Optical Network Equipper Meets Latest Funding Target By SHELLY GARCIA Senior Reporter Telecom giants are bleeding and optical networking equipment suppliers are struggling to stay afloat amidst a severe sales downturn. Not an inviting environment for any fiber optic company, let alone those who invest in the sector. Yet, Sabeus Photonics, which develops and manufactures fiber optic devices, has just raised an additional $5 million in a funding round that now totals $21 million. Even more surprising, Chatsworth-based Sabeus raised its latest round of funding at a higher valuation than the company received in 2000, before the telecom industry took its nosedive. If Sabeus’ success seems to fly in the face of funding trends, it is because the company itself has not followed the mainstream wave of optical networking businesses. Sabeus, a four-year-old company, has, since its inception, gone after business overseas, where telecommunications companies were managing their growth at a far slower pace than were their American counterparts. As a result, the company’s customers have continued to place orders while American customers have all but shut down their buying. Perhaps more important, the company has diversified into other applications, including sensor devices for the defense industry, which are showing even more potential in the wake of the Sept. 11 terrorist attacks. “The strength of Sabeus is that we have, right now, sales and customers,” said Dimitry Starodubov, chief technology officer, “and at the same time we have a long-term perspective. We have very interesting and promising technology building right now.” Sabeus, which began seeking its third round of funding in September 2001, has secured investments from Agere Systems Inc., TL Ventures, Redpoint Ventures, Digital Coast Ventures and Credit Suisse Group. Most recently, Lexington Ventures invested $5 million in the company. “The difference here is you have a technology that a lot of people are involved in, but you have a unique application of that technology and the ability to transcend that technology beyond telecommunications,” said Harvey Gettleson, COO of Lexington Ventures, the venture capital arm of Lexington Commercial Holdings. Sabeus is working on applications that will put fiber optic technology into computers, a development that could expand the market for its devices immeasurably. “It’s that application that I think provides a tremendous upside,” said Gettleson. “I can’t predict (the size of the market), but that’s the great potential of the company.” Founded by a group of telecom industry veterans and scientists, Sabeus developed a business model based on automating the manufacture of optical fiber. Other companies were essentially manufacturing by hand, so when business increased, the only way to meet demand was to add workers and, therefore, the cost of doing business. Most companies were unable to bring those costs in line with new revenue levels when sales plummeted, and losses mounted. “We thought that is not the right way to continue,” said Starodubov. “We have to redesign optical components from the ground up and bring in a new class of components which could be manufactured in an automated environment on a large scale.” The company, which owns six patents on its technology and is in the process of securing nine more, developed a mass production technique that allowed it, not only to produce optical fiber more inexpensively, but for a variety of uses besides telecommunications. “In 2000, when other people were raising $100 million with a better idea, we had worked out the details of our process and we were delivering a solution to the customers,” said Starodubov. “We were delivering real numbers and real devices, and this is probably why our valuation wasn’t hurt that much.” Sabeus’ manufacturing technique creates fiber that is much stronger and, for instance, can be embedded in an aircraft wing to monitor a flight. “Imagine if we had such a fiber system in every airplane,” Starodubov said. “We would be able to detect problems way before it results in catastrophic damage.” Indeed, interest in the application of optical fiber for sensors and other monitoring devices has picked up considerably since Sept. 11, Starodubov said. Although telecom customers still account for the bulk of the company’s sales, Sabeus is currently working with a number of major aircraft manufacturing companies. “We had customers before that, but definitely we saw an increase of interest in our products in the area of security,” said Starodubov. The company’s business model helped Sabeus to attract investors in an environment that has been downright hostile to optical networking companies. Overcapacity and the accompanying virtual shutdown in demand for optical networking equipment in the U.S. has many expecting a rash of bankruptcies in the sector. Just last week, Williams Communications Group Inc. filed for bankruptcy protection, and some of the largest telecom carriers just reported losses for the first quarter of 2002. With no pickup in demand expected for the next 12 months, many optical equipment manufacturers are projecting price declines anywhere from 30 percent to 50 percent this year. Sabeus will not divulge its sales figures. But Starodubov said a majority of its revenues come from worldwide sales, primarily in the United Kingdom and Italy, and the company expects to be profitable by the end of this year. At the same time, Sabeus has begun work on future generations of fiber optics which would replace electrical wiring inside computers, greatly expanding their ability to receive, send and process data. “At some point the amount of information which would be transmitted inside the computer would be so huge and speeds will be so fast it will be necessary to switch from wires to optics,” said Starodubov. Optical fiber emerged as a technology for telecommunications because it can manage the flow of very large amounts of information very quickly. Right now, computers are able to download large quantities of data by hooking up with fiber optic networks, but Sabeus sees a future generation of computers that will not require that connection. You will just plug in an optical cable and (the computer) will be connected, which will bring a lot of bandwidth, and be part of the (computer) design. “That is my dream,” said Starodubov. “To bring optical signal transmission inside of the computer.”

