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Strategies & Market Trends : ACRT going to Zero -- Ignore unavailable to you. Want to Upgrade?

To: CLEMENZA who wrote (17)	2/4/1998 7:14:00 PM
From: John Chew	Respond to of 320

ACTRADE J. Chew Actrade TOTAL TOTAL TOTALS CAPITAL 1997 30-Sep-97 31-Dec-97 31-Mar-97 30-Jun-98 30-Jun-98 30-Sep-98 31-Dec-98 31-Mar-99 30-Jun-99 30-Jun-99 30-Sep-99 31-Dec-99 31-Mar-00 30-Jun-00 30-Jun-00 1 Revenues 22,000,000 11,500,000 13,000,000 12,127,500 12,733,875 49,361,375 13,370,569 14,039,097 14,741,052 15,478,105 57,628,823 16,252,010 17,064,610 17,917,841 18,813,733 70,048,194 2 Account Executives 10 New 1,050,000 3,000,000 4,050,000 4,950,000 7,500,000 10,050,000 12,600,000 35,100,000 15,000,000 15,750,000 16,537,500 17,364,375 64,651,875 3 Account Executives 10 New 1,050,000 1,050,000 3,000,000 4,950,000 7,500,000 10,050,000 25,500,000 12,600,000 14,490,000 14,490,000 16,663,500 58,243,500 4 Account Executives 15 New 0 1,575,000 4,500,000 7,425,000 11,250,000 24,750,000 15,075,000 18,900,000 21,735,000 24,995,250 80,705,250 5 Account Executives 15 New 0 0 1,575,000 4,500,000 7,425,000 13,500,000 11,250,000 15,075,000 18,900,000 21,735,000 66,960,000 6 Account Executives 20 New 0 0 2,100,000 6,000,000 8,100,000 9,900,000 15,000,000 20,100,000 25,200,000 70,200,000 7 Total Revs. 54,461,375 22,895,569 32,564,097 46,316,052 62,803,105 164,578,823 80,077,010 96,279,610 109,680,341 124,771,858 410,808,819 8 Cost of Revs 10,230,000 12,090,000 12,255,075 15,609,004 48,835,579 21,292,879 30,284,610 43,073,928 58,406,887 153,058,304 74,471,619 89,540,038 102,002,717 116,037,828 382,052,202 9 Gr. Profit 1,270,000 910,000 922,425 922,425 5,625,796 1,602,690 2,279,487 3,242,124 4,396,218 11,520,519 5,605,391 6,739,572 7,677,624 8,734,030 28,756,617 10 GP Margin 10.33% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 11 Sale Units Expenses 12 Outside Commission 16,625 18,550 24,246 36,869 96,290 58,259 92,099 140,231 197,936 488,525 258,395 315,104 362,006 414,827 1,350,332 13 Insurance 11,875 13,250 17,319 26,335 68,779 41,614 65,785 100,165 141,383 348,947 184,568 225,074 258,576 296,305 964,523 14 A/E Salaries & Commissions 81,759 91,226 119,240 181,314 473,539 286,512 452,931 689,637 973,420 2,402,500 1,270,747 1,549,635 1,780,295 2,040,057 6,640,734 15 Investment in New Branches 0 50,000 50,000 75,000 175,000 75,000 100,000 175,000 0 0 0 0 0 16 Investment in New A/E's 30,000 150,000 225,000 325,000 730,000 250,000 450,000 187,500 50,000 937,500 0 0 0 0 0 17 TOTAL SALES EXPENSES 140,259 323,026 435,805 644,518 1,543,608 711,385 1,160,815 1,117,533 1,362,739 4,352,472 1,713,710 2,089,813 2,400,877 2,751,189 8,955,589 18 Overhead Exps. 19 Rent 52,000 57,000 62,000 69,500 240,500 77,000 87,000 87,000 87,000 338,000 87,000 87,000 87,000 87,000 348,000 20 Credit Analysis 21,000 21,220 21,871 23,314 87,405 25,758 28,852 33,253 38,529 126,392 45,438 50,623 54,911 59,741 210,713 21 Accting Staff 33,000 33,160 33,635 34,687 134,482 36,470 39,290 43,301 48,109 167,170 53,147 57,873 61,782 66,183 238,985 22 Advertising 15,000 15,275 16,089 17,892 64,256 20,948 25,782 32,658 40,902 120,290 49,539 57,640 64,340 71,886 243,405 23 Bad Debts 27,500 28,875 32,944 41,960 131,279 57,239 81,410 115,790 157,008 411,447 200,193 240,699 274,201 311,930 1,027,023 24 Other Overhead 110,000 114,950 129,528 161,432 515,910 214,337 295,798 408,223 539,006 1,457,364 672,433 794,886 894,459 1,005,225 3,367,003 25 Total Overhead 258,500 270,480 296,067 348,785 1,173,832 431,752 558,132 720,225 910,554 2,620,663 1,107,750 1,288,721 1,436,693 1,601,965 5,435,129 26 27 Grand Total Expenses 398,759 593,506 731,872 993,303 2,717,440 1,143,137 1,718,947 1,837,758 2,273,293 6,973,135 2,821,460 3,378,534 3,837,570 4,353,154 14,390,718 28 Fin. Income 125,000 250,000 175,000 87,500 0 512,500 (180,000.00) (360,000.00) (472,500.00) (630,000.00) (1,642,500.00) 29 Net bef. Tax 871,241 316,494 190,553 (70,878) 3,033,356 