maderas futuro, s.a. – timber investment in nicaragua … · maderas will maintain, harvest and...

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

Daniel Iwata Associate

December 20, 2013

2013 Fundamental Research Corp. www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Maderas Futuro, S.A. – Timber Investment in Nicaragua Sector/Industry: Forestry www.maderasfuturosa.com

Issuer Maderas Futuro, S.A.

Minimum Subscription US$50,000

Investment Packages $50K, $100K and $500K

Management Fee 25% of the harvested trees

Time Horizon

Investors need to find a buyer to purchase their land in order to exit this investment

Sales Fees N/A

Offering Summary

All the figures in the report are in US$

FRC Rating

Base-Case IRR 12.2%

Rating 6+

Risk 5

*see back of report for rating definitions

Investment Highlights - Maderas Futuro, S.A. (“Maderas”) is offering investors an

opportunity to invest in land and timber in Nicaragua. - Maderas’ management team have been actively involved in

Nicaraguan real estate since the early 2000’s. - Management owns rural land throughout Nicaragua. They are

currently offering investors a portion of their 1,062 acre Estancia property. The land is intended to be separated into lots, and sold to investors. Investors will have 100% ownership and title to the land.

- Investment in land will also include planted sapling trees. Maderas will manage the maintenance, harvest and sale of the trees in return for 25% of the harvested trees. After the first harvest, management will charge a fee for tree maintenance and care.

- Management will focus on planting the Paulownia tree and three local species. Paulownia is a fast growing hardwood, which management believes can be harvested every 5 years.

- Investors are free to sell their land parcel and trees at any time.

Risks

- Like most investments, return of principal is not guaranteed. - Political and exchange rate risk. - Risk of theft, fire, infestation etc. - Trees require a long growth period before they can be

harvested. - Investors may have difficulty finding a purchaser for their

land in order to exit the investment. - There is currently a limited market to sell Paulownia wood. - The quality and quantity of wood produced are unknown. - The company has limited operational history. - The land title transfer process is lengthy in Nicaragua.

Investors might have to wait months, or even years, to receive their title documents.



Background of the Offering

Maderas is offering investors the opportunity to invest in land and timber in Nicaragua. The company was formed in 2010. However, management has been actively involved in Nicaraguan real estate since 2000. They are currently offering a portion of their 1,062 acre land, that they purchased for $1 million in 2004. We have verified documents displaying ownership by management. Management notes, over the last two years, they have planted 100,000 saplings of various local species trees and paulownia trees on the property. Investors have the opportunity to invest in one of three investment packages. Each package contains a certain amount of land, saplings (trees), and tree types. The amount of each will vary depending on which package is chosen. All packages include the paulownia tree, an ultra-fast growing (relative to other types of trees) hardwood that has the ability to continue to grow from its stump after being cut, which eliminates need for replanting. Maderas will maintain, harvest and sell the trees, once they are mature, for a fee of 25% of the harvested trees. After the first harvest of trees, management will charge an additional fee of $1 per tree per year for care and maintenance; the fee will rise with subsequent harvests. Management will focus on growing the paulownia tree (they will be the first to introduce this tree to Nicaragua), and other local species of trees. They forecast that investors will receive revenue from harvested paulownia trees every five years, with other species harvested approximately every 15 years. Returns to investors are intended to come from cash received from the harvest of trees, and possible land appreciation. Why invest in timber? Timber has historically been a strong performing asset class. Several institutional investors such as the Harvard endowment fund have chosen to invest in timber directly. Brookfield Asset Management raised $1 billion for its timber fund in August of 2013. The following highlights the benefits of investment in timber. Diversification - As shown in the chart below, the correlation between the NCREIF Timberland Index, and various other asset classes, have been low between the period 1987 and 2012. This indicates that timber, when added to a stock portfolio, has historically provided diversification benefits.



Source: The Campbell Group

Inflation – Timber has historically been a good inflation hedge. Due to a tree’s biological growth, it constantly increases in value, which coincides to inflation.

The return history for timber in comparison to other asset classes and investments is shown below. Over the last 5 years, timber has averaged an annual return of 2.55% per annum. Over the last 10 years, the rate of return annually was 8.17%, and over the last 25 years, returns were 12.5% p.a.

Source: International Woodland Company (IWG)

The sharpe ratio, which is a risk-adjusted return measurement, for various asset classes for the period of 1987-2012 is shown on the next page. Timberland had the highest sharpe ratio compared to the other asset classes used in the study.



