EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY Powered By Docstoc
					Board Meeting                                       Agenda Item 14
August 20-21, 2002                                    Attachment 1




         RECYCLING MARKET
         DEVELOPMENT LOAN LEVERAGING
         STUDY


         PREPARED FOR:   CALIFORNIA INTEGRATED WASTE
                         MANAGEMENT BOARD

         PREPARED BY:    MILKEN INSTITUTE
                         CAPITAL ACCESS GROUP

         CONTRIBUTORS:   PAUL PRYDE
                         BILL SCHMIDT
                         GLENN YAGO, PH.D.
                         BETSY ZEIDMAN

                         MILKEN INSTITUTE
                         1250 FOURTH STREET, 2/FL
                         SANTA MONICA, CA 90401
                         (310) 998-2600
                         AUGUST 9, 2002
TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................................................................................................ 1
INTRODUCTION..................................................................................................................................... 10
INDUSTRY ASSESSMENT .................................................................................................................... 11
       California Recycling Industry ............................................................................................... 11
       Recycling Market Development Revolving Loan Eligible Companies ................................ 12
SUMMARY OF INTERVIEWS WITH BUSINESSES AND ZONE ADMINISTRATORS ............ 13
       Businesses ............................................................................................................................. 13
       Characteristics of Financing Needs ...................................................................................... 13
       Attractiveness of the Program ............................................................................................... 13
       Zone Administrators ............................................................................................................. 14
FINANCING IN RECYCLING AND REUSE INDUSTRY ................................................................. 16
       Available Financial Products ................................................................................................ 17
       Recycling and Reuse Firms’ Financing Needs ..................................................................... 20
       Annual Financing Needs ....................................................................................................... 21
OVERVIEW OF THE INITIAL LEVERAGING OPTIONS .............................................................. 22
       Framework ............................................................................................................................ 22
       Preliminary Recommentations .............................................................................................. 24
OVERVIEW OF MINI BUSINESS PLANS .......................................................................................... 29
       Introduction ........................................................................................................................... 29
       Borrowers .............................................................................................................................. 29
       Products................................................................................................................................. 29
       New Markets Tax Credit Strategy ........................................................................................ 31
       Analysis................................................................................................................................. 32
       Loan Guaranty Strategy ........................................................................................................ 34
       Loan Sale Strategy ................................................................................................................ 38
       Equity Equivalent/Program-Related Investment Strategy .................................................... 41
TABLES
TABLE A California's Share of Recycling Activity…..………………………………………...44
TABLE B Recycling Industry Definitions……….……………………………………………...45
TABLE C California's Recycling Industry Characteristics……………………………………...46
TABLE D RMDZ Loan Recipients……………………………………………………………...47
TABLE E Prime Rate and CIWMB's RMDZ Active Loan Portfolio….………………………...48
TABLE F Overview of Leverage Strategies...…………………………………………………...49
APPENDICES
NEW MARKETS TAX CREDIT STRATEGY ..................................................................................... 50
LOAN GUARANTY STRATEGY .......................................................................................................... 76
LOAN SALE STRATEGY....................................................................................................................... 92
EQUITY EQUIVALENT/PROGRAM-RELATED INVESTMENT STRATEGY ......................... 115
FINANCIAL TERMS GLOSSARY……………………………………………………………..…….137
     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




EXECUTIVE SUMMARY

This report examines the market, financial requirements, leveraging options and final plans to leverage
the California Integrated Waste Management Board’s (herein referred to as ―CIWMB‖ or the ―Board‖)
Recycling Market Development Zone’s (RMDZ) revolving loan program. The plans outline the process
of increasing the Board’s available funds of $3.5 million to $10 million annually in a manner that is
consistent with the financing needs of recycling companies in California.

This study was commissioned because the amount of funds available during the next four years (state
fiscal years 2002/03 through 2005/06) declines significantly, from $10 million to $3.5 million. The
program has the advantage of relaxed credit underwriting standards and repayment terms longer than
industry average. Although the government approval process is protracted because of public open
meeting acts, the Board has the flexibility to structure loans to better match the recycling businesses
needs.

The goal of the leveraging strategies are to secure long term funding for recycling businesses, making the
loan program sustainable beyond the sunset date of July 1, 2006. The leveraging strategies identify other
sources of funds that perhaps can be made available through existing community financing organizations.

Recycling Industry Assessment

California produces more than 60 million tons of waste per year. The State’s recycling and reuse industry
generates over $14.2 billion in revenue and employs over 84,000 workers. Thirty-six percent of this
revenue is generated by establishments in industries eligible for the RMDZ loans if the project is located
in one of forty Recycling Market Development Zones, underscoring the importance of the program.

For the purposes of this report, the industry in California is the universe defined in the report
commissioned by the National Recycling Coalition, U.S. Recycling Economic Information Study. The
industry can be broadly divided into four categories: Recycling Collection, Recycling Processing,
Recycling Manufacturing, and Reuse and Remanufacturing with 27 sub-industry categories. Seventeen of
these industries contain companies that are eligible for RMDZ loans.

Current and Historic RMDZ Loan Pool

Throughout the history of the RMDZ program, $55,910,300 has been lent to recycling companies, with an
average loan granted of $511,697 and a 5.1 percent annual interest rate. The Board sets the interest rate
semiannually and it is currently 4.0 percent through July 15th, 2002 (presently, 75 basis points below the
current prime rate). Of the companies that have received loans, 14 percent were classified as in the ―start-
up‖ phase, 38 percent were in the expansion phase, and 48 percent were in the established phase of their
growth cycle. The overriding use of the proceeds of the loans was for machinery and equipment (41
percent of companies) and working capital (35 percent). However, RMDZ financing was used for other
projects such as leasehold-improvements (10 percent), real estate purchases (8 percent), and refinancing
onerous debt (6 percent).

The current pool of active RMDZ loans has a weighted average interest rate of 5.37 percent. Because this
rate is above the prime rate, the Board may have the opportunity to sell loans at a premium (a strategy
discussed later in this paper).



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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




Evaluation of Current Program

In order to gain a better understanding of the current recycling marketplace in California and businesses’
and governmental officials’ response to the RMDZ loan program, the Milken Institute and the Capital
Access Group (MI/CAG) interviewed a sample group of loan recipients and Zone Administrators. While
the information presented is anecdotal in nature, it offers a representative picture of the views of
administrators and participants of the program.

The two drivers providing the greatest incentive for a company to participate in the RMDZ program are
the relatively low interest rate and the access to financing that traditionally would have been unavailable.
Established businesses would not have participated in the program without the below-market interest rate,
while start-ups would have most likely considered a loan with a market interest rate because of their lack
of access to other capital sources.

While businesses were overwhelmingly supportive of the program, they voiced the following criticisms:

   Timing of interest payments. The program requires that companies begin paying down interest on the
    entire principal amount regardless of when the funds have been fully disbursed.
   Collateral requirements too strict. Some businesses knew of companies that could not participate in
    the program because the program restricts loan recipients from using their homes as collateral.

Zone Administrators have been crucial in marketing the program to potential businesses. To more
effectively aid this effort they suggested changes in the following areas:

   Start-up companies are often worried about the confidentiality of their business plans when sending
    them to State agencies.
   The financial incentives are not great enough to merit some potential borrowers’ attention.
   The universe of qualified companies in some zones is too small.
   Improve stability of funding given the threat of losing credibility by aggressively marketing the
    program whose funding history is unstable.

Furthermore, Zone Administrators described the following issues with the current structure:

   The interest rate charged on loans is not adjusted with great enough frequency.
   Disallowing single-family homes as collateral has restricted access to financing for many start-up
    firms.
   Smaller loans require the same review process and approval time as larger loans.
   The target market is too small given the eligibility requirements.
   The funds must be better replenished.

The Board provided input on how it has addressed these issues, specifically in the area of confidentiality,
project eligibility, adjusting the interest rate, improvements made to improve and expedite loan approval
process, and the Board’s stance on using residential properties as collateral. Please see the body of the
report for their specific comments.




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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




Financing in the Recycling and Reuse Industry

In order to create leveraging strategies to address the concerns addressed in the above interviews it is
important to understand the specific financing needs of the recycling and reuse industry. Recycling
companies face barriers to traditional capital sources because of lack of security or collateral, lack of an
established credit history, thin profit margins, tight credit conditions in the marketplace, lack of
information about new recycling products and processes, and restrictive covenants that some bank loans
place on businesses reducing their access to other forms of capital.

Nonetheless, in most respects recycling businesses are like any firm. Companies, regardless of industry
need two types of financing—equity and debt.

Equity is capital supplied by investors to a business in exchange for an ownership interest. Because it has
no fixed cost or repayment requirement, equity allows a company to finance activities and assets that are
important to growth and success but produce uncertain short-term returns. For example, equity capital is
often used to fund operating expenses for start-up companies until they are able to finance these costs
from operating cash flows. Examples of equity capital that recycling companies traditionally rely on are:

   Personal savings and internal investments
   Earnings
   Angel Investors
   Venture capital
   Government and charitable grants

Debt is fixed-cost capital that is repaid from business revenues. Because lenders receive only a modest
return in the form of interest, debt capital is generally used to finance activities and assets that can
produce immediate cash flows. For example, debt capital is often used to finance assets (collateral) that
can easily be converted into cash within a short period such as receivables and inventory. It is also used to
finance equipment and facilities that can be sold to repay indebtedness in the event that business cash
flows are insufficient to do so. Examples of debt capital that recycling companies traditionally rely on are:

   Banks
   Leasing and financing companies
   Community development loan funds
   Local government loan funds
   State loans and bonds

Because few recycling companies would qualify for external equity investment (and must use various
forms of debt to fund growth) the decisions of lenders, especially banks, would determine whether they
have adequate access to outside financing.

Assuming that the credit history and character of a borrower are acceptable, lenders have two concerns
when they consider financing a business.




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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




1. Is there adequate cash flow? The operating cash flow of a business is a lender’s principal source of
   loan repayment. If the cash flow is not large or predictable enough to repay the loan, most lenders
   will refuse to extend credit.

2. Is there adequate collateral? Lenders recognize that historic cash flow may not materialize in the
   future. Thus, they look to the market value of the borrower’s collateral as the secondary source of
   repayment. If things go wrong, the lender will take possession of the borrower’s property and sell it to
   recover any outstanding indebtedness.

Looked at in terms of these two factors, recycling firms often have two characteristics that increase their
credit risk in the eyes of lenders.

1. Unpredictable cash flows. As is the case with early stage companies in any industry, newer recycling
   companies are too young to have established a history of positive cash flow. Because lenders tend to
   look at past performance (rather than future promise) these companies are considered high credit
   risks.

2. Special-purpose assets. Recycling companies often need real estate or equipment with few
   alternative uses or buyers (special-purpose assets). Because this property cannot easily be resold
   (without a substantial loss) lenders are reluctant to make loans secured by it.

The way to solve this problem is to identify strategies that can mitigate the associated risk—not with
recycling companies as such, but with companies that may have unpredictable cash flows and collateral
which is not easily sold. Put differently, any strategy that works for recycling companies would work for
any other company with similar characteristics—transportation companies, construction companies,
retailers, etc.

In fact, these two factors can be used to construct a credit matrix for such firms regardless of industry.
All of the firms in CIWMB’s market generally fall within these four cells.

                     CREDIT MATRIX FOR FIRMS SEEKING FINANCING


                                                                  Collateral

                                        Adequate                          Inadequate
                      Adequate       Established company                  Established service or technology
                                     representing low credit risk; can    firm in the expansion stage with
                                     secure conventional bank             few hard assets; needs
                                     financing; most attracted by low     subordinate debt product that
                                     capital cost.                        removes collateral risk from
                                                                          lender
   Cash flow
                      Inadequate Company’s in the expansion               Start-up early-stage company
                                 stage seeking to acquire real            with little operating
                                 property with good market value          history; most concerned
                                 but weak income stream; needs            about financing availability;
                                 equity or deferred payment.              needs
                                                                          equity or deferred payment



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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




Criteria to Select Final Leveraging Strategies

Based on discussions with CIWMB and the research conducted above, MI/CAG developed the initial
leveraging options. The initial options were evaluating using the following criteria:

   Financing capacity. The strategy should achieve the highest possible ratio between CIWMB capital
    resources and private investment.

   Financial stability. As noted above, uncertainty regarding the availability of loan funds has, in the
    past, made Zone administrators reluctant to promote the program. The RMDZ loan program needs a
    sustainable long-term source of funds to leverage with outside investors and allow time for marketing
    efforts to come to fruition. Thus the strategy should provide a reliable source of continuing liquidity.
    In addition, program revenues – interest income, fees and the like – should cover program costs.

   Market responsiveness. The strategy should allow the RMDZ program to offer financial products that
    meet the varied needs of a large number of recycling companies. For example, the program should be
    able to help start-up companies having little collateral as well as established firms looking for low-
    cost financing.

   Customer friendliness. Some borrowers – and administrators – have complained that RMDZ loans
    involve large amounts of paperwork and a protracted approval process. While loans cannot be
    approved without public comment which can lengthen the process when compared to receiving funds
    from a private lender, the strategy, where possible, should simplify and shorten the loan approval
    process.

   Affordability. Loans and investments made possible by the strategy should be structured to ease
    repayment burdens on borrowers. Interest costs should be as low as possible.

Leveraging strategies addressed one, or all, of the following types of financing:

   Equity. Early-stage companies without a proven business model or operating history and established
    enterprises entering unproven lines of business often require infusions of risk-oriented permanent
    capital that do not carry fixed repayment obligations.

   Senior debt. Companies that need to finance assets and activities that produce reliable and predictable
    cash flows often employ loans that are repaid according to a fixed schedule and secured by business
    (and personal) collateral.

   Subordinate debt. Established companies acquiring new assets or entering new lines of business often
    employ subordinate debt both as a borrowing base for senior debt and to increase their return on
    equity. Subordinate debt can also be employed as part of venture financing structures.

The ability of recycling companies to secure any of these forms of financing is often inhibited by the
following risks and costs:



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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




A. Risk

   Credit or portfolio risk. The possibility that loans will not be repaid according to their terms or that
    investments will prove worthless can make lenders and investors reluctant to finance certain deals.

   Rate risk. The danger that interest rates on short-term borrowings (especially deposits) will exceed the
    interest coupon on fixed rate loans makes certain loan structures unattractive for private lenders.

   Liquidity or exit risk. The need to sell existing loans and investments in order to fund new loans or
    provide a return to investors can make lenders and investors unwilling to finance certain deals for
    which there is no secondary or investor market.

B. Cost

   Origination expenses. The high costs of identifying and pre-qualifying promising borrowers and
    business plans can make certain loans and investments economically unattractive.

   Underwriting and processing costs. Credit analysis, due diligence and transaction structuring
    expenses can make the economics of small or marginal loans and investments unattractive.

   Servicing and monitoring costs. Excessive oversight and management expenses can reduce the
    returns on loans and investments.

Strategies for reducing these risks and costs generally involved one or more of the following:

   New products. Loans and investments that are structured to assume risks that other lenders and
    investors refuse to bear can increase the availability of scarce forms of financing. For example,
    second mortgages make it easier for marginal borrowers to purchase property.

   New organizations. Organizations that specialize in a particular type of product, borrower segment or
    finance function can achieve the efficiencies and expertise needed to improve the economics
    associated with serving certain markets. For example, the emergence of specialty finance companies
    as competitors to banks has expanded the availability of commercial credit to mid-market companies.

   New technologies. New uses of information and computer technology can reduce the uncertainty and
    cost of loans and investments. For example, credit scoring allows the underwriting of certain
    consumer and small-business loans under $100,000 to be automated.

   New strategies for managing risk. New insurance and credit enhancement techniques allow lenders
    and investors to reduce risks or remove unwanted risks from their balance sheets. This allows them to
    make capital and credit available to a wider group of borrowers. For example, the California Capital
    Access Program administered by the state Treasurer’s Office, a small business portfolio insurance
    program, makes loans more available to small, marginal firms by reducing bank credit risk.

   New sources and methods of funding. Access to new pools of private investment capital can broaden
    the financing capacity of lenders and investors. For example, securitization allows almost any



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       Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




     financial asset to be sold in the capital markets allowing lenders to offer a wider array of products to
     borrowers.

MI/CAG developed initial options with CIWMB staff. Some were dropped because of requirements that
would require new legislation or because they were determined suboptimal based on the above criteria.
The remaining options were combined into four mechanisms, and a mini-business plan created for each.
Each of these mechanisms uses innovative financial technologies to leverage up CIWMB’s annual
contribution of $3.5 million to provide at least $10 million in lending capacity per year. Each mechanism
utilizes three different financial products, catering to the particular needs of the three stages of borrowers:
early, expansion and established companies.


                                                              Mechanisms


                                             Equity
    New Markets Tax Credit                                                   Loan Guaranty                    Loan Sale
                                     Equivalent Investments
                                                               Sources
    Community Development
                                             CDFIs                              CTTCA                   Securitization Investors
          Entities




                                                               Products


                         Subordinate Loans           Deferred Payment Loans             Below-Market Loans




Leveraging Strategies

Assuming CIWMB has an available pool of capital of $3.5 million annually, the following plans assume
that the full amount is applied to each strategy to leverage this amount to satisfy the estimated demand of
$10 million per year be available to lend to eligible recycling companies. Nonetheless, the plans are
structured in such a matter that two or more strategies can be employed simultaneously with similar
results:

    New Markets Tax Credit Strategy
    Loan Guaranty Strategy
    Loan Sale Strategy
    Equity Equivalent/Program-Related Investment Strategy

Each of the plans is designed to meet the financing needs of three types of recycling companies that make
up the RMDZ market.

    Established recycling firms.
    Expansion-stage companies.
    Early-stage companies.




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     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




The following three products are designed to meet the distinct needs of each these borrower segments:

   Below-market loans. Established recycling companies seeking expansion financing would be eligible
    for medium and long-term fixed-asset loans priced below the market rate for such financing.

   Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure senior
    financing needed for fixed assets or working capital would be candidates for subordinate debt. These
    loans would typically be structured as junior participations in senior, secured loans extended by banks
    or other commercial lenders.

   Deferred payment loans. The borrower makes no interest or principal payments during the life of the
    loan, but at maturity, pays the original principal amount plus accrued interest.

The following table describes how these products are utilized in the four leveraging strategies.




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                                Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


                                    New Markets Tax Credit          Loan Guaranty                   Loan Sale                        EQ2/PRI
Description                         A new federal incentive         A risk-sharing partnership      Selling loans to secondary       Forming a financing
                                    program under which             between CIWMB and one or        market investors, such as the    partnership with an
                                    taxpayers are allowed to        more existing small business    Community Reinvestment           established non-profit
                                    reduce their federal income     loan guarantors – preferably    Fund, and using the cash to      Certified Development
                                    tax payments by 39 percent of   with a California Financial     make more loans. Interest        Financial Institution (CDFI)
                                    the amount invested in a        Development Corporation         rates on the loans would be      that would agree to use funds
                                    qualifying Community            (FDC) that provide guaranties   structured so that loans would   obtained through PRIs, low-
                                    Development Entity (CDE)– a     of up to 90 percent on small    be sold at a premium.            interest loans that foundations
                                    for-profit organization that    business bank loans of up to                                     provide, or EQ2s, long-term,
                                    makes business loans and        $350,000.                                                        low interest loans made by
                                    investments in low-income                                                                        commercial banks to
                                    areas.                                                                                           community development
                                                                                                                                     organizations.
Borrowers                            Established: 50%               Established: 50%               Established: 50%                Established: 50%
                                     Early-Stage: 30%               Early-Stage: 30%               Early-Stage: 30%                Early-Stage: 30%
                                     Start-Up: 20%                  Start-Up: 20%                  Start-Up: 20%                   Start-Up: 20%
Products                             Below-market loans             Below-market loans             Below-market loans              Below-market loans
                                     Subordinate loans              Subordinate loans              Subordinate loans               Subordinate loans
                                     Deferred payment loans         Deferred payment loans         Deferred payment loans          Deferred payment loans
Sources of Funds for Loans          Investors that expressed        California FDCs such as:        Possible purchasers of loans     Organizations that have made
                                    interest in purchasing NMTCs     Nor-Cal FDC,                  such as:                         EQ2 or PRI investments such
                                    such as:                         Pacific Coast Regional         Community                      as:
                                     Enterprise Social                 FDC                             Reinvestment Fund             Ford Foundation
                                         Investment Corporation      California Southern FDC        Bayview Financial               Citibank
                                     Bank of America                                                CBA Receivables                 F.B. Heron Foundation
                                     Bear Stearns
Lenders                             Community Development           Ca. Technology, Trade and       Companies that purchase          Certified Development
                                    Entity (for-profit)             Commerce Agency’s 11            commercial loans to private      Financial Institions
                                                                    Financial Development           businesses at market interest
                                                                    Corporations that administer    rates
                                                                    the State Loan Guarantee
                                                                    Program
Analysis                                                  Rating                          Rating                           Rating                            Rating
Rating: (-) worse than avg.         Simplicity            (-)       Simplicity            (+)       Simplicity             (+)       Simplicity              (0)
         (0) average                Practicality          (-)       Practicality          (0)       Practicality           (+)       Practicality            (-)
         (+) better than avg.       Sustainability        (+)       Sustainability        (+)       Sustainability         (+)       Sustainability          (0)
                                    Affordability         (+)       Affordability         (0)       Affordability          (+)       Affordability           (+)
                                    Implementability      (0)       Implementability      (-)       Implementability       (+)       Implementability        (0)
Leverage                            Base Case: 5 to 1               Base Case: 12 to 1              Base Case: 16 to 1               Base Case: 5 to 1
                                    Best Case: 5 to 1               Best Case: 19 to 1              Best Case: 16 to 1               Best Case: 5 to 1
Return on Investment                Base Case: 32.98%               Base Case: 10.23%               Base Case: 0.01%                 Base Case: 0.06%
                                    Best Case: 33.30%               Best Case: 14.37%
                                                                                 9                  Best Case: 15.30%                Best Case: 12.50%
    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



INTRODUCTION

The United States generates approximately 208 million tons of municipal solid waste per year, or
approximately 4.3 per pounds per person per day.1 California, alone, produces over 60 million tons of
waste per year. Currently, 56,000 recycling establishments operate in the nation with over $236 billion in
revenues. California’s 10 percent share of the total number of these businesses is approximately in line
with its 12 percent share of the country’s population. However, despite the State’s extraordinarily large
share of economic activity in the country, California generates only 6 percent of the U.S.’s total recycling
revenue and employs a similar share of workers (see Table A on page 44).

Overview

This report covers five areas that examine the market, financial requirements, leveraging options, and
final plans to improve and leverage the Recycling Market Development Zone (RMDZ) loan program. The
first section consists of an assessment of the recycling market in California and an analysis of the current
pool of RMDZ loans. This is followed by a summary of interviews conducted with past loan recipients
and current Zone Administrators. In the subsequent section, we examine financing the needs and products
available in the recycling and reuse industry. Next, we describe the process that was used by the Milken
Institute and Capital Access Group and the California Integrated Waste Management Board (―CIWMB‖
or ―the Board‖) to determine the four chosen business plans to leverage RMDZ assets. In the last section,
the final mini business plans are summarized.




1
    Environmental Systems of America, Inc. website.


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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



INDUSTRY ASSESSMENT

California Recycling Industry

Table B (page 45) summarizes the recycling, remanufacturing, and reuse industry in California. 5,342
establishments2 operate in the State, employing approximately 84,000 workers and generate $14.2 billion
in revenue. For the purposes of this report, the industry in California is the universe defined in the report
commissioned by the National Recycling Coalition, U.S. Recycling Economic Information Study. The
industry can be broadly divided into four categories: Recycling Collection, Recycling Processing,
Recycling Manufacturing, and Reuse and Remanufacturing. Of these industries the following sub-
categories (see Table B for definitions) exist:

RECYCLING INDUSTRY CATEGORIES
Recycling Collection Recycling                           Recycling Manufacturing             Reuse and
                     Processing                                                              Remanufacturing
Government Staffed   Compost and                         Glass Container                     Computer and
Collection           Miscellaneous                       Manufacturing Plants (a)            Electronic
                     Organic Producers                                                       Appliance
                     (a)                                                                     Demanufacturers
                                                                                             (a)
Private Staffed              Materials Recovery          Glass Product Producers             Motor Vehicle Parts
Collection                   Facilities (MRFs)           (other recycled uses) (a)           (used)
                             Recyclable Material         Nonferrous Secondary                Retail Merchandise
                             Wholesalers (a)             Smelting and Refining               Sales
                                                         Mills (a)
                             Textile Recycling           Nonferrous Product                  Tire Retreaders
                             (a)                         Producers (a)
                                                         Nonferrous Foundries (a)            Wood Reuse (a)
                                                         Paper, Paperboard, and              Materials Exchange
                                                         Deinked Market Pulp Mills           Services
                                                         Paper-based Product                 Other Reuse (a)
                                                         Manufacturers (a)
                                                         Pavement Mix Producers
                                                         (asphalt and aggregate) (a)
                                                         Plastics Reclaimers (a)
                                                         Plastics Converters (a)
                                                         Rubber Product
                                                         Manufacturers (a)
                                                         Steel Mills
                                                         Iron and Steel Foundries
                                                         Other Recycling
                                                         Processors/Manufacturers
                                                         (a)



2
  An establishment is a single physical location where business is conducted or where services or industrial operations are
performed.
(a) RMDZ eligible industry group, which diverts non-hazardous solid waste materials from California’s landfills and adds-value
to the product.


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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




Recycling Market Development Revolving Loan Eligible Companies

Under the current rules of the program, only seventeen of the twenty-seven industry subcategories defined
above are eligible for RMDZ loans. This represents 12 percent of the State’s total establishments and 36
percent, or approximately $5.1 billion, of the $14.2 billion recycling market in California. Through the
history of the program, 108 loans have been made to 96 different companies located throughout
California. Table C (page 46) provides additional information about the relative size of each of the sub-
industries.

Table D (page 47) summarizes the geographic location, average loan size, average term, average rate, and
use of loan proceeds for each of the seventeen eligible sub-industries. Firms in all but one eligible sub-
industry, Tire Retreaders, have received RMDZ loans. The average loan granted was $511,697 at a 5.1
percent average annual interest rate and an average term of 9 years. The interest rate is set semiannually
and is currently 4.0 percent through July 15th, 2002 (presently, 75 basis points below the current prime
rate). Of the companies that have received loans, 14 percent were classified as in the ―start-up,‖ 38
percent were in the expansion, and 48 percent were in the established phase of their growth cycle. The
overriding use of the proceeds of the loans was for machinery and equipment (41 percent of companies)
and working capital (35 percent). However, RMDZ financing was used for other projects such as
leasehold improvements (10 percent), real estate purchases (8 percent), and refinancing onerous debt (6
percent).

Throughout the history of the program, the majority of loans have been made to companies located in
Southern California (52 percent) with the remaining split between Northern California (24 percent) and
Central California (24 percent). Of the current, active loans, approximately 23.4 percent of the loans
representing 23.2 percent of the total principal amount have been financed by businesses located in zip
codes of economically distressed empowerment zones or enterprise communities. To determine whether
these businesses are located within the census tracks covered by the New Markets Tax Credit (one of the
leveraging strategies described later) as low-income communities, requires further analysis.

As shown in Table E (page 48), the prime rate, once at a relative high of 9.5 percent in 2001, is currently
4.75 percent following aggressive cuts in interest rates by the Federal Reserve to stimulate economic
growth. Because of the recent decline in interest rates, the average interest rate of the active portfolio of
RMDZ active loans is above the current prime rate of 4.75 percent. The portfolio of RMDZ loans
presently has a weighted average interest rate of 5.37 percent.3 This presents an opportunity to sell the
pool of loans at a premium.




3
    The interest rate is weighted by the remaining principal owed for each loan.


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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



SUMMARY OF INTERVIEWS WITH BUSINESSES AND ZONE ADMINISTRATORS


In order to gain a better understanding of the current recycling marketplace in California and businesses’
and governmental officials’ response to the RMDZ loan program, the Milken Institute interviewed a
sample group of loan recipients and Zone Administrators. While the information presented is anecdotal in
nature, it offers a representative picture of the views of administrators and participants of the program.
Businesses that received loans were generally enthusiastic about the program and the access it provided to
much needed financing. As one borrower in the plastics industry stated, ―We have been major
beneficiaries of the program and have been able to recycle hundreds of tons of plastic milk bottles.‖

Businesses

Characteristics of Financing Needs

Participating companies used a variety of financial instruments to fund the growth of their businesses.
Beyond the initial investments by the founder, friends and family, businesses used commercial loans,
lines of credit, real estate financing and off balance sheet operating leases to finance expansion. Financing
was applied to such purposes as ongoing equipment purchases, working capital, and building
improvements. The following section, ―Financing in Recycling and Reuse Industry,‖ describes the
requirements of businesses in this industry in greater detail.

Attractiveness of the Program

The two drivers that provided the greatest incentive for a company to participate in the program were its
relatively low interest rate and access to financing that would have traditionally been unavailable.
Established businesses indicated that they would not have participated in the program without the below-
market interest rate, while start-ups indicated that they would have most likely considered a loan with a
market interest rate because they lacked access to other capital sources. Barriers to traditional capital
sources included lack of security or collateral, lack of an established credit history, thin profit margins,
tight credit conditions in the marketplace, lack of information about new recycling products and
processes, and restrictive covenants that some bank loans place on businesses reducing their access to
other forms of capital.

Criticisms of the Program

While businesses were overwhelmingly supportive of the program, they voiced the following criticisms:

     Timing of interest payments. The program requires that companies begin paying down interest on the
      entire principal amount regardless of when the funds were fully disbursed.

     The program does not provide construction financing.

     Smaller, bridge loans are not available. One company suggested that smaller loans of $5,000 to
      $15,000 be offered to bridge the gap between initial equity investments and larger rounds of financing
      for start-up companies.

     Collateral requirements too strict. Some businesses knew of companies that could not participate in
      the program because the program restricts loan recipients from using their homes as collateral.



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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Zone Administrators

Marketing the Program

Zone Administrators use a variety of techniques to contact potential recipients. While some
Administrators receive inquiries from potential businesses, most proactively market the program. They
use techniques such as working with local economic coordinators and economic development agencies to
identify potential recipients, offering workshops, and sending information sheets. Furthermore, some
Administrators pre-screen potential applicants before sending their applications to the State.

While the Administrators’ marketing efforts are substantial, there are still considerable impediments to
reaching potential recipients. Administrators voiced the following concerns:

     Start-up companies are often worried about the confidentiality of their business plans when sending
      them to State agencies.

     The financial incentives are not great enough to merit some potential borrowers’ attention.

     The universe of qualified companies in some zones is too small.

     Given its lack of stable funding, aggressively marketing the program threatens its credibility.

Problems Identified with Current Structure

Zone Administrators voiced the following issues regarding the current loan program and process:

     The interest rate charged on loans is not adjusted often enough. While the Federal Reserve has been
      cutting interest rates almost monthly, CIWMB sets its rate semi-annually. As market interest rates
      decline, the incentive to borrow from the loan program erodes. The loan program’s rate should be
      adjusted more frequently to follow market conditions.

     Disallowing single-family homes as collateral has restricted access to financing for many start-up
      firms. For many entrepreneurs, the most significant collateral they own is their home. Many do not
      have other significant tangible assets. It is these same firms that have the most difficulty obtaining
      traditional bank loans. Entrepreneurs who use their residences as collateral have a greater incentive to
      ensure that their businesses succeed, however, CIWMB, a state agency, decided not to use homes as
      collateral so as not to be in the position of foreclosing on personal residences.

     Smaller loans require the same review process and approval time as larger loans. The excessive
      administrative cost to firms to obtain a small loan as a large one acts as a disincentive to use the
      RMDZ program to fund smaller projects.

     The target market is too small given the eligibility requirements. Some Administrators feel the
      eligibility requirements should be broadened to provide funding to more potentially waste-reducing
      businesses.

     Better replenishing of funds. Because of a potential lack of funds, many Administrators are reluctant
      to market the program to its full potential. This study is the first step toward alleviating that problem.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Board Response

The preceding concerns were presented to the Board to receive more comprehensive information in
designing the leveraging plans. The Board had the following response to Zone Administrator and loan
recipient concerns:

     Confidentiality. Current code and regulatory provisions provide protections for the confidential and
      sensitive business information submitted with loan applications. Precautions are taken by staff to
      ensure that the information is not released to others. Loan application packages are confidential. The
      information is only reviewed by the RMDZ loan officer and 9 loan committee members. The only
      information made public is contained in a Board Agenda Item. Agenda items include the business
      name, address, loan amount, use of RMDZ loan proceeds, and what the company does. Agenda items
      do not include any financial information or lists of suppliers and customers.

     Project Eligibility: Each year staff reviews the Loan Eligibility Criteria to ensure that projects
      requiring funding are included. Prior to making revisions to the eligibility criteria, the Board solicits
      input from Zone Administrators and other interested parties. The Board last considered project
      eligibility in Sept. 2001.

     Loan Interest Rate: The interest rate is tied with the State Surplus Money Investment Fund. That
      interest rate is set semiannually. Shortly after that rate is set in January and July of each year,
      adjustment of the RMDZ Loan interest rate is made.

     Loan Processing and Approval Timeline: Since the Board is a public body, additional loan
      processing time is required to have application reviewed by a loan committee, a board committee, and
      the full board. On average, an RMDZ loan officer only has two weeks to review, analyze, and
      underwrite a loan application. The most time consuming elements are the placement of a loan item
      on the Board Agendas, the 10-day public meeting notices, and the fact that the Board only meets
      once a month. Loan Committee is scheduled once a month, on a date when the loan is ready to be
      presented.

     Improvements made to improve and expedite process: If a borrower has all the information included
      at the time his application is submitted to the Board, a loan can be processed in 45 - 90 days. Over
      the last few years, the Board and its staff have tried to make the program responsive to its clients
      through the lessening of loan guarantee requirements from those having 10% ownership the business
      to 20%, changing from quarterly to continuous application filings, hiring more staff with direct
      lending experience, streamlining loan documents to mirror those of private sector, outsourcing loan
      servicing, increasing collateral advance rates, reducing the loan application fee from $500 to $300,
      and reducing loan points from 3% to 1/2%. In addition, RMDZ loan officers make many attempts to
      work with recycling businesses before they apply, to confirm they are located in an RMDZ, the
      project meets the Boards Eligibility Guidelines, to understand how the loan will be structured, the
      repayment schedule, collateral requirements, and that the borrower has sufficient funds for the entire
      project. All these improvements have made the Loan program more responsive to the clients needs
      and significantly shortened time to process loans.

     Residential properties as collateral: The decision was made not to take residential property as
      collateral based on a loan where the Board was in the position to foreclose on a single family
      residence occupied by a retired disabled couple, who owned 100% of the recycling business. Loan
      staff is only aware of only one recycling business that did not apply for an RMDZ loan because their
      only collateral was a home.


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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Creating leveraging strategies that address the concerns raised in the above interviews calls for an
understanding of the specific financing needs of the recycling and reuse industry. The following section
examines the requirements of this industry in greater detail.




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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



FINANCING IN RECYCLING AND REUSE INDUSTRY

Available Financial Products

Businesses, regardless of industry, need two types of financing—equity and debt.

Equity is capital supplied by investors to a business in exchange for an ownership interest. Because it has
no fixed cost or repayment requirement, equity enables a company to finance activities and assets that are
important to growth and success despite uncertain short-term returns. For example, equity capital is often
used to fund operating expenses for start-up companies until they are able to finance these costs from
operating cash flows.

Debt is fixed-cost capital that is repaid from business revenues. Because lenders receive only a modest
return in the form of interest, debt capital is generally used to finance activities and assets that can
produce immediate cash flow. For example, debt capital is often used to finance assets (collateral) that
can easily be converted into cash within a short period such as receivables and inventory. It is also used to
finance equipment and facilities that can be sold to repay indebtedness in the event that business cash
flow is insufficient to do so.

Companies often employ two types of debt to finance their operations: senior loans and subordinate loans.
Senior loans are well-collateralized and therefore relatively safe for the lender, thus, they bear relatively
low interest rates. By contrast, subordinate loans are less well-collateralized and typically carry a higher
interest rate.

The particular mix of equity, and senior and subordinated debt that a company employs depends upon its
operating characteristics and stage of development. For example, firms with large amounts of fixed assets
and stable cash flows would use relatively more debt than companies that have less predictable cash flow
and fewer hard assets

Our research and interviews with recycling companies revealed that recycling companies typically rely on
the following sources of financing:

Equity capital

       Personal savings and internal investments. Like most entrepreneurs, owners of recycling
        companies drew upon personal savings and credit lines (including home equity loans and credit
        cards) to finance their businesses, especially during the early stages of development. However,
        few entrepreneurs have the wealth to finance the continued growth of their companies from
        personal assets. Thus, except for early-stage companies, owner capital would generally represent
        a small part of a recycling company’s capital structure.

       Earnings. While recycling companies distribute some cash to owners and employees (e.g., for
        bonuses), they tend to retain much of their internally-generated cash flow to fund future growth.
        This is a company’s most inexpensive source of private financing. However, its availability
        would vary depending on the company’s profitability and stage of development.

       Venture capital. A small number of companies with significant growth and profit potential were
        able to secure financing from venture capital firms. Venture firms tend to demand a significant
        share of equity in the companies that they fund (thus making it expensive) and invest in less than
        two percent of all companies that apply for financing (thus limiting its availability). As a result,


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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


        venture financing cannot be considered a prominent source of equity capital for most recycling
        companies.

       Angel Investors. Several RMDZ loan borrowers have obtained funds from Angel Investors, who
        are high net worth individuals that invest in small businesses but do not take an active role in the
        company.

       Government and charitable grants. While grants are not technically equity capital they serve the
        same financial function. Companies do not have to pay them back. Several recycling firms in the
        industry have able to secure this form of funding to finance development work on recycling
        products, processes and technologies. However, like venture capital, grants are a form of
        funding that is available to only a small percentage of the total applicant pool.

