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Stepping Up the Pace

ECONOMIC OUTLOOK 2003

– The Waiting Game

Stepping Up the Pace

In their predicted order of finish, the Business Journal ranks Los Angeles’ major industry sectors

Real Estate (Residential)

Year in Review: Low interest rates coupled with a persistent housing shortage helped drive single-family home prices up by 20 percent Building permits for new single- and multi-family units in L.A. County kept pace with last year’s levels and foreclosures were down 23 percent reaching their lowest level since 1991 Hot housing markets included Long Beach, Highland Park, Woodland Hills and Venice while Hollywood, Marina del Rey and San Pedro have cooled off Apartment rents were up about 5 percent for the year while vacancies were up about 1 percent. Moderately priced areas like San Gabriel Valley, East L.A. and Mid-Wilshire showed strongest rental increases while higher end areas like the West Valley and West L.A. experienced some flattening The first of Playa Vista’s 3,200-residential-unit initial phase came on-line Shea Properties took over as master development consultant at Worldwide Church of God’s 48-acre mixed-use development at Pasadena’s Ambassador College after Legacy Partners walked away Northern California-based Sobrato Development Cos. paid $56.5 million for Pasadena’s Alexan City Place apartments, marking a record $276 a foot for a non-beachfront apartment complex.

Players to Watch: Federal Reserve Governor Ben Bernanke will be key in keeping interest rates close to their current record-lows Jerry Snyder is scheduled to break ground on mixed-use projects NoHo Commons and Wilshire Crescent in North Hollywood and Beverly Hills, respectively Archstone Communities will finish apartment complexes of 350 units and 200 units in Playa del Rey and West L.A., respectively PCS Development will finish its 221-unit project and Long Beach’s CityPlace and will break ground on a $70-million assisted living project and an apartment complex in Sherman Oaks and Beverly Hills adjacent, respectively.

Buzz for 2003: Home prices won’t keep up the same torrid pace, with year-to-year appreciation dropping to about 10 percent, mirroring the state Mortgage rates are not expected to increase by more than half a point, helping entry-level homes in East L.A. and the Antelope Valley and “move-up” markets like the San Gabriel Valley continue to appreciate by 10 to 15 percent. Higher-end markets like the Westside and Manhattan Beach are seen flattening out Larger development companies and more conservative institutional investors will join entrepreneurial developers in the burgeoning mixed-use market Apartment rents that started to tail off in the second half of ’02 will continue to do so in ’03. Higher concessions will pull down rents down in the Westside and Santa Clarita Valley.

Grade: A-

Danny King

Aerospace/Defense

Year in Review: Northrop Grumman Corp. dominated the action in Los Angeles aerospace as it continued making acquisitions. Shareholders approved Northrop’s purchase of TRW Inc. for $7.8 billion, creating the nation’s No. 2 defense firm (behind Lockheed Martin Corp.) with annual revenues of $26 billion and 120,000 employees Boeing won a $9.7 billion Air Force contract in August to build 60 more C-17 cargo planes, guaranteeing employment for 7,000 Long Beach-based employees through 2008.

Players to Watch: Northrop will be the region’s most active aerospace company, having teamed up with Lockheed to win an $11 billion contract in June to modernize U.S. Coast Guard’s ships, aircraft, command and control and logistics systems. It also assumed control of $14 billion awarded to TRW in 2002 for four major military satellite contracts. It won Navy contracts worth $2.9 billion and $1.9 billion respectively to design a new generation of destroyers and to build four additional DDG 51-class missile destroyers. Meanwhile, Northrop President Ronald Sugar is considered the top candidate to replace Chairman Kent Kresa, who is expected to retire in 2003 Defense Secretary Donald Rumsfeld may reduce the number of F-35 Joint Strike Fighters, F-22 Raptors and F/A-18 Super Hornets, cutting potential local jobs generated to 12,000, from the original projection of 17,000.

Buzz for 2003: Region to get a large share of $7.4 billion allotted for missile defense this fiscal year, including $293.8 million earmarked for development of two test missile-tracking satellites as part of former TRW’s Space Tracking and Surveillance System Raytheon Co. will ultimately receive $200 million (from $868 million overall) to make the system’s sensor package Northrop will hire more than 1,000 engineers and hundreds of other technical support staff locally to handle four other satellite contracts awarded to TRW in 2002 worth more than $14 billion. Northrop also will complete hiring of 1,000 additional staff by fall in support of F-35 Joint Strike Fighter program Boeing’s beleaguered spy satellite program, expected to generate $25 billion over two decades, could reach $900 million in cost overruns over the next 12 months. Downturn in telecommunications industry will also force the company’s El Segundo-based satellite making operation to cut 1,500 jobs by June, on top of same number of pink slips handed out in 2002 Employment in L.A. County’s defense industry is at 104,300, far away from its 1988 peak of 274,000. But the $355.5 billion defense budget recently signed by President Bush is expected to add several thousand to the total by end of 2003.

Grade: A-

David Greenberg

Banking

Year in Review: Consolidation continued, but most of the deals were relatively small In October, California National Bank, L.A.’s second largest bank, announced it would merge with Fidelity Federal Bank, based in Glendale (Fidelity Federal and California National are both owned by privately held FBOP Corp., based in Oak Park, Ill.). The resulting institution, called California National Bank, has $5.7 billion in assets After acquiring United California Bank (which had been created after the 2001 merger of Sanwa Bank California and Tokai Bank of California), Bank of the West kicked off a $5 million marketing campaign introducing itself to Southern California Local bank stocks rallied, as community banks, like the local economy, brushed off the effects of national economic troubles As of the middle of December, financial services stocks in the LABJ 200 were up 12 percent year to date, compared with a decline of nearly 10 percent for the entire LABJ index.

