Secession Advocates Don’t Know What Trouble Is Yet Commentary: From The Newsroom by Michael Hart On the evening of May 22, secession advocates in their “Free the Valley” T-shirts hooped, hollered and openly jeered a whiney Mayor James Hahn; former state Assemblywoman Paula Boland cried; Valley VOTE’s Jeff Brain had a long 15 minutes with the national media; and Los Angeles voters got the right to decide whether the San Fernando Valley would become a city. The following day, May 23, Hahn planned a quieter meeting in the comfort of his City Hall office. Expected were Eli Broad, real estate developer Ed Roski, former Mayor Richard Riordan and former Secretary of State Warren Christopher. Their only agenda topic was likely to be a strategy to stop 1.4 million people from leaving them and this time, for good. It’s my guess, however, that there was also a certain amount of how-did-we-let-it-get-this-far talk. It’s true, events and the behavior of the principal players last week indicated things have changed quickly. Last week, Hahn bickered over petty distinctions with LAFCO members, warned that the crime rate would climb, hinted at lawsuits, fretted that his administration just might have to raise water and electricity rates in the Valley and begged on the last evening of a process secessionists had worked their way through over the last decade for one more week. Meanwhile, a gracious, generous Richard Close cavalierly labeled as good news reports that potential alimony payments a Valley city would owe L.A. had escalated from $56 million to $128 million. After all, he noted, it proved once and for all that the Valley has been L.A.’s crutch all along, that a new city could take care of itself and still pay whatever it would take to get out of the relationship. Also, one day last week, the Los Angeles Times devoted an entire op-ed page to a collection of what I’m sure its editors thought were whimsical, light-hearted accounts of people who grew up in the Valley, moved “over the hill” and now wonder why we can’t all just get along. The morning after LAFCO’s vote to place the secession issue on a November ballot, National Public Radio interviewed a woman who said she “loves the Valley,” is “sick of having the rest of Los Angeles look down its nose at us,” and then giggled certainly leaving the rest of America scratching its head and wondering what L.A. could be up to this time. It is possible Hahn spent much of his Memorial Day weekend in high dudgeon, anxious to the point of distraction that after a lifetime spent aiming toward the mayor’s office he might be the one in charge when the whole thing falls apart. It is likely that, for giddy secession advocates, it really was a holiday. But bright and early the Tuesday after Memorial Day, it must have seemed clear to both sides that their work was just beginning. Particularly for those in favor of secession who feel like their biggest obstacle has been overcome, there is peril at every turn now. For instance: – Hahn’s last-gasp attempt to scare the public into believing that an escalating crime rate (that he can’t seem to curb even with an intact city government at his disposal) will only worsen on both sides of Mulholland Drive should be a clue as to the levels he and his colleagues will stoop to make their points. Expect to hear from him and the anti-secession bloc that, with a breakup, crime, taxes and utility rates will go up while what he considers the smooth, efficient delivery of municipal services will be diminished. Expect also the message to be delivered in a hit-’em-over-the-head style, designed to scare the hell out of those least able to make sense of it. Expect the message to have a kernel of truth as well. – Wall Street, business forecasters and maybe your own instincts might be telling you the economic downturn is over, but it is just beginning for government, which at every level is experiencing problems mayors and governors haven’t had to deal with for nearly a decade. Gov. Gray Davis has an anticipated state budget deficit of almost $24 billion to figure out, Hahn whines that he doesn’t have the money his predecessor had to work with and all the little Mayberrys we hear the Valley could one day be like Burbank, Glendale, Santa Clarita have budget problems. When it comes to dollars and cents, Valley VOTE picked a hell of a time to launch the municipal equivalent of a tech sector startup. – Boland may have finagled for herself a photo op the night of the LAFCO vote guaranteed to place her front and center in both the Daily News and The Times the following morning, but the other grand dame of the secession movement, former U.S. Rep. Bobbi Fiedler, was nowhere close to the limelight. That’s because earlier in the week she made it clear that, despite years of campaigning for secession, the time still is not quite right. The problem, according to Fiedler, is the dearth of political leadership in the Valley that will be required to pull off that startup, especially when it means bringing the sixth-largest city in the U.S. to life in a matter of months. Many of you who read this column already know who the likely suspects are when we talk about political leadership. Think about all the characters that will be required to fill out election ballots for 15 council districts and a mayor, then tell me how many you’d have enough confidence in to run your city. For Valley voters, the up-or-down question may be determined by the personalities they think will be their elected officials. And if they don’t like what they see, they’ll not only vote against them, but against cityhood as well. Last week may have been intoxicating, but on the first day after a long holiday weekend, it’s clear there’s a lot of work to do. Michael Hart is editor of the San Fernando Valley Business Journal. He can be reached at [email protected].