Debt capital

       Banks. As is true with small companies in general, banks are a principal provider of funds to
        recycling companies. Until recently, banks were fairly aggressive commercial lenders and made a
        number of loans to recycling firms. However, the recession-induced tightening of credit standards
        is likely to make bank loans harder for many recycling companies to secure. As the economy
        contracts, the probability of firms defaulting on loans increases, making banks more reluctant to
        offer credit. In addition, proposed cutbacks by the Bush Administration in the Small Business
        Association’s (SBA) 7(a) program and the reluctance of many small banks to use SBA guaranties
        may limit the future availability of SBA loans to recycling companies. A 7(a) loan is intended to
        provide capital for businesses that may not have enough collateral for a regular bank loan.
        Participating banks make the loans, but repayment is guaranteed up to 80 percent by the
        government.

       Real estate lenders. Commercial property is typically financed by banks, which generally obtain
        a Federal Small Business Loan Guarantee. Residential real estate loans are readily available from
        residential property lenders and brokers, in many cases subordinate loans can be up to 125
        percent of the property’s market value.

       Leasing and finance companies. Several companies employed lease financing through non-bank
        lenders to obtain business assets. Leasing is a form of secured financing in which the
        lender/lessor retains title to the property. Other recycling firms used non-bank lenders, including
        factoring companies, to finance receivables. Factors buy receivables for cash at a discount.
        Leasing and finance companies are an alternative source of financing for companies that have
        difficulty securing bank credit. However, because of the added risk they assume, non-bank
        lending and leasing companies generally charge higher interest rates than banks. Despite its high
        cost, funding from leasing and finance companies remains a major source of credit for recycling
        companies that cannot secure bank debt.

       Community development loan funds. Some recycling companies were able to secure below-
        market financing from non-profit loan funds that extend credit to companies that carry out
        activities consistent with the fund’s mission. Because they tend to rely on the limited funds of
        government agencies and foundations for capital, community development loan funds cannot be
        considered a sizeable funding source for recycling companies. In addition, many community
        development loan funds restrict their financing to companies that meet strictly defined mission-
        related investment criteria.




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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


     Local government loan funds. Selected recycling companies were also able to secure loans
      through programs operated by local governments. Although government loans tend to have low
      interest costs, they are typically limited to firms that meet strict location, job creation or other
      criteria and are often subject to the particulars of local budget and political processes.

     State loans and bonds. Recycling companies were able to secure taxable and tax-exempt
      financing through state programs. Because of federally-imposed volume caps, tax-exempt
      financing is not always available to companies who otherwise meet the qualifications for the
      issuance of such debt. In addition, issuance costs, including credit enhancement expenses, can
      make tax-exempt transactions prohibitively expensive for smaller businesses.




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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


Recycling and Reuse Firms’ Financing Needs

Because few recycling companies would qualify for external equity investment (and must use various
forms of debt to fund growth) the decisions of lenders, especially banks, determines whether they obtain
adequate access to outside financing.

Unlike venture capital investors who often concentrate their investments in certain industries or
technologies, banks and finance companies lend across industries to any business that meets their tests of
―creditworthiness.‖ Thus, whether loans are more or less available to recycling companies depends more
on their financial characteristics than their industry sector. To put it differently, if recycling companies
tend to have characteristics that increase lenders’ credit risk, recycling companies would, as a group, find
financing difficult to secure. If, however, these elements are removed or mitigated, financing availability
would improve.

The restaurant industry illustrates this phenomenon. Many lenders refuse to finance independent
restaurants, not because they serve food, because they have a relatively high failure rate. On the other
hand, franchise restaurants have a much lower failure rate, due to the management, financial and technical
support provided franchisees by franchisors. The lender’s credit risk has effectively been mitigated by the
franchisor, enabling the franchisee to secure financing more easily than the independent restaurant owner.

Assuming that the credit history and character of a borrower are acceptable, lenders have two concerns
when they consider financing a business.

3. Is there adequate cash flow? The operating cash flow of a business is a lender’s principal source of
   loan repayment. If the cash flow is not large or predictable enough to repay the loan, most lenders
   will refuse to extend credit.

4. Is there adequate collateral? Lenders recognize that historic cash flow may not materialize in the
   future. Thus, they look to the liquidation value of the borrower’s collateral as the secondary source of
   repayment. If things go wrong, the lender will take possession of the borrower’s property and sell it to
   recover any outstanding indebtedness. Banks generally finance equipment for no more than three to
   five years and only lend up to 65 percent of the cost, to ensure the loan balance reduces with the
   useful life of the equipment.

Looked at in terms of these two factors, recycling firms often have two characteristics that increase their
credit risk in the eyes of lenders.

3. Unpredictable cash flows. As is the case with early stage companies in any industry, newer recycling
   companies are too young to have established a history of positive cash flow. Because lenders tend to
   look at past performance (rather than future promise) these companies are considered high credit
   risks.

4. Special-purpose assets. Recycling companies often need real estate or equipment with few
   alternative uses or buyers (special-purpose assets). Because this property cannot easily be resold
   (without a substantial loss) lenders are reluctant to make loans secured by it.

As said earlier, the way to solve this problem is to identify strategies that can mitigate the associated
risk—not with recycling companies as such, but with companies that may have unpredictable cash flow
and collateral that is not easily sold. Put differently, any strategy that works for recycling companies
would work for any other company with similar characteristics—transportation companies, construction
companies, retailers, etc.


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        Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



       In fact, these two factors can be used to construct a credit matrix for firms regardless of industry. All of
       the firms in CIWMB’s market generally fall within these four cells.

       CREDIT MATRIX FOR FIRMS SEEKING FINANCING


                                                                Collateral



                              Adequate                                  Inadequate
               Adequate   Established company                           Established service or technology
                          representing low credit risk; can             firm with few hard assets;
Cash flow                 secure                                         needs subordinate debt product
                          conventional bank financing; most             that
                          attracted by low capital cost                 removes collateral risk from lender
               Inadequate Company seeking to acquire                    Start-up company with little
                          real property with good market value          operating
                          but                                           history; most concerned
                          weak income stream; needs equity or           about financing availability; needs
                          deferred payment.                             equity or deferred payment



       Annual Financing Needs

       Through discussions with the Board’s staff, MI/CAG determined that the approximate demand for
       investment of RMDZ eligible companies is at least $10 million annually. The following proposed initial
       leveraging options were designed to leverage the current $3.5 million loan pool that the RMDZ loan
       program has, to meet this $10 million need.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



OVERVIEW OF THE INITIAL LEVERAGING OPTIONS

Based on discussions with CIWMB and the research conducted above, MI/CAG developed the following
initial leveraging options. This section provides a basis for CIWMB’s evaluation of the leveraging
strategies for the RMDZ loan program. By leveraging, we mean the using funds from the RMDZ loan
program sub-account of CIWMB to generate more private investment, through loans or stock to
leveraging partners.

Framework

The strategies were evaluated using the following criteria:

     Financing capacity. Achieve the highest possible ratio between CIWMB capital resources and private
      investment.

     Financial stability. Provide a reliable source of funding sustainability for recycling businesses,
      considering the future decline of RMDZ loan program sub-account.. Program revenues—interest
      income, fees and the like—should cover program costs.

     Market responsiveness. Allow the RMDZ program to offer financial products that meet the diverse
      needs among recycling companies. The program ought to be able to help start-up companies with
      little collateral, as well as established firms seeking low-cost financing.

     Customer friendliness. Simplify and shorten the loan approval process. Some borrowers as well as
      administrators have complained that RMDZ loans involve large amounts of paperwork and a
      protracted approval process.

     Affordability. Structure loans and investments to ease repayment burdens on borrowers with interest
      costs as low as possible.

Leveraging strategies may address one, or all, of the following types of financing:

     Equity. Early-stage companies without a proven business model or operating history and established
      enterprises entering unproven lines of business often require infusions of risk-oriented permanent
      capital that do not carry fixed repayment obligations.

     Senior debt. Companies that need to finance assets and activities that produce reliable and predictable
      cash flows often employ loans that are repaid according to a fixed schedule and secured by business
      (and personal) collateral.

     Subordinate debt. Established companies acquiring new assets or entering new lines of business often
      employ subordinate debt both as a borrowing base for senior debt and to increase their return on
      equity. Subordinate debt can also be employed as part of venture financing structures.

The ability of recycling companies to secure any of these forms of financing is often inhibited by the
following risks and costs:




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




C. Risk

     Credit or portfolio risk. The possibility that loans will not be repaid according to their terms or that
      investments will prove worthless can make lenders and investors reluctant to finance certain deals.

     Rate risk. The danger that interest rates on short-term borrowings (especially deposits) will exceed the
      interest coupon on fixed rate loans makes certain loan structures unattractive for lenders.

     Liquidity or exit risk. The need to sell existing loans and investments in order to fund new loans or
      provide a return to investors can make lenders and investors unwilling to finance certain deals for
      which there is no secondary or investor market.

D. Cost

     Origination expenses. The high costs of identifying and pre-qualifying promising borrowers and
      business plans can make certain loans and investments economically unattractive.

     Underwriting and processing costs. Credit analysis, due diligence and transaction structuring
      expenses can make the economics of small or marginal loans and investments unattractive.

     Servicing and monitoring costs. Excessive oversight and management expenses can reduce the
      returns on loans and investments.

Strategies for reducing these risks and costs generally involved one or more of the following:

     New products. Loans and investments that are structured to assume risks that other lenders and
      investors refuse to bear can increase the availability of scarce forms of financing. For example,
      second mortgages make it easier for marginal borrowers to purchase property.

     New organizations. Organizations that specialize in a particular type of product, borrower segment or
      finance function can achieve the efficiencies and expertise needed to improve the economics
      associated with serving certain markets. For example, the emergence of specialty finance companies
      as competitors to banks has expanded the availability of commercial credit to mid-market companies.

     New technologies. New uses of information and computer technology can reduce the uncertainty and
      cost of loans and investments. For example, credit scoring allows the underwriting of certain loans to
      be automated.

     New strategies for managing risk. New insurance and credit enhancement techniques allow lenders
      and investors to reduce risks or remove unwanted risks from their balance sheets. This allows them to
      make capital and credit available to a wider group of borrowers. For example, CalCAP, a small
      business portfolio insurance program, makes loans more available to small, marginal firms by
      reducing bank credit risk.

     New sources and methods of funding. Access to new pools of private investment capital can broaden
      the financing capacity of lenders and investors. For example, securitization allows almost any
      financial asset to be sold in the capital markets allowing lenders to offer a wider array of products to
      borrowers.


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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Preliminary Recommendations

The chosen leveraging option may employ a combination of strategies. (For example, one option would
be to create a free-standing organization that uses an innovative funding method to make a unique type of
loan offering terms not generally available in the market). Based on initial discussions with CIWMB
staff, the market research reviewed above and consideration of the stated criteria, MI/CAG identified ten
potential leveraging options. Grouped according to their primary category of strategy, these options are:

New products
 Subordinate companion loans
 Deferred payment debt

New organizations
 Small business lending company specializing in the recycling industry
 Private equity company specializing in the recycling industry

New ways of managing risk
 Portfolio insurance
 Loan guarantees

New funding methods and sources
 Loan sale
 Tax-exempt financing
 Tax credit financing
 Equity equivalent investments


Following is a brief outline of each alternative:

1. COMPANION SUBORDINATE DEBT

       Similar to a second mortgage, a companion subordinate loan has rights to collateral that are
        inferior to the rights of more senior secured creditors.
       Many small businesses are undercapitalized, requiring 100 percent financing to purchase
        equipment and other business assets. ―Senior‖ lenders will rarely make a loan equaling the full
        amount of the assets’ value. Companion subordinate loans fill the gap between the amount
        required by the business and the amount of the loan provided by a senior lender. Because
        companion subordinate loans comprise a small percentage of the overall transaction, they can
        bear the interest rate needed to offer market-rate capital a competitive return without appreciably
        increasing the cost of borrowing.
       Companion subordinate loans can be used to finance expanding recycling companies that have
        difficulty securing bank loans due to inadequate capital or applicable collateral, e.g., those whose
        available collateral is a home.

2. DEFERRED PAYMENT NOTE

       Deferred payment loans are zero-coupon debt (like savings bonds). The borrower makes no
        interest or principal payments during the life of the loan, but at maturity, pays the original
        principal amount plus accrued interest.


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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


      The notes are ideal for relatively new companies that have not achieved positive cash flow and do
       not have the capacity to make immediate payments of principal and interest. While some
       companies are able to secure equity financing from venture capital firms and ―angel‖ investors,
       many are unable or unwilling to use equity from external sources to finance business growth. A
       loan on which no payment is due during the term may be a reasonable alternative, assuming the
       borrower has contracts and/or purchase orders to document the future ability to repay.
      Deferred payment loans can be used to finance early-stage recycling companies that need equity-
       type financing but do not have access to venture capital or other private equity.
      The loans address the concern of businesses that want access to full financing before interest
       payments are due.

3. SMALL BUSINESS LENDING COMPANY

      The company is structured as a for-profit or non-profit non-depository lender.
      A commercial finance company employs borrowed funds secured from banks or the bond market
       to make loans to businesses.
      State and federal loan guarantees reduce cost of finance companies to raise funds.
      Examples:
           o Business and Industrial Development Companies (BIDCOs)
           o Companies authorized to make SBA-guaranteed loans (Banks)
           o Small Business Financial Development Companies (SBFDCs)
      CIWMB’s expertise would reduce transaction costs of double-bottom line and return-driven
       investors.
      A partnership with a finance company increases the pool of eligible recycling companies and loan
       pool simultaneously.
      Zone Administrators expressed interest in findings ways of increasing pool of RMDZ eligible
       companies.

4. PRIVATE EQUITY COMPANY

      For-profit companies that provide risk capital to companies with the expectation of returns from
       capital appreciation.
      Three types of private equity firms:
           o Yield-Driven (e.g. Venture Capital): These firms generally operate as managers of profit-
                driven institutional money. They invest the funds in growth companies and ―exit‖ or sell
                their investment through an IPO, sale to another firm, or recapitalization.
           o Double-Bottom-Line: Investors in this type of private equity look for both a positive
                social and financial return. Most are willing to accept slightly lower than market financial
                returns.
           o Small Business Investment Company: Special type of double-bottom-line private equity
                firm that leverages its capital with loans from the Small Business Administration.
      Meets need of young and growing recycling companies of equity in addition to – or instead of –
       debt for rapid growth.
      Eliminates burdensome collateral requirements of traditional debt instruments.

5. PORTFOLIO INSURANCE

      Similar to the CalCAP program, portfolio insurance provides loss protection for an entire pool of
       loans rather than on a loan-by-loan basis.




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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


      The lender and borrower contribute a specified percentage of each loan to a cash reserve fund.
       This amount may be matched by the program sponsor (often a public entity). A lender’s cash
       reserve account would cover any defaults in its portfolio of loans.
      Portfolio insurance works best for lenders who make a relatively large volume of loans.
      Pooling a large number of loans spreads risk across all loans, and reduces risk of any individual
       loan.
      The reduced risk to lenders enables private and public lenders to increase loan volume.
      The increased loan pool gives reassurance to Zone Administrators of the continuity of the
       program

6. LOAN GUARANTY PROGRAM

      A loan guaranty allows a lender to recover a specified percentage of the outstanding interest and
       principal on individual loans covered by the guaranty.
      Like an insurance program, loan guarantors limit lenders’ risk to a certain percentage of loan
       value in the case of a borrower’s default. Typically, guarantors set aside funds equaling a
       specified percentage of each guaranty. Funds set aside in this fashion are then used to pay
       guaranty obligations on defaulted loans.
      Loan guarantees could be used to induce reluctant banks and other private lenders to make loans
       to recycling companies.
      The increased loan pool gives reassurance to Zone Administrators of the continuity of the
       program
      A sound reserve policy may foster secondary market interest in guarantee portion of loans.

7. TAX-EXEMPT FINANCING

      Tax-exempt financing generally consists of notes or bonds on which interest payments are free
       from federal and (usually) state income tax.
      A local or state authority issues the debt instruments on behalf of qualifying businesses that use
       the proceeds for eligible purposes, typically the purchase of hard assets. Owing to favorable tax
       treatment, businesses that use tax-exempt debt can realize substantial interest savings.
      Tax-exempt financing can reduce the cost of borrowing for recycling companies that need low-
       cost financing in order to acquire equipment and fixed assets.
      The companies surveyed expressed need for low-cost financing of equipment and fixed assets.

8. NEW MARKETS TAX CREDIT

      The New Markets Tax Credit is a federal incentive program under which taxpayers are allowed to
       reduce their tax payments by 39 percent of the amount invested in companies that make business
       loans and investments in low-income areas.
      For each dollar invested in a qualifying ―community development entity‖ (CDE), investors are
       entitled to reduce their federal tax payments by an average of 5.57 percent annually for seven
       years. A CDE is a for-profit organization that is in the business of making business loans and
       investments in low-income areas. Because the NMTC allows taxpayers to use money they would
       otherwise pay in taxes to finance an investment in a CDE, capital for low-income area businesses
       should become cheaper and more available.
      A company formed by CIWMB to provide loans and investments to recycling companies would
       qualify for the NMTC if 85 percent of the companies financed were located in low-income
       distressed urban and rural areas. A CDE could make both loans and equity investments in such
       companies.



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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


      Eligible recycling companies in low-moderate income areas would be candidates for this loan
       program, increasing the size of the pool of available funds.

9. EQUITY EQUIVALENT INVESTMENTS (EQ2)

      Debt with an interest rate significantly below-market supported by charitable organizations
       through ―program related investments.‖
      Typically structured as unsecured debt with fairly long maturities (in order to minimize the size
       of periodic principal payments). May require repayment only from the net cash flows of the
       borrower.
      The availability of long-term, inexpensive debt would increase the capacity of CIWMB to offer
       low-interest-rate financing to rate-sensitive borrowers. CIWMB (or an affiliated financial
       company) could also use this source of capital to provide risk financing to early-stage recycling
       companies.

10. LOAN SALE

      Sale of whole loans or securities backed by loans (securitization) to investors.
      Lender sells single loans or a group of loans in exchange for cash, or notes or bonds that are sold
       for cash and uses the cash to make new loans. Depending upon the interest rate and credit quality
       of the loans sold, such transactions may or may not involve a discount.
      High level of flexibility, with record of success in other non-traditional industries.
      Useful for recycling industry that includes businesses with unproven technologies.
      Provides potential for increased level of both equity financing for early stage companies, and
       below-market interest rate financing for mature companies.




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 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


The following grid provides a relative (1) to (5) score of each of the ten alternatives against five criteria:

EVALUTATION OF INITIAL LEVERAGING STRATEGIES
                  Financing    Financial        Market                                    Customer           Affordability     TOTAL
                   Capacity     Stability   Responsiveness                               Friendliness
Subordinate            3             4              4                                        4                      3           18.0
Loans
Deferred               3.5           3              4                                        3                      5           18.5
Payment Loans
Small Business         4             4              3.5                                      4                      3.5         19.0
Lending Co.
Private Equity         3             4              3                                        4                      5           19.0
Co.
Portfolio              5             4              1                                        4                      3           17.0
Insurance
Loan Guaranty          4             3              3                                        4                      3           17.0
Tax-exempt             4             3              2.5                                      2.5
Financing
New Markets            5             5              2.5                                      3                      4           19.5
Tax Credit
EQ2/PRI                3             2              4                                        5                      4           18.0
Loan Sale              5             4.5            3                                        3.5                    3.5         19.5
Key: 5=Exceptional, 4=Very Good, 3= Good, 2= Fair, 1= Poor

MI/CAG reviewed these options with CIWMB staff. Some were dropped because of requirements that
would require new legislation or because they were determined to be suboptimal based upon the above
criteria. The remaining options were combined into four mechanisms, and a mini-business plan created
for each. Each of these mechanisms uses innovative financial technologies to leverage up CIWMB’s
annual contribution of $3.5 million to provide at least $10 million in lending capacity per year. Each
mechanism utilizes three different financial products, catering to the particular needs of the three stages of
borrowers: early, expansion and established companies.



                                                            Mechanisms


                                           Equity
  New Markets Tax Credit                                                 Loan Guaranty                    Loan Sale
                                   Equivalent Investments
                                                             Sources
  Community Development
                                           CDFIs                            CTTCA                   Securitization Investors
        Entities




                                                             Products


                       Subordinate Loans           Deferred Payment Loans           Below-Market Loans




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



OVERVIEW OF MINI BUSINESS PLANS

Introduction

Assuming CIWMB has an available pool of capital of $3.5 million annually, the following plans assume
that the full amount is applied to each strategy to leverage this amount to satisfy the estimated demand of
$10 million. Nonetheless, the plans are structured in such a matter that two or more strategies can be
employed simultaneously with similar results. The full mini business plans are presented in Appendices
One, Two, Three, and Four. The following section provides information on the borrowers and loan
products that are common to the four plans, followed by summaries of each strategy (see Table F, page 49
for a comparison matrix):

     New Markets Tax Credit Strategy
     Loan Guaranty Strategy
     Loan Sale Strategy
     Equity Equivalent/Program-Related Investment Strategy

Borrowers

Each of the plans is designed to meet the financing needs of three types of recycling companies that make
up the RMDZ market.

     Established recycling firms. Approximately 50 percent of borrowers are companies that have
      sufficient operating and earnings history to secure credit from conventional sources. These low-risk
      companies would be more concerned with the cost of capital than with access to capital.

     Expansion-stage companies. Approximately 30 percent of borrowers are companies that have
      survived their formative years and are now seeking to grow. However, these companies lack the
      earnings history, capital or collateral needed to support the full amount of funding needed to finance
      expansion.

     Early-stage companies. The remaining 20 percent of borrowers are companies that are essentially
      start-up businesses. Because they are not yet producing positive cash flows, these high-risk
      companies require some form of ―equity-like‖ financing to fund continued growth.

Products

The following three products are designed to meet the distinct needs of each these borrower segments:

     Below-market loans. Established recycling companies seeking expansion financing would be eligible
      for medium and long-term fixed-asset loans priced, on average, 200 basis points below the market
      rate for such financing. Underwriting standards for these loans including loan-to-value and debt
      service coverage ratios would be only slightly more liberal than those employed by commercial
      lenders.

     Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure senior
      financing needed for fixed assets or working capital would be candidates for subordinate debt. These
      loans would typically be structured as 25-40 percent junior participations in senior, secured loans
      extended by banks or other commercial lenders. Because of the risk associated with junior-lien


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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


      lending, the junior interest in each transaction would be priced at 300 to 500 basis points above prime.
      In addition, as part of each transaction, a loan loss reserve contribution, equaling four-to-eight percent
      of the total financing, would be funded from loan proceeds.

     Deferred payment loans. Early-stage companies, including start-up firms that possess neither the cash
      flow nor collateral to qualify for debt financing, nor the ―upside‖ potential to qualify for venture or
      angel financing, would be candidates for deferred payment loans. The deferred payment loan would
      be modeled on the structure employed by SBA for investments in New Markets Venture Capital
      Companies. That is, each loan would involve a ―discount period‖ – two to three years during which
      no principal or interest payments would be required – followed by an amortization period. Upon
      closing, the borrower would receive the full amount of the loan less the present value of interest for
      the discount period. At the end of the discount period, the borrower would repay the loan in regular
      installments of principal and interest over a period of up to seven years. Because of the risk that
      borrowers would be unable to repay loans during the amortization period, deferred payment loans
      would priced at 600 basis points above prime. In addition, as with subordinate loans, a cash reserve
      account would be funded as part of each transaction.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


New Markets Tax Credit Strategy

The New Markets Tax Credit (NMTC) is a new federal incentive program under which taxpayers are
allowed to reduce their federal income tax payments by 39 percent of the amount invested in a qualifying
―community development entity‖ (CDE) – a for-profit organization that makes business loans and
investments in low-income areas. For each dollar invested in the CDE, investors are entitled to reduce
their federal tax payments by an average of 5.57 percent annually for seven years.

To meet a minimum demand of $10 million in recycling loans annually for five years, the Board would
employ an existing CDE as the vehicle for raising $50 million in NMTC financing. The financing plan
follows:

     The California Integrated Waste Management Board (―CIWMB‖ or the ―Board) and a selected
      number of banks or other financial companies would agree to invest a total of $40 million in the CDE
      for the purpose of financing businesses located in targeted Recycling Market Development Zones or
      other low-income areas.

      1. CIWMB would invest $10 million over three years in the CDE in the form of a long-term, low-
         interest subordinate loan. The loan would bear an interest rate of 2.75 percent (200 basis points
         below prime) and would be repaid solely from the earnings of the CDE.

      2. Banks and other taxable investors would invest $30 million in the form of equity in exchange for
         New Markets Tax Credit allocations totaling $11.7 million over seven years. The banks would
         also be entitled to all profits after interest and principal payments on the CIWMB loan.

     With $40 million in equity capital and subordinate debt financing, the CDE could obtain a $10
      million credit facility secured by the CDE’s $50 million loan portfolio and associated reserves. The
      credit facility would be priced at no higher than prime.

Financing Sources:

The following investors have either announced their intention to purchase NMTCs or have experience in
purchasing the residential equivalent of the NMTC, the Low-Income Housing Tax Credit. While they do
not specifically focus on recycling companies, the entities they lend to share similar risk profiles to
CIWMB’s target borrowers.

     Enterprise Social Investment Corporation
     Bank of America
     Bear Stearns

Leverage

Leverage is calculated as the ratio between CIWMB’s total capital contribution and loan originations.
Under both base-case and best case scenarios, total leverage is approximately 5:1. That is, CIWMB’s $10
million capital contribution would produce $50 million in total recycling loans over a 5-year period.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


Return on Investment

Return on investment is defined as the increase in the CDE’s net worth in relationship to CIWMB’s
original investment. Under the base-case scenario, return on investment is 32.98 percent. Under the best-
case scenario, it is 33.30 percent

Board’s Return of Investment

Because of the high return on investment achieved under this model, the Board would receive the return
of its $10 million investment through the retirement of its loan to the CDE. The Board could recover its
entire investment as early as Year 4 through an early retirement of its loan to the CDE.

Analysis

As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis below considers the proposed leveraging strategy in light of five criteria
discussed as important in a successful CIWMB loan leveraging program:

     Simplicity. Because of the inherent complexities associated with using a new tax incentive to raise
      capital, New Markets Tax Credit transactions are likely to be more complicated than other
      alternatives. For example, because of its previous experience, CIWMB may well find loan sales
      simpler and easier to execute.

     Practicality. Because the NMTC is new, investor response to NMTC-based financing transactions
      cannot be known. For this reason, NMTC-based financing must also be considered more speculative
      than other alternatives.

     Sustainability. NMTC financing would provide substantial sums of equity for the CDE, thereby
      reducing the size of necessary leverage and decreasing the risk that interest income would be
      insufficient to cover fixed interest costs and other operating expenses. For example if CIWMB
      financed its program with greater amounts of debt, in lieu of equity generating NMTCs for the
      investors, the interest costs would be much higher and the income required to cover them higher. For
      this reason, a lending program organized around the NMTC has a higher probability of achieving
      long-term financial viability than other leveraging options discussed.

     Affordability. As noted, the substantial amounts of equity that can be raised with the NMTC should
      reduce need for interest income to pay interest expense. This would allow borrowers to pay lower
      interest rates than if debt (especially market-rate debt) were the principal source of loan financing.

     Implementability. Assuming success in securing an NMTC allocation, there is at least a reasonable
      likelihood that successful transactions involving the exchange of the NMTC for equity can be
      structured. The need of both small and large banks for CRA ―investment credit,‖ as well as the
      financial success of Low Income Housing Tax Credit syndications, should produce a high degree of
      interest in NMTC financings.




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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




                                             Investors




                                                   Invests $30 million in
                                                   exchange for $11.7 million
                                                   (39%) NMTC




                 Makes $10 million market-                         Makes $10 million loan
                 rate loan                                         term loan (funded over 3
                                                                   years).
     Lender                                    CDE                                            Board




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Loan Guaranty Strategy

The Loan Guaranty Program (LGP) would be a partnership between the Board and one or more of
California’s eleven California’s Regional Financial Development Corporations (FDCs). FDCs are
nonprofit companies that employ a dedicated reserve fund of the California Technology, Trade and
Commerce Agency to provide loan guaranties of up to 90 percent on small business bank loans of up to
$350,000. Under LGP:

The state Small Business Loan Guarantee Program (LGP) promotes local economic development by
providing guarantees of principal and interest on small business loans made by participating private
financial institutions. FDC’s market the program, coordinate the packaging of the loan and loan
guarantee applications and issue loan guarantees. Appropriations to a Small Business Expansion Fund
(SBEF) serve as loan-loss reserves and ―back‖ FDC guaranties. An FDC can issue guaranties equaling
four times its allocable share of these reserves. The five-year default rate on loan guarantees is 1.55%.

As of June 2001, the SBEF possessed $31.7 million in reserves, giving it the capacity to support up to
$127 million of bank loans. Of this total $8.3 million was available to support up to $33.3 million in new
loan guarantees

         CIWMB would enter into a master contract with the California Technology, Trade and
          Commerce Agency to provide funds to the Loan Guarantee Trust Fund in exchange for an
          agreement by participating Financial Development Corporations to issue loan guarantees to
          recycling businesses.
         Under the risk-sharing agreement, CIWMB would pay 80 percent of losses exceeding $350,000.
          At present, FDCs are limited to guaranties on loans of no greater than $350,000. Thus, LGP
          would be structured so that the FDCs would pay losses incurred on the first $350,000 of each
          guaranteed loan with CIWMB paying losses on amounts over $350,000. The following table
          compares how much CIWMB and the FDC would pay for losses incurred on three different loan
          guaranty agreements, each involving an 80 percent guaranty.

               Loan Amount                $350,000      $700,000      $1,000,000
               Total guaranty (80%)       $280,000      $560,000      $ 800,000
               FDC share                  $280,000      $280,000       $ 280,000
               CIWMB share                  -0-         $280,000       $ 520,000
               Total exposure             $280,000      $560,000       $ 800,000

For the following reasons, LGP would enable both CIWMB and participating FDCs to achieve greater
leverage with their limited guaranty reserve funds without increasing the guaranteed lender’s exposure to
loss.

     CIWMB would share risk on guaranteed loans with FDCs. Thus, it would be able to achieve higher
      leverage than would be the case were it responsible for paying 100 percent of loan losses. For
      example, assuming that CIWMB were to set aside 25 percent of its exposure for each loan guaranty
      (the amount that FDCs are required to hold in reserve), and that the average guaranty contract covers
      80 percent of the loan balance, each $1 in reserves could achieve leverage ranging from about 8:1 to
      40:1 (or more) depending on the average size of loans guaranteed


                     CALCULATION OF LEVERAGE RATIO
                      Average loan size  $400,000 $1,000,000


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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


                      Guaranty exposure            $320,000     $   800,000
                      FDC exposure                 $280,000     $   280,000
                      CIWMB exposure               $ 40,000     $   520,000
                      CIWMB reserves (25%)         $ 10,000     $   130,000
                      Leverage                      40:1            7.69:1


     By paying losses on recycling loans above $350,000, CIWMB would help FDCs to achieve higher
      leverage. Banks would be able to secure guaranties for loans above $350,000 (at least to recycling
      companies), thus minimizing their credit risk on larger loans.

Subsidies

Approximately half of the recycling loans made under the guaranty program would be below-market
loans to established companies. Because lenders would be reluctant to subsidize borrowers, CIWMB
would create a subsidy fund to pay lenders an amount that would produce market-rate yields on
guaranteed loans. Based on expected loan volume, average loan size and the probable spread between the
below-market rate and the bank’s normal commercial rate, an annual subsidy contribution of
approximately $650,000 (13 percent of $5 million) should be sufficient to provide lenders the yields they
require.

Financing Sources

Currently there are 11 non-profit Financial Development Corporations that administer and issue state loan
guarantees. Following is a list of three FDCs that are possible candidates for the proposed co-guaranty
program. Under the current state-sponsored small business loan guaranty program, FDCs provide risk
protection for bank loans to companies that do not meet normal standards of creditworthiness. The
maximum guaranty is 80 percent on loans of up to $350,000. The typical FDC has guaranty authority of
about $15-$20 million backed by approximately $4 million in reserves.

     Nor-Cal Financial Development Corporation, Pleasanton, CA
     Pacific Coast Regional Financial Development Corporation, Los Angeles, CA,
     California Southern Financial Development Corporation, San Diego, CA

Following is a list of additional FDCs.

     SAFE-BIDCO, Santa Rosa, Ca.
     California Capital Financial Development Corporation, Sacramento, Ca.
     California Coastal Rural Development Corporation, Salinas, Ca. (with branch offices in Monterey,
      Santa Barbara, and Santa Maria)
     Valley Small Business Development Corporation, Fresno, Ca.
     Hancock Urban Development Corporation, Los Angeles, Ca.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


Leverage

Leverage is calculated as the ratio between total loan originations and loan guaranty payments. Under the
base-case scenario, LGP achieves leverage of 11.96:1. Under the best case scenario, leverage is 18.68:1.

Return on Investment

Return on Investment is calculated as the growth rate in reserves over the five-year period of LGP. Under
the base-case scenario, the rate of return is 10.23 percent; under the best case, it is 14.37 percent.

Board Return of Investment

Board funds would be deposited in the Loan Guarantee Trust Fund. Cash or insurance reserves funded as
part of each transaction would enable the Board to recover all or part of its initial contribution to LGP
over time. Funds encumbered to support issued to support loan guarantees would become available upon
repayment on the underlying loans.

Analysis

As a source of financing for the LGP has both advantages and disadvantages.

     Simplicity. Because the loan-guaranty plan requires CIWMB to raise no outside capital, it would be
      relatively simple to implement. The fact that participating FDCs and commercial banks would carry
      out loan origination, underwriting and loan servicing functions would further reduce the plan’s
      complexity.

     Practicality. The CEOs of two regional corporations have expressed great interest in serving as
      partners in the loan-guaranty program attesting to the practicality of the plan. Furthermore, the $8.2
      million in financing required by the plan is well within CIWMB’s three-year $10.5 million budget.
      However, because credit decisions would be reserved for commercial banks and other participating
      lenders the extent to which the guaranty program would produce increased lending to recycling loans
      is uncertain.

     Sustainability. For five years, program reserves would be adequate to sustain cumulative losses
      exceeding 16 percent on $50 million in loans. This loss rate is almost three times the loss rate for
      SBA and CalCAP loans and 10 times the historic default rate on FDC loans. In addition, the bank
      may obtain loan default ―insurance‖ on each loan through the Treasurer’s California Capital Access
      Program, a program in which the RMDZ loan program participates. In addition, reserve
      ―insurance‖ or loan-loss contributions made in connection with each loan and approximately
      $2.3 million in additional CIWMB reserves – the difference between its available 3-year
      budget of $10.5 million and the $8.2 called for in the mini-business plan—should make the
      program viable beyond the five-year horizon.

     Affordability. Annual subsidy contributions would ensure the affordability of below-market loans to
      established borrowers. Deferred payment and subordinate loan borrowers would generally be rate-
      insensitive firms and would generally consider the financing affordable as long as debt payments can
      be serviced with relative ease from available cash flows.

     Implementability. The existence of willing guaranty partners (the regional FDCs) to share risks and
      manage the LGP Program should make it relatively simple to institute and operate. However, two


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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


  possible problems could create implementation difficulties. First, recruiting banks to make loans that
  employ relatively novel structures could prove more time-consuming than expected. Second, if
  regulatory approval is required for FDCs to participate in guaranties above $350,000, the completion
  of risk-sharing agreements could prove a relatively protracted process.

                                                               3. Provides up to $12
                                                                   million in loans
                                            Lenders                                    Borrowers




                                                 2. Provides up to $12
                                                 million in guaranties




             1. Contributes $3 million
                                         Small Business
  Board
                                         Expansion Fund




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


LOAN SALE STRATEGY

Under the Recycling Assets Sales Program (RASP), $3 million in Board funds would be employed to
make $10 million annually in recycling loans that would be sold to investors. The proceeds from the
sales, which would be made on a quarterly basis under a ―forward purchase commitment,‖ would then be
used to make new loans. The proposed $2.5 million in capital could come from either an individual or
bulk sale of the Board’s existing loan portfolio or from appropriated funds. In an individual sale
transaction, an investor would purchase, for cash or a combination of cash and notes, selected loans from
an existing portfolio of loans. In a bulk sale transaction, the investor would purchase the entire portfolio
of existing loans, once again for cash or a combination of cash and notes. The price paid by the investor
would depend mainly on the default and delinquency history and interest rate of the loans being
purchased.

By contrast, under a ―forward purchase‖ program, loans would be made by the lender and, under a pre-
existing agreement with the investor, immediately sold. The forward purchase or ―flow‖ program would
be structured in the following manner:

     The Board, in cooperation with the investor, would establish underwriting policies for each type of
      recycling loan that would potentially be sold. These policies would be employed by CIWMB’s staff,
      and ―participating lenders‖ to originate loans to eligible recycling companies.

     Loans would be funded either by the Board or by participating lenders. ―Participating lenders‖ would
      immediately be able to sell their loans to the Board under RASP.

     The Board would then sell the loans to secondary market investors, such as the Community
      Reinvestment Fund, and would use the cash to make more loans. Interest rates on loans made under
      RASP would be established so that discounts on the sale of below-market loans would be offset by
      premiums earned on the sale of market-rate loans. For example, a 5% premium on a market-rate loan
      would compensate for a 5% discount on a below-market loan.

Financing Sources

Following is a list of three organizations that are possible purchasers of loans under RASP:

     Community Reinvestment Fund (CRF). CRF is a non-profit secondary market for economic
      development loans that has provided $200 million to lenders in 22 states since 1989.

     Bayview Financial. Bayview is a private investment banking firm owned by Allstate Insurance that
      purchases and securitizes both mortgage and commercial loans from a wide variety of lenders. The
      company specializes in loans to borrowers with imperfect credit.

     CBA Receivables. CBA buys and securitizes loans from smaller financial companies that originate
      loans on a scale that fails to attract larger investment banking firms

Leverage

Leverage is calculated as the ratio of loan originations to original CIWMB capital. Under both scenarios
leverage is 15.76:1.




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    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


Return on Investment

Return on Investment is calculated as cumulative RASP earnings as a percentage of CIWMB’s original
investment. Under the base-case scenario, return on investment is 0.009 percent. Under the best case
scenario, return on investment is 15.3 percent.

