MannKind Has Postponed IPO Until Early ’03 By CARLOS MARTINEZ Staff Reporter Entrepreneur and biomed pioneer Alfred E. Mann has decided to wait until early next year to take his biotech conglomerate MannKind Corp. public, despite plans for an initial public offering this summer. “We met with bankers and they told me that, because of my track record with companies and my reputation, that we could go public now, but I don’t believe the market is ready,” Mann said. New York-based brokerage firm UBS Warburg last year conducted a study of MannKind’s assets with a potential IPO in mind, Mann said, but he would not reveal how much it was valued at. “All I can say is that it had a very healthy valuation,” Mann said, adding that the proceeds from the initial public offering will fund research at MannKind’s companies. While it’s unclear how much money an initial IPO for MannKind might raise, Kurt Kruger, an analyst for Bank of America Securities, said Mann’s reputation for building successful companies virtually from scratch could only help. “It doesn’t matter whether he goes public now or later, he’s going to have a lot of interest,” Kruger said. “He has struck gold so many times in this biomedical category that he’s liable to do it again.” The IPO would give Mann the opportunity to acquire more companies and possibly accelerate research at his startups, he said. Even with a personal fortune of about $1.6 billion, the IPO could give Mann the tools to build the next Amgen with one or all of his MannKind companies, Kruger said. It’s still possible a MannKind IPO would face the kind of investor skittishness that greets most IPOs in the biotech sector. “But they’re going to leverage Al Mann’s reputation and his nose for success, and that could go a long way toward resting their concerns,” Kruger said. Brent Reinke, managing director of Crosby Heafey’s Westlake Village office, predicted MannKind’s IPO would generate a lot of interest among investors. “These are companies with potential, and it’s going to help raise the profile of the whole biotech industry here,” he said. Still, potential investors will have to wait a while, Mann said. “IPOs have not been well received by the market so far,” he said. However, initial public offerings by biotech firms have raised $610.3 million since January 2001, according to documents filed with the Securities and Exchange Commission. Last June, Tarzana-based Unilab Corp. raised $107.2 million by selling nearly 7 million shares for $16 apiece. But many biotechs run into investor skepticism, like France-based Alcon Inc., which raised a disappointing $2.3 million last month, or Washington state-based Northwest Biotherapeutics Inc., which raised $20 million last December. MannKind owns CTL, Second Sight Inc., AlleCure Corp. and Pharmaceutical Discovery Corp., the oldest of the firms, established in 1991. All four companies have the potential to develop a number of new products, analysts say, but it’s hard to imagine any will have the success of Mann’s MiniMed, which he sold to Medtronic Inc. last year for about $3.7 billion. & #344; Chatsworth-based CTL is developing a cancer vaccine, now in early clinical trial stage, that will reduce the size of tumors. & #344; Valencia-based Second Sight is developing eye implants that connect a video camera to a patient’s optic nerve, giving sight to those for whom other therapies don’t work. & #344; AlleCure in Valencia is developing allergy vaccines that the company says could make asthma a malady of the past. & #344; Pharmaceutical Discovery Corp. of Elmsford, N.Y. makes microscopic capsules containing proteins and peptides that can be inhaled or swallowed, making them more effective in delivering medicine to patients. Mann’s track record in creating and building successful companies includes his first firm, Spectrolab, an electrophysics company; Heliotek, a semiconductor firm; Pacesetter, a heart pacemaker manufacturer; Medtronic MiniMed, an insulin pump maker; and Advanced Bionics, manufacturer of ear implants. Stephen McCormack, CEO of AlleCure, said he believes the IPO will bring a heightened profile to his company and to its allergy vaccine research. “It will bring more public awareness of what we’re doing in AlleCure and how rapidly we’re moving into the clinical trial stage and eventually into the marketplace,” he said. Likewise, John Simard, CEO of CTL, said the IPO will help fund expensive clinical trials at his company and MannKind’s other companies, most of which are in the early stages of testing.

