msa/mike1st BEN SULLIVAN Staff Reporter Medical savings accounts are being touted by proponents as the hottest thing to hit the health insurance industry in years. But so far, most local managed care companies are keeping their distance from the novel payment method. In Woodland Hills, the hub of Los Angeles’ managed care industry, only Blue Cross of California has attempted to market a medical savings account, or MSA, and that effort earned the company a $100,000 fine last month from the California Department of Corporations. Blue Cross had run a half-page advertisement in the Wall Street Journal in December promoting its MSA, but did so before receiving final regulatory approval from the department. Blue Cross’ MSA license now hangs in limbo as the company negotiates a settlement with the department. Indeed, since MSAs went into effect Jan. 1, only San Francisco-based Blue Shield of California has received approval from the Department of Corporations to market a plan. In part, the managed care industry’s reluctance to pursue MSAs is because the products undermine existing HMOs, according to Peter Lee, director of the HMO Consumer Protection Project at the Los Angeles-based Center for Health Care Rights. HMOs rely on the concept of shared risk, in which all enrollees contribute a little each month, Lee said. For every person who opts out of an HMO in favor of an MSA plan, the burden on those left behind increases. Also, HMOs tend to emphasize preventive care, Lee said, while MSAs focus on catastrophic coverage. “The theories of the two definitely go against each other,” said Daniel Meracle, vice president of Seabury & Smith, a broker and administrator of employee benefit plans in Glendale. Managed care has also been slow to act because it is unclear how popular the plans will be with consumers. “We need to do more research,” explained David Olson, a spokesman for Woodland Hills-based Health Systems International. “We don’t have anything in the product development pipeline at this time, but we’ll continue to watch them with a great deal of interest.” Similarly, Woodland Hills-based CareAmerica Health Plans said it has been exploring the possibility of launching an MSA plan, but has yet to get one off the drawing board. Kaiser Permanente said it has no plans to offer an MSA. Still, both Lee and Meracle noted, if MSAs do catch on, the managed care industry will be unable to ignore them. Warren Blumberg, executive director Centerstone Insurance & Financial Services in Woodland Hills, said that’s just what is likely to happen. “Carriers are not jumping on the bandwagon to provide these yet,” Blumberg acknowledged. “But when they take off, (the groups) will want a piece of the action.” MSAs come out of last year’s Health Insurance Portability and Accountability Act of 1996, which sanctioned the creation of an MSA pilot program of 750,000 accounts nationally to help small companies, self-employed and uninsured individuals attain affordable health care coverage. The plans let people set aside money in tax-exempt, interest-earning bank accounts, for the exclusive purpose of covering health care expenses. Not only does the holder not pay taxes on the interest earned, but he or she can deduct the amount deposited in a given year from their taxable income. However, to qualify for an MSA, consumers must purchase a high-deductible catastrophic health insurance policy. When a medical cost arises, account holders pay the first several thousand dollars of expense out of the account, after which insurance picks up the rest. For its part, Blue Shield remains bullish on the products. “We’re very positive about the opportunity on this thing,” said Jim English, Blue Shield’s vice president of sales and marketing. “Clearly, this is new ground that we’re exploring, but it’s really exciting stuff.” we’re brokers and adminsitrators of employee benefit programs We act as general agents for MSA hard to get employers interested until after the 1st of the year. just received People like kaiser cant get a handle on the expenses. outpatient costs The theory of it def go against each other. its a defensive mechanism. the premium’s going to come down so our commison’s going Glendale, The theory of it def go against each other.Daniel Meracle, vice president and Western US area head , marsh and maclenen

partners/jan20/bb/6 inches/mike1st/mark2nd Payroll processing specialist Entertainment Partners is planning to develop a 90,000-square-foot Burbank office building into which it will consolidate operations from several Burbank-area sites, according to City of Burbank development officials. The company, which primarily serves the entertainment production industry, is currently headquartered on Olive Avenue in Burbank’s Media District. Entertainment Partners officials didn’t return phone calls for comment. But Jim O’Neil, special assistant to Burbank’s community development director, said he expects the city this week to approve the company’s plans to develop a new headquarters building on the vacant lot at 2835 Naomi St., near Glenoaks Boulevard. The site, formerly occupied by Ocean Technology Industries, is just east of the Golden State (5) Freeway near Woodbury University. O’Neil added that Entertainment Partners is expected to break ground on the proposed three-story building shortly after plans get final approval. Demand from the entertainment industry has filled nearly all the office space in the Media District and throughout the Burbank area. That has left companies wishing to expand or consolidate with little choice but to commit to new developments or leave the city. Brad Berton –30–