Small Business Profile: More Muscle Powerhouse owner Derek Scharlin designs expansion plan to attract wider group of members By SHELLY GARCIA Senior Reporter Most of the youngish crowd at Powerhouse Gym seems to know the club’s 36-year-old owner, Derek Scharlin, by name. He stops to talk with several of the members as he makes his way across the workout floor to the office in the back. It’s an atmosphere not unlike the one Scharlin remembers as a kid. He first joined a gym at the age of 12 and, as much as the exercise, he liked the way everyone in the small gym seemed to know everyone else and how it felt so familial. Those memories became the impetus that convinced Scharlin to open his own club and, 10 years later, he believes he’s accomplished what he set out to do. “Over the last five years, 90 percent of the business has come off referrals,” he said. “It’s more of a familial relationship.” Indeed, Chatsworth-based Powerhouse boasts a utilization factor of 30 to 35 percent of its active members. That means more than three in 10 members show up to work out every day, compared to an industry-wide average of 10 to 15 percent. With 5,000 members, Powerhouse last year had annual revenues of $1.7 million, despite the fact that Bally Total Fitness, a chain with huge advertising power, operates just down the street and many more health clubs are located close by. And the club has grown large enough so that Scharlin is now planning a $600,000 expansion. In July, Powerhouse will move to a new, 63,000-square-foot facility across the street at Nordhoff Street and DeSoto Avenue. With the move, the company will add basketball and racquetball courts, a dedicated spinning room and women’s exercise area, a quiet room for yoga and Pilates, martial arts and gymnastics programs and an expanded restaurant and juice bar. There will also be a full-time chiropractor with x-ray facilities. “What we’re trying to do is take the same philosophy and feel and atmosphere and add to it services and amenities that people in today’s environment are seeking,” Scharlin said. Since he opened the gym in 1992 with about $750,000 from his parents, Scharlin has built Powerhouse to its maximum capacity, given the current facility’s parking limits as well as the options the club offers. Adding locations, Scharlin believes, would dilute the club’s intimate feel, so the next step was to expand the membership base by attracting new members with different activities. “If you’re going to leap into the realm of a 40,000-foot facility, you have to be able to expose yourself to amenities that take out reasons for people to say ‘I don’t want to join,’ Scharlin said. Scharlin said he is tapping into niches that have already proven successful at other gyms. Clubs like Total Woman Health and Day Spa have shown there is a market for facilities with equipment and an atmosphere that caters to women. Basketball is the No. 1 group sport activity among men, and it is becoming increasingly difficult to find locations to play. Yoga and Pilates have become very popular particularly among older people who are making up an increasing portion of health club membership. (According to the International Health, Racquet and Sportclub Association, one in every four club members is now over age 55.) “If you look at what’s going in there, he’s trying to go after the full-family trade,” said Donald DeMars, chairman and CEO of Donald DeMars International, design and development consultants for the fitness industry. “There are clubs very much like Powerhouse that serve the same customer, so there’s adequate competition. But he knows his market, he knows his niche, and he’s priced well and he runs a good operation, so I think he’ll compete quite well.” While the move will be expensive, Scharlin has designed the expansion to minimize his risks. It can take years before membership grows large enough to recoup the costs of opening a brand new facility. But with the expansion, Powerhouse will only add about 1,000 feet to its already well-equipped workout area, and the company need not add new equipment until it adds new members. At the same time, about 20,000 square feet in the new facility will be leased to other companies that will run the gymnastics and martial arts programs, the food service and the chiropractic services, programs that are expected to draw members who may not have considered joining a gym before. Scharlin hopes that these programs, along with an expanded schedule of classes during peak hours, will not only attract new members in the immediate area, but will also expand the geographic radius from which the club now draws. He likens the dynamics to the popularity of The Cheesecake Factory, which he believes has established the kind of customer loyalty that transcends geography. “Before the Cheesecake Factory opened in Sherman Oaks, I would drive to Woodland Hills or to Marina Del Rey,” he said. “So if they’re driving five miles now, maybe they’ll go to 10 miles.” Scharlin said the build-out should increase membership and revenues by about 50 percent within 24 to 36 months. More important, the expansion will not come at the expense of what he feels most contributes to his success. “I think one of the reasons I’m successful here is I’m here. No matter how much you pay somebody, they’re not going to love the business like you do.” SPOTLIGHT: Powerhouse Gym Core Business: Fitness and aerobics center Revenues in 1998: $1.4 million Revenues in 2001: $1.7 million Employees in 1998: 45 Employees in 2001: 45 Goal: To grow 50 percent, if not more, in revenues in three years. Driving Force: The growing population of the Valley. The more people there are, the more people work out.

Long Days Are Part of a High Profile Practice By JACQUELINE FOX Staff Reporter The year was 1985. James E. Blatt had roughly a decade of experience as a criminal defense attorney under his belt. But the Valley lawyer had yet to take on a particularly high-profile case. There had been few appearances on the courthouse steps before TV news crews and the editors at People magazine had never even heard of him. Then came Etta Smith, a Burbank woman and shipping clerk at Lockheed Martin. Smith claimed to have had a “psychic vision” of the body of a Sylmar nurse who had been missing for a couple of days. She told police about the vision and ultimately led them to the woman’s body in a rural clearing north of Lake View Terrace. After 13 hours of relentless questioning, police arrested Smith on suspicion of murdering the woman. She spent four days in jail before three men would be arrested and charged with the crime. Enter James Blatt. With his help, Smith sued the city of Los Angeles for unlawful arrest. He would successfully argue her case in Van Nuys Superior Court, convincing a jury to award Smith nearly $30,000 in damages. “A lot of your career as a criminal defense attorney is decided by sheer accident,” Blatt said. “I thought it was a fascinating case, and I also thought, plain and simple, that she should have her day in court.” By 1987 Blatt was getting calls from producers interested in making a film based on Smith’s story, which made national headlines and, yes, the pages of People. “I suppose that case was the first truly high-profile case for me,” said Blatt, a raspy-voiced, fast talker in a crisp blue shirt and silk tie. The 53-year-old Punxsutawney, Pa. native practices law from his penthouse suite atop an Encino high-rise, complete with a panoramic view, glossy hardwood floors, fluffy Persian rugs and a wall loaded down with awards, photos and news clippings depicting courtroom victories. Blatt clerked at the district attorney’s office while attending law school. He got his degree in 1973, passed the bar at the age of 24 and worked briefly as a deputy district attorney before setting up his own Valley private practice in 1975. Today there are few involved with the criminal justice system who would not recognize Blatt’s name. He is as famous for taking on unusual and often difficult cases as he is for pioneering innovative and often risky lines of defense. His arguments have set new standards for criminal attorneys and, in at least one case, resulted in a landmark ruling by the U.S. Supreme Court. For example, Blatt pioneered the “defense of a neighborhood” when he convinced a jury to reject assault charges against his client, a Pacoima man who shot in the back a woman he believed to