China’s Entry Into WTO Is Good News for Valley Firms By SHELLY GARCIA Senior Reporter Like many companies, Diodes Inc. first set up a manufacturing operation in China to take advantage of the abundance of inexpensive labor. But six years later, the Westlake Village-based discrete semiconductor manufacturer is finding it’s not just the labor that’s abundant in China. The computer companies it sells to are moving there as well. “China is the hottest market in the global economy at this point,” said Mark King, vice president for sales and marketing at Diodes, which just opened its second sales office in Shenzhen, China to service the many Taiwanese computer companies that have set up manufacturing operations in the region. “Anybody in electronics has to have a big focus on that marketplace, and there will be continued migration.” For years, labyrinthine regulations, restrictive tariffs and other barriers kept all but the most determined foreigners from doing business in China. And for those companies that did venture into the region, China was little more than a solution to keeping labor costs down. But in recent years, as attitudes have shifted and restrictions have lifted, clusters of businesses representing every link in the supply chain have emerged in the region. Shifting political and economic winds in the recent past have already spawned dramatic changes, ranging from new roads to five-star hotels. With China’s entry into the World Trade Organization in December, the most staggering differences may be yet to come. “A lot of companies got into China with the understanding that they’re not going to make any money,” said Claire Wright, director of the World Trade Organization center set up at Ernst & Young LLP in August. “Now the difference is that the restrictions should go away. You can look at China as a place where you can actually sell products and make money.” In recent months, Bally Total Fitness has announced a joint venture to launch between 50 and 100 clubs throughout Asia in the next five years. American Express Co. has set up a partnership to launch its travel services in the region, as has Rosenbluth International, a service that specializes in business travel. And Warner Bros. International Theatres will soon open a multiplex in Shanghai. Not that the agreements makes China an instant Mecca on the global stage. Most who have done business in the region point out that the country’s policies are dictated as much by its cultural predisposition and the clout of local, provincial governments, traditions that will be difficult to breach, even with a legally binding agreement. Still, the WTO agreement comes as good news to many companies who have long eyed the region and the market potential of its population of 1.2 billion people, particularly the kinds of small and mid-sized businesses that dominate the greater San Fernando Valley. “The WTO entry has meant increased opportunities for American companies,” said Allan Woodruff, vice president, Asia Pacific, for Nomadix Inc., a Westlake Village-based maker of software for mobile technology that entered the market in China about a year ago through a partnership with a Chinese company called Cyberark. “(Infrastructure build-out) has meant large changes in the telecommunications industry. For companies who produce the products for this build-out, it means sales in an otherwise dismal technology market.” Larger companies like Wal-Mart, which operates 15 chain stores, 13 supermarkets and three club stores in mainland China, have for some time now had somewhat more leverage negotiating with the government because these companies can promise employment to large numbers of the Chinese moving from the farms to the cities. But smaller firms have typically had to play by the rules as written. That too is likely to change. “Now, how foreign-based companies are treated is a rule-based system,” said Wright. “In the past it certainly was who you know.” Such changes are spurring a great deal of interest in China by American companies, said Wright. Since opening last August, Ernst & Young’s San Diego-based World Trade Organization center has fielded questions about commerce in many developing countries. But there’s been a dramatic uptick in inquiries about China since the WTO agreement, she said. China has been loosening the shackles of communism for some time, shifting from a state-owned economy to private enterprise. But its policies have largely been geared to tilting trade balances in its favor. Foreigners could manufacture in China, but they could not sell there. A high percentage, if not all, of the raw materials and components used in manufacturing had to be purchased from Chinese firms. Those that could be imported were taxed exorbitantly. But with the agreement in place to join the WTO, the government of the People’s Republic must now relinquish many of those controls. Companies can not only make goods in China, they can sell them too. They will no longer be limited to using Chinese-made materials in manufacturing. And what they do import will be subject to pre-determined valuation criteria, not the whims of customs officials who often set valuations arbitrarily before. Tariffs on imports into China have been slashed to just over 9 percent of the value of goods, down from an average of 17.4 percent previously. By 2005, the average tariff should go down to 7 percent. And foreign ownership, in whole or part, will be permitted in many industries, eliminating the need to set up complex partnership agreements with Chinese firms. Perhaps the most striking changes can be found within the telecommunications industry. China has built an infrastructure, not only of roads but a broadband network that is setting the stage for a technological revolution. Already 123 million of China’s 1.2 billion people use cell phones. And, while only 12.5 million computers are in use in the region, that number is growing rapidly thanks to declining computer prices and a growing middle class. Just a few years ago, China had only one or two million computers, and Internet usage, currently pegged at about 35 million, has ballooned from 5.6 million in 1999. “I remember when I was in China eight years ago, you couldn’t even find an ISP,” said Max Sun, CEO of CBCom Inc., an Encino-based company that hopes to become the largest private Internet service provider in the country. “Now they’re getting triple-digit growth.” CBCom entered China about five years ago using a complex series of partnerships and agreements to comply with ownership regulations in place at the time. The WTO agreement completely revamps those rules, providing a staggered schedule under which foreigners may own up to 50 percent of telecom ventures after two years and 49 percent of mobile phone company ventures after five years. Just as significant, the government in recent weeks broke up its phone monopoly, China Telecom, which has held an 80-percent share of the Internet market. Sun points out that foreigners enjoy some advantages over the entrenched, state-owned businesses, but they also encounter disadvantages. “The disadvantage is they are government-owned and it’s easier to cut through the red tape,” Sun said. “You don’t have that. What you have is you operate in a more efficient and better way. You can compete with your sophistication.” Many believe that, even with the WTO agreement, it may continue to be necessary for foreign-owned companies to partner with Chinese firms for some time. Officials at Nomadix, which entered China with the assistance of a personal relationship between its founder, Dr. Leonard Kleinrock, and Dr. Daniel Gu, a Chinese national, say such relationships can be critical. “Having a Chinese national representing Nomadix and taking advantage of his ties is advantageous to us from a sales perspective,” said Nomadix director of marketing John DiGiovanni. “As in most Asian countries, the sales cycle is very relationship-driven.” Local relationships can also help companies navigate a bureaucracy in which local officials often hold the strings to permits and other business approvals. “One thing I do see is the central government by and large seems to be behind these moves, but that doesn’t mean each provincial official is behind this,” said Wright. “And they will drag their feet and pretend they didn’t get the memo.” Then too, the wheels of change grind slowly in a culture so long entrenched in communism, even with a local partner. Just ask Warner Bros. Warner Bros. International Theatres, in partnership with Shanghai Paradise Co. Ltd., scheduled the opening of its nine-screen, 1,490-seat multiplex, the first of its kind by a major theatrical exhibitor, for April. The theater is built, everything is set to go, but two months later, the company is still winding its way through the approval process and a new opening date has yet to be set. “Be prepared to be patient,” said Woodruff at Nomadix. “Something as simple as buying a mobile phone can take half a day.” The idiosyncrasies of China’s transition from a communist economy to a socialized one have been apparent in other ways as well. Sun tells a story about a financial consultant working with a Chinese company that intended to go public on an American exchange. The consultant pointed out that the company has not defined its market demographics and would need to do so to assure investors of its revenue potential. “The response from the CFO was, we are working for the benefit of the people,” Sun recalled, “and profit is not a concern for us.”