REColSFVFeb/bb/21 inches/mark2nd A response management company that’s been a fixture in the San Fernando Valley for 30 years is growing under new ownership and is headed for expanded (and expandable) new digs in the next valley to the north. The firm, Harte-Hanks Response Management, has preleased an entire 115,220-square-foot industrial building (plus 20,000-square-foot mezzanine office) in Valencia. The company, formerly known as Inquiry Handling Service, has been based in the City of San Fernando for three decades. It was purchased last June by NYSE-traded media firm Harte-Hanks Communications. So what exactly does the response management group do? It helps the sales and marketing divisions of its clients particularly big in the computer, electronics and software fields increase sales by handling functions such as telemarketing, literature distribution, sales-lead management and seminar coordination. The parent company, headquartered in San Antonio, also publishes newspapers, owns television stations and offers direct-mail services. Harte-Hanks Response Management signed the long-term relocation lease just after Newhall Land & Farming Co. began developing the building on a speculative basis (i.e., without a pre-construction tenant commitment) in its high-momentum Valencia Commerce Center business park just off the Golden State Freeway (I-5). Scott Knight, the response management group’s general manager, noted that the division will double the size of its current facility, on Parkside Drive San Fernando, when 140 to 150 employees make the move to Valencia. Harte-Hanks can expand its future home, at Franklin Parkway and Commerce Center Drive, up to about 175,000 square feet as is needed, he added. Besides preferring a modern new facility in a prestige area like Valencia, Knight also said the growing company wanted to make sure its facility would include 500 parking spots within five years. After Harte-Hanks bought Inquiry Handling from the local owners last June, Knight explained, the new owner signed a short-term lease with the sellers who continue to own the San Fernando property. Ross Thomas of Delphi Business Properties negotiated the lease transaction, terms of which weren’t disclosed, on behalf of Harte-Hanks. CB Commercial Real Estate Group’s Doug Sonderegger and Craig Peters, who handle leasing at Valencia Commerce Center, noted that industrial vacancy in the area has dipped to a scant 1.8 percent. Harte-Hanks is the latest of several expanding companies seeking modern facilities in a master-planned environment that have relocated from the bigger Valley to the south. The Valencia Commerce Center is within the 3,200-acre master-planned Valencia Gateway commercial/industrial complex being developed by Newhall Land, the NYSE-traded master limited partnership that has long been Santa Clarita Valley’s dominant developer. Plastics firm to expand The fact that Harte-Hanks snatched up the entire building just after construction commenced illustrates the level of tenant demand in Valencia. During the same week that Harte-Hanks signed its lease, another fast-expanding tenant already in the Valencia Gateway development committed to a Valencia Commerce Center “spec” building just after construction started. Cosmic Plastics Inc., which makes plastic resins used for injection molding, preleased the entire 71,750-square-foot industrial building on Industry Drive. The company owned by Lillian Luh will relocate from about 32,000 square feet in two buildings it now occupies in Newhall Land’s nearby Valencia Industrial Center, the other big business park at Valencia Gateway. CB’s Peters and Sonderegger represented both landlord and tenant in negotiating that long-term lease transaction, terms of which, again, weren’t disclosed at Newhall Land’s request. But the veteran brokers did specify that Valencia Gateway ended 1996 with just over 1 million more square feet occupied than at the beginning of the year. In addition to the Harte-Hanks and Cosmic Plastics buildings, the brokers said they’re getting “good activity” from tenants interested in the other two speculative buildings now under construction, totaling just over 76,000 square feet, at Valencia Commerce Center. Next up: Another Valencia Commerce Center phase including eight buildings totaling 435,000 square feet are in planning. Not surprisingly, investors have just purchased some of the buildings Newhall Land developed and leased at Valencia Gateway. During the last two months of 1996, musical drum maker Remo Inc. purchased the 216,000-square-foot building it occupies, and Beverly Hills-based Crown Associates Realty Inc. bought the 93,000-footer occupied by Ultra Violet Devices Inc.