be a habitual drug dealer operating outside his house. “The man had had enough,” said Blatt. “Why shouldn’t he have had the right to defend his home and his neighborhood?” Blatt’s client claimed he was merely firing a warning shot. He was acquitted. “I don’t know precisely what he does, but generally any big criminal case in the Valley, he’s there. How he gets them, I don’t know,” said Jim Felton, a business attorney at the law firm of Greenberg & Bass in Encino. “As a successful lawyer you have to think outside the box and the boundaries. And Jim’s ability to sway a jury with these new and innovative defenses shows that he’s willing to take on new areas and challenges.” There’s also the “cultural defense” in which Blatt argued his client, a Woodland Hills man who admitted to bludgeoning his wife to death with a wrench, did so because she abused him physically and emotionally throughout most of their 25-year marriage. Blatt argued that his client had no choice but to kill his wife after humiliating him in the eyes of his children and his male-dominated Persian Jewish culture. Rejecting second-degree murder, the jury convicted the man of involuntary manslaughter. “That line of defense had never been used before,” said Blatt. “It was very important. I like to get creative when I come up with a defense. I like a challenge and I work very hard on that.” Within the profession, Blatt is perhaps best known for his 1998 victory in a case he argued before the U.S. Supreme Court. His client, a Tarzana resident about to board a plane to his native Syria, was arrested at LAX when security officers found $357,144 in cash hidden inside his suitcase. Federal law requires passengers transporting cash out of the country to report amounts over $10,000, something he had failed to do. Blatt’s client pleaded guilty to the smuggling charge, but said he had hidden the cash because he was afraid corrupt Syrian officials would confiscate it once he landed. American officials seized the money and kept it for four years before Blatt was able to convince the high court in a 5-4 decision to return it. “What they said was that my client’s crime did not match the punishment,” said Blatt. The ruling is expected to have a significant impact on future forfeiture cases. “For the first time in our history we asked the court to determine what was an excessive fine,” said Blatt. “That issue had never been addressed before.” Nevertheless, if you think the life of a high-paid, well-dressed criminal defense attorney is all glitz and glamour, think again. Blatt’s day begins around 5 a.m. By 7 a.m. he’s usually seated at a Valley restaurant having breakfast with his four associates, going over the day’s list of court appearances. By 8:30 a.m., he’s often in court. In an average week, he’ll make between 15 and 20 appearances on behalf of clients. Afternoons are spent tying up loose ends, returning the 40 or so “while you were out” messages stacked on his desk, and preparing for the next morning’s court appearances. He’s usually in the office until 7:30 p.m. or 8 p.m. weeknights and puts in at least five or six more hours each weekend. Blatt won’t discuss his income or his fees. He would only say “they are substantial.” He points out that, in his line of work, what’s at stake is usually hard to put a price tag on. “A criminal defense lawyer deals with the most precious possessions their clients have: their liberty or their lives,” said Blatt. “One always feels very disappointed when they lose a murder case because of the significant amount of time the defendant goes to jail. I’ve had a few of those.” Calling himself a product of childhood poverty, Blatt admits sometimes his good fortune can be overwhelming. “What keeps me awake at night?” Blatt asks rhetorically. “I recently visited my hometown and things haven’t changed much. I know what it’s like to have to work hard and I just consider myself very, very fortunate to have a nice job, nice clothes, a nice lifestyle and the opportunity to fulfill my dream. I stay awake thinking about that.”

Banks, Large & Small, Line Up for Latino Customers By CARLOS MARTINEZ Staff Reporter Tiny Woodland Hills-based First Bank & Trust, like its larger banking brethren, is targeting the Latino business owner. Its new Hispanic Business Group will focus on developing loans, checking and other business accounts for the rapidly growing Latino market in the San Fernando Valley, said company CEO Gil Dalmau. The new unit will attempt to develop relationships with a variety of Latino-owned firms, often small businesses that cater to the Hispanic community, Dalmau said. The bank, owned by San Francisco-based First Banks America Inc., will offer a variety of banking products, including traditional lines of credit for working capital purposes, equipment loans, cash management, asset-based financing structured credits and owner-occupied commercial real estate loans. “Hispanic-owned businesses are growing at nearly eight times the national average,” said Joseph Arco, senior vice president of operations for the bank, who added that the bank is well positioned to serve the Valley’s growing Latino business community. The bank’s efforts follow along the same lines as similar programs at Bank of America and Wells Fargo Bank, the third and fifth largest banks in the U.S., respectively. In 1989, Bank of America launched its Hispanic Business program and in 1997 Wells Fargo began its Latino Business Services unit with $1 billion for potential loans nationwide. “We conducted a study prior to launching the division and we found that Hispanics believe they will not qualify for a loan so they don’t bother to apply, even though they would most likely qualify,” said Tim Rios, Wells Fargo vice president of community development. “But I think we’re slowly changing that way of thinking.” Elizabeth Kelderhouse, community affairs officer for the Federal Deposit Insurance Commission, said efforts to reach out to the Latino business community have been spotty at best. She said most banks have ignored the Latino business community, despite efforts like those at Bank of America and Wells Fargo. Calabasas-based banking attorney S. Alan Rosen said the Valley’s Latino business community would benefit from First Bank’s emphasis on their market segment. “This is a group that is vastly underrepresented by local banks,” he said. “So this could mean a very positive impact on our local economy.” First Bank’s Arco said the company hopes to make about $24 million in loans this year, and double that figure next year, through an aggressive outreach program that targets both large and small Latino-owned businesses. “It doesn’t matter to us if it’s a small store or a big manufacturer, we’ll make loans to both,” Arco said. Already, the three-week-old program has netted a $4 million loan to a Simi Valley business. Arco said banks have largely ignored the Valley’s Latino business community. “It’s not an easy area for banks,” he said. “You’ve got to know the market and you’ve got to know the community and you have to learn how to build relationships with the people.” Mike Zamora, a spokesman for Washington D.C.-based National Council of La Raza, said cultural differences have been a stumbling block for many Latinos in need of banking services. “Latinos, whether they are business people or not, prefer the personal approach when it comes to doing business,” he said. “And if they don’t know you or you don’t speak their language, they’re not going to want to do business with you.” A 1996 study by the council found that 42 percent of Latinos did not have a checking account, only 11 percent had mutual funds. As part of its Hispanic Business Group effort, First Bank will provide bilingual employees to assist customers and offer a variety of other programs to speed the loan application process, including an interactive bilingual Web site. Although Arco is unsure how much potential loan revenue the Valley’s Latino businesses could generate, federal statistics show that Los Angeles is the largest Latino market in the country. Latinos this year are expected to account for $453 billion in purchasing power, up from $420 billion in 2000. First Bank’s parent, First Banks America, reported net income of $16 million on $57.8 million in revenue for the quarter ending Dec. 31, compared to a year earlier when it reported $18.4 million in net income on revenues of $119.4 million.

