Note: Descriptions are shown in the official language in which they were submitted.
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COMMERCE SYSTEM, METHOD AND ARTICLES UTILIZING
OPTION CONTRACT TRANSACTIONS
Field of the Invention
The present invention relates to a system and method for enhancing
cash-based and non-cash-based commerce.
Background of the Invention
Cash-based commerce systems involve one party delivering to another
party goods or services in exchange for cash payment or the promise of cash
payment. Alternatively, countertrade forms of commerce involve the use of non-
cash forms of payment utilizing different concepts such as corporate barter,
currency generation, or offset. Countertrade commerce uses different
transactions for a variety of purposes, including asset valuation recovery,
financing, and cost reduction programs.
Over the last two decades, national and international commerce have
~5 undergone significant changes. Various network systems have been created to
facilitate the computerized purchase and sale of goods and services, or
exchange of various goods and services. These network systems connect buyer
computers, merchant computers, advertiser computers, and payment computers,
sometimes to or through one or several sites on the World Wide Web existing on
2o the global Internet.
In cash-based commerce, a first type of a network system is based on
offers from a merchant computer. That is, the merchant computer provides
advertised products or services. A buyer uses a buyer computer to request and
view the advertised products and then send from the buyer computer a purchase
2s message describing a selected product to the merchant computer. The
merchant computer constructs a payment order, sends it to a payment computer,
and receives authorization from the payment computer. After receiving the
authorization, the selected product is sent to a designated computer
electronically (when the selected product is a software program, a picture,
data
30 or another digitized product) or shipped to an address provided by the user
(when the selected product is not or cannot be digitized).
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There are other variations to the above-described purchase method
conducted over a network system using cash-based transactions. For example,
when purchasing a selected product or service, the buyer computer can send the
purchase order directly to a payment computer and the payment computer can
send authorization back to the buyer computer, in the form of a secure digital
certificate. This secure certificate is then sent to the merchant computer,
which
causes the electronic transfer or physical shipment. Alternatively, the
payment
computer can send the authorization to the merchant computer, which causes
the electronic transfer or physical shipment. The buyer computer can also have
secure "cash certificates," pre-authorized by the payment computer. Then, the
buyer computer can send directly the purchase message, describing the
selected product or service, together with the secure "cash certificates" to
the
merchant computer. The merchant computer "recognizes" the cash certificates
as a valid form of cash payment and causes the electronic transfer or the
~5 physical shipment of the ordered product. The merchant computer assembles a
number of the cash certificates received from several purchase transactions
and
presents them to the payment computer. The payment computer causes a cash
transfer to the merchant's account.
There are other types of network systems that connect buyers and sellers
2o and provide efficient ways to conduct transactions. For example, a network
system may enable a buyer to submit a detailed request that specifies
requested
goods or services and their price to a merchant computer. The merchant
computer may also be a network site accessible by several seller computers or
service provider computers, each of which can supply one or several goods and
25 services. After submitting the request for goods or services, a number of
seller
computers or service provider computers may respond to the buyer with
customized responses and offers to sell goods or services. The buyer computer
can then compare the responses and determine which seller or provider best
meets his needs.
3o Another type of network systems can include one or more intermediaries.
These intermediaries collect advertisements or offers of goods or services
with
detailed descriptions and prices from buyer computers and seller computers.
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The intermediaries then post the collected information on their web site or
actively seek buyers or sellers using their databases. For example, the
collected information can be matched to the addresses of different businesses
expected to have a need for advertised goods or services or a supply of
desired
goods or services. The entire process may be fully automated and transacted
over a computer network. Thus, these networks can improve market efficiency
by avoiding an extended search or advertising, and by expediting the selection
and order process.
Existing on-line business marketplaces and portals enable efficient
o screening, selection and matching of buyers and sellers of goods and
services.