econowatch/dy/12″/mike1st/mark2nd The December apartment vacancy rate for the San Fernando Valley fell substantially from the like period a year ago, according to this month’s Valley Econowatch. The 9.3 percent rate was unchanged from November, but down from 11.7 percent for December, 1995. Industry specialists point out that apartment vacancies moved steadily downward for much of 1996, and that trend should continue in 1997, as the local economy improves. “You don’t see a lot of construction and haven’t had a lot of construction (of new Valley apartments) in the last five years. So with the economy gaining momentum, we see these occupancies going up,” said Raffi Krikorian, managing regional partner in the Encino office of Sperry Van Ness. Valley apartment vacancies either held steady or dropped in every month since the middle of last year, going from 10.4 percent in May 1996 to the current 9.3 percent. Submarkets with the lowest vacancy rates as of December included Encino-Tarzana (6.0 percent), Sherman Oaks-Studio City (6.2 percent) and North Hollywood (8.0 percent). The weakest submarkets were in areas hit hardest by the Northridge earthquake of 1994, including Reseda-West Van Nuys (14.4 percent), Northridge (12.9 percent) and Mission Hills-Panorama City (11.9 percent). Zeke Logan, a senior associate with brokerage firm Lee & Associates of Sherman Oaks, said that Valley apartment vacancies could drop as low as 6 percent before the decreases taper off. The falling vacancy rates have already caused rents to level off in many Valley submarkets and rents could even start to rise in the strongest submarkets as early as mid-1997, said Logan and Krikorian. Rising rents and falling vacancies could start to push up building prices, which ultimately would result in a sellers’ market for the first time in five years, Krikorian said. Areas where rents have firmed up include Sherman Oaks, Woodland Hills, Studio City, Tarzana and Encino. The move to a sellers’ market could even spark the first development of new Valley apartment buildings in recent years, Krikorian said. “At this point in time, you can buy buildings at or below replacement cost, so new construction isn’t justified. But we could see some new construction beginning as early as the end of this year” if building prices and rents rise, he said. Douglas Young

hyatt/dy/13″/mike1st/mark2nd DOUGLAS YOUNG Staff Reporter A flurry of commercial development activity is taking place in Valencia, as developer Newhall Land and Farming Co. transforms Town Center Drive into a retail district extending westward from the Valencia Town Center mall. Upon completion, Town Center Drive is designed to be an upscale retail/office district reminiscent of Colorado Boulevard in Old Town Pasadena, according to Newhall Land spokeswoman Marlee Lauffer. On parcels along the drive, which begins at the Valencia Town Center mall and stretches about half a mile to the west, are planned a 250-room Hyatt hotel, an entertainment center with a 3-D IMAX theater, a sports club and several buildings with retail and restaurant space. Newhall Land is financing and developing most of the buildings through its own internal resources, Lauffer said. Four projects on Town Center Drive have either been completed, are under construction or are slated to break ground in the near future. The lone completed project is a three-story mixed-use building with retail and restaurant space on the ground floor and offices on the two upper floors. The building was finished last September and is currently 55 percent leased, with Dean Witter as its largest office tenant, Lauffer said. Meanwhile, both the Hyatt and a 55,000-square-foot sports club are currently under construction. The sports club, with an expected completion date in May, will be operated by Spectrum Health Clubs, which plans to market the facility as a high-end sports facility, Lauffer said. The Hyatt is tentatively scheduled to open in the spring or summer of 1998, according to Cheryl Phelps, the Hyatt vice president in charge of the project. One factor attracting Hyatt to the area is the hotel chain’s relative lack of presence in the San Fernando Valley area, Phelps said. “We don’t have a presence in that part of Los Angeles. This would be the farthest north we have until you hit the one in Monterey,” she said, noting that the two closest Hyatts to Valencia are located in Westlake Village to the west and Century City to the south. Both Newhall Land and Hyatt are plugging the new hotel as Valencia’s first full-service inn catering to an upscale clientele. Aside from the three projects either finished or under construction, Newhall is also scheduled to soon break ground on a 60,000-square-foot entertainment complex. The complex, slated for completion in the spring of 1998, will feature an IMAX theater and 12 additional screens to be operated by Edwards Cinemas, said Lauffer. As early as this fall, Newhall also plans to break ground on two more mixed-use retail/office buildings. All the recent activity on Town Center Drive comes after a period of relative quiet for Newhall Land in the Valencia area. Lauffer explained that Newhall Land has spent much of the last four years developing infrastructure for Town Center Drive so it would be ready to build actual commercial projects as soon as the Southern California real estate market started to come back. “We’re creating this traditional street, but from the ground up. It was designed to be reminiscent of downtown main streets,” she said.