Market Slowdown Delays Product Release at Vitesse By CARLOS MARTINEZ Staff Reporter Camarillo-based semiconductor maker Vitesse Semiconductor Corp. has decided to delay release of its 10 gigabit-per-second network processor, claiming the market is too weak for the device right now. Vitesse is only the latest in a series of semiconductor makers in recent months who have agreed to postpone development of the high-speed processor. IBM Corp. and Motorola Inc. have also backed off plans to develop their 10 Gbit network processor, saying there is little demand for it at the moment. The processor, which would ramp up the speed and efficiency of Ethernet networks, has seen demand slow to just a trickle as suppliers like Cisco Systems Inc. and Lucent Technologies Inc. and network operators like WorldCom Inc. and Verizon Communications Inc. have all moved away from the ultra high-speed devices. “We don’t really see the market for the 10 gig processor at all,” said Jennifer Goman, a spokeswoman for Vitesse, “and we’re not seeing that customers are really looking to make that jump to 10 gigs.” Although some of its competitors, like Applied Micro Circuits Corp., are delivering 10 Gbit devices to the marketplace, Vitesse said it has indefinitely postponed the release of its IQ510G chip, planned at one time for the third quarter of this year. The company said it would not abandon its network processing operations altogether, but will now focus on its slower IQ2000 and IQ2200 devices for the 2.5 Gbit optical connection market. “We’re not abandoning that market, but simply not putting as many resources into developing a product that doesn’t have a market,” Goman said. “It boils down to what the carriers are buying, and they’re simply not buying 10 gig devices.” Allen Leibovitch, an analyst with RHK Inc., said Vitesse’s decision comes amid reports that the company may be having trouble developing the 10 Gbit processor. “They’re realizing that they need to rethink their strategy on this processor,” he said. Vitesse, however, said the trouble is with the market, not its engineering. Jeremy Lopez, an analyst with Morningstar Inc., said the company has been hit hard by the tech downturn and needs to reduce its research and development expenses. “The company is not able to keep in step with the market. R & D; is accounting for 84 percent of their total sales and they can’t sustain that,” he said. For the quarter ending March 30, Vitesse spent $35 million on research and development, while reporting sales of $42.1 million. Net loss for the quarter was $44.4 million. That is a sharp drop from the same quarter a year earlier when the company reported a net loss of $11.2 million on revenue of $121.7 million. Other, smaller companies have moved forward with plans for their own 10 Gbit network processors, including Terago Communications Inc. and Fast-Chip Inc., both of which began to ship processors earlier this year. Firms looking to ship similar processors later this year include Intel Corp., Internet Machines Inc., Silicon Access Networks and Agere Systems Inc. Morningstar’s Lopez said they may be premature. “I don’t see a recovery any time soon,” he said. “WorldCom just cut their capital budget, companies are still not filling up their broadband capacity and it doesn’t make much sense to put product out there now.” Another sign of telecom gloom is the sharp 40-point drop in the Nasdaq Index over the past two weeks, propelled in part by negative announcements by WorldCom, which cut back orders, and Swedish cell phone maker Ericsson Inc., which reversed itself and said it may not turn a profit until next year. The two companies’ stock prices are down nearly 90 percent from their 52-week highs. During a conference call earlier this month, Vitesse CFO Gene Hovanec said he expects the company’s performance during the third quarter to be on a par with or improve upon that of the second quarter. Hovanec projected a pro forma loss of between 9 cents and 11 cents per share on revenue of between $42 million and $46 million. Analysts polled by Thomson Financial/First Call said they expect Vitesse to post a loss of 9 cents a share for the third quarter on revenue of about $45 million.