Source: International Woodland Company

The chart below shows the average annual returns of 116 institutional timber funds since inception to 2011, as compiled by IWG. As shown, the majority of returns for the funds were between 0-15% p.a.


Overall, we feel that adding timber to a portfolio can benefit investors. We feel that timber has many benefits for investors with a long time horizon. Management History The land currently being sold to investors, in this offering, was purchased by Paradise Development Holdings. Ken Ross (Director of Operations of Maderas) and Alex Wilson



Management Bios

(Director of Marketing of Maderas) were co-owners of Paradise Development Holdings Company, a residential property developer in Nicaragua. Hugo Rodriguez (CEO of Maderas) was an employee of Paradise. Management states that Paradise was formed in 2001 for the purpose of developing residential lots. Management states there were 9 developments completed by Paradise throughout the San Juan Del Sur region, and sales for the lots totaled in excess of $25 million. We have not been able to verify any of the information provided. Paradise also invested in rural land throughout Nicaragua. Management indicated to us that they have sold their stakes in Paradise Development. Management states the land in this offering is in the process of being transferred to Maderas. However, the transfer of land title, which is a lengthy process in Nicaragua, has not been completed. We feel that this is a risk for investors, who will have to wait (months or even years) to have title registered in their names. We have spoken to several investors (all based in the U.S.) who bought land from Paradise Developments in the early 2000’s. The land is located just outside of San Juan del Sur, and the owners continue to hold it. Some land owners have chosen to convert their land to timber farms. All the investors we have spoken to have visited their land in Nicaragua, and met with management of Maderas. The following details the biographies of the management of Maderas. These biographies have been provided by management. Hugo Rodriguez – Founder and CEO

Mr. Rodriguez was born in San Juan del Sur, Nicaragua and educated at the University of Mobile Latin American Campus San Marco Carazo where he studied English as a second language, and tourism and hotel management. After earning his diploma in 1993, he became a freelance translator at a time when foreign investment in Nicaragua began to grow. His initial services focused on translation needs for investors and real estate developers.

In 1999 he managed a Canadian owned real estate office in San Juan del Sur, which was the largest of its kind in the country. His management of local agents, and the strategies he implemented, helped property sales and listings grow more than 500%.

In 2003, he joined Paradise Development Holdings, S.A, as operations coordinator where his duties included managing a staff of more than 80 people, acting as management liaison between local agencies and developer/clients, as well as primary translator on corporate legal matters.

Ken Ross – Director of Plantation Operations

Mr. Ross is responsible for the strategic oversight and planning of the company’s reforestation projects, sustainable forest management, field operations ranging from logging, site preparation, wood species, harvesting, road maintenance, and plantation personnel.



Mr. Ross has been running companies since the age of 17, starting with a family owned swimming pool construction business in Southern California that helped him develop a keen entrepreneurial spirit. Most recently (2001 – 2013), Mr. Ross has managed on-site operations for Paradise Development Holdings, S.A. in areas such as property acquisitions, project development, and construction coordination.

Currently, and since 2005, Mr. Ross has been the San Juan Del Sur, Nicaragua warden for the US Embassy.

Prior to this (1986 – 2001) Mr. Ross acquired his State of California Contractors License and founded his own residential construction company that operated successfully throughout Orange County for more than 15 years.

Mr. Ross is 57 years old and brings over 40 years of business related experience to Maderas Futuro, S.A.

Alex Wilson – Executive Director of Marketing Alex Wilson has the responsibility for the identification and evaluation of forest

investment and strategic marketing opportunities. Mr. Wilson is also responsible for timberland acquisitions, direct client accounts, and locating short-term and long term timber contracts.

Mr. Wilson has both international and multi-industry experience in strategic corporate growth, management operations, and visionary planning. In addition to his position with Maderas Futuro, S.A., he remains a managing consultant to Paradise Development Holdings, S.A., and has since 2001, directed the company to performance improvement initiatives focused on building internal capabilities in both strategic marketing and real property development processes.

Previous to that, Mr. Wilson was President, & CEO of Pacific Ostrich Group (POG), a California livestock company that was at the forefront of introducing ostrich meat as a viable and healthy red meat alternative. POG was one of the largest ostrich ranchers in the U.S. from 1990 through 1995 with more than 12,000 birds.