FASTTRACK/1stjc/mark2nd BENJAMIN MARK COLE Senior Reporter Making the new look old and turning tin into “gold” has proven the Midas touch for Burbank-based costume jewelry maker 1928 Inc. Started 27 years ago, 1928 today has a workforce of between 600 and 1,500, depending on the season, and ships out an average of 10,000 filigreed baubles each working day. Most pieces are reproductions of pins, pendants and earrings originally manufactured in the 1700s through early 1900s. 1928’s niche is “antique” costume jewelry, sold nationwide and globally, in the mid-point price range generally, well under $30 a piece. By picking out a market and largely sticking to it, 1928 has grown to about $100 million in sales, says David Sukonik, senior vice president. “Over the years, we’ve tried to get into other markets, and we’ve had our brains kicked in,” says Sukonick, a gruff, native Philadelphian who joined the company in 1976. “This is not a forgiving business.” Now, instead of trying new looks deco or modern, for example 1928 has broadened its line within the antique look. Today, in addition to rings, bracelets and pins, 1928 offers bookmarks, letter-openers, watches, small boxes, pens, picture frames, handheld magnifying glasses, scissors and even copies of Faberge eggs. But whatever the product, the look is consistent usually antiqued gold, sometimes silver, with filigree, around an enamel figurine or semi-precious stone. Changes in the domestic retailing market may have forced 1928’s hand towards diversification among products, if not style, relates Sukonick. Heavy mergering among mid- and upper-market retailers and booming discount chains has meant far fewer wholesale buyers for 1928’s wares. “Federated bought Macy’s which bought Broadway and Bullocks and Bloomingdale’s,” says Sukonik, in a shorthand rendition of department store mergers. “Now, instead of five buyers, you have one. Overall, you’ve gone from 1,000 to 1,500 department stores in the country, to maybe 100 or 80 today.” But with the additional product lines, 1928 no longer appeals only to the jewelry wholesale buyer. “We have a lot of different things out there, so we sell not only to the jewelry buyer from Federated, but the gift buyer, the watch buyer, the kids’ buyer. We have a lot more chances,” says Sukonik. Also, two years ago 1928 inked a contract with the Vatican to produce jewelry primarily pendants and pins and boxes based upon art and religious artifacts in the church’s vast Roman library. “They have to approve all designs,” notes Sukonik. For each piece sold, 1928 pays a royalty to the Vatican. “The Vatican Collection now makes up 15 percent to 18 percent of sales,” says Sukonik. In general, 1928 sells the Vatican iconography to much the same wholesale buyers as its other wares, but reaches a different retail buyer, says Sukonick. “We are reaching a new market with the Vatican Library. Our antique line sells most heavily in the Midwest, while the Vatican lines sell most heavily on the coasts, particularly ” he says. “I don’t want to reveal details, but we are looking at other religious lines as well,” he said. 1928 was founded by Melvin Bernie, the company’s original designer, as well as inventor of the proprietary antiquing process and some of the production equipment and processes used by the company. Burnie does not grant media interviews, according to Sukonik. The company was relatively small in its first seven years, reaching $3 million in sales. Sukonick, with marketing and distribution experience gained at the old Max Factor cosmetic company in Hollywood, joined two decades ago. “I already knew the buyers from the major department stores, so I had an in,” he says. “You have to make good stuff, but I could at least get them to try it.” In 1928’s 100,000-square-foot warrens near the Burbank airport, the alchemy of turning tin into gold begins with casting. First, tin (mixed with 4 percent bismuth) is made molten at 726 degrees, and poured into centrifigul molds, explains Norman Miles, production engineer. “In season (the summer-time peak manufacturing season) we pour about 2 million pieces a month,” says Miles. After a de-burring process, cast pieces are then gold- or silver-plated, and then set with stones or enamel. Sometimes a decal is placed onto the enamel, such as images of flowers or cherubs. Almost all work is done by hand. Small production runs are the reason, says Miles. “You can set up machines, when you have long production runs. But here, we are changing styles and models every day, every season. A human being can change in a heartbeat,” he says. At the heart of the 1928 operation is the antique-ing room. In an inner santuary, craftsworkers make new gold-plated castings look old, through a proprietary process. In minutes, maybe 100 years is added to the visual look of a piece. A visitor is sworn to secrecy before gaining admittance. For the future, 1928 will try to broaden its market in the antique look, and keep production in the United States. Importers of costume jewelry present ferocious, low-price competition, which 1928 tries to counter by offering quicker turnarounds, higher quality and better design, says Sukonick. “The customer right now is very pricey (price-sensitive). Our concept is to give them higher quality, something they can keep. But things are very competitive right now,” he says.