709,553 735,540 1,491,866 2,122,925 5,059,884 2,603,931 3,001,038 3,367,554 3,750,876 12,723,399 30 Taxes @40% 348,496 126,598 76,221 0 551,315 283,821 294,216 596,746 849,170 2,023,954 1,041,572 1,200,415 1,347,022 1,500,350 5,089,360 31 Net After Tax 522,745 189,896 114,332 (70,878) 2,482,041 425,732 441,324 895,120 1,273,755 3,035,930 1,562,359 1,800,623 2,020,532 2,250,526 7,634,039 32 Yr. End. O/S 8,018,000 8,384,667 8,818,000 8,918,000 8,534,667 8,920,000 8,920,000 8,950,000 8,990,000 8,980,000 9,100,000 9,100,500 9,250,000 9,350,000 9,220,000 33 EPS Contribution $0.065 $0.023 $0.013 ($0.008) $0.291 $0.048 $0.049 $0.100 $0.142 $0.338 $0.172 $0.198 $0.218 $0.241 $0.828 34 ACTRADE SA 35 Revenues 6,670,000 6,870,100 7,076,203 7,288,489 27,904,792 7,507,144 7,732,358 7,964,329 8,203,259 31,407,090 8,449,356 8,702,837 8,963,922 9,232,840 35,348,955 36 CGS 5,889,610 6,006,298 6,248,287 6,435,736 24,579,931 6,628,808 6,827,672 7,032,502 7,243,477 27,732,459 7,460,782 7,684,605 7,915,143 8,152,598 31,213,128 37 Gross Profit 780,390 863,802 827,916 852,753 3,324,861 878,336 904,686 931,827 959,782 3,674,631 988,574 1,018,232 1,048,779 1,080,242 4,135,827 38 GP Margin 11.70% 12.57% 11.70% 11.70% 11.92% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70% 11.70% 39 Sales Units Expenses 20,000 20,600 21,218 21,855 83,673 22,510 22,510 22,510 22,510 22,510 25,335 26,095 26,878 27,685 105,993 40 Overhead expenses 10,000 10,300 10,609 10,927 41,836 11,255 11,255 11,255 11,255 11,255 12,668 13,048 13,439 13,842 52,997 41 TOTAL EXPENSES 30,000 30,900 31,827 32,782 125,509 33,765 33,765 33,765 33,765 33,765 38,003 39,143 40,317 41,527 158,990 42 Net bef. Tax 750,390 832,902 796,089 819,971 3,199,352 844,571 870,921 898,062 926,017 3,640,866 950,571 979,089 1,008,462 1,038,715 3,976,837 43 Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 44 Net Income 750,390 832,902 796,089 819,971 3,199,352 844,571 870,921 898,062 926,017 3,640,866 950,571 979,089 1,008,462 1,038,715 3,976,837 45 EPS Contribution $0.094 $0.099 $0.090 $0.092 $0.375 $0.095 $0.098 $0.100 $0.103 $0.405 $0.104 $0.108 $0.109 $0.111 $0.431 46 TAD INTERNATIONAL 47 Revenues 0 3,500,000 5,000,000 6,500,000 15,000,000 7,800,000 9,360,000 11,232,000 13,478,400 41,870,400 16,174,080 19,408,896 23,290,675 27,948,810 86,822,461 48 CGS 0 3,255,000 4,650,000 6,045,000 13,950,000 7,254,000 8,704,800 10,445,760 12,534,912 38,939,472 15,041,894 18,050,273 21,660,328 25,992,394 80,744,889 49 Gr. Profit 0 245,000 350,000 455,000 1,050,000 546,000 655,200 786,240 943,488 2,930,928 1,132,186 1,358,623 1,630,347 1,956,416 6,077,572 50 GP Margin 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 51 Sales Units Expenses 0 27,344 39,063 50,781 117,188 60,938 73,125 87,750 105,300 327,113 126,360 151,632 181,958 218,350 551,940 52 Overhead expenses 0 41,125 58,750 76,375 176,250 91,650 109,980 131,976 158,371 491,977 190,045 228,055 273,665 328,339 830,059 53 TOTAL EXPENSES 0 68,469 97,813 127,156 293,438 152,588 183,105 219,726 263,671 819,090 316,405 379,687 455,623 546,689 1,381,999 54 55 Net bef. Tax 0 176,531 252,187 327,844 756,562 393,412 472,095 566,514 679,817 2,111,838 815,781 978,936 1,174,724 1,409,727 4,695,573 56 Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 57 Net Income 0 176,531 252,187 327,844 756,562 393,412 472,095 566,514 679,817 2,111,838 815,781 978,936 1,174,724 1,409,727 4,695,573 58 EPS Contribution $0.000 $0.021 $0.029 $0.037 $0.089 $0.044 $0.053 $0.063 $0.076 $0.235 $0.090 $0.108 $0.127 $0.151 $0.509 59 ACTRADE (EXPORT) 60 Revenues 1,300,000 1,300,000 1,300,000 1,300,000 5,200,000 1,300,000 1,300,000 1,300,000 1,300,000 5,200,000 1,300,000 1,300,000 1,300,000 1,300,000 5,200,000 61 CGS 1,131,000 1,131,000 1,131,000 1,131,000 4,524,000 1,131,000 1,131,000 1,131,000 1,131,000 4,524,000 1,131,000 1,131,000 1,131,000 1,131,000 4,524,000 62 Gr. Profit 169,000 169,000 169,000 169,000 676,000 169,000 169,000 169,000 169,000 676,000 169,000 