Return of Investment

Given the relatively high return on investment, the Board would be able to recover its $3 million
investment from annual cash distributions.

Analysis

Loan sale strategies have both advantages and disadvantages.

     Simplicity. Because RASP requires neither outside capital nor a new entity, it should be the simplest
      of the four leveraging strategies to implement. The fact that participating banks can carry out a
      substantial amount of out loan origination and loan servicing would further reduce the plan’s
      complexity.

     Practicality. The Board has already completed one successful bulk loan sale, thus proving the
      feasibility of loan sales as a technique for leveraging capital. Increased investor interest in buying
      economic development loans increases the likelihood of securing forward purchase commitments on
      attractive terms.

     Sustainability. RASP can be structured so that discounts from the sale of below-market loans are
      offset by premiums received from the sale of market-rate loans. As the attached financial analysis
      shows, this approach allows the Program to operate on a self-sustaining basis.

     Affordability. Subordinate and deferred payment loans would be structured so that their higher
      interest rates are more than offset by extended and deferred amortization features. The subsidy
      implicit in the interest rate for below-market loans would ensure their affordability to established
      borrowers.

     Implementability. The increased willingness of investors to purchase economic development loans
      should make both bulk and flow sales relatively simple to execute.




                                                   39
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


                                                    2. Gives Board up to $3
                                                        million in notes




                            RASP                                                 Borrowers

                                                     1. Makes up to $3 million
                                                        in loans per quarter




   4. Gives up $3 million          3. Sells up to $3 million
 in cash for relending             in loans per quarter




                            Investor




                                               40
    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


Equity Equivalent/Program-Related Investment Strategy

In order to increase investment in poor communities, foundations, banks and insurance companies
provide below-market capital – in the form of Equity Equivalent Investments (EQ2) or Program-Related
Investments (PRIs) – to community development financial institutions (CDFIs). CDFIs are financial
services organizations that make loans and investments primarily in targeted geographic areas.

An EQ2 is a long-term, low-interest loan made by commercial banks that is typically structured with a
rolling ―maturity‖ entailing automatic annual extensions of the loan as long as the borrower carries out its
community development purposes. Because interest payments are made solely from the net cash flows of
the borrower, EQ2 financing serves as a form of quasi-equity for CDFIs. PRIs are low-interest loans that
foundations use as an alternative to grants to finance charitable activities. As with EQ2s, they are
typically repayable only from the net cash flows of the borrower.

To take advantage of these unique sources of capital, the Board would form a financing partnership with
an established non-profit ―CDFI‖ that would agree to use funds obtained through the plan described
below for the purpose of lending $10 million annually to eligible recycling companies. The financing plan
would be as follows:

     CIWMB would agree to contribute $10 million to the CDFI over a three-year period in the form of a
      recoverable grant or long-term subordinate loan. In either event, CIWMB would be entitled to recover
      its capital contribution only after EQ2 and PRIs had been repaid.

     Commercial banks, financial services companies and foundations would provide the CDFI $10
      million in EQ2 investments and PRIs structured as long-term, low-interest subordinate loans. The
      loans would bear an interest rate of 2.75 percent (200 basis points below prime) and would be repaid
      solely from the earnings of the RFP.

     Finally, a consortium of commercial banks would provide $30 million in credit secured by the assets
      of the RFP. The credit line would be priced at prime plus a small spread of 100 basis points.

Financing Sources

Following are the names of three organizations that have made EQ2 or PRI investments in the past and
may find the idea of helping a CDFI expand its lending program to recycling companies intriguing.

     Ford Foundation. With $14.5 billion in assets, the Ford Foundation is the largest private foundation
      in America and has allocated $180 million for program-related investment activity.

     Citibank. The nation’s largest bank with over $1 trillion assets, Citibank has a commitment to lend
      and invest $115 billion in low and moderate income communities over a 10-year period. It is one of
      the pioneers in the use of EQ2 investments to finance community development finance institutions

     F.B. Heron Foundation. The F.B. Heron Foundation is a $300 million charitable organization with an
      exclusive focus on community development. It has the stated aim of investing its entire corpus in
      community development assets.

Leverage

Leverage, defined as the ratio between CIWMB’s capital contribution and total financing generated,
would be 5:1 under both best-case and base-case scenarios.


                                                 41
    Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002



Return on Investment

Return on investment is defined as the 5-year rate of appreciation in the net worth or fund balance of the
RMDZ Loan program over the present value of CIWMB’s capital contributions. For the base-case
scenario, the rate of return is 0.57 percent. Under the best-case scenario, the rate of return is 12.5 percent.

Return of Investment

At maturity, the Board’s loan or recoverable grant would be repaid from the capital and earnings of the
CDFI.

Analysis

As a source of financing for the RFP, EQ2 and PRI financing have both advantages and disadvantages.
The analysis below considers the proposed leveraging strategy in light of five criteria.

     Simplicity. PRIs and EQ2 financing have been employed to fund a number of CDFI lending
      programs. As a result, reasonably standard structures and documents exist and can be employed to
      finance the RFP.

     Practicality. The total pool of available PRI and EQ2 financing is relatively small and competition for
      it correspondingly stiff. Thus, CIWMB may find it difficult to raise as much as $10 million in such
      financing for the RFP. However, the fact that the RFP should increase the participating CDFI’s
      viability (by increasing its income and enabling it to spread costs over a larger loan portfolio) as well
      as aid the growth of recycling companies should increase its attractiveness to investors.

     Sustainability. Low-cost EQ2 and PRI financing, combined with CIWMB’s capital contribution,
      should yield a blended cost of financing that is substantially less than the average interest rate on the
      RFP’s recycling loans. In addition, the insurance features built into the RFP’s loans should minimize
      the need to use interest spread to finance loan losses. As a result, the Program should be able to
      finance its operating costs entirely from revenues without the need for additional infusions from
      CIWMB.

     Affordability. Once again, the Program’s low cost of funds should reduce the amount of interest
      income needed to pay interest expense. This would allow borrowers to pay lower interest rates than if
      market-rate debt were the principal source of loan financing.

     Implementability. Because institutions tend to limit ―social investments‖ to certified CDFIs,
      CIWMB’s success in raising below-market capital for the RFP would depend, to a large degree, on its
      partner. Recruiting, as program manager – and borrower – a well-regarded and well-known CDFI
      would substantially increase the likelihood of success in raising funds for the program.




                                                   42
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002




                                             Borrower




                                                  Makes up to $50 million in
                                                  recycling loans




                                                                                           PRI/EQ2
     Board                                    CDFI
                                                                                           Investor
                 Provides $10 million loan
                                                                     Invests $10 million
                 or recoverable grant




                                                  Provides $30 million credit
                                                  line




                                              Bank




                                                43
       Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


TABLE A
CALIFORNIA'S SHARE OF RECYCLING ECONOMIC ACTIVITY

US SUMMARY OF ESTIMATES OF DIRECT ECONOMIC ACTIVITY
                                                    Industry Sector
                        Recycling         Recycling        Recycling        Reuse and
                        Collection        Processing       Manufacturing    Remanufacturing Industry Total
Establishments                      9,247           12,051            8,047            26,716      56,061
Employment                         32,010          160,865          759,746           169,183   1,121,804
Annual Payroll ($000s)            956,875        3,826,360       29,181,749         2,747,498  36,712,482
Revenue ($000s)                 1,974,516       41,753,902      178,390,423        14,182,531 236,301,372


CALIFORNIA SUMMARY OF ESTIMATES OF DIRECT ECONOMIC ACTIVITY
                                                    Industry Sector
                        Recycling         Recycling        Recycling         Reuse and
                        Collection        Processing       Manufacturing     Remanufacturing Industry Total
Establishments                        521            1,209               795             2,817       5,342
Employment                          5,000           18,208            39,448            21,588      84,244
Annual Payroll ($000s)            173,000          440,999         1,278,568           357,352   2,249,919
Revenue ($000s)                   344,005        5,060,323         6,889,668         1,888,178  14,182,174


CALIFORNIA PERCENTAGES OF TOTAL US ECONOMIC ACTIVITY
                                                 Industry Sector
                       Recycling       Recycling        Recycling       Reuse and
                       Collection      Processing       Manufacturing   Remanufacturing Industry Total
Establishments                      6%              10%             10%              11%          10%
Employment                         16%              11%              5%              13%           8%
Annual Payroll                     18%              12%              4%              13%           6%
Revenue                            17%              12%              4%              13%           6%


SOURCE: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK.




                                                    44
      Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


TABLE B
RECYCLING INDUSTRY DEFINITIONS
INDUSTRY                     SUB-INDUSTRY                                        DEFINITION




Recycling Collection         Government Staffed Collection                    Recyclables collection using government employees.
Recycling Collection         Private Staffed Collection                       Private sector collection of recyclables, including contract
                                                                              collection on behalf of municipalities.
Recycling Processing         Compost and Miscellaneous Organic Producers      Produce compost, mulch, bark, or bedding from yard and
                                                                              wood waste, biosolids, or other organic, also includes
                                                                              vermiculture.
Recycling Processing         Materials Recovery Facilities (MRFs)             Process commingled or recovered materials, usually from
                                                                              curbside/drop-off collection or recyclables separated from
                                                                              solid waste.
Recycling Processing         Recyclable Material Wholesalers                  Paper stock dealers, scrap metal processors, and other
                                                                              establishments that sort, remove contaminants, and densify
                                                                              recovered materials and brokers of recovered materials.
                                                                              This category excludes textiles.
Recycling Processing         Textile Recycling                                Textile recycling businesses.
Recycling Manufacturing      Glass Container Manufacturing Plants             Produce finished glass containers.
Recycling Manufacturing      Glass Product Producers (other recycled uses)    Produce glass products other than containers.
Recycling Manufacturing      Nonferrous Secondary Smelting and Refining Mills Recycling and alloying of nonferrous metals, primary
                                                                              products include billets, ingots, and other basic shapes.
Recycling Manufacturing      Nonferrous Product Producers                     Produce nonferrous products through extrusion, rolling, or
                                                                              drawing processes.
Recycling Manufacturing      Nonferrous Foundries                             Produce castings from nonferrous metals.
Recycling Manufacturing      Paper, Paperboard, and Deinked Market Pulp Mills Produce paper and paperboard products from recovered
                                                                              paper or market pulp and/or deink recovered paper and sell
                                                                              pulp.
Recycling Manufacturing      Paper-based Product Manufacturers                Produce cellulose-based products from recovered paper or
                                                                              paperboard (e.g. cellulose insulation, hydro-seeding,
                                                                              bedding)
Recycling Manufacturing      Pavement Mix Producers (asphalt and aggregate) Produce asphalt paving mix from recycled materials such as
                                                                              crumb rubber, aggregates, or glass.
Recycling Manufacturing      Plastics Reclaimers                              Transform recovered plastics directly into products (e.g.
                                                                              plastic lumber) or raw materials ready for remanufacture.
Recycling Manufacturing      Plastics Converters                              Convert a recycled plastic clean flake or pellet into an
                                                                              intermediate or end product.
Recycling Manufacturing      Rubber Product Manufacturers                     Manufacture products using crumb rubber or cut rubber
                                                                              shapes and stampings such as feedstock.
Recycling Manufacturing      Steel Mills                                      Produce iron and steel slabs, billets, bar, plate, and sheet
                                                                              from scrap and/or raw materials.
Recycling Manufacturing      Iron and Steel Foundries                         Produce cast iron or steel products.
Recycling Manufacturing      Other Recycling Processors/Manufacturers         Other processors and manufacturers not elsewhere
                                                                              classified, using ash, sludge, engineering application of tires
                                                                              or other recovered materials.
Reuse and Remanufacturing    Computer and Electronic Appliance                Sort, grade, dismantle and/or rebuild used electronic
                             Demanufacturers                                  appliances.
Reuse and Remanufacturing    Motor Vehicle Parts (used)                       Clean, sort, inspect, and remanufacture used automobile
                                                                              parts.
Reuse and Remanufacturing    Retail Merchandise Sales                         Retail thrift stores, antique shops, reuse centers, and other
                                                                              shops dedicated to selling used merchandise.
Reuse and Remanufacturing    Tire Retreaders                                  Remove old tread from worn tires and add new thread.
Reuse and Remanufacturing    Wood Reuse                                       Process used wood for reuse (e.g. pallet rebuilders,
                                                                              construction materials)
Reuse and Remanufacturing    Materials Exchange Services                      Facilitate the reuse of products and materials by commercial
                                                                              and industrial establishments.
Reuse and Remanufacturing    Other Reuse                                      Other reuse or remanufacturing, not elsewhere classified.

SOURCE: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK.




                                                                 45
                                              Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002

TABLE C
CALIFORNIA'S RECYCLING INDUSTRY CHARACTERISTICS
INDUSTRY                    SUB-INDUSTRY                                                                                    SUB-INDUSTRY CHARACTERISTICS
                                                                                      Eligible for        Number of         Employment     Annual Payroll        Revenue         Rev./Establish.
                                                                                 RMDZ Loans*         Establishments**                     (Thousands of $)    (Thousands of $)   (Thousands of $)
Recycling Collection        Government Staffed Collection                                  N                          198         1,900             65,740             130,722                660
Recycling Collection        Private Staffed Collection                                     N                          323         3,100            107,260             213,283                660
Recycling Processing        Compost and Miscellaneous Organic Producers                    Y                          162         1,892             46,119             304,722              1,881
Recycling Processing        Materials Recovery Facilities (MRFs)                           N                          47          2,606             49,986             206,424              4,392
Recycling Processing        Recyclable Material Wholesalers                                N                          955        11,131            344,894           4,437,163              4,648
Recycling Processing        Textile Recycling***                                           Y                          45          2,579                N/A             112,014              2,465
Recycling Manufacturing     Glass Container Manufacturing Plants                           Y                           8          3,013            122,890             651,773             81,472
Recycling Manufacturing     Glass Product Producers (other recycled uses)                  Y                           9           697                8,233             52,749              5,861
Recycling Manufacturing     Nonferrous Secondary Smelting and Refining Mills               N                          43          1,597             62,504             707,670             16,457
Recycling Manufacturing     Nonferrous Product Producers                                   N                          18          1,467             46,998             329,511             18,306
Recycling Manufacturing     Nonferrous Foundries                                           N                          166         4,550            133,746             434,161              2,615
Recycling Manufacturing     Paper, Paperboard, and Deinked Market Pulp Mills               Y                          24          2,940            149,712           1,112,318             46,347
Recycling Manufacturing     Paper-based Product Manufacturers                              Y                          16           520              15,713             104,528              6,533
Recycling Manufacturing     Pavement Mix Producers (asphalt and aggregate)                 Y                          15           228                2,990             41,370              2,758
Recycling Manufacturing     Plastics Reclaimers                                            Y                          63          1,499             43,090             126,276              2,004
Recycling Manufacturing     Plastics Converters                                            Y                          309        16,546            503,281           2,476,497              8,015
Recycling Manufacturing     Rubber Product Manufacturers                                   Y                          15           271                9,363             56,880              3,792
Recycling Manufacturing     Steel Mills                                                    N                           1           333              17,316             129,036            129,036
Recycling Manufacturing     Iron and Steel Foundries                                       N                          77          4,916            141,878             582,238              7,562
Recycling Manufacturing     Other Recycling Processors/Manufacturers                       Y                          31           871              20,854              84,661              2,731
Reuse and Remanufacturing   Computer and Electronic Appliance Demanufacturers              Y                          34           956              24,696             125,120              3,680
Reuse and Remanufacturing   Motor Vehicle Parts (used)                                     N                          773         5,288            108,208             653,927                846
Reuse and Remanufacturing   Retail Merchandise Sales                                       N                      1,895          13,845            185,931             877,939                463
Reuse and Remanufacturing   Tire Retreaders                                                Y                          68           893              20,971             111,147              1,635
Reuse and Remanufacturing   Wood Reuse                                                     Y                          32           375                4,503             29,088                909
Reuse and Remanufacturing   Materials Exchange Services                                    N                           4            19                 728               7,456              1,864
Reuse and Remanufacturing   Other Reuse                                                    Y                          11           212              12,315              83,501              7,591


TOTAL OF ELIGIBLE RMDZ LOAN COMPANIES                                                                                 635        29,021            938,611           5,055,908
GRAND TOTAL                                                                                                       5,342          84,244           2,249,919         14,182,174
* UNDER CURRENT REGULATIONS
** A SINGLE LOCATION OF AN ORGANIZATION OR GOVERNMENT, THE ORGANIZATION OR GOVERNMENT MAY HAVE MULITPLE ESTABLISHMENTS (PHYSICAL LOCATIONS)
*** ESTIMATED FROM NATIONAL AND STATE CENSUS AND COUNCIL FOR TEXTILE RECYCLING DATA


SOURCES: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK, STATE CENSUS, AND COUNCIL FOR TEXTILE RECYCLING




                                                                                                     46
                                                 Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002


TABLE D
RMDZ LOAN RECIPIENTS
INDUSTRY                      SUB-INDUSTRY                                                   RMDZ LOAN RECIPIENT CHARACTERISTICS                                       CURRENT FINANCING
                                                                                  Receives    Number       Number   Geographic Location (% of Total)   Avg. Loan      Average         Use of Loan     Average
                                                                                  Loans*     Companies     Loans    Northern    Central    Southern     Size ($)     Term (Yrs.)      Proceeds**      Rate***
Recycling Processing          Compost and Miscellaneous Organic Producers            Y              16         18        28%        33%          39%      349,698               8    ME,WC,LI,RP         5.1%
Recycling Processing          Materials Recovery Facilities (MRFs)                   Y                 1        1         0%          0%        100%       68,685               5       RP,ME            4.5%
Recycling Processing          Textile Recycling****                                  Y                 2        4         0%          0%        100%      650,000               9     ME,WC,RP           5.4%
Recycling Manufacturing       Glass Container Manufacturing Plants                   Y                 1        1         0%       100%           0%      150,000               6         WC             5.0%
Recycling Manufacturing       Glass Product Producers (other recycled uses)          Y                 2        3        33%          0%         67%      775,333             11          WC             5.5%
Recycling Manufacturing       Paper, Paperboard, and Deinked Market Pulp Mills       Y              14         17        18%        18%          65%      503,506               8    ME,WC,LI,DR         5.4%
Recycling Manufacturing       Paper-based Product Manufacturers                      Y                 3        3        33%          0%         67%      453,500               6       WC,DR            4.8%
Recycling Manufacturing       Pavement Mix Producers (asphalt and aggregate)         Y              11         12        17%        25%          58%      574,458               7     ME,WC,DR           4.9%
Recycling Manufacturing       Plastics Reclaimers                                    Y              13         14         7%        29%          64%      519,293             10    ME,WC,DR, RP,LI      5.2%
Recycling Manufacturing       Plastics Converters                                    Y              10         12        17%        25%          58%      702,356               7    WC,ME,RP,LI         4.9%
Recycling Manufacturing       Rubber Product Manufacturers                           Y                 1        1         0%       100%           0%      700,000             10     ME, WC, RP, LI      4.0%
Recycling Manufacturing       Iron and Steel Foundries                               Y                 2        2       100%          0%          0%      717,475               7         ME             5.3%
Recycling Manufacturing       Other Recycling Processors/Manufacturers               Y                 3        3        33%        33%          33%      491,667               7         WC             4.5%
Reuse and Remanufacturing     Computer and Electronic Appliance Demanufacturers      Y                 4        4        50%          0%         50%      681,250             10      ME,WC,RP           5.0%
Reuse and Remanufacturing     Tire Retreaders                                        N             N/A        N/A         N/A        N/A         N/A           N/A           N/A          N/A              N/A
Reuse and Remanufacturing     Wood Reuse                                             Y                 7        7        29%        29%          43%      361,429             10     ME,WC,RP,DR         5.3%
Reuse and Remanufacturing     Other Reuse                                            Y                 6        6        22%        33%          44%      505,234               9       ME,WC            5.3%
ACTIVE LOANS                                                                                        54         64                                         649,827            9.2                         5.3%
TOTAL LOANS                                                                                         96        108        24%         24%         52%      511,697            9.2                         5.1%
* CURRENTLY HAS COMPANIES IN SUB-INDUSTRY THAT PARTICIPATE IN CIWMB RMDZ LOAN PROGRAM
** (IN ORDER OF MOST USED TYPE) ME=MACHINERY/EQUIPMENT, WC=WORKING CAPITAL, RP=REAL PROPERTY, DR=DEBT RESTRUCTURING, LI=LEASEHOLD IMPROVEMENTS
*** INTEREST RATE IS SET SEMIANUALLY, CURRENTLY: 5.7% THROUGH 12/31/01
**** ESTIMATED FROM NATIONAL AND STATE CENSUS AND COUNCIL FOR TEXTILE RECYCLING DATA




                                                                                                    47
                  Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002

 TABLE E: PRIME RATE, SURPLUS MONEY INVESTMENT FUND RATE, AND CIWMB’s RMDZ ACTIVE LOAN PORTFOLIO

10.00%


9.00%


8.00%                                                                                                          RMDZ
                                                                                                               Weighted
                                                                                                               Average
7.00%
                                                                                                               Active Loan
                                                                                                               Interest Rate
6.00%


5.00%


4.00%


3.00%


2.00%


1.00%


0.00%
    92




           93




                   94




                              95




                                          96




                                                     97




                                                                 98




                                                                            99




                                                                                       00




                                                                                                   01




                                                                                                          02
  19




         19




                 19




                            19




                                        19




                                                   19




                                                               19




                                                                          19




                                                                                     20




                                                                                                 20




                                                                                                        20
                                                  Prime Rate      SMIF Rate



                                                          48
                                     Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002

TABLE F
OVERVIEW OF LEVERAGING STRATEGIES
                  New Markets Tax Credit                               Loan Guaranty                      Loan Sale                         EQ2/PRI
Description                     A new federal incentive program        A risk-sharing partnership          Selling loans to secondary        Forming a financing partnership
                                under which taxpayers are allowed      between CIWMB and one or            market investors, such as the     with an established non-profit
                                to reduce their federal income tax     more existing small business        Community Reinvestment            ―CDFI‖ that would agree to use
                                payments by 39 percent of the          loan guarantors – preferably        Fund, and using the cash to       funds obtained through PRIs, low-
                                amount invested in a qualifying        with a California Financial         make more loans. Interest         interest loans that foundations
                                community development entity – a       Development Corporation             rates on the loans would be       provide, or EQ2s, long-term, low
                                for-profit organization that makes     (FDC) that provide guaranties of    structured so that loans would    interest loans made by commercial
                                business loans and investments in      up to 90 percent on small           be sold at a premium.             banks to community development
                                low-income areas.                      business bank loans of up to                                          organizations.
                                                                       $350,000.
Borrowers                        Established: 50%                      Established: 50%                   Established: 50%                 Established: 50%
                                 Early-Stage: 30%                      Early-Stage: 30%                   Early-Stage: 30%                 Early-Stage: 30%
                                 Start-Up: 20%                         Start-Up: 20%                      Start-Up: 20%                    Start-Up: 20%
Products                         Below-market loans                    Below-market loans                 Below-market loans               Below-market loans
                                 Subordinate loans                     Subordinate loans                  Subordinate loans                Subordinate loans
                                 Deferred payment loans                Deferred payment loans             Deferred payment loans           Deferred payment loans
Sources of Financing            Investors that expressed interest in   California FDCs such as:            Possible purchasers of loans      Organizations that have made EQ2
                                purchasing NMTCs such as:               Nor-Cal FDC,                      such as:                          or PRI investments such as:
                                 Enterprise Social Investment          Pacific Coast Regional FDC         Community                        Ford Foundation
                                    Corporation                         California Southern FDC               Reinvestment Fund              Citibank
                                 Bank of America                                                           Bayview Financial                F.B. Heron Foundation
                                 Bear Stearns                                                              CBA Receivables
Analysis                                                Rating                               Rating                                Rating                          Rating
Rating: (-) worse than avg.     Simplicity              (-)            Simplicity            (+)           Simplicity              (+)       Simplicity            (0)
         (1) average            Practicality            (-)            Practicality          (0)           Practicality            (+)       Practicality          (-)
         (+) better than avg.   Sustainability          (+)            Sustainability        (+)           Sustainability          (+)       Sustainability        (0)
                                Affordability           (+)            Affordability         (0)           Affordability           (+)       Affordability         (+)
                                Implementability        (0)            Implementability      (-)           Implementability        (+)       Implementability      (0)
Leverage                        Base Case: 5 to 1                      Base Case: 12 to 1                  Base Case: 16 to 1                Base Case: 5 to 1
                                Best Case: 5 to 1                      Best Case: 19 to 1                  Best Case: 16 to 1                Best Case: 5 to 1
Return on Investment            Base Case: 32.98%                      Base Case: 10.23%                   Base Case: 0.01%                  Base Case: 0.06%
                                Best Case: 33.30%                      Best Case: 14.37%                   Best Case: 15.30%                 Best Case: 12.50%




                                                                                       49
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
NEW MARKETS TAX CREDIT STRATEGY


Introduction

The following mini-business plan describes a strategy to enable the California Integrated Waste
Management Board (the ―Board‖ or ―CIWMB‖) to employ the New Markets Tax Credit (NMTC)
to produce $10 million annually in private financing for small recycling companies that have
difficulty securing affordable financing from banks and venture firms. The NMTC is a new
federal incentive program under which taxpayers are allowed to reduce their federal income tax
payments by 39 percent of the amount invested in a qualifying ―community development entity‖
(CDE) – a for-profit organization that makes business loans and investments in low-income areas.
For each dollar invested in the CDE, investors are entitled to reduce their federal tax payments by
an average of 5.57 percent annually for seven years.


The plan is based on the proposition that the Board would partner with an independent for-profit
CDE (see Section 5 – Implementation, below, for further detail). . To be more specific, CIWMB
funds, along with private loans and investments (liabilities), would finance a portfolio of
recycling loans (assets). In turn, these assets (the loans to recycling companies) would generate
the income needed for CIWMB to cover operating expenses, losses, interest on borrowed funds
and a return on capital. In other words, the program’s lending capacity and financial viability
would depend on three factors:

   The performance of its assets. Loans made under the program must meet two tests. First,
    they should provide different types of funding for recycling companies at different stages of
    maturity. Second, they must provide sufficient earnings to cover the CDE’s costs.

   The structure of its liabilities. The program’s mix of contributed capital and borrowed money
    should be such that the principal and interest payments on its assets can retire its debts and
    provide a return on its capital.

   The level of its operating expenses. The expenses associated with originating, underwriting
    and servicing loans, as well as covering loan losses, must not exceed net interest income, i.e.,
    the difference the interest paid on borrowed money and the earnings generated by the
    portfolio.

The mini business plan is organized into seven brief sections.

Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.

Section 2 – Products
Describes the types of loans the program issues.

Section 3 – Capital Structure & Sources
Describes the mix of debt and equity capital that would be used to fund the CDE, and provides
several potential sources of financing for the program.

Section 4 – Operations


                                                 50
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
Describes how the CDE’s financing program would be managed.

Section 5 – Implementation
Sets forth the tasks and costs required to secure financing commitments for the program.

Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.

Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.

Section 1 – Borrowers

The Board would need to invest in an existing CDE that has a history of making commercial
loans to for-profit businesses.

The CDE would be designed to meet the financing needs of three types of recycling companies
that make up the RMDZ market.

   Established recycling firms. Approximately 50 percent of borrowers would be companies
    that have sufficient operating and earnings history to secure credit from conventional sources.
    These low-risk companies would be more concerned with the cost of capital than with access
    to capital, and would welcome the lower cost capital the CDE could offer.

   Expansion-stage companies. Approximately 30 percent of borrowers would be companies
    that have survived their formative years and are now seeking to grow. However, these
    companies lack the earnings history, capital or collateral needed to support the full amount of
    funding needed to finance expansion. The CDE would cover this gap.

   Early-stage companies. The remaining 20 percent of borrowers would be companies that are
    essentially start-up businesses. Because they are not yet producing positive cash flows, these
    high-risk companies require some form of ―equity-like‖ financing to fund continued growth.

Section 2 – Products

The following three products are designed to meet the distinct needs of each these borrower
segments:

   Below-market loans. Established recycling companies seeking expansion financing would be
    eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
    below the market rate for such financing. Underwriting standards for these loans including
    loan-to-value and debt service coverage ratios would be only slightly more liberal than those
    employed by commercial lenders. A profile of a borrower might be:

        Sunset Manufacturing, a 20-year old company that uses waste materials to produce a
        range of furniture products. Its sales are about $1.5 million annually. In order to expand,
        it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5


                                                51
                                    Appendix One
                Mini Business Plan – New Markets Tax Credit Strategy
        percent, a 15-year SBA loan would cost the firm $56,000 annually in debt service.
        However, at two percent below prime, a loan from the CDE would only require $41,000
        in debt service, a savings of $15,000 annually.

   Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
    senior financing needed for fixed assets or working capital would be candidates for
    subordinate debt. These loans would typically be structured as 25-40 percent junior
    participations in senior, secured loans extended by banks or other commercial lenders.
    Because of the risk associated with junior-lien lending, the CDE’s interest in each transaction
    would be priced at 300 to 500 basis points above prime. In addition, as part of each
    transaction, a loan loss reserve contribution, equaling four-to-eight percent of the total
    financing, would be funded from loan proceeds and retained by the CDE. A profile of a
    borrower might be:

        MicroCast, a $2.5 million company purchases, that repairs and resells consumer
        electronics. The company has grown rapidly but its weak balance sheet makes it
        impossible to secure $250,000 in equipment financing that it needs to expand. The CDE
        advances $250,000 to MicroCast and then sells a 75 percent senior interest ($187,500) in
        the loan to a local bank. The CDE retains a 25 percent ($67,500) subordinate interest in
        the loan along with a five percent loan-loss insurance payment ($12,500). The loan
        structure provides the bank with a senior loan of $187,500 secured by $250,000 in
        equipment. At the same time, the CDE’s risk is covered by an insurance payment of
        $12,500 – 20 percent of its exposure. Finally, the CDE’s subordinate interest is
        structured with a long amortization, producing lower debt service payments than the
        borrower would pay for bank financing alone.




                    Gives $250,000 note and $12,500 reserve




           Lender                                     MicroCast
                         Makes $250,000 loan




             CDE




                                                52
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy


   Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
    the cash flow (or collateral) to qualify for debt financing nor the ―upside‖ potential to qualify
    for venture or angel financing would be candidates for deferred payment loans. The deferred
    payment loan would be modeled on the structure employed by SBA for investments in New
    Markets Venture Capital Companies. That is, each loan would involve a ―discount period‖ –
    two to three years during which no principal or interest payments would be required –
    followed by an amortization period. Upon closing, the borrower would receive the full
    amount of the loan less the present value of interest for the discount period. At the end of the
    discount period, the borrower would repay the loan in regular installments of principal and
    interest over a period of up to seven years. Because of the risk that borrowers would be
    unable to repay loans during the amortization period, deferred payment loans would priced at
    600 basis points above prime. In addition, as with subordinate loans, a cash reserve account
    would be funded as part of each transaction. A profile of a borrower might be:

        TireWare, an early stage company that has developed a more efficient way of retreading
        tires. Although it needs $200,000 to fund its operations, neither venture capital
        companies nor angel investors are willing to invest. Using the deferred payment note
        structure, the Recycling Loan Program makes a $287,000 loan to the borrower. Of this
        amount approximately $67,000, the present value of three years of interest and $20,000
        in loan-loss reserve contributions are retained by the CDE. At the end of three years
        TireWare begins making payments of $5,000 per month to repay the $287,000 balance
        over seven years. Because of the deferred payment note, TireWare has full use of
        $200,000 for three years. It has obtained the equivalent of equity without having to
        relinquish stock to an outside investor. The loan’s high interest rate and the insurance
        reserve provide compensation and credit support for CDE’s risk.




                                TireWare




              Advances $200,000




                                   CDE




                                                 53
                                       Appendix One
                   Mini Business Plan – New Markets Tax Credit Strategy
 Section 3 – Capital Structure and Sources4

 To meet its need to finance $10 million in loans annually for five years, the CDE would use the
 New Markets Tax Credit to raise $50 million in debt and equity financing. As noted above, the
 NMTC provides taxpayers a seven-year, 39 percent income tax credit for investments in qualified
 community development entities (CDE’s). The financing plan would be as follows:

    CIWMB and a selected number of banks or other financial companies would agree to invest a
     total of $30 million in the CDE for the purpose of financing businesses located in targeted
     Recycling Market Development Zones or other low-income areas.

         CIWMB would invest $10 million over three or four years in the CDE in the form of a
          long-term, low-interest subordinate loan. The loan would bear an interest rate of 2.75
          percent (200 basis points below prime) and would be repaid solely from the earnings of
          the CDE.

         The banks would invest $30 million in the form of equity in exchange for New Markets
          Tax Credit allocations totaling $11.7 million over seven years. The banks would also be
          entitled to all profits after interest and principal payments on the CIWMB loan.

    With $40 million in equity capital and subordinate debt financing, the CDE could obtain a
     $10 million credit facility secured by the CDE’s $50 million loan portfolio and associated
     reserves. The credit facility would be priced at no higher than prime.




                                       Investors


                                                 $30 million in exchange
                                                 for $11.7 million (39%) NMTC


                  $10 million                             $10 million
                  market-rate                             long-term
                  loan                                    loan
Lenders                                   CDE                                   CIWMB




 4
   Under an alternative structure, the Board could enter into a ―co-lending‖ agreement with an existing CDE.
 Under that agreement, the CDE would use capital raised through the sale of the NMTC to finance recycling
 loans in partnership with the Board.


                                                     54
                                    Appendix One
                Mini Business Plan – New Markets Tax Credit Strategy

The New Markets Tax Credit is an entirely new incentive program. Thus, it is impossible to say
with certainty what investors would make equity investments in CDE’s in exchange for the
NMTC. Nevertheless, the following investors have either announced their intention to purchase
NMTCs or have experience in purchasing the residential equivalent of the NMTC, the Low-
Income Housing Tax Credit. While they do not specifically focus on recycling companies, the
entities they lend to share similar risk profiles to CIWMB’s target borrowers.

   Enterprise Social Investment Corporation. The Enterprise Social Investment Corporation
    (ESIC) is a subsidiary of the Enterprise Foundation, a national, non-profit community
    development organization. Since 1984, ESIC has used the Low-Income Housing Tax Credit
    to raise over $3.2 billion in financing for affordable housing. Its community development
    mission and experience in syndicating tax credits make it probable that the ESIC would
    assume a significant role in helping qualified CDE’s raise NMTC financing.

   Bank of America. Bank of America serves as general partner and placement agent for the
    California Tax Credit Funds, a series of limited partnerships established to make Low-Income
    Housing Tax Credit investments. The most recent Fund, California Tax Credit Fund III, is
    $40 million offering of limited partnership units. It is probable that the Bank would build on
    its experience with LIHTC funds to create similar vehicles to raise and invest NMTC
    financing for small businesses.

   Bear Stearns. Representatives of Bear Stearns, a major Wall Street investment bank, recently
    announced the firm’s intention to create a Fund to purchase up to $600 million in New
    Markets Tax Credits. While specific details on the Fund are unlikely to emerge until after the
    U.S. Treasury and IRS publish final regulations governing NMTC transactions, the size of the
    stated commitment makes this firm a strong target investor.

   Certified Development Entities are forming for-profit units to participate in the NMTC
    program.


Section 4 – Operations


In order to minimize the CDE’s operating costs, the Board, the CDE investors and would assume
the principal functions associated with making and monitoring recycling loans. The ZA’s role
would be to market the program.

   Loan origination. Banks, would be responsible for identifying borrowers and packaging their
    loan applications.

   Loan underwriting. In cooperation with the lenders who comprise the CDE’s equity investors,
    the Board would develop a set of underwriting standards and policies for each type of loan
    product. The CDE’s credit committee or Chief Credit Officer would use these standards in
    approving loans under the program. Under a ―co-lending‖ agreement, the CDE and the
    Board would agree on underwriting standards and apply these policies in approving loans.

   Loan processing and documentation. For the sake of simplicity, the Board and the CDE (or its
    equity investors) would agree on a set of standard loan documents and closing procedures. In



                                               55
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
    all likelihood, procedures and documents now employed by either CIWMB or investing
    banks would be adopted by the CDE.

   Loan servicing. Loan servicing would be contracted out to one or more banks that are CDE
    investors. In a limited number of cases, RMDZ Administrators could assume some sub-
    servicing responsibilities.


Section 5 – Implementation5

Raising $50 million in NMTC financing would involve the following tasks:

   Organizing a finance team. (The finance team will most likely be composed of Board staff.
    The included budgets are merely an estimate of the associated costs). The job of raising
    significant amounts of capital from lenders and investors would require a ―finance team‖
    comprising both in-house CIWMB staff and outside advisors. This team’s responsibility
    would be to establish the parameters for the financing transaction, prepare the NMTC
    application, negotiate terms of an NMTC award with Treasury officials, manage relationships
    with prospective investors and lenders, serve as liaison with CIWMB’s senior management
    and Board, and guide the capital-raising process to a successful closing. Given the complexity
    of most tax-advantaged transactions the team should include, at a minimum, the Board’s
    Chief Financial Officer and in-house counsel, as well as a tax partner from its accounting
    firm and outside legal counsel with expertise in both tax and corporate finance. If necessary,
    a financial advisory firm should be retained to help in preparing the NMTC application and in
    structuring and placing the financing transaction.

   Defining financing requirements. Although the mini-business plan recommends that
    CIWMB raise $50 million in total capital by leveraging $10 million in appropriated funds
    with $40 million in private debt and equity financing, the Board staff should determine
    whether some change in the amount and mix of capital is needed to accommodate the
    amount, type and timing of anticipated loan demand.

   Identifying a CDE. In order to qualify for NMTC financing, the Board staff would need to
    identify a for-profit vehicle to serve as the NMTC investment vehicle or CDE. The CDE
    could be an existing for-profit small business finance organization (such as CEDLI) or a for-
    profit affiliate of a non-profit economic development lender. In either event, its management
    should have significant loan origination, underwriting and servicing capabilities, thus
    obviating the need for the Board to expand its staff.. (NMTC allocations would be
    competitively awarded. The CDE would need to prepare a detailed NMTC business plan
    describing the small business market to be served, the loan and investment products to be
    offered, the CDE’s investment and/or lending strategy and its legal, management governance
    structure. The team would also need to describe the CDE’s proposed capital structure and
    present proforma financial statements. Assuming success in securing an NMTC award, the
    team would then negotiate any terms and conditions associated with the allocation with
    Treasury officials).