Retail Developers Discover Santa Clarita Valley By SHELLY GARCIA Senior Reporter A few years ago, you couldn’t give away land for retail development north of Valencia. Today, at least 10 retail shopping centers in the Santa Clarita Valley are in some stage of development, many stretching farther and farther from the Valencia commercial hub that is the traditional center of the community. The combination of residential development sprouting all across the Santa Clarita Valley and the growing base of businesses creating brisk daytime traffic has spawned a dramatic increase in consumer demand for retail centers. And the retailers are lining up for space. “A couple of years ago, a couple of these sites would have been premature,” said Steve Hopkins, president of Hopkins Real Estate Group, which is developing five of the centers underway in the region. “In a couple of cases we closed (on the land) without specific tenants in place, but we were so confident in getting those tenants that we decided to do it.” Most of the complexes under development are neighborhood centers, less than 100,000 square feet and anchored by supermarkets or drug stores. In some cases, they are only miles from each other. Despite the proximity, brokers report that tenants are looking to make multiple deals, persuaded as much by the development yet to come as the building that has already taken place. “It’s the traffic that drives past the center, the daytime population, and the residential population,” said Bert Abel, vice president of the retail group at Grubb & Ellis, who is marketing the Hopkins centers. “The more dense those factors, the higher the traffic counts, the closer together you can put those concepts.” Until recently, the majority of workers spending their day in Valencia commuted from outside the area, and the majority of residents went elsewhere to work as well. As a result, shopping was dispersed, with commuters running errands closer to their place of work or home, wherever that might be. But today about 50 percent of the population of Santa Clarita Valley no longer leaves the Valley to work. And the number of residents has increased substantially. The population of the city of Santa Clarita grew more than 30 percent during the 1990s. The current population, 155,000, is projected to increase by another 20 percent to more than 187,000 by 2010. Perhaps more significant, the population of the Santa Clarita Valley, which includes unincorporated areas as far north as Castaic, is expected to increase to 271,467 by 2010 from about 195,000 currently. “This is a master-planned area and you’re starting to see the retail response to master-planned level of rooftops,” said Larry Kosmont, president and CEO of real estate consultancy Kosmont Cos. The critical mass of traffic required for large regional shopping centers or big box stores differs from what’s needed for smaller community complexes. A free-standing Home Depot, for example, may want a population of 100,000 in the radius from which it draws, whereas a shopping center with many national retailers may look for populations in excess of 300,000. A small community center may look for a population density of 20,000 to 50,000 within a three-mile radius. In addition to the growing residential population, retailers are counting on daytime traffic from the businesses that continue to relocate to the area. Valencia currently has a daytime population of 18,000 and that number is about to increase by about 7,000 as new industrial developments Rye Canyon Business Park among them come on line, according to Bert Abel, vice president of the retail group at Grubb & Ellis, who is marketing many of the upcoming centers. The combination of residential and commercial traffic is now sufficient to attract a second Home Depot and a second Target store, and, along with the anticipated increases in both types of shoppers, other national companies are turning their sights to the area as well. “I think developers and tenants recognize that it’s critical to get a foothold in a well-located center within a community with anticipated growth,” said Mac Chandler, senior vice president at Regency Centers, a Jacksonville, Fla.-based real estate company with 268 properties, including 23 in Southern California. “I think the long-term growth prospects are what’s most appealing. Tenants see Valencia like they saw the Irvine Ranch in the ’60s.” One such retailer is Kohl’s, which has signed on for 88,000 square feet at Valencia Crossroads, a 17-acre, $35 million center Regency is developing at Valencia Boulevard and McBean Parkway. The population spurt throughout the region is also creating a need for smaller shopping areas that can house dry cleaners, groceries, nail salons and the other local retailers and services a short hop from where people live. “There are still some lengthy drives from one area of Santa Clarita to another, so you’re seeing the distribution of the centers in more geographically appropriate locations,” Kosmont said. Among the neighborhood centers currently under or close to completing construction, two are located where residential and daytime populations are most dense. They are: & #149; Valencia Town Center, a 9,600-square-foot retail complex with apartments at Town Center Drive and McBean Parkway under development by Hanover Financial Co. & #149; Promenade at Town Center, a 184,000-square-foot grocery-anchored center at McBean Parkway and Magic Mountain Parkway, which was recently completed by RKR Inc. Development is also taking place well to the north, east and west of the Town Center area, a commercial hub of the city. Consider these developments underway by Hopkins: & #149; River View Place, a 45,000-square-foot center at Via Princessa and Sierra Highway expected to open in June 2003; & #149; Valencia Village, a 30,000-square-foot center at Newhall Ranch Road and Dickason Drive, which will open in April 2003; & #149; Highridge Crossing, a 70,000-square-foot center at Copper Hill Drive and Newhall Ranch Road, also slated to open in April 2003; & #149; Seco Canyon Plaza 1 and 2 at the southeast and southwest corners of Seco Canyon Road and Copper Hill Drive respectively, totaling 74,000 square feet. The first phase of the Seco Canyon development just opened and the second is set to open in June 2003. In addition, Intertex, a Valencia developer, is building Castaic Plaza, a 40,000-square-foot center at Lake Hughes Road and Interstate 5, set to open in June 2003; and Regency is developing Westridge Village, a 100,000-square-foot center at Valencia Boulevard and Interstate 5, which will be anchored by Albertson’s. That complex is also expected to open in the summer of 2003. Not only are centers such as these springing up in response to an increasing number of residents, the developments are also being fueled by the demographics of the anticipated newcomers. Many of those moving to the region are younger families with median household incomes of $70,000 and more. “Suburban communities also tend to have younger populations with growing families, so they hit a good sweet spot in a retailer’s demographic,” Kosmont said.

