Polling Question 1: What is the biggest factor hurting small businesses in California?

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1 Polling Question 1: What is the biggest factor hurting small businesses in California? 1. The loss of home equity and less ability to tap it 2. Tight lending conditions especially on credit cards 3. Labor costs such as health insurance and workers compensation 4. Navigating red tape

2 Polling Question 2: What s the most efficient way to boost small-business activity in California? 1. Increase financing to community banks 2. Create small business regulatory exemptions 3. Establish state or municipal funds for lending or matching equity investments 4. Provide tax credits or sales tax exemptions

3 Small businesses outlook still gloomy Small Business Optimism Index Sources: National Federation of Independent Business, Moody s Analytics.

4 Lack of credit hurting small businesses Small Business Optimism Index Net percent of firms reporting credit is harder to get Net percent of firms planning to increase employment Sources: National Federation of Independent Business, Moody s Analytics.

5 Banks tightening standards for C&I loans Net percentage of U.S. domestic bank respondents, 2000-Q Tightening standards Easing standards Source: Federal Reserve Board of Governors,Senior Loan Officer Opinion Survey on Bank Lending Practices.

6 Demand for commercial and industrial loans Net percentage of U.S. domestic bank respondents, 2000-Q Strong demand Weak demand Source: Federal Reserve Board of Governors,Senior Loan Officer Opinion Survey on Bank Lending Practices.

7 Commercial and industrial loans still limited All commercial banks Source: Federal Reserve Bank of St. Louis.

8 Average commercial and industrial loan size All domestic banks Source: Federal Reserve Board of Governors, Moody s Analytics.

9 C&I loans secured by collateral All domestic banks Source: Federal Reserve Board of Governors, Moody s Analytics.

10 Business bankruptcy filings California and U.S., 2000-Q Sources: U.S. District Courts Administrative Offices, Moody s Analytics.

11 Venture capital investment activity All investments, California, 2000-Q Q2 2010: Total invested: $3.8 billion Average $/deal: $10.2 million Number of deals: 369 Sources: PricewaterhouseCoopers, Thomson Reuters, National Venture Capital Association.

12 Venture capital investment by region Investment Percent Number of Region US$ millions of total Deals Silicon Valley 2, L.A./Orange County New England N.Y. metro Southeast Midwest Northwest D.C./Metroplex Texas San Diego North Central Southwest Philadelphia metro Colorado Upstate N.Y Sacramento/N. California South Central AK/HI/PR Unknown U.S. total (Q2 2010): Total invested: $6.5 billion Average $/deal: $7.2 million Number of deals: 906 Sources: PricewaterhouseCoopers, Thomson Reuters, National Venture Capital Association.

13 SBA loans approved California and U.S., Sources: Small Business Administration, Moody's Analytics.

14 Small Business Jobs Act 2010 Recovery Act loans extension: $14 billion more in lending support 90% government guarantee on 7(a) loans and reduced fees through 12/31/2010 Higher loan limits Permanently increase 7(a) and 504 limits from $2 million to $5 million 504 limit increases to $5.5 million for manufacturers Permanently increase microloan limit from $35,000 to $50,000 Alternative size standards Expand eligibility for SBA loans to include small businesses with less than $15 million in net worth and $5 million in average net income Help with working capital and commercial real estate refinancing Increase SBA Express loan limit from $350,000 to $1 million (expires 9/27/2011) Allow some to refinance owner-occupied commercial real estate mortgages into the 504 loan program (expires 9/27/2012) Source: Small Business Administration.

15 Number of business starts 2008 Starts per Rank State 100,000 people 1 Wisconsin California North Carolina South Carolina Texas Louisiana Utah Georgia New Jersey Illinois 59.1 Source: Small Business Administration.

16 Small firms, big presence California, million small businesses Responsible for 52.1 percent of employment in California In the middle of one of the worst recessions in U.S. history, 165,478 small businesses started in California; however, 180,074 small businesses closed The accommodation and food services industry was the state s largest small-business employer in 2006 Source: Small Business Administration.

17 Small-business activity California and U.S., 2008 Estimated number of small businesses* Small firms with employees Percent of employment by small firms Establishments opened, 2008 Percent change Establishments closed, 2008 Percent change Business bankruptcies, 2008 Percent change (millions) (millions) (2008) (thousands) (thousands) (thousands) California U.S , , * Includes employer and non-employer businesses. Source: Small Business Administration.

18 Small-business jobs: Tale of two recessions United States, number of jobs in thousands Note: Numbers are for businesses with fewer than 50 employees. Sources: Bureau of Labor Statistics, The Heritage Foundation.

19 Small businesses account for nearly half of the decline in job creation United States, change from 2007 to Q Total change in job creation = -1,648,000 Sources: Bureau of Labor Statistics, Moody s Analytics.