Players to Watch: Dominic Ng, chief executive of East West Bank, L.A.’s largest ethnic Bank. Company has continued to record earnings and asset growth; given the right price, could make a purchase or two next year Russell Goldsmith, chief of City National Bank, L.A.’s largest bank, which has continued to grow and could also make a small purchase Expect Bank of the West, the San Francisco-based subsidiary of BNP Paribas, to lay low but continue advertising heavily in Los Angeles Same for California National Bank, which also is in the midst of a marketing campaign.

Buzz for 2003: After getting into the Los Angeles market via acquisitions, Bank of the West and California National Bank likely will spend most of next year making sure the pieces are in place L.A.’s biggest players City National, California National and East West tend to be on the conservative side and have veteran managers producing good returns, so why jeopardize a good thing by executing a risky purchase? A couple of small deals will go through, especially among Chinese banks, but most of the banks have continued to thrive and would prefer to remain independent if possible All eyes are on GBC Bancorp, ailing parent of General Bank, which already has more than one suitor One big question mark is the state’s budget crisis, drastic cuts could hurt local businesses in the service economy, such as contractors, and might show up in bank earnings later in the year after cuts take effect Be prepared to see more Citigroup signs around town After the recently completed purchase of Golden State Bancorp (California Federal Bank) for $5.3 billion, the New York institution should be a formidable competitor for any bank doing business in Los Angeles

Grade: B+

Conor Dougherty

Film

Year in Review: Domestic box office was projected to hit a record $9.2 billion in 2002, up 6.4 percent from a year earlier, but that hides serious fissures. Media giants that own the large studios have proven poor investments, dragged down by weakness in other units meant to offer “synergy.” Through Dec. 15, Sony led the studios with a 17.9 percent market share. Runners up were Disney’s Buena Vista (13.5 percent), Fox (12.1 percent), Warner Bros. (11.6 percent), Universal (10.2 percent) and Paramount (7.6 percent) Massive debt woes at Vivendi Universal led to the ouster of its colorful chairman and raised the prospect of the French media giant spinning off its U.S. entertainment assets with perhaps John Malone and/or Barry Diller leading the way Walt Disney Co. went through a mostly downbeat year that included the box office disaster “Treasure Planet” Lifted by the success of “Spider Man,” Sony Pictures Entertainment broke the all-time industry box office record, taking in more than $2.75 billion in worldwide box office receipts.

Players to Watch: Rupert Murdoch, whose News Corp. raised $1.2 billion through a secondary offering of 50 million new shares of Fox Entertainment Group (perhaps for GM’s stake in Hughes Electronics) Liberty Media Corp.’s John Malone could emerge as a suitor for Vivendi Universal’s U.S. entertainment assets. (He also amassed some cash after initiating a $620-million rights offering in October.) Barry Diller is critical to the future of Vivendi Universal, but would not be able to run both Universal and USA Interactive, adding to confusion about Universal’s future.

Buzz for 2003: All eyes will be focused on Vivendi. Lots of talk about Malone, whose cable empire could use the company’s content and distribution capabilities, but would likely spin off the music division Despite recent success with the 20th James Bond film, Metro-Goldwyn-Mayer Inc. has been shopped around by majority shareholder Kirk Kerkorian, but at $8 billion it is considered too expensive. Depending on its box office success and if the price is lowered look for any number of suitors to vie for MGM’s library Comic book superhero movies to continue, with “Daredevil” set for release in February and “The Hulk” due out in June The two major independents, Lion’s Gate Entertainment and Artisan Entertainment, have both done well by exploiting their libraries, but are still considered ripe acquisition targets Expect the DVD boom to continue, supporting those firms with the biggest libraries Times can only get better for Disney: Due to new accounting rules, dismal results of “Treasure Planet” have already been written down.

Grade: B+

Conor Dougherty

Trade

Year in Review: After six months of bitter negotiations and a shutdown of West Coast ports, the International Longshore and Warehouse Union and Pacific Maritime Association reached agreement on a six-year contract. In exchange for allowing labor-saving technology, union members will receive a $3 increase to their $27.63 hourly base pay, a maximum pension increase to $63,000, and maintaining health benefits averaging $42,000 per worker each year The $2.4 billion, 20-mile Alameda Corridor rail line opened from the Ports of L.A. and Long Beach to downtown L.A. on budget and by its April 15 deadline. It is designed to accommodate an increase in cargo capacity from the ports Shipping company Maersk Sealand left Long Beach for a 316-acre facility in L.A. just as Hanjin Shipping Co. was leaving L.A. for a 288-acre site in Long Beach China Shipping Holding Co.’s planned move into the first phase of $175 million, 174-acre Long Beach terminal in late November halted when California’s 2nd District Court of Appeal ruled adequate environmental study wasn’t conducted.

Players to Watch: The California Trucking Association will push more legislation designed to ease traffic gridlock outside terminal gates that hurts truckers paid by the load, not the hour Coast Guard Capt. John Holmes and LAX Federal Security Director David Stone as they expand security programs Cargo CATS (Criminal Apprehension Team) resurrected to oversee container cargo-theft investigations Asian trading partners who might seek other port destinations in wake of labor unrest at West Coast Ports.

