2001 – HOW THEY FARED
The Business Journal Looks Back at Its 2001 Picks to Watch
Each December, the Business Journal picks companies and people to watch in the coming year. Our picks for 2002 are set to appear in the Dec. 31 issue. For now, we thought we’d take a look back at our picks of a year ago and recap how they did in 2001. To be sure, all of our 2001 picks were worth watching,but many for reasons we didn’t anticipate.
TECHNOLOGY
Company to watch:
Conexant Systems Inc.
A year ago, the Business Journal predicated that Newport Beach-based chipmaker Conexant Systems Inc. would have a big year in 2001. Boy, did it.
Last December, Conexant was set to spin off its Mindspeed Technologies unit, which makes chips for networking gear. Growth was the watchword: Conexant had long-term plans to add another 2,500 workers in Newport Beach.
Flashforward a year. Conexant has put on hold plans for a Mindspeed public offering or even a distribution of shares to its own shareholders. Expansion plans have given way to drastic cutbacks. In the past year, Conexant has seen its Orange County workforce drop by 33% to 2,000 people. Companywide, the company’s headcount has been halved to 6,500 people.
Conexant also temporarily stopped production at its plants, sold assets and shifted production to contract chipmakers in Asia. While the moves haven’t given Conexant many good headlines, they have helped preserve cash.
Conexant turned out to be worth watching in 2001 because the company came to symbolize the turmoil that played out in the communications chip sector.
But Conexant is seeing signs of light. The company has watched its stock mount a slow but steady climb in the recent months. And Chief Executive Dwight Decker recently told a group of analysts that he believes the worst is over for the company.
,Andrew Simons
Person to watch:
Emulex Corp.’s Paul Folino
A market downturn can ruin everyone’s party, even that of Costa Mesa-based Emulex Corp.
A year ago, the Business Journal picked Paul Folino, Emulex’s chief executive, as its technology person to watch. After Emulex’s buy of Giganet Inc. and Folino’s masterful handling of the fallout from a fake company press release, he was poised to make strides this year. And, with a $6 billion market value a year ago, he had ammunition for deals.
But as tech stock prices shrunk, Em-ulex’s market capitalization dove by half. An expected acquisition push didn’t realize. The year has been a hard one for Folino, who has overseen the company during one of the largest downturns in the storage networking industry.
But that’s not to say Folino hasn’t made any strides. Emulex unveiled a host of new host bus adapter products and was named the No. 1 host bus adapter maker by market researchers Gartner Group Inc. and International Data Corp. Folino also led a share buyback program to help his company’s stock price.
And Folino remains optimistic. He said he expects the storage networking business will be an important economic growth driver in the coming year.
REAL ESTATE
Project to Watch: Vantis
When historians look back at Orange County’s market trends, Shea Properties’ Vantis project may well be known as the last major project to break ground under OC’s recent economic boom.
The 40-acre, $350 million class A project got under way just as developers and analysts began forecasting a slowing economy.
The question: could a large-scale project make a go of it with a recession looming? Or would Walnut-based Shea Properties be stuck with extensive vacancies?
So far, so good. With the project under construction at the Aliso Viejo Town Center, Seattle-based insurer Safeco Corp. has agreed to a 15-year lease for 120,000 square feet in the first phase of the project.
Safeco will occupy space in the first Vantis building, a 175,000-square-foot, five-story structure slated for completion in the first quarter of 2003.
The entire Vantis project calls for 1.5 million square feet of office space and 30,000 square feet of retail space after a seven-phase build-out that is planned for completion in 2007. The project will include three- to eight-story buildings ranging from 75,000 square feet to 260,000 square feet apiece.
Still, Shea faces challenges. South Orange County vacancy rates continued to climb during 2001, according to a recent report by Lee & Associates. Vacancy rates grew from 13.7% in June to 17.9% in November. And net absorption sunk further, from negative 167,379 in June to minus 558,067 in November.
,Daniel D. Williams
People to watch: The Irvine Company’s Michael McKee, Clarence Barker
Though the economy slowed and The Irvine Company lowered lease rates for some Irvine Spectrum space, Orange County’s dominant landowner and developer pointed toward the future with major shifts in its power structure.
Chairman Donald Bren still rules. But the organizational chart continues to shift under him. In 2001, Richard “Dick” Sim, chairman of the investment property group, stepped down, leaving the leadership to the new generation of Michael D. McKee and Clarence Barker.