Mr. Wilson was born and raised in The United Kingdom and began his first private enterprise at the age of 14. From then and until now, Mr. Wilson has helped start more than twenty companies in eleven different countries.

Mr. Wilson is 55 years of age.

Wilber Lopez – Head Forester and Plantation Coordinator Wilber Lopez is Head Forester and Plantation Coordinator and has the responsibility

include inventory processing, growth and yield modeling, tree volume and weight prediction, silvicultural response modeling and statistical analysis.

Mr. Lopez was born in San Juan del Sur. After graduating from high school in 1997, he moved to Costa Rica where he studied carpentry and handcrafted furniture making, and the management of hardwood forestry. His apprenticeship began with a five-year in forest education on land preparation and planting and harvesting techniques. This was followed by mill operations, lumber selection, and finally cabinetry skills.



In 2007, Mr. Lopez returned to Nicaragua to begin a begin a privately owned carpentry fabrication firm that manufactured furniture for the retail marketplace.

Strategy Maderas plans to sell an investment package of land and planted saplings to investors. Maderas is offering three different investment packages. Each package contains a certain amount of land and trees. The packages are shown below.

Investment package Cost Acres Paulownia Local treesSmart Start Estate 50,000$ 2.5 750 Retire Well Estate 100,000$ 6 1,000 600 Family Heritage 500,000$ 35 5,500 3,600

As shown above, every package contains paulownia trees. Management specifically selected the paulownia elongate, a patented species of tree developed by the World Paulownia Institute (WPI), for its fast growth and ability to grow from the stump after harvest. WPI is the world’s largest grower and supplier of paulownia seedlings. They offer various services to timber farms to assist in the cultivation and growth of paulownia. The higher cost packages contain local tree species, such as Caoba, Pochote and Cedro Real. These trees need to be re-planted after each harvest. Maderas will replace any trees, at no cost to investors, that do not survive up to one year after planting. Any trees that need to be replanted after one year, would cost the property owner (investor) $50 per tree. Management states they will provide investors annual updates on the growth of the trees from a registered forester. Management has priced the Smart start estate’ package based on $5,000 per acre for the land, and $50 per tree. Investors’ cost per tree and land is lower for the other packages. Included in the investment package is the maintenance and care of the trees up until the first harvest. After the first harvest, investors are charged $1 per tree per year for maintenance and care (the fee rises for subsequent harvests). The fee includes oversight of the trees by an experienced forester, and an annual care maintenance schedule, including pruning, fertilization, germination, etc. Management will handle the cutting, processing and sale of trees for a 25% fee of all harvested trees sold. We view the fees as an all-inclusive service that allows investors passive investment (no work needs to be done) in trees and land. However, we would encourage all investors to view the land package in person and meet with management prior to investment. Management is currently in the process of planting a variety of trees on the property. They have provided us with an invoice for 45,000 Caoba, Pochote and Cedro Real tree saplings purchased for a price of $112,500 ($2.50 per tree) in 2012. We have reviewed an invoice for



30,000 paulownia saplings for a cost of $50,000 ($1.67 per tree), purchased from WPI dated January 28, 2013. In addition, we have reviewed documents from the Ministry of Agriculture and Forests in Nicaragua dated April 29, 2013, for the import of the paulownia saplings. When looking at just the sapling cost ($1 - $3 per tree), the $50 price per tree, charged by management, appears high. However, management notes that there are costs for transportation, planting, annual maintenance until the first harvest, preparation of the land etc.) Selling the wood As mentioned earlier, management’s focus will be on cultivating the paulownia tree due to its high growth and other benefits (discussed later). There is a very limited market for the paulownia tree worldwide, and it would be a new species to Nicaragua (no market yet). Management’s goal is to introduce the paulownia tree into the local economy. They plan to promote the wood to furniture manufacturers, builders, and flooring companies. Management also sees a growing industry for shipping materials (crates, pallets, boxes etc.) that would happen if the Nicaragua Canal is built. They feel if they can accomplish this, they will receive higher prices compared to exporting it to various markets. Given the price of other wood trading in the South American market, management believes a target price of $0.85-$0.90 per board foot would be reasonable in the early stages of consumer adoption. We cannot comment on this pricing as paulownia is not widely traded in the region. There is a market in Japan for high quality paulownia. Prices in Japan vary from $5-$8 per board foot of high quality wood. Lower quality paulownia sells for around $0.50 – $1.00 per board foot. The price is very dependent on many factors including grade, age, location etc. Management states that they expect a long term stable price of $0.90 per board foot. We feel that due to the limited market, the future pricing and demand for fast grown paulownia is a risk. As a backup plan, management has secured a contract with the World Paulownia Institute (“WPI”), whereby they have guaranteed to purchase paulownia timber from Maderas’ first four harvests. WPI has offered US$0.62 per board foot for the first harvest, with price increases for subsequent harvests. The first harvest price is $0.62, the second is $0.73, the third is $0.85, and the fourth is $1.01 per board foot. The contract offered by WPI is subject to certain conditions. These include:

1. A minimum of 200,000 board feet has to be offered for sale. Management estimates that each tree will produce 90 board feet; therefore, approximately 2,222 trees will be needed to meet this requirement.

2. All lumber must meet or exceed National Hardwood Lumber Association (NHLA) grade 2 specifications. NHLA is a leader in providing structure and rules to the global timber market. Grading of the wood is based on visible defects (knots, stains, grain, cut, etc).

3. Minimum length of each board should be 6 feet, and 60% must be a minimum of 16 feet.



4. Maderas is responsible for delivering the wood to the port of San Juan. We discuss the amount of wood produced by each tree in our discussion on paulownia later in the report. However, we feel that the guidelines set by WPI, especially regarding the minimum length requirement, is strict. Management estimates that the loss rate for trees due to natural causes such a fire, infestation and other factors to be around 1%. Although illegal logging is a major concern, management notes that it usually occurs in rural areas where there is minimal oversight and supervision of the trees. Paulownia Tree Paulownia is native to China, and areas of Asia. The particular tree that Maderas will focus on is the Paulownia Elongata, which is a species of paulownia patented by WPI. WPI states they have supplied and overseen the planting of the paulownia in various timber farms around the world, including Panama. We have spoken to WPI, who states that the growing conditions in Panama are very similar to Nicaragua. They do not foresee any challenges growing the tree in Nicaragua, and feel it is well suited for the environment. Keep in mind that WPI sells the saplings to Maderas, so their opinion might be biased. In a study produced in the Journal of Environmental Biology by researchers from the Kastamonu University and Karabuk University in Turkey, they noted that paulownia has the ability to grow wood fast, however wood produced in 6-7 years was of poor quality. High quality Paulownia usually takes around 15 years to produce. The fast grown paulownia has a light weight, but the strength is not good enough for buildings. The researchers noted the wood is rot-resistant and free from warping, cracks and knots. They feel it would be best suited to low strength uses such as furniture and boxes. Older slow growth paulownia wood is more valuable, and produces higher grade wood than fast grown wood. We have reviewed various research studies on the growth of the paulownia tree and its different varieties. Studies have shown the paulownia can reach a height of 30-65 feet, and have a diameter of 12-24 inches in this time. However, the value of the wood would vary depending on many factors. The most valuable would be long planks. Management estimates that each paulownia, at harvest (5-7 years), can produce 90 board feet per tree. From our research, we estimate that a paulownia tree can produce approximately 50-120 board feet per tree in 5-7 years, and feel management’s estimates are reasonable. Our major concern is the amount of wood that would meet the quality standards. Keep in mind, 60% of the wood would also have to be 16 feet or longer as well. There is limited information on the quality of 5-7 year old fast grown paulownia, and paulownia regrown from the stump. Management will also look to grow Caoba Trees, Pochote, and Cedro real, which they have already planted. These trees have longer growth cycles, estimated at 15 years; however,



they produce a larger quantity of wood at harvest. Management estimates that these trees would produce approximately 250 board feet over this time. These woods also have higher demand than paulownia and receive higher prices. From information obtained from Costa Rica’s forestry service, we estimate that these woods, on average, would sell for $1.70 a board foot. Management anticipates paulownia lumber will be well received in Central America. They first heard of the benefits of paulownia from a real estate client. Since then, they have researched paulownias, and other trees, over a period of three years, to see the best fit for their property. Management liked the fast growth capability of the paulownia tree. Some of the other benefits of the wood noted by WPI are:

lightweight Paulownia air-dries in 30 to 60 days without cupping, warping, cracking or splitting.

