declined in the past two years, going from an estimated $9 billion in 2000 to $8 billion in 2001, according to Merrill Lynch. John Thompson, an independent media analyst in Los Angeles, said the firm is able to cash in on people’s interest in gambling, without letting them actually place a bet. “It’s not really gambling since no one is betting, but it’s addictive nonetheless and it seems to attract a lot of people, which is what advertisers want,” he said. Among Vendare’s advertisers are American Express Co., LL Bean, United Airlines, eBay Inc., Sprint Corp. and Nabisco. The company has grown from its initial Jackpot.com site by adding BigPrizes.com, SportSkill.com and the recently acquired Blink.com, all offering games and contests to users who must register to play. “It’s all advertising revenue. Players don’t have to pay a dime,” Cohn said. That doesn’t mean there is no value added for advertisers. Blink, for instance, offers cash, gift certificates and savings coupons to consumers who visit new sites. Altogether, the company has a database of about 18 million registered members to their Web sites, with about 300,000 new members joining each month, Cohn said. Despite a brief downturn immediately after the Sept. 11 terrorist attacks, Vendare’s Web sites have seen increased traffic and improved advertising numbers. Although the company laid off 10 of its 75 employees shortly after the attacks, it has recovered and is looking to improve upon last year’s numbers. “More people are staying at home with the family and going out less, and when they’re at home they want to go online and play games,” Cohn said. “It’s bad for the airline business, but it’s great for us.” Last year, the company signed a two-year agreement with Fox Sports Inc., a unit of Fox Broadcasting Co, to run its sports fantasy Web site where fans can coach virtual teams against other virtual teams using the records of real NFL and major league baseball players.