Buzz for 2003: ILWU’s 10,500 members are expected to ratify new agreement with shipping companies in January As the economy mends, two-way trade volume through Ports of L.A. and Long Beach is expected to increase about 5 percent from the $200 billion that moved through the L.A. Customs District in 2002 The main products coming in will be furniture, apparel, toys, computer equipment, other consumer electronics, autos and footwear Overcapacity of products at terminals from imports delayed during 10-day shutdown of ports in late September expected to subside in early January To avoid paying $250 fines for each truck forced to idle more than 30 minutes outside their gates under a state bill passed in September, terminals will extend gate hours and devise a scheduling system for truckers to arrive at non-peak hours L.A. port’s main channel deepening project will commence in early 2003. It will lower the channel’s depth to 53 feet from current 45 feet to allow world’s largest container ships, holding up to 9,000 TEUs (20-foot equivalent units) to call on port.

Grade: B+

David Greenberg

Law

Year in Review: Shareholder suits and corporate fraud cases flooded the market, with L.A. firms Global Crossing Ltd., Homestore.com Inc. and Idealab among those in litigation An L.A. jury awarded a smoker a record-breaking $28 billion later cut to $28 million in a case against Philip Morris Cos. Inc. Four Carson city officials were indicted on bribery charges L.A. Superior Court laid off more than 300 staff and judicial officers after the state’s severe budget cuts The Los Angeles Unified School District’s $100 million suit against O’Melveny & Myers LLP over the Belmont complex was dropped L.A. County sued L.A. city over its downtown redevelopment plan The Roman Catholic Archdiocese of Los Angeles defended itself against local sexual abuse cases Gubernatorial candidate Bill Simon’s family investment firm was on the losing end of a $78 million fraud verdict, later overturned Crosby Heafey Roach & May PC merged with Reed Smith Lyon & Lyon LLP went out of business after 100 years Senior partners left Akin Gump Strauss Hauer & Feld LLP’s labor and corporate departments.

Players to Watch: Debra Yang, who took over as U.S. Attorney for the Central District of California Three senior partners of O’Neill Lysaght & Sun LLP, which represents the whistleblower executive in the Global Crossing investigation Incoming Presiding Judge of the L.A. Superior Court, Robert Dukes, who took over as Gov. Gray Davis announced mid-year proposals for more budget cuts Richard Odom, head of faltering Brobeck Phleger & Harrison LLP, which is one of the law firms most impacted by the dot-com bust John Hartigan, former Securities and Exchange Commission branch chief and lead partner of the L.A. office of Morgan Lewis & Bockius LLP, which may merge with Brobeck Mark Geragos, attorney for Winona Ryder Thomas Mesereau Jr. and Jennifer Keller, new attorneys for Robert Blake.

Buzz for 2003: With Republicans now controlling the Senate, judicial confirmations should move along more expeditiously, which would help ease the backlog of cases in U.S. District Court, Central District of California although not everyone believes that will happen More layoffs and arbitration is expected at L.A. Superior Court as the state considers mid-year budget cuts Merger between Morgan Lewis and Brobeck Phleger & Harrison is anticipated early in 2003 Profits at L.A. firms is expected to increase, with O’Melveny & Myers possibly exceeding $1 million per partner Profitable practices include white-collar crime, bankruptcy and biotechnology The Robert Blake murder case, still in its pretrial phase, is likely to get underway, creating another celebrity-style media circus.

Grade: B+

Amanda Bronstad

Local Media

Year in Review: It was the year of the duopoly as Viacom Inc. received approval for its $650 million purchase of KCAL-TV (Channel 9), pairing it with KCBS-TV (Channel 2). In April, General Electric Corp.-owned NBC completed its acquisition of Spanish-language broadcaster Telemundo Communications and its local outlets KVEA-TV (Channel 52) and KWHY-TV (Channel 22) for $2.7 billion in cash and debt In radio, Clear Channel Communications abandoned its two-year experiment with talk on KLAC AM (570) An unusual deal between Village Voice Media LLC and New Times Media highlighted a down year in local print media. The Department of Justice is investigating possible antitrust violations related to the deal in which New Times closed its Los Angeles paper in October in exchange for Village Voice shutting its Cleveland weekly and paying New Times a reported $8 million in cash The Los Angeles Times eliminated its Metro and Southern California Living sections in favor of a California section and an expanded Calendar. Sunday Calendar switched from a tabloid to a two-part broadsheet.

Players to Watch: Ownership limits will require NBC to sell KWHY, one its local Spanish stations Univision Communications Inc. Chairman A. Jerrold Perenchio will extend his influence from television to radio if, as expected, the Justice Department approves the $2 billion acquisition of Hispanic Broadcasting Corp. HBC owns 55 radio stations, including five in Los Angeles The Los Angeles Times continues to launch new sections amid an improved financial outlook at parent Tribune Co. Infinity Broadcasting will wait for word from the Federal Communications Commission on its application to place news station KFWB-AM (980) in a trust, a move that would enable the company to keep all seven of its local radio stations, or one more than rules allow. An affirmative response by the FCC would have national and local implications on ownership limits It’s do or don’t time for former L.A. Mayor Richard Riordan, who has been talking for nearly a year about starting up a newspaper in town.

Buzz for 2003: Optimism is growing that an anticipated bump in national advertising spending will lead to gains for local media, especially newspapers and magazines that have had two miserable years in a row. That optimism is balanced, however, by a fear that a war with Iraq could reverse any momentum that exists heading into the new year Radio advertising was one of the bright spots in 2002, with total spending expected to reach $975 million, a seven percent jump over 2001. In 2003, that number could jump again by 15 percent Will anyone leap in to fill the gap created by the demise of New Times Los Angeles?