L.A., Hahn Try to Make Secession Look Complicated COMMENTARY: From The Newsroom by Michael Hart Bundling products and services to make it too complicated for customers to leave you is a good trick. It’s such a good trick that the city of Los Angeles is trying to pull it on the San Fernando Valley with Proposition Q. If you believe secession is a good possibility, it might have made sense to put off for a while a bond election for projects that wouldn’t even end up being in the city that eventually would do the work. One of the most attractive carrots that Prop. Q advocates had to offer was that the woefully overcrowded Northwest Valley Police Station would be replaced. And it probably worked. I’m sure L.A. city officials are prepared to say “Who knows?” if asked what made the difference in their razor-thin victory on the $600 million bond issue. However, I’ve got to believe those pictures of a cramped police station changed a few minds and, given the tight election race, they might have made the difference. Regardless of how and why the bond issue passed, you can now look to Business Journal reporter Jacqueline Fox’s story elsewhere in this issue to learn how complicated this gets if secession is successful and, consequently, what kind of trick’s been pulled on Valley voters. First, there are the what-if-secession-passes questions: Will that not-yet-built police station belong to L.A. or a new Valley city? If it’s the former, will Valley taxpayers still buy it for a city they’re not citizens of? If it ends up somehow in the hands of a new city, wouldn’t citizens want the chance to take another look at whether it’s needed and how it fits into the rest of their plans? It could be that these are all questions Mayor Jim Hahn and secession foes are hoping we’ll ask right before we say, “This is just too complicated,” and vote no in November to secession. It’s a strategy that my insurance company uses successfully when it manages to sell me policies to protect a couple different cars with different values, my house and my health all at the same time. Pulling any one of those policies out to see how it stacks up in the marketplace changes everything else in the package so much it’s just not worth trying. And in a day and age when municipal governments at least say they’re interested in improving customer service, there’s nothing wrong with them taking a lesson or two from businesses who say the same thing and then implement a strategy designed to make it hard for customers to go anywhere else. Just as companies are out there telling customers, “We’re going to do everything we can to make you happy,” Hahn is telling the Valley, “I’m going to do everything I can to convince you that sticking with us is a good idea.” Apparently, he feels like the promise of a new police station in the Northwest Valley is a good idea. So too, I guess, are those cops who now wander rather aimlessly around busy Ventura Boulevard intersections during rush hours. Perhaps it’s not fair to criticize Hahn too much for this strategy of trying to make L.A. city government appear indispensable. You can be sure Antonio Villaraigosa would have tried the same thing if he’d won the last election. It’s incumbent on us all to be aware that many of the stratagems applied by those opposed to a breakup like, for instance, a very complex Prop. Q scenario are intentionally confusing and part of a strategy that will be successful if we finally all just throw our hands up and say, “Never mind.” Michael Hart is editor of the San Fernando Valley Business Journal. He can be reached at [email protected].

Surgeons Look Beyond Hospital Walls for Profits By JACQUELINE FOX Staff Reporter Dr. Scott A. Baden, an orthopedic surgeon, has been relatively happy with the 20-year working relationship he’s had with Sherman Oaks Hospital. But there are challenges: much of the surgical equipment at the hospital, he said, is outdated; operating rooms are often overbooked, making it difficult to maintain profitable patient turnover rates; and rising health care costs continue to take a bite out of salary and benefit packages for hospital staff in general. So when an opportunity came along a little more than a year ago to join about 20 other doctors to own and operate their own outpatient surgery center in Encino, Baden didn’t hesitate. He is one of many doctors in the Valley and elsewhere who have opted to supplement their incomes over the last few years by buying into doctor-owned and operated outpatient surgery centers. Baden and others say this kind of co-op practice provides him and his colleagues with an opportunity to perform outpatient surgery in new facilities with up-to-date equipment and take more control over their schedules. It also offers a way for doctors to boost their incomes since payments for services and aftercare go directly to the businesses they own, not a hospital, and, because the equipment is newer and more efficient, they can perform more surgeries in less time. “The reason we all want to work here and be a part of this is because the equipment is state of the art, the patient turnover is better, we can make more money, and it’s a beautiful environment,” said Baden. Today he is a senior orthopedic surgeon at Nations Surgery Centers, one of three outpatient clinics in the Thousand Oaks-based Nations Capital Group network specializing in orthopedic surgery. Baden declined to discuss financial details or the difference that owning part of the center has made for him so far. He remains on staff at Sherman Oaks Hospital and spends one day a week at the center where patients are either referred to him by other doctors or, in many cases, by Baden himself. State conflict-of-interest laws bar doctors from referring their patients to most businesses they own because of the potential for impropriety. For example, doctors can’t own and operate their own laboratories, because they risk the perception they would be motivated to order unnecessary lab tests. However, the laws do not apply to outpatient surgery centers. With that in mind, the cooperative concept where the large infrastructure start-up costs can be shared, said Baden, is one that he and many of his colleagues have tried to convince hospitals to get in on for years. But historically, hospitals, which typically have outpatient surgery centers on-site, have been reluctant to run them as partnerships with medical staff members because they would have to share revenues and administrative oversight. And, traditionally, doctors and administrators have not made the best of business partners, just by virtue of the different interests they represent within the industry. The doctors at Nations collectively own 40 percent of the business, according to Larry Sherman, president and CEO of Nations Capital, who owns the remaining 60 percent. “We suggested this 10 years ago,” said Baden. “We said, why not partner with us? They wouldn’t do it. They just weren’t interested.” But things are changing. Now threatened with competition, hospitals are starting to grapple with the fact that not only have they been losing patients and business to independent outpatient centers, they’ve been losing them to members of their own surgical teams. “This has always been the bane of our existence because (these co-run centers) are taking patients out of the hospitals,” said Jim Lott, executive vice president of the