Earlier this month, McKee was elected by The Irvine Company’s board of directors to the newly created position of chief operating officer.
“Mike’s appointment recognizes the expanded role he has had in the business of the company beyond his recent responsibilities as vice chairman and chief financial officer,” Bren said in a statement.
Now, all division heads report to Bren and McKee. Before joining the Irvine Co. in 1994 as chief legal officer, McKee was managing partner of the OC office of Latham & Watkins.
A year ago, Barker was named president of the Investment Properties Group, which oversees retail, office, campus-office properties and apartments. Barker joined The Irvine Co. in 1988 as vice president of development.
Manufacturing
Fairchild Fasteners
Fairchild Fasteners, a big unit of Dulles, Va.-based Fairchild Corp., makes almost anything that fastens one surface to another,screws, rivets, nuts, bolts, latches and clamps. The company’s products are used in planes, cars, boats, eyeglasses and heavy machinery.
With a runup in defense spending, the Business Journal pegged Fairchild, with its operations in Fullerton and Huntington Beach, as one to watch.
The company is seeing steady long-term growth in defense work, including supplies for Boeing Co.’s C-17 Globemaster III cargo plane. For the three months ended Sept. 30, Fairchild Corp. saw sales increase 11.3% to $165 million. The company’s fasteners business made up 90% of sales and was up 17% to $147 million. Fairchild’s backlog stood at $222.3 million as of Sept. 30.
This past year, Fairchild Fasteners expanded its Fullerton and Huntington Beach operations, adding nearly 200 employees to bring its current Orange County staff roster up to 1,300.
While defense projects have propelled Fairchild, commercial aviation is weak. The company said the Sept. 11 attacks and their aftermath “continue to have a significant effect on the commercial aviation industry, raising concerns about the company’s strong order backlog and projected levels of new orders.”
,Chris Cziborr
TOURISM
Disneyland’s Cynthia Harriss
A year ago, Orange County tourism players were keeping an eye on Walt Disney Co.’s new theme park with visions of more than just sugar plums dancing in their heads.
Instead they saw dollar signs,their reward for three years of construction at Disney, the Convention Center and on area freeways. That put Disneyland Resort President Cynthia Harriss in the spotlight.
But what should have been a triumphant start for OC’s newest amusement park began with weak crowds and lukewarm reviews. Critics said the park didn’t offer enough to do and was short on appeal to families and locals.
In the spring, Harriss was faced with companywide layoffs that resulted in a loss of about 300 people in OC just months after 8,000 “cast members” were hired.
Harriss started tweaking. Most visible were changes at California Adventure. Pass restrictions were eased, promotions targeted at locals were started and new shows began to show up at the new park. And when the Mondavi folks and Wolfgang Puck pulled out of their high-profile restaurants at the new park, Disney took over.
But anemic attendance figures have put plans for a third park,announced last summer,on the back burner. California Adventure attendance improved over the summer, but capacity crowds never materialized.
Recent seasonal hiring is one sign that Disney is cautiously optimistic. And Harriss,who remains popular with workers and management,still is upbeat about the resort.
“All of our plans are not only for what are we doing today, but what is our park going to be like the next 10 years,” she said recently.
But clearly, what should have been Harriss’ crowning year fell short.
,Sandi Cain
Venue to watch:
Anaheim Convention Center
A year ago this month, the last phase of the Anaheim Convention Center’s $180 million, three-year expansion opened to great fanfare and great expectations. Tourism officialsboasted the project would drive conventioneer numbers to 1.2 million in 2001,a number that was projected to grow to 1.4 million in 2005.
The city of Anaheim, which runs the Convention Center, expected big things, too. Last fall, the city trumpeted an economic analysis that estimated Anaheim was likely to see its hotel tax revenue grow from $45 million in fiscal 1998-99 to between $75 million and $78 million in fiscal year 2004-2005.
The money, city officials said, would fund improvements for residents as well as tourists.
Through August, those rosy projections held true,at least for conventions. As of August, about 725,000 convention delegates already had come to town, leading Charles Ahlers, president of the Anaheim Visitor & Convention Bureau, to proclaim 2001 a banner year.