Grade: B

Darrell Satzman

Advertising

Year in Review: Despite a rough start, national advertising rebounded in the latter half of the year with a 2 percent gain over 2001. Budget tightening was the order of the day, and there were fewer national advertisers opening up accounts for bidding as the status quo was maintained Locally, radio was a bright spot, drawing a projected $970 million in ad revenues, about 7 percent more than 2001. The strongest performer was Emmis Communication’s KPWR-FM (105.9) Print media continued to feel pain, with classified revenue at the Los Angeles Times down by nearly 50 percent from its peak in 2000. On the plus side, Times parent Tribune Co. reported a 7 percent increase in ad income from a year ago Interpublic Group, one of advertising’s Big Four, said it would close the El Segundo office of Foote, Cone & Belding after the firm lost the account for Mattel Inc.’s boy/entertainment division.

Players to Watch: Initiative Media, where new Chief Executive Alec Gerster will be on the spot as he works to breathe new life into the $20 billion media network Downtown-based Castells & Associados, formerly known as Ad Americas, which pushed its billings beyond the $40 million threshold in 2002 and is positioned to take advantage of growth in the Hispanic market Bob McCauley, who took over local cable interconnect Adlink, hired a new management team and oversaw close to a 10 percent gain in sales Ad agency The Ballpark, whose clever campaign for the World Series Champion Anaheim Angels helped propel the three-year-old firm into the spotlight. It will be doing work for the Los Angeles Galaxy, ESPN and Fox Sports in the year ahead Former Mayor Richard Riordan, who keeps putting off the launch of his much-discussed newspaper. The closure of New Times Los Angeles could provide an opening.

Buzz for 2003: A “soft recovery” is forecast for 2003, with overall ad spending rising from 2 to 5 percent. Some believe the rebound will be better, especially in Los Angeles where the national economic slump has been less severe than elsewhere An anticipated rise in Hispanic media should benefit L.A. as many of the big Spanish-language accounts are handled here Big wave of industry consolidation may have played itself out, leaving remaining independent agencies to sink or swim on their own The No. 1 threat to an industry recovery in 2003 is war with Iraq Radio, which has been a local bright spot in the industry is expected to be strong So-called “advertainment,” in which companies produce short films and other programming that features their products will proliferate as advertisers continue looking for ways to connect with consumers beyond the traditional 30-second spot Look for a moderate increase in Internet and mobile phone advertising in 2003.

Grade: B

Darrell Satzman

Real Estate

(Commercial)

Year in Review Downtown office properties churned as BP Plaza, Union Bank Plaza and Figueroa Plaza traded for $270 million, $110 million and $90 million, respectively. Maguire Partners bought Dai-ichi Mutual Life’s 75 percent share of the Library Tower for $300 million Orange County investor Ken Picerne acquired an option to buy Shuwa Investment Corp.’s Arco Plaza by purchasing Shuwa debt on other properties. Douglas Emmett bought the 1.8-million-square-foot Warner Center Plaza for $360 million while Kearny Real Estate Co. purchased adjoining Warner Center Business Park for $60 million Apollo Real Estate Advisers pushed aside lead developer Maefield Development from the Sunset Millennium project in West Hollywood Madison Marquette divested from its 375,000 square feet of Westwood Village properties while billionaire John Anderson, who bought 160,000 square feet of buildings from a Madison Marquette partnership, upped his Westwood stake by 183,000 square feet General Growth Properties Inc. paid $415 million for the Glendale Galleria while Trizec Properties Inc. wrote down the value of Hollywood & Highland twice for a combined $432 million Despite a slow leasing year, the county absorbed 229,000 square feet of office space during the first three quarters. Westside and San Fernando Valley office markets bounced slightly as positive absorption was recorded for the year while Tri-Cities continued to put space back on the market and downtown stayed about even. Class-A asking rents were down about 5 percent from last year. Industrial vacancy rates remained low as Mid-Cities and San Gabriel Valley were the tightest markets in the county. Vacancies were less than 3 percent.

Players to Watch: Robert Maguire will take his public offering on the road in late January Ohio-based REIT Developers Diversified Realty Corp. will complete its $114 million purchase of the 410,000-square-foot Paseo Colorado while continuing to put finishing touches on Long Beach’s CityPlace San Diego-based REIT Pan Pacific Retail Properties, which picked up 2.8 million square feet of local retail space with its buyout of Center Trust, will continue to purchase properties in the area New City Planning Commission President and O’Melveny & Myers Partner Mitch Menzer seen as key to approving mixed-use projects.

Buzz for 2003: Low interest rates will continue to drive investment while sluggish economy and questions about war will keep the leasing environment quiet into 2004. Vacancy rates and rents will stay close to 2002 levels LAPD’s choice of temporary replacement offices for Parker Center and its stepped-up security in industrial zones will help determine the performance of downtown’s office and residential markets Tenant-in-common entities will be investment vehicle of choice for smaller players looking to place 1031 exchange money into high-quality properties Tech wreck is done but companies will continue to tighten space or delay decisions on Westside, keeping its office market fairly stagnant Both big and small brokerage houses will continue consolidation trend West Valley office properties will continue to churn as Lennar Corp. puts the two phases of LNR Warner Center on the market Wells Fargo will put downtown’s 1 million-square-foot AON Building up for sale.