Health Care Association of Southern California. “Doctors have found a loophole in the law to do this and it’s draining the hospitals of income. So, many hospitals are saying, ‘Let’s partner up and do something on our own,”‘ Lott said. Here in the San Fernando Valley, Encino-Tarzana Regional Medical Center has received state approval to build a $3 million, 7,500-square-foot outpatient surgery center inside its Encino campus, which will be owned jointly by the hospital and staff surgeons. The center, which will specialize in orthopedic, obstetrics, neurology and general surgery, is expected to open by spring 2003. According to Ron Yukelson, Encino-Tarzana’s associate administrator for business development, the hospital has had plans in place to set up a jointly-run center for several years, but until 1999, state laws wouldn’t allow hospitals to run separate businesses unless they were located offsite. “We had plans to either invest in or purchase an ambulatory surgery center that we would co-run with doctors on staff even before Nation’s Capital was in business,” said Yukelson. “When we listened to our physicians, and they said, ‘Look, we know we’d rather maximize our income by going into another joint-venture,’ we were already strategizing about different ways to do this. And because we knew about the pending (changes in the law), we decided to wait for clearance to build the center right here inside the hospital.” Sherman Oaks Hospital also has plans to build its own outpatient surgery center, according to Baden. But he said he now has no interest in sharing a business with the hospital when he can do it with colleagues just as successfully. “If you think about it, we’ve really been partnering with the hospitals for decades already,” said Baden. “We’ve been there, done that.” While the revenue for doctors who buy into these jointly run centers can be lucrative, recent changes in California’s Workers’ Compensation laws could make it more difficult, according to Lott. Outpatient centers, he said, have typically derived a large percentage of their revenue from workers’ comp cases because doctors can base fees on service to those patients, instead of a fee schedule negotiated by HMO’s or insurance companies. Hospitals have always had to use fee schedules for all patients, including workers’ compensation cases. But recent legislation now requires outpatient surgery centers to use fee schedules for workers’ comp patients too, although the law likely won’t take effect for about a year. “Basically, many of these outpatient surgery centers have capitalized on a rather liberal reimbursement policy for workers’ comp cases,” said Lott. “That’s what’s been driving these physicians to go into business for themselves.” Lott estimated that the changes in workers’ comp law could result in a 50- to 60-percent reduction in reimbursements from patients and their medical providers. “The gold mine has always been workers’ comp,” said Lott. “But I would think physicians won’t be as motivated to set up separate businesses like these if they aren’t going to get much out of them.” Baden declined to say what percentage of his patients were workers’ comp cases. But he downplayed the changes saying, “We have a good mix of patients here, so it’s not really that big of an issue for us.” Sherman of Nations Capital declined to reveal revenues for the Encino facility, up and running since October 2000, but he said “these centers have the potential to generate $100 million a year in gross revenue.” Nations also owns another center in Anaheim and is planning a third in Ontario next year.

Furniture Firm Shifts Focus in Slow Economy By CARLOS MARTINEZ Staff Reporter When the tech downturn started battering local tech companies, Pacific Office Interiors got battered right along with them. The office furniture company that had targeted tech firms primarily in the Conejo Valley saw its numbers drop and needed to do something to bolster its sales. “So we started talking to firms that dealt in defense,” said David Walk, the company’s vice president. “It was our luck that the defense industry was picking up.” During the summer, defense firms like Raytheon Corp., which operates a facility in Santa Barbara, and Northrop Grumman Corp., which operates a facility in Chatsworth, were preparing to ramp up their purchases of office furniture. Both companies confirmed the purchases, but would not comment further. Pacific’s troubles were not unique as the office furniture industry throughout the United States suffered. Michigan-based Steelcase Inc., the world’s top office furniture maker and seller, saw its revenue drop by more than 20 percent last year as orders plummeted. Last month, Herman Miller Inc., the country’s third largest office furniture maker, announced drastic cutbacks, laying off 600 workers in the face of a 30-percent drop in sales from last year. Herman Miller had already closed one manufacturing plant and consolidated several of its brands and operations. But by January, Pacific’s fortunes had turned as Raytheon and Northrop Grumman suddenly were responsible for 35 percent of the company’s sales, and helped make up for some of the business it lost due to the tech downturn. “We used to have a lot of business from defense firms, but all that went away in the early ’90s,” said Free Taylor, company principal. The return of defense work was still not enough to overcome a drop in business from the previous year, due to the tech industry’s downturn. Overall revenue dropped from $16 million in 2000 to about $13 million in 2001, Taylor said. The company does not reveal net income figures. But while tech companies either reduced or canceled their orders, defense firms slowly began to order more furniture and more installation work. “These were companies that we hadn’t heard from in years, so we were somewhat surprised,” Taylor said. But perhaps not surprised enough to be satisfied. Although more orders are coming in from Northrop Grumman and others, Taylor said the company expects only a slight revenue increase, to about $14.5 million this year. Barry Coyle, a Ventura-based office furniture industry consultant, said furniture companies like Pacific will continue to see rough times through the end of this year. “You’re not seeing a lot of movement overall since furniture is a capital item,” Coyle said. “What you’re going to see are corporations readying for expenditures next year. “But the defense market is different and a lot of them are doing business now.” Overall, furniture orders figure to increase, beginning in spring 2003, Coyle predicted. “The economy started recuperating a few months ago and the typical rule of thumb is that the furniture industry lags behind by 18 to 23 months, so that’s in line with that,” he said. Pacific Office Interiors, in anticipation of a return to prosperity in its old stomping grounds, is moving its operations from Oxnard to Westlake Village in June. The company will move from its existing 15,000-square-foot building to 17,000 square foot closer to its clients. “We found that it’s a lot more difficult to get people to come out to Oxnard to look at furniture,” Walk said. The new facility will give potential clients a chance to see more displays and a larger showroom, Walk said. Companies generally spend between $3,000 and $4,000 per workstation, making such purchases a major investment, Taylor said.