A Hand-y Solution How a Couple of Newcomers Took Matters Into Their Own Hands and Nailed the Salon Business By SHELLY GARCIA Senior Reporter Ronnie Yesharim knew so little about the nail salon business that he got fleeced the first time he went out to buy manicure tools. But a little dented pride wasn’t enough to deter him. Yesharim wanted to start a chain of mid-priced nail salons with the ambience of a pricey spa and procedures that practically guaranteed it would be free from the health concerns that have plagued the industry. He figured the niche he was staking out in what has grown to be a $6.4 billion industry was so promising he could afford a few mistakes along the way. A little more than a year later, Hands To Hold, a Sherman Oaks salon with 16 technicians, is booked nearly to capacity. The shop, open seven days a week, has about 3,500 active customers, most of whom visit regularly. Marlon Brando paid a visit, along with Jon Lovitz. So did Paula Abdul. And Yesharim and his partner, Eyal Ben-Nissan, are getting ready to open a second outlet in Encino this summer. “A lot of people are getting frustrated by these Vietnamese places because it’s in and out, but the quality isn’t there,” said Ken Cassidy, whose company, Kassidy Salon Management Consulting, works with beauty salons and spas. “I think there’s a great market for that.” The Vietnamese, who have dominated the nail salon industry in California for a decade, turned what had been a luxury affordable only by the affluent into a mass market service by offering manicures and pedicures at prices often less than one quarter the cost at a hair salon or day spa. Though no hard statistics exist, some have estimated that a staggering 80 percent of nail salons in Southern California are Vietnamese-owned. And as more new immigrants flock to the industry, attracted by the low cost of entry, the high earnings potential and a supply chain that is also Vietnamese-owned, low-priced salons have proliferated. The competition has kept prices at rock bottom, but it has also forced some to cut corners, resulting in several highly publicized public health problems related to poorly sanitized tools and equipment like nail clippers and foot baths. Last year, the Bureau of Barbering and Cosmetology issued 1,335 so-called informal actions, most having to do with health and safety issues, to the state’s 32,900 hair and nail salons and barber shops. One case, in which 110 cases of bacterial infection were so severe they led to permanent scarring, was traced to a single nail salon in Watsonville. It attracted the attention of the national media and led to an expose on TV newsmagazine 20/20. The case was resurrected in recent weeks when the New England Journal of Medicine issued a study on the incident. Hands To Hold was intended to eliminate those concerns. Customers get their own kit of tools, which is then stored away until their next visit, and, among other precautions, foot baths (used for pedicures) are treated with anti-bacterial spray so there’s little, if any, risk of infection or disease. And in contrast to the rickety storefronts with worn furniture that characterize most low-cost salons, Hands To Hold is designed to look like a more expensive salon, with lavender d & #233;cor, music and even a DVD player to entertain kids. After hearing about Hands To Hold from a friend, a customer who wanted only to be identified as Ronnie S. decided to make the trip over from Mulholland Drive. She has been coming back ever since for her acrylics, a service that costs $10 more at Hands To Hold than it did at the Encino salon she used to frequent. “This place is unique,” she said. “First and foremost, it’s clean. It’s big and spacious. They ask you if you want coffee. That’s special. That’s Beverly Hills kind of service.” At $12 for a manicure and $18 for a pedicure, prices are somewhat higher than a typical Vietnamese-owned salon, which charges $7 to $9 for manicures and $12 to $15 for pedicures. But Hands To Hold is far less expensive than a day spa, which can charge $45 or more for a manicure. “We’re working real close to what our costs are, but if you do enough of them you start making money,” said Yesharim. He won’t disclose revenues, but Yesharim points out he turned enough of a profit in his first year in business to open a second salon about eight months ahead of his initially anticipated schedule. The idea for Hands To Hold came from Yesharim’s own experience. A wholesale jeweler with what he describes as a multi-million dollar business, he uses his hands to show off his wares, and regularly frequented a local salon for manicures to keep them well-groomed. “I always used to dread the fact that I had to do my nails,” Yesharim said. “I always felt there was no real cleanliness in the tools, as well as with the actual premises. When you do something as an indulgence, it should be enjoyable, and it’s a chore.” Yesharim’s partner in the jewelry business, Ben-Nissan, had the same concerns and, knowing he was not alone, Yesharim slowly began to hatch a plan. “I did my own little research,” he said. “I went to a four-block area on Ventura Boulevard from Studio City to Sherman Oaks and counted 118 salons. It was mind-boggling.” Those numbers assured Yesharim there was plenty of demand. But the hard part still lay ahead: finding a suitable location and building it out properly, hiring technicians and, most important, assuring that conditions in the salon were sanitary. “There were not many solutions,” said Yesharim. He could insist technicians sterilize the tools, but he could not be certain that they would. He could ask customers to bring their own tools, but he worried that would turn a lot of people away. The answer was to provide a personal tool kit that would be stored and re-used each time the customer returned to the shop. That way each set of clippers, cuticle sticks and the like only touched one set of hands. Yesharim still didn’t know much about the actual operation of such a system. When he took his idea for individual kits to an Anaheim company, he walked out with a $500 kit that should have cost less than 20 bucks. “The people saw we didn’t know anything,” he said. “It’s like what people say happens when a woman goes to a mechanic.” Yesharim’s wife steered him to Sav-On where he purchased a more reasonably priced kit, and found a supplier for small boxes to store them, leaving still the problem of where to find employees. Yesharim was not opposed to using the Vietnamese technicians that have flocked to the business, where they can earn $400 to $500 per week before tips. What he didn’t like was the fact that most of the technicians in the salons he frequented didn’t speak English. He went to an area in Garden Grove known locally as Little Saigon, found the dominant Vietnamese newspaper and, with the help of the ad staff, placed a classified ad in Vietnamese, specifying that applicants must speak English. Hands To Hold opened on Feb. 3, 2001 with storage capacity for 2,200 manicure kits. Two months later, the news of the Watsonville fiasco broke, and Yesharim placed an ad in the Los Angeles Times to take advantage of what had become a hot public health issue. Within a week, the salon had 500 new customers and, by the end of May, all 2,200 storage spaces were full. The partners added cabinet capacity for another 1,300 kits. They also came up with a system to review the logs of clients every two months, and discard the kits of those who had not returned. “At one point we were recycling every month, but that was not acceptable,” said Yesharim. “People have lives and sometimes they can’t get to the salon for a month and a half, and that doesn’t mean their kit should be thrown away.” Because most of his customers do return regularly, the salon can only accommodate 10 to 15 new customers a week, so, Yesharim said, growth must come from adding new stores. “My idea is to open as many as we can in the next 10 years,” said Yesharim.