This is simpler and less costly compared to kiln drying the wood. resistant to decay and rotting, provided it is not in permanent contact with the

ground. fire resistance is a feature of all paulownia – the ignition temp is 420 to 430 deg

Celsius as compared to average hardwood at 220 to 225 deg Celsius. Thermal conductivity of paulownia is very low, giving it excellent heat/cool

insulation properties. Paulownia can regrow from the stump after the tree is cut.

Images of paulownia saplings



Source: Management

The below is an image of a few planted paulownia saplings.



Source: Management

Location of property Nicaragua is located in Central America, and is bordered by Honduras to the North, and Costa Rica to the South.



Source: Google maps

The property is located in the south west of Nicaragua. The general location of the property is shown below. Management states the property is located approximately 4 miles east of San Juan del Sur, and 7 Miles South of Rivas. Management notes the property has excellent access to Highway 16, a major paved roadway that runs east to west. Management notes access to transportation routes is a significant advantage over other timber and agricultural land in Nicaragua.



Source: Google maps

The property is approximately 1,062 acres, and was purchased by management in 2004, for US $1 million ($942 per acre). As mentioned earlier, management is in the process of registering title of the land under Maderas. We have reviewed the lot plan for the property and title insurance taken on the property. Management states that the property is currently being surveyed and subdivided, which will allow them to be registered in individual owners’ names. Investors will receive a surveyed plot map of their piece of land, and detailed GPS coordinates. Lots are currently being subdivided into 2 acre, 6 acre and 35 acre parcels to coincide with the investment packages being offered. Management states they have sold approximately 160 acres to investors so far. Management states that they have constructed 11 km of roads throughout the property at a cost of over $150,000. They have also constructed a fence around much of the perimeter. Images of the road construction provided by management are shown below.



Source: Management

Generally, the property rights in Nicaragua are thought to be relatively weak. The World Bank has rated the legal rights in the country a 3 out of 10 for the period 2009-2013. The World Economic Forum for 2011-2012, has property rights rated 3.3 out of 7, and ranked Nicaragua 123 out of 142 countries. The International Property Rights Index in 2013, scores it 4.4 out of 10, and ranks it 98 out of 130 countries. In Latin America, they are



ranked 18 out of 23 countries. The Nicaraguan government has historically kept poor records of land ownership, which makes establishing a title history difficult. There is also the challenge of the 30,000 expropriation of properties that occurred from 1979-1990, under the Sandinista government. Properties are still under dispute or are in the claims process from this. Despite these land ownership risks, management has experience in the market and have engaged policies to mitigate the risks. Management notes that they have operated real estate in the country since early 2000’s, and are very aware of the necessary due diligence required. This includes thorough title searches, property surveys, etc. Management has also registered title insurance on the land with First American Title Insurance Co. Management states that investors would be covered under the title insurance. Management also engages Garcia & Bodan, one of the top law firms in Nicaragua. We feel that management has done a reasonable job mitigating the major risks of land development in Nicaragua. Forestry Land in Nicaragua In 2006, the Nicaraguan government tried to curtail illegal logging by banning the cutting of mahogany, cedar, pochote, mangrove, and ceiba. The law also prohibited the export of plank or roll form of any wood. Management states that their site is constantly monitored by workers, which significantly decreases illegal logging. They also note they are in the process of being certified by the government to sell and export their timber. The following looks at the economic development in Nicaragua to give an indication to the future demand for land and foreign investment in the country. The country has had strong Gross Domestic Product (GDP) growth (shown in the chart below) over the last 10 years due in large part to their strong trade relationship with the US. The U.S. receives approximately 50% of Nicaragua’s exports (Source: CIA). The major exports are coffee, beef, sugar, apparel and gold. In 2011, Nicaragua had an estimated $2.3 billion in exports. Of this, wood and wood products accounted for $13.5 million, and wood pulp was $19.2 million (Source: International Trade Centre).



Source: World Bank

The estimated population in 2012 was just under 6 million in Nicaragua. The rural population in Nicaragua has been increasing as shown below, which indicates demand for land outside of city centers is increasing.

Population of rural land in Nicaragua

Source: World Bank

We feel that foreign direct investment (FDI) is a good indication of the demand for Nicaraguan land and the strength of their economy. FDI has been rapidly rising since 2005, as shown below.



Source: World Bank

Nicaragua’s FDI investment compared to other Latin American countries is shown below. Nicaragua has shown strong growth YOY up until 2011.