This Coffee is HOT! One sip by a Dreamworks executive who lived nearby propelled a Valencia coffee roaster into a new market beyond the confines of the Santa Clarita Valley By CARLOS MARTINEZ Staff Reporter When the Newhall Coffee Roasting Co. closed out its first year in business with a grand total of $6,000 in sales, founder and CEO Mitch McMullen and his brother Kyle knew they’d have to move beyond the small group of local shops and restaurants they could call customers if there was even going to be a second year. “We were just selling to a few people around town, but we wanted to take it to the next level,” said company president Kyle McMullen, noting that back in 1993 they had neither the big name accounts they needed to survive nor the reputation for roasting good coffee they had to have to land those accounts. The family-owned company did take it to the next level too. Today, Valencia-based Newhall Coffee has expanded from the Santa Clarita Valley into the San Fernando Valley and beyond, with clients as far away as the Deep South. After hitting the $2 million revenue mark last year, the McMullens say their six-year-old company is on track to make $3.5 million this year, having landed customers like Commerce-based Smart & Final, with 162 stores throughout the West, and South Carolina-based Bi-Lo LLC, which operates 306 Bi-Lo supermarkets in the South. The brothers, who started out with no formal business education and little intention of every owning their own company, said they owe what success they’ve experienced to the quality of their product not their business acumen. Kyle started out in marketing with their father’s product placement firm; Mitch played professional basketball in France. But when Mitch was diagnosed with a career-ending heart ailment in 1993, he returned home and opened the Java n’ Jazz coffeehouse in Newhall (which they still own). Kyle joined his brother in the enterprise shortly thereafter and they bought their own coffee roaster. When roasting beans for their Java n’ Jazz customers didn’t seem like enough, they established Newhall Coffee and started selling to local shops and restaurants. But it wasn’t until 1997 when an executive at Dreamworks SKG studios who lived nearby tasted their coffee that the brothers’ fortunes turned. “That’s how we got the Dreamworks account,” Kyle said. Before long, Newhall Coffee was the only kind anybody at Dreamworks was drinking. The McMullens were able to leverage their exclusive relationship with the studio into other important accounts like Warner Brothers Studios, the Getty Museum and Costco, the latter of which helped propel the company to the $2 million range last year. Then, the visibility that came with getting its Newhall Blend and Colombia Supremo decaffeinated coffee onto Costco’s store shelves helped land other important accounts like Ralphs Grocery Co. and the Walt Disney Co. “It took us two years to get into Costco, but it paid off,” Mitch said. Companies like Newhall may be benefiting from being the “un-Starbucks” brand. Patrick Bock, owner of Moorpark-based California Coffee Roasters, said so-called “micro-roasters” like himself and Newhall Coffee are tapping into a market with potential. “People really want quality that the big companies just can’t give,” Bock said. “More expensive beans are not worthwhile for them because of cost and lack of availability in high volume.” Taking on the Starbucks of the world without the resources of the big players, the McMullens felt success would have to depend on their coffee’s quality and not on high-priced advertising campaigns. “We knew nobody could beat our product as far as quality and taste,” Mitch said. “We roast to order and we deliver the next day. Nobody can beat that. They just can’t.” It wasn’t just the corporate clients that helped spur sales, but local clients like Ice Station Valencia, an ice rink that began working with the brothers last year. Gary Lane, the rink’s marketing director, said he preferred working with a company with local roots, instead of a larger firm like Starbucks. “When it comes to coffee, people want quality and that’s what we provide,” Mitch said. The brothers import several kinds of premium coffee beans from South America to be roasted in their 70-year-old, German-built cast iron and brass Probat roaster. The beans go in the roaster’s rotating drum in 200-pound batches, heated at between 390 and 450 degrees, depending on the kind of roast, for about 15 minutes. Then the beans are cooled in another rotating drum and readied for packaging. Located in Building 10 of the former Lockheed Skunk Works complex in Valencia, the company is at home in the 10,000-square-foot structure they leased two years ago. “Ultimately, our goal is to purchase our own building, but that’s down the road still,” Kyle said. Meanwhile, the McMullens say they hope to continue to grow the company, relying on the cash flow they generate. “We’ve had people approach us, offering to invest, but we’ve decided against it,” Kyle said. “We want to see how much we can get done on our own.” SPOTLIGHT: Newhall Coffee Roasting Co. Core Business: Wholesale and retail coffee sales Revenue in 1995: $6,000 Revenue in 2001: $2 million Employees in 1995: 3 Employees in 2001: 20 Goal: To offer high quality coffee and grow its customer base with both retail store chains and large corporate operations Driving Force: Consumer demand for high quality coffee