Grade: B

Danny King

Television

Year in Review: Thanks to a strong second half of the year, location television shooting in Los Angeles was on pace to reach 13,154 shooting days, a 17 percent gain over 2001 and the largest year-to-year jump of any filming category Local cable viewership pulled virtually even with the broadcast side for the first time EchoStar Communications abandoned its proposed $18 billion acquisition of Hughes Electronics Corp. and its DirecTV satellite television service Dick Clark Productions Inc. (“American Dreams,” “Golden Globe Awards”) sold for $136 million (Clark remains an investor) Univision Communications in January launched a third U.S. Spanish-language television network, TeleFutura. It airs locally on KFTR-TV (Channel 46) Despite the success of “American Idol,” it’s been a tough ratings year for Fox Television. The news was somewhat better for Walt Disney’s long-struggling ABC network, which finished third in overall viewership but came in second to NBC among young adults Three months after being named to the top job at The Academy of Television Arts & Sciences, former NBC executive Todd Leavitt rankled network executives when he flirted with an HBO bid before re-signing at more than twice the old annual fee over the next eight years. More Emmy changes are expected

Players to Watch: News Corp. Chairman Rupert Murdoch was maneuvering a new play for Hughes and DirecTV in concert with John Malone, fellow billionaire and head of Liberty Media Corp Gemstar-TV Guide International Inc., which has brought in John Loughlin, a former Primestar executive, and J. Scott Crystal, former head of Gruner & Jahr’s publishing business, to turn around the company’s ailing flagship program-guide magazine The resignation of KCBS-TV (Channel 2) general manager David Woodcock led to the appointment of Don Corsini, KCAL-TV’s (Channel 9) president and general manager, to head both stations. He will be putting synergy to the test as he works to improve two sets of ratings.

Buzz for 2003: Unions and broadcasters will try to develop rules regarding cross-utilization of talent and alternate pay scales between sister stations such as Viacom’s KCBS and KCAL and NBC’s KNBC-TV (Channel 4) and KVEA-TV (Channel 52) The proliferation of new cable networks and a need for original content likely will lead to an increase in local television production in 2003. But continued belt tightening means downward pressure on budgets Trying to avoid a repeat of 2000’s painful six-month strike, the Screen Actors Guild and American Federation of Television and Radio Artists are seeking early talks with the advertising industry High definition television sets, a hot item during the holiday season, will get more popular now that the Federal Communications Commission set 2007 as the date when all new sets must be equipped with high-definition tuners. There is twice as much programming being broadcast in high definition now compared to last year, including almost all of the major networks’ primetime shows.

Grade: B-

Darrell Satzman

Insurance

Year in Review: Ouch! The past year was a painful one for the industry and its customers. With investment income way off and the reinsurance market still reverberating from losses stemming from Sept. 11, prices shot way up for both personal and commercial lines Homeowners insurance became hard to find as skyrocketing mold claims caused insurers to pull out of some markets Progress appeared to be made on the troubled workers’ compensation front when the governor signed into law a reform package Meanwhile, former Insurance Commissioner John Garamendi bested Gary Mendoza, a former corporations commissioner, for insurance commissioner.

Players to Watch: Garamendi will draw close attention as he tackles sky high premiums, questionable industry practices, the still faltering workers’ compensation market and out-of-control health care costs Farmers Insurance Chief Executive Martin Feinstein remains hard-pressed to right L.A.’s venerable 75-year-old insurer, which has suffered massive underwriting losses in its homeowners and automobile insurance business but could be turning the corner Zenith National Insurance Corp. is an up and comer by posting profits in the worker’s comp market where others have only seen losses.

Buzz for 2003: Mold will be the watchword. Garamendi promises to investigate whether insurers are right to pull back from the homeowners’ market because of skyrocketing claims Big questions still surround the workers’ compensation market. The reform package includes benefit hikes that are supposed to be tempered by reforms in the way workers’ injuries are evaluated by doctors. But no one knows how it will work out, especially for some businesses that have seen rates rise more than 100 percent. There’s also uncertainty over the viability of the State Compensation Insurance Fund, the market of last resort, as well as the California Insurance Guarantee Association, which picks up the pieces after insurers fail But it’s not all doom and gloom, now that President Bush has signed the Terrorism Risk Insurance Act that calls for federal money to help pay for future acts of terrorism. The move is expected to speed the flow of insurance for $15 billion in delayed real estate transactions and construction projects nationwide and, potentially, at lower prices Meanwhile, the insurance industry is overflowing with new underwriting capital, as investors look for a place to park their money. Look no farther than the once troubled Lloyd’s of London, which is expected to have a record $22.5 billion underwriting capacity in 2003.

Grade: C+

Laurence Darmiento

Retail

Year in Review: The year started out somewhat weakly, but things began to pick up in early spring as interest rates continued to decline and mortgage rates tumbled. As homeowners refinanced, more disposable income was freed up and produced a surge in retail sales, which remained a bright spot in the economy. Discounters weathered the tough times best, with Wal-Mart Stores Inc. at the top of the heap. Target was not far behind but K-Mart Corp. bottomed out and filed for Chapter 11 bankruptcy Taxable retail sales in Los Angeles County rose a scant 2.1 percent over 2001 One success story has been the opening of The Grove at Farmers Market… On the other hand, the Hollywood & Highland had a tough year. Developer Trizec Properties Inc. estimated that the development’s operating income in 2002 would run $13.7 million instead of the anticipated $22.2 million. Trizec has taken two write-downs totaling $432 million and pulled the property off the selling block Bisou Bisou, an L.A. manufacturer and retailer that filed for Chapter 11 bankruptcy, announced plans to close all 10 of its stores and signed an agreement with J.C. Penney to be the exclusive North American retailer of its goods starting in February.

Players to Watch: Hot Topic Inc., the City of Industry retailer that sells music-themed apparel to teens and juniors, is expected to do well. In 2002 its same store sales were up consistently and the same is expected next year as the company opens more Hot Topic stores in malls across the country and expands its Torrid stores for large-size teens . 99 Cents Only Stores will keep expanding aggressively, opening more stores in 2003 in new markets such as northern California and Arizona Frederick’s of Hollywood, which is expected to be out of Chapter 11 protection by the beginning of 2003, will revamp its flagship store on Hollywood Boulevard and add leopard carpeting and bright pink fabric to some of its frumpier stores.