Valley Forum: How’s Business Overseas? With the economy becoming more global, companies that previously thought only locally now are looking at ways to expand their markets overseas. So, the San Fernando Valley Business Journal asks: What are you doing to take advantage of business overseas that you weren’t doing five years ago? Keith Green Executive Vice President, Office Services DAUM Commercial Real Estate Services Woodland Hills I’m more knowledgeable about overseas business than five years ago. I am more caught up in the business climate and involved in creating strategic relations of local brokers in those markets. It allows me to manually trace the paper of the transactions while the local broker imparts market conditions for my clients. John Sehrer Vice President/Business Development Officer Wells Fargo Commercial Banking Woodland Hills We now provide Internet-based solutions to our clients doing business outside the United States. These solutions include foreign exchange, trade services and international cash management. Keshav Kuthiala Director of Technology and Partnerships Systech Solutions Glendale Currently, we service Europe through our UK office and service the Pacific Rim, Indian subcontinent and the Middle East through our office in Chennai, India. We constantly search for opportunities to expand and develop new overseas relationships because we have always believed in the future of the global marketplace. Dave Burtch Vice President Ameritel Inc. Northridge Ameritel is a Southern California service company. We purchase telecommunications equipment from manufacturers, value add to it, then install it and service it in our client’s offices. The manufacturers that we purchase from are already doing business overseas, so we would be competing directly with our manufacturers. Our market niche is serving our Southern California customers so we have no plans to become global ourselves. Victor Gill Director of Public Affairs and Communications Burbank-Glendale-Pasadena Airport Burbank There’s no thought of international traffic or overseas at this time. We’re fundamentally dealing with short-term issues and enabling processing mode. Our consulting firm forecast until 2015 showed that there will be no change within the continued domestic, short-haul travel in the basic nature of the Burbank marketplace.

Firm Gets Film, TV to Handhelds By JACQUELINE FOX Staff Reporter Vivendi Universal, Walt Disney Co. and AOL Time Warner may be courting Sprint PCS and AT & T; Wireless, hoping to slice up the wireless world in order to place graphics, movie trailers, promos and games on cell phone screens. In the meantime, three-month-old Pocket PC Films of Sherman Oaks is quietly beating the big players at their own game by turning Palm Pilots and similar handheld devices into mobile entertainment centers. And it now has one of the biggest independent film distributors as a business partner. Lion’s Gate Entertainment recently signed a multi-year deal to provide Pocket PC with more than 1,300 film and TV titles. Pocket has a patent pending on a software program called the “Pocket Cinema Installer,” which allows users to download full-length feature films, TV shows and other multimedia products straight to their Pocket PC, Palm Pilot or other hand-held devices using Microsoft Media Player 7.1 or higher. There are one or two competitors with software available online for the handheld devices offering primarily graphics and TV shows. However, Pocket is the first in the country to place programming designed specifically for Palm Pilots and handheld devices on retail shelves. Pocket PC now distributes discs from a library of more than 25,000 titles owned by parent company TuneIn Entertainment, a film and video distributor to cable markets. At the moment though, Pocket PC’s multimedia products are only available on the West Coast at Fry’s Electronics or on the Web at Amazon.com or Pocket’s own Web site. Still, the company sold 10,000 units in April, its first month on the market. The deal with Lion’s Gate marks the first significant studio partnership for Pocket, and places Lion’s Gate at the head of a rush to tap new distribution outlets. According to Ron Schwartz, executive vice president, North America Home Video for Lions Gate, partnering with Pocket was an easy decision to make: It is the only company with pocket discs already on retail shelves, and its sales have already proven to be strong. “Clearly, as you travel around you see an explosion in these handheld devices,” said Schwartz. “And the opportunity to view films in this format is a platform we certainly think is worth experimenting with.” Lion’s Gate’s first pocket films are expected to hit shelves next month and retail for about $15. Among titles available will be “Eve’s Bayou,” starring Samuel L. Jackson, and “Leprechaun,” with “Friends” co-star Jennifer Aniston. Darrell Griffin, co-founder and president of Pocket and TuneIn, said that, even if sales the first month were strong, the deal with Lion’s Gate was the proof he and his three partners needed that they had a market. “They (Lions Gate) are a real forward-thinking company,” said Griffin. “It wasn’t a very long courtship because they got it right away. That’s the one test that said we either have a real business here, or I better get a job as a CPA somewhere,” said Griffin, who actually was a CPA before co-founding TuneIn in 2000. Both Schwartz and Griffin declined to discuss the terms of their deal or how revenues would be shared. The Pocket software allows users to download films to their laptop or