The Briefing: THE BOSS’ MANAGEMENT STRATEGY When Jolene Koester decided almost two years ago that the opportunity to be president of Cal State Northridge might be worth leaving her position as provost at Cal State Sacramento for, she realized this was not the typical state university campus she was headed to. Koester knew this was an institution with all the complex, often competing, interests and agendas that come with being one of the largest public university campuses in the country. It was also an institution that six years earlier had been at the center of one of the most devastating natural disasters in American history. Koester spoke to Business Journal editor Michael Hart recently about the challenge of moving Cal State Northridge in a new direction in this post-earthquake era. “This is something that I would not characterize as in the taken-care-of column: establishing for people the regional awareness of what the university does in the larger community. “Before I got here, the focus of many people was on earthquake recovery, for good reason. Consequently, a lot of other goals weren’t attended to. “I knew there were issues around Cal State Northridge’s relationship with the community. I knew it was very isolated from the community. “The challenge is articulating a message at all different levels to help the leadership in the region understand how we are and can be involved. They don’t really understand what a gem this university is. “The challenge is how to disseminate that message. It requires my speaking and being a vocal representative. It requires every level of the university to have the ability and willingness to talk about what we do. “There’s first that leadership level. At the vice president level, there’s the need to be clear their divisions know what they can do. That places a lot of responsibility on our university advancement division. You’ll see there is a lot of material distributed now on our indispensability, with evidence that supports this. “In the academic area there is a concerted effort to keep track of all the successes we have. “As we become more successful with this, leaders will more often turn to Cal State Northridge in addressing issues.”

INTERVIEW: Taking the Test of Time Even Errol Ginsberg’s Ixia has suffered the travails of a telecom sector that is still a few quarters away from recovery. By MICHAEL HART Staff Reporter These days, it seems like hell in the telecom world. But even hell has its circles. At Ixia in Calabasas, the earnings reports look familiar. In the last quarter of 2001, the testing equipment developer had $3.3 million in net income on $17 million in revenue, down from $4.1 million on $26.5 million in revenue in the same quarter a year earlier. Its stock was trading at $8.50 on April 2, down from the $12 range it has been in most of the time since going public in late 2000. Nevertheless, the company that develops products to test the next generation of telecom equipment has $116 million in cash to work with, has acquired one company and the product line from another in the last six months and expects to buy more, and since it went public in late 2000 has never had a quarterly net loss. And it has a founder, president and CEO in Errol Ginsberg who says he believed so strongly in the original impetus for the company that, while stock prices may fluctuate and earnings may be less than anticipated at the moment, he was willing to take on an initial public offering in October 2000 just as the market was beginning to sour on technology-related issues. Ginsberg spent more than 15 years working for one computer-related firm or another after emigrating to the U.S. from South Africa in 1981. Finally, in 1997, he recognized the potential in what appeared to be a wide open market for products that could test Ethernet switches and decided to strike out on his own. He approached Jean-Claude Asscher, chairman of Tekelec Inc. where Ginsberg was once vice president of engineering, and asked for help. Asscher said yes; today he is also chairman of Ixia’s board. At one time, Ginsberg said he thought Ixia could avoid the travails others in the telecom sector have suffered because it was busy preparing for whatever the next generation of technology would be, something his customers would always have R & D; money for. Now Ginsberg says, he underestimated the impact a slowdown in the telecom industry would have on companies like his and believes Ixia still has at least a few rough quarters ahead of it. Ginsberg spoke recently to Business Journal editor Michael Hart about the slowdown, how and why he founded Ixia and what the future may hold for the company. Question: In the simplest terms possible, what does Ixia do? Answer: We’re in a pretty specialized area that’s hard for people to understand. We build products that generate traffic that would be equivalent to millions of users on the Internet, but in a controlled way so that devices that are (used) in the Internet can be tested, so when they are installed they don’t fall over and die. Q: How did Ixia come about? A: I saw an opportunity. I had been doing consulting for a company that back then was building a product that was designed to test Ethernet switches. That was right at the beginning of Ethernet switch units, a massive growing market. Then I worked for a company that was building the switches, basically traffic control products. We were customers of the company I’d been consulting for. We were buying the products I had been involved in developing previously. So now I’d had both sides. After I’d been there about a year I saw the market was still growing and I saw an opportunity to build a competing product. Q: You have said that, in those early years, you did pretty well funding growth with cash flow. So why did you decide to go ahead with an initial public offering in late 2000? A: It’s true, we had enough cash to fund growth at that point in time. The IPO allowed us to get a number of things accomplished. We were able to hire a lot of good people. That certainly was part it. The other part was that an IPO gets you a lot of visibility in the market. It tends to give you