169,000 169,000 169,000 676,000 63 GP Margin 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 64 Sales Units Expenses 60,000 60,000 60,000 60,000 240,000 60,000 60,000 60,000 60,000 240,000 65,000 65,000 65,000 65,000 260,000 65 Overhead Expenses 50,000 50,000 50,000 50,000 200,000 50,000 50,000 50,000 50,000 200,000 53,000 53,000 53,000 53,000 212,000 66 TOTAL EXPENSES 110,000 110,000 110,000 110,000 440,000 110,000 110,000 110,000 110,000 440,000 118,000 118,000 118,000 118,000 472,000 67 Net bef. Tax 59,000 59,000 59,000 59,000 236,000 59,000 59,000 59,000 59,000 236,000 51,000 51,000 51,000 51,000 204,000 68 Taxes 40% 23,600 23,600 23,600 23,600 94,400 23,600 23,600 23,600 23,600 94,400 20,400 20,400 20,400 20,400 81,600 69 Net Income 35,400 35,400 35,400 35,400 141,600 35,400 35,400 35,400 35,400 141,600 30,600 30,600 30,600 30,600 122,400 70 EPS Contribution $0.004 $0.004 $0.004 $0.004 $0.017 0.004 0.004 0.004 0.004 0.016 0.003 0.003 0.003 0.003 0.013 71 Additional Taxes against EPS Add. Taxes 658,103 ($0.077) ($0.070) -0.02 72 TOTAL EPS ESTIMATED Add. Taxes EPS $0.077 $0.694 $0.920 $1.765 73 Multiple 50x $34.69 40x $36.80 30x $52.94

To: CLEMENZA who wrote (17)	2/4/1998 7:21:00 PM
From: John Chew	Respond to of 320

Notes on Actrade What makes Actrade a unique investment opportunity is the Company's ability to grow rapidly at over 80% in sales, net income and EPS while also building its infrastructure for future growth. Very few companies can grow rapidly while being extremely profitable and debt free. Actrade averages over 43% return on capital employed in its TAD Program with sales growth expected to double next year without financing. By becoming the only company providing services for account receivable between 60 and 180 days, the Capital has created its own market. Risks The ability to handle growth. Can the Company manage its rapid growth. Competition. David Bengston, a credit manager with Morton International, agreed that security was the most attractive feature about a TAD. "We use it for our clients who do not pay us on time, but whom we do not want to give up or shift into cash-on-delivey," he said (Investor's Business Daily Jan. 23, 1997). My first business was import/export, and that is where I learned about the TAD, " he said. Our market will grow as the market becomes educated about the flexibility and cash flow provided by TADs. We fill a niche that opened up when banks turned their backs on mid-sized businesses. Their main challenge is creating the infrastructure to support the rapid growth that is on the way. Favorable Trends: Wall Street Transcript-Jan. 13, 1997 Actrade International personnel have 20 to 30 years of trade relationships build up a network of contacts and buyers all over the world which allow Actrade to put together the right packages to sell our program around the world. Specializing in complicated products like air conditioning and refrigeration equipment allows Actrade to have an edge ove most competitors. ACRT can provide a full array of product from its network of US sellers and offer them to its network of foreign buyers. Management developed a new commercial paper, the "trade acceptance draft" or TAD that has a potential market of $billions. The growth of the business is being developed through the hiring and training of account executives and a broker network. At first, Actrade marketed to specific industries: building supply, subcontractors, printing by AE's trained in that industry. Then Actrade would market geographically. Go step by step to teach our clients. We need to teach the customers of our clients. After awhile marketing to an industry becomes easier because of referrals as our customers tell others about our new method of trade financing. (how much is coming from referrals). How the program works The TAD, this is a paper that is signed by a buyer of product or services to be paid on a defined due date, and on that due date, the TAD that up to