20 60 percent of current decline in job creation stems from small businesses versus 26 percent in previous recession United States Sources: Bureau of Labor Statistics, Moody s Analytics.

21 Kauffman Index of Entrepreneurial Activity 2009 California ranked 10th with 410 entrepreneurs per 100,000 residents. Source: Ewing Marion Kauffman Foundation.

22 Kauffman Index of Entrepreneurial Activity 15 largest metros, 2009 Entrepreneurs Rank Metropolitan Statistical Area per 100,000 people 1 Houston-Baytown-Sugar Land, TX Miami-Fort Lauderdale-Miami Beach, FL Atlanta-Sandy Springs-Marietta, GA Phoenix-Mesa-Scottsdale, AZ San Francisco-Oakland-Fremont, CA Los Angeles-Long Beach-Santa Ana, CA New York-Northern New Jersey-Long Island, NY-NJ-PA Detroit-Warren-Livonia, MI Riverside-San Bernardino, CA Dallas-Fort Worth-Arlington, TX Washington-Arlington-Alexandria, DC-VA-MD-WV Chicago-Naperville-Joliet, IN-IN-WI Boston-Cambridge-Quincy, MA-NH Philadelphia-Camden-Wilmington, PA-NJ-DE Seattle-Tacoma-Bellevue, WA 160 Source: Ewing Marion Kauffman Foundation.

23 Private-sector job gains and job losses California, Note: Shaded area represents NBER defined recession periods. Source: U.S. Bureau of Labor Statistics.

24 Amount of home equity cashed out United States, prime conventional loans, Q Q Sources: Freddie Mac, Moody s Analytics.

25 Annual home price appreciation California Sources: National Association of Realtors, Moody's Analytics.

26 Small business credit card use United States Small business credit card charges increased from $120 billion in 2002 to $300 billion in (Source: Creditcards.com) Small business credit card use fell to $137 billion in (Source: Keybridge Research) 74% of small businesses had business credit cards in (Source: National Federation of Independent Businesses) 59% of small businesses used credit cards to meet their capital needs. (Source: National Small Business Association)

27 Residential and Non-residential permit valuations California, 2000-July 2010 Sources: Construction Industry Research Board, Moody's Analytics.

28 GROWING MY COMPANY 1982: Torrance - Initial investment $50,000-0 employees - Pioneer in ready-to-eat gelatins in the U.S. 1985: Gardena - Growing using own profits. - No credit employees 1989: Huntington Beach - First loan received by SBA 504; - Purchased a new plant and 20 different bank loans for equipment; - 60 employees 2000: Financing received by seller of the plant, Baskin Robbins - Company sales at 8 million with 100 employees. - Sold the plant in 2004, stayed in operation through outsourcing for 6 years

29 GOING BACK TO MY ROOTS 2010: THANKS TO A FAMILY LOAN - Returning to self manufacturing at the same plant we left 10 years ago employees Several challenges: - 3 months no production - Lack of financing Supported by: - Lulu s Dessert name brand - Long term customers - Cooperative and understanding suppliers - Valued employees STILL TODAY NO FINANCING FROM BANKS

30 Potential for continued growth 2010 Credibility in the industry National distribution: available at major national chains including WalMart, Kroger, Safeway

31 ACCESS TO CAPITAL 2010 Seeking strategic alliances with major food companies Venture Capital Continue talking with traditonal banks Recommendations Banks need to partner with small businesses, like they did in the 90s: trust the potential of the company and track record. Implications: Companies will move out of California, to more business friendly states or will go out of business THANK YOU

32 Private Equity Transactions All Investments, California, YTD # of Transactions Q107 Q207 Q307 Q407 # of Transactions Transaction Implied Equity Value Q108 Q208 Q308 Q408 Q109 Q209 Sources: CapitalIQ. Note: Q408 excludes the IndyMac Federal Bank transaction with an Implied Equity Value of $13.9 billion. Q309 Q409 Q110 Q210 Q310 $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 ($ in Billions)

33 Middle Market High Yield Offerings USA, YTD Sources: CapitalIQ. Note: Middle Market defined as Companies that generate $100 million to $1 billion in revenues.

34 Leveraged Loan Offerings USA, Excluding Large Caps, YTD Sources: CapitalIQ. Note: Excluding large cap companies generating $1+ billion of revenue.

35 Helping small businesses recover Lending Assistance Leading lender of SBA 504 loans 2 nd Look Program $5 billion lending commitment Assisting small businesses having difficulty repaying credit card and business loan Proactive credit line increases Participation in 504 and 7(a) loan pooling Non-Lending Assistance Hiring >1,000 small business bankers $10 billion spending commitment Increased clarity and transparency of small business card contract terms Community Development Financial Institutions (CDFI) Capital access to start-up companies and other businesses that do not qualify for traditional bank loans. $10 million grant to CDFIs for loan loss reserves, could provide as much as $100 million in loans to small business Source: Small Business Administration.