Buzz for 2003: With consumer confidence still lagging, shoppers will be hunting for bargains at the big discount stores Kohl’s Department Stores, the Wisconsin-based discount chain that is making its debut in Southern California in 2003 with seven stores in Los Angeles County, expects to take sales away from other discounters and mass merchandisers. Economists expect more store closings as retailers close their under-performing stores to compete with Kohl’s Overall taxable retail sales in Los Angeles County in 2003 are expected to increase 5.2 percent, to $76.7 billion, as the entertainment industry improves and the aerospace industry gets a boost from defense contracts.

Grade: C+

Deborah Belgum

Manufacturing

Year in Review: Manufacturing jobs in Los Angeles fell 3.2 percent to 586,500. The losses continue a trend toward fewer factory jobs that’s now in its second decade. Los Angeles remains second to Chicago in manufacturing jobs for the third year in a row Last year, aerospace and apparel were hardest hit. Locally based subcontractors for Boeing Co. and Airbus Industrie suffered as airline troubles translated to fewer orders for new aircraft An apparel manufacturing exodus to the Far East gained momentum Furniture makers showed signs of life, as a number of companies leased out large manufacturing plants this year . Dole Food Co. Chairman and Chief Executive David Murdock met resistance to his $2.5 billion offer to buy the 76 percent of the company he didn’t already own Farmer Bros. Chairman and Chief Executive Roy Farmer engaged in a battle royale with shareholders and family members who seek to unleash assets they say are undervalued Mattel Inc., finally on sound financial footing, got caught up in a campaign finance scandal Gold-plated investor Ronald Perelman reversed the sale of Panavision Inc. to another company he controls, avoiding the likelihood that a Delaware court would have done it for him Shoe manufacturer K-Swiss Inc. soared on the retro trend, while competitors Vans Inc. and Skechers USA Inc. swooned Guess Inc. co-founder Armand Marciano, who is ill, took a leave from the company and sold all his stock.

Players to Watch: Ski maker K2 Inc., whose chief executive, Richard Heckmann, is pursuing an acquisition-built sporting goods powerhouse Z Gallerie, a growing frame manufacturer and retailer that recently added 100,000 square feet of space in Gardena OSI Systems, the maker of bomb-detection systems whose stock soared post-9/11, but remains relatively untested operationally Scope Industries, a collection of companies that includes a bakery waste unit and beauty schools, prowls for new investments

Buzz for 2003: This could be a turnaround year, especially in defense-related manufacturing. The announced flow of defense contracts will keep a big contingent of shops busy in L.A. Also, the national security allotments doled out post 9/11 will begin to flow in the form of contracts. Look for specific benefits to satellite and intelligence-gathering firms News Corp.’s Rupert Murdoch, frustrated by rival Echostar Communications Corp. in his first attempt to land El Segundo-based Hughes Electronics, was maneuvering a second bid in concert with John Malone’s Liberty Media. This time, many expect Murdoch to land his long-sought prize and add the final U.S. piece to a global satellite broadcast franchise… L.A.-based apparel manufacturers will discover there is a viable worldwide export market for locally designed and made goods Japan, the focus for initial efforts to build interest in apparel exports, will show the first signs of success for this new business opportunity.

Grade: C

Anthony Palazzo

Transportation

Year in Review: L.A. International Airport struggled to rebound from the effects of Sept. 11 and is still operating at more than 10 percent below pre-Sept. 11 levels. There were numerous terminal shutdowns and terrorism scares, as well as a shooting on July 4. L.A. Mayor James Hahn in July introduced a $10 billion plan to make over LAX. Unlike former Mayor Richard Riordan’s plan, this one caps passengers at 78 million a year while making extensive changes aimed at improving security and airfield safety. LAX is likely to emerge relatively unscathed from turmoil over the United Airlines bankruptcy filing The Ports of Los Angeles and Long Beach were hit with a 10-day lockout of dockworkers in September; the big issue was new technology taking away jobs over the long term. Lockout had ripple effects, causing delays in end-of-year seasonal shipments to stores. President Bush invoked the Taft-Hartley Act forcing ports to reopen; settlement finally reached earlier this month Hahn reached agreement with major shipping lines to reduce pollution while anchored at Port of L.A The $2.4 billion, 20-mile Alameda Corridor opened in April; while it relieved some surface street congestion and improved train travel times, it didn’t achieve goal of reducing truck traffic on overloaded Long Beach (710) Freeway Last stretch of freeway likely ever to be built in L.A. County the Foothill (210) Freeway extension into San Bernardino County opened in December.

Players to Watch: L.A. Airport Commission President Ted Stein, who must sell Hahn’s airport modernization plan to skeptical airlines and some sectors of the public while convincing the federal government to kick in billions in funding MTA chief executive Roger Snoble, who is trying to decentralize his agency, now faces hundreds of millions of dollars in state cutbacks of transportation funds California Department of Transportation chief Jeff Morales, who will likely get to decide which projects get put on hold as agency must cut back billions in spending.

Buzz for 2003: LAX will again dominate as Hahn tries to move forward with makeover Expect more scrutiny of travelers now that new screening equipment is in place. Airport may also have to take steps to guard perimeter against shoulder-borne missile attacks With contract mess behind them, ports will return to other issues, like continued terminal expansion Work on Santa Monica Boulevard through West L.A. is expected to start next month, but other projects, like the 405/101 interchange, may face delays, thanks to budget cutbacks in Sacramento and Washington.