entcol/turner/23″/mike1st/mark2nd Who would have thought, when we were growing up watching Elmer Fudd chasing Bugs around with a shotgun or Daffy Duck making those wacky whooping noises, that someday people would be willing to shell out $25,000 for a Looney Tunes chess set? The David Krakov-designed chess set is the most expensive item at the Fifth Avenue flagship of the Warner Bros. Studio Store, which expanded to nine stories in a building on New York’s equivalent of Rodeo Drive in October. Excessive? Maybe. But the retail chains launched by Warner Bros. and Walt Disney Co. have proven to be cash cows for both studios, and both chains have somehow managed to elevate their parent companies’ famous brands into high-end fashion icons. For many years, the studio stores run by Disney and Warner Bros. were ignored by analysts because, while they were believed to be profitable, their overall income and revenues represented barely a trickle of the torrential revenue streams of companies as big as Disney and Time Warner Inc. But both chains have grown so quickly that the trickle is turning into a veritable gusher. “In 1988, we started as a small division with annual revenues of $20 million,” said Dan Romanelli, president of the Warner Bros. worldwide consumer products division, which manages the studio stores, the licensing of the studio’s creative properties, interactive entertainment, publishing and toys. “Our growth has been at a compounded annual rate of 30 percent. Over the next four years, we will exceed $1 billion a year in revenues. That is clearly a considerable achievement,” he said. Romanelli is referring to overall revenues for the consumer products division financial information on the stores alone is not revealed in Time Warner’s public filings. But the majority of those revenues come from the retail and licensing sides. Warner Bros., which opened 22 new stores around the world in 1995, opened 30 more last year, bringing its total to 161. Disney, meanwhile, opened 101 new stores in 1996, bringing its total to 530. Like Time Warner, Disney doesn’t break out financial information for its stores division, but we do learn from its fiscal 1996 year-end earnings report that revenues from the Disney Stores increased $197 million in 1996 over 1995. If that’s the sales increase, the total sales figure must be in the neighborhood of $1 billion a year. Sales at the Disney and Warner stores aren’t necessarily brisk in the traditional retail sense usually, a retailer’s success is measured on how well its stores perform versus the previous year. From that standpoint, the Disney Store is nothing to write home about. According to Disney’s earnings report, same-store sales were down 2 percent in 1996, after rising 4 percent in 1995 on the popularity of merchandise based on “The Lion King.” As for Warner well, there’s no telling, but it would be surprising if its stores were doing substantially better than those of the merchandising master, the Mouse. The stores are nonetheless generating terrific profits for the studios, according to analysts, for two reasons: One, the continual opening of new stores generates a great deal of extra cash (that $197 million generated at Disney in 1996 came from its new stores), and two, the markup on that merchandise is monstrous. Arthur Rockwell, research director with L.A.-based Yaeger Capital Markets, says it’s relatively inexpensive for Disney and Warner Bros. to open new stores. And the better ones can generate a profit within three to six months. So a strategy of continual expansion is almost guaranteed to keep adding large sums to the studios’ balance sheets. Of course, this strategy has been tried by retail chains before, and inevitably a saturation point is reached. That’s when the market is too flooded with stores, the new stores stop generating profits and the old ones start losing money. But neither Disney nor Warner Bros. appears to have reached that point yet. “There is a critical mass, but what it is for studio stores, I don’t know,” said Rockwell. In addition, by establishing their entertainment properties into respected apparel and even houseware brands, the studios can charge a huge markup on their merchandise. Thus, Disney or Warner Bros. can slap a picture of Mickey Mouse or Wile E. Coyote on the pocket of a polo shirt made in Asia and charge the same price as a Ralph Lauren or an Izod. “When you go into one of these stores and pick up a Bugs Bunny or Daffy Duck keychain for $3.95, you don’t care if it only cost 5 cents to make it overseas. You’re paying for the brand,” said Steve Cesinger, entertainment analyst with downtown L.A.