that moment was a note, becomes a check, and Actrade collects the money directly from the buyer's bank account, like a check. The seller (supplier) after receiving the TAD from the buyer sells us the TAD. Now Actrade provides the seller with protection. In case the buyer does not pay, it is Actrade's job to collect. Accounting for TADs Revenues for Actrade's TAD sales are the full or face value amount of the TADs, not the difference between the price that Actrade purchases the TAD and the cost. Credit Insurance Actrade typically insures all of its TADs with American Credit Indemnity, rated A by Best Insurance. The Company has coverage of up to $25 million of trade acceptance volume per year, while the insurance will pay for up to $3 million in losses. At Actrade's current loss rate of less than 0.01 per cent (it is not a typo), it could theoretically do $300 million before going over the $3 million loss limit. Why such a miniscule loss rate? How TADs benefit Actrade's customers Remember that Actrade purchases the TAD, it does not finance a seller's TAD. There are three major reasons a customer would use TADs Financing One, a customer can use TADs to finance themselves on the strength of their customer, and no one else in the market allows them to do this but Actrade. Actrade relays on the financial strength of the buyer not the Seller-no matter how weak financially. We can buy from our customer even if all his assets have liens to someone else. If an owner has bank lines and the bank has as collateral all of his business' receivable and inventory, then what does he do if he needs more money to fill an order. Actrade comes with a solution to provide more money without breaking the contract the owner has with the bank or other lender. The typical customer can be a small or new company without bank lines, or medium sized companies that have a line with a lender and they need more working capital quickly without affecting their lending arrangements. Collection The second benefit is the automatic collection of the TADs. The TAD becomes a check on the due date. Not before, not after, exactly on the due date and for the exact amount written on the TAD. The customer never hears, "The check is in the mail or the balance will be sent later when I have the cash." Also, the TAD allows the buyer to pay in installments. If a customer is supposed to pay $20,000 and this amount is too burdensome to pay at one time, then Actrade's client can offer its customers special terms of say 5 installments of $4,000 each. Actrade finds that smaller installments are easier to collect, particularly when on the due date, Actrade just debits the buyer's bank account for the amount. The third benefit is as a selling tool. If a potential customer is selling in an industry where everyone is selling on 30 days, and he/she can offer his/her customers special terms of up to five months to pay. For seasonal businesses, this allows them to buy more inventory. The buyer who signs the TAD gives up the flexibility to delay payment, not pay or pay partially. But the buyer gains more time. If the TAD bounces, the TAD is a legal document which the buyer can not dispute and which allows Actrade to sue for collection.

To: CLEMENZA who wrote (17)	2/4/1998 7:23:00 PM
From: John Chew	Respond to of 320

Competition Patent Protection Management is not aware of any other financial service program offered in the United States which utilizes trade acceptance drafts. The Company has filed for patent protection on the processes involved in the TAD Program, which application is currently pending under Number 08/506,539. The TAD itself is not patentable, it's the processing of the TAD like a check Actrade is attempting to patent. The computer encoding on the TAD allows for electronic collection-that is what is patentable. Although no assurances can be given, based upon discussions had with the Company's patent counsel, management believes that it may be able to secure patent protection for this innovative program. As an investor, I place no value on this patent. Perhaps the patent pending creates more uncertainty for a potential competitor, but I would not count on this as a reason to invest. Actrade's TAD Program is under the radar screen of large potential competitors. Until Actrade's revenues increase above $200 million, larger competitors may not notice.