5
 Under a ―co-lending‖ agreement with an existing CDE, the Board might well be spared all tasks
associated with preparing an NMTC allocation application. This would dramatically reduce the cost and
complexity of implementing this particular leveraging option.


                                                  56
                                    Appendix One
                Mini Business Plan – New Markets Tax Credit Strategy

   Developing an investment structure. Once the program’s capital requirements are
    established, an NMTC allocation received, and likely lenders and investors identified, the
    team should negotiate the terms under which the Board would invest in the CDE. This effort
    is needed to align the investment structure with the Board’s loan origination and return of,
    and on, investment goals.

   Preparing and reviewing financing documents. Transaction documents may be prepared by
    the CDE’s legal counsel, or by counsel for the Board

   Closing the transaction. Finally, the Board staff would be responsible for closing the
    investment, addressing last-minute issues and oversights that could produce problems in
    consummating the transaction.

Sample Budget

This sample budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:


   CIWMB staff                 $150
   Outside legal counsel       $250
   Accounting                  $175
   Financial advisory          $250

                                                                   Financial   Total
           Task               CIWMB       Legal       Accounting   Advisory    Hours            Cost

1. Organize financing team       30          0            0           0          30       $        4,500
2. Define financing              24          0            0           16         40       $        8,400
requirements
3. Identify/prequalify CDE       40          0             0          20         60       $      12,000
4. Negotiate investment          40         24            16          16         96       $      18,400
structure
5. Prepare financing             16         120           0           16        152       $      37,200
documents
6. Close transaction              24         40            0          8         72        $      12,496
Total Hours                      174        184           16          76        450       $      92,996




                                                 57
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
Section 6 – Analysis

As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis below considers the proposed leveraging strategy in light of five
criteria discussed as important in a successful CIWMB loan leveraging program:

   Simplicity. Because of the inherent complexities associated with using a new tax incentive to
    raise capital, New Markets Tax Credit transactions are likely to be more complicated than
    other alternatives. For example, because of its previous experience, CIWMB may well find
    loan sales simpler and easier to execute.

   Practicality. Because the NMTC is new, investor response to NMTC-based financing
    transactions cannot be known. For this reason, NMTC-based financing must also be
    considered more speculative than other alternatives.

   Sustainability. NMTC financing would provide substantial sums of equity for the CDE,
    thereby reducing the size of necessary leverage and decreasing the risk that interest income
    would be insufficient to cover fixed interest costs and other operating expenses. For
    example if CIWMB financed its program with greater amounts of debt, in lieu of equity
    generating NMTCs for the investors, the interest costs would be much higher and the income
    required to cover them higher. For this reason, a lending program organized around the
    NMTC has a higher probability of achieving long-term financial viability than other
    leveraging options discussed.

   Affordability. As noted, the substantial amounts of equity that can be raised with the NMTC
    should reduce need for interest income to pay interest expense. This would allow borrowers
    to pay lower interest rates than if debt (especially market-rate debt) were the principal source
    of loan financing.

   Implementability. Assuming success in securing an NMTC allocation, there is at least a
    reasonable likelihood that successful transactions involving the exchange of the NMTC for
    equity can be structured. The need of both small and large banks for CRA ―investment
    credit,‖ as well as the financial success of Low Income Housing Tax Credit syndications,
    should produce a high degree of interest in NMTC financings.


Section 7 – Financial Analysis


General Overview

    Following are ―best-case‖ and ―base-case‖ financial forecasts for the CDE. Each set of
    forecasts includes three types of financial statements:

           Proforma Statement of Financial Condition
           Proforma Statement of Financing and Investment Activities
           Proforma Statement of Operations




                                                 58
                                    Appendix One
                Mini Business Plan – New Markets Tax Credit Strategy
    Each set of pro-forma financial statements illustrates the economic condition and activities of
    the RMDZ Loan Program for a five-year period. Each financial statement is briefly
    explained below followed by a more detail explanation of assumptions.

   Proforma Statement of Financial Condition

    The balance sheet has been prepared assuming an accrual basis of accounting and reflects the
    financial condition of the fund as of December 31 of each year. Cash on hand, idle cash in
    the form of short-term investments and loan loss reserves are combined as one amount under
    current assets. Notes Receivable reflects the combined value of each class of loans as of the
    end of each fiscal year. The Accrued Interest Receivable on Deferred Interest Loans is
    separated from the value of Notes Receivable and shown as the third item of Current Assets.

    Amounts for Furniture & Equipment are estimates of the additional furniture and computer
    equipment that may need to be acquired in order to support the RMDZ fund activities. Other
    resources and infrastructure costs are assumed to be provided by the managing entity for the
    fund.

    Although it is anticipated that CIWMB’s investment would take the form of a long-term
    subordinate loan, it has been shown under Shareholders’ Equity as its character most closely
    resembles fund equity.

   Proforma Statement of Financing and Investment Activities

    The Statement of Financing and Investment Activities illustrates the inflows and outflows of
    funds resulting from financing and investment activities of the fund. The specific types of
    financing and investment transactions summarized on this financial include:

    Financing activities
     Receipt of investment including CIWMB startup funding
     Receipt of funds from the issuance of corporate notes (debt)
     Repayment of startup funding from CIWMB
     Repayment of corporate notes
    Investment activities
     Receipt of funds from the sale of program assets
     Outflow of funds applied to lending activities
     Receipt of principal collections on outstanding notes
    This report has been provided to enable the reader to track the loan origination and sale by
    product category. For a complete picture of total sources and uses of funds, the reader must
    combine the activity shown on this report with the activity from operations described on the
    next and final set of pro-forma financials.

   Pro-forma Statement of Operations

    The Pro-forma Statement of Operations illustrates the sources of program income and
    summarizes the operating expenses including gains and losses on sales of assets as well as
    loan losses. Loan losses are shown as a provisional reserve adjustment and are calculated


                                                59
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
    using a loss factor that is applied to the outstanding asset portfolio. Losses as they are
    incurred are written off against the loan loss reserve. (Note that for clarity, the loan loss
    reserve, typically shown as a contra to Notes Receivable, have been included as part of the
    cash, short term investments and reserves (net).

Assumptions to the Pro-forma Financials

    The following assumptions were used to develop the previously described pro-forma
    financials depicting the NMTC option.

   Investment

       NMTC investors provide $30 million of equity in month 2 of Year One.
       CIWMB puts in $10 million timed as follows: $3.5M in year 1; $3.5M in Year Two; and
        $3M in Year Three. No interest has been assumed on the CIWMB investment carried as
        equity on the balance sheet.

   Long Term Debt

    The fund borrows $10 million in Year Four and paying six percent.

   Investment of Idle Funds

    Idle funds are invested at four percent increasing to 4.125 percent in Year Four. Cash on
    hand averages approximately $250,000 plus 60 days origination volume.



Loan Portfolio Characteristics

                       % of      Average                                              Deferment of
Asset                  Portfolio Loan Amt             Yield          Term             Payment
Low Interest             50%       $200,000               4.25%          5 yrs        None
Deferred Payment         20%       $80,000               12.25%         10 yrs        3 yrs
Subordinate Debt         30%       $120,000                9.5%          5 yrs        None


Asset Sales - none

Loan Losses and Insurance Payments

                       Insurance             Base-case Loan           Best-case Loan
Asset                  Payment               Losses Net of            Losses Net of
                                             Recoveries               Recoveries
Low Interest                   None                   3%                      1.5%
Deferred Payment               25%                   25%                      15%
Subordinate Debt               15%                   15%                      7.5%




                                                 60
                                     Appendix One
                 Mini Business Plan – New Markets Tax Credit Strategy
Operating Expenses

The following functions are assumed to be borne by the CDE:
         Chief Credit Officer @ $120,000
         Chief Financial/Operations Officer @ $85,000
         Two loan officers @ $80,000 total
         One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.

Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.




                                                 61
                                                               Appendix One, Attachment A – Best Case Financials
                                                              Mini Business Plan – New Markets Tax Credit Strategy
                                                                        CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                 RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
                                                                           Proforma Statement of Financing and Investment Activities
                                                                                                  Five Years

                                                                                             YEAR ONE                                                                                                                                          Total
                                             Month 1         Month 2         Month 3         Month 4         Month 5         Month 6         Month 7         Month 8         Month 9         Month 10         Month 11        Month 12        YEAR 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                         $3,500,000               $0               $0              $0              $0              $0              $0              $0              $0               $0            $0              $0       $3,500,000
    Private (NMTC) Investors                           0       30,000,000                0               0               0               0               0               0               0                0             0               0       30,000,000
 Total of Funding From Investors             $3,500,000      $30,000,000               $0              $0              $0              $0              $0              $0              $0               $0            $0              $0      $33,500,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                              0               0               0               0               0               0               0               0               0                0               0               0              0
   Debt Class 2-Long Term Fixed Rate                    0               0               0               0               0               0               0               0               0                0               0               0              0
Total Funding From Issuance of
 Debt                                                  $0              $0              $0              $0              $0              $0              $0              $0              $0               $0            $0              $0               $0

Total Funding From Financing Activities      $3,500,000      $30,000,000               $0              $0              $0              $0              $0              $0              $0               $0            $0              $0      $33,500,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.               0        335,996                0               0               0               0               0               0               0                0               0               0        335,996
    Private (NMTC) Investors                            0              0                0               0               0               0               0               0               0                0               0               0              0
 Total Shares Redeemed                                  0        335,996                0               0               0               0               0               0               0                0               0               0        335,996

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                        0               0               0               0               0               0               0               0               0                0             0               0                0
    Debt Class 2-Long Term Fixed Rate                    0               0               0               0               0               0               0               0               0                0             0               0                0
 Total Payments of Corporate Notes                     $0              $0              $0              $0              $0              $0              $0              $0              $0               $0            $0              $0               $0

Total Application of Funds                             $0      $335,996                $0              $0              $0              $0              $0              $0              $0               $0            $0              $0        $335,996

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            $3,500,000      $29,664,004               $0              $0              $0              $0              $0              $0              $0               $0            $0              $0      $33,164,004

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
 Sale of Low Cost Loans                                 0               0               0               0               0               0               0               0               0                0               0               0              0
 Sale of Deferred Payment Loans                         0               0               0               0               0               0               0               0               0                0               0               0              0
 Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                $0              $0              $0              $0              $0              $0              $0              $0              $0               $0               $0              $0            $0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                        0       150,000         450,000         450,000         450,000         450,000         450,000         450,000         450,000         450,000          450,000         450,000        4,650,000
  Deferred Payment Loans                                 0        60,000         180,000         180,000         180,000         180,000         180,000         180,000         180,000         180,000          180,000         180,000        1,860,000
  Subordinate Debt                                       0        90,000         270,000         270,000         270,000         270,000         270,000         270,000         270,000         270,000          270,000         270,000        2,790,000
Total Lending Activities                               $0      $300,000        $900,000        $900,000        $900,000        $900,000        $900,000        $900,000        $900,000        $900,000         $900,000        $900,000       $9,299,999

ADD: Principal Collections                             $0              $0        $3,421         $13,700         $24,033         $34,419         $44,859         $55,353         $65,902         $76,505          $87,163         $97,877        $503,232

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                      $0      ($300,000)     ($896,579)      ($886,300)      ($875,967)      ($865,581)      ($855,141)      ($844,647)      ($834,098)       ($823,495)      ($812,837)      ($802,123)     ($8,796,767)

NET INCREASE (DECREASE) IN FUNDS FROM
 FUNDING AND INVESTMENT ACTIVITIES           $3,500,000      $29,364,004      ($896,579)      ($886,300)      ($875,967)      ($865,581)      ($855,141)      ($844,647)      ($834,098)       ($823,495)      ($812,837)      ($802,123)     $24,367,237




                                                                                                                  62
                                              Appendix One, Attachment A – Best Case Financials
                                             Mini Business Plan – New Markets Tax Credit Strategy
                                                     CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                              RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                        Proforma Statement of Financing and Investment Activities
                                                                               Five Years

                                                              YEAR TWO                                         Total                         YEAR THREE                                       Total
                                              1st Qtr         2nd Qtr         3rd Qtr         4th Qtr         YEAR 2         1st Qtr         2nd Qtr         3rd Qtr         4th Qtr         YEAR 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                          $3,500,000                $0              $0              $0    $3,500,000     $3,000,000                $0              $0              $0    $3,000,000
    Private (NMTC) Investors                            0                 0               0               0             0              0                 0               0               0             0
 Total of Funding From Investors              $3,500,000                $0              $0              $0    $3,500,000     $3,000,000                $0              $0              $0    $3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                               0               0               0               0              0               0               0               0               0              0
   Debt Class 2-Long Term Fixed Rate                     0               0               0               0              0               0               0               0               0              0
Total Funding From Issuance of
 Debt                                                   $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

Total Funding From Financing Activities       $3,500,000                $0              $0              $0    $3,500,000     $3,000,000                $0              $0              $0    $3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                0               0               0               0              0               0               0               0               0              0
    Private (NMTC) Investors                             0               0               0               0              0               0               0               0               0              0
 Total Shares Redeemed                                   0               0               0               0              0               0               0               0               0              0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                         0               0               0               0              0               0               0               0               0              0
    Debt Class 2-Long Term Fixed Rate                     0               0               0               0              0               0               0               0               0              0
 Total Payments of Corporate Notes                      $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

Total Application of Funds                              $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                             $3,500,000                $0              $0              $0    $3,500,000     $3,000,000                $0              $0              $0    $3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
 Sale of Low Cost Loans                                  0               0               0               0              0               0               0               0               0              0
 Sale of Deferred Payment Loans                          0               0               0               0              0               0               0               0               0              0
 Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                 $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

LESS: Funds Applied to Lending Activities:
    Low Cost Loans                                750,000       1,050,000       1,200,000       1,500,000       4,500,000      1,200,000        1,200,000      1,200,000       1,200,000       4,800,000
   Deferred Payment Loans                         480,000         420,000         480,000         600,000       1,980,000        480,000          480,000        480,000         480,000       1,920,000
   Subordinate Debt                               450,000         630,000         720,000         900,000       2,700,000        720,000          720,000        720,000         720,000       2,880,000
Total Lending Activities                      $1,680,000      $2,100,000      $2,400,000      $3,000,000      $9,180,000     $2,400,000       $2,400,000     $2,400,000      $2,400,000      $9,600,000

ADD: Principal Collections                     $220,317         $225,636        $355,028        $494,857      $1,295,838       $573,769        $709,674        $843,273        $955,217      $3,081,933

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                            ($1,459,683)     ($1,874,364)    ($2,044,972)    ($2,505,143)    ($7,884,162)   ($1,826,231)    ($1,690,326)    ($1,556,727)    ($1,444,783)    ($6,518,067)

NET INCREASE (DECREASE) IN FUNDS FROM
 FUNDING AND INVESTMENT ACTIVITIES $2,040,317                 ($1,874,364)    ($2,044,972)    ($2,505,143)    ($4,384,162)   $1,173,769      ($1,690,326)    ($1,556,727)    ($1,444,783)    ($3,518,067)




                                                                                                63
                                              Appendix One, Attachment A – Best Case Financials
                                             Mini Business Plan – New Markets Tax Credit Strategy
                                                     CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                              RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                        Proforma Statement of Financing and Investment Activities
                                                                               Five Years

                                                              YEAR FOUR                                        Total                          YEAR FIVE                                       Total
                                              1st Qtr         2nd Qtr         3rd Qtr         4th Qtr         YEAR 4         1st Qtr         2nd Qtr         3rd Qtr         4th Qtr         YEAR 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                    $0              $0              $0              $0             $0              $0              $0              $0              $0             $0
    Private (NMTC) Investors                              0               0               0               0              0               0               0               0               0              0
 Total of Funding From Investors                        $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0                 0               0               0              0               0               0               0               0              0
   Debt Class 2-Long Term Fixed Rate          10,000,000                 0               0               0     10,000,000               0               0               0               0              0
Total Funding From Issuance of
 Debt                                        $10,000,000                $0              $0              $0    $10,000,000              $0              $0              $0              $0             $0

Total Funding From Financing Activities      $10,000,000                $0              $0              $0    $10,000,000              $0              $0              $0              $0             $0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                0               0               0               0              0               0               0               0               0              0
    Private (NMTC) Investors                             0               0               0               0              0               0               0               0               0              0
 Total Shares Redeemed                                   0               0               0               0              0               0               0               0               0              0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                         0               0               0               0              0               0               0               0               0              0
    Debt Class 2-Long Term Fixed Rate                     0               0               0               0              0               0               0               0               0              0
 Total Payments of Corporate Notes                      $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

Total Application of Funds                              $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            $10,000,000                $0              $0              $0    $10,000,000              $0              $0              $0              $0             $0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
 Sale of Low Cost Loans                                  0               0               0               0              0               0               0               0               0              0
 Sale of Deferred Payment Loans                          0               0               0               0              0               0               0               0               0              0
 Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                 $0              $0              $0              $0             $0              $0              $0              $0              $0             $0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                               1,200,000        1,200,000      1,200,000       1,200,000        4,800,000     1,200,000       1,200,000       1,200,000       1,200,000       4,800,000
   Deferred Payment Loans                         480,000          480,000        480,000         480,000        1,920,000       480,000         480,000         480,000         480,000       1,920,000
   Subordinate Debt                               720,000          720,000        720,000         720,000        2,880,000       720,000         720,000         720,000         720,000       2,880,000
Total Lending Activities                      $2,400,000       $2,400,000     $2,400,000      $2,400,000       $9,600,000    $2,400,000      $2,400,000      $2,400,000      $2,400,000      $9,600,000

ADD: Principal Collections                     $951,570        $1,111,448     $1,270,681      $1,400,893       $4,734,593    $1,460,095      $1,620,576      $1,782,750      $1,916,353      $6,779,774

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                            ($1,448,430)     ($1,288,552)    ($1,129,319)     ($999,107)     ($4,865,407)    ($939,905)      ($779,424)      ($617,250)      ($483,647)     ($2,820,226)

NET INCREASE (DECREASE) IN FUNDS FROM
 FUNDING AND INVESTMENT ACTIVITIES $8,551,570                 ($1,288,552)    ($1,129,319)     ($999,107)      $5,134,593     ($939,905)      ($779,424)      ($617,250)      ($483,647)     ($2,820,226)



                                                                                               64
                                          Appendix One, Attachment A – Best Case Financials
                                         Mini Business Plan – New Markets Tax Credit Strategy
                                             CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                RMDZ LOAN PROGRAM
                                       RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
                                                     Proforma Statement of Financial Condition
                                                                   At December 31


                                                      December 31         December 31        December 31        December 31      December 31
            ASSETS                                     FY Year 1           FY Year 2          FY Year 3          FY Year 4        FY Year 5
Current Assets
Cash, Short Term Investments and Reserves                $24,781,432          $20,808,895       $17,687,728        $23,117,245      $20,371,062
Notes Receivable                                           8,796,767           16,680,931        23,198,997         28,064,404       30,884,630
Interest Receivable-Deferred Interest Notes                   30,813              160,225           374,425            637,799          871,186
  Total Current Assets                                   $33,609,012          $37,650,050       $41,261,150        $51,819,448      $52,126,878

Fixed Assets and Other
Furniture & Equipment                                       $90,000              $91,350           $92,761            $94,235          $95,776
Less Accumulated Depreciation                               (18,000)             (36,270)          (54,822)           (73,669)         (92,824)
  Total Fixed Assets                                        $72,000              $55,080           $37,939            $20,566           $2,951

Other Assets                                                $25,000              $25,000           $25,000            $25,000          $25,000

Total Assets                                             $33,706,012          $37,730,130       $41,324,089        $51,865,014      $52,154,829



LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable & Accrued Expenses                         $52,375              $54,757           $57,247            $59,851          $62,573
Current Portion of Long Term Debt                                 0                    0                 0                  0                0
 Total Current Liabilities                                  $52,375              $54,757           $57,247            $59,851          $62,573

Long Term Debt
Corporate Notes Payable                                             $0                  $0                 $0      $10,000,000      $10,000,000
 Total Long Term Debt                                               $0                  $0                 $0      $10,000,000      $10,000,000

Total Liabilities                                           $52,375              $54,757           $57,247         $10,059,851      $10,062,573

Shareholders' Equity
CIWMB Equity-Like Investment                              $3,164,004           $6,664,004        $9,664,004         $9,664,004       $9,664,004
NMTC Investment-Common Stock                              30,000,000           30,000,000        30,000,000         30,000,000       30,000,000
Retained Earnings                                            489,633            1,011,369         1,602,838          2,012,144        2,428,252
 Total Shareholders' Equity                              $33,653,637          $37,675,373       $41,266,842        $41,676,148      $42,092,256


Total Liabilities and Shareholders' Equity               $33,706,012          $37,730,130       $41,324,089        $51,735,999      $52,154,829
                                                                         65
                                                                 Appendix One, Attachment A – Best Case Financials
                                                                Mini Business Plan – New Markets Tax Credit Strategy
                                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                            RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
                                                                               Proforma Statement of Operations
                                                                                          Five Years


                                                                                                                       YEAR ONE                                                                              Total
                                                Month 1      Month 2      Month 3      Month 4      Month 5      Month 6      Month 7      Month 8      Month 9      Month 10     Month 11     Month 12     YEAR 1
Investment Income

  Loan Loss Reserves                                  $0       $19,800      $59,400      $59,400      $59,400      $59,400      $59,400      $59,400      $59,400      $59,400      $59,400      $59,400      $613,800
  Interest on loans                                     0         1,324        5,496       10,059       14,588       19,082       23,541       27,965       32,354       36,708       41,026       45,309       257,453
  Interest on Idle Funds                           10,473       108,239      105,163      102,062       99,075       96,132       93,246       90,410       87,610       84,860       82,160       79,498     1,038,928
TOTAL INCOME                                     $10,473      $129,363     $170,059     $171,521     $173,063     $174,614     $176,187     $177,776     $179,364     $180,968     $182,586     $184,207    $1,910,181

Expenses
Operating Expenses
  Administration, marketing and overhead           36,872        36,872       36,872       36,872       39,905       39,905       39,905       39,905       44,405       44,405       44,405       47,375      487,698
  Legal, audit and other professional fees          7,500         4,167        4,167        4,167        4,167        6,250        4,167        4,167        4,167        4,167        4,167        5,000       56,250
Subtotal fund management                         $44,372       $41,039      $41,039      $41,039      $44,072      $46,155      $44,072      $44,072      $48,572      $48,572      $48,572      $52,375     $543,948

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                       0             0            0            0            0            0            0            0            0            0            0            0            0
    Debt Class 2 - Long Term Fixed Rate Notes           0             0            0            0            0            0            0            0            0            0            0            0            0
Gain or Loss on Sale of Notes                           0             0            0            0            0            0            0            0            0            0            0            0            0
Provision for Loan Losses                               0        18,000       53,949       53,794       53,640       53,484       53,327       53,170       53,011       52,852       52,693       52,532      550,452
Subtotal cost of financing activities                 $0       $18,000      $53,949      $53,794      $53,640      $53,484      $53,327      $53,170      $53,011      $52,852      $52,693      $52,532     $550,452

TOTAL EXPENSES                                   $44,372       $59,039      $94,987      $94,833      $97,711      $99,639      $97,399      $97,241     $101,583     $101,424     $101,264     $104,907    $1,094,400

PRE-TAX OPERATING PROFIT (LOSS)                 ($33,899)      $70,324      $75,072      $76,688      $75,352      $74,975      $78,788      $80,534      $77,781      $79,544      $81,322      $79,300     $815,781

Less: Provision for Corp Income Taxes            (13,553)       28,116       30,014       30,660       30,126       29,975       31,499       32,197       31,097       31,801       32,512       31,704      326,149

NET OPERATING PROFIT (LOSS)                     ($20,346)      $42,209      $45,058      $46,028      $45,226      $45,000      $47,289      $48,337      $46,684      $47,742      $48,810      $47,596     $489,633




                                                                                                          66
                                                        Appendix One, Attachment A – Best Case Financials
                                                       Mini Business Plan – New Markets Tax Credit Strategy
                                                       CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
                                                                   Proforma Statement of Operations
                                                                              Five Years


                                                                YEAR TWO                            Total                    YEAR THREE                           Total
                                                   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     YEAR 2        1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     YEAR 3
Investment Income

  Loan Loss Reserves                               $131,400    $138,600    $158,400    $198,000      $626,400    $158,400    $158,400    $158,400    $158,400      $633,600
  Interest on loans                                  103,753     122,226     142,365     167,029       535,374     184,982     201,575     216,832     230,970       834,359
  Interest on Idle Funds                             258,521     239,569     219,135     194,917       912,143     206,570     190,254     175,461     161,945       734,230
TOTAL INCOME                                       $493,675    $500,394    $519,901    $559,947    $2,073,916    $549,952    $550,229    $550,693    $551,315    $2,202,189

Expenses
Operating Expenses
  Administration, marketing and overhead             148,521     148,521     148,521     148,521      594,083      155,204     155,204     155,204     155,204      620,816
  Legal, audit and other professional fees            15,750      15,750      15,750      15,750       63,000       16,538      16,538      16,538      16,538       66,150
Subtotal fund management                           $164,271    $164,271    $164,271    $164,271     $657,083     $171,742    $171,742    $171,742    $171,742     $686,966

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                          0           0           0           0            0            0           0           0           0            0
    Debt Class 2 - Long Term Fixed Rate Notes              0           0           0           0            0            0           0           0           0            0
Gain or Loss on Sale of Notes                              0           0           0           0            0            0           0           0           0            0
Provision for Loan Losses                            113,695     122,615     138,675     172,577      547,562      135,393     133,355     131,351     129,672      529,771
Subtotal cost of financing activities              $113,695    $122,615    $138,675    $172,577     $547,562     $135,393    $133,355    $131,351    $129,672     $529,771

TOTAL EXPENSES                                     $277,966    $286,886    $302,945    $336,848    $1,204,645    $307,135    $305,096    $303,092    $301,413    $1,216,737

PRE-TAX OPERATING PROFIT (LOSS)                    $215,709    $213,508    $216,955    $223,099     $869,271     $242,817    $245,133    $247,601    $249,902     $985,452

Less: Provision for Corp Income Taxes                86,240      85,361      86,739      89,195      347,535       97,078      98,004      98,991      99,911      393,984

NET OPERATING PROFIT (LOSS)                        $129,468    $128,148    $130,217    $133,904     $521,737     $145,739    $147,129    $148,610    $149,991     $591,468




                                                                                          67
                                                          Appendix One, Attachment A – Best Case Financials
                                                         Mini Business Plan – New Markets Tax Credit Strategy
                                                       CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
                                                                   Proforma Statement of Operations
                                                                              Five Years


                                                               YEAR FOUR                            Total                      YEAR FIVE                          Total
                                                   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     YEAR 4        1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     YEAR 5
Investment Income

  Loan Loss Reserves                               $158,400    $158,400    $158,400    $158,400      $633,600    $158,400    $158,400    $158,400    $158,400     $633,600
  Interest on loans                                  245,354     257,965     268,674     277,772     1,049,765     285,976     292,308     296,770     299,600     1,174,654
  Interest on Idle Funds                             246,696     233,220     221,476     211,185       912,576     201,517     193,545     187,301     182,470       764,833
TOTAL INCOME                                       $650,450    $649,584    $648,551    $647,356    $2,595,941    $645,893    $644,253    $642,471    $640,470    $2,573,087

Expenses
Operating Expenses
  Administration, marketing and overhead             162,188     162,188     162,188     162,188      648,753      169,487     169,487     169,487     169,487      677,947
  Legal, audit and other professional fees            17,364      17,364      17,364      17,364       69,458       18,233      18,233      18,233      18,233       72,930
Subtotal fund management                           $179,553    $179,553    $179,553    $179,553     $718,210     $187,719    $187,719    $187,719    $187,719     $750,877

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                          0           0           0           0             0           0           0           0           0             0
    Debt Class 2 - Long Term Fixed Rate Notes        168,750     168,750     168,750     168,750       675,000     168,750     168,750     168,750     168,750       675,000
Gain or Loss on Sale of Notes                              0           0           0           0             0           0           0           0           0             0
Provision for Loan Losses                            137,310     132,511     127,689     123,270       520,781     120,225     115,973     111,329     106,401       453,927
Subtotal cost of financing activities              $306,060    $301,261    $296,439    $292,020    $1,195,781    $288,975    $284,723    $280,079    $275,151    $1,128,927

TOTAL EXPENSES                                     $485,613    $480,814    $475,992    $471,573    $1,913,991    $476,694    $472,442    $467,798    $462,870    $1,879,804

PRE-TAX OPERATING PROFIT (LOSS)                    $164,837    $168,770    $172,559    $175,784     $681,950     $169,199    $171,811    $174,673    $177,600     $693,283

Less: Provision for Corp Income Taxes                65,902      67,474      68,989      70,278      272,643       67,646      68,690      69,834      71,005      277,175

NET OPERATING PROFIT (LOSS)                         $98,935    $101,296    $103,570    $105,505     $409,306     $101,553    $103,121    $104,839    $106,596     $416,108




                                                                                         68
                                                                Appendix One, Attachment B – Base Case Financials
                                                               Mini Business Plan – New Markets Tax Credit Strategy
                                                                         CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                 RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                                         Proforma Statement of Financing and Investment Activities
                                                                                                Five Years

                                                                                        YEAR ONE                                                                                                                           Total
                                             Month 1        Month 2       Month 3       Month 4       Month 5       Month 6       Month 7       Month 8       Month 9       Month 10       Month 11       Month 12        YEAR 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                         $3,500,000             $0           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0      $3,500,000
    Private (NMTC) Investors                           0     30,000,000            0             0             0             0             0             0             0              0              0              0      30,000,000
 Total of Funding From Investors             $3,500,000    $30,000,000           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0     $33,500,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0              0             0             0             0             0             0             0             0              0              0              0              0
   Debt Class 2-Long Term Fixed Rate                   0              0             0             0             0             0             0             0             0              0              0              0              0
Total Funding From Issuance of
 Debt                                                $0             $0           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0               $0

Total Funding From Financing Activities      $3,500,000    $30,000,000           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0     $33,500,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.              0       335,996             0             0             0             0             0             0             0              0              0              0        335,996
    Private (NMTC) Investors                           0             0             0             0             0             0             0             0             0              0              0              0              0
 Total Shares Redeemed                               $0      $335,996            $0            $0            $0            $0            $0            $0            $0             $0             $0             $0       $335,996

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                      0              0            0             0             0             0             0             0             0              0              0              0                0
    Debt Class 2-Long Term Fixed Rate                  0              0            0             0             0             0             0             0             0              0              0              0                0
 Total Payments of Corporate Notes                   $0             $0           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0               $0

Total Application of Funds                           $0      $335,996            $0            $0            $0            $0            $0            $0            $0             $0             $0             $0       $335,996

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            $3,500,000    $29,664,004           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0     $33,164,004

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                               0              0             0             0             0             0             0             0             0              0              0              0              0
  Sale of Deferred Payment Loans                       0              0             0             0             0             0             0             0             0              0              0              0              0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans              $0             $0           $0            $0            $0            $0            $0            $0            $0             $0             $0             $0               $0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                      0       150,000       450,000       450,000       450,000       450,000       450,000       450,000       450,000        450,000       450,000        450,000        4,650,000
   Deferred Payment Loans                              0        60,000       180,000       180,000       180,000       180,000       180,000       180,000       180,000        180,000       180,000        180,000        1,860,000
   Subordinate Debt                                    0        90,000       270,000       270,000       270,000       270,000       270,000       270,000       270,000        270,000       270,000        270,000        2,790,000
Total Lending Activities                             $0      $300,000      $900,000      $900,000      $900,000      $900,000      $900,000      $900,000      $900,000       $900,000      $900,000       $900,000       $9,299,999

ADD: Principal Collections                           $0             $0       $3,421       $13,700       $24,033       $34,419       $44,859       $55,353       $65,902        $76,505       $87,163        $97,877        $503,232

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                    $0      ($300,000)   ($896,579)    ($886,300)    ($875,967)    ($865,581)    ($855,141)    ($844,647)    ($834,098)     ($823,495)     ($812,837)     ($802,123)    ($8,796,767)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES   $3,500,000           $29,364,004    ($896,579)    ($886,300)    ($875,967)    ($865,581)    ($855,141)    ($844,647)    ($834,098)     ($823,495)     ($812,837)     ($802,123)    $24,367,237



                                                                                                          69
                                               Appendix One, Attachment B – Base Case Financials
                                              Mini Business Plan – New Markets Tax Credit Strategy
                                                       CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                               RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                       Proforma Statement of Financing and Investment Activities
                                                                              Five Years

                                                                YEAR TWO                                           Total                          YEAR THREE                                           Total
                                              1st Qtr          2nd Qtr          3rd Qtr          4th Qtr          YEAR 2          1st Qtr          2nd Qtr          3rd Qtr          4th Qtr          YEAR 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                         $3,500,000                  $0               $0               $0    $3,500,000      $3,000,000                  $0               $0               $0    $3,000,000
    Private (NMTC) Investors                           0                   0                0                0             0               0                   0                0                0             0
 Total of Funding From Investors             $3,500,000                  $0               $0               $0    $3,500,000      $3,000,000                  $0               $0               $0    $3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                               0                0                0                0               0                0                0                0                0               0
   Debt Class 2-Long Term Fixed Rate                     0                0                0                0               0                0                0                0                0               0
Total Funding From Issuance of
 Debt                                                   $0               $0               $0               $0              $0               $0               $0               $0               $0              $0

Total Funding From Financing Activities      $3,500,000                  $0               $0               $0    $3,500,000      $3,000,000                  $0               $0               $0    $3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                 0                0                0                0               0                0                0                0                0               0
    Private (NMTC) Investors                              0                0                0                0               0                0                0                0                0               0
 Total Shares Redeemed                                  $0               $0               $0               $0              $0               $0               $0               $0               $0              $0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                         0                0                0                0               0                0                0                0                0               0
    Debt Class 2-Long Term Fixed Rate                     0                0                0                0               0                0                0                0                0               0
 Total Payments of Corporate Notes                      $0               $0               $0               $0              $0               $0               $0               $0               $0              $0

Total Application of Funds                              $0               $0               $0               $0              $0               $0               $0               $0               $0              $0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            $3,500,000                  $0               $0               $0    $3,500,000      $3,000,000                  $0               $0               $0    $3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                 0                0                0                0               0                0                0                0                0               0
  Sale of Deferred Payment Loans                         0                0                0                0               0                0                0                0                0               0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                 $0               $0               $0               $0              $0               $0               $0               $0               $0              $0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                750,000        1,050,000        1,200,000        1,500,000        4,500,000       1,200,000        1,200,000        1,200,000        1,200,000        4,800,000
   Deferred Payment Loans                        480,000          420,000          480,000          600,000        1,980,000         480,000          480,000          480,000          480,000        1,920,000
   Subordinate Debt                              450,000          630,000          720,000          900,000        2,700,000         720,000          720,000          720,000          720,000        2,880,000
Total Lending Activities                     $1,680,000       $2,100,000       $2,400,000       $3,000,000       $9,180,000      $2,400,000       $2,400,000       $2,400,000       $2,400,000       $9,600,000

ADD: Principal Collections                     $220,317         $225,636         $355,028         $494,857       $1,295,838        $573,769         $709,674         $843,273         $955,217       $3,081,933

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                            ($1,459,683)     ($1,874,364)     ($2,044,972)     ($2,505,143)     ($7,884,162)    ($1,826,231)     ($1,690,326)     ($1,556,727)     ($1,444,783)     ($6,518,067)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES   $2,040,317              ($1,874,364)     ($2,044,972)     ($2,505,143)     ($4,384,162)    $1,173,769       ($1,690,326)     ($1,556,727)     ($1,444,783)     ($3,518,067)



                                                                                                   70
                                               Appendix One, Attachment B – Base Case Financials
                                              Mini Business Plan – New Markets Tax Credit Strategy
                                                       CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                               RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                       Proforma Statement of Financing and Investment Activities
                                                                              Five Years

                                                              YEAR FOUR                                           Total                           YEAR FIVE                                       Total
                                              1st Qtr          2nd Qtr          3rd Qtr         4th Qtr          YEAR 4         1st Qtr         2nd Qtr         3rd Qtr         4th Qtr          YEAR 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                    $0               $0               $0              $0              $0              $0              $0              $0              $0              $0
    Private (NMTC) Investors                              0                0                0               0               0               0               0               0               0               0
 Total of Funding From Investors                        $0               $0               $0              $0              $0              $0              $0              $0              $0              $0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0                  0                0               0              0                0               0               0               0               0
   Debt Class 2-Long Term Fixed Rate          10,000,000                  0                0               0     10,000,000                0               0               0               0               0
Total Funding From Issuance of
 Debt                                        $10,000,000                 $0               $0              $0    $10,000,000               $0              $0              $0              $0              $0

Total Funding From Financing Activities      $10,000,000                 $0               $0              $0    $10,000,000               $0              $0              $0              $0              $0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                 0                0                0               0               0               0               0               0               0               0
    Private (NMTC) Investors                              0                0                0               0               0               0               0               0               0               0
 Total Shares Redeemed                                  $0               $0               $0              $0              $0              $0              $0              $0              $0              $0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                         0                0                0               0               0               0               0               0               0               0
    Debt Class 2-Long Term Fixed Rate                     0                0                0               0               0               0               0               0               0               0
 Total Payments of Corporate Notes                      $0               $0               $0              $0              $0              $0              $0              $0              $0              $0

Total Application of Funds                              $0               $0               $0              $0              $0              $0              $0              $0              $0              $0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            $10,000,000                 $0               $0              $0    $10,000,000               $0              $0              $0              $0              $0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                 0                0                0               0               0               0               0               0               0               0
  Sale of Deferred Payment Loans                         0                0                0               0               0               0               0               0               0               0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                 $0               $0               $0              $0              $0              $0              $0              $0              $0              $0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                               1,200,000       1,200,000        1,200,000        1,200,000        4,800,000      1,200,000       1,200,000       1,200,000       1,200,000       4,800,000
   Deferred Payment Loans                         480,000         480,000          480,000          480,000        1,920,000        480,000         480,000         480,000         480,000       1,920,000
   Subordinate Debt                               720,000         720,000          720,000          720,000        2,880,000        720,000         720,000         720,000         720,000       2,880,000
Total Lending Activities                      $2,400,000      $2,400,000       $2,400,000       $2,400,000       $9,600,000     $2,400,000      $2,400,000      $2,400,000      $2,400,000      $9,600,000