more credibility in front of your customers. You start to be perceived as a large company. It gave us a very strong balance sheet. At this point, we’re sitting on close to $120 million in cash. Customers don’t have to have any concerns about whether we’re going to be around next year. It’s a good way to provide liquidity to shareholders and it gives us a significant amount of cash to acquire other companies which we’ve done. Q: You went public on Oct. 17, 2000, not exactly an auspicious moment for many IPOs. The atmosphere at the time didn’t give you cause to hesitate? A: We were due to start trading that day at 11 o’clock. Earlier that morning, the Dow had dropped about 400 and something points, which I didn’t even know about. By the time I got in there (to the Merrill Lynch trading floor in New York) it had recovered, but they would have postponed the IPO if that drop had continued. It opened and we were priced at $13. It started trading at $23, so we had a pretty successful offering. The stock has held pretty steady. It has gone up and hit a high of $39, but it has traded pretty steadily around $12 for quite some time. Q: But now it’s in the range of $7 or $8. What happened? A: I don’t know. It’s market-driven. The telecom market, as you know, is in pretty bad shape and that has affected our sales as well as our stock price. Cisco’s our largest customer. If you look at our price relative to Cisco’s stock price, it trades very similarly up and down. Q: A year ago, you said Ixia was dealing with next-generation technology and, consequently, was likely to avoid the perils of a momentary downturn in the tech sector because telecoms would continue to invest in research and development. Were you right? A: Back then it wasn’t obvious how much these companies would suffer in the downturn. They did start to cut back on R & D; and it did affect us. We were probably na & #271;ve back then to think they would keep spending as much money on R & D.; The reality is that, if companies are going to stay in this business, they still need to do R & D.; But they’re definitely much more conservative than they were a year ago about how they spend their money. They’re certainly much tighter with their money. Q: When did it become clear to you that Ixia would experience a slowdown in sales? A: For us it was a year ago, but the beginnings of it probably started a year and a half ago. Back then, nobody really knew what was going on. When we were on the road show (in October 2000), people were aware of a lot of the problems they were having, but our sales were extremely strong. So it took another six months before we started to see an impact. Back then, people talked about, is it going to be one quarter, is it going to be two quarters? They didn’t realize the depths of the problem. Q: From your point of view, what are the prospects for a turnaround? A: People are much more aware now of what has transpired with this telecom slowdown. Some companies in some areas are starting to see some improvement. But overall people don’t expect much improvement for at least three quarters. Some segments that serve the telecom sector are starting to see some improvement. The chip companies, for instance. A lot of companies stopped new orders going out about a year or two ago and now they’re having to replenish that. We’re going to have a tough time over the next few quarters. Q: Given the relatively small number of competitors you have in what is a pretty narrowly defined niche, how hard is it to stay on top of the market? A: You have to have your test product ready to test your equipment vendor’s product prior to him releasing it. Otherwise, you’re too late. An example right now is the 10-gig Ethernet, which is the latest thing in technology that’s hitting the market this year. We’ve had the 10-G products since the third quarter of last year. We were very early indeed for the technology cycle. Vendors have started showing 10-G Ethernet products and will start shipping later this quarter and next quarter. Q: Are you worried about others seeing an opportunity the way you did and getting into the market? A: The barrier to entry today is pretty significant. We’ve been at it for four years now. We have 120 engineers working on various products. To come along and attack some area that we are already in is a formidable undertaking. It’s not an unlimited market in size. Usually, the second and third players to a market get some percentage of it and everybody after that gets a limited percentage because those before them have 95 percent of the market. Q: You’ve said one of your main goals was to own your own company. Why was that so important to you? A: It was very simple. I didn’t want to work for another boss. I felt I’d had enough experience over the years that I didn’t need somebody else to tell me what I needed to do on a daily basis to run a company. I wanted to build a company that would be successful and we could make a decent living. There are about 60 million shares outstanding. At 12 bucks a share, that’s over $1 billion in market cap. So that’s success beyond anybody’s wildest dreams, including everybody who started working here in the early days. There are engineers here who are millionaires now, which is great. Q: Is there anything about starting a company and running it that you didn’t expect? A: You spend all this energy creating a company and creating products that you think are good and have value for your customers. Most investors don’t really care about that. You tend to be a commodity that’s bought and sold. If you’re fashionable, and the industry you’re in is fashionable and if people like you, they’ll buy your stock and if you fall out of favor, they’ll dump it. Nobody cares about the products you create. That was kind of a wakeup to me.