LAFCO’s Calemine to World: ‘No More Meetings’ Politics by Jacqueline Fox For those who’ve never attended a meeting of the Local Agency Formation Commission, the state agency that has been crafting terms and conditions and is likely to recommend a ballot initiative on Valley secession, you’ve spared yourselves some agony. For the most part, LAFCO meetings are relatively benign, often two-hour-long marathons crammed full of minutiae. You might sit in on a hearing on whether to amend the County Sanitation District’s sphere of influence, or hear arguments on whether Bell Gardens should trash the Belevedere Garbage Disposal District. And, of course, there have been long and sometimes weighty discussions about previous discussions on the proposed terms and conditions for a Valley split, followed by a series of three-minute speeches from a small cadre of council gadflies and Valley VOTE’s usual suspects during public comment periods. But for the most part, LAFCO meetings have been snoozers, even if over the last year they have largely centered on the historic issue of whether to carve up Los Angeles. The meeting of April 24, however, was a doosie, and anyone who missed it (and by the number of vacant seats inside Los Angeles County Board of Supervisors Hearing Room 381B, there were plenty) skipped an opportunity to catch government at its finest. But, if you were there and paying attention, there were strong indications that the panel’s pro-secessionists largely outweigh and can out-yell those who oppose breaking up Los Angeles, even if they hide behind a veneer of “impartiality.” There were also indications that, like those proposing a breakup, LAFCO members have just about reached the end of their rope and are ready to get it over with once and for all. It was an important meeting because “Team LAFCO,” as the panel’s executive officer, Larry Calemine, referred to them repeatedly, received their leader’s final report on secession, nearly wrapping up a process that began six years ago. Tempers flared, promises were broken, reports were rejected, proposals for new reports were canned, and at one point it appeared as if a couple of panel members just might leap from their leather chairs and strangle their colleague Yvonne Brathwaite-Burke if she asked one more “what if” question. In short, the meeting felt like a grand jury inquisition, with some LAFCO members serving as the prosecution, others the defense, and L.A. Assist. City Attorney Fred Merkin on the witness stand. Merkin took the hot seat to answer questions about whether city officials had or hadn’t agreed not to charge new Valley city residents more for their water and power, should secession be approved, during negotiating sessions with LAFCO and members of Valley VOTE over the last six months. LAFCO and Valley VOTE have said the city agreed to keep rates the same in exchange for having the new Valley city contract for the services instead of breaking up the utility. Merkin was careful to avoid saying the city did or didn’t agree to anything, but instead insisted over and over that the city was being forced to “acquiesce” and give up its rights under the law. Which was not what some LAFCO members or Calemine wanted to hear. And the more they tried to get Merkin to come clean, the testier and livelier the debate got. Calemine threatened to split up DWP if the city didn’t give “Team LAFCO” its written position on the issue by May 15, when the panel is expected to approve recommendations for a ballot initiative on secession. “If I don’t have that (the letter), I’m going to change my recommendation to this commission that the new Valley city get its proportionate share of all the assets and liabilities of Water and Power,” Calemine snapped. “Just agree to the damn conditions,” he said later. “Yes or no?” fired LAFCO member and County Supervisor Zev Yaroslavsky when Merkin again refused to answer the question to his satisfaction. “This is not about rights, it’s about rates,” he said. Deputy Mayor Felipe Fuentes later took to the podium to speak on behalf of his boss, Mayor James Hahn, who has vowed to fight secession. Fuentes said Hahn was still concerned about “stranded costs,” what it would cost the city to complete a divorce from the Valley. But the stranded costs issue is one LAFCO counsel had already declared all but dead in the water. Still, Fuentes pressed on, saying the city planned to submit a report to LAFCO detailing its concerns regarding the issue. “We believe the effects (of a breakup) on Los Angeles haven’t been looked at completely,” Fuentes said. Fuentes’ comment might as well have been a bullet. The last thing LAFCO wants is another report, particularly one from the city just as it begins to weigh the details of its own study, one that has already cost upwards of $2 million and taken nearly three years to complete. “What are his concerns with the report that all of us have had for five days to read?” Yaroslavsky asked. “What is it that would satisfy you?” he asked later, followed by, “So the $2 million we’ve spent on consultants aren’t sufficient? If you think you have $300 million in stranded costs, which I think are bogus, then start dealing with them.” LAFCO Chairman Henri Pellissier later took his own shot at Fuentes, saying, “This shouldn’t have come as a surprise to you. Here we come down to (a final decision on a ballot initiative) and we are going to get a whole list from you people?” Later Yaroslavsky asked Merkin to look into the issue of how sitting council members’ districts in the Valley and those that straddle the Valley and Los Angeles would be affected by a split. “If you can do that in three weeks, I’ll buy you lunch. I’ve never seen the city issue a report in that short of time.” Finally, Jeff Brain, president of Valley VOTE, got his chance to weigh in, largely echoing points made earlier by Calemine and others. But he, too, tested the resolve of the panel, particularly Calemine, when he said Valley VOTE intended to submit “a case for” and call for a meeting to discuss making Jan. 1, 2003 the date of incorporation for a new city, not July 1, which Calemine recommended in his report. “No more meetings,” snapped Calemine. “Just submit alternative language in writing for re-wording. I’ll set up a matrix on alternative language in this report on each and every paragraph.” Jacqueline Fox is politics reporter for the San Fernando Valley Business Journal. She can be reached at [email protected].