ADD: Principal Collections                     $951,570       $1,111,448       $1,270,681       $1,400,893       $4,734,593     $1,460,095      $1,620,576      $1,782,750      $1,916,353      $6,779,774

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                            ($1,448,430)     ($1,288,552)     ($1,129,319)      ($999,107)     ($4,865,407)     ($939,905)      ($779,424)      ($617,250)      ($483,647)     ($2,820,226)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES   $8,551,570              ($1,288,552)     ($1,129,319)      ($999,107)      $5,134,593      ($939,905)      ($779,424)      ($617,250)      ($483,647)     ($2,820,226)




                                                                                                  71
                              Appendix One, Attachment B – Base Case Financials
                             Mini Business Plan – New Markets Tax Credit Strategy
                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                      RMDZ LOAN PROGRAM
                            RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                         Proforma Statement of Financial Condition
                                                       At December 31




           ASSETS                              December 31       December 31       December 31    December 31 December 31
Current Assets                                  FY Year 1         FY Year 2         FY Year 3      FY Year 4   FY Year 5
Cash, Short Term Investments and Reserves
Notes Receivable                               $    24,666,582   $ 20,582,111      $ 17,356,593   $ 22,687,104   $ 19,871,428
Interest Receivable-Deferred Interest Notes          8,796,767     16,680,931        23,198,997     28,064,404     30,884,630
  Total Current Assets                                  30,813        160,225           374,425        637,799        871,186
                                                    33,494,162     37,423,266        40,930,015     51,389,307     51,627,244
Fixed Assets and Other
Furniture & Equipment
Less Accumulated Depreciation                  $        90,000 $          91,350 $       92,761 $       94,235 $       95,776
  Total Fixed Assets                                   (18,000)          (36,270)       (54,822)       (73,669)       (92,824)
                                                        72,000            55,080         37,939         20,566          2,951
Other Assets
                                                       25,000            25,000          25,000        25,000         25,000
Total Assets
                                               $    33,591,162   $ 37,503,346      $ 40,992,954   $ 51,434,873   $ 51,655,195

LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable & Accrued Expenses
Current Portion of Long Term Debt              $       52,375    $       54,757    $     57,247   $    59,851    $    62,573
  Total Current Liabilities                                 0                 0               0             0              0
                                                      $52,375           $54,757         $57,247       $59,851        $62,573
Long Term Debt
Corporate Notes Payable
 Total Long Term Debt                                      $0                $0             $0     $10,000,000   $10,000,000
                                                           $0                $0             $0     $10,000,000   $10,000,000
Total Liabilities
                                                      $52,375           $54,757         $57,247    $10,059,851   $10,062,573
Shareholders' Equity
CIWMB Equity-Like Investment
NMTC Investment-Common Stock                   $     3,500,000   $     7,000,000   $ 10,000,000   $ 10,000,000   $ 10,000,000
Retained Earnings                                   29,664,000        29,664,000     29,664,000     29,664,000     29,664,000
 Total Shareholders' Equity                            374,783           784,585      1,271,703      1,582,003      1,928,618
                                                   $33,538,787       $37,448,589    $40,935,707    $41,246,007    $41,592,622

Total Liabilities and Shareholders' Equity
                                               $    33,591,162   $ 37,503,346      $ 40,992,954   $ 51,305,857   $ 51,655,195



                                                          72
                                                             Appendix One, Attachment B – Base Case Financials
                                                            Mini Business Plan – New Markets Tax Credit Strategy
                                                            CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                      RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                                          Proforma Statement of Operations
                                                                                Five Years


                                                                                                               YEAR ONE                                                                          Total
                                                Month 1     Month 2    Month 3     Month 4     Month 5     Month 6     Month 7     Month 8     Month 9     Month 10    Month 11    Month 12     YEAR 1
Program Income

  Loan Loss Reserves                                 $0  $28,500  $85,500  $85,500  $85,500  $85,500  $85,500  $85,500  $85,500  $85,500  $85,500  $85,500   $883,500
  Interest on loans                                    0    1,324    5,496   10,059   14,588   19,082   23,541   27,965   32,354   36,708   41,026   45,309    257,453
  Interest on Idle Funds                          10,473  108,218  105,079  101,916   98,867   95,863   92,916   90,020   87,160   84,351   81,592   78,872  1,035,327
TOTAL INCOME                                    $10,473 $138,042 $196,075 $197,475 $198,955 $200,445 $201,957 $203,485 $205,014 $206,559 $208,119 $209,681 $2,176,280

Expenses
Operating Expenses
  Administration, marketing and overhead          36,872      36,872      36,872      36,872      39,905      39,905      39,905      39,905      44,405      44,405      44,405      47,375      487,698
  Legal, audit and other professional fees         7,500       4,167       4,167       4,167       4,167       6,250       4,167       4,167       4,167       4,167       4,167       5,000       56,250
Subtotal fund management                        $44,372     $41,039     $41,039     $41,039     $44,072     $46,155     $44,072     $44,072     $48,572     $48,572     $48,572     $52,375     $543,948

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                      0           0           0           0           0           0           0           0           0           0           0           0          0
    Debt Class 2 - Long Term Fixed Rate Notes          0           0           0           0           0           0           0           0           0           0           0           0          0
Gain or Loss on Sale of Notes                          0           0           0           0           0           0           0           0           0           0           0           0          0
Provision for Loan Losses                              0      33,000      98,897      98,589      98,279      97,967      97,654      97,339      97,023      96,705      96,385      96,064  1,007,903
Subtotal cost of financing activities                $0     $33,000     $98,897     $98,589     $98,279     $97,967     $97,654     $97,339     $97,023     $96,705     $96,385     $96,064 $1,007,903

TOTAL EXPENSES                                  $44,372     $74,039    $139,936    $139,628    $142,351    $144,122    $141,726    $141,411    $145,595    $145,277    $144,957    $148,439    $1,551,851

PRE-TAX OPERATING PROFIT (LOSS)                 ($33,899)   $64,003     $56,139     $57,847     $56,604     $56,322     $60,231     $62,074     $59,420     $61,282     $63,162     $61,242     $624,429

Less: Provision for Corp Income Taxes            (13,553)    25,588      22,444      23,127      22,630      22,518      24,080      24,817      23,756      24,501      25,252      24,485      249,646

NET OPERATING PROFIT (LOSS)                     ($20,346)   $38,415     $33,695     $34,720     $33,974     $33,805     $36,151     $37,257     $35,664     $36,782     $37,910     $36,758     $374,783




                                                                                                 73
                                                   Appendix One, Attachment B – Base Case Financials
                                                  Mini Business Plan – New Markets Tax Credit Strategy
                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                             RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                                  Proforma Statement of Operations
                                                                        Five Years


                                                              YEAR TWO                        Total                  YEAR THREE                        Total
                                                 1st Qtr    2nd Qtr    3rd Qtr    4th Qtr    YEAR 2      1st Qtr    2nd Qtr    3rd Qtr    4th Qtr     YEAR 3
Program Income

  Loan Loss Reserves                             $187,500 $199,500 $228,000 $285,000   $900,000          $228,000 $228,000 $228,000 $228,000   $912,000
  Interest on loans                                103,753  122,226  142,365  167,029    535,374           184,982  201,575  216,832  230,970    834,359
  Interest on Idle Funds                           256,308  236,948  216,064  191,290    900,610           202,525  185,811  170,641  156,764    715,742
TOTAL INCOME                                     $547,561 $558,674 $586,429 $643,319 $2,335,984          $615,507 $615,386 $615,473 $615,734 $2,462,100

Expenses
Operating Expenses
  Administration, marketing and overhead           148,521  148,521  148,521  148,521          594,083     155,204  155,204  155,204  155,204           620,816
  Legal, audit and other professional fees          15,750   15,750   15,750   15,750           63,000      16,538   16,538   16,538   16,538            66,150
Subtotal fund management                         $164,271 $164,271 $164,271 $164,271         $657,083    $171,742 $171,742 $171,742 $171,742          $686,966

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                     0        0        0        0                   0           0        0        0        0                 0
    Debt Class 2 - Long Term Fixed Rate Notes         0        0        0        0                   0           0        0        0        0                 0
Gain or Loss on Sale of Notes                         0        0        0        0                   0           0        0        0        0                 0
Provision for Loan Losses                       203,390  224,231  253,349  315,154             996,125     246,787  242,710  238,702  235,343           963,542
Subtotal cost of financing activities         $203,390 $224,231 $253,349 $315,154            $996,125    $246,787 $242,710 $238,702 $235,343          $963,542

TOTAL EXPENSES                                   $367,661   $388,502   $417,620   $479,425 $1,653,207    $418,528   $414,451   $410,443   $407,085   $1,650,508

PRE-TAX OPERATING PROFIT (LOSS)                  $179,900   $170,172   $168,810   $163,895   $682,776    $196,978   $200,935   $205,030   $208,649    $811,592

Less: Provision for Corp Income Taxes              71,924     68,035     67,490     65,525    272,974      78,752     80,334     81,971     83,418     324,474

NET OPERATING PROFIT (LOSS)                      $107,976   $102,137   $101,319    $98,370   $409,802    $118,226   $120,601   $123,059   $125,231    $487,117




                                                                                   74
                                                    Appendix One, Attachment B – Base Case Financials
                                                   Mini Business Plan – New Markets Tax Credit Strategy
                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                             RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
                                                                  Proforma Statement of Operations
                                                                        Five Years


                                                            YEAR FOUR                         Total                     YEAR FIVE                      Total
                                                 1st Qtr   2nd Qtr    3rd Qtr    4th Qtr     YEAR 4      1st Qtr    2nd Qtr    3rd Qtr    4th Qtr     YEAR 5
Program Income

  Loan Loss Reserves                            $228,000 $228,000 $228,000 $228,000   $912,000           $228,000 $228,000 $228,000 $228,000   $912,000
  Interest on loans                               245,354  257,965  268,674  277,772  1,049,765            285,976  292,308  296,770  299,600  1,174,654
  Interest on Idle Funds                          241,106  227,260  215,186  204,598    888,150            194,658  186,448  180,005  175,013    736,124
TOTAL INCOME                                    $714,460 $713,225 $711,860 $710,370 $2,849,915           $708,633 $706,756 $704,775 $702,613 $2,822,778

Expenses
Operating Expenses
  Administration, marketing and overhead          162,188  162,188  162,188  162,188           648,753     169,487  169,487  169,487  169,487           677,947
  Legal, audit and other professional fees         17,364   17,364   17,364   17,364            69,458      18,233   18,233   18,233   18,233            72,930
Subtotal fund management                        $179,553 $179,553 $179,553 $179,553          $718,210    $187,719 $187,719 $187,719 $187,719          $750,877

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                     0        0        0        0          0                    0        0        0        0          0
    Debt Class 2 - Long Term Fixed Rate Notes   168,750  168,750  168,750  168,750    675,000              168,750  168,750  168,750  168,750    675,000
Gain or Loss on Sale of Notes                         0        0        0        0          0                    0        0        0        0          0
Provision for Loan Losses                       247,812  239,103  230,360  222,435    939,710              217,143  209,323  200,854  192,081    819,401
Subtotal cost of financing activities         $416,562 $407,853 $399,110 $391,185 $1,614,710             $385,893 $378,073 $369,604 $360,831 $1,494,401

TOTAL EXPENSES                                  $596,114   $587,406   $578,663   $570,738   $2,332,921   $573,613   $565,792   $557,323   $548,550   $2,245,278

PRE-TAX OPERATING PROFIT (LOSS)                 $118,345   $125,819   $133,197   $139,633    $516,994    $135,021   $140,964   $147,452   $154,064    $577,500

Less: Provision for Corp Income Taxes             47,314     50,302     53,252     55,825     206,694      53,981     56,357     58,951     61,595     230,884

NET OPERATING PROFIT (LOSS)                      $71,031    $75,517    $79,945    $83,808    $310,300     $81,039    $84,607    $88,501    $92,469    $346,615




                                                                                  75
                                     Appendix Two
                      Mini Business Plan – Loan Guaranty Strategy

LOAN GUARANTY STRATEGY

Introduction

The following mini-business plan describes a strategy for a Co-Guaranty Program (COP) that
would produce at least $10 million annually in private financing for small recycling companies
that have difficulty securing affordable financing from banks and venture firms. Under the COP,
the Board’s appropriated funds would be used for two purposes:

   To back loan guaranties on both market and below-market rate loans.
   To pay subsidies on below-market loans made by guaranteed lenders.

To implement this loan guarantee strategy, Board staff would meet with the Ca. Technology,
Trade and Commerce Agency that has state oversight for the program and meet with the The
Association of Regional Corporations (TARC) that represents the 11 Financial Development
Corporations that issue the state loan guarantee’s. Some of these FDC;’s have CDFI and/or CDE
certification and plan on utilizing the NMTC program.

Success of COP would depend on

   The performance of guaranteed loans. (The historic 5-year FDC loss rate is only 1.55%)
    Prudent underwriting developed by each of the FDC’s have proved successful in issuing loan
    guarantees to banks for small business subordinate and deferred-payment loans.

   Amount of exposure. Although the maximum guaranty authorized under the COP would be
    90 percent of the loan amount, the average guaranty percentage could conceivably be lower.
    Lower loss exposure levels would allow the Board to achieve greater leverage.

   Revenues generated by reserve funds and guarantee premiums. To the extent that guaranty
    premiums (paid by borrowers) and interest earned from the invested reserves are able to
    finance guaranty payments on defaulted loans, CIWMB would be able to reduce the level of
    reserves need to (a) to back reserves and pay losses and (b) finance subsidy payments in
    connection with below-market loans.


Under the other three leveraging alternatives to be presented, the Board or an affiliated
organization would use borrowed and invested capital to finance loans to recycling companies.
However, under the COP, the Board would use its funds to provide ―credit support‖ for recycling
loans made by commercial lenders. Nevertheless, the guaranty program’s capacity to generate
recycling loans – as well as its financial viability-- would depend on two of the factors that
govern the success of direct lending programs

   The performance of loan assets. Loans made under the program should provide different
    types of funding for recycling companies at different stages of maturity. At the same time
    losses must be limited to levels that would not exhaust COP’s guaranty reserves.

   The right level of operating expenses. The expenses associated with underwriting loan
    guaranties should not exceed what the Board can earn from investing the reserves held
    against its guaranties. Under an existing arrangement with an outside investor in the state



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                                     Appendix Two
                      Mini Business Plan – Loan Guaranty Strategy
    loan guarantee program, the FDC’s can use that investors funds to collect a $3,500 fee per
    loan and the FDC’s can use all the interest earnings to cover part of their operating costs.

The mini business plan is organized into seven brief sections.

Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.

Section 2 – Products
Describes the types of loans the program issues.

Section 3 – Capital Structure & Sources
Describes how the Co-Guaranty Program would be financed.

Section 4 – Operations
Describes how the Co-Guaranty Program would be managed.

Section 5 – Implementation
Sets forth the tasks and costs required to secure commitments for the program

Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.

Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.

Section 1 – Borrowers

The COP would be designed to meet the financing needs of three types of recycling companies
that make up the RMDZ market.

   Established recycling firms. Approximately 50 percent of its borrowers would be companies
    that have sufficient operating and earnings history to secure credit from conventional sources.
    These low-risk companies would be more concerned with the cost of capital than with access
    to capital.

   Expansion-stage companies. Approximately 30 percent of borrowers would be companies
    that have survived their formative years and are now seeking to grow. However, these
    companies lack the earnings history, capital or collateral needed to support the full amount of
    funding needed to finance expansion.

   Early-stage companies. The remaining 20 percent of COP borrowers would be companies
    that are essentially start-up businesses. Because they are not yet producing positive cash
    flows, these high-risk companies require some form of ―equity‖ financing to fund continued
    growth.




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                      Mini Business Plan – Loan Guaranty Strategy
Section 2 – Loans

Following are the types of loans that would be guaranteed under COP. Each is designed to meet
the peculiar needs of a particular borrower segment:

   Below-market loans. Established recycling companies seeking expansion financing would be
    eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
    below the market rate for such financing. Underwriting standards for these loans including
    loan-to-value and debt service coverage ratios would be only slightly more liberal than those
    employed by commercial lenders.

        Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
        range of furniture products. Its sales are about $1.5 million annually. In order to expand,
        it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
        percent, a 15-year, market-rate loan would cost the firm $56,000 annually in debt
        service. However, at 2 percent below prime, a below-market loan would only require
        $41,000 in debt service, a savings of $15,000 annually. A bank agrees to make the loan
        at 2.75 percent in exchange for an 80 percent guaranty and the payment of sufficient
        points, by COP, to bring its yield on the loan to prime, 4.75 percent.

   Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
    senior financing needed for fixed assets or working capital would be candidates for
    subordinate debt. These loans would typically be structured as 25 to 40 percent junior
    participations in senior, secured loans extended by banks or other commercial lenders.
    Because of the risk associated with junior-lien lending, the junior interest in each transaction
    would be priced at 300 to 500 basis points above prime. In addition, as part of each
    transaction, a loan loss reserve contribution, equaling four to eight percent of the total
    financing, would be funded from loan proceeds and retained in a dedicated insurance fund.

        MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
        The company has grown rapidly but its weak balance sheet makes it impossible to secure
        $250,000 in equipment financing that it needs to expand. A local bank agrees to make
        the equipment loan under a two-part structure. It makes a $187,500 loan backed by a 75
        percent SBA guarantee and a 7-year, $80,000 subordinate loan backed by an COP
        guarantee. The subordinate loan includes a $12,500 insurance payment to the COP
        program. The loan structure provides the bank with earning assets of $267,500 but with
        total exposure of only $72,250 and allows MicroCast to grow.




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                                     Appendix Two
                      Mini Business Plan – Loan Guaranty Strategy

                                 Gives $250,000 note and $12,500 reserve




                            RFP             Makes $250,000 loan          MicroCast



                                   Sells $187,500 senior interest



                           Lender




   Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
    the cash flow (or collateral) to qualify for debt financing nor the ―upside‖ potential to qualify
    for venture or angel financing would be candidates for deferred payment loans. The deferred
    payment loan would be modeled on the structure employed by SBA for investments in New
    Markets Venture Capital Companies. That is, each loan would involve a ―discount period‖—
    2 to 3 years during which no principal or interest payments would be required --followed by
    an amortization period. Upon closing, the borrower would receive the full amount of the loan
    less the present value of interest for the discount period. At the end of the discount period, the
    borrower would repay the loan in regular installments of principal and interest over a period
    of up to seven years. The COP program would assume part of the risk that borrowers would
    be unable to repay loans during the amortization period by providing up to an 80 percent
    guarantee. As with subordinate loans, a cash reserve account would be funded as part of each
    transaction

        TireWare is an early stage company that has developed a more efficient way of
        retreading tires. Although it needs $200,000 to fund its operations, neither venture
        capital companies nor angel investors are willing to invest. Using the deferred payment
        note structure, a bank makes a $287,000 loan to the borrower. Of this amount
        approximately $67,000, the present value of three years of interest and $20,000 in loan-
        loss reserve contributions are retained by the bank. At the end of three years TireWare
        begins making payments of $5,000 per month to repay the $287,000 balance over seven
        years. In order to protect the bank from default risk during the amortization period, COP
        provides an 80 percent guaranty. The guaranteed deferred payment note structure gives
        TireWare has full use of $200,000 for three years—essentially equity without the need to
        relinquish shares. At the same time, it provides the bank protection against loan default
        during both the discount period and the amortization period.




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                     Mini Business Plan – Loan Guaranty Strategy




                               Borrower

                                                         Gives $287,000 note with
                                                         3-year discount period and
             Advances $200,000                           7-year amortization




                                 Lender




Section 3 – Program Structure

Guaranties

In order to maximize leverage while minimizing program administration costs, the COP would be
undertaken as a partnership between the Board and an existing small business loan guarantor,
preferably one or more of California’s Regional Financial Development Corporations (FDCs).
FDC’s are non-profit companies that employ a dedicated reserve fund of the California
Technology, Trade and Commerce Agency to provide guaranties of up to 90 percent on small
business loans made by commercial banks. Preliminary conversations with at least both Nor-Cal
FDC and California Southern FDC indicate significant interest in a program designed to finance
recycling companies. As we envisage the partnership:

   CIWMB would enter into a master contract with the CTTCA to issue loan guarantee to
    recycling companies.

   Under the agreement, CIWMB would pay 50 percent of the FDC’s guaranty expenses on
    loans of up to, say, $1 million. Because FDC’s are limited to guaranties on loans of no
    greater than $350,000, COP may have to be structured so that the FDC’s pay losses incurred
    on the first $350,000 of each guaranteed loan with CIWMB paying losses on amounts over
    $350,000. The following table compares how much CIWMB and the FDC would pay for
    losses incurred on three different loan guaranty agreements, each involving an 80 percent
    guaranty.




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                                     Appendix Two
                      Mini Business Plan – Loan Guaranty Strategy

               Loan Amount                $350,000      $700,000      $1,000,000
               Total guaranty (80%)       $280,000      $560,000      $ 800,000
               FDC share                  $280,000      $280,000)     $ 280,000
               CIWMB share                  -0-         $280,000      $ 520,000
               Total exposure             $280,000      $560,000)     $ 800,000


The proposed co-guaranty program structure enables both CIWMB and the FDC to achieve
greater leverage with their limited guaranty reserve funds without increasing the guaranteed
lender’s exposure to loss.

   Because CIWMB’s would share the risk on loans with FDCs, it would be able to achieve
    higher leverage than would be the case were it responsible for paying 100 percent of loan
    losses. For example, assuming that CIWMB were to set aside 25 percent of its exposure for
    each loan guaranty (the amount that FDC’s are required to hold in reserve), and that the
    average guaranty contract covers 80 percent of the loan balance, each $1 in reserves could
    achieve leverage ranging from about 8:1 to 40:1 (or more) depending on the average size of
    loans guaranteed.

                     Average loan size            $400,000    $1,000,000
                     Guaranty exposure            $320,000    $ 800,000
                     FDC exposure                 $280,000    $ 280,000
                     CIWMB exposure               $ 40,000    $ 520,000
                     CIWMB reserves (25%)         $ 10,000    $ 130,000
                     Leverage                      40:1          7.69:1


   By sharing guaranty risk on recycling loans with CIWMB, FDC’s would also achieve higher
    leverage and provide banks higher guaranty levels (at least on recycling loans) without
    increasing their risk.

Subsidies

We expect that approximately half of the recycling loans made under the guaranty program would
be below-market loans to established companies. Because lenders would be reluctant to
subsidize borrowers, CIWMB would need to create a subsidy fund to pay lenders an amount that
would produce market-rate yields on guaranteed loans. Assuming that that would be on average
a 300 basis point difference between the CIWMB’s ―below-market‖ rate and a lender’s market
rate, CIWMB would need to make an up-front payment to the lender of between 8 to 18 percent
of the loan, depending on the contractual life of the loan. Given an average payment at the
midpoint between the two amounts, annual contributions to the subsidy of fund of approximately
$650,000 (13 percent of $5 million) should be sufficient to provide lenders the yields they
require.

Financial Requirements

Assuming an average guaranteed loan size of $700,000, CIWMB would need to contribute
approximately $8.2 million to guaranty reserves and subsidy funds over a five-year period in
order to support $50 million in lending over a five-year period.



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              Year 1       Year 2        Year 3         Year 4        Year 5         Total
Guaranty     $1.000        $1.000        $1.000         $1.000        $1.000         $5.000
reserves
Subsidy        .650           .650          .650          .650           .6 50       3.250
fund
Total        $1.650        $1.650        $1.650         $1.650        $1.650         $8.250


Financing Sources


Following is a list of three FDC’s that are possible candidates for the proposed co-guaranty
program. Under the current state-sponsored small business loan guaranty program, FDCs
provide risk protection for bank loans to companies that do not meet normal standards of
creditworthiness. The maximum guaranty is 80 percent on loans of up to $350,000. The typical
FDC has guaranty authority of about $15-$20 million backed by approximately $4 million in
reserves.


   Nor-Cal Financial Development Corporation, Pleasanton, CA
   Pacific Coast Regional Financial Development Corporation, Los Angeles, CA,
   California Southern Financial Development Corporation, San Diego, CA

Section 4 – Operations

In order to minimize the CIWMB’s staffing requirements and operating costs, the principal
functions associated with managing the guaranty program would be assumed by banks and
cooperating FDCs.

   Loan origination. FDCs, banks and Recycling Market Development the Board would be
    responsible for identifying borrowers and packaging their loan applications.

   Guaranty underwriting. In cooperation with its FDC partners, CIWMB would develop a set
    of underwriting standards and policies for each type of guaranteed loan. The FDC would use
    these standards in approving loan guaranties.

   Processing and documentation. Guaranties would be processed and documented by the FDC.
    In all likelihood, procedures and documents now employed by the FDC could be used for the
    COP.

   Loan servicing. Loan servicing would be carried out by the lender under an agreement with
    the FDC.


Section 5 – Implementation

Organizing the COP would involve the following tasks

   Organizing finance team. (The finance team will most likely be composed of Board staff. The
    included budgets are merely an estimate of the associated costs). The task of developing a


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                      Mini Business Plan – Loan Guaranty Strategy
    co-guaranty agreement with one or more FDCs would require a ―finance team‖ comprising
    mainly in-house CIWMB staff. At a minimum, CIWMB’s chief credit officer and in-house
    attorney should be members of the team. The services of outside counsel and of a financial
    advisory firm may also be needed. This team’s responsibility would be to establish the
    parameters for the guaranty program, to identify co-guaranty partners and to negotiate co-
    guaranty agreements with these partners.

   Defining initial financing goals. Based on past lending experience, discussions with Zone
    Administrators and interviews with commercial lenders, the finance team should make a
    preliminary estimate of the timing, percentage and average size of loan guaranties needed to
    meet recycling company loan demand. Based on this estimate, a forecast can be made of
    reserve and subsidy funds that the program would require.

   Identify co-guaranty partners. Armed with the loan guaranty forecast, the team should
    identify, and begin discussions with, organizations that are likely partners for the co-guaranty
    program. The principal candidates as co-guarantors are, once again, California’s regional
    small business financial development corporations.

   Develop co-guaranty and subsidy agreement. Discussions with co-guaranty partners should
    result in detailed risk sharing agreements including underwriting standards for various types
    of loan products, required reserve and subsidy levels for each type of loan or guaranty and
    procedures for establishing and maintaining reserve and subsidy funds.

   Review and refine agreement. A draft of the co-guaranty agreement should be presented to,
    and discussed with, CIWMB senior management and Board, selected and lenders. Their
    comments, suggestions and criticisms should be employed to prepare a revised version of the
    agreement.

Cost Budget

The following budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:

   CIWMB staff                  $150
   Outside legal counsel        $250
   Accounting                   $175
   Financial advisory           $300


                                                                       Financial      Total
                                 CIWMB        Legal    Accounting      Advisory       Hours         Cost
             Task
 1. Organize financing team          30         0            0              0           30         4,500
 2. Define financing goals           24         0            0             16           40         8,400
 3. Recruit partners                 80         24          24             40          168        34,000
 4. Develop agreement                40        120          16             24          200        46,000
 5. Refine agreement.                40         60            8            16          124        27,200
 Total                              214        204          48             96          562       120,100

Attachments C and D set forth a schedule for the completion of these tasks.


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                       Mini Business Plan – Loan Guaranty Strategy


Section 6 – Analysis

As a source of financing for the RFP, COP has both advantages and disadvantages. The analysis
bellows considers the proposed leveraging strategy in light of five criteria.

   Simplicity. Because the co-guaranty plan requires CIWMB to raise no outside capital, it
    would be relatively simple to implement. The fact that the co-guaranty partner, RMDZ
    administrators and commercial banks would carry out loan origination, underwriting and loan
    servicing functions would further reduce the plan’s complexity.

   Practicality. The CEOs of two regional corporations have expressed great interest in serving
    as partners in the co-guaranty program attesting to the practicality of the plan. Furthermore,
    the $8.2 million in financing required by the plan is well within CIWMB’s three-year $10.5
    million budget. However, because credit decisions would be reserved for commercial banks
    and other participating lenders, the extent to which the guaranty program would produce
    increased lending to recycling loans is uncertain.

   Sustainability. For five years, program reserves would be adequate to sustain cumulative
    losses exceeding 16 percent on $50 million in loans. This loss rate is almost three times the
    loss rate for SBA and CalCAP loans. In addition, reserve ―insurance‖ or loan-loss
    contributions made in connection with each loan and approximately $2.3 million in additional
    CIWMB reserves --the difference between its available 3-year budget of $10.5 million and
    the $8.2 called for in the mini-business plan—should make the program viable beyond the
    five-year horizon.

   Affordability. Annual subsidy contributions would ensure the affordability of below-market
    loans to established borrowers. Deferred payment and subordinate loan borrowers would
    generally be rate-insensitive firms and would generally consider the financing affordable as
    long as debt payments can be serviced with relative ease from available cash flows.

   Implementability. The existence of willing co-guaranty partners (the regional FDCs) to share
    risks and manage the COP programs should make COP relatively simple to institute and
    operate. However, two possible problems could create implementation difficulties. First,
    recruiting banks to make loans that employ relatively novel structures could prove more time-
    consuming than expected. Second, if regulatory approval is required for FDCs to participate
    in guaranties above $350,000, the completion of risk-sharing agreements could prove a
    relatively protracted process.


Section 7 – Financial Analysis

The following Statements of Sources, Uses and Portfolio Activity are ―best-case‖ and ―base-case‖
financial forecasts for the COP which illustrate the economic condition and activities of the COP
Program for a five-year period. Under both scenarios, COP’s guaranty commitments are
supported by reserves funds coming from the following sources:

   CIWMB contributions.
   Transaction proceeds.


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                        Mini Business Plan – Loan Guaranty Strategy
   Interest on idle funds

The forecasts are based on the following the assumptions

   CIWMB contributes $2.5 million in reserves annually for three years
   Total reserves as a percentage of guaranty exposure are maintained at ratio of 1:4
   Losses occur for each cohort of loans starting in the third year.

Following is a summary of the five-year performance of COP under both scenarios.


               Origination        Guaranty         Reserves       Loan                   Remaining
                                  Exposure                        Losses/Subsidy         Reserves
                                                                  Payments
Best Case      47,280             17,924           4,481          2,531                  8,767
Base Case      47,280             17,924           4,481          3,952                  7,291


Operating Expenses

The following functions are assumed to be borne by the fund:
         Chief Credit Officer @ $120,000
         Chief Financial/Operations Officer @ $85,000
         Two loan officers @ $80,000 total
         One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.

Administration, Marketing and Overhead -- Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.




                                                 85
                                                       Appendix Two, Attachment C – Best Case Financials
                                                         Mini Business Plan – Loan Guaranty Strategy
                                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                          RMDZ LOAN PROGRAM-COP BEST CASE
                                                                       Statement of Sources, Uses and Porfolio Activity
                                                                                         Five Years




                                                                                  YEAR ONE                                                                                                            Total
                                         Month 1       Month 2       Month 3     Month 4       Month 5       Month 6     Month 7       Month 8     Month 9       Month 10     Month 11    Month 12    FY 01
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                               0   1,050,000                                      0        900,000          0        900,000          0         900,000           0     900,000   4,650,000
  Subordinate Loans                                0           0       630,000           0            0        600,000          0        750,000          0               0     810,000           0   2,790,000
  Deferred Payment Loans                           0      60,000       180,000     180,000      180,000        180,000    180,000        180,000    180,000         180,000     180,000     180,000   1,860,000
Total Loan Origination                             0   1,110,000       810,000     180,000      180,000      1,680,000    180,000      1,830,000    180,000       1,080,000     990,000   1,080,000   9,300,000

Defaults Losses
  Below Market Loans
  Subordinate Loans
  Deferred Payment Loans
Total Losses

Principal Curtailments
   Below Market Loans                              0       8,569         8,569       8,569        8,569        15,914      15,914        23,259      23,259         30,604       30,604      37,949    211,780
   Subordinate Loans                               0         752         3,008       5,264        7,520         9,775      12,031        14,287      16,543         18,799       21,055      23,311    132,345
   Deferred Payment Loans                          0           0             0           0            0             0           0             0           0              0            0           0          0
Total Principal Curtailments                       0       9,321        11,577      13,833       16,089        25,690      27,945        37,546      39,802         49,403       51,659      61,260    344,125

Loan Guaranty Commitments
  Below Market Loans                               0     560,000             0             0             0    440,000              0    440,000              0     440,000            0     440,000   2,320,000
  Subordinate Loans                                0           0       224,000             0             0    200,000              0    320,000              0           0      368,000           0   1,112,000
  Deferred Payment Loans                           0           0             0             0             0          0              0          0              0           0            0           0           0
Total Guarantees Issued                            0     560,000       224,000             0             0    640,000              0    760,000              0     440,000      368,000     440,000   3,432,000

Beginning Balance of Guarantees Issued             0           0       560,000     784,000      784,000        784,000   1,424,000     1,424,000   2,184,000      2,184,000   2,624,000   2,992,000           0
Cumulative Guarantee Commitments                   0     560,000       784,000     784,000      784,000      1,424,000   1,424,000     2,184,000   2,184,000      2,624,000   2,992,000   3,432,000   3,432,000


LOAN LOSS RESERVES (@25%)                          0    140,000       196,000      196,000       196,000       356,000     356,000       546,000     546,000       656,000      748,000     858,000    858,000
LEVERAGE                                           0    7.93          9.80        10.71         11.63         11.12       11.63         10.93       11.26         11.02        10.99       10.84



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment                     2,500,000                                                                                                                                                    2,500,000
    Loan Reserves                                0        72,617        52,991      11,776       11,776       109,907      11,776       119,720      11,776         70,654       64,766      70,654     608,411
    Interest On Idle Funds                   5,156         5,156         5,156       5,156        5,156         5,156       5,156         5,156       5,156          5,156        5,156       5,156      61,875
Total Source of Funds                    2,505,156        77,773        58,147      16,932       16,932       115,063      16,932       124,876      16,932         75,810       69,923      75,810   3,170,286


Uses of Funds:
    Interest Subsidies                           0         1,750         1,729       1,735        1,728         3,220       3,206         4,692       4,672          6,152        6,125       7,598     42,607
    Loan Guarantee Loss Payments                 0             0             0           0            0             0           0             0           0              0            0           0          0
   COP Operating Expenses                   17,892        16,401        14,910      13,419       11,928        10,437       8,946         7,455       5,964          4,473        2,982       1,491    116,300
Total Use of Funds                          17,892        18,151        16,639      15,154       13,656        13,657      12,153        12,148      10,636         10,625        9,107       9,089    158,907

Funds on Hand at Beginning of Period             0     2,487,264     2,546,886   2,588,394     2,590,171     2,593,447   2,694,853     2,699,632   2,812,360      2,818,656   2,883,842   2,944,658           0
Ending Balance of Funds on Hand          2,487,264     2,546,886     2,588,394   2,590,171     2,593,447     2,694,853   2,699,632     2,812,360   2,818,656      2,883,842   2,944,658   3,011,380   3,011,380



                                                                                                  86
                                         Appendix Two, Attachment C – Best Case Financials
                                           Mini Business Plan – Loan Guaranty Strategy
                                                    CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                           RMDZ LOAN PROGRAM-COP BEST CASE
                                                        Statement of Sources, Uses and Porfolio Activity
                                                                          Five Years




                                                         YEAR TWO                           Total                   YEAR THREE                            Total
                                          1st Qtr       2nd Qtr     3rd Qtr     4th Qtr     FY 02       1st Qtr     2nd Qtr     3rd Qtr     4th Qtr       FY 03
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                        750,000     1,050,000   1,200,000   1,500,000   4,500,000   1,200,000   1,200,000   1,200,000    1,200,000    4,800,000
  Subordinate Loans                         450,000       630,000     720,000     900,000   2,700,000     720,000     720,000     720,000      720,000    2,880,000
  Deferred Payment Loans                    480,000       420,000     480,000     600,000   1,980,000     480,000     480,000     480,000      480,000    1,920,000
Total Loan Origination                    1,680,000     2,100,000   2,400,000   3,000,000   9,180,000   2,400,000   2,400,000   2,400,000    2,400,000    9,600,000

Defaults Losses
  Below Market Loans
  Subordinate Loans
  Deferred Payment Loans
Total Losses

Principal Curtailments
   Below Market Loans                        48,100        49,142      43,992     41,253     182,487       70,633      29,380     129,393     158,772      388,178
   Subordinate Loans                         39,716        55,507      73,554     96,113     264,888      114,160     132,207     150,254     168,301      564,921
   Deferred Payment Loans                         0             0           0          0           0            0           0           0           0            0
Total Principal Curtailments                 87,815       104,649     117,546    137,366     447,376      184,793     161,586     279,646     327,073      953,099

Loan Guaranty Commitments
  Below Market Loans                        320,000       560,000     680,000     690,000   2,250,000     680,000     680,000     680,000     510,000     2,550,000
  Subordinate Loans                          80,000       224,000     296,000     440,000   1,040,000     296,000     296,000     296,000     296,000     1,184,000
  Deferred Payment Loans                          0             0           0           0           0           0           0           0           0             0
Total Guarantees Issued                     400,000       784,000     976,000   1,130,000   3,290,000     976,000     976,000     976,000     806,000     3,734,000

Beginning Balance of Guarantees Issued    3,432,000     3,832,000   4,616,000   5,592,000   3,432,000   6,722,000   7,698,000   8,674,000    9,650,000    6,722,000
Cumulative Guarantee Commitments          3,832,000     4,616,000   5,592,000   6,722,000   6,722,000   7,698,000   8,674,000   9,650,000   10,456,000   10,456,000


LOAN LOSS RESERVES (@25%)                  958,000      1,154,000   1,398,000   1,680,500   1,680,500   1,924,500   2,168,500   2,412,500    2,614,000    2,614,000
LEVERAGE                                  11.46         11.33       11.07        11.00                  10.85       10.74       10.64        10.74