To: CLEMENZA who wrote (17)	2/4/1998 7:24:00 PM
From: John Chew	Respond to of 320

Actrade's Default Rate or Non-Payment of TADs Is Now Approximately 0.11%, Near 1/10th of One Percent. How Can It Be So Low? This is a critical section for potential investors to read, understand and verify in their due-diligence. Since inception of the TAD Program, sales from the second half of 1993 to the first nine months of FY 1997 have totaled $26,939,746. I estimate approximately $6 million more TAD business has been generated during April and three weeks in May which would bring a total of about $33 million of TAD revenues to date. To date, only $36,000 of TADs has not been paid (Actrade's credit insurance covered the losses) which gives Actrade a default rate of about 1/10th of 1 percent-far exceeding management's expectations. Capital takes very little risk in purchasing TADs from a Buyer. Actrade's two risks would either be 1) having TADs non-payment exceed its $3 million loss limit from American Credit Indemnity ("American") or 2) having losses in an amount that would cause American to drop its insurance coverage. At Actrade's current default rate of 0.11%, Capital could generate $2.7 billion of TAD revenues before exceeding this limit. Of course, I would expect this default rate to increase as Revenues grow, but Actrade's diversifica-tion of Buyers would offset this risk. By accepting TAD's issued by a large number of customers, the risk of loss is reduced. Each Seller typically deals with TAD's from many unrelated companies. Therefore, the extent of Capital's exposure from nonpayment by any company is limited. Capital has many protections against loss and non-payment of TADs as explained below in order of importance. 1. The Power of the Instrument, the TAD Elimination of Commercial Disputes An investor, after reading the prior section on Commercial Paper, understands that TADs eliminate any commercial dispute. Essentially, the TAD Program separates the financial from the commercial transaction between Buyer and Seller. For example, if a Seller delivers computers to a Buyer, then the Buyer inspects the computers, finds them OK and signs and returns the TAD to the Seller, the Seller is then considered paid. (The Seller's Accounts Receivable is replaced with a payment-see accounting for TADs section). If the next day, the computers are found to be inoperable or defective, the Buyer cannot LEGALLY stop payment on the TAD like a check. Remember that a Buyer could legally stop payment on a check if that buyer has a commercial dispute regarding the goods of the Seller. Though TADs are processed like checks, they are like, "a leasing agreement." If you lease a car, you have no legal right to not pay the leasing company if you are unhappy with the car. Your dispute is with the car manufacturer. In this example, the Buyer would have to settle with the computer manufacturer's warranty company or the Seller. The Psychology of The Buyer or Signatory of the TADs When a Buyer has signed a TAD, he/she understands that the TAD will be automatically debited from his/her company's bank account on the due date, unless he/she requests and receives an extension from Actrade. The transaction is psychologically very different than being able to pay on open account terms. Here the Buyer feels like he/she has written a check or made payment. If the Buyer has cash-flow problems as the due date of the TAD approaches, the Buyer will typically stretch out his other open account payables to be able to pay promptly on the TAD. For example, a Seller's