Stellar Risk Management Services, Inc. Steven P. Gan, President, CPA, Licensed Insurance Provider 4528 Lindenwood, Suite 101B, Northbrook, IL 60062 Tel: 847-714-0121 Fax: 847-714-0104 www.stellarrisk.com [email_address] Credit Insurance

Credit Risk Management System Goals Protect company assets Maximize cash flow Maximizing sales

Protect company assets

Maximize cash flow

Maximizing sales

P o i n t o f S a l e Before Sales C r e d i t R e p o r t s C r e d i t I n d u s t r y G r o u p s C r e d i t I n s u r a n c e C r e d i t & C o l l e c t i o n T r a i n i n g A / R F i n a n c i n g I n v o i c e & P a y m e n t M n g m t S o f t C o l l e c t i o n A / R C o l l e c t i o n L e g a l P r o c e s s i n g D e b t P u r c h a s i n g Total Credit Risk Management System After Sales

What Do Companies Always Insure or Protect? Employees Key Personnel & Officers Buildings Equipment Inventory Computers Intellectual Property Commercial Suits Property & Casualty Group Health Workmen’s Compensation Key Man Patents & Trademarks General Liability

Employees

Key Personnel

& Officers

Buildings

Equipment

Inventory

Computers

Intellectual Property

Commercial Suits

Property &

Casualty

Group Health

Workmen’s

Compensation

Key Man

Patents & Trademarks

General Liability

What’s Usually Not Insured? Although Accounts Receivables are often the 2nd largest, if not the number one largest, asset on a company’s balance sheet, they are often not insured. But like any important asset, Accounts Receivables should also be protected and insured.

Although Accounts Receivables are often the 2nd largest, if not the number one largest, asset on a company’s balance sheet, they are often not insured.

But like any important asset, Accounts Receivables should also be protected and insured.

Nobody Thought They Would Go Bankrupt Aladdin Gaming, LLC (Las Vegas Hotel Casino) (2001) ABB Lummus Global, Inc. (Petroleum Refining) (2006) American Banknote Corporation (1999) America Online Latin America, Inc. (2005) American Restaurant Group, Inc. (2004) Ameridebt (2004) AMF Bowling Worldwide, Inc. (2001) Atkins Nutritionals, Inc. (2005) Baldwin Piano & Organ Company (2001) Bethlehem Steel Corporation (2001) Birch Telecom, Inc. (2005) Burlington Industries Inc. (2001) Carolco Pictures Inc. (1995) Chiquita Brands International Inc. (2001) Continental Airlines Inc. (1967 & 1984) Converse Inc. (2001) Dairy Mart Convenience Stores Inc. (2001) Delphi Corporation (2005) Delta Airlines Inc. (2005) Dow Corning Corporation (1995) Eastern Airlines Inc. (1991) Enron Corporations (2001) eToys Inc. (2001) Excite@Home (2001) Frank’s Nursery & Crafts, Inc. (2004) Frederick's of Hollywood Inc. (2000) Fruit of the Loom Inc. (1999) Gadzooks, Inc. (2004) Happy Kids, Inc. (2005) Hollywood Casino Shreveport (2004) KB Toys, Inc. (2004) Kmart Corporation (2002) Lionel Corporation (1967 & 1984) Loews Cineplex Entertainment, Inc. (2000) Maidenform Inc. (1997) Marvel Entertainment Group (1996) Montgomery Ward Inc (1997 & 2000) Musicland Holding Corp. (2006) Northwest Airlines (2005) Owens Corning Corporation (2000) Pan Am Corporation (1998) Planet Hollywood International Inc.(1999 & 2001) Polaroid Corporation (2001) Purina Mills Inc. (1999) Regal Cinemas Inc. (2001) Resorts International Inc. (1994) Silicon Graphics, Inc. (2006) Singer Company (1999) Sizzler International (1996) Smith Corona Corporation (1995) Southland Corporation (7-11 stores) (1990) Sunbeam Corporation (2001) Swissair Group Inc. (2001) Toysmart.com (2000) Trans World Airlines Inc. /TWA (1995 & 2000) US Airways Group, Inc. (2004) US Office Products Company (mail boxes etc. stores) (2001) Vlasic Foods International Inc. (2001) Western Union Corporation (1993) Winn-Dixie Stores, Inc. (2005) Zenith Electronics Corporation (1999)

What is Credit Insurance? Asset Security - prevents a devastating loss to one of a company’s largest, unprotected assets - it’s accounts receivables. Cash Flow Protection - protects against unforeseen non-payments which could bring a company’s operation to a complete stop. Political Risk Protection - protects assets against political events that could make accounts receivables uncollectible. Risk Management - Caps exposure to bad-debt losses that even the best credit management practices cannot foresee.