Runaway Production Condundrum Only Gets Worse Guest Column by Gregory N. Lippe About a year ago, the Valley Industry and Commerce Association joined a nationwide effort to stop the increasing migration of U.S. film and television production, known as runaway production, to other countries. In May 2001, a VICA delegation of eight traveled to Washington, D.C. to lobby for legislation that would provide wage-based tax credits for productions substantially filmed in the U.S. A bill had been drafted by several congressmen, but had not yet been introduced into the House. In July 2001, U.S. Sen. Blanche Lincoln, D-Ark., introduced S. 1278 into the Senate. In October, U.S. Reps. Howard Berman, D-Calif.; David Dreier, R-Calif.; and Charles B. Rangel, D-N.Y., introduced a similar bill, H.R. 3131, into the House. Since the introduction of the bills, there have been tremendous efforts to inform the public of the critical situation. There have been articles in the trade papers and local newspapers about runaway production. The lobbying efforts have significantly increased with the formation and continuation of coalitions of industry groups, film commissions, chambers of commerce and small businesses. Representatives of studios, networks and unions are working on possible contract concessions to reduce the cost of filming in the U.S. A wage-based tax credit bill has been introduced in the California Assembly, the “Film California First” program has been enhanced and the STAR partnership, which makes surplus state (California) property available to filmmakers for free or nominal cost, has been implemented. Despite all this, conditions have worsened considerably. Australia has introduced very attractive tax subsidies similar to those offered by Canada. There has been dramatic growth in the building of infrastructure to support filming in Canada as well as increased availability of quality crews. A UCLA industry forecast stated that Los Angeles County lost 17,000 motion picture jobs in 2001, and ancillary service companies are losing substantial revenue, forcing many out of business. Although the UCLA report didn’t specifically address the number of jobs lost in the San Fernando Valley, because of the substantial film workforce in the Valley, I believe it is fair to assume that many of the lost jobs were here. On April 7 of this year, a VICA delegation again traveled to Washington D.C. This time 15 members were armed with a powerful video, ” Runaway Films: Keep Them in America.” The film adds a human touch to the problem by providing personal interviews of those hardest hit, the below- the-line workers (art, construction, costumes, props, camera, sound, special effects, etc.) and the ancillary service businesses (caterers, dry cleaners, transportation companies, janitorial services, security services, restaurants, communications companies, etc.). Once again we were welcomed by our legislators and had many face-to-face meetings with them and their staffs. Our video was distributed throughout Capitol Hill and to the White House. It was well received. The information we obtained from our meetings was quite enlightening. The key committee for S. 1278 is the Senate Finance Committee. Currently there are 24 co-sponsors of the bill, including six of the 24-member Finance Committee. The bill’s primary sponsor is Blanche Lincoln, D-Ark., a member of the committee and very committed to this bill. She is young, delightful and highly energized. Her enthusiasm gave us all a tremendous boost. The key committee for H.R. 3131 is the House Ways and Means Committee. Currently there are 55 co-sponsors of H.R. 3131, including nine members of the 41-member House Ways and Means Committee. At first, we were very encouraged because the committee’s chairman is our own U.S. Rep. Bill Thomas, a Republican from Bakersfield. Since more than 80 percent of U.S. filming is done in California, our and his home state, we believed his support would be unquestionable. Unfortunately, although we did not meet with Mr. Thomas, credible sources outside Congress believe that he will not lend his support to the bill. This is difficult for us at VICA to understand. I hope our sources are incorrect. Other issues related to the success of the bills are the estimated cost (currently being determined by a process called scoring) and the vehicle that will be used to carry the bills through Congress. The consensus of the legislators we spoke with was that they will not succeed as stand-alone bills, but will need to be attached to a more comprehensive bill (the vehicle). Possible vehicles include a bill (currently in the Ways and Means Committee) that will add permanence to otherwise expiring provisions of the massive Economic Growth and Tax Relief Reconciliation Act of 2001, a minimum wage increase billl. Although we are encouraged, we harbor no illusions that getting these very important tax incentive bills passed through both houses of Congress will be easy. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based firm of Lever, Lippe, Hellie & Russell LLP and chairman of the VICA Subcommittee on Runaway Film Production.

INTERVIEW: A Fringe Decision Mark Kernes of the Free Speech Coalition says recent Supreme Court ruling will help Hollywood, not the adult entertainment industry. By MICHAEL HART Staff Reporter On April 16, the U.S. Supreme Court surprised many with a decision that struck down the Child Pornography Act, primarily along First Amendment lines. At the heart of the decision was the understanding that the depiction of children in sexual situations for film or video is not illegal as long as children are not involved in the actual production. Viewed primarily as a First Amendment issue, the decision caught the attention of many in the San Fernando Valley adult entertainment industry. The plaintiff in the case was the Free Speech Coalition, a Valley-based trade association for the industry. Some in the industry said last week the decision and the coalition’s involvement signal growing acceptance of the adult entertainment business and its gradual move into the mainstream economy. As further evidence, they sometimes cite last year’s purchase of three television channels by Playboy Enterprises Inc. from Van Nuys-based Vivid Video for $70 million. Supreme Court decisions and multi-million-dollar deals with Playboy notwithstanding, most still consider porn a fringe industry. While it is clear the overwhelming majority of adult videos are produced in the Valley, estimates of the industry’s size and impact on the area economy vary widely. In reports on the recent Supreme Court decision, local daily newspapers stated the industry employs 12,000 in the Valley and had profits of $10 billion to $12 billion last year. Mark Kernes, senior editor with Adult Video News for nearly 20 years, says the employment figures are closer to 3,000 to 5,000 and that adult TV and film production in the Valley may generate $1 billion a year. AVN, Adult Video News’ parent, is a privately held Chatsworth company with an estimated $12 million in annual revenues. Along with the monthly industry trade magazine, it produces AVN Insider, an industry newsletter, and operates industry trade shows. Kernes, also a member of the Free Speech Coalition board of directors, spoke with Business Journal editor Michael Hart about the Supreme Court decision, its impact on the adult entertainment industry and the question of whether the industry is “going mainstream.” Question: What effect will the Supreme Court decision have on the adult entertainment industry? Answer: The adult industry itself, not really a lot. There are only three or four producers who are making material that features adult women dressed in miniskirts and pigtails hanging around a jungle