But after Sept. 11, all bets were off. Only two large conventions were canceled,one in progress and another scheduled for the following week. But a handful of smaller hotel meetings canceled, too, leaving hotels virtually empty in the first days following the catastrophe. And though other conventions have occurred on schedule and hotel occupancy has been steadily climbing, attendance numbers have been 20% to 30% below original projections.
Despite the unexpected downturn, there’s still a chance that Anaheim will top that 1 million mark in conventioneers when year-end numbers are in. If so, it would be the first time since 1994 that the city has reached that number. Ahlers said he expects to see 90% recovery from Sept. 11 by early next year.
RETAIL
Company to watch:
HomeBase Inc.
A year ago, what’s now Irvine-based House2Home Inc. closed several HomeBase stores and converted some to a new home decorating chain, House2Home. The company also brought on a new chairman and chief executive officer, Herbert Zarkin, to spearhead the changes.
But the moves didn’t work exactly as planned. On Nov. 7, the same day the company’s penny stock was delisted from the New York Stock Exchange, House2Home filed for Chapter 11 bankruptcy protection. The company now is in the final phase of liquidating 42 of its House2Home stores and said it will cease operations in the next two to three months.
The struggling company couldn’t stay afloat in an already tough retail sector that was exacerbated by the Sept.11 attacks. Plus, the company said it ran into credit problems following the August completion of its store conversion program. House2Home was running out of cash, and the company failed to find another out besides liquidation. In the meantime, competitors, such as Home Depot Inc. and Sears, Roebuck and Co., also have struggled in the high-end home decorating sector.
,Jennifer Bellantonio
Person to watch:
Taco Bell Corp.’s Emil Brolick
It took the greater part of a year, but it looks like Emil Brolick,who took over as president of Taco Bell Corp. in 2000 to halt declining sales,is showing progress.
The Irvine-based Mexican fast food chain saw the glimmer of a turnaround for the four weeks ended Dec. 1, when it posted a same-store sales increase of 8%. That’s a big improvement from January, when Taco Bell’s same-store sales fell by 10%.
Brolick, who was recruited from Wendy’s International Inc., is bent on repositioning the brand. That includes working with hurting franchisees and financially restructuring more than 700 of Taco Bell’s 4,000 franchised restaurants, as of the third quarter.
Taco Bell, which has 6,700 restaurants in the U.S., also purchased 120 franchise stores. In recent earnings reports, executives at parent Tricon Global Restaurants Inc. said they are optimistic they’re seeing a “turnaround for the brand.” They credit tastier products, cleaner stores and catchy advertising campaigns focused on the food. FCB Worldwide, which last year replaced TBWA/Chiat/Day (creators of the talking Chihuahua) has led the charge. They tapped Amazon.com Inc.’s Jeff Bezos for their most recent ad campaign and made splashes by partnering with Microsoft Corp. and its Xbox game console in November. Still, Brolick can’t sit back and relax. Industry observers say now Taco Bell has to deliver on operations and keep improving food quality.
TRADE
Market to watch: Europe
Europe is Orange County’s biggest collective export market, grabbing 20% to 25% of the county’s annual shipments. But the struggling euro provided a challenge for OC companies in the past year.
“The euro showed some life early in the year and then began waning,” said Eric Brandt, chief financial officer with Irvine drug maker Allergan Inc.
Currency issues worldwide have cost Allergan $47 million since the beginning of the year,primarily the result of the weak euro, as well as the Japanese yen and Brazilian real, Brandt said.
Fullerton medical diagnostic products maker Beckman Coulter Inc. also reported lower revenue because of the weaker euro. About 24% of Beckman’s sales are into Europe.
“Those sales have been affected by the strengthening dollar,” said Jay Steffenhegen, Beckman’s vice president corporate development and strategic planning. “So even though our reported sales in Europe were roughly flat compared with last year, we still lost 6% in revenues because of the weak euro.”
Steffenhegen described some of the European economies as “mixed.”
“Germany in particular seems to be struggling,” Steffenhegen said. “But all the other market factors in Europe pale in comparison to this currency effect.”
Europe has struggled in recent years, lagging behind the U.S. economy, and the year so far hasn’t been any different.
“Their slowdown is worse than ours right now because they never went up that fast compared to the U.S. economy in the first place,” said Anil Puri, dean of the College of Business and Economics at California State University, Fullerton. “A big reason for that is there are still a lot of barriers to trade and cross-border financial transactions within the European Union.”
HEALTHCARE
Company to watch: Sicor Inc.