Airline Antenna Maker Retools to Fit Military Specs By CARLOS MARTINEZ Staff Reporter When sales to commercial airlines and private plane builders fell by nearly 20 percent last year, Chatsworth-based aviation antenna-maker Sensor Systems Inc. turned to the military to make up the lost revenue. The company, which makes 66 percent of all radio antennas for military and civilian aircraft in the country, struggled with a decline in orders from commercial firms after the Sept. 11 terrorist attacks sent the commercial aircraft industry into a tailspin. As commercial orders slowed or were canceled, Sensor made its bid to improve military sales by modifying a number of its products for military use. “We were really concerned about the business, but we thought the military could give us an opportunity,” said Tom Nixon, director of military sales for the company. Sensor Systems had already begun developing communications and guidance system technology for military aircraft and munitions, in an effort to make so-called dumb bombs smart. “We managed to take off-the-shelf products into useful military technology,” Nixon said. “We felt that we didn’t need to reinvent the wheel to give them a product.” By adapting its electronic radio antennas from commercial aircraft for use on sophisticated jet fighters like the F-16 and F-15, the company has grown its military business from about 20 percent five years ago to about 27 percent now. That business figures to increase as the U.S. Air Force goes forward with plans to move much of its existing arsenal to bombs that can be guided to their target by computer. “With the Global Positioning System, these bombs in some ways are superior to laser-guided missiles, which don’t work well in fog, for instance,” said Michael S. Crow, Sensor’s director of marketing, referring to bombs guided through an uplink with orbiting satellites. “In our new war on terrorism, no company is better positioned to provide the antennas our military needs to guide smart bombs, unmanned aircraft and other weapons,” said Si Robin, vice president and company CEO. Edward Aldridge, Defense Department acquisitions chief, said the U.S. military has asked defense contractors to produce more precision-guided munitions. The request comes as Congress debates a proposal to fund the purchase of more high-tech weapons, such as laser-guided bombs and modified rockets and bombs that could be guided to their targets, Aldridge said. The funding, if approved, could mean millions in sales for the company, Nixon said, noting that it could pave the way for developing more guidance systems for bombs that otherwise would be dropped from planes without any guidance electronics. This year, the company projects military sales at about $3 million, compared to $2.2 million last year, said Penelope Von Kalinowski, the company’s director of external affairs. “And we expect our military-related revenue to continue to grow in the next few years,” she said. In 2001, the privately held company grossed $29.9 million, with projected revenue this year to be about the same, Von Kalinowski said. Allen Haggerty, a consultant and recently retired Boeing Co. vice president, said firms like Sensor are part of a new wave of military contractors that will produce and design products cheaply and more efficiently for the military.

Telecom Firms Seeing Gradual Earnings Improvement By SHELLY GARCIA Senior Reporter Several local telecom suppliers in the greater San Fernando Valley showed improved results in their most recent quarters, at least compared with the prior consecutive quarter. But many in the industry are stopping short of calling the results an indication that the worst is over. The oversupply that threw the telecom sector into its downward spiral seems to be continuing. And a number of the equipment suppliers and semiconductor companies that service these carriers have begun to report troubling numbers for the first three months of the year, at least on the national level. Those trends could mean there is more erosion to come. “We’ve said for some time we thought their estimates for the second half were much too high,” said Chuck Hill, director of research for Thomson Financial/First Call. “A lot of estimates were based on people looking back at how the tech sector responded in recovering from different recessions. The problem is this is a different recession. There’s no prior history to key off of.” Nevertheless, Hill said, wireless carriers are expected to reduce their losses in all four quarters of 2002. Communications equipment companies, too, are expected to lessen their losses in the first and second quarters, compared to a year ago, and to “swing into positive territory in the third and fourth quarters of the year.” Semiconductor companies should also experience positive earnings in the third quarter and the fourth. That comes as good news to an industry that has, in many cases, seen revenues cut by 90 percent and bled red ink for nearly a year now. But as the year unfolds, these companies’ financials will be compared to extremely low prior year numbers, and improvement does not necessarily indicate strength. Such is the outlook in the greater San Fernando Valley as well, where many telecom companies are two steps removed in the distribution chain from telecom carriers. Many of these companies are beginning to see improvement in their financial picture as compared with the most recent consecutive quarter, but the results are still dramatically down from a year ago. Vitesse Semiconductor Corp., which supplies circuits and other components to telecom and datacom equipment makers, is expecting to see its revenues for the second quarter ended Mar. 31, 2002 increase by 5 percent to 10 percent over the first quarter of 2001. The Camarillo-based company said it expects to break even by the end of the calendar year. “This is going to be achieved through a combination of cost cutting as well as revenue growth,” said Yatin Mody, vice president and controller at Vitesse. In its first quarter 2002, Vitesse’s most recent complete quarter ended Dec. 31, the company reported revenues of $39.1 million and a net loss of $24.3 million or $0.12 per diluted share. But Vitesse’s improved picture looks considerably different when compared with the year-ago numbers. In the first quarter of 2001, Vitesse reported net income of $47.6 million or $0.25 per share on revenues of $165 million. The picture is pretty much the same for the other tech companies in the Valley. MRV Communications Inc., a maker of network infrastructure components, said it expects revenues for the first quarter of the company’s 2002 