Grade: C

Howard Fine

Tourism

Year in Review: There were spotty signs of recovery from the effects of 9/11, although international tourists still stayed home and there was little business to pick up the slack. Only 439,000 Japanese travelers visited Los Angeles this year, around half the levels recorded in 1997 Domestic travelers stuck close to home, offering a modest boost to sagging tourist destinations. The Los Angeles Convention & Visitors Bureau launched a major advertising campaign to get visitors from Northern California, San Diego, the Inland Empire and Arizona Travelers this year were more budget-minded, spending $11.8 billion versus $12.1 billion the year before. Hotels had a particularly tough time, with their average 2002 occupancy rates at 68.2 percent, down 2.3 percent from the year earlier Special programs helped somewhat; the Museum of Contemporary Art’s Andy Warhol retrospective attracted 195,000 visitors, although most of them were locals.

Players to Watch: Kor Hotel Group, which recently finished turning the old Pacifica Shores Hotel in Santa Monica into The Viceroy and has more plans for boutique hotels in 2003. The group recently purchased the 112-room Summerfield Suites in West Hollywood and plans to spend $11 million next year to renovate the 313-room Four Points Hotel in Santa Monica, now operated by Starwood George Kirkland, executive director of LA Inc. (the renamed Los Angeles Convention & Visitors Bureau), has been under pressure by some downtown hotel managers to resign because of poor convention business.

Buzz for 2003: Don’t expect any big improvement until international visitors start arriving. The total number of visitors to Los Angeles is expected to increase 4.7 percent, again led by those within a few hundred miles of town A bright spot may be the opening of the Disney Concert Hall downtown. Architecture aficionados are expected to visit the concert hall as well as the new Cathedral of Our Lady of the Angels nearby If the U.S. goes to war with Iraq expect a further crimp Hotels in L.A. County aren’t expecting much improvement over 2002. The average room rate should hold steady at $117.50.

Grade: C-

Deborah Belgum

Energy

Year in Review: The lingering effects of the 2000-01 statewide electricity crisis continued to dominate the headlines. Gov. Gray Davis reached settlements with several energy suppliers over claims of overcharging, but Davis hasn’t settled with most major suppliers and claims they owe the state $9 billion. This month, a federal regulatory judge issued a preliminary ruling rejecting those claims. Several “smoking guns” emerged in the form of memos from energy suppliers detailing how they allegedly rigged the energy markets. State officials hope the memos strengthen their case for refunds, but the Enron debacle triggered an industrywide collapse, pushing several other energy suppliers into financial difficulties. After 18 months of delays and haggling, the state sold $11.3 billion in power bonds last month, $6.5 billion of which went to refund the state’s general fund for debts incurred when the state bought electricity at the height of the crisis On the oil and gas side, crude oil prices became increasingly volatile as talk of war with Iraq heated up.

Players to Watch: Federal Energy Regulatory Commission Chairman Patrick Wood. He said he intends to hold energy suppliers accountable for any market manipulation, but given a preliminary staff decision rejecting California’s overcharging claims and a Bush administration unlikely to challenge its energy industry pals, many see him capitulating to the energy companies John Bryson, chairman of Edison International, which is scheduled to reenter the power buying business early next year Davis is faced with a possible supply bottleneck as state converts from gasoline additive MTBE to ethanol. Will he grant oil suppliers a reprieve?

Buzz for 2003: More aftershocks from the energy crisis of 2000-01. Investor-owned utilities Southern California Edison and Pacific Gas & Electric are supposed to re-enter the business of procuring power early next year. But PG & E; remains mired in bankruptcy and Edison’s financial standing is far from sound Expect considerable action on the PG & E; bankruptcy throughout the year as the utility tries to get its reorganization plan approved Showdown is looming between state and feds over the $9 billion in energy refunds the state is demanding; Davis has indicated he may go to court on the issue if FERC turns him down Power suppliers remain in slump; one or more may go under in the coming year, causing ripples in supply The state’s power outlook is precarious enough that a long, hot summer, coupled with an uptick in the economy, could bring shortages On the gasoline side, dominant issue will be conversion from gasoline additive MTBE to ethanol, which is supposed to take full effect Jan. 1. An expected supply crunch could drive prices up at the pump by 10 cents a gallon or more Wild card: possible war with Iraq, which could wreak short-term havoc on oil markets.

Grade: C-

Howard Fine

Health Care

Year in Review: The rise in health care costs accelerated, reaching heights not seen since prior to the managed care revolution in 1990 and socking employers and employees with another year of whopping premium increases. This time the finger was not only pointed at insurers and big drug companies but hospital chains that consolidated market share and demanded higher reimbursement rates. Tenet Healthcare Corp. saw its stock price collapse after allegations that it was found to be gaming the federal Medicare system with sky high charges… Meanwhile, the County Board of Supervisors, facing a huge health budget deficit, shuttered clinics and threatened to close hospitals, but voters came through with a parcel tax to help prop up the system Nursing unions continue to score big gains organizing local hospitals, including winning a vote at prestigious Cedars-Sinai Medical Center.

Players to Watch: All eyes will be on Tenet Chief Executive Jeffrey Barbakow as the company faces a federal audit, hosts of shareholder lawsuits and renegotiates contracts with insurers demanding better deals. The question is whether the nation’s second-largest hospital company can return to growth and will Barbakow be around to see it L.A. County Health Director Thomas Garthwaite will be in the spotlight as he negotiates with federal and state officials to save the beleaguered department, navigating between consumer groups that oppose any cuts and supervisors seeking to keep their budget balanced… Wellpoint Health Networks Inc. will try to consummate its deal for CareFirst BlueCross/Blue Shield of Maryland over the opposition of consumer groups. That could make it the nation’s largest health insurer.