About a year ago, the Business Journal picked Sicor Inc., an Irvine-based maker of injectable generic pharmaceuticals, as its company to watch. The reason: Sicor’s moves to ready itself for the anticipated opening of the biotechnology drug market later this decade.
In July, Sicor finished building a new plant in Toluca, Mexico, near an existing facility that makes steroids. A consultant was then brought in to make sure that the new building’s systems and equipment met U.S. Food and Drug Administration standards. Still, Sicor said it wasn’t immediately going to seek U.S. approval for the facility right off the bat.
Sicor’s stock price was on a steady roll most of this year, reaching a peak of around 27 during the summer before dropping down to around 17 in recent weeks. The company’s market capitalization stood at $1.9 billion at recent check.
Few companies have expressed much interest in making biotech generics, which tend to be more complicated to produce than other drugs. Biotechnology drugs and vaccines typically are complex proteins, compared to conventional pharmaceuticals, which are chemical compounds.
Analysts who follow Sicor said the company was taking the correct steps by creating a Mexican launchpad.
In other Sicor news, the company offered 20 million shares of its common stock in October. Sicor said it would use the offering’s proceeds for general corporate purposes, principally working capital and capital expenditures and for acquiring of businesses, technologies, products or services that are complementary to what it does.
,Vita Reed
PacifiCare’s Howard Phanstiel
Last December, Howard Phanstiel, chief financial officer of Santa Ana-based PacifiCare Health Systems Inc., was serving as the managed care company’s interim president and chief executive. That also was the time when the Business Journal picked “PacifiCare’s next CEO” as its healthcare person to watch for 2001.
Well, Phanstiel secured the permanent chief executive’s spot. He was tapped for his insurance background. But 2001 was a turbulent year for Phansteil.
Phanstiel’s goals included taking PacifiCare’s products beyond its traditional health maintenance organizations. Strides were made in that direction this year, with the introduction of a preferred-provider organization and a Medicare supplemental health insurance program.
Among other things, Phanstiel said that PacifiCare had to de-emphasize its reliance on Medicare, which makes up a good portion of PacifiCare’s profits. PacifiCare said in the fall that it would cut more than 64,000 seniors from its Medicare HMO rolls partially due to rising costs and insufficient government funding.
PacifiCare’s stock also bounced up and down during 2001. Its shares started at around 10 in January and climbed to nearly 40 in February and rode in the 20s and 30s until early June, when they slid. Except for one blip in November, PacifiCare has traded in the teens in recent weeks. The company’s market capitalization stood at around $623 million at recent check.
Meanwhile, Phanstiel and PacifiCare management drew fire during the year from some corners of Wall Street. David Shove, a Prudential Securities Inc. senior managed care analyst, blasted the company after a pair of earnings bombs, including a sharp downward revision of profit estimates.
Sheryl Skolnick, managing director of Fulcrum Global Partners LLC in New York, criticized PacifiCare after it made preliminary plans toward launching a new marketing campaign to recast its image.
“They don’t seem to understand that their inability to operate a fundamentally sound business consistently (is the problem),” she said. “When consistency exists in your business model, your reputation and stock price follow.”
, Vita Reed
FINANCE
Person to watch: ClearLight Partners’ Michael Kaye
Michael Kaye, managing partner at Newport Beach-based private equity fund ClearLight Partners LLC, has been busy this year hiring some key people, closing an investment deal and making a few follow-on investments.
“It was a good year for us,” Kaye said. “There was good amount of activity and we filled in some key positions.”
The fund brought in Patrick Haiz as a partner this summer. Haiz was a principal at San Francisco-based Gryphon Investors Inc., a middle-market private equity fund that Haiz co-founded in 1995. ClearLight also hired Andrew Brennan as senior associate and Robert Polentz as its chief financial officer.
ClearLight Partners’ sole backer is security company WestecGroup and its Japanese parent Secom Co. The firm’s fund was set up in early 2000, with an investment capital of $300 million. It began active investment in September 2000.
But like most private equity and venture funds, ClearLight saw a slowdown in the number of deals it closed. The firm made one new investment this year compared with four last year. It invested $6 million in Data Direct Networks Inc., a storage network appliance company based in Chatsworth. It also made three follow-on investments, investing a total of $12 million.
Kaye said that in 2001 he and other partners at ClearLight were cautious given the “turbulence” in the economy and hence were careful when it came to investing. He said that the firm looked at many deals but decided to invest in one solid company.