Asset Security - prevents a devastating loss to one of a company’s largest, unprotected assets - it’s accounts receivables.

Cash Flow Protection - protects against unforeseen non-payments which could bring a company’s operation to a complete stop.

Political Risk Protection - protects assets against political events that could make accounts receivables uncollectible.

Risk Management - Caps exposure to bad-debt losses that even the best credit management practices cannot foresee.

Insurable Events Payment Default of the Customer Bankruptcy of the Customer

Payment Default of the Customer

Bankruptcy of the Customer

Who is the Insured’s Customer A customer that is a commercial entity of the insured and who purchases goods or services through a sales contract, standing purchase agreement, or invoice can be covered. In general, customers that are required to pay the insured’s invoices within 180 days can be included in the contract.

A customer that is a commercial entity of the insured and who purchases goods or services through a sales contract, standing purchase agreement, or invoice can be covered.

In general, customers that are required to pay the insured’s invoices within 180 days can be included in the contract.

Premium Calculation Estimated Annual Sales Customer 1 $20,000 Customer 2 $10,000 Customer 3 $15,000 　　 Customer 200 $25,000 Total Est. Sales $10,000,000 Eg. Premium rate of 0.2% (20 basis points) Estimated Premium $10,000,000 ｘ 0.20 ％ = $20,000 Minimum required premium $20,000 ｘ 80 ％ = $16,000 ※ Upon completion of the Insurance Coverage Period The actual premium will be determined based upon the Actual sales amount. The premium rate is generally between 0.1 - 0.2% of the estimated annual sales.

Factors Influencing Premium Rates Industry Purpose of credit insurance Pool of customers Creditworthiness of customers Set credit limits or discretionary limits Customer location (domestic or international, country risk) Deductible Previous loss history Financial condition of the insured Internal credit management control Special considerations

Industry

Purpose of credit insurance

Pool of customers

Creditworthiness of customers

Set credit limits or discretionary limits

Customer location (domestic or international, country risk)

Deductible

Previous loss history

Financial condition of the insured

Internal credit management control

Special considerations

Insurance Payment Calculation Company A Company B Credit Limit Default Amount Deductible Limit $70,000 $10,000 $35,000 $22,000 $60,000 When the defaulted amount is greater than the deductible, the insurance payment is reduced by the co-insurance rate and then the deductible is subtracted to reach the insurance payment. ＜ Calculation Example ＞ Company A: 　 $60,000 ｘ 90 ％ - $10,000 = 　 $44,000 Company B: 　 $22,000 ｘ 90 ％ = $19,800 The deductible is usually an aggregate deductible. Once it is used up, only the co-insurance remains in the payout calculation. There are other variations on the payout scheme which can be arranged based upon the client’s needs.

Benefits of Credit Insurance Protects against excessive or catastrophic losses Provides a safety net to new markets, whether domestic or overseas Allows you to pursue new customers more freely and provides higher lines of credit to existing ones No need to continue using letters of credit Greatly enhances your borrowing power from financial institutions Assists in establishing a guide for effective credit risk management Strengthens the internal control system under Sarbanes-Oxley

Protects against excessive or catastrophic losses

Provides a safety net to new markets, whether domestic or overseas

Allows you to pursue new customers more freely and provides higher lines of credit to existing ones

No need to continue using letters of credit

Greatly enhances your borrowing power from financial institutions

Assists in establishing a guide for effective credit risk management

Strengthens the internal control system under Sarbanes-Oxley

Reasons For Not Insuring One’s A/R Reason: There have been virtually no losses for the past several years. Response: You have been either extremely lucky or your customer base is so narrow that your company’s growth has been very minimal. Companies that expand and seek new markets will incur unexpected losses. Reason: Have been doing business with my customers for years and know their children who now run the business. Response: Seventy percent of all businesses do not survive the second generation. Reason: The credit & collection department does an excellent job. Response: No department is infallible and can forecast when a customer may suddenly go bankrupt. There are many reasons why a company can bankrupt which include: Management Deficiencies, Complex Financial Restructuring, Regulatory Changes, Product Liability, Legal Maneuvering, Political Upheaval, and Regional Natural Disasters Reason: Too expensive. Response: Credit insurance is one of the most reasonable and cost effective insurance products in the market place. Simply speaking, even if your gross margin is as low as 6%, credit insurance will be only 0.1 - 0.2%. Furthermore, if you have a loss of $25,000 at a 6% gross margin, you will need another sale of $416,000 to compensate for this loss. Reason: Only want to cover the bad accounts. Response: Like a health insurance program, we cannot just cover our heart or lungs. Covering all or most of your receivables spreads the risk and therefore greatly lowers the cost of coverage per customer. Reason: Don’t mind writing off some accounts if it will lower taxes. Response: Every controller, CFO, and accounting manager has a fiduciary responsibility to collect every receivable. If you want to lower your taxes, spend funds on items that will grow your company or protect its assets, which includes credit insurance. Reason: Already set up reserves to cover losses. Response: Credit Insurance will allow you to lower your reserves considerably and create available cash.