-based Greif & Co. Disney, of course, took some flack last year when activists accused the company of using underpaid child laborers in Asia to make its licensed products. But the protests appear to have done little damage to the studio’s sales or image, Cesinger said. With all the success these two Burbank-based giants have had with their retail divisions, it might seem odd that other studios haven’t jumped into the game. They haven’t, analysts say, simply because they can’t. The overwhelming majority of the merchandise in Disney and Warner Bros. stores is based on both studios’ animated character franchises. And nobody else but Disney and Warner has such well-established animated characters. That does, however, help explain why studios such as 20th Century Fox and DreamWorks SKG are spending so much money to build feature animation divisions.

universal/dy/17″/mike1st/mark2nd DOUGLAS YOUNG Staff Reporter Opponents of Universal Studios Inc.’s plan to expand its Universal City development plan say they will recruit a larger contingent to turn out for the next public hearing on ther project, slated for March 3. They are seeking to bolster their ranks to offset a massive public relations campaign Universal has been mounting. The March session will be a follow-up to the Jan. 21 meeting, a standing-room-only affair that involved lengthy testimony from both opponents and supporters. Supporters of the plan say the expansion would bring jobs and growth to the local economy, while opponents argue the proposed expansion would create a traffic-and-noise nightmare in nearby communities. L.A. city and county planning commissioners listened for five hours at the Jan. 21 hearing, as supporters and opponents gave their opinions on a plan that could add up to 5.9 million square feet of additional hotel, studio, office and theme park development to the Universal City lot over the next 25 years. The hearing marked the first time commissioners heard what Valley residents had to say about the proposed expansion, which would add 13,000 jobs to the area and increase state and local tax revenues by $25 million a year, according to Universal’s estimates. Some 43 supporters and 70 opponents signed up to publicly voice their opinions, though only a fraction of those had time to address officials, leading to the decision for a continuance on March 3. Many of the plan’s supporters are members of a Universal-backed group called Universal City Tomorrow, comprised of homeowners from various Valley communities near the Universal lot. Meanwhile, homeowner groups from Toluca Lake, Studio City and the Cahuenga Pass area turned out the largest contingents for the opposition. Cahuenga Pass Property Owners Association President Krysta Michaels was among those who didn’t have a chance to speak at the January hearing because of time constraints. “I think it’s important for people to get up and have enough time to say everything they want to say. It’s important for (the planning commissioners) to hear how frustrated and desperate homeowners are,” she said. Michaels and other opponents of the plan pointed out that they are not particularly opposed to Universal’s plan to expand its studio operations. The strong opposition is actually to Universal’s plan to expand its theme park and build a resort district, which opponents claim would make noise and traffic levels unacceptable. To drive home its point, the Studio City Residents Association say they will try to get more of its members out for the March meeting, said association President Tony Lucente. He said his group was caught off guard by the large turnout of Universal City Tomorrow members on Jan. 21. “It’s very apparent that Universal has a well-orchestrated public relations campaign to give the impression that they have a lot of support in adjacent communities,” said Lucente. “Given that, I think we’ll also play the same game, to some extent, in ensuring the proper numbers (of opponents) are there and that’s visible to the commissioners,” he said. Specifically, Lucente said he expects to get a Studio City crowd of about 50 opponents out for next month’s hearing, compared with only about half that number that came out in January. Universal officials previously made a presentation to city and county commissioners detailing their expansion plans on Jan. 13. The company spent the Jan. 21 hearing on the sidelines, listening to feedback from supporters and opponents.