Furthermore, the on-line exchanges enable efficient trading in raw material,
parts, surplus inventory or customized items. Several companies have
seamlessly integrated their enterprises with such exchanges and created
content
management platforms and applications that provide flexible solutions built on
~ 5 open application servers. These networks can also provide security and
confidentiality using encryption techniques.
Non-cash based commerce provides the possibility for asset value
recovery in cases where assets have diminished values due to market factors or
other factors. Asset valuation recovery enables recovery of up to the original
2o value (or the book value) of the asset (e.g., raw material, products, real
estate,
services). Businesses experience significant needs in this area because of the
frequent differences between the book values and the market values of their
assets. Asset valuation recovery may be practiced using corporate barter,
where the deficient asset having a diminished value is sold for trade credit
25 having potentially a higher price than the fair market value of the asset.
The
asset is exchanged not for an immediate delivery of goods, services, or cash,
but
only for a trade credit which may or may not be exercised depending on the
market conditions. Since this trade credit has a lower value than the book
value,
the deficient asset may need to be "written-down" to the lower cost or market
3o value. Writing down the value of the asset means the seller must declare a
loss
on its books, which in turn may negatively affect the perception of the
seller's
financial condition (and thus the seller's stock valuation).
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The use of a barter exchange, however, may result in a smaller loss than
would have been experienced if the assets were sold conventionally for cash.
In
the barter exchange, a trade facilitator issues a trade credit to a seller for
a
higher price than the fair market value of the asset (e.g., raw material,
products,
real estate, services). Since the seller can potentially achieve cash savings
in
future purchases, the seller can realize a degree of asset valuation recovery.
It
is important to note that the recipient of the trade credit (e.g., the seller
of the
deficient asset), in an effort to realize asset valuation recovery, has
invested in
the corporate barter process and assumed the associated risk. The investment
o is equal to the cash liquidation value of the asset given in exchange for
the trade
credit. Over the life of the trade credit, if the trade credit cannot be used
fully,
this investment (or some part of the investment) is lost. Thus the seller can
potentially lose more than the difference between the book value and the
market
value of the deficient asset. This is a major weakness of corporate barter
when
~5 used for asset valuation recovery.
In general, there is a need for an efficient process of selecting and
matching the needs of buyers and sellers of goods or services. Furthermore,
there is a need for a system, method and product that will permit a business
to
exercise its future purchasing power or future selling abilities to achieve a
2o present financial advantage.
Summary of the Invention
The invention relates to a system and method for creating a marketable
asset (i.e., a saleable asset) based on purchasing or selling capabilities of
an
25 entity quantified in a contract. The invention enables, inter alia, asset
valuation
recovery, financial services and cost reduction programs applicable to cash-
based and non-cash-based commerce. One aspect of the invention supports or
uses is a highly effective commerce system that improves the ability of
sellers to
achieve their price objectives while providing buyers an opportunity to
acquire
3o goods or services (i.e., either goods or services separately, or both) for
a current
outlay of a value lower than the seller's price.
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In general terms, the present system and method enable an entity to
create an asset based on its expected commercial activities (probable, future
commercial activities). The entity grants to a grantee a cross purchase option
contract, and the grantee provides to the entity consideration having a value
agreed to have a specified relationship to the value of the cross purchase
option
contract. Alternatively, the entity grants to a grantee a cross sell option
contract,
and the grantee provides to the entity consideration having a value agreed to
have a specified relationship to the value of the cross sell option contract.
According to one aspect, a system or a method enables an entity to
o create a current asset based on its expected commercial activities. The
method
includes the entity granting to a grantee a cross purchase option contract,
and
the grantee providing to the entity consideration having a value agreed to
have a
specified relationship to the value of the cross purchase option contract. The
cross purchase option contract has terms and conditions such that the entity
is
s not required, under applicable accounting rules, to record a liability from
the
grant of the option contract.
Preferably, the above method is performed on a computer system
arranged for communication with several user interfaces, wherein the act of
granting by the entity is performed by entering data using a computer
interface
2o and the grantee receives the cross purchase option contract using a grantee
interface.
The grantee may be a trade facilitator engaged in commercial trade, and
the entity may be a client of the trade facilitator. Alternatively, the
grantee may
be a supplier that can directly supply to the entity to satisfy the cross
purchase
25 option contract.
The cross purchase option contract involves future purchase of goods or
services. The value of the cross purchase option contract has an associated
indicator in the form of a known amount of cross purchase units. The cross
purchase option contract also has a predetermined term. Alternatively, the
cross
3o purchase option contract has unspecified duration measured by the
consumption
of a known amount of cross purchase units.
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In this method, the provided consideration may include making a
monetary payment (either directly, by a draft, electronic funds transfer,
secure
cash certificate or indirectly by other means), or paying the currency to a
third-
party beneficiary. The provided consideration may include purchasing from the
entity goods or services in exchange for a price that is higher than the
current
market value goods or services. The goods or services may include deficient
inventory or real estate. The provided consideration may include assuming
risk,
providing credit, or paying debt.
The method may further includes purchasing by a financial institution a
o portion of trade receivables from the entity, wherein the trade receivables
are
generated by satisfying the option contract. Importantly, any two or more of
the
above steps may be combined.
According to another aspect, a system or a method enables recovery of
an asset's value. The method includes an owner of an asset selling to a
grantee
the asset and granting to the grantee a cross purchase option contract, and
the
grantee delivering to the asset owner value greater than a fair market value
of
the asset. The cross purchase option contract has terms and conditions such
that the asset owner is not required, under applicable accounting rules, to
record
a liability from the grant of the option contract, equal to a full difference
between
2o the book value of the asset and the fair market value of the asset.
Preferably,
the asset owner is not required to record any liability from the grant of the
option
contract.
According to yet another aspect, a system or a method enables an entity
to create a current asset based on its expected commercial activities. The
method includes the entity granting to a grantee a cross sell option contract,
and
the grantee providing to the entity consideration having a value agreed to
have a
specified relationship to the value of the cross sell option contract. The
cross
sell option contract has terms and conditions such that the entity is not
required,
under applicable accounting rules, to record a liability from the grant of
said
option contract.
Preferably, this method is performed on a computer system arranged for
communication with several user interfaces, wherein the act of granting by the
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entity is performed by entering data using a computer interface and the
grantee
receives the cross sell option contract using a grantee interface.
The grantee may be a trade facilitator engaged in commercial trade, and
the entity may be a client of the trade facilitator. Alternatively, the
grantee may
be a supplier that can directly supply to the entity to satisfy the cross sell
option
contract.
The cross sell option contract involves future sales of goods or services.
The value of the cross sell option contract has an associated indicator in the
form of a known number of cross sell units. The cross sell option contract
also
o has a predetermined term.
In this method, the provided consideration may include making a
monetary payment (either directly, by a draft, electronic funds transfer,
secure
cash certificate or indirectly by other means), or paying the currency to a
third-
party beneficiary. The provided consideration may include purchasing from the
5 entity goods or services in exchange for a price that is higher than the
current
market value goods or services. The goods or services may include deficient
inventory or real estate. The provided consideration may include assuming
risk,
providing credit, or paying debt.
The method may further include purchasing by a financial institution a
2o portion of trade receivables from the entity, wherein the trade receivables
are
generated by satisfying the option contract.
According to yet another aspect, a system or a method enables recovery
of an asset's value. The method includes an owner of an asset selling to a
grantee the asset and granting to the grantee a cross sell option contract,
and
25 the grantee delivering to the asset owner value greater than a fair market
value
of the asset. The cross sell option contract has terms and conditions such
that
the asset owner is not required, under applicable accounting rules, to record
a
liability from the grant of the option contract, equal to a full difference
between
the book value of the asset and the fair market value of the asset.
Preferably,
3o the asset owner is not required to record any liability from the grant of
the option
contract.
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According to yet another aspect, a system or a method calculates a value
of expected commercial activities of an entity. The method includes providing
by
the entity to a grantee a purchase pattern of specific goods or services;
retrieving
from a database of the grantee purchase and sale terms applicable to the
specific goods or services; determining the cost spread between the purchase
and sale terms of the specific goods or services; and calculating an amount of
cross purchase units for the purchase pattern of the specific goods or
services
based on the cost spread. Based on the amount of cross purchase units, the
method calculates the value of expected commercial activities specified in a
o cross purchase option contract that can be granted by the entity to the
grantee.
The method may be performed on a computer system arranged for
communication with several user interfaces. The cross purchase option
contract has predetermined duration. Alternatively, the cross purchase option
contract has unspecified duration measured by the consumption of a known
~5 amount of cross purchase units. The grantee may be a trade facilitator
engaged
in commercial trade, and the entity may be a client of the trade facilitator.
According to yet another aspect, a system or a method calculates a value
of expected commercial activities of an entity. The method includes providing
by
the entity to a grantee a sale pattern of specific goods or services;
retrieving from
2o a database of the grantee purchase and sale terms applicable to the
specific
goods or services; determining the cost spread between the purchase and sale
terms of the specific goods or services; and calculating an amount of cross
sell
units for the sale pattern of the specific goods or services based on the
cost,
spread. Based on the amount of cross sell units, the method calculates the
25 value of expected commercial activities specified in a cross sell option
contract
that can be granted by the entity to the grantee.
The method may be performed on a computer system arranged for
communication with several user interfaces. The cross sell option contract has
predetermined duration. Alternatively, the cross sell option contract has
3o unspecified duration measured by the consumption of a known amount of cross
sell units. The grantee may be a trade facilitator engaged in commercial
trade,
and the entity may be a client of the trade facilitator.
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The above
system and
method include
any use of
the purchasing
and/or
the selling activities of an entity and/or any other form of
option to derive benefits
for the purpose
of:
a) providing asset valuation recovery;
b) providing any entity with net worth protection;
c) providing any entity with income generation;
d) providing any entity with cash flow benefits;
e) improving the capitalization structure of an entity
and/or increasing
the valuation
of an entity
and/or increasing
the net worth
of an entity;
f) deriving additional economic benefit to merger and
acquisition
activities;
g) providing any benefit to a leasing product or service;
h) providing any benefit to any financial type of financial
service or
product;
~5 i) providing any benefit to any type of cost reduction
program or
service;
j) improving option trading capabilities and/or opportunities;
k) establishing a hedging fund and/or a hedging technique,
this would
include both
currency
and interest
rate hedging
schemes;
2o I) facilitating the use of Export Agency Funding;
m) providing a mechanism for International Balance of
Trade
stabilization
and/or improvement;
n) funding any socio-economic development programs,
this would
include the UNDP (United Nations Development Program);
25 0) providing any benefit to a not-for-profit organization;
p) providing any benefit to any type of liability coverage
product;
r) providing any benefit to any type of insurance product;
s) providing any benefit to export finance;
t) providing any benefit to project finance;
3o u) providing any benefit to offset finance; and
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v) providing any benefit to a Financial Engineering technique, Trade
Finance Structure, Countertrade Process or any type of derivative-based
process.
The above aspects are based on a derivative-based process that creates
a value, which can be securitized (e.g., insured or guaranteed). The above
aspects provide an alternative to the conventional "opportunity with
investment
risk" and facilitate an immediate asset valuation recovery. Furthermore, they
permit a business to exercise its future purchasing power to present financial
advantage and create a saleable asset.
o The above-described features, aspects and advantages will be more
readily understood from the accompanying drawing figures, which should be
read in conjunction with the detailed description which follows.
Brief Description of the Drawings
Various embodiments of the present invention will now be described by
way of examples with reference to the drawings in which:
Fig. 1 illustrates a network sale system connecting client computers,
trade facilitator computers, buyer computers and seller computers;
Fig. 2 illustrates an exemplary commercial transaction that enables a
2o seller to sell an underperforming asset for its book value;
Fig. 3 illustrates another exemplary commercial transaction that enables a
seller to sell an underperforming asset for its book value;
Fig. 4 illustrates an exemplary commercial transaction that enables a
trade facilitator to fund international trade transactions; and
Fig. 5 illustrates steps performed by a management information system
operating over the network sale system shown in Fig. 1.
Detailed Description
Fig. 1 illustrates a network sate system connecting a trade facilitator
3o computer network 20, a client computer network 30, a buyer computer network
40, and a seller computer network 45 (and optionally a financial institution
computer network). The network sale system is connected together by a
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communication network (e.g., an ATM network 12) and private networks 20, 30,
40 and 45. The communication network includes links 13, and network switches
14, 15 and 16.
Trade facilitator computer network 20 includes a bridge 22 connected to
a token ring network 24 and an Ethernet network 27. Token ring network 24
provides connection, for example, to a general purpose computer 25 and a
storage device 26. Ethernet network 27 is connected to general purpose
computers (for example, computers 28A and 28B), a printer 29 and other
devices.
o Client computer network 30 includes an Ethernet network 34 connected to
switch 15 via a bridge 32. Ethernet network 34 connects general purpose
computers 35 and 36, and a printer 37. Buyer computer network 40 includes a
private network 42 connecting computer 43B and printer 43A to a bridge 44.
Seller computer network 45 includes a computer 46 and printer 47, both
~5 connected to switch 16. The above is only an example of networks 20, 30, 40
and 45, which may include other devices and may be connected together
differently. Each element of these networks is optional and the claimed
invention
may also be practiced even without any network system, with any of the
networks replaced by a single computer, or even without any computer.
2o Fig. 2 illustrates an exemplary commercial transaction, performed on the
above-described network system, which enables a seller (e.g., a client of a
trade
facilitator) to sell an underperforming asset for its book value. A client 102
owns
a building 105 (i.e., an underperforming or deficient asset), having a book
value
of $15 million, but a market value of only $8 million. A trade facilitator 116
enters
25 into a contract with client 102 pursuant to which trade facilitator 116
buys
building 105 for $15 million and, in return, client 102 agrees to grant to
trade
facilitator 116 a cross purchase option (CPO) contract, valued at 22 million
cross
purchase units (CPUs).
Importantly, client 102 receives $15 million in cash (indicated as transfer
so 106) immediately upon agreeing to transfer building 105 (transfer 108) and
granting the 22 million CPUs (transfer 110) to trade facilitator 116. Thus,
client
102 does not need to record a loss of $7 million for sale of building 105
(i.e., the
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difference between the asset's book value of $15 million and market value of
only $8 million) which would occur had the client sold building 105 on the
open
market (global market). Trade facilitator 116 sells building 105 for $8
million on
the open market (indicated as a transfer 118) and uses the proceeds from the
sale of building 105 (i.e., $8 million indicated as a transfer 119) to pay
client 102.
Trade facilitator 116 uses $7 million of his own funds to pay $15 million in
cash
to client 102.
Trade facilitator 116 uses his trading partners (shown collectively as 136)
to sell to client 102 goods and services (indicated as transfer 132) and
receives
o payments therefore (indicated as transfer 134). The cost spread (i.e., the
difference between the cost of the goods or services sold to trade facilitator
116
and their sale price to client 102) is sent to trade facilitator 116 (transfer
130).
In general, a CPO contract is an opportunity for a trade facilitator to sell
to
his client goods or services in accordance with a mutually agreed procedure. A
~5 CPO contract is usually "a right of first refusal" under which a trade
facilitator
can supply to a client goods or services needed in the client's ordinary
course of
business. In the CPO contract, the trade facilitator and the client jointly
identify
specific spending and establish a list of benchmarks. They also establish
benchmark pricing based on the existing and/or historical needs of the client
to
2o purchase goods or services in their ordinary course of business. Based on
this
information, they agree on a specified number of CPUs. A CPO contract term is
limited to a specified number of years, or the consumption of a specified
number
of CPUs, whichever occurs first. Thus, the CPUs are a measure of the CPO
contract term. A CPO contract may be structured in several different ways.
25 Preferably, the CPO contract is "a right of first refusal" sell to a client
goods or
services in the client's ordinary course of business. Alternatively, the CPO
contract may include at least one predefined term (e.g., price, quantity, time
of
delivery, etc.) For the trade facilitator, the number of CPUs is a measure of
his
trade obligation to remain profitable.
3o The above CPO contract is exercised by trade facilitator 116 during a
three-year term or until retiring 22 million CPUs. The CPO contract forms the
right for trade facilitator 116 to supply to client 102 goods or services
needed in
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the client's ordinary course of business. For this purpose, trade facilitator
116
and client 102 jointly identify specific spending areas of client 102 and
establish
a list of benchmarks to form the basis of the CPO contract. Client 102 may
provide, in the CPO contract, lists of pre-approved suppliers for various
goods or
services. To exercise the CPO contract, trade facilitator 116 has to match all
commercial terms and benchmark pricing. If trade facilitator 116 cannot do
that,
client 102 can find another source of the needed goods or services, under the
same terms.
In the CPO contract, the amount of the CPUs must be set high enough so
~o that the profits, realized when exercising the CPO contract, will be larger
than
the difference of the amount of initial cash paid and the actual market value
of
the deficient asset sold (if any) by client 102. That is, trade facilitator
116 needs
to realize the minimal profit of $7 million (plus the trade facilitator's
expenses)
over the three-year term of the CPO contract. The amount of the CPUs, set in
the CPO contract, also reflects the CPU usage ratio historically achieved (or
expected to be achieved) by trade facilitator 116. The CPU usage ratio varies
depending on the type of goods or services covered by the CPO contract.
Based on an established procedure, prior to any purchase of goods or
services, client 102 submits a description of their needs to trade facilitator
116. If
2o trade facilitator 116 can supply the needed goods or services to client
102, he
has the right to do so under the CPO contract 110. After this transaction is
completed, trade facilitator 116 "retires" a certain amount of the CPUs. The
cash
flow to trade facilitator 116 (transfer 130) reflects the cost spread (i.e.,
the price
differential) for the sold supplied goods or services to client 102.
Therefore, the
specific amount of the goods or services to be provided under the CPO contract
cannot be predetermined because the cost spread for the goods and services
needed by client 102 will vary depending on the market conditions. If trade
facilitator 116 has an average 10% spread, he must sell at least $70 million
worth of goods or services to client 102 to recoup his initial investment of
$7
3o million. Under the contract, trade facilitator 116 has the right to sell
about $220
million worth of goods or services to client 102 over the three-year term to
retire
' CA 02376252 2001-12-05 US
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. , ~. . . ~.~. . .. .
. . . . . ~ ~ . . .
. .~~. ~. .. .~ .. ~.
-14-
the 22 million CPUs. This number enables trade fadlitator 116 to be
profitable over a number of CPO contracts (each of which carries a certain
risk).
Pursuant to the above CPO contract, trade faalitator 116 supplies needed
goods or services to client 102. The entire transaction may be completed using
the network system of Fig. 1. Client 102 enters (for example, on computer 36)
the description of goods and services as needed in their ordinary course of
business. This description is transmitted via network 12 to trade facilitator
network 20 and ston3d, for example, in storage device 26. Different sellers
can
submit to trade facilitator network 20 their adverrti:sements or even offers
to sell
their goods or services from their networks 45. Storage device 26 thus
includes
a database of goods and services available fior sale by various sellers
received
via network 12. Different buyers can submit to trade facilitator network 20,
using
their network 40, their advertisements or offiers to buy goods or services.
Trade
faalitator 116 (for example, by using computer 25) determines if the client's
~5 requirements can be met, that is, whether he can generate a suffiaent
spread
between the goods and services offered by the seller and the goods and
services needed by client 102. If trade fadlitator 116 cannot generate a
suffident spread, client 102 is free to procure these goods or services, under
the
same terms, from another souroe.
2o The trade fadlitator's database includes the terms of numerous goods or
services available for sale (or offered for sale) and wanted for purchase (or
offered to buy). The system links together the offers and creates a trade
routing
map achieving a cost spread. The map shows a match between the goods or
services needed by client 102 and available to trade fadlitator 116. The
25 individual links in the map may have different forms and can be executed
automatically or under the supervision of a human. For example, the trade
facilitator's system may directly match a telecommunications put and a
telecommunications call, while achieving a cost spread. The trade
facilitator's
system can indirectly match a put in delivery services to a trade routing map
that
so includes a trade position in a raw plastic material to acquire automobile
tires.
The automobile tires can then be used to acquire the delivery services. The
teens of sale and purchase of the raw plastic material and automobile tires
are
RECTIFIED SHEET RULE g1 )
ISAIEP
' CA 02376252 2001-12-05
r ~-~l 1.
. . . . . .. .. .. .. .. ..
.. .. . 1 . . . . . . . . .
. . . . .. . . .... . . . .
. . . ... . . . . . . . . . .
. . . . . .. . . . . .
.... .. .. .. .. ..
entered by the respective seller and buyer using seller computer network 45
and
buyer computer network 40. Then: may, of course, be numerous seller
computer networks 45 and buyer computer networks 40, which arse connectable
to nefinrork 12 for entering the individual offrers and their terms.
The feasibility of a selected trade routing map is assessed by the cost
spread, i.e., a cash benefd arising from the price differential when the
pun~ase
under the CPO contract is exercised. The trade routing map indudes a series of
performed transactions. In some situations, one or several individual
transactions may not achieve a cost spread, but the overall transaction can
still
~o achieve the cash benefrt. The value of the purchasing activities depends on
trade capabilkies derived from (~ investmer~ in time-sensitive surplus
products
and excess (production or other) capabilfies; (ii) marketing alliances; (iii)
purchasing alliances; (iv) trade positions and availabiffies to trade
fadlitator 116;
(v) trading strategies designed to move financial leverage acquired in one
type of
~5 goods or services to another type of goods or services; and (v~ trading
techniques using tolling, spiral trading, or trading-up in commodities to
increase
their value (e.g., manufacturing or processing of acquin3d raw materials to
realize additional value created by the manufacturing process).
Trade facilitator 116 is in a unique posi5on to generate additional profits
2o beyond those others might achieve by selling the goods end services to
dient
102. Having acquired the right to sell specific kinds of goods or services
over a
predetermined period, trade facilitator 116 can approach purveyors of those
goods or services to bargain for the best prices on future guaranteed sales.
Moreover, trade facilitator 116 can participate in one or more trading
25 organizations and may enter into similar CPO contracts with several dients.
Thus, trade facilitator 116 may acquire the ability to aggregate the right to
sell
the same kind of goods or services to mul5ple dients. By increasing the
purchasing power trade fiacilitator 116 can obtain price concessions from
suppliers. Moreover, trade faalitator 116 can obtain, through other such
3o transactions, the right to sell goods or services to those suppfrers.
Fig. 3 illustrates another exemplary commeraal transaction, performed on
the above-described network system, which enables a client 103 to sell to
trade
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' CA 02376252 2001-12-05
.. . . . .. .. .. .. .. ..
.. .. . . s . . . . . . . .
. . . .. . ~ . ~.. . . . .
. . . ... . . . . . . . . .
. . . . . .. . ~ ~ ~ ~
.... .. .. .. .. ..
facilitator 116 an underperforming asset for its book value. For example,
client