Reason: There have been virtually no losses for the past several years.

Response: You have been either extremely lucky or your customer base is so narrow that your company’s growth has been very minimal. Companies that expand and seek new markets will incur unexpected losses.

Reason: Have been doing business with my customers for years and know their children who now run the business.

Response: Seventy percent of all businesses do not survive the second generation.

Reason: The credit & collection department does an excellent job.

Response: No department is infallible and can forecast when a customer may suddenly go bankrupt. There are many reasons why a company can bankrupt which include: Management Deficiencies, Complex Financial Restructuring, Regulatory Changes, Product Liability, Legal Maneuvering, Political Upheaval, and Regional Natural Disasters

Reason: Too expensive.

Response: Credit insurance is one of the most reasonable and cost effective insurance products in the market place. Simply speaking, even if your gross margin is as low as 6%, credit insurance will be only 0.1 - 0.2%. Furthermore, if you have a loss of $25,000 at a 6% gross margin, you will need another sale of $416,000 to compensate for this loss.

Reason: Only want to cover the bad accounts.

Response: Like a health insurance program, we cannot just cover our heart or lungs. Covering all or most of your receivables spreads the risk and therefore greatly lowers the cost of coverage per customer.

Reason: Don’t mind writing off some accounts if it will lower taxes.

Response: Every controller, CFO, and accounting manager has a fiduciary responsibility to collect every receivable. If you want to lower your taxes, spend funds on items that will grow your company or protect its assets, which includes credit insurance.

Reason: Already set up reserves to cover losses.

Response: Credit Insurance will allow you to lower your reserves considerably and create available cash.

A Few Who Had Credit Insurance Major Japanese auto maker located in the US sold over $10,000,000 in auto accessories to hundreds of K-Mart stores. Although K-Mart went bankrupt, the policy paid $8,800,000. Mid-sized US cable & wire manufacturer had Enron as a customer which comprised about 20% of its sales. Credit insurance saved this company’s receivable of $3,000,000 and paid out $2,550,000.

Major Japanese auto maker located in the US sold over $10,000,000 in auto accessories to hundreds of K-Mart stores. Although K-Mart went bankrupt, the policy paid $8,800,000.

Mid-sized US cable & wire manufacturer had Enron as a customer which comprised about 20% of its sales. Credit insurance saved this company’s receivable of $3,000,000 and paid out $2,550,000.

Examples of Trade Credit Insurance Scenarios Company A Industry: Musical Instruments Approximate annual sales: $10mm Premium rate: 0.15% Premium: $15,000 Aggregate Deductible: $10,000 Number of customers: 12 Customers are domestic, overseas, or both?: overseas Previous loss history: good Insured’s credit mgmt. system: adequate Discretionary limits? Yes Company B Industry: Industrial Equipment Approximate annual sales: $20mm Premium rate: 0.20% Premium: $40,000 Aggregate Deductible : $20,000 Number of customers: 20 Customers are domestic, overseas, or both?: overseas Previous loss history: good Insured’s credit mgmt. system: sophisticated Discretionary limits? Yes Company C Industry: Commercial Construction Approximate annual sales: $50mm Premium rate: 0.13% Premium: $65,000 Aggregate Deductible : $0 Number of customers: 80 Customers are domestic, overseas, or both?: domestic Previous loss history: good Insured’s credit mgmt. system: adequate Discretionary limits? No Company D Industry: Fashion Footwear Approximate annual sales: $112mm Premium rate: 0.1% Premium: $110,000 Aggregate Deductible : $80,000 Number of customers: 120 Customers are domestic, overseas, or both?: both Previous loss history: good Insured’s credit mgmt. system: satisfactory Discretionary limits? No

From Application to Contract Submit Sales, A/R, and Other Data with Application Acceptance of Contract & Implementation of Policy Proposal Is Issued Based Upon Customer Needs & Underwriting Submit & Confirm Contract Terms & Conditions

You will sleep soundly at night…. For further information or to discuss any questions or issues, please contact Steven Gan at Stellar Risk Management Services, Inc. Tel: 847-714-0121 Email: s.gan@stellarrisk.com Thank you.

For further information or to discuss any questions or issues, please contact Steven Gan at Stellar Risk Management Services, Inc.

Tel: 847-714-0121

Email: s.gan@stellarrisk.com

Thank you.