gym. This is the stuff that was targeted by the Child Pornography Act, which just got overturned. Where it’s going to have a big effect is on Hollywood. You’ve got your movies like “Titanic,” “Traffic,” “Fast Times at Ridgemont High,” “The Last Picture Show,” dozens and dozens of movies that feature actors that appear to be under 18 involved in sexual simulation, and that’s exactly what’s illegal under this. Q: How did Adult Video News get started and what was your involvement? A: The turning point was in a store in Philadelphia called Movies Unlimited, one of the first video stores in the country to rent adult videos. I started renting them there in the early ’80s. The night manager then was a fellow named Paul Fishbein, who now owns this magazine. He had just started up this little newsletter for people who were renting adult videos there and we got to talking. He said people would come up to the counter and say, “Is this any good?” He figured they might want to read reviews of whether they were any good or not. I was always too chicken to come up and ask, but we had talked and I guess he decided I was reasonably well spoken. So, he offered me a job. Q: What was the competitive atmosphere like for a trade publication like this when you started? A: This was it. We were the first magazine to review adult videotapes. Penthouse didn’t do it, Playboy didn’t do it, Screw didn’t do it, and, in terms of magazines, in those days that was about it. We were the first and continue to be the only magazine that does it to the depth that we do. Q: How then did you move from being a porn reviewer to a First Amendment advocate? A: I’ve always been a First Amendment guy. I was a socialist until I got to NYU and fell in with the Libertarians. So, I combined my interest in freedom of speech in general and the realization that sexual speech was among the most suppressed. Then when I got out here and met the people involved in the industry, what I found was an industry which at its base is very libertarian. Q: How has the industry changed during the 20 or so years you’ve been covering it? A: It used to be people in the industry, if not exactly ashamed of what they did, weren’t all that open about it. You’d go to a party and somebody asked you what you do, the actors would say, “I wait tables.” There’s a lot less of that now. The fact is more and more people in society have seen the movies and, it turned out, sex was a lot more mundane than they were afraid it was. Q: If that’s the case and the business is so big, why aren’t adult entertainment companies pitching story ideas to me in the same way other Valley companies do every day? A: They assume, and it’s reasonable for them to assume, that the answer would be, “Get out of here.” Plus, porn is such a salable product that you really don’t need much publicity. We’re very much an advertising-based publication, but the ads are really more to inform retailers of what’s about to come out, because we’re a trade magazine more than a publication for the general public. Mainstream magazines like Penthouse or Playboy don’t so much have ads for our products as they do for phone sex lines and Web sites, so the product itself doesn’t take a lot of advertising and it doesn’t need a lot of mainstream coverage to be salable. From the mainstream media point of view, the question is, is covering porn worth it, considering the amount of flak they would take because of it from some very big-mouthed people? Q: Vivid Entertainment is one company that has caught the attention of the mainstream business media. Why is it the exception so far? A: They’re the shining example. Vivid was the first to sell its films to Playboy and Playboy is about as mainstream as you can get and still be sexual. That gave Vivid the impetus to say, “Yes, John Q. Consumer, we also have this product or this service available.” Q: Are there other companies likely to make the kinds of deals Vivid did with more mainstream business partners? A: Wicked Pictures just down the street is certainly headed in that direction. They have product which is at least as good as Vivid’s. Q: Even assuming for the moment that adult entertainment is gaining wider acceptance, won’t there always be a part of the industry that is not mainstream? A: Yes, simply because one of the traits of some people in the industry is to say, “Let’s see how far we can push the envelope.” Q: With this Supreme Court decision behind it, what’s the next goal for the Free Speech Coalition? A: The Supreme Court decision is only a small step. The ultimate goal is to create some sanity in society when it comes to the subject of sex. Q: If that were to ever happen, would there still be porn industry with the high profit margins people believe it has? A: Not a chance. No, at that point the industry becomes like all the others, calling you up trying to get stories in the paper. I look forward to the day when this is like any other business. Q: Will that happen anytime soon? A: No. SNAPSHOT: Mark Kernes Age: 52 Title: Senior editor, Adult Video News; member, Free Speech Coalition board of directors Education: B.A., New York University Career-turning point: The opportunity to leave court reporting to write for Adult Video News Most admired person: Science fiction writer Robert Heinlein Personal: Single

Valley Talk Who’s the Joke On Now? Without doubt, at an April 25 reception honoring the San Fernando Valley Business Journal’s Top 25 Lawyers, Greg Lippe had every reason to feel outnumbered. The managing partner of the CPA firm of Lever, Lippe, Hellie and Russell LLP looked out over the sea of lawyers and noted how much things had changed in recent months. Beginning with the Enron and Andersen debacles and moving on to the struggle Tyco International Ltd. has had with accounting irregularities, Lippe said these are “unusual” times for accountants. “Finally,” he said, “we’ve got something on lawyers. People now have more jokes to tell about us than they do about you.” Cheap, Not Better Ever wonder what business executives do when they can’t hire a high-priced accounting firm to cover up their misdeeds? David Gurnick, now a partner with Arter & Hadden LLP, found out when he began practicing law. A client Gurnick was representing came to him about an employee who was skimming from the company. The employee, it seems, was independently selling the company’s products to accounts in Indonesia and pocketing the money, but he had to devise a way to explain the parts he was shipping off illicitly. So he cut and pasted portions of the sales invoices to other, legitimate customer invoices to compensate for the missing inventory. “You had to look at the lines and alignment of text and see if the receipts had been doctored,” Gurnick recalls. How good a job did this wayward employee do? “He did a very good job, but not quite good enough,” said Gurnick. We’d say the high-priced accounting firm would get the same rating. On the Other Side Encino attorney James Blatt can wax nostalgic about his law clerking days with the District Attorney’s Office in the early 1970s, but none of his recollections was stranger than when he encountered what seemed to be just another ’60s flower child in the hall of the courthouse. “I was just a kid at 21 working as a law clerk in the D.A.’s office, and every day I’d walk past these hippies sitting around in the hallway,” he said. “One day one of these girls approached me and tried to recruit me. I knew they were part of Charlie Manson’s family. There used to be five or six of them camped out there everyday. It was crazy. “I just looked at her and said, ‘Sorry, I’m on the other side.’ I thought that would be the end of it, but she tried a couple of more times with me. I guess I looked like a good prospect for them.”