personal computer in CD-ROM format. From there, the compressed file can be downloaded to a hand-held device, turning an otherwise high-tech organizer and data storage unit into a portable entertainment center. Although Vivendi, Disney and AOL Time Warner see the potential in handheld devices, none have yet managed to transfer more than a short clip or trailer of a film or TV show into streaming video. And, even if Pocket has managed to get a real product on store shelves, the “anytime, anywhere” entertainment concept for the cell phone hasn’t quite caught on as some in the industry thought it would have by now. “If you think about it, the majority of cell phones have screens that are pretty much one-dimensional and don’t really support graphics very well at all,” said Colin Duwe, an associate editor for online magazine CNET Electronics. “So, at this point the carriers don’t have the sort of data networks to support streaming video, at least not here. It’s being done with some success overseas, but even there the problems are not completely ironed out.” The top manufacturers of the Palm Pilot and Pocket PC, such as Toshiba and Casio, have already begun adding features to newer models that will support film and multimedia graphics. “This is exactly the thing that many of the companies are using as marketing tools to sell upgraded devices,” said Dewe. “I think it’s been pretty effective so far, and I think it’s proved to be a popular download, even if it means spending more money for the added features.” Because the viewing screen on hand-held devices is so small, each disc can hold up to about six full-length feature films, depending on memory availability. A 100-minute film or TV show can be downloaded in about 10 minutes, and played at the same speed as a big-screen film, 24 frames per second. The technology is still quite new, and it could be that Pocket PCs, which retail for $400 and up, might still be too expensive for the average consumer. “I think the technology is almost there, but I’m not sure the quality of the resolution is what it should be for films,” said Knox Bricken, an analyst with Boston-based technology research firm Yankee Group. “And, is the market ready to pay for pocket devices just because they can now get films? I’m not sure of that either.” Good point, said Duwe. “A lot of handheld devices out there still don’t have color screens and some also don’t have sound capability,” he said. “So that would be like watching a silent movie in black and white, and where’s the draw?” Nevertheless, market saturation has begun to push prices downward. There are roughly 1,000 different types of handhelds on the market today. And, said Duwe, $400 isn’t all that much. “That’s just a little less than a desktop,” he said. “Yeah, they are an expensive toy, but they have so many features that I think consumers are finding ways to justify the expense.”

The Digest WellPoint Gets Subpoena WellPoint Health Networks has received a subpoena from the U.S. Attorney’s Office in Boston regarding its relationship with TAP Pharmaceuticals. TAP Pharmaceuticals manufactures Prevacid, a drug that has gained popularity among WellPoint’s 13 million medical members because of its ability to effectively treat heartburn. TAP has been under federal scrutiny ever since the company reached an $875 million criminal and civil settlement last fall on charges it provided sales representatives with $40,000 worth of Lupron. The company allegedly used its prostate cancer drug to woo doctors to buy more of the product instead of less expensive alternatives. LAUSD Buys Boeckmann Property The Los Angeles Unified School District has purchased a 14.4-acre site for a new middle school in the northeast San Fernando Valley from Jane and Bert Boeckmann, owners of the Galpin Ford dealership in North Hills. The onetime Van Nuys Drive In Theater at Roscoe Boulevard and Noble Avenue cost the school district $12.9 million. About $2.5 million of the purchase price will be offset by transferring ownership of the district’s maintenance and operations yard in the 8200 block of Orion Avenue to the Boeckmanns. The Boeckmanns bought the site for $9.94 million in June 2000 from Circuit City Stores Inc. The new school is expected to accommodate 1,629 sixth-, seventh- and eighth-graders. Telemarketer Convicted of Securities Fraud A salesman with a Canoga Park telemarketing firm has been sentenced to 37 months in federal prison and ordered to pay $4.5 million in restitution to defrauded investors. Authorities charged Aldo Tarallo, 71, of conning victims into believing that they were investing in companies about to go public. Assistant U.S. Atty. Steve Olson said investors across the country lost a total of about $6.2 million in the scam. A federal jury convicted Tarallo in November on six counts of securities fraud and four counts of mail fraud. Tarallo, free on $250,000 bond, was given until July 22 to surrender to serve his sentence so that he can make arrangements for the care of his seriously ill wife. The firm’s president, David Allan Colvin, 57, of Chatsworth, pleaded guilty last year and was sentenced to 78 months in prison. Sales manager John Larson, 51, was sentenced to 42 months in prison after pleading guilty. According to evidence presented during Tarallo’s two-week trial, the telemarketers touted investments in an assortment of companies they claimed were on the verge of going public. The companies included one that supposedly could detoxify a drug addict within 15 minutes and another that was developing a guide to adult sex sites on the Internet.