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment                      2,500,000                                         2,500,000   2,500,000                                         2,500,000
    Loan Reserves                           109,907       137,383     157,009    196,262      600,561     157,009     157,009     157,009     157,009       628,037
    Interest On Idle Funds                   36,094        36,094      36,094     36,094      144,375      56,719      56,719      56,719      56,719       226,875
Total Source of Funds                     2,646,000       173,477     193,103    232,355    3,244,936   2,713,728     213,728     213,728     213,728     3,354,912


Uses of Funds:
    Interest Subsidies                       48,752        58,264      69,198      82,341    258,555       93,404     103,924     113,986     123,790      435,103
    Loan Guarantee Loss Payments                  0             0           0           0          0            0           0           0           0            0
   COP Operating Expenses                     7,500         7,500       7,500       7,500     30,000        7,500       7,500       7,500       7,500       30,000
Total Use of Funds                           56,252        65,764      76,698      89,841    288,555      100,904     111,424     121,486     131,290      465,103

Funds on Hand at Beginning of Period      3,011,380     5,601,128   5,708,840   5,825,246   3,011,380   5,967,760   8,580,584   8,682,889    8,775,131    5,967,760
Ending Balance of Funds on Hand           5,601,128     5,708,840   5,825,246   5,967,760   5,967,760   8,580,584   8,682,889   8,775,131    8,857,570    8,857,570



                                                                                87
                                         Appendix Two, Attachment C – Best Case Financials
                                           Mini Business Plan – Loan Guaranty Strategy
                                                      CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                             RMDZ LOAN PROGRAM-COP BEST CASE
                                                          Statement of Sources, Uses and Porfolio Activity
                                                                            Five Years




                                                        YEAR FOUR                              Total                       YEAR FIVE                           Total
                                         1st Qtr        2nd Qtr     3rd Qtr      4th Qtr       FY 04       1st Qtr      2nd Qtr      3rd Qtr      4th Qtr      FY 05
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                      1,200,000     1,200,000    1,200,000    1,200,000    4,800,000    1,200,000    1,200,000    1,200,000    1,200,000    4,800,000
  Subordinate Loans                         720,000       720,000      720,000      720,000    2,880,000      720,000      720,000      720,000      720,000    2,880,000
  Deferred Payment Loans                    480,000       480,000      480,000      480,000    1,920,000      480,000      480,000      480,000      480,000    1,920,000
Total Loan Origination                    2,400,000     2,400,000    2,400,000    2,400,000    9,600,000    2,400,000    2,400,000    2,400,000    2,400,000    9,600,000

Defaults Losses
  Below Market Loans                        16,800         13,200      13,200       26,400       69,600       13,200       26,400       79,200       57,900      176,700
  Subordinate Loans                         33,600          6,000       9,600       11,040       60,240       48,000       11,040       35,760       28,800      123,600
  Deferred Payment Loans                         0              0           0            0            0            0            0            0            0            0
Total Losses                                50,400         19,200      22,800       37,440      129,840       61,200       37,440      114,960       86,700      300,300

Principal Curtailments
   Below Market Loans                      188,152        217,532     246,912      276,292       928,888     305,672       335,052      364,431      393,811    1,398,966
   Subordinate Loans                       186,348        204,395     222,442      240,489       853,674     258,536       276,583      294,630      312,677    1,142,426
   Deferred Payment Loans                   28,930         56,482      90,922      128,118       304,452     276,899       454,611      665,385      917,488    2,314,384
Total Principal Curtailments               403,430        478,409     560,276      644,898     2,087,014     841,107     1,066,246    1,324,447    1,623,976    4,855,776

Loan Guaranty Commitments
  Below Market Loans                       680,000        680,000     680,000      510,000     2,550,000     680,000      680,000      680,000      510,000     2,550,000
  Subordinate Loans                        296,000        296,000     296,000      296,000     1,184,000     296,000      296,000      296,000      296,000     1,184,000
  Deferred Payment Loans                         0              0           0            0             0           0            0            0            0             0
Total Guarantees Issued                    976,000        976,000     976,000      806,000     3,734,000     976,000      976,000      976,000      806,000     3,734,000

Beginning Balance of Guarantees Issued   10,456,000    11,432,000   12,408,000   13,384,000   10,456,000   14,190,000   15,166,000   16,142,000   17,118,000   14,190,000
Cumulative Guarantee Commitments         11,432,000    12,408,000   13,384,000   14,190,000   14,190,000   15,166,000   16,142,000   17,118,000   17,924,000   17,924,000


LOAN LOSS RESERVES (@25%)                 2,858,000     3,102,000    3,346,000    3,547,500    3,547,500    3,791,500    4,035,500    4,279,500    4,481,000    4,481,000
LEVERAGE                                  10.66          10.60        10.54        10.62                     10.57        10.53        10.49       10.55



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment
    Loan Reserves                          157,009        157,009     157,009      157,009      628,037      157,009      157,009      157,009      157,009      628,037
    Interest On Idle Funds                  56,719         56,719      56,719       56,719      226,875       56,719       56,719       56,719       56,719      226,875
Total Source of Funds                      213,728        213,728     213,728      213,728      854,912      213,728      213,728      213,728      213,728      854,912


Uses of Funds:
    Interest Subsidies                     133,026        142,609     151,617      160,353      587,606      168,414      176,990      184,884      192,490       722,778
    Loan Guarantee Loss Payments            50,400         19,200      22,800       37,440      129,840       61,200       37,440      114,960       86,700       300,300
   COP Operating Expenses                    7,500          7,500       7,500        7,500       30,000        7,500        7,500        7,500        7,500        30,000
Total Use of Funds                         190,926        169,309     181,917      205,293      747,446      237,114      221,930      307,344      286,690     1,053,078

Funds on Hand at Beginning of Period      8,857,570     8,880,372    8,924,791    8,956,601    8,857,570    8,965,036    8,941,651    8,933,449    8,839,833    8,965,036
Ending Balance of Funds on Hand           8,880,372     8,924,791    8,956,601    8,965,036    8,965,036    8,941,651    8,933,449    8,839,833    8,766,871    8,766,871



                                                                                    88
                                                       Appendix Two, Attachment D – Base Case Financials
                                                          Mini Business Plan – Loan Guaranty Strategy
                                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                          RMDZ LOAN PROGRAM-COP BASE CASE
                                                                       Statement of Sources, Uses and Porfolio Activity
                                                                                         Five Years




                                                                                  YEAR ONE                                                                                                            Total
                                         Month 1       Month 2       Month 3     Month 4       Month 5       Month 6     Month 7       Month 8     Month 9       Month 10     Month 11    Month 12    Year 1
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                               0   1,050,000                                      0        900,000          0        900,000          0         900,000           0     900,000   4,650,000
  Subordinate Loans                                0           0       630,000           0            0        600,000          0        750,000          0               0     810,000           0   2,790,000
  Deferred Payment Loans                           0      60,000       180,000     180,000      180,000        180,000    180,000        180,000    180,000         180,000     180,000     180,000   1,860,000
Total Loan Origination                             0   1,110,000       810,000     180,000      180,000      1,680,000    180,000      1,830,000    180,000       1,080,000     990,000   1,080,000   9,300,000

Defaults Losses
  Below Market Loans
  Subordinate Loans
  Deferred Payment Loans
Total Losses

Principal Curtailments
   Below Market Loans                              0       8,569         8,569       8,569        8,569        15,914      15,914        23,259      23,259         30,604       30,604      37,949    211,780
   Subordinate Loans                               0         752         3,008       5,264        7,520         9,775      12,031        14,287      16,543         18,799       21,055      23,311    132,345
   Deferred Payment Loans                          0           0             0           0            0             0           0             0           0              0            0           0          0
Total Principal Curtailments                       0       9,321        11,577      13,833       16,089        25,690      27,945        37,546      39,802         49,403       51,659      61,260    344,125

Loan Guaranty Commitments
  Below Market Loans                               0     560,000             0             0             0    440,000              0    440,000              0     440,000            0     440,000   2,320,000
  Subordinate Loans                                0           0       224,000             0             0    200,000              0    320,000              0           0      368,000           0   1,112,000
  Deferred Payment Loans                           0           0             0             0             0          0              0          0              0           0            0           0           0
Total Guarantees Issued                            0     560,000       224,000             0             0    640,000              0    760,000              0     440,000      368,000     440,000   3,432,000

Beginning Balance of Guarantees Issued             0           0       560,000     784,000      784,000        784,000   1,424,000     1,424,000   2,184,000      2,184,000   2,624,000   2,992,000           0
Cumulative Guarantee Commitments                   0     560,000       784,000     784,000      784,000      1,424,000   1,424,000     2,184,000   2,184,000      2,624,000   2,992,000   3,432,000   3,432,000


LOAN LOSS RESERVES (@25%)                          0    140,000       196,000      196,000       196,000       356,000     356,000       546,000     546,000       656,000      748,000     858,000    858,000
LEVERAGE                                           0    7.93          9.80        10.71         11.63         11.12       11.63         10.93       11.26         11.02        10.99       10.84



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment                     2,500,000                                                                                                                                                    2,500,000
    Loan Reserves                                0        72,617        52,991      11,776       11,776       109,907      11,776       119,720      11,776         70,654       64,766      70,654     608,411
    Interest On Idle Funds                   5,156         5,156         5,156       5,156        5,156         5,156       5,156         5,156       5,156          5,156        5,156       5,156      61,875
Total Source of Funds                    2,505,156        77,773        58,147      16,932       16,932       115,063      16,932       124,876      16,932         75,810       69,923      75,810   3,170,286


Uses of Funds:
    Interest Subsidies                           0         1,750         1,729       1,735        1,728         3,220       3,206         4,692       4,672          6,152        6,125       7,598     42,607
    Loan Guarantee Loss Payments                 0             0             0           0            0             0           0             0           0              0            0           0          0
   COP Operating Expenses                   17,892        16,401        14,910      13,419       11,928        10,437       8,946         7,455       5,964          4,473        2,982       1,491    116,300
Total Use of Funds                          17,892        18,151        16,639      15,154       13,656        13,657      12,153        12,148      10,636         10,625        9,107       9,089    158,907

Funds on Hand at Beginning of Period             0     2,487,264     2,546,886   2,588,394     2,590,171     2,593,447   2,694,853     2,699,632   2,812,360      2,818,656   2,883,842   2,944,658           0
Ending Balance of Funds on Hand          2,487,264     2,546,886     2,588,394   2,590,171     2,593,447     2,694,853   2,699,632     2,812,360   2,818,656      2,883,842   2,944,658   3,011,380   3,011,380



                                                                                                  89
                                         Appendix Two, Attachment D – Base Case Financials
                                            Mini Business Plan – Loan Guaranty Strategy
                                                     CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                            RMDZ LOAN PROGRAM-COP BASE CASE
                                                         Statement of Sources, Uses and Porfolio Activity
                                                                           Five Years




                                                          YEAR TWO                           Total                   YEAR THREE                           Total
                                           1st Qtr       2nd Qtr     3rd Qtr     4th Qtr     Year 2      1st Qtr     2nd Qtr     3rd Qtr     4th Qtr      Year 3
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                         750,000     1,050,000   1,200,000   1,500,000   4,500,000   1,200,000   1,200,000   1,200,000    1,200,000    4,800,000
  Subordinate Loans                          450,000       630,000     720,000     900,000   2,700,000     720,000     720,000     720,000      720,000    2,880,000
  Deferred Payment Loans                     480,000       420,000     480,000     600,000   1,980,000     480,000     480,000     480,000      480,000    1,920,000
Total Loan Origination                     1,680,000     2,100,000   2,400,000   3,000,000   9,180,000   2,400,000   2,400,000   2,400,000    2,400,000    9,600,000

Defaults Losses
  Below Market Loans
  Subordinate Loans
  Deferred Payment Loans
Total Losses

Principal Curtailments
   Below Market Loans                         48,100        49,142      43,992     41,253     182,487       70,633      29,380     129,393     158,772      388,178
   Subordinate Loans                          39,716        55,507      73,554     96,113     264,888      114,160     132,207     150,254     168,301      564,921
   Deferred Payment Loans                          0             0           0          0           0            0           0           0           0            0
Total Principal Curtailments                  87,815       104,649     117,546    137,366     447,376      184,793     161,586     279,646     327,073      953,099

Loan Guaranty Commitments
  Below Market Loans                         320,000       560,000     680,000     690,000   2,250,000     680,000     680,000     680,000     510,000     2,550,000
  Subordinate Loans                           80,000       224,000     296,000     440,000   1,040,000     296,000     296,000     296,000     296,000     1,184,000
  Deferred Payment Loans                           0             0           0           0           0           0           0           0           0             0
Total Guarantees Issued                      400,000       784,000     976,000   1,130,000   3,290,000     976,000     976,000     976,000     806,000     3,734,000

Beginning Balance of Guarantees Issued     3,432,000     3,832,000   4,616,000   5,592,000   3,432,000   6,722,000   7,698,000   8,674,000    9,650,000    6,722,000
Cumulative Guarantee Commitments           3,832,000     4,616,000   5,592,000   6,722,000   6,722,000   7,698,000   8,674,000   9,650,000   10,456,000   10,456,000


LOAN LOSS RESERVES (@25%)                   958,000      1,154,000   1,398,000   1,680,500   1,680,500   1,924,500   2,168,500   2,412,500    2,614,000    2,614,000
LEVERAGE                                   11.46         11.33       11.07        11.00                  10.85       10.74       10.64        10.74



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment                       2,500,000                                         2,500,000   2,500,000                                         2,500,000
    Loan Reserves                            109,907       137,383     157,009    196,262      600,561     157,009     157,009     157,009     157,009       628,037
    Interest On Idle Funds                    36,094        36,094      36,094     36,094      144,375      56,719      56,719      56,719      56,719       226,875
Total Source of Funds                      2,646,000       173,477     193,103    232,355    3,244,936   2,713,728     213,728     213,728     213,728     3,354,912


Uses of Funds:
    Interest Subsidies                        48,752        58,264      69,198      82,341    258,555       93,404     103,924     113,986     123,790      435,103
    Loan Guarantee Loss Payments                   0             0           0           0          0            0           0           0           0            0
   COP Operating Expenses                      7,500         7,500       7,500       7,500     30,000        7,500       7,500       7,500       7,500       30,000
Total Use of Funds                            56,252        65,764      76,698      89,841    288,555      100,904     111,424     121,486     131,290      465,103

Funds on Hand at Beginning of Period       3,011,380     5,601,128   5,708,840   5,825,246   3,011,380   5,967,760   8,580,584   8,682,889    8,775,131    5,967,760
Ending Balance of Funds on Hand            5,601,128     5,708,840   5,825,246   5,967,760   5,967,760   8,580,584   8,682,889   8,775,131    8,857,570    8,857,570



                                                                                 90
                                         Appendix Two, Attachment D – Base Case Financials
                                            Mini Business Plan – Loan Guaranty Strategy
                                                      CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                             RMDZ LOAN PROGRAM-COP BASE CASE
                                                          Statement of Sources, Uses and Porfolio Activity
                                                                            Five Years




                                                        YEAR FOUR                             Total                        YEAR FIVE                           Total
                                          1st Qtr       2nd Qtr     3rd Qtr      4th Qtr      Year 4       1st Qtr      2nd Qtr      3rd Qtr      4th Qtr      Year 5
LOAN PORTFOLIO ACTIVITY
Loan Originations
  Below Market Loans                      1,200,000     1,200,000    1,200,000    1,200,000    4,800,000    1,200,000    1,200,000    1,200,000    1,200,000    4,800,000
  Subordinate Loans                         720,000       720,000      720,000      720,000    2,880,000      720,000      720,000      720,000      720,000    2,880,000
  Deferred Payment Loans                    480,000       480,000      480,000      480,000    1,920,000      480,000      480,000      480,000      480,000    1,920,000
Total Loan Origination                    2,400,000     2,400,000    2,400,000    2,400,000    9,600,000    2,400,000    2,400,000    2,400,000    2,400,000    9,600,000

Defaults Losses
  Below Market Loans                         84,000        66,000      66,000      132,000      348,000       66,000      132,000      396,000      289,500       883,500
  Subordinate Loans                          67,200        30,000      48,000       55,200      200,400       96,000       55,200      178,800      144,000       474,000
  Deferred Payment Loans                          0             0           0            0            0            0            0            0            0             0
Total Losses                                151,200        96,000     114,000      187,200      548,400      162,000      187,200      574,800      433,500     1,357,500

Principal Curtailments
   Below Market Loans                       188,152       217,532     246,912      276,292       928,888     305,672       335,052      364,431      393,811    1,398,966
   Subordinate Loans                        186,348       204,395     222,442      240,489       853,674     258,536       276,583      294,630      312,677    1,142,426
   Deferred Payment Loans                    28,930        56,482      90,922      128,118       304,452     276,899       454,611      665,385      917,488    2,314,384
Total Principal Curtailments                403,430       478,409     560,276      644,898     2,087,014     841,107     1,066,246    1,324,447    1,623,976    4,855,776

Loan Guaranty Commitments
  Below Market Loans                        680,000       680,000     680,000      510,000     2,550,000     680,000      680,000      680,000      510,000     2,550,000
  Subordinate Loans                         296,000       296,000     296,000      296,000     1,184,000     296,000      296,000      296,000      296,000     1,184,000
  Deferred Payment Loans                          0             0           0            0             0           0            0            0            0             0
Total Guarantees Issued                     976,000       976,000     976,000      806,000     3,734,000     976,000      976,000      976,000      806,000     3,734,000

Beginning Balance of Guarantees Issued   10,456,000    11,432,000   12,408,000   13,384,000   10,456,000   14,190,000   15,166,000   16,142,000   17,118,000   14,190,000
Cumulative Guarantee Commitments         11,432,000    12,408,000   13,384,000   14,190,000   14,190,000   15,166,000   16,142,000   17,118,000   17,924,000   17,924,000


LOAN LOSS RESERVES (@25%)                 2,858,000     3,102,000    3,346,000    3,547,500    3,547,500    3,791,500    4,035,500    4,279,500    4,481,000    4,481,000
LEVERAGE                                  10.66          10.60        10.54        10.62                     10.57        10.53        10.49       10.55



SOURCES AND USES OF FUNDS
Sources of Funds:
    CIWMB Investment
    Loan Reserves                           157,009       157,009     157,009      157,009      628,037      157,009      157,009      157,009      157,009      628,037
    Interest On Idle Funds                   56,719        56,719      56,719       56,719      226,875       56,719       56,719       56,719       56,719      226,875
Total Source of Funds                       213,728       213,728     213,728      213,728      854,912      213,728      213,728      213,728      213,728      854,912


Uses of Funds:
    Interest Subsidies                      133,026       142,609     151,617      160,353       587,606     168,414      176,990      184,884      192,490       722,778
    Loan Guarantee Loss Payments            151,200        96,000     114,000      187,200       548,400     162,000      187,200      574,800      433,500     1,357,500
   COP Operating Expenses                     7,500         7,500       7,500        7,500        30,000       7,500        7,500        7,500        7,500        30,000
Total Use of Funds                          291,726       246,109     273,117      355,053     1,166,006     337,914      371,690      767,184      633,490     2,110,278

Funds on Hand at Beginning of Period      8,857,570     8,779,572    8,747,191    8,687,801    8,857,570    8,546,476    8,422,291    8,264,329    7,710,873    8,546,476
Ending Balance of Funds on Hand           8,779,572     8,747,191    8,687,801    8,546,476    8,546,476    8,422,291    8,264,329    7,710,873    7,291,111    7,291,111



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                                    Appendix Three
                         Mini Business Plan – Loan Sale Strategy
LOAN SALE STRATEGY

Introduction

The following mini-business plan describes a strategy for a loan sale program—the Recycling
Asset Sale Program (RASP) that would produce at least $10 million annually in private financing
for small recycling companies that have difficulty securing affordable financing from banks and
venture firms. Under the Program, the Board would use its appropriated funds to fund recycling
loans that would then be sold to investors. The proceeds from the sale would then be used to
make new loans

The success RASP would depend almost entirely on the characteristics of the loans to be sold,
specifically the:

   Interest rate. The value of each loan sold under RASP would depend, in part, on the
    discounted value of its expected cash flows. Because the discount rate used by the purchaser
    would reflect its required yield or rate of return, loans that bear below-market interest rates
    would have to be sold at a discount.

   Credit quality. Seasoned performing loans that are well-collateralized and extended to
    creditworthy borrowers would have a higher value than loans to marginal borrowers or loans
    with a history of delinquency or default.

However RASP is also the simplest of the four ―leveraging‖ alternatives to implement because it
requires no:

   Outside source of equity or debt investment. Rather, as well more fully described below,
    CIWMB funds can be used to fund $10 million annually in recycling loans.

   Non-profit or for-profit structure. The fact that RASP requires no external investment
    obviates the creation of a new for-profit or non-profit entity to obtain debt or equity
    investments from private lenders or investors.

The mini business plan is organized into seven brief sections.




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Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.

Section 2 – Products
Describes the types of loans the program issues.

Section 3 – Capital Structure & Sources
Describes how RASP would be financed.

Section 4 – Operations
Describes how RASP would be managed.

Section 5 – Implementation
Sets forth the tasks and costs required to secure commitments for the program

Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.

Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.


Section 1 – Borrowers

RASP would be designed to meet the financing needs of three types of recycling companies that
make up the RMDZ market.

   Established recycling firms. Approximately 50 percent of its borrowers would be companies
    that have sufficient operating and earnings history to secure credit from conventional sources.
    These low-risk companies would be more concerned with the cost of capital than with access
    to capital.

   Expansion-stage companies. Approximately 30 percent of borrowers would be companies
    that have survived their formative years and are now seeking to grow. However, these
    companies lack the earnings history, capital or collateral needed to support the full amount of
    funding needed to finance expansion.

   Early-stage companies. The remaining 20 percent of the borrowers under RASP would be
    companies that are essentially start-up businesses. Because they are not yet producing
    positive cash flows, these high-risk companies require some form of ―equity‖ financing to
    fund continued growth.


Section 2 – Loans

Following are the types of loans that would be guaranteed under RASP. Each is designed to meet
the peculiar needs of a particular borrower segment:



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                                     Appendix Three
                          Mini Business Plan – Loan Sale Strategy


   Below-market loans. Established recycling companies seeking expansion financing would be
    eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
    below the market rate for such financing. Underwriting standards for these loans including
    loan-to-value and debt service coverage ratios would be only slightly more liberal than those
    employed by commercial lenders.

        Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
        range of furniture products. Its sales are about $1.5 million annually. In order to expand,
        it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
        percent, a 15-year, market-rate loan would cost the firm $56,000 annually in debt
        service. However, at 2 percent below prime, a below-market loan would only require
        $41,000 in debt service, a savings of $15,000 annually. A bank agrees to make the loan
        at 2.75 percent provided that it is immediately purchased under RASP.

   Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
    senior financing needed for fixed assets or working capital would be candidates for
    subordinate debt. These loans would typically be structured as 25-40 percent junior
    participations in senior, secured loans extended by banks or other commercial lenders.
    Because of the risk associated with junior-lien lending, the Board’s interest in each
    transaction would be priced at 300 to 500 basis points above prime. In addition, as part of
    each transaction, a loan loss reserve contribution, equaling four to eight percent of the total
    financing, would be funded from loan proceeds and retained in a dedicated insurance fund.


        MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
        The company has grown rapidly but its weak balance sheet makes it impossible to secure
        $250,000 in equipment financing that it needs to expand. A local bank agrees to make
        the equipment loan under a two-part structure. It makes a $187,500 loan backed by a 75
        percent SBA guarantee and a 7-year, $80,000 subordinate loan funded by the Board.
        The subordinate loan includes a $12,500 insurance payment. The loan structure
        provides the bank with earning assets of $267,500 but with total exposure of only
        $72,250 and allows MicroCast to grow.




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                                     Appendix Three
                          Mini Business Plan – Loan Sale Strategy

                                 Gives $250,000 note and $12,500 reserve




                           Board            Makes $250,000 loan          MicroCast



                                   Sells $187,500 senior interest



                           Lender




   Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
    the cash flow (or collateral) to qualify for debt financing nor the ―upside‖ potential to qualify
    for venture or angel financing would be candidates for deferred payment loans. The deferred
    payment loan would be modeled on the structure employed by SBA for investments in New
    Markets Venture Capital Companies. That is, each loan would involve a ―discount period‖—
    2 to 3 years during which no principal or interest payments would be required --followed by
    an amortization period. Upon closing, the borrower would receive the full amount of the loan
    less the present value of interest for the discount period. At the end of the discount period, the
    borrower would repay the loan in regular installments of principal and interest over a period
    of up to seven years. As with subordinate loans, a cash reserve account would be funded as
    part of each transaction



        TireWare is an early stage company that has developed a more efficient way of
        retreading tires. Although it needs $200,000 to fund its operations, neither venture
        capital companies nor angel investors are willing to invest. Using the deferred payment
        note structure, a bank makes a $287,000 loan to the borrower. Of this amount
        approximately $67,000, the present value of three years of interest and $20,000 in loan-
        loss reserve contributions are retained by the bank. At the end of three years TireWare
        begins making payments of $5,000 per month to repay the $287,000 balance over seven
        years. Once again, the Board immediately purchases the loan from the bank with the
        intention of selling under RASP. The deferred payment note structure gives TireWare full
        use of $200,000 for three years—essentially equity without the need to relinquish shares.




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                         Mini Business Plan – Loan Sale Strategy


                                                                $200,000
                                               TireWare




                      $287,000 deferred payment note




              RASP         $287,000 note          Bank




Section 3 – Program Structure

In order to maximize leverage while minimizing program administration costs, the job of making
and servicing loans under RASP could be would be undertaken in cooperation with ―participating
lenders‖. ―Participating lenders‖ would be banks, CDFIs, FDCs and other small business finance
organizations that agree to use underwriting policies established by the Board to make loans that
would be purchased under RASP. As we envisage the Program--

   The Board would establish underwriting policies for each type of recycling loan. These
    policies would be employed by CIWMB’s staff, RMDZ loan administrators and
    ―participating lenders‖ to originate loans to eligible recycling companies.


   Loans would be funded either by the Board or by participating lenders. Under an agreement
    with the Board, ―participating lenders‖ would immediately be able to sell the loans to the
    Board under RASP.

   Under RASP, the Board would then sell the loans to a secondary market investor and would
    use the cash to make more loans.

Financial Requirements

Assuming quarterly loans sales, total capital of $3 million is sufficient to fund approximately $50
million in lending over a five-year period.

Financing Sources

Following is a list of three organizations that are possible purchasers of loans under RASP




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                         Mini Business Plan – Loan Sale Strategy
   Community Reinvestment Fund (CRF). CRF is a non-profit secondary market for economic
    development loans that has provided $200 million to lenders in 22 states since 1989.

   Bayview Financial. Bayview is a private investment banking firm owned by Allstate
    Insurance that purchases and securitizes both mortgage and commercial loans from a wide
    variety of lenders. The company specializes in loans to borrowers with imperfect credit.

   CBA Receivables. CBA buys and securitizes loans from smaller financial companies that
    originate loans on a scale that fails to attract larger investment banking firms


Section 4 – Operations

In order to minimize the CIWMB’s staffing requirements and operating costs, the principal
functions associated with making loans under RASP would be assumed by banks and cooperating
FDCs.

   Loan origination. Participating lenders and the Board would be responsible for identifying
    borrowers and packaging their loan applications.

   Loan underwriting. CIWMB would develop a set of underwriting standards and policies for
    each type of loan. Participating lenders would use these standards in approving loans.

   Funding, processing and documentation. Loans would be closed and funded by participating
    lenders using documentation approved by CIWMB.

   Loan servicing. Loan servicing would be carried out by the lender under an agreement with
    the CIWMB.


Section 5 – Implementation

Organizing the RASP would involve the following tasks

   Organizing finance team. (The finance team will most likely be composed of Board staff. The
    included budgets are merely an estimate of the associated costs). The task of developing
    RASP would require a ―finance team‖ comprising mainly in-house CIWMB staff. At a
    minimum, CIWMB’s chief credit officer and in-house attorney should be members of the
    team. The services of outside counsel and of a financial advisory firm may also be needed.
    This team’s responsibility would be to establish expected loan origination levels, to determine
    the frequency, structure and size of required loan sales, to identify prospective purchasers and
    to negotiate forward loan purchase commitments.

   Defining origination program. Based on past lending experience, discussions with Zone
    Administrators and interviews with participating lenders, the finance team should forecast the
    number, principal balance, average interest rate, average maturity and credit quality of the
    recycling loan that would be sold. Based on this estimate, a projection of loan sale
    requirements can be prepared.

   Identify investors. Armed with the loan origination forecast, the team should identify, and
    begin discussions with, organizations that are likely purchasers of RASP loans.


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                                    Appendix Three
                         Mini Business Plan – Loan Sale Strategy

   Develop loan sales plan. Discussions with investors should be the basis for a loan sales plan
    that aligns the requirements of investors with the amount and characteristics of loans to be
    sold. The need for changes to loan pricing or underwriting policies should be identified.

   Secure forward purchase commitments. The loan sale plan should be the basis for forward
    purchase agreements between the Board and investors. Among other provisions, the
    agreement should specify the volume and timing of expected purchases as well as the pricing
    formula for these purchases.


Cost Budget

The following budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:

   CIWMB staff                 $150
   Outside legal counsel       $250
   Accounting                  $175
   Financial advisory          $300



                Task                   CIWMB                     Financial Total           Cost
                                                Legal Accounting Advisory Hours

1. Organize financing team               30        0         0            0       30     $ 4,500
2. Define origination program            24        0         0           16       40     $ 8,400
3. Identify investors                    24        0         0           40       64     $ 15,600
4. Develop loan sales plan               48       24        24            8      104     $ 18,000
5. Secure forward purchase               48       24        24           24      120     $ 22,800
commitment

Total Hours                              174      48        48           88      358     $ 69,300



Attachments E and F set forth a schedule for the completion of these tasks.


Section 6 – Analysis

As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis bellows considers the proposed leveraging strategy in light of five
criteria.

   Simplicity. Because RASP requires no outside capital nor new entity, it should be the
    simplest of the four leveraging strategies to implement. The fact that participating banks and




                                                98
                                     Appendix Three
                          Mini Business Plan – Loan Sale Strategy
    RMDZ administrators would carry out a substantial amount of out loan origination and loan
    servicing would further reduce the plan’s complexity.

   Practicality. The Board has already completed one successful loan sale, thus proving the
    feasibility of loan sales as a technique for leveraging capital. Increased investor interest in
    buying economic development loans increase the likelihood of securing forward purchase
    commitments on attractive terms.

   Sustainability. RASP can be structured so that discounts from the sale of below-market loans
    are offset by premiums received from the sale of market-rate loans. As the attached financial
    analysis shows, this approach allows the Program to operate on a self-sustaining basis.

   Affordability. Subordinate and deferred payment loans would be structured so that their
    higher interest rates are more than offset by extended and deferred amortization features. The
    subsidy implicit in the interest rate for below-market loans would ensure their affordability to
    established borrowers

   Implementability. The increased willingness of investors to purchase economic development
    loans should make RASP relatively simple to institute and operate

Section 7 – Financial Analysis

Following are ―best-case‖ and ―base-case‖ financial forecasts for the RASP Program. Each set of
forecasts includes two types of financial statements:

   Proforma Statement of Operations.
   Proforma Statement of Financing and Investment Activities

Each set of pro-forma financial statements illustrates the economic condition and activities of
RASP for a five-year period.

Proforma Statement of Financing and Investment Activities

This Statement sets forth sources and applications of RASP funds for all five years of the
forecast. The section of the Statement entitled ―Financing Activities‖ includes the sources of
funds used to fund RASP. ―Investment Activities‖ represents the application of funds described
under Financing Activities to loan origination and loan sale activities.

Pro-forma Statement of Operations

The Pro-forma Statement of Operations illustrates the sources of program income and
summarizes the operating expenses including gains and losses on sales of assets as well as loan
losses. Loan-loss reserve revenues represent ―insurance‖ contributions made as part of each new
loan transaction. Losses on loans as well as gains and losses on sale are accounted for as expense
adjustments as incurred.

Assumptions to the Pro-forma Financials

The following assumptions were used to develop the previously described pro-forma financials
depicting RASP.


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                                     Appendix Three
                          Mini Business Plan – Loan Sale Strategy


   CIWMB puts in $3 million in year 1.

   Loans originated with the proceeds of CIWMB’s investment are sold on a quarterly basis.

   Idle funds are invested at four percent increasing to 4.125 percent in Year Four.


Loan Portfolio Characteristics

                     % of       Average                                                 Deferment of
Asset                Portfolio Loan Amt                Yield         Term               Payment
Low Interest            50%        $200,000               2.75%          5 yrs          None
Deferred Payment        20%        $80,000               12.25%         10 yrs          3 yrs
Subordinate Debt        30%        $120,000              10.50%          5 yrs          None
Loan Losses and Insurance Payments

                       Insurance             Base-case Loan          Best-case Loan
Asset                  Payment               Losses Net of           Losses Net of
                                             Recoveries*             Recoveries*
Low Interest                   5%                    0%                       0%
Deferred Payment              18%                    0%                       0%
Subordinate Debt              10%                    0%                       0%

* Loans are sold on a quarterly basis thus shifting all losses to the purchaser. Insurance payments
transferred to the purchaser finance these losses.


Operating Expenses

The following functions are assumed to be borne by the fund:
         Chief Credit Officer @ $120,000
         Chief Financial/Operations Officer @ $85,000
         Two loan officers @ $80,000 total
         One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.

Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.