PROFILE/1stjc/mark2nd BEN SULLIVAN Staff Reporter At heart, Steven Muellner is a salesman. He’s hawked potato chips in the midwest, vertical blinds in Santa Monica and now as president of Woodland Hills toy maker Applause Inc. peddles Grovers, Elmos, Darths and Tweeties by the shipload. With more than $150 million in net revenue in 1996, Applause is the nation’s top privately-held licensor of toys and accessories stemming from feature film characters. The company counts Disney, Universal and Fox among its partners, and has held rights to produce plush toys and plastic knickknacks for such merchandising wonders as “The Lion King,” “Space Jam,” “101 Dalmatians” and “Star Trek.” Q: Licensing of film merchandise is growing, to the point where secondary products often bring in more revenue than ticket sales. What’s driving this trend? A: Licensing in its current form began to take on a more serious tone within retailing in the U.S. about 10 years ago. Today it accounts for something in the neighborhood of half of all toys sold. The box office is now just one element, and probably not even the driving element, of the profitability of a film product. So going into a film that has high licensing probabilities, the studios are considering the profit from licensing as probably more important than the box office. Q: Walk me through the process. If a studio’s making a film with licensing potential, at what point are you called in? A: Each of the studios is really quite different, but all of them will bring in their licensing partners 12 to 18 months prior to the release of a film. Depending on the closeness of the partnership, it could be four years prior to the release of the film. We have a relatively strong relationship with the Disney folks, for example, and we have at least their preliminary schedule of movie releases going three to four years out. We don’t actually start working on those movies this far out, but we start the creative juices going, discuss with them characters and things like that. Q: Does the licensing potential ever affect the film itself? For example, making one character more cuddly because it’ll sell more dolls down the road? A: It does. I’ve heard of a very specific instance where (a studio) determined the hair would be longer on a female lead character because of the “playability” it would lend to the dolls that would then be sold. The initial concept was to have the hair shorter. Q: People complain about what a cut-throat group movie folk are. Do you have to be as shark-like? A: Much less so. I’ve yet to experience my first shark fest. My observation is that for all the talk of the industry being very tough, I notice that actors, writers, directors and musicians all flow fairly freely back and forth between one studio and another. The same is definitely true on the license side. I run into the same companies that might be holding a license for Warner Bros. and also for a Disney, Fox or Universal. Q: Does Applause hold licenses or just manufacture for companies that do? A: It’s done in both ways. We actually buy the licenses for almost all of our domestic business, but it changes dramatically when we go international. In international it is probably more likely that the specific distributor might buy the license for his particular country and then we serve as the manufacturing source for them. This is important because the purchaser of the license will have to meet a minimum number of sales. If Applause holds the risk, we have to meet a guaranteed number of sales. And if we don’t meet the number, we just have to pay the studio the difference. Q: When you buy the license to a product, what are you getting? A: One answer is we get the incredible consumer awareness that is tied to a Tasmanian Devil, or a Bugs Bunny or a Mickey Mouse or a Darth Vader. There is incredible consumer awareness around these characters because hundreds of millions of dollars of advertising effort has gone into building a built-in customer base. We basically are paying for the privilege of knowing that when we introduce a product there is immediate consumer demand. Do we have the right to carte blanche produce anything? The answer is a quite definitive no. When we get a license with any one of our licensors, it is very specific for products. It would be specifically written into the contract what it is we can manufacture and sell, as well as specifically in what channels. Many of our licenses go so far as to specifically name retailers across the United States that we can and can’t sell to. Q: What keeps the studios which already have their own retail stores in some cases from taking it one step further and manufacturing this stuff themselves and putting you out of business? A: They probably have discussions on that very subject once a week, or once a day. (laughs) What prevents the studios from doing the same thing? We have established relationships, methodologies and 165 sales people in the U.S. with established contacts and methodology for distributing our