Investors Find Value in SageMetrics Corp. Performance Media & Technology by Carlos Martinez North Hollywood-based SageMetrics Corp. has received $6 million in its second round of venture capital funding. The company, which makes business software and analyzes online and off-line consumer data, completed its latest round of financing earlier this month, with Ascend Venture Group leading the round with $3 million in capital. Darryl Wash, managing partner for Ascend, said the company was attractive because it has been breaking even in a difficult economy and is poised to return to profitability within a year. Other backers include Bay Star Capital, Innisbrook Partners and GCWF Investment Partners. SageMetrics CEO E. Kenneth Nwabueze said the new funding will go toward marketing efforts and improving sales. Already, SageMetrics has begun a number of new initiatives, including a strategic partnership in February with software maker RedSheriff Inc., based in New York. The agreement allows the firms to offer a combined data analysis platform to serve their combined customers. Wash said SageMetrics’ biggest competition comes from DigiMine Inc., based in Bellevue, Wash. That firm recently announced $20.3 million in venture financing. DVD Piracy Alleged Chatsworth-based adult video producers Anabolic Video Productions Inc. and Diabolic Video Productions Inc. have filed suit against three video distributors for alleged illegal copying and distribution of their DVDs. According to a lawsuit filed in Federal Court in Los Angeles, attorneys for both video companies say VIP Services Inc., Lynton Appelson Inc., Aware Distributors Inc. and other unnamed companies and individuals illegally copied and distributed DVDs produced by Diabolic and Anabolic. Anabolic president Christopher Alexander said the suit seeks to recover the alleged illegal profits made from the sales of the counterfeit DVDs, unspecified punitive damages and attorney’s fees for infringement of copyright. Officials for the three firms contacted by the Business Journal would not comment. “We found out when retailers complained that they had received inferior copies of our DVDs,” said Alexander, who added that at least 25 titles had been pirated. Alexander said the company has been using investigators posing as buyers at a number of video stores to determine whether more DVDs have been illegally copied and distributed to unsuspecting video shop owners. Alexander said both companies will pursue anyone who has illegally copied the companies’ material, whether by downloading from the Internet or by making or selling counterfeit copies of the two companies’ DVDs or videocassettes. The companies said an unspecified number of pirated versions of their DVDs have been circulating for months throughout Southern California, making efforts to catch the culprits difficult. “We don’t know how many have already been sold,” said Alexander, who noted that retailers are also victims of the scam. Bill Lyon, executive director of the Adult Video Association, said DVD piracy has been a growing problem for the industry. “The retailer is going to look for the best deal he can get,” Lyon said. “If you’re going to get a better deal from another supplier instead of some established supplier, you’re going to go there and that’s where the problem lies.” Adult videos and DVDs are generally carried by small retailers rather than large chains, which shun porn, he said. Film Roman Turns to Effects Film Roman Inc. is making its move into the effects business after the company acquired VanHook Studios, formerly of Glendale, and moved the company into its North Hollywood studios. The acquisition, the value of which was not disclosed, marked the company’s push into visual effects as a way to improve its revenue flow, said Film Roman CEO John Hyde. “Our role is to expand Film Roman into graphics and effects as a way to improve and diversify,” Hyde said. “We want to refocus the company back into animation, graphics and visual effects that are all in keeping with what Film Roman is about.” As part of the move, VanHook has been renamed Forum Visual Effects and will continue to be led by its founder, Kevin VanHook. Moving the company into visual effects may well improve the company’s bottom line, said longtime Sun Valley-based effects specialist Sean Taylor. “There’s a lot of business in effects right now, so it’s definitely going to help,” he said. Over the last three years, Film Roman’s revenue has decreased steadily as the animation business declined. According to figures for the quarter ended March 30, the company lost $816,267 on $15.8 million in revenues, compared to the same period last year when it lost $302,193 on revenues of $19.2 million. The company’s dependence on a handful of shows for its revenue flow has been the reason it has struggled over the past few years. “King of the Hill,” “The Simpsons” and “X-Men” accounted for 33 percent, 30 percent and 16 percent, respectively, of the company’s total revenue last year. “We need to broaden our scope and take on areas where we know we can excel,” said Hyde of the move into effects. This month, the company announced plans to develop a series on the comic book character “Deity.” It also signed deals with the SciFi Channel for a new computer-animated series, titled “Tripping the Rift,” and with Showtime Networks for animated programming spots. Terms of both deals were not disclosed. The announcements, coupled with the acquisition of VanHook Studios, helped push the company’s stock up slightly, from 21 cents a share to 25 cents. On May 24, the stock closed at 24 cents a share. Lockheed, Optics 1 Get Contracts Optics 1 Inc. of Westlake Village and Lockheed Martin Corp. in Palmdale received separate U.S. Defense Department contracts this month. Optics 1 received a $12.3 million contract for designing and manufacturing imaging equipment for the U.S. Navy’s AN/AAS-52 Multi-Sensor Targeting System. The work will be conducted at the company’s headquarters and is scheduled to be delivered to the Naval Air Warfare Center Aircraft Division in Lakehurst, N.J. by July 2003. Lockheed Martin has been awarded a $14 million contract to develop and provide sensor technology equipment for U.S. Air Force fighter aircraft. Other details were not available. Work will be done in Palmdale and is scheduled to be delivered to Wright-Patterson Air Force Base in Ohio by September 2009. Business Journal reporter Carlos Martinez may be reached (818) 676-1750 ext. 17 or by e-mail at [email protected].

3D Earnings Flounder as Lawsuits Distract Managers By SHELLY GARCIA Senior Reporter 3D Systems Corp. built its business offering manufacturers ways to make three-dimensional models and prototypes quickly and inexpensively. A financial model for the Valencia-based company is proving to be somewhat more elusive. Despite several recent acquisitions to bolster its product offerings and technical expertise, 3D’s earnings have slipped and its revenue growth has stalled. Like many companies whose fortunes are tied to industrial and corporate growth, 3D has been hit by a virtual shutdown in capital spending across every industry sector. The company has also been embroiled in several lawsuits that drained management resources and curtailed growth. These factors came to bear in the first quarter of 2002. Excluding the proceeds of a legal settlement and without benefit of an acquisition made last year, 3D would have reported a loss of $3.5 million or $.27 per diluted share and a 28-percent decline in revenues for its most recent quarter ended March 31. 