Source: Economic Commission for Latin America

A major boon to the Nicaraguan economy is the Nicaraguan Canal. The Nicaraguan congress approved the proposition to build the $40 billion canal. There are still significant development challenges to be worked out. Various sources predict that the canal would take approximately 10 years to complete.



Financial Projections As discussed earlier, management purchased the land for $1 million or $942 per acre in 2004. Since then, they have invested money into the property, building infrastructure (roads), and preparing the land for timber growth (clearing brush etc.). They are now selling the land to investors for approximately $5,000 per acre. Management has provided the purchase documentation for a 397 acre rural property that they state is a neighboring property and occurred in March of 2013. The property sale price was $2.64 million ($6,665 per acre). We have reviewed other listings for rural property, agricultural and farmland, and have viewed a wide range of pricing from $800 - $5,000+ per acre. The location to paved roadways and proximity to cities is a large factor in prices. Many of the listings did not show the exact location and infrastructure to the land, and therefore, we find it difficult to compare the land packages up for sale. There are no land tracking sites, or data on historical land pricing in Nicaragua. Returns for traditional institutional timber investment are generated from the biological growth of the trees, timber price changes and land value changes. Their contribution, historically, to the total returns is shown below. Land values contribute a minor portion of growth in timber due to the remoteness of the properties.


Biological growth and timber prices changes account for most of the returns. For our base case models, we reviewed the various investor packages. The inputs we used for our projections are shown below.



Board feet per tree (local species) 250Board feet per tree (paulownia) 90Price (paulownia) per board foot WPI contract pricing

Price (local species) per board footfirst harvest $1.68 /

second harvest $2.01

Loss (fire, infestation etc.) 1%Management fee (% of harvest) 25%Land appreciation (per annum) 2%Maintenance expenses, and property tax (% of revenues)

10%

As we believe that investors may be paying more for the land than comparable land in Nicaragua; we feel that a 2% p.a. increase in land value is a reasonable estimate. Also, as shown in the chart above, land value appreciation has historically accounted for only 2% - 5% of the total returns of timber funds. The following would be the cash flows produced if the paulownia trees are harvested every 5 years, and local species are harvested every 15 years. Package Paulownia Other Trees Year 5 Year 10 Year 15 Year 20 Year 25 Year 30Smart 750 0 31,074$ 32,928$ 38,341$ 45,107$ 52,291$ 60,620$ Retire Well 1000 600 41,432$ 43,904$ 219,754$ 60,143$ 69,722$ 282,501$

Family Heritage 5500 3600 227,873$ 241,472$ 1,292,965$ 330,784$ 383,469$ 1,654,591$

Based on this, the expected Internal Rate of Return for investors, is shown below. We have presented IRR estimates for a 15-year, and a 30-year time horizon.

30 years 15 yearsSmart 12.16% 8.83%Retire well 12.34% 10.45%Family Heritage 13.05% 11.73%

Overall, we believe this investment offering carries significantly high risks relative to the expected returns. We feel that the major risk is the future demand/pricing of paulownia. Also, the quality of a fast grown paulownia is uncertain. Other concerns include – a) we believe investors may be paying more for the land, and b) the lengthy land title transfer process in Nicaragua. Investors might have to wait months, or even years, to receive their title documents. Based on our review, we assign an overall rating of 6+, and a risk rating of 5, for this offering.



FRC Rating

Base-Case IRR 12.2%

Rating 6+

Risk 5



Fundamental Research Corp. Rating Scale: Rating – 1: Excellent Return to Risk Ratio Rating – 2: Very Good Return to Risk Ratio Rating – 3: Good Return to Risk Ratio Rating – 4: Average Return to Risk Ratio Rating – 5: Weak Return to Risk Ratio Rating – 6: Very Weak Return to Risk Ratio Rating – 7: Poor Return to Risk Ratio A “+” indicates the rating is in the top third of the category, A “-“ indicates the lower third and no “+” or “-“ indicates the middle third of the category. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) 2 (Below Average Risk) 3 (Average Risk) 4 (Speculative) 5 (Highly Speculative)

Rating - 1 0% Risk - 1 0%Rating - 2 23% Risk - 2 0%Rating - 3 51% Risk - 3 31%Rating - 4 5% Risk - 4 45%Rating - 5 5% Risk - 5 5%Rating - 6 2% Suspended 19%Rating - 7 0%Suspended 14%

FRC Distribution of Ratings

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