credit manager does not have to hear from the Buyer, "Sorry, can you give me two more weeks to pay?" or "the check is in the mail." Collection is between the Buyer and Actrade. Actrade's management reports a historical 98% payment rate on TADs; on the 2% bounced (insufficient funds) TADs, the Buyer will usually replace the TAD with a certified check as soon as possible. Why? Actrade analyzes the Buyer's cash balances and wants each TAD to be a small portion of that Buyer's payables. For example, the Buyer might have to pay $100,000 to his open account vendors while also having a $10,000 TAD to pay, yet the Buyer only has $60,000 cash available. In this instance the TAD amount is 1/11th of the Buyer's total payables and the Buyer knows that Actrade can really hurt him/her. What Buyer wants to go to court to fight Actrade, pay legal expenses and then lose? The Buyer will pay the $10,000 out of his available $60,000, while delaying payment with his/her remaining $50,000 in cash. Actrade has in its possession a signed TAD from the Buyer as evidence of payment and a contract signed by the Buyer waiving ALL rights to commercial dispute. Also, Actrade can accelerate payment on all the other of the Buyer's outstanding TADs purchased by Actrade. Actrade is the first payable to be paid by a Buyer of an ongoing business. The opposite occurs if the Buyer declares bankruptcy. Actrade has no underlying security or asset behind the TAD. Asset-based creditors would be paid ahead of Actrade in the event of a Buyer's bankruptcy, but Actrade will collect from the insurance company in the event of a Buyer's bankruptcy. In the rare case where the Buyer is not insured, then Actrade ALWAYS has recourse to the Seller. This usually occurs when the Seller has a strong credit history and is willing to accept the credit risk, but the Buyer is unable to qualify for insurance. 2. Rigorous Credit Analysis of the Buyer, The Seller's Relationship with the Buyer and the Underlying Transaction. Actrade's concern is mainly with the Buyer Since the Buyer has to pay the TAD, Actrade will do a comprehensive and rigorous credit check on the Buyer. This analysis includes but is not limited to: UCC-1 Filings, D&B Reports, Lien Searches, Trade References, Signature Verification, Financial Statements, Officer's Certificate and the Buyer's average monthly cash balances. Actrade does not wish to accept a TAD that is too large a percentage of a Buyer's average monthly cash balance. For example, A Buyer may have excellent credit and want to sign a $200,000 TAD, but the Buyer only has $75,000 average cash balances. Actrade would ask the Buyer to accept five $40,000 TADs spread out over a period of time where the terms of payment are similar to what the Buyer originally wanted. A $40,000 TAD has a greater probability of clearing than a $200,000 TAD. The Seller Actrade will investigate the Seller's trade references and complete a reference check on the company and its owners. Actrade wants to be sure that the Seller is a legitimate company. The Underlying Transaction Actrade wants the TAD to represent a payment on a trade or liquid asset. There is a legitimate purpose for the transaction and the TAD is not used to pay, say, for an apartment building, mortgage or other illiquid asset. Actrade wants the Buyer to have a cash stream to pay the TADs. Typically, the Buyer pays with a TAD to get a good that is sold for cash which will be used to pay the TAD on its due date. Actrade's management believes its tough credit standards and resulting low default rate are important in building a strong future with the insurance industry and lowering premiums with its insurance company, American. The Company wishes to be recognized as a good customer in the insurance industry. Other major insurance carriers like AIG have expressed to Actrade an interest in insuring TADs. Insurance is important for Actrade, especially as it develops new markets for TADs. Actrade currently has discretion to extend credit for up to $50,000 for each of the Seller's customers. If the Buyer seeks to sign TADs in amounts greater than $50,000, then American has discretion to give final approval. 