3D heralded the problems early in April, revising its first-quarter guidance downward, a move that led A.G. Edwards & Sons Inc. to downgrade the company’s stock to a “sell.” “We are not pleased with first-quarter results,” said Brian K. Service, president and chief operating officer of 3D, in announcing first-quarter results. (3D executives declined to comment for this story.) “We are in the process of recalibrating our cost structure in line with current market conditions, including a reduction of approximately 10 percent of our work force.” As of the end of 2001, 3D employed 580 workers. For the first quarter of 2002, 3D reported net income of $8.5 million or $.58 per diluted share on revenues of $27.2 million. That compares with earnings of $1.4 million or $.11 per share on revenues of $27.9 million in the comparable period last year. But the results include a pre-tax benefit of $18.5 million due to the settlement of a claim with a former business affiliate. The company’s revenues, too, would have shown a decline if not for the contribution of DTM Corp., a company acquired in August 2001. “The majority of the products the company sells are capital equipment and, post-Sept. 11, capital spending plans were largely put on hold,” said Jay R. Harris, a security analyst and president of Goldsmith & Harris in New York. “What you saw in the first quarter was the consequence of that kind of corporate-America, corporate-Europe decision-making process.” Founded in 1986, 3D makes solid imaging products and systems used to create prototypes and concept models. Its systems, allowing manufacturers to “print” three-dimensional models directly from computer-assisted designs, eliminate the need for tooling, shortening the length of time it takes to bring a product to market and reducing the expense. Whereas injection molding and other traditional techniques can be amortized over long periods of production and sales, 3D’s systems, ranging from $50,000 to $800,000, have had particular appeal in lower volume productions when designs are likely to change every few years. And 3D, which saw revenues grow to more than $120 million from about $90.3 million in 1997, has carved out the No. 1 position in its niche. But last year, the company attracted the interest of the Justice Department when it announced plans to acquire DTM, a $45 million maker of three-dimensional prototypes using laser technology. The DOJ challenged the acquisition, and 3D executives were engaged in defending their merger until a resolution was reached in February. About the same time, a decision by 3D to terminate a development agreement with Vantico Inc. led to a challenge that was not settled until March. “A lot of senior people and marketing managers spent long hours testifying before the Justice Department,” said Harris, “and they basically lost control of the marketplace.” In recent months, 3D’s stock price has fallen into the $13 range from a 52-week high of $18.52. On Friday, May 24, the stock closed at $13.11

Wisdom of Rumored Merger of Giants Is Hard to See Real Estate by Shelly Garcia In a big-get-bigger world, there’s not much mystery to the reports that CB Richard Ellis and Grubb & Ellis are discussing a merger. It’s no secret that brokerages are feeling the pain of a couple of quarters of reduced leasing activity. No secret that the bigger they are, the more overhead they carry, the more pain they absorb. No secret that companies under pressure to improve performance can gain economies of scale through mergers and acquisitions. Those are probably all the things that executives at CB and Grubb would say were they commenting on reports that a merger is imminent. But they are not commenting, which leaves me kind of confused by this news and the rationale behind it. First of all, how big is big enough? CB’s got 250 offices in 47 countries. Grubb has 200 offices in 29 countries. How much do you think it matters to the average tenant in the San Fernando Valley, in Poughkeepsie, in Kansas City, if, through the acquisition, Grubb, or CB for that matter, adds an office in, say, Jakarta? In Milan? Buenos Aires? A broker I spoke with (many were uncharacteristically shy about commenting for the record for this story) said it’s an image thing. Just like the adage that you can’t get fired if you buy IBM, a REIT manager probably can keep his nose clean by sticking with a large firm. But the bread and butter for most real estate brokerages, and that includes the largest of them, is not institutional accounts who buy and sell portfolios of properties on an international scale. It’s the independents, the local property owners and the local tenants. Indeed, the same brokers who pointed out that big business is corporately correct business say in the next breath, “Me? I don’t personally see any benefit.” Some of them even work with institutional clients. Which brings me to the crux of the problem I see with such a merger. Real estate brokerages are, first and foremost, a network of individual me’s who set up relationships with individual they’s, and that relationship is pretty exclusive. So much so that many brokers take their clients with them when they switch companies. So much so that most brokers, although they are affiliated with a brokerage, are paid based on a percentage of the deals they bring in. So much so that even institutional clients often select their brokers on the basis of a personal referral, not the corporate umbrella under which they operate, no matter how fancy the graphics on the brochures. “Sometimes, all things being equal, if you remind him of his cousin Bob who he really likes in Wisconsin, he’s going to pick you,” is how one broker explained the decision making process of tenants and property owners. “I’ve had it happen quite a bit.” A supermarket buyer buys Procter & Gamble because it’s got the cereals customers want. But the client/broker relationship is a game of whom do you trust. That’s why brokers find their own clients, and they keep them through their own efforts. It doesn’t matter whose name is on the business card. None of this, however, means that it doesn’t matter if two of the largest real estate brokers merge. It actually matters a lot, but not for the obvious reasons. Put bluntly, as one broker did, “We’re working our butts off for clients and you guys are selling us out.” To be sure, both Grubb and CB can use a financial boost. CBRE Holding Inc., the privately owned parent of the brokerage, saw revenues plummet 18 percent to $224 million for the quarter ended March 31. Earnings before interest, taxes, depreciation and amortization (EBITDA) sank 21 percent to $11 million compared to the same period last year. Grubb lost $5.2 million or $.35 per share and revenues declined by 27.4 percent to $58.2 million compared to last year. A merger would save a bundle. But only because there are so many duplications between both companies indeed, it’s likely each will shrink down from their current size if they are combined. But economies of scale mean little to the brokers working in the Valley, or the Westside, or any of the local markets in which these companies operate. And in a business where your one indispensable resource is arguably your brokers, what would either company really gain? Agilent Moves Agilent Technologies leased 37,300 square feet at Westlake North Business Park at 30699 Russell Ranch Road in a five-year lease valued at $5.2 million. Agilent has occupied a 53,000-square-foot space at 5601 Lindero Canyon Road, but never utilized all the space, said Dave Leit, vice president at CRESA Partners, who represented the tenant in the deal along with Bill Nichols, a broker with Corporate Services Consortium in Minneapolis. “The facility they’re in needed some upgrades,” Leit said. “The economics didn’t warrant staying there.” The company’s lease is set to expire in September. Tom Festa, Jim Lindvall and Sam Monempour, brokers with Grubb & Ellis, represented the landlord, Investment Development Services. Senior reporter Shelly Garcia can be reached at (818) 676-1750, ext. 14 or by e-mail at [email protected].