Buzz for 2003: Look for continued fallout over double-digit premium increases. Expect insurers to roll out more stripped-down health plans that cuts costs through various devices, such as minimizing choice and tiering co-pays for hospital and other services. Consumer-driven health plans that tie a large deductible with a spending account also will come into the mainstream. The increases will give rise to more serious discussion of some type of universal care plan but don’t expect any real movement unless things get worse The effort to save the county health care system will reach a critical juncture as the Bush Administration considers a plan from state and county officials to loosen up regulations to provide $700 million in federal funds for the struggling safety net system. With California facing a $20 billion plus budget deficit, don’t expect anything more from Gov. Gray Davis, who is calling for $2 billion in cuts to health spending next year . Meanwhile, organized labor is expected to push hard to organize registered nurses and other hospital workers after its big win at Cedars-Sinai as well as Long Beach Memorial Medical Center.

Grade: D

Laurence Darmiento

Government

Year in Review: A year spent lurching from crisis to crisis. At first, state officials were still grappling with the effects of the 2000-01 energy crisis, but attention shifted to the rapidly ballooning budget deficit, which reached a record $24 billion for the 2002-03 fiscal year (and at least that much for 2003-04). The Legislature, faced with fall elections, deadlocked for two months on how to close the gap and ended up putting off tough decisions by resorting to smoke and mirrors On the local level, two battles dominated the City of L.A.’s agenda: secession and selecting a new police chief. In late spring, momentum to form a new city in the San Fernando Valley began to build when a breakup measure made it on the November ballot, but the campaign fizzled soon after. Hahn, meanwhile, stunned L.A.’s black leadership by moving to dump Bernard Parks as chief, though by the end of the year, he had mollified many of the bad feelings. Meanwhile, L.A. County’s agenda has been dominated by the ticking time bomb of a $700 million hole in its health care budget.

Players to Watch: Gov. Gray Davis, who comes off a non-convincing re-election campaign having to find ways to close a budget gap estimated at $30 billion over the next 18 months. The self-avowed “centrist” politician who took great pains to try to please (and raise money from) everybody now must make moves that will upset everyone Assembly Speaker Herb Wesson, who presided over his party losing two seats in the chamber, must now try to convince six Republicans to go along with the Democrats’ budget package William Bratton, Hahn’s pick for L.A. Police Chief, has talked a good game, but with a huge spike in crime, must show results quickly Antonio Villaraigosa, former Assembly Speaker and mayoral candidate, tries to make political comeback against incumbent Nick Pacheco in an Eastside council race that’s already turned nasty David Tokofsky, the independent-minded school board member, fights for his political life against a determined effort by former Mayor Richard Riordan and billionaire philanthropist Eli Broad to unseat him Former L.A. Police Chief Bernard Parks, expected to win election to the City Council: will he carry a grudge against Hahn?

Buzz for 2003: The state’s huge budget deficit estimated at $30 billion over the next 18 months will dominate the government landscape in 2003. Davis and legislators will try to put off as much of problem as possible to 2004, but significant cuts to education, transportation, health and welfare programs and other programs are inevitable. New taxes and fees also are on the way. Impact will spread to local governments and force them in turn to cut services, raise fees On top of City of L.A. agenda: reducing crime, with limited resources. A deteriorating budget may divert Hahn from pledge to reform city’s business tax On election front, three tough council races: two for open seats to replace Hal Bernson and Nate Holden and that Villaraigosa-Pacheco faceoff on the Eastside.

Grade: D

Howard Fine

Technology

Year in Review: The year started off with Global Crossing Ltd. filing for Chapter 11 bankruptcy protection, and things deteriorated from there. Technology remained one of the worst performing sectors of the broader stock market, and L.A. was home to some of the biggest share price meltdowns, including Gemstar-TV Guide International, SeeBeyond Technology Corp. and Homestore Inc Homestore, Gemstar and Global Crossing each drew national attention with accounting scandals, while Pasadena tech incubator Idealab was sued by investors who wanted their money back Venture capitalists spent the year licking their wounds, with little new activity. Venture investing fell 60 percent worldwide, according to Ernst & Young, and 80 percent of the amount spent was devoted to follow-on investments in the VCs’ existing portfolio companies. The dearth of funding opportunities made it harder for new tech companies to get off the ground. Software and biotech were the most popular recipients of new investments Despite the problems, a number of struggling dot-coms made recoveries, including United Online Inc. and J2 Global Communications. The long-delayed convergence between technology and entertainment took a few baby steps with the launch of studio-led online movie service Movielink.

Players to Watch: Tom Gores, who has assembled two IPO-ready companies under the umbrella of his Los Angeles investment group, Platinum Equity. Look for NextiraOne, an operator of voice and data networks, and possibly Synertech, a provider of health care industry software, to go public if the IPO market makes a strong rebound AOL-Time Warner’s struggling AOL division is experimenting with ways to charge for online content produced elsewhere in the company Boingo Wireless, Internet boy wonder Sky Dayton’s latest ambitious project, seeks to bring wireless Internet connectivity to park benches and airport lounges.

Buzz for 2003: A crowded field of security related start-up firms will have a difficult time nabbing a piece of the homeland security budget, leaving backers that have poured millions into investments only to watch them wither. The same fate awaits numerous tech companies that have reconfigured themselves as security-oriented Global Crossing, scheduled to emerge from Bankruptcy Court protection with a new owner by mid-year, is expected to struggle in an environment that still has too much telecom capacity. The SEC, Justice Department and other oversight bodies are at the same time weighing whether to charge Chairman Gary Winnick, other insiders or Global Crossing’s accounting firm, Arthur Andersen, with securities laws violations.

Grade: D

Anthony Palazzo

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