3. Co-insurance with the Seller 20% Coinsurance Capital retains a 25% reserve of the full face value of the TADs against non-payment. Capital also earns the interest on this reserve while it is retained. Insurance will cover 90% of the losses on TADs for Actrade while Actrade provides the Seller, if given insurance protection, 80% of the losses on TADs. This gives the Seller an incentive to give Actrade credit-worthy customers. Actrade will usually insure its TADs but may not, in all cases, give insurance to the Seller. Cross-Collateralization of the Seller's TADs If several TADs are outstanding, Capital can halt repayment of the reserves (25%) on all of the Seller's TADs, if one TAD is overdue. Likewise, if one of the Buyer's TADs is not paid, Capital can accelerate payment on all of the Buyer's other TADs. Personal Guarantees Capital may require personal guarantees of payment in some cases, The Seller may require the Buyer to pledge personal assets as protection against default. 4. Insurance Actrade has L/C protection from major international banks and insurance protection for 85% of all its TADs. The other 15% is always recourse to the Seller provided the Seller has a good relationship with Actrade and passes a thorough credit check (Milton International is one customer who would apply). The percentage of uninsured Buyers is declining as Actrade grows. As of May 1, 1996, Actrade's TADs are insured through American Credit Indemnity Company (Rated A, Excellent in 1996 by BEST'S Insurance. Call 900-555-BEST for the latest Best's Ratings). American underwrites accounts receivable credit insurance, which guarantees payments to policyholders for goods shipped or services rendered. BEST'S reports that American continues to maintain superior capitalization and favorable long-term profitability enhanced by salvage recoveries. American had Policyholders' Surplus of $80.3 million in 1995. Actrade pays $30,000 a year for credit protection to cover $25 million in TADs for a $3 million loss limit with a $40,000 deductible. In a few cases, Actrade will not insure TADs if the recourse is to the Seller and the Seller has the credit standing to be accepted by Capital's credit department. 5. Diversification of Sellers and Buyers prevents concentration of risk. Actrade has approximately 100 clients (Sellers) active in its TAD ProgramT. Each client has averaged about 5 to 20 customers (Buyers). As Actrade's customer base expands in customer size, industry and geographical location, the risk of percentage non-payment will lessen to Actrade's insurance company. While there will be more Buyers going bankrupt and not paying TADs on an absolute number basis, however, as long as Actrade maintains its credit standards, the relative risk should decline. Actrade's management believes that as its TAD business grows it will be able to securitize pools of TADs in amounts of $20 million or greater. Securitization could allow Actrade to turnover its capital faster and earn origination fees. Summary My first research report (July 16, 1996 ACRT-$3.50) mentioned that Actrade's default rate on TADS was 3/10ths of 1% (0.3%). Since July 16th until now, there have been NO additional defaults on TADS. The extremely low TAD default rate has actually improved. The long-term strength of Actrade's business depends upon it's ability to originate business while maintaining its credit standards. Actrade will insure 85% to 90% of its TADs by credit insurance or be secured by a letter of credit from a major U.S or international bank. In certain cases, 10% to 15% of TADs may be uninsured but Actrade would have full recourse back to the Seller who would have an excellent credit history and relationship with Actrade. In other words, Actrade is always protected.