Not Quite Ready to Roll Vitesse’s Lou Tomasetta, struggling to find revenues wherever he can, puts off release of his latest next-generation product. By CARLOS MARTINEZ Staff Reporter Lou Tomasetta thought he was on to something as Vitesse Semiconductor Corp. prepared to roll out its 10-gigabit network processor later this year. Granted, networking equipment makers like Alcatel, Lucent Technologies Inc., IBM Corp., Nortel Networks Inc. and Cisco Systems Inc. make up 90 percent of its sales, so the Camarillo-based company Tomasetta founded and runs was hit as hard as any by the tech downturn last year. In the first quarter of this year, the company posted a $44.4 million loss on revenue of $42 million, compared to an $11.2 million loss on $121.7 million at the same time last year. Still, a new high-end product seemed like it might be what Vitesse needed to fuel a rebound. The new 10-gigabit processor would vastly improve the efficiency and speed of Ethernet networks. Ethernet networks are a series of computers, usually in the same organization and linked together, that allow users to access information from every other computer in the network. Unlike the Internet though, which connects users to servers all over the world, the Ethernet connects workplace or home computers to each other, only at much greater speeds, up to 2 gigabits per second. The speed and efficiency provided by the Ethernet network would cause customers to flock to the new processor, thought Vitesse CEO Louis R. Tomasetta. But that doesn’t appear to be the case yet. Few companies have shown interest in the new processor. In fact, at this point demand is nearly non-existent and earlier this month Tomasetta indefinitely postponed the release of Vitesse’s 10-gigabit network processor. Instead, Vitesse is focusing on developing slower, more affordable, devices for the 2.5 Gbit optical connection market, products that are “less sexy” but more likely to produce revenue, Tomasetta said. Tomasetta insists he’s been through more than one industry downturn since founding the company in 1987, and this recent market decline doesn’t faze him. An engineer who helped develop the gallium arsenide chip more efficient than chips made of silicon Tomasetta has learned to survive sharp market changes. Vitesse started out as a chipmaker, then expanded into communications components when the chip market slipped, and later moved into network processors and fiber optic devices as markets again changed. Tomasetta spoke with Business Journal reporter Carlos Martinez recently about the travails, and opportunities, of running a semiconductor company in 2002. Question: Over the last year and a half, Vitesse has been hit hard by the tech downturn as customers like Alcatel, Cisco Systems and Lucent cut orders drastically. Did you see all this coming? Answer: We felt there was no way this growth would last. We felt we could resize ourselves and plan for even a 50-percent decline in revenue and still stay profitable. But I don’t think I’ve seen a cycle where almost across the board all the communication chip companies went down 70 to 80 percent of revenue from their peak. With that kind of scenario, there’s no way you can plan for (it). Q: Once you realized what was going on, did you come up with a strategy, or did you feel compelled simply to respond to market forces? A: We had a plan. We all expected a downturn, but I don’t think anybody expected to have this sharp of a downturn. When the first decline happened, you have to resize manufacturing because there is no reason to have a manufacturing facility that supports $150 million in revenue when you’re only doing $40 million. So we resized our manufacturing. Q: The tech industry’s problems appear only to have gotten worse in recent months with the collapse of Global Crossing and the telecom sector’s continuing troubles. How do you see things playing out? A: We’re starting to see recovery from the storage connection and the Ethernet backbone, so that’s what you’re starting to see from companies like Cisco. The long haul (telecom) service market, which used to be 80 percent of our business three years ago, still has a lot of overcapacity and a lot of equipment that they don’t need. We don’t see the recovery, at the earliest, until the first half of 2003. Q: Vitesse has had the 10-gigabit processor in development for quite some time. How difficult was it to pull the plug on its release? A: We felt there was a lot more opportunity to build variations of our 2 gigabit chip that would solve problems of one to two and a half gigabits per second than to go to a whole new product that would be very expensive, and where we couldn’t see where the customers would be for that product. Q: When will the market be ready for the 10-gigabit processor? A: That’s probably three or four years away. Q: Why then have other companies decided to go forward with plans to release their 10 gigabit processors when Vitesse feels it makes more sense to hold off? A: It’s a question of where they want to put their resources. The market for network processors is very fragmented. It’s not like the PC market where there is one architecture and all you’re arguing about are price and speed. There is no question that you can build a 10 gigabit processor, but can you invest 40, 50 or 60 engineers to work on a product for 18 months that can take away from other products that are not as sexy but may generate more revenue right now? Q: Vitesse has moved into fiber optics, but that area has been slow in developing too. Do you see any growth there next year? A: We’re seeing that side of the business growing again slowly because it’s replacing (devices) that were built 10 years ago, primarily to connect data centers to data centers and not long-haul (telecom) providers. Q: Heading a company in the middle of the kind of troubles your industry is having must be a test of your management skills. Have you had to reevaluate your management philosophy and, if so, what have you changed? A: We’ve been through these types of cycles before. In the early ’90s, we had a dominant business in gallium arsenide custom chips in high-performance computer chips when communications was just getting started. That business went through a major restructuring where we lost 65 percent of our revenue over a six-month period, so we always reevaluate what we’re doing. We don’t believe there is a secret formula to managing a company. You have to use your common sense a lot because in these down cycles you just don’t have accurate information. Q: How did you come to start Vitesse? A: I came here in ’77 (from MIT). I worked at the Rockwell corporate research center in Thousand Oaks. We were doing a lot of contract research for the U.S. Department of Defense. You could build products with the technology they had there, but it wasn’t part of the culture to do the research and invest money before you got revenue. So I left. We were able to raise some money and get the company started. We never raised much money in those days. Even when we went public we only raised $30 million, which wasn’t a lot. SNAPSHOT: Louis R. Tomasetta Age: 53 Title: President and CEO, Vitesse Semiconductor Corp. Education: B.S., M.S. and Ph.D. in electrical engineering from the Massachusetts Institute of Technology Most admired persons: Vitesse Chairman Pierre R. Lamond; Bob Paluck, co-founder of Convex Computer Corp.; T.J. Rodgers, founder and CEO of Cypress Semiconductor Corp. Personal: Married, two children