product. We have, in fact, a company, which for the studios to eliminate they would have to replicate. Any good business is designed around the principle of win-win. It is my assumption that as long as we make it more profitable for the studios to deal with us than to do it on their own, then this relationship will continue. If at some point they determine they can do what we do just as well and make more money without us, then I would expect them to make that decision and do it. Q: Why don’t you manufacture domestically? A: The costs are prohibitive. Most of what we do is hand produced. There’s really nothing that just gets cranked out in a machine. And because of the costs of labor in the United States you would be prohibited. (He holds up a plastic Grover figure). This piece was molded and then mass-produced in the color blue. Somewhere in China there’s a line of people that have five or six paintbrushes in their hand and five or six different paints on the table. They’ll paint the white stripe on the body, then use the other brush for the red stripe, then a slightly different color red for the bow-tie, and then another brush to paint the eyes. You can see the steps involved here. And even as good and efficient as people can get doing this, it’s time-consuming and would be very difficult to do in the United States. In fact you couldn’t do it. Q: Are there toy manufacturing opportunities in Los Angeles? A: There is no major toy manufacturer doing anything of any quantity in the United States today. That would suggest to me that the time has passed for any realistic opportunity for producing toys in America, and definitely for L.A. as well. If we were to start our business fresh today and had to decide where would we do our manufacturing, there’s probably a zero probability that we’d even consider California. Having said that, I consider this to be the perfect spot for a company such as ours to be located because of the access to the Hollywood film industry. SNAPSHOT: Steven Muellner Position: President, Applause Inc. Born: Minneapolis, 1950 Education: B.S. business & journalism, University of Minnesota; MBA Cornell University Career turning point: Earning MBA in mid-career Most admired person: Ronald Reagan Personal: Married, one daughter

valleyedit///lacter/mike1st Hed — Time to wise up Charter reform is a tough sell for a town not accustomed to deciding important public policy matters especially ones that won’t have any real impact for years to come. Are enough Angelenos even aware of the issue, much less able to take a position on it? That question, and others like it, take on greater urgency over the next two months. After much legal wrangling much of it instigated by the Los Angeles City Council voters in the April 8 city election will be asked to create and elect 15 members of a citizens’ panel to rewrite the charter. Substantive and reasoned reform is long overdue. The 71-year-old charter, which runs more than 700 pages and has been subjected to 400 amendments, is a hopelessly outdated document. Its mechanisms for dividing power among the mayor, the City Council and the assorted part-time citizen commissions leave more incentive for filibustering than for getting things done. Want to know why it’s such a hassle to get licenses in the city of Los Angeles? Wonder why business taxes are so capriciously drawn or why the mayor has so little power in getting things done? Much of it comes down to the charter. To his credit, Mayor Richard Riordan has taken the lead in reforming the system by supporting and partially funding the charter reform measure. It hasn’t been easy; it took a federal judge’s order to finally put the reform initiative on April’s ballot in essence, overruling council opposition. The council has created its own advisory body to recommend charter reform measures complete with veto power on any of the proposals. That arrangement strikes us as a cynical effort to keep the council in control, hardly the way to provide an open forum on the city’s future. In fact, the recent tug-of-war perfectly illustrates the need for charter reform. But if past is prologue, the debate will involve far too few voices. Voter turnouts for municipal elections even those that involve mayoral races are notoriously low, and we fear that the confusion in selecting members of a citizens’ panel could keep even more voters away. This serves no one’s purpose. Getting a mechanism for charter reform up and running is a landmark event and it requires mass participation not just the 15 percent of the electorate that, all too often, tend to make decisions for the rest of us. Now that the measure is on the ballot, Los Angeles has a real opportunity. Government officials, interest groups, the media, and the public at large have more than two months to examine the ways in which charter reform can help shape L.A. in the 21st century. This is not bite-sized stuff. It’s challenging, it’s complex and yes, it’s vitally important. The big question is whether L.A. is up to the task.