“A lot of deals did not make it to the finish line,” he said.
,Rajiv Vyas
Downey Financial Corp.
Falling interest rates, a tough lending environment and the cost of opening new branches took their toll on Downey Financial Corp. this year.
For the third quarter, the Newport Beach-based thrift saw its net income drop 17% to $22 million, down from $26 million in the previous year period as it provided for higher valuation allowance because of falling interest rates.
Lower interest rates resulted in heavy refinancing and increased prepayments of loans. If the valuation allowance had not been made, Downey’s net income in the third quarter would have been $28.6 million, up $1.9 million or 7.1% from the year-ago level.
Lower profits and a drop in deposits did not help the company’s stock price either. In December, its stock was trading at around 37, down 31% from where it was traded at the start of the year.
Its market capitalization fell to $1.05 billion, down from around $1.5 billion a year ago.
But despite a drop in the third quarter profit, Downey saw record level of mortgage loan origination because of declining interest rates. For the first 10 months of the year, Downey originated loans worth $6.4 billion compared with $5 billion in all of 2000.
The financial services company also continued to expand its operations in a tough market. The company added 23 new in-store and stand-alone branches in and around California. Nine of those branches were added in the second half of the year. Downey now has a total of 136 branches, with the total equally divided between traditional and in-store locations.
TRANSPORTATION
Person to watch: Arthur Leahy
Arthur Leahy had a busy first year as chief executive of the Orange County Transportation Authority.
OCTA last week said it would set out to buy the 91 Express Lanes,the private toll road that has received blame for worsening congestion on the Riverside (91) Freeway.
Earlier in the fall, county transportation officials gave the nod to study a proposed light rail route running from Irvine to Santa Ana, which would include stops at the University of California, Irvine, John Wayne Airport and South Coast Plaza.
Rail is a hot-button issue. Leahy has handled similar issues before, including gaining support and approval of a 12-mile light rail system as general manager for Metro Transit in Minneapolis.
Leahy, a former Los Angeles Metropolitan Transportation Authority bus driver, had other tough issues to tackle this past year.
Early on, Leahy had to quell labor unrest among bus drivers.
After months of difficult talks, OCTA and the bus drivers’ union agreed to a new contract increasing pay at least 12.5% and scrapping concessions made during the county’s bankruptcy.
The talks came as OCTA wrestled with lower-than-expected bus ridership projections following recent fare hikes and route changes.
This year, OCTA officials projected around 57 million bus boardings, compared to a target of 60.7 million. Revenue for the year had been pegged at $39.3 million, but could come in closer to $37.7 million, they said.
At his post at Metro Transit, Leahy received credit for increasing bus ridership by 20% after years of decline.
,Chris Cziborr
Person to watch: Larry Agran
Agency to watch: Board
of Supervisors
Irvine Mayor and the county supervisors were tapped to watch a year ago for one key reason: El Toro. And they didn’t let us down.
In October, the board certified an environmental report on an airport at the former Marine base. The county also launched a big PR campaign touting an El Toro airport,something officials say they will continue despite a recent ruling frowning on the practice by a San Diego judge.
Meanwhile, Larry Agran made his grand return to the Irvine mayor’s office on the wings of El Toro,opposition to an airport, that is. As a councilman, Agran led the campaign for the anti-airport Measure F. As mayor, Agran has championed a great park at El Toro, a roughly 1,500-acre open space that would be developed in the next 40 years or so. Voters are set to vote on the park idea in March. Critics say a great park will be a taxpayer nightmare.
For now, Agran has rolled out a massive publicity campaign for the park of TV ads and mailers, comparing it to Balboa Park in San Diego, among others.
,Daniel D. Williams
ENVIRONMENT
Person to watch: Rancho Mission Viejo LLC’s Anthony Moiso
After years of planning, Tony Moiso, chief executive of Rancho Mission Viejo LLC, made public plans on how he and his family intend to develop their remaining 22,850 acres of land in southeast Orange County. The 30-year plan calls for 14,000 homes and 5.1 million square feet of commercial development. The announcement drew criticism from some environmentalists, even though it sets aside roughly two-thirds of the land as open space.
Moiso is developing the land under the federal Natural Communities Conservation Plan, which allows developers to create a comprehensive plan for their project with input from government, environmentalists and residents.