fiscal year ended Mar. 31 to be in the range of $71 million to $76 million, about even with its fourth quarter, 2001 revenues of $73.5 million, with a somewhat improved earnings picture MRV lost $2.1 million in the last quarter of 2001. However, MRV reported revenues of $97.6 million in the final quarter 2000, and net income of $4.5 million or $0.06 per diluted share. In announcing its fourth quarter results and guidance going forward, the company said it had improved its inventory levels and cash position and expected continued improvement. “We remain optimistic and committed to continuing these positive trends going forward,” said CFO Shay Gonen. The improvements MRV and Vitesse are seeing have led both companies to revise their guidance upward for the coming year. MRV bumped up its revenue guidance for the full year to a range of $315 million to $355 million, compared with earlier guidance of $300 million to $350 million. For the full year 2001, MRV reported revenues of $332.8 million and a net loss of $326.4 million or $4.27 per share. Vitesse’s Mody said the company had earlier given guidance for the quarter ended Mar. 31, 2002 of zero to 10-percent revenue growth and recently adjusted it upward to 5 percent to 10 percent. For Vitesse, however, that optimism is based less on the expectations for the industry than it is on a wholesale restructuring of the company’s business. Vitesse has moved from a supplier of commodity semiconductors to a maker of layer 2, 3 and 4 components switch fabrics, network processors and traffic management components that represent the kinds of upgraded equipment companies are moving toward. “We’ve got a number of design wins for systems that have never been shipped, so we don’t have the inventory issue that has plagued the level 1 devices because they were oversold,” said Mody. Indeed, Mody is not particularly confident that capital expenditures will improve dramatically in the commodity semiconductor sector. But what capital expenditures those companies do make are likely to come in the sectors that Vitesse has moved into, providing greater potential to improve the company’s financial picture. Diodes Inc., a Westlake Village semiconductor maker, has not issued guidance for its first quarter. However, in February, company officials said they thought the worst is over. “While 2001 proved to be a universally challenging market climate for semiconductor companies, we believe we have passed the worst of this correction and expect the industry climate to gradually improve in 2002,” said C.H. Chen, Diodes CEO, in announcing the company’s fourth quarter results. For the fourth quarter ended Dec. 31, 2001, Diodes reported revenues of $25.8 million, a sequential increase of 13.6 percent over the third quarter last year. The company decreased its loss to $76,000 or $0.01 per diluted share, compared with a net loss of $847,000 in the third quarter of the year. At least one company, Optical Communication Products, Chatsworth-based maker of fiber optic components, was reluctant to venture an estimate of future results. In announcing their most recent quarter results, company officials said the outlook for carriers is still too murky to venture a guess about future quarters. The company saw its revenues fall to $8.8 million in the first quarter of fiscal 2002 ended Dec. 31, from $14.9 million in the fourth quarter of its fiscal 2001 year. The company also reported a net loss of $200,000 in its most recent quarter, an improvement over the $3.3 million OCP lost in the fourth quarter of 2001.

VICA Begins Next Stage of Tax Reform Campaign By JACQUELINE FOX Staff Reporter Business groups from the San Fernando Valley and other parts of Los Angeles, along with the city’s Business Tax Advisory Committee (BTAC), will huddle this week with members of the Los Angeles City Council to formally kick off their campaign to abolish the gross-receipts tax and press the council to take the issue seriously. Mayor James Hahn has already said he’d support the idea of replacing the tax, which levies businesses on gross receipts rather than net income, as have some city council members, including his sister, Janice Hahn, who represents the 15th District. City Attorney Rocky Delgadillo has also thrown his support behind the drive to “ax the tax,” according to Fred Gaines, chairman of the Valley Industry Commerce Association (VICA). But there is staunch opposition to the tax repeal movement coming from City Council Members Cindy Miscikowski and Nick Pacheco, which has log-jammed past efforts to negotiate the issue. “The city council just won’t work with us,” said BTAC Co-Chairman Mel Kohn. Hoping to unclog the jam, VICA has formed a coalition to abolish the tax that includes members of the United Chambers of Commerce and the L.A. Central City Association and replace it with a tax that is more business-friendly. L.A.’s gross-receipts tax is the highest in the state and the coalition asserts it is driving businesses to other cities. It also divides businesses into 64 different categories and charges rates of up to $5.91 per $1,000 of gross receipts. The coalition is pushing to whittle the number of categories down to about 10. But considering the gross-receipts tax brings about $300 million to the city’s coffers each year, it is now facing a $250 million budget deficit, and any changes to the tax would involve overturning state law, some say the full council isn’t likely to be too accommodating. “I think it’s a very good idea,” said Jack Kyser, chief economist with the Los Angeles Economic Development Corp. “But is it likely to happen? No. “I’m not looking for much action because the city isn’t likely to approve letting go of that revenue right now, especially when you are talking about potential cuts at the state level.” Gaines admits his coalition faces a tough battle in pushing for changes to the tax, particularly because it would involve taking revenue away from the city something city officials are already confronting as they work out final terms and conditions for a potential Valley secession. “We met recently with the city attorney and he said he was very supportive of trying to find ways to get rid of the tax,” said Gaines. “How confident are we? I think we are going to have to show how the changes can be revenue neutral, that’s the only way the city council is going to take it seriously.” Gaines said the coalition is hoping to put forward a formal plan for alternatives to the tax in the next few months. “We are looking at what we are calling best practices, or what is used in other cities, and we have a lot of that data on our hands already,” said Gaines.