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                                  Appendix Three
                       Mini Business Plan – Loan Sale Strategy

                                                            Financial   Total
                             CIWMB   Legal       Accounting Advisory    Hours       Cost
            Task
1. Organize financing team    30       0             0          0        30     $    4,500
2. Define financing
requirements                  24       0             0         16        40     $    8,400
3. Develop initial
financing structure           48       24           24         24        120    $   22,800
4. Identify/prequalify
investors                     24       0             0         80        104    $ 27,600
5. Organize financing
proposal                      48       24           48         32        152    $ 27,600
6. Conduct presentations      120       0            0         40        160    $ 30,000
7. Negotiate term sheet       72       40            0         40        152    $ 32,800
8. Organize structure/
meet conditions               48       60           24         24        156    $ 31,800
9. Prepare financing
documents                     16       80            0         16        112    $ 27,200
10. Close transaction         24       40            0         24         88    $ 17,296

Total Hours                   454     268           96         296      1114    $ 229,996




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                                    Appendix Three
                         Mini Business Plan – Loan Sale Strategy




                            Transactions



                                      Provides subsidies and guaranties to loan transactions


     Pays losses on loans                          Pays subsidies
     over $350,000                                 on below-market loans
                                FDC




 Guaranty                                                  Subsidy
  Fund                                                      Fund




                               CIWMB
                                                    Allocates appropriated funds
Allocates appropriated
funds and insurance
payments




                                             102
                                                Appendix Three, Attachment E – Best Case Financials
                                                     Mini Business Plan – Loan Sale Strategy
                                                               CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                              RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                                     Statement of Financing and Investment Activities
                                                                                      Five Years

                                                                                       YEAR ONE                                                                                                                          Total
                                             Month 1       Month 2       Month 3       Month 4       Month 5       Month 6       Month 7       Month 8       Month 9       Month 10       Month 11       Month 12       YEAR 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                         3,000,000               0             0             0             0             0             0             0             0              0              0              0   3,000,000
    Private (NMTC) Investors                         0               0             0             0             0             0             0             0             0              0              0              0           0
 Total of Funding From Investors             3,000,000               0             0             0             0             0             0             0             0              0              0              0   3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0             0             0             0             0             0             0             0             0              0              0              0            0
   Debt Class 2-Long Term Fixed Rate                   0             0             0             0             0             0             0             0             0              0              0              0            0
Total Funding From Issuance of
 Debt                                                  0             0             0             0             0             0             0             0             0              0              0              0            0

Total Funding From Financing Activities      3,000,000               0             0             0             0             0             0             0             0              0              0              0   3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.              0             0             0             0             0             0             0             0             0              0              0              0            0
    Private (NMTC) Investors                           0             0             0             0             0             0             0             0             0              0              0              0            0
 Total Shares Redeemed                                 0             0             0             0             0             0             0             0             0              0              0              0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                      0             0             0             0             0             0             0             0             0              0              0              0            0
    Debt Class 2-Long Term Fixed Rate                  0             0             0             0             0             0             0             0             0              0              0              0            0
 Total Payments of Corporate Notes                     0             0             0             0             0             0             0             0             0              0              0              0            0

Total Application of Funds                             0             0             0             0             0             0             0             0             0              0              0              0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                            3,000,000               0             0             0             0             0             0             0             0              0              0              0   3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                               0             0             0     588,320               0             0   1,308,634               0             0    1,308,072                0              0   3,205,026
  Sale of Deferred Payment Loans                       0             0             0     240,000               0             0     540,000               0             0      540,000                0              0   1,320,000
  Sale of Subordinate Debt Loans                       0             0             0     354,255               0             0     788,861               0             0      787,485                0              0   1,930,601

Total Funds Received From Sale of Loans                0             0             0   1,182,575               0             0   2,637,495               0             0    2,635,557                0              0   6,455,627

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                      0     150,000       450,000       450,000       450,000       450,000       450,000       450,000       450,000        450,000       450,000        450,000      4,650,000
   Deferred Payment Loans                              0      60,000       180,000       180,000       180,000       180,000       180,000       180,000       180,000        180,000       180,000        180,000      1,860,000
   Subordinate Debt                                    0      90,000       270,000       270,000       270,000       270,000       270,000       270,000       270,000        270,000       270,000        270,000      2,790,000
Total Lending Activities                               0     300,000       900,000       900,000       900,000       900,000       900,000       900,000       900,000        900,000       900,000        900,000      9,299,999

ADD: Principal Collections                             0       3,482        13,943         9,429        21,268        31,808         8,972        22,463        33,008         10,206        23,702         34,253        212,533

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                      0    -296,518      -886,057       292,005      -878,732      -868,192     1,746,467      -877,537      -866,992      1,745,763       -876,298       -865,747     -2,631,839

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES          3,000,000      -296,518      -886,057       292,005      -878,732      -868,192     1,746,467      -877,537      -866,992      1,745,763       -876,298       -865,747       368,161




                                                                                            103
                                             Appendix Three, Attachment E – Best Case Financials
                                                  Mini Business Plan – Loan Sale Strategy
                                                     CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                    RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                          Statement of Financing and Investment Activities
                                                                           Five Years

                                                                 YEAR TWO                                 Total                     YEAR THREE                                 Total
                                                 1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 2       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                       0             0             0     500,000       500,000              0             0             0             0            0
    Private (NMTC) Investors                               0             0             0           0             0              0             0             0             0            0
 Total of Funding From Investors                           0             0             0     500,000       500,000              0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                 0             0             0             0            0             0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                       0             0             0             0            0             0             0             0             0            0
Total Funding From Issuance of
 Debt                                                      0             0             0             0            0             0             0             0             0            0

Total Funding From Financing Activities                    0             0             0     500,000       500,000              0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                  0             0             0             0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0             0            0             0             0             0             0            0
 Total Shares Redeemed                                     0             0             0             0            0             0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                          0             0             0             0            0             0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                      0             0             0             0            0             0             0             0             0            0
 Total Payments of Corporate Notes                         0             0             0             0            0             0             0             0             0            0

Total Application of Funds                                 0             0             0             0            0             0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                          0             0             0     500,000       500,000              0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                         1,305,819       716,267     1,000,209     1,143,509     4,165,804    1,429,144     1,144,482     1,143,836     1,143,834     4,861,296
  Sale of Deferred Payment Loans                   540,000       480,000       420,000       480,000     1,920,000      600,000       480,000       480,000       480,000     2,040,000
  Sale of Subordinate Debt Loans                   786,021       432,796       605,914       692,473     2,517,204      865,591       692,473       692,473       692,473     2,943,011

Total Funds Received From Sale of Loans          2,631,840     1,629,063     2,026,124     2,315,982     8,603,008    2,894,735     2,316,955     2,316,309     2,316,308     9,844,307

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                  750,000     1,050,000     1,200,000     1,500,000     4,500,000    1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                          480,000       420,000       480,000       600,000     1,980,000      480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                                450,000       630,000       720,000       900,000     2,700,000      720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                         1,680,000     2,100,000     2,400,000     3,000,000     9,180,000    2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                          62,565        68,577        81,807       100,525       313,474       88,107        83,478        83,692        83,692       338,969

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                1,014,404      -402,360      -292,070       -583,494     -263,518      582,842           433               1             0     583,275

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES              1,014,404      -402,360      -292,070        -83,494      236,482      582,842           433               1             0     583,275



                                                                                       104
                                             Appendix Three, Attachment E – Best Case Financials
                                                  Mini Business Plan – Loan Sale Strategy
                                                 CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                    RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                          Statement of Financing and Investment Activities
                                                                           Five Years

                                                               YEAR FOUR                                  Total                        YEAR FIVE                               Total
                                                 1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 4       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                       0             0             0             0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0             0            0             0             0             0             0            0
 Total of Funding From Investors                           0             0             0             0            0             0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                 0             0             0             0            0             0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                       0             0             0             0            0             0             0             0             0            0
Total Funding From Issuance of
 Debt                                                      0             0             0             0            0             0             0             0             0            0

Total Funding From Financing Activities                    0             0             0             0            0             0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                  0             0             0             0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0             0            0             0             0             0             0            0
 Total Shares Redeemed                                     0             0             0             0            0             0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                          0             0             0             0            0             0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                      0             0             0             0            0             0             0             0             0            0
 Total Payments of Corporate Notes                         0             0             0             0            0             0             0             0             0            0

Total Application of Funds                                 0             0             0             0            0             0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                          0             0             0             0            0             0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                         1,143,834     1,143,834     1,143,834     1,143,834     4,575,338    1,143,834     1,143,834     1,143,834     1,143,834     4,575,338
  Sale of Deferred Payment Loans                   480,000       480,000       480,000       480,000     1,920,000      480,000       480,000       480,000       480,000     1,920,000
  Sale of Subordinate Debt Loans                   692,473       692,473       692,473       692,473     2,769,893      692,473       692,473       692,473       692,473     2,769,893

Total Funds Received From Sale of Loans          2,316,308     2,316,308     2,316,308     2,316,308     9,265,231    2,316,308     2,316,308     2,316,308     2,316,308     9,265,231

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                1,200,000     1,200,000     1,200,000     1,200,000     4,800,000    1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                          480,000       480,000       480,000       480,000     1,920,000      480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                                720,000       720,000       720,000       720,000     2,880,000      720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                         2,400,000     2,400,000     2,400,000     2,400,000     9,600,000    2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                          83,692        83,692        83,692        83,692       334,769       83,692        83,692        83,692        83,692       334,769

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                          0             0             0             0            0             0             0             0             0            0

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                        0             0             0             0            0             0             0             0             0            0




                                                                                       105
                                                                 Appendix Three, Attachment E – Best Case Financials
                                                                      Mini Business Plan – Loan Sale Strategy
                                                                             CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                               RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                                                                    Proforma Statement of Operations
                                                                                                          Five Years


                                                                                          YEAR ONE                                                                                                                     Total
                                                Month 1       Month 2       Month 3       Month 4      Month 5       Month 6       Month 7     Month 8       Month 9       Month 10     Month 11       Month 12       YEAR 1
Investment Income

  Loan Loss Reserves                                    0        22,800        68,400       -39,642        68,400       68,400      -173,118      68,400        68,400       -172,952      68,400         68,400        115,889
  Interest on loans                                     0           841         3,494         3,077         5,438        8,326         3,767       5,439         8,324          3,765       5,434          8,316         56,220
  Interest on Idle Funds                            9,333         8,345         5,391         6,365         3,436          542         6,363       3,438           548          6,367       3,446            561         54,136
TOTAL INCOME                                        9,333        31,986        77,285       -30,200        77,274       77,268      -162,987      77,277        77,272       -162,820      77,280         77,277        226,244

Expenses
Operating Expenses
  Administration, Legal and overhead               34,499        31,624        25,555        23,000        20,444       17,889        12,831      12,831        12,831         12,831      12,831         12,830        229,996
Subtotal fund management                           34,499        31,624        25,555        23,000        20,444       17,889        12,831      12,831        12,831         12,831      12,831         12,830        229,996

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                         0             0             0           0              0             0           0             0             0            0              0              0           0
    Debt Class 2 - Long Term Fixed Rate Notes             0             0             0           0              0             0           0             0             0            0              0              0           0
(Gain) or Loss on Sale of Notes                           0             0             0      -3,719              0             0      -8,505             0             0       -8,488              0              0     -20,712
 Loan Loss Payments                                       0             0             0           0              0             0           0             0             0            0              0              0           0
Subtotal cost of financing activities                     0             0             0      -3,719              0             0      -8,505             0             0       -8,488              0              0     -20,712

TOTAL EXPENSES                                     34,499        31,624        25,555        19,281        20,444       17,889         4,326      12,831        12,831          4,343      12,831         12,830        209,285

PROGRAM OPERATING PROFIT (LOSS)                   -25,166           361        51,730       -49,481        56,830       59,379      -167,314      64,446        64,441       -167,163      64,449         64,447         16,959




                                                                                                          106
                                                          Appendix Three, Attachment E – Best Case Financials
                                                               Mini Business Plan – Loan Sale Strategy
                                                               CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                                             Proforma Statement of Operations
                                                                                   Five Years


                                                               YEAR TWO                                  Total                     YEAR THREE                                 Total
                                                1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 2       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 3
Investment Income

  Loan Loss Reserves                              -94,693        -5,893        -3,802        15,177       -89,211      -83,616         2,753         2,753         2,753       -75,358
  Interest on loans                                16,849        18,568        20,371        25,210        80,998       21,615        20,786        20,786        20,786        83,974
  Interest on Idle Funds                           11,826         7,802         4,881         4,046        28,555        3,292         3,293         3,293         3,293        13,171
TOTAL INCOME                                      -66,018        20,477        21,451        44,434        20,343      -58,709        26,832        26,832        26,832        21,786

Expenses
Operating Expenses
  Administration, Legal and overhead                      0             0             0             0            0             0             0             0             0            0
Subtotal fund management                                  0             0             0             0            0             0             0             0             0            0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                       0             0             0             0             0            0             0             0             0             0
    Debt Class 2 - Long Term Fixed Rate Notes           0             0             0             0             0            0             0             0             0             0
(Gain) or Loss on Sale of Notes                    -8,504       -11,131        -6,814        -7,779       -34,228       -9,729        -7,760        -7,773        -7,773       -33,034
 Loan Loss Payments                                     0             0             0             0             0            0             0             0             0             0
Subtotal cost of financing activities              -8,504       -11,131        -6,814        -7,779       -34,228       -9,729        -7,760        -7,773        -7,773       -33,034

TOTAL EXPENSES                                     -8,504       -11,131        -6,814        -7,779       -34,228       -9,729        -7,760        -7,773        -7,773       -33,034

PROGRAM OPERATING PROFIT (LOSS)                   -57,514        31,607        28,265        52,213       54,571       -48,980        34,592        34,605        34,605       54,821




                                                                                             107
                                                          Appendix Three, Attachment E – Best Case Financials
                                                               Mini Business Plan – Loan Sale Strategy
                                                               CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
                                                                             Proforma Statement of Operations
                                                                                   Five Years


                                                              YEAR FOUR                                  Total                       YEAR FIVE                                Total
                                                1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 4       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 5
Investment Income

  Loan Loss Reserves                                2,753         2,753         2,753         2,753        11,011        2,753         2,753         2,753         2,753        11,011
  Interest on loans                                21,536        19,549        23,261        26,974        91,319       20,786        20,786        20,786        20,786        83,144
  Interest on Idle Funds                            9,379         9,379         9,379         9,379        37,517        9,379         9,379         9,379         9,379        37,517
TOTAL INCOME                                       33,668        31,680        35,393        39,105       139,847       32,918        32,918        32,918        32,918       131,672

Expenses
Operating Expenses
  Administration, Legal and overhead                      0             0             0             0            0             0             0             0             0            0
Subtotal fund management                                  0             0             0             0            0             0             0             0             0            0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                       0             0             0             0             0            0             0             0             0             0
    Debt Class 2 - Long Term Fixed Rate Notes           0             0             0             0             0            0             0             0             0             0
(Gain) or Loss on Sale of Notes                    -7,773        -7,773        -7,773        -7,773       -31,091       -7,773        -7,773        -7,773        -7,773       -31,091
 Loan Loss Payments                                     0             0             0             0             0            0             0             0             0             0
Subtotal cost of financing activities              -7,773        -7,773        -7,773        -7,773       -31,091       -7,773        -7,773        -7,773        -7,773       -31,091

TOTAL EXPENSES                                     -7,773        -7,773        -7,773        -7,773       -31,091       -7,773        -7,773        -7,773        -7,773       -31,091

PROGRAM OPERATING PROFIT (LOSS)                    41,441        39,453        43,166        46,878       170,938       40,691        40,691        40,691        40,691       162,763




                                                                                             108
                                             Appendix Three, Attachment F – Base Case Financials
                                                  Mini Business Plan – Loan Sale Strategy
                                                               CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                                     Statement of Financing and Investment Activities
                                                                                      Five Years

                                                                                       YEAR ONE                                                                                                                         Total
                                             Month 1       Month 2       Month 3       Month 4       Month 5       Month 6       Month 7       Month 8       Month 9       Month 10       Month 11       Month 12       Year 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                          3,000,000              0             0             0             0             0             0             0             0              0              0              0    3,000,000
    Private (NMTC) Investors                          0              0             0             0             0             0             0             0             0              0              0              0            0
 Total of Funding From Investors              3,000,000              0             0             0             0             0             0             0             0              0              0              0    3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0             0             0             0             0             0             0             0             0              0              0              0            0
   Debt Class 2-Long Term Fixed Rate                   0             0             0             0             0             0             0             0             0              0              0              0            0
Total Funding From Issuance of
 Debt                                                  0             0             0             0             0             0             0             0             0              0              0              0            0

Total Funding From Financing Activities       3,000,000              0             0             0             0             0             0             0             0              0              0              0    3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.              0             0             0             0             0             0             0             0             0              0              0              0            0
    Private (NMTC) Investors                           0             0             0             0             0             0             0             0             0              0              0              0            0
 Total Shares Redeemed                                 0             0             0             0             0             0             0             0             0              0              0              0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                      0             0             0             0             0             0             0             0             0              0              0              0            0
    Debt Class 2-Long Term Fixed Rate                  0             0             0             0             0             0             0             0             0              0              0              0            0
 Total Payments of Corporate Notes                     0             0             0             0             0             0             0             0             0              0              0              0            0

Total Application of Funds                             0             0             0             0             0             0             0             0             0              0              0              0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                             3,000,000              0             0             0             0             0             0             0             0              0              0              0    3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                               0             0             0     588,320               0             0   1,308,634               0             0    1,308,072                0              0    3,205,026
  Sale of Deferred Payment Loans                       0             0             0     240,000               0             0     540,000               0             0      540,000                0              0    1,320,000
  Sale of Subordinate Debt Loans                       0             0             0     354,255               0             0     788,861               0             0      787,485                0              0    1,930,601

Total Funds Received From Sale of Loans                0             0             0   1,182,575               0             0   2,637,495               0             0    2,635,557                0              0    6,455,627

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                      0     150,000       450,000       450,000       450,000       450,000       450,000       450,000       450,000        450,000       450,000        450,000       4,650,000
   Deferred Payment Loans                              0      60,000       180,000       180,000       180,000       180,000       180,000       180,000       180,000        180,000       180,000        180,000       1,860,000
   Subordinate Debt                                    0      90,000       270,000       270,000       270,000       270,000       270,000       270,000       270,000        270,000       270,000        270,000       2,790,000
Total Lending Activities                               0     300,000       900,000       900,000       900,000       900,000       900,000       900,000       900,000        900,000       900,000        900,000       9,299,999

ADD: Principal Collections                             0       3,482        13,943         9,429        21,268        31,808         8,972        22,463        33,008         10,206        23,702         34,253        212,533

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                      0    -296,518      -886,057       292,005      -878,732      -868,192     1,746,467      -877,537      -866,992      1,745,763       -876,298       -865,747     -2,631,839

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES           3,000,000     -296,518      -886,057       292,005      -878,732      -868,192     1,746,467      -877,537      -866,992      1,745,763       -876,298       -865,747       368,161



                                                                                        109
                                             Appendix Three, Attachment F – Base Case Financials
                                                  Mini Business Plan – Loan Sale Strategy
                                                    CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                     RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                         Statement of Financing and Investment Activities
                                                                          Five Years

                                                                YEAR TWO                                   Total                      YEAR THREE                                Total
                                                 1st Qtr       2nd Qtr       3rd Qtr         4th Qtr       Year 2       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       Year 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                       0             0             0       500,000      500,000               0             0             0             0            0
    Private (NMTC) Investors                               0             0             0             0            0               0             0             0             0            0
 Total of Funding From Investors                           0             0             0       500,000      500,000               0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                 0             0             0               0            0             0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                       0             0             0               0            0             0             0             0             0            0
Total Funding From Issuance of
 Debt                                                      0             0             0               0            0             0             0             0             0            0

Total Funding From Financing Activities                    0             0             0       500,000      500,000               0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                  0             0             0               0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0               0            0             0             0             0             0            0
 Total Shares Redeemed                                     0             0             0               0            0             0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                          0             0             0               0            0             0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                      0             0             0               0            0             0             0             0             0            0
 Total Payments of Corporate Notes                         0             0             0               0            0             0             0             0             0            0

Total Application of Funds                                 0             0             0               0            0             0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                          0             0             0       500,000      500,000               0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                         1,305,819       716,267     1,000,209       1,143,509     4,165,804    1,429,144     1,144,482     1,143,836     1,143,834     4,861,296
  Sale of Deferred Payment Loans                   540,000       480,000       420,000         480,000     1,920,000      600,000       480,000       480,000       480,000     2,040,000
  Sale of Subordinate Debt Loans                   786,021       432,796       605,914         692,473     2,517,204      865,591       692,473       692,473       692,473     2,943,011

Total Funds Received From Sale of Loans          2,631,840     1,629,063     2,026,124       2,315,982     8,603,008    2,894,735     2,316,955     2,316,309     2,316,308     9,844,307

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                  750,000     1,050,000     1,200,000       1,500,000     4,500,000    1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                          480,000       420,000       480,000         600,000     1,980,000      480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                                450,000       630,000       720,000         900,000     2,700,000      720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                         1,680,000     2,100,000     2,400,000       3,000,000     9,180,000    2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                          62,565        68,577        81,807         100,525      313,474        88,107        83,478        83,692        83,692      338,969

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                1,014,404      -402,360      -292,070        -583,494      -263,518      582,842           433               1             0    583,275

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES              1,014,404      -402,360      -292,070         -83,494      236,482       582,842           433               1             0    583,275



                                                                                       110
                                             Appendix Three, Attachment F – Base Case Financials
                                                  Mini Business Plan – Loan Sale Strategy
                                                    CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                     RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                         Statement of Financing and Investment Activities
                                                                          Five Years

                                                               YEAR FOUR                                   Total                        YEAR FIVE                               Total
                                                 1st Qtr       2nd Qtr       3rd Qtr         4th Qtr       Year 4       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       Year 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                       0             0             0               0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0               0            0             0             0             0             0            0
 Total of Funding From Investors                           0             0             0               0            0             0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                 0             0             0               0            0             0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                       0             0             0               0            0             0             0             0             0            0
Total Funding From Issuance of
 Debt                                                      0             0             0               0            0             0             0             0             0            0

Total Funding From Financing Activities                    0             0             0               0            0             0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                  0             0             0               0            0             0             0             0             0            0
    Private (NMTC) Investors                               0             0             0               0            0             0             0             0             0            0
 Total Shares Redeemed                                     0             0             0               0            0             0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                          0             0             0               0            0             0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                      0             0             0               0            0             0             0             0             0            0
 Total Payments of Corporate Notes                         0             0             0               0            0             0             0             0             0            0

Total Application of Funds                                 0             0             0               0            0             0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                          0             0             0               0            0             0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                         1,143,834     1,143,834     1,143,834       1,143,834     4,575,338    1,143,834     1,143,834     1,143,834     1,143,834     4,575,338
  Sale of Deferred Payment Loans                   480,000       480,000       480,000         480,000     1,920,000      480,000       480,000       480,000       480,000     1,920,000
  Sale of Subordinate Debt Loans                   692,473       692,473       692,473         692,473     2,769,893      692,473       692,473       692,473       692,473     2,769,893

Total Funds Received From Sale of Loans          2,316,308     2,316,308     2,316,308       2,316,308     9,265,231    2,316,308     2,316,308     2,316,308     2,316,308     9,265,231

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                1,200,000     1,200,000     1,200,000       1,200,000     4,800,000    1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                          480,000       480,000       480,000         480,000     1,920,000      480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                                720,000       720,000       720,000         720,000     2,880,000      720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                         2,400,000     2,400,000     2,400,000       2,400,000     9,600,000    2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                          83,692        83,692        83,692          83,692      334,769        83,692        83,692        83,692        83,692      334,769

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                          0             0             0               0            0             0             0             0             0            0

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                        0             0             0               0            0             0             0             0             0            0



                                                                                       111
                                                                 Appendix Three, Attachment F – Base Case Financials
                                                                      Mini Business Plan – Loan Sale Strategy
                                                                               CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                                RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                                                             Proforma Statement of Operations
                                                                                                   Five Years


                                                                                          YEAR ONE                                                                                                                    Total
                                                Month 1       Month 2       Month 3       Month 4     Month 5       Month 6       Month 7     Month 8       Month 9       Month 10     Month 11       Month 12       YEAR 1
Investment Income

  Loan Loss Reserves                                    0        22,800        68,400       -39,642      68,400        68,400      -173,118      68,400        68,400       -172,952       68,400        68,400        115,889
  Interest on loans                                     0           841         3,494         3,077       5,438         8,326         3,767       5,439         8,324          3,765        5,434         8,316         56,220
  Interest on Idle Funds                            9,333         8,345         5,391         6,365       3,436           542         6,363       3,438           548          6,367        3,446           561         54,136
TOTAL INCOME                                        9,333        31,986        77,285       -30,200      77,274        77,268      -162,987      77,277        77,272       -162,820       77,280        77,277        226,244

Expenses
Operating Expenses
  Administration, Legal and overhead               34,499        31,624        25,555        23,000      20,444        17,889        12,831      12,831        12,831         12,831       12,831        12,830        229,996
Subtotal fund management                           34,499        31,624        25,555        23,000      20,444        17,889        12,831      12,831        12,831         12,831       12,831        12,830        229,996

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                         0             0             0           0             0             0           0             0             0            0              0              0           0
    Debt Class 2 - Long Term Fixed Rate Notes             0             0             0           0             0             0           0             0             0            0              0              0           0
(Gain) or Loss on Sale of Notes                           0             0             0      11,766             0             0      26,173             0             0       26,161              0              0      64,101
 Loan Loss Payments                                       0             0             0           0             0             0           0             0             0            0              0              0           0
Subtotal cost of financing activities                     0             0             0      11,766             0             0      26,173             0             0       26,161              0              0      64,101

TOTAL EXPENSES                                     34,499        31,624        25,555        34,766      20,444        17,889        39,004      12,831        12,831         38,992       12,831        12,830        294,097

PROGRAM OPERATING PROFIT (LOSS)                   -25,166           361        51,730       -64,966      56,830        59,379      -201,991      64,446        64,441       -201,812       64,449        64,447        -67,853




                                                                                                        112
                                                              Appendix Three, Attachment F – Base Case Financials
                                                                   Mini Business Plan – Loan Sale Strategy
                                                                   CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                    RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                                        Statement of Financing and Investment Activities
                                                                                         Five Years

                                                                 YEAR TWO                                  Total                     YEAR THREE                                 Total
Investment Income                               1st Qtr         2nd Qtr       3rd Qtr       4th Qtr       YEAR 2       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 3

  Loan Loss Reserves                              -94,693          -5,893        -3,802        15,177       -89,211      -83,616         2,753         2,753         2,753        -75,358
  Interest on loans                                16,849          18,568        20,371        25,210        80,998       21,615        20,786        20,786        20,786         83,974
  Interest on Idle Funds                           11,826           7,802         4,881         4,046        28,555        3,292         3,293         3,293         3,293         13,171
TOTAL INCOME                                      -66,018          20,477        21,451        44,434        20,343      -58,709        26,832        26,832        26,832         21,786

Expenses
Operating Expenses
  Administration, Legal and overhead                      0               0             0             0            0             0             0             0             0            0
Subtotal fund management                                  0               0             0             0            0             0             0             0             0            0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                       0               0             0             0            0             0             0             0             0             0
    Debt Class 2 - Long Term Fixed Rate Notes           0               0             0             0            0             0             0             0             0             0
(Gain) or Loss on Sale of Notes                    26,116          14,325        20,004        22,870       83,316        28,583        22,890        22,877        22,877        97,226
 Loan Loss Payments                                     0               0             0             0            0             0             0             0             0             0
Subtotal cost of financing activities              26,116          14,325        20,004        22,870       83,316        28,583        22,890        22,877        22,877        97,226

TOTAL EXPENSES                                     26,116          14,325        20,004        22,870       83,316        28,583        22,890        22,877        22,877        97,226

PROGRAM OPERATING PROFIT (LOSS)                   -92,135           6,151         1,447        21,564       -62,973      -87,292         3,942         3,955         3,955        -75,440




                                                                                                113
                                                              Appendix Three, Attachment F – Base Case Financials
                                                                   Mini Business Plan – Loan Sale Strategy
                                                                  CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                   RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
                                                                       Statement of Financing and Investment Activities
                                                                                        Five Years

                                                               YEAR FOUR                                  Total                       YEAR FIVE                                Total
Investment Income                               1st Qtr        2nd Qtr       3rd Qtr       4th Qtr       YEAR 4       1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       YEAR 5

  Loan Loss Reserves                                2,753          2,753         2,753         2,753        11,011        2,753         2,753         2,753         2,753        11,011
  Interest on loans                                21,536         19,549        23,261        26,974        91,319       20,786        20,786        20,786        20,786        83,144
  Interest on Idle Funds                            9,379          9,379         9,379         9,379        37,517        9,379         9,379         9,379         9,379        37,517
TOTAL INCOME                                       33,668         31,680        35,393        39,105       139,847       32,918        32,918        32,918        32,918       131,672

Expenses
Operating Expenses
  Administration, Legal and overhead                      0              0             0             0            0             0             0             0             0            0
Subtotal fund management                                  0              0             0             0            0             0             0             0             0            0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                       0              0             0             0             0            0             0             0             0             0
    Debt Class 2 - Long Term Fixed Rate Notes           0              0             0             0             0            0             0             0             0             0
(Gain) or Loss on Sale of Notes                    22,877         22,877        22,877        22,877        91,507       22,877        22,877        22,877        22,877        91,507
 Loan Loss Payments                                     0              0             0             0             0            0             0             0             0             0
Subtotal cost of financing activities              22,877         22,877        22,877        22,877        91,507       22,877        22,877        22,877        22,877        91,507

TOTAL EXPENSES                                     22,877         22,877        22,877        22,877        91,507       22,877        22,877        22,877        22,877        91,507

PROGRAM OPERATING PROFIT (LOSS)                    10,791          8,804        12,516        16,229        48,340       10,041        10,041        10,041        10,041        40,165




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                                  Appendix Four
    Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
EQUITY EQUIVALENT/PROGRAM-RELATED INVESTMENT STRATEGY

Introduction

The following mini-business plan describes a strategy for employing Equity Equivalent
Investments (EQ2) and Program-related Investments (PRIs) to produce $10 million annually in
private financing for small recycling companies that have difficulty securing affordable financing
from banks and venture firms.

Equity Equivalent Investments are long-term, low-interest loans made by commercial banks to
non-profit organizations for the purpose of financing loans and investments in low-income areas.
The typical EQ2 loan is structured with a rolling ―maturity‖ entailing automatic annual extensions
of the loan as long as the borrower complies with the terms of the loan agreement. In addition,
interest payments are made solely from the net cash flows of the borrower. Because of these
liberal terms, EQ2’s serve as a form of ―quasi-equity‖ for non-profit lenders.

PRIs are low-interest loans that foundations use, as an alternative to grants, to finance charitable
activities.

The plan is based on the proposition that the Recycling Finance Program must be structured with
the same financial discipline that characterizes a bank or other commercial lender. That is,
California Integrated Waste Management Board (the ―Board‖ or ―CIWMB‖) funds along with
EQ2’s and PRIs (liabilities) would finance a portfolio of recycling loans (assets). In turn, these
assets—loans—must produce the income needed to cover operating expenses, losses and interest
on borrowed funds. In other words, the program’s lending capacity and financial viability would
depend on three factors:

The Board would invest in a CDFI who already has a successful track record of attracting EQ2
and PRI investors, and makes commercial loans to for-profit businesses. With the Board’s
investment, the CDFI would be able to attract even more outside funds, especially from
foundations that want an environmental purpose and use of their funds.

   The performance of its assets. Loans made under the program must meet two tests. First,
    they should provide the type of financing required by recycling companies. At the same time,
    they must provide sufficient earnings to cover the program’s costs.

   The structure of its liabilities. The program’s mix of contributed capital and borrowed money
    should be such that the principal and interest payments on its assets can retire its debts and
    provide a return on its capital.

   The right level of operating expenses. The expenses associated with originating,
    underwriting and servicing loans – as well as covering loan losses – must not exceed net
    interest income, the difference the interest paid on borrowed money and the earnings
    generated by the portfolio.

The mini business plan is organized into seven brief sections:

Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.




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Section 2 – Products
Describes the types of loans the program issues.

Section 3 – Capital Structure & Sources
Describes the mix of debt and equity capital that would be used to fund the RFP and provides
several potential sources of financing for the program.

Section 4 – Operations
Describes how the Program would be managed.

Section 5 – Implementation
Sets forth the tasks and costs required to secure financing commitments for the program.

Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.

Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.


Section 1 – Borrowers

The Recycling Finance Program is designed to meet the financing needs of three types of
recycling companies that make up the RMDZ market.

   Established recycling firms. Approximately 50 percent of borrowers would be companies
    that have sufficient operating and earnings history to secure credit from conventional sources.
    These low-risk companies would be more concerned with the cost of capital than with access
    to capital.

   Expansion-stage companies. Approximately 30 percent of borrowers would be companies
    that have survived their formative years and are now seeking to grow. However, these
    companies lack the earnings history, capital or collateral needed to support the full amount of
    funding needed to finance expansion.

   Early-stage companies. The remaining borrowers would be companies that are essentially
    start-up businesses. Because they are not yet producing positive cash flows, these high-risk
    companies require some form of ―equity‖ financing to fund continued growth.

Section 2 – Loans

The following three products are designed to meet the distinct needs of each these borrower
segments:

   Below-market loans. Established recycling companies seeking expansion financing would be
    eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
    below the market rate for such financing. Underwriting standards for these loans including


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    loan-to-value and debt service coverage ratios would be only slightly more liberal than those
    employed by commercial lenders.

        Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
        range of furniture products. Its sales are about $1.5 million annually. In order to expand,
        it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
        percent, a 15-year SBA loan would cost the firm $56,000 annually in debt service.
        However, at 2 percent below prime, a loan from the Recycling Finance Program would
        only require $41,000 in debt service, a savings of $15,000 annually.

   Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
    senior financing needed for fixed assets or working capital would be candidates for
    subordinate debt. These loans would typically be structured as 25-40 percent junior
    participations in senior, secured loans extended by banks or other commercial lenders.
    Because of the risk associated with junior-lien lending, the Recycling Finance Program’s
    interest in each transaction would be priced at 300 to 500 basis points above prime. In
    addition, as part of each transaction, a loan loss reserve contribution, equaling four to eight
    percent of the total financing, would be funded from loan proceeds and retained by the
    Recycling Program.

        MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
        The company has grown rapidly but its weak balance sheet makes it impossible to secure
        $250,000 in equipment financing that it needs to expand. The Recycling Finance
        Program advances $250,000 to MicroCast and then sells a 75 percent senior interest
        ($187,500) in the loan to a local bank. The RFP retains a 25 percent ($67,500)
        subordinate interest in the loan along with a 5 percent loan-loss insurance payment
        ($12,500). The loan structure provides the bank with a senior loan of $187,500 secured
        by $250,000 in equipment. At the same time, the Recycling Finance Program’s risk is
        covered by an insurance payment of $12,500 or 20 percent of its exposure. Finally, the
        RFP’s subordinate interest is structured with a long amortization, thus producing lower
        debt service payments than the borrower would pay for bank financing alone.




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                             Gives $250,000 note and $12,500 reserve




                         RFP                                       MicroCast
                                     Makes $250,000 loan


                                 Sells $187,500 senior interest




                       Lender




   Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
    the cash flow (or collateral) to qualify for debt financing nor the ―upside‖ potential to qualify
    for venture or angel financing would be candidates for deferred payment loans. The deferred
    payment loan would be modeled on the structure employed by SBA for investments in New
    Markets Venture Capital Companies. That is, each loan would involve a ―discount period‖—
    2 to 3 years during which no principal or interest payments would be required –followed by
    an amortization period. Upon closing, the borrower would receive the full amount of the loan
    less the present value of interest for the discount period. At the end of the discount period, the
    borrower would repay the loan in regular installments of principal and interest over a period
    of up to seven years. Because of the risk that borrowers would be unable to repay loans
    during the amortization period, deferred payment loans would priced at 600 basis points
    above prime. In addition, as with subordinate loans, a cash reserve account would be funded
    as part of each transaction

        TireWare is an early stage company that has developed a more efficient way of
        retreading tires. Although it needs $200,000 to fund its operations, neither venture
        capital companies nor angel investors are willing to invest. Using the deferred payment
        note structure, the Recycling Loan Program makes a $287,000 loan to the borrower. Of
        this amount approximately $67,000, the present value of three years of interest and
        $20,000 in loan-loss reserve contributions are retained by the RFP. At the end of three
        years TireWare begins making payments of $5,000 per month to repay the $287,000
        balance over seven years. Because of the deferred payment note, TireWare has full use
        of $200,000 for three years. It has obtained the equivalent of equity without having to
        relinquish stock to an outside investor. The loan’s high interest rate and the insurance
        reserve provide compensation and credit support for RFP’s risk.




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                                  Borrower


                                                              Gives $287,000 note with
         Advances $200,000                                    3-year discount period and
                                                              7-year amortization




                                     RFP




Section 3 – Capital Structure and Sources

Many foundations, banks and insurance companies provide below-market ―double-bottom-line‖
financing only to ―certified‖ community development financial institutions (CDFIs). CDFIs are
financial services organizations that make loans and investments primarily in low-income areas.
To meet this eligibility requirement, the RFP would be carried out through an established non-
profit ―CDFI‖ that would agree to use funds obtained through the plan described below for the
purpose of lending $10 million annually to eligible recycling companies. The financing plan
would be as follows:

   CIWMB would agree to contribute $3.5 million annually to the CDFI for the three years in
    the form of a recoverable grant or long-term loan. In either event, CIWMB would be entitled
    to recover its capital contribution only after EQ2 and PRIs had been repaid.

   Commercial banks, financial services companies and foundations would provide the CDFI
    $10 million in EQ2 investments and PRIs structured as long-term, low-interest subordinate
    loan. The loans would bear an interest rate of 2.75 percent (200 basis points below prime)
    and would be repaid solely from the earnings of the RFP.

   Finally, a consortium of commercial banks would provide $30 million in credit secured by
    the assets of the RFP. The credit line would be priced at prime plus a small spread of 100
    basis points.

Following are the names of three organizations that have made EQ2 or PRI investments in the
past and may find intriguing the idea of helping a CDFI expand its lending program to recycling
companies.

   Ford Foundation. With $14.5 billion in assets, the Ford Foundation is the largest private
    foundation in America and has allocated $180 million for program-related investment
    activity.




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                                  Appendix Four
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   Citibank. The nation’s largest bank with over $1 trillion assets, Citibank has a commitment
    to lend and invest $115 billion in low and moderate income communities over a 10-year
    period. It is one of the pioneers in the use of EQ2 investments to finance community
    development finance institutions

   F.B. Heron Foundation. The F.B. Heron Foundation is a $300 million charitable organization
    with an exclusive focus on community development. It has the stated aim of investing its
    entire corpus in community development assets.

Section 4 – Operations

In order to minimize the RFP’s operating costs, the CDFI would assume the principal functions
associated with making and monitoring recycling loans.

   Loan origination. The CDFI, local banks as well as the Board would be responsible for
    identifying borrowers and packaging their loan applications.

   Loan underwriting. In cooperation with its CDFI partner, CIWMB would develop a set of
    underwriting standards and policies for each type of loan product. The CDFI’s credit
    committee or chief credit officer would use these standards in approving loans under the
    program.

   Loan processing and documentation. For the sake of simplicity, CIWMB would employ the
    CDFI’s standard loan documents and closing procedures.

   Loan servicing. Loan servicing would be performed by the CDFI or contracted out to one or
    more banks that are EQ2 investors. If desirable, CIWMB would assume sub-servicing
    responsibilities.


Loan origination                   CDFI, banks
Loan underwriting                  CDFI
Loan processing/documentation      CDFI using existing documentation and procedures
Loan servicing                     CDFI, banks


Section 5 – Implementation

Implementing the financing plan would involve the following tasks

   Organizing a finance team. (The finance team will most likely be composed of Board staff.
    The included budgets are merely an estimate of the associated costs). The job of raising
    significant amounts of capital from lenders and investors would require a ―finance team‖
    comprising both in-house CIWMB staff, staff of the CDFI ―partner‖ and outside advisors.
    This team’s responsibility would be to establish the parameters for the financing transaction,
    manage CIWMB’s relationships with prospective investors and lenders, provide CIWMB’s
    senior management and board required decision-making information and guide the capital-
    raising process to a successful closing. The team should include CIWMB’s chief financial
    officer and designated senior management of the CDFI as well as CIWMB’s in-house
    attorney. If necessary, a financial advisory firm should be retained to help in structuring and
    placing the transaction.


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   Defining financing requirements. Although the mini-business plan recommends that
    CIWMB raise $50 million in total capital by leveraging $10.5 million in appropriated funds
    with $40 million in private EQ2, PRI and market-rate debt financing, the finance team should
    determine whether some change in the amount and mix of capital is needed to accommodate
    the amount, type and timing of anticipated loan demand.

   Establishing an investment structure. Once the program’s financing requirements are
    established, the team should negotiate the terms and conditions under which the Board will
    investment in the CDFI. This effort is needed to ensure that the investment structure is
    properly aligned with the Board’s loan origination and return goals.

   Preparing and reviewing financing documents. Transaction documents may be prepared by
    CIWMB’s counsel or the CDFI’s counsel.

   Closing the transaction. Finally, the finance team would be responsible for managing the
    closing process, addressing last-minute issues and oversights that could produce problems in
    consummating the transaction.

The following two charts set forth a cost budget and time schedule for carrying out the proposed
financing.

Sample Budget

This sample budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:

   CIWMB staff                 $150
   Outside legal counsel       $250
   Accounting                  $175
   Financial advisory          $300


                                                                    Financial   Total
                              CIWMB        Legal       Accounting   Advisory    Hours           Cost
            Task
 1. Organize financing team       30         0             0           0          30       $       4,500
 2. Define financing
 requirements                     24         0             0           16         40       $       8,400
 3. Develop initial
 financing structure              48        24            24           24        120       $ 22,800
 4. Prepare financing
 documents                        16        80             0           16        112       $ 27,200
 5. Close transaction             24        40             0           24         88       $ 17,296

 Total Hours                     142        144           24           80        390        $ 80,196




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Section 6 – Analysis

As a source of financing for the RFP, EQ2 and PRI financing have both advantages and
disadvantages. The analysis bellows considers the proposed leveraging strategy in light of five
criteria.

   Simplicity. PRIs and EQ2 financing have been employed to fund a number of CDFI lending
    programs. As a result, reasonably standard structures and documents exist and can be
    employed to finance the RFP.

   Practicality. The total pool of available PRI and EQ2 financing is relatively small and
    competition for it correspondingly stiff. Thus, CIWMB may find it difficult to raise as much
    as $10 million in such financing for the RFP. However, the fact that the RFP should increase
    the participating CDFI’s viability (by increasing its income and enabling it to spread costs
    over a larger loan portfolio) as well as aid the growth of recycling companies should increase
    its attractiveness to investors.

   Sustainability. Low-cost EQ2 and PRI financing, combined with CIWMB’s capital
    contribution, should yield a blended cost of financing that is substantially less than the
    average interest rate on the RFP’s recycling loans. In addition, the insurance features built
    into the RFP’s loans should minimize the need to use interest spread to finance loan losses.
    As a result, the Program should be able to finance its operating costs entirely from revenues
    without the need for additional infusions from CIWMB.

   Affordability. Once again, the Program’s low cost of funds should reduce the amount of
    interest income needed to pay interest expense. This would allow borrowers to pay lower
    interest rates than if market-rate debt were the principal source of loan financing.

   Implementability. Because institutions tend to limit ―social investments‖ to certified CDFIs,
    CIWMB’s success in raising below-market capital for the RFP would depend, to a large
    degree, on its partner. Recruiting, as program manager—and borrower– a well-regarded and
    well-known CDFI would substantially increase the likelihood of success in raising funds for
    the program.


Section 7 – Financial Analysis

Following are ―best-case‖ and ―base-case‖ financial forecasts for the RASP Program. Each set of
forecasts includes two types of financial statements:

   Proforma Statement of Operations.
   Proforma Statement of Financing and Investment Activities.

Each set of pro-forma financial statements illustrates the economic condition and activities of the
RMDZ Loan Program for a five-year period




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Proforma Statement of Financing and Investment Activities

This Statement sets forth sources and applications of funds for all five years of the forecast. The
section of the Statement entitled ―Financing Activities‖ includes the sources of funds used to fund
the RMDZ Loan Program employing. For purposes of simplicity, both EQ2 and PRI investments
are labeled EQ2. ―Investment Activities‖ represents the application of funds described under
Financing Activities to loan origination activities.

Pro-forma Statement of Operations

The Pro-forma Statement of Operations illustrates the sources of program income and
summarizes the operating expenses including loan losses. Loan-loss reserve revenues represent
―insurance‖ contributions made as part of each new loan transaction.

Assumptions to the Pro-forma Financials

The following assumptions were used to develop the previously described pro-forma financials.

   CIWMB contributes $10 million in subordinate capital over a 3-year period according to the
    following schedule:
     Year 1, $3.5 million
     Year 2, $3.5 million
     Year 3, $3.0 million
   $10 million in EQ2 investments are secured from banks and foundations at 200 basis points
    below prime, 2.75 percent.

   $30 million in market rate debt is secured from banks at 100 basis points above prime, 5.75
    percent

   Idle funds are invested at four percent increasing to 4.125 percent in Year Four.


Loan Portfolio Characteristics

                       % of      Average                                                Deferment of
Asset                  Portfolio Loan Amt             Yield         Term                Payment
Low Interest             50%       $200,000               2.75%         5 yrs           None
Deferred Payment         20%       $80,000               12.25%        10 yrs           3 yrs
Subordinate Debt         30%       $120,000              10.50%         5 yrs           None




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Loan Losses and Insurance Payments

                       Insurance             Base-case Loan         Best-case Loan
Asset                  Payment               Losses Net of          Losses Net of
                                             Recoveries             Recoveries
Low Interest                  None                    3%                    1.5%
Deferred Payment              25%                    25%                    15%
Subordinate Debt              15%                    15%                    7.5%


Operating Expenses

The following functions are assumed to be borne by the fund:
         Chief Credit Officer @ $120,000
         Chief Financial/Operations Officer @ $85,000
         Two loan officers @ $80,000 total
         One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.

Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.


Attachments G and H set forth a schedule for the completion of these tasks.

The projections should clearly show the Board’s investment, outside investment, the amount of
loan funds available to recycling businesses, and how much and when the Board’s money would
be returned.




                                                124
                                                        Appendix Four, Attachment G – Best Case Financials
                                             Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                                  CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                                          RMDZ LOAN PROGRAM-EQ2-BEST CASE
                                                                                      Statement of Financing and Investment Activities
                                                                                                        Five Years

                                                                                            YEAR ONE                                                                                                                           Total
                                                  Month 1       Month 2       Month 3       Month 4         Month 5       Month 6       Month 7       Month 8       Month 9       Month 10       Month 11       Month 12       Year 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                               3,500,000             0              0             0               0             0             0             0             0              0              0              0    3,500,000
    Private (EQ2) Investors                                0    10,000,000              0             0               0             0             0             0             0              0              0              0   10,000,000
 Total of Funding From Investors                   3,500,000    10,000,000              0             0               0             0             0             0             0              0              0              0   13,500,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                  0             0            0              0               0             0             0             0             0              0              0              0            0
   Debt Class 2-Long Term Fixed Rate                        0             0   30,000,000              0               0             0             0             0             0              0              0              0   30,000,000
Total Funding From Issuance of
 Debt                                                       0             0   30,000,000              0               0             0             0             0             0              0              0              0   30,000,000

Total Funding From Financing Activities            3,500,000    10,000,000    30,000,000              0               0             0             0             0             0              0              0              0   43,500,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                   0      229,996              0             0               0             0             0             0             0              0              0              0     229,996
    Private (EQ2) Investors                                 0            0              0             0               0             0             0             0             0              0              0              0           0
 Total Shares Redeemed                                      0      229,996              0             0               0             0             0             0             0              0              0              0     229,996

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                           0             0             0             0               0             0             0             0             0              0              0              0            0
    Debt Class 2-Long Term Fixed Rate                       0             0             0             0               0             0             0             0             0              0              0              0            0
 Total Payments of Corporate Notes                          0             0             0             0               0             0             0             0             0              0              0              0            0

Total Application of Funds                                  0      229,996              0             0               0             0             0             0             0              0              0              0     229,996

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                  3,500,000     9,770,004    30,000,000              0               0             0             0             0             0              0              0              0   43,270,004

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                    0             0             0             0               0             0             0             0             0              0              0              0            0
  Sale of Deferred Payment Loans                            0             0             0             0               0             0             0             0             0              0              0              0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                     0             0             0             0               0             0             0             0             0              0              0              0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                           0      150,000       450,000       450,000         450,000       450,000       450,000       450,000       450,000       450,000        450,000        450,000      4,650,000
   Deferred Payment Loans                                   0       60,000       180,000       180,000         180,000       180,000       180,000       180,000       180,000       180,000        180,000        180,000      1,860,000
   Subordinate Debt                                         0       90,000       270,000       270,000         270,000       270,000       270,000       270,000       270,000       270,000        270,000        270,000      2,790,000
Total Lending Activities                                    0      300,000       900,000       900,000         900,000       900,000       900,000       900,000       900,000       900,000        900,000        900,000      9,299,999

ADD: Principal Collections                                  0             0        3,504        14,031          24,604        35,224        45,890        56,604        67,364         78,172        89,028         99,931       514,353

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                           0     (300,000)     (896,496)     (885,969)       (875,396)     (864,776)     (854,110)     (843,396)     (832,636)      (821,828)      (810,972)      (800,069)   (8,785,646)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                3,500,000     9,470,004    29,103,504      (885,969)       (875,396)     (864,776)     (854,110)     (843,396)     (832,636)      (821,828)      (810,972)      (800,069)   34,484,358




                                                                                                      125
                                                        Appendix Four, Attachment G – Best Case Financials
                                             Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                         CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                                 RMDZ LOAN PROGRAM-EQ2 BEST CASE
                                                                             Statement of Financing and Investment Activities
                                                                                               Five Years

                                                                    YEAR TWO                                      Total                       YEAR THREE                                 Total
                                                      1st Qtr       2nd Qtr       3rd Qtr         4th Qtr         Year 2        1st Qtr        2nd Qtr       3rd Qtr       4th Qtr       Year 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                   3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000
    Private (EQ2) Investors                                    0              0             0                0             0             0               0             0             0            0
 Total of Funding From Investors                       3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                      0             0             0                0             0              0              0             0             0            0
   Debt Class 2-Long Term Fixed Rate                            0             0             0                0             0              0              0             0             0            0
Total Funding From Issuance of
 Debt                                                           0             0             0                0             0              0              0             0             0            0

Total Funding From Financing Activities                3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                       0             0             0                0             0              0              0             0             0            0
    Private (EQ2) Investors                                     0             0             0                0             0              0              0             0             0            0
 Total Shares Redeemed                                          0             0             0                0             0              0              0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                               0             0             0                0             0              0              0             0             0            0
    Debt Class 2-Long Term Fixed Rate                           0             0             0                0             0              0              0             0             0            0
 Total Payments of Corporate Notes                              0             0             0                0             0              0              0             0             0            0

Total Application of Funds                                      0             0             0                0             0              0              0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                      3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                        0             0             0                0             0              0              0             0             0            0
  Sale of Deferred Payment Loans                                0             0             0                0             0              0              0             0             0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                         0             0             0                0             0              0              0             0             0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                        750,000     1,050,000     1,200,000          1,500,000    4,500,000     1,200,000      1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                                480,000       420,000       480,000            600,000    1,980,000       480,000        480,000       480,000       480,000     1,920,000
   Subordinate Debt                                      450,000       630,000       720,000            900,000    2,700,000       720,000        720,000       720,000       720,000     2,880,000
Total Lending Activities                               1,680,000     2,100,000     2,400,000          3,000,000    9,180,000     2,400,000      2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                               224,218       227,664       351,287           486,796     1,289,965       569,379        699,167       826,996       936,438     3,031,980

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                     (1,455,782)   (1,872,336)   (2,048,713)     (2,513,204)     (7,890,035)   (1,830,621)    (1,700,833)   (1,573,004)   (1,463,562)   (6,568,020)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                    2,044,218    (1,872,336)   (2,048,713)     (2,513,204)     (4,390,035)    1,169,379     (1,700,833)   (1,573,004)   (1,463,562)   (3,568,020)


                                                                                                126
                                                     Appendix Four, Attachment G – Best Case Financials
                                          Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                      CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                              RMDZ LOAN PROGRAM-EQ2 BEST CASE
                                                                          Statement of Financing and Investment Activities
                                                                                            Five Years

                                                           YEAR FOUR                                     Total                        YEAR FIVE                                Total
                                             1st Qtr        2nd Qtr       3rd Qtr        4th Qtr         Year 4        1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       Year 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                   0              0             0              0              0              0             0             0             0            0
    Private (EQ2) Investors                            0              0             0              0              0              0             0             0             0            0
 Total of Funding From Investors                       0              0             0              0              0              0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                             0              0             0              0              0              0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                   0              0             0              0              0              0             0             0             0            0
Total Funding From Issuance of
 Debt                                                  0              0             0              0              0              0             0             0             0            0

Total Funding From Financing Activities                0              0             0              0              0              0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.              0              0             0              0              0              0             0             0             0            0
    Private (EQ2) Investors                            0              0             0              0              0              0             0             0             0            0
 Total Shares Redeemed                                 0              0             0              0              0              0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                      0              0             0              0              0              0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                  0              0             0              0              0              0             0             0             0            0
 Total Payments of Corporate Notes                     0              0             0              0              0              0             0             0             0            0

Total Application of Funds                             0              0             0              0              0              0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                      0              0             0              0              0              0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                               0              0             0              0              0              0             0             0             0            0
  Sale of Deferred Payment Loans                       0              0             0              0              0              0             0             0             0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                0              0             0              0              0              0             0             0             0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                             1,200,000      1,200,000     1,200,000      1,200,000       4,800,000     1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                       480,000        480,000       480,000        480,000       1,920,000       480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                             720,000        720,000       720,000        720,000       2,880,000       720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                      2,400,000      2,400,000     2,400,000      2,400,000       9,600,000     2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                      998,357      1,140,514     1,282,132      1,399,045       4,820,049     1,459,247     1,604,967     1,750,778     1,869,409     6,684,401

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                            (1,401,643)    (1,259,486)    (1,117,868)   (1,000,955)     (4,779,951)     (940,753)     (795,033)     (649,222)     (530,591)   (2,915,599)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES
                                (1,401,643)                 (1,259,486)    (1,117,868)   (1,000,955)     (4,779,951)     (940,753)     (795,033)     (649,222)     (530,591)   (2,915,599)




                                                                                                   127
                                                    Appendix Four, Attachment G – Best Case Financials
                                         Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                 CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                        RMDZ LOAN PROGRAM-EQ2-BEST CASE
                                                                           Proforma Statement of Operations
                                                                                      Five Years


                                                                                    YEAR ONE                                                                                          Total
                                                Month 1     Month 2    Month 3     Month 4  Month 5         Month 6    Month 7   Month 8   Month 9   Month 10   Month 11   Month 12   Year 1
Investment Income

  Loan Loss Reserves                                  0      31,800     95,400      95,400      95,400       95,400     95,400    95,400    95,400     95,400     95,400     95,400     985,800
  Interest on loans                                   0       1,738      6,942      12,122      17,278       22,410     27,518    32,600    37,658     42,692     47,700     52,684     301,343
  Interest on Idle Funds                         10,506      41,955    138,500     135,031     131,699      128,428    125,228   122,080   118,986    115,945    112,957    110,023   1,291,339
TOTAL INCOME                                     10,506      75,493    240,842     242,554     244,378      246,239    248,145   250,080   252,044    254,037    256,058    258,107   2,578,482

Expenses
Operating Expenses
  Administration, marketing and overhead         34,499      31,624     25,555      23,000         20,444    17,889     12,831    12,831    12,831     12,831     12,831     12,830    229,996
  Legal, audit and other professional fees
Subtotal fund management                         34,499      31,624     25,555      23,000         20,444    17,889     12,831    12,831    12,831     12,831     12,831     12,830    229,996

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                      0          0          0           0           0            0          0         0         0          0          0          0           0
    Debt Class 2 - Long Term Fixed Rate Notes          0     22,917    166,667     166,667     166,667      166,667    166,667   166,667   166,667    166,667    166,667    166,667   1,689,583
Gain or Loss on Sale of Notes                          0          0          0           0           0            0          0         0         0          0          0          0           0
Provision for Loan Losses                              0     18,000     53,947      53,790      53,631       53,472     53,312    53,151    52,990     52,827     52,665     52,501     550,285
Subtotal cost of financing activities                  0     40,917    220,614     220,456     220,298      220,138    219,978   219,818   219,656    219,494    219,331    219,168   2,239,868

TOTAL EXPENSES                                   34,499      72,541    246,169     243,456     240,742      238,027    232,809   232,649   232,487    232,325    232,162    231,998   2,469,864

NET PROGRAM PROFIT (LOSS)                        (23,993)      2,952     (5,327)      (903)         3,636      8,211    15,336    17,432    19,557     21,712     23,895     26,109    108,618




                                                                                             128
                                      Appendix Four, Attachment G – Best Case Financials
                           Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                       RMDZ LOAN PROGRAM-EQ2-BEST CASE
                                                          Proforma Statement of Operations
                                                                     Five Years


                                                             YEAR TWO                      Total                   YEAR THREE                    Total
                                                 1st Qtr   2nd Qtr   3rd Qtr    4th Qtr    Year 2       1st Qtr   2nd Qtr   3rd Qtr   4th Qtr    Year 3
Investment Income

  Loan Loss Reserves                             200,400   222,600   254,400    318,000     995,400     254,400   254,400   254,400   254,400   1,017,600
  Interest on loans                              186,847   221,770   261,055    309,833     979,504     347,618   384,512   420,526   455,788   1,608,444
  Interest on Idle Funds                         348,163   327,572   305,754    280,588   1,262,077     291,493   274,571   259,321   245,534   1,070,920
TOTAL INCOME                                     735,410   771,942   821,208    908,421   3,236,981     893,512   913,483   934,247   955,722   3,696,964

Expenses
Operating Expenses
  Administration, marketing and overhead               0         0         0          0             0         0         0         0         0             0
  Legal, audit and other professional fees
Subtotal fund management                               0         0         0          0             0         0         0         0         0             0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                      0         0         0          0           0           0         0         0         0           0
    Debt Class 2 - Long Term Fixed Rate Notes    500,000   500,000   500,000    500,000   2,000,000     500,000   500,000   500,000   500,000   2,000,000
Gain or Loss on Sale of Notes                          0         0         0          0           0           0         0         0         0           0
Provision for Loan Losses                        113,637   122,585   138,731    172,698     547,651     135,459   133,513   131,595   129,953     530,520
Subtotal cost of financing activities            613,637   622,585   638,731    672,698   2,547,651     635,459   633,513   631,595   629,953   2,530,520

TOTAL EXPENSES                                   613,637   622,585   638,731    672,698   2,547,651     635,459   633,513   631,595   629,953   2,530,520

NET PROGRAM PROFIT (LOSS)                        121,774   149,357   182,478    235,722    689,331      258,053   279,970   302,652   325,769   1,166,444




                                                                               129
                                           Appendix Four, Attachment G – Best Case Financials
                                Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                 CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                        RMDZ LOAN PROGRAM-EQ2-BEST CASE
                                                           Proforma Statement of Operations
                                                                      Five Years


                                                           YEAR FOUR                              Total                        YEAR FIVE                    Total
                                                1st Qtr   2nd Qtr      3rd Qtr     4th Qtr        Year 4        1st Qtr    2nd Qtr    3rd Qtr   4th Qtr     Year 5
Investment Income

  Loan Loss Reserves                            254,400     254,400     254,400     254,400      1,017,600       254,400     254,400   254,400   254,400   1,017,600
  Interest on loans                             490,572     524,260     556,853     588,515      2,160,200       619,603     649,580   678,429   706,307   2,653,918
  Interest on Idle Funds                        232,729     221,712     212,454     204,724        871,619       197,930     192,908   189,679   187,946     768,463
TOTAL INCOME                                    977,701   1,000,373   1,023,707   1,047,639      4,049,419     1,071,933   1,096,887 1,122,508 1,148,654   4,439,982

Expenses
Operating Expenses
  Administration, marketing and overhead              0          0           0               0             0          0           0         0         0              0
  Legal, audit and other professional fees
Subtotal fund management                              0          0           0               0             0          0           0         0         0              0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                     0          0           0           0               0            0           0         0          0           0
    Debt Class 2 - Long Term Fixed Rate Notes   500,000    500,000     500,000     500,000       2,000,000      500,000     500,000   500,000    500,000   2,000,000
Gain or Loss on Sale of Notes                         0          0           0           0               0            0           0         0          0           0
Provision for Loan Losses                       128,608    125,526     122,423     119,661         496,219      117,470     114,414   111,225    108,205     451,315
Subtotal cost of financing activities           628,608    625,526     622,423     619,661       2,496,219      617,470     614,414   611,225    608,205   2,451,315

TOTAL EXPENSES                                  628,608    625,526     622,423     619,661       2,496,219      617,470     614,414   611,225    608,205   2,451,315

NET PROGRAM PROFIT (LOSS)                       349,092    374,846     401,283     427,978       1,553,200      454,462     482,473   511,283    540,449   1,988,667




                                                                                  130
                                                        Appendix Four, Attachment H – Base Case Financials
                                             Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                                  CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                                          RMDZ LOAN PROGRAM-EQ2-BASE CASE
                                                                                      Statement of Financing and Investment Activities
                                                                                                        Five Years

                                                                                            YEAR ONE                                                                                                                           Total
                                                  Month 1       Month 2       Month 3       Month 4         Month 5       Month 6       Month 7       Month 8       Month 9       Month 10       Month 11       Month 12       Year 1
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                               3,500,000             0              0             0               0             0             0             0             0              0              0              0    3,500,000
    Private (EQ2) Investors                                0    10,000,000              0             0               0             0             0             0             0              0              0              0   10,000,000
 Total of Funding From Investors                   3,500,000    10,000,000              0             0               0             0             0             0             0              0              0              0   13,500,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                  0             0            0              0               0             0             0             0             0              0              0              0            0
   Debt Class 2-Long Term Fixed Rate                        0             0   30,000,000              0               0             0             0             0             0              0              0              0   30,000,000
Total Funding From Issuance of
 Debt                                                       0             0   30,000,000              0               0             0             0             0             0              0              0              0   30,000,000

Total Funding From Financing Activities            3,500,000    10,000,000    30,000,000              0               0             0             0             0             0              0              0              0   43,500,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                   0      229,996              0             0               0             0             0             0             0              0              0              0     229,996
    Private (EQ2) Investors                                 0            0              0             0               0             0             0             0             0              0              0              0           0
 Total Shares Redeemed                                      0      229,996              0             0               0             0             0             0             0              0              0              0     229,996

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                           0             0             0             0               0             0             0             0             0              0              0              0            0
    Debt Class 2-Long Term Fixed Rate                       0             0             0             0               0             0             0             0             0              0              0              0            0
 Total Payments of Corporate Notes                          0             0             0             0               0             0             0             0             0              0              0              0            0

Total Application of Funds                                  0      229,996              0             0               0             0             0             0             0              0              0              0     229,996

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                  3,500,000     9,770,004    30,000,000              0               0             0             0             0             0              0              0              0   43,270,004

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                    0             0             0             0               0             0             0             0             0              0              0              0            0
  Sale of Deferred Payment Loans                            0             0             0             0               0             0             0             0             0              0              0              0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                     0             0             0             0               0             0             0             0             0              0              0              0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                           0      150,000       450,000       450,000         450,000       450,000       450,000       450,000       450,000       450,000        450,000        450,000      4,650,000
   Deferred Payment Loans                                   0       60,000       180,000       180,000         180,000       180,000       180,000       180,000       180,000       180,000        180,000        180,000      1,860,000
   Subordinate Debt                                         0       90,000       270,000       270,000         270,000       270,000       270,000       270,000       270,000       270,000        270,000        270,000      2,790,000
Total Lending Activities                                    0      300,000       900,000       900,000         900,000       900,000       900,000       900,000       900,000       900,000        900,000        900,000      9,299,999

ADD: Principal Collections                                  0             0        3,504        14,031          24,604        35,224        45,890        56,604        67,364         78,172        89,028         99,931       514,353

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                           0     (300,000)     (896,496)     (885,969)       (875,396)     (864,776)     (854,110)     (843,396)     (832,636)      (821,828)      (810,972)      (800,069)   (8,785,646)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                3,500,000     9,470,004    29,103,504      (885,969)       (875,396)     (864,776)     (854,110)     (843,396)     (832,636)      (821,828)      (810,972)      (800,069)   34,484,358




                                                                                                      131
                                                        Appendix Four, Attachment H – Base Case Financials
                                             Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                        CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                                RMDZ LOAN PROGRAM-EQ2 BASE CASE
                                                                            Statement of Financing and Investment Activities
                                                                                              Five Years

                                                                     YEAR TWO                                      Total                       YEAR THREE                                 Total
                                                       1st Qtr       2nd Qtr       3rd Qtr         4th Qtr         Year 2        1st Qtr        2nd Qtr       3rd Qtr       4th Qtr       Year 3
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                    3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000
    Private (EQ2) Investors                                     0              0             0                0             0             0               0             0             0            0
 Total of Funding From Investors                        3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                       0             0             0                0             0              0              0             0             0            0
   Debt Class 2-Long Term Fixed Rate                             0             0             0                0             0              0              0             0             0            0
Total Funding From Issuance of
 Debt                                                            0             0             0                0             0              0              0             0             0            0

Total Funding From Financing Activities                 3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                        0             0             0                0             0              0              0             0             0            0
    Private (EQ2) Investors                                      0             0             0                0             0              0              0             0             0            0
 Total Shares Redeemed                                           0             0             0                0             0              0              0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                                0             0             0                0             0              0              0             0             0            0
    Debt Class 2-Long Term Fixed Rate                            0             0             0                0             0              0              0             0             0            0
 Total Payments of Corporate Notes                               0             0             0                0             0              0              0             0             0            0

Total Application of Funds                                       0             0             0                0             0              0              0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                       3,500,000              0             0                0     3,500,000     3,000,000               0             0             0    3,000,000

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                         0             0             0                0             0              0              0             0             0            0
  Sale of Deferred Payment Loans                                 0             0             0                0             0              0              0             0             0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                          0             0             0                0             0              0              0             0             0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                         750,000     1,050,000     1,200,000          1,500,000    4,500,000     1,200,000      1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                                 480,000       420,000       480,000            600,000    1,980,000       480,000        480,000       480,000       480,000     1,920,000
   Subordinate Debt                                       450,000       630,000       720,000            900,000    2,700,000       720,000        720,000       720,000       720,000     2,880,000
Total Lending Activities                                1,680,000     2,100,000     2,400,000          3,000,000    9,180,000     2,400,000      2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                                224,218       227,664       351,287           486,796     1,289,965       569,379        699,167       826,996       936,438     3,031,980

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                      (1,455,782)   (1,872,336)   (2,048,713)     (2,513,204)     (7,890,035)   (1,830,621)    (1,700,833)   (1,573,004)   (1,463,562)   (6,568,020)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                     2,044,218    (1,872,336)   (2,048,713)     (2,513,204)     (4,390,035)    1,169,379     (1,700,833)   (1,573,004)   (1,463,562)   (3,568,020)




                                                                                                 132
                                                        Appendix Four, Attachment H – Base Case Financials
                                             Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                     CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                             RMDZ LOAN PROGRAM-EQ2 BASE CASE
                                                                         Statement of Financing and Investment Activities
                                                                                           Five Years

                                                                     YEAR FOUR                                      Total                        YEAR FIVE                                Total
                                                       1st Qtr        2nd Qtr       3rd Qtr         4th Qtr         Year 4        1st Qtr       2nd Qtr       3rd Qtr       4th Qtr       Year 5
FINANCING ACTIVITIES
Funds Received From:
 Sale of Shares
    CIWMB Investment                                             0              0             0                0             0              0             0             0             0            0
    Private (EQ2) Investors                                      0              0             0                0             0              0             0             0             0            0
 Total of Funding From Investors                                 0              0             0                0             0              0             0             0             0            0

Funding From Issuance of
 Debt
   Debt Class 1-Short Term                                       0              0             0                0             0              0             0             0             0            0
   Debt Class 2-Long Term Fixed Rate                             0              0             0                0             0              0             0             0             0            0
Total Funding From Issuance of
 Debt                                                            0              0             0                0             0              0             0             0             0            0

Total Funding From Financing Activities                          0              0             0                0             0              0             0             0             0            0

Less Funds Applied To:
 Redemption of Shares
    CIWMB Investment/Start Up Cost Reimb.                        0              0             0                0             0              0             0             0             0            0
    Private (EQ2) Investors                                      0              0             0                0             0              0             0             0             0            0
 Total Shares Redeemed                                           0              0             0                0             0              0             0             0             0            0

 Repayment of Corporate Notes
    Debt Class 1-Short Term Notes                                0              0             0                0             0              0             0             0             0            0
    Debt Class 2-Long Term Fixed Rate                            0              0             0                0             0              0             0             0             0            0
 Total Payments of Corporate Notes                               0              0             0                0             0              0             0             0             0            0

Total Application of Funds                                       0              0             0                0             0              0             0             0             0            0

FUNDING FROM FINANCING
 ACTIVITIES (NET)                                                0              0             0                0             0              0             0             0             0            0

INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
  Sale of Low Cost Loans                                         0              0             0                0             0              0             0             0             0            0
  Sale of Deferred Payment Loans                                 0              0             0                0             0              0             0             0             0            0
  Sale of Subordinate Debt Loans

Total Funds Received From Sale of Loans                          0              0             0                0             0              0             0             0             0            0

LESS: Funds Applied to Lending Activities:
   Low Cost Loans                                       1,200,000      1,200,000     1,200,000          1,200,000    4,800,000     1,200,000     1,200,000     1,200,000     1,200,000     4,800,000
   Deferred Payment Loans                                 480,000        480,000       480,000            480,000    1,920,000       480,000       480,000       480,000       480,000     1,920,000
   Subordinate Debt                                       720,000        720,000       720,000            720,000    2,880,000       720,000       720,000       720,000       720,000     2,880,000
Total Lending Activities                                2,400,000      2,400,000     2,400,000          2,400,000    9,600,000     2,400,000     2,400,000     2,400,000     2,400,000     9,600,000

ADD: Principal Collections                                998,357      1,140,514     1,282,132          1,399,045    4,820,049     1,459,247     1,604,967     1,750,778     1,869,409     6,684,401

PROCEEDS FROM INVESTMENT
 ACTIVITIES (NET)                                      (1,401,643)    (1,259,486)   (1,117,868)     (1,000,955)     (4,779,951)     (940,753)     (795,033)     (649,222)     (530,591)   (2,915,599)

NET INCREASE (DECREASE) IN FUNDS FROM
  FUNDING AND INVESTMENT ACTIVITIES                    (1,401,643)    (1,259,486)   (1,117,868)     (1,000,955)     (4,779,951)     (940,753)     (795,033)     (649,222)     (530,591)   (2,915,599)




                                                                                                  133
                                       Appendix Four, Attachment H – Base Case Financials
                            Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy

                                                CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                       RMDZ LOAN PROGRAM-EQ2-BASE CASE
                                                          Proforma Statement of Operations
                                                                     Five Years


                                                             YEAR TWO                           Total                    YEAR THREE                       Total
                                                1st Qtr   2nd Qtr     3rd Qtr      4th Qtr      Year 2       1st Qtr    2nd Qtr    3rd Qtr    4th Qtr     Year 3
Investment Income

  Loan Loss Reserves                            200,400   222,600     254,400      318,000       995,400     254,400    254,400    254,400    254,400    1,017,600
  Interest on loans                             186,847   221,770     261,055      309,833       979,504     347,618    384,512    420,526    455,788    1,608,444
  Interest on Idle Funds                        332,672   309,221     284,165      254,969     1,181,026     262,714    242,677    224,356    207,537      937,284
TOTAL INCOME                                    719,919   753,590     799,619      882,802     3,155,931     864,733    881,588    899,282    917,725    3,563,328

Expenses
Operating Expenses
  Administration, marketing and overhead              0          0           0            0              0         0          0          0          0              0

Subtotal fund management                              0          0           0            0              0         0          0          0          0              0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                     0         0           0         0                0           0          0          0          0            0
    Debt Class 2 - Long Term Fixed Rate Notes   500,000   500,000     500,000   500,000        2,000,000     500,000    500,000    500,000    500,000    2,000,000
Gain or Loss on Sale of Notes                         0         0           0         0                0           0          0          0          0            0
Loan Losses Incurred                            378,789   408,617     462,436   575,660        1,825,502     451,531    445,042    438,650    433,178    1,768,401
Subtotal cost of financing activities           878,789   908,617     962,436 1,075,660        3,825,502     951,531    945,042    938,650    933,178    3,768,401

TOTAL EXPENSES                                  878,789   908,617     962,436 1,075,660        3,825,502     951,531    945,042    938,650    933,178    3,768,401

NET PROGRAM PROFIT (LOSS)                       (158,870) (155,027)   (162,816)    (192,858)    (669,571)    (86,798)   (63,453)   (39,368)   (15,453)    (205,073)




                                                                                  134
                                                  Appendix Four, Attachment H – Base Case Financials
                                       Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                                 CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                                        RMDZ LOAN PROGRAM-EQ2-BASE CASE
                                                                           Proforma Statement of Operations
                                                                                      Five Years


                                                                                     YEAR ONE                                                                                                     Total
                                                Month 1     Month 2     Month 3     Month 4  Month 5        Month 6     Month 7     Month 8     Month 9     Month 10     Month 11    Month 12     Year 1
Investment Income

  Loan Loss Reserves                                  0      31,800      95,400      95,400      95,400      95,400      95,400      95,400      95,400       95,400       95,400      95,400      985,800
  Interest on loans                                   0       1,738       6,942      12,122      17,278      22,410      27,518      32,600      37,658       42,692       47,700      52,684      301,343
  Interest on Idle Funds                         10,506      41,815     137,940     134,053     130,304     126,617     123,002     119,441     115,935      112,483      109,086     105,743    1,266,926
TOTAL INCOME                                     10,506      75,353     240,282     241,576     242,982     244,428     245,920     247,441     248,993      250,575      252,186     253,827    2,554,069

Expenses
Operating Expenses
  Administration, marketing and overhead         34,499      31,624      25,555      23,000      20,444      17,889      12,831      12,831      12,831       12,831       12,831      12,830      229,996

Subtotal fund management                         34,499      31,624      25,555      23,000      20,444      17,889      12,831      12,831      12,831       12,831       12,831      12,830      229,996

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                      0          0           0           0           0           0           0           0           0            0            0           0            0
    Debt Class 2 - Long Term Fixed Rate Notes          0     22,917     166,667     166,667     166,667     166,667     166,667     166,667     166,667      166,667      166,667     166,667    1,689,583
Gain or Loss on Sale of Notes                          0          0           0           0           0           0           0           0           0            0            0           0            0
Loan Losses Incurred                                   0     60,000     179,825     179,298     178,770     178,239     177,705     177,170     176,632      176,091      175,549     175,003    1,834,282
Subtotal cost of financing activities                  0     82,917     346,491     345,965     345,436     344,905     344,372     343,836     343,298      342,758      342,215     341,670    3,523,866

TOTAL EXPENSES                                   34,499     114,541     372,046     368,965     365,880     362,794     357,203     356,667     356,129      355,589      355,046     354,500    3,753,862

NET PROGRAM PROFIT (LOSS)                        (23,993)    (39,188)   (131,764)   (127,389)   (122,898)   (118,367)   (111,284)   (109,226)   (107,136)    (105,014)   (102,860)   (100,673)   (1,199,793)




                                                                                          135
                                          Appendix Four, Attachment H – Base Case Financials
                               Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
                                                  CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
                                                         RMDZ LOAN PROGRAM-EQ2-BASE CASE
                                                            Proforma Statement of Operations
                                                                       Five Years


                                                          YEAR FOUR                             Total                        YEAR FIVE                    Total
                                                1st Qtr   2nd Qtr   3rd Qtr       4th Qtr       Year 4        1st Qtr    2nd Qtr    3rd Qtr   4th Qtr     Year 5
Investment Income

  Loan Loss Reserves                            254,400   254,400   254,400       254,400       1,017,600      254,400     254,400   254,400   254,400   1,017,600
  Interest on loans                             490,572   524,260   556,853       588,515       2,160,200      619,603     649,580   678,429   706,307   2,653,918
  Interest on Idle Funds                        191,730   177,785   165,670       155,148         690,334      145,613     137,921   132,098   127,840     543,472
TOTAL INCOME                                    936,703   956,445   976,923       998,064       3,868,135    1,019,616   1,041,901 1,064,927 1,088,547   4,214,991

Expenses
Operating Expenses
  Administration, marketing and overhead              0         0             0             0            0          0           0         0         0              0

Subtotal fund management                              0         0             0             0            0          0           0         0         0              0

Cost of financing activities
  Interest Cost Incurred
    Debt Class 1-Short Term Notes                     0         0         0             0               0           0           0         0          0           0
    Debt Class 2 - Long Term Fixed Rate Notes   500,000   500,000   500,000       500,000       2,000,000     500,000     500,000   500,000    500,000   2,000,000
Gain or Loss on Sale of Notes                         0         0         0             0               0           0           0         0          0           0
Loan Losses Incurred                            428,694   418,421   408,078       398,870       1,654,064     391,568     381,380   370,751    360,684   1,504,383
Subtotal cost of financing activities           928,694   918,421   908,078       898,870       3,654,064     891,568     881,380   870,751    860,684   3,504,383

TOTAL EXPENSES                                  928,694   918,421   908,078       898,870       3,654,064     891,568     881,380   870,751    860,684   3,504,383

NET PROGRAM PROFIT (LOSS)                         8,008    38,024    68,845        99,193        214,071      128,048     160,521   194,176    227,863    710,608




                                                                                  136
                             Appendix Five



APPENDIX 5: FINANCIAL TERMS GLOSSARY
Assets                              Anything that an individual or a corporation owns
                                    that has economic value to its owner. Also a
                                    balance sheet item showing what a firm owns.
                                    They are bought to increase the value of a firm or
                                    benefit the firms operations.
Balance Sheet                       A company's financial statement that reports its
                                    assets, liabilities, and net worth at a specific time.
Basis Point                         A measure of a bond's yield, equal to 1/100th of
                                    1% of yield. A bond whose yield increases from
                                    5.0% to 5.5% is said to increase by 50 basis points.
Cash Flow                           The amount of cash a company generates and uses
                                    during a period, calculated by adding noncash
                                    charges (such as depreciation) to the net income
                                    after taxes. Cash Flow can be used as an indication
                                    of a company's financial strength.
Collateral                          Property or assets that are offered to secure a loan
                                    or other credit. Collateral becomes subject to
                                    seizure on default.
Credit Risk                         This is one of the measurements or likelihood that a
                                    party will default on a financial agreement.
Debt                                An amount of money owed from one person or
                                    firm to another.
Deferred Payment Loans              The borrower makes no interest or principal
                                    payments during the life of the loan, but at
                                    maturity, pays the original principal amount plus
                                    accrued interest.
Equity                              Equity is a term whose meaning depends very
                                    much on the context. In general though, you can
                                    think of equity as ownership. For example, stocks
                                    are equity because they represent ownership of a
                                    company, whereas bonds are classified as debt
                                    because they represent an obligation to pay and not
                                    ownership of assets.
Exit Risk                           The risk than an investment will not be able to be
                                    sold at a predetermined time.
Liabilities                         A legal debt or obligation. Recorded on the balance
                                    sheet, current liabilities are debts payable within
                                    one year while long-term liabilities are debts
                                    payable over a longer period.
Prime Rate                          The interest rate that commercial banks charge
                                    their prime or most credit worthy customers,
                                    generally large corporations.
Principal                           The amount owed on a loan. Usually the face value
                                    of a debt.
Program Related Investment          Debt with an interest rate significantly below-
                                    market supported by charitable organizations.




                                  137
                       Appendix Five



APPENDIX 5: FINANCIAL TERMS GLOSSARY
Rate Risk
Return on Investment          The profit or loss resulting from an investment
                              transaction, usually expressed as an annual
                              percentage return.
Senior Debt                   Debt that must be repaid before other creditors
                              receive any payment in the event of bankruptcy.
Subordinate Debt              A loan (or security) that ranks below other loans
                              (or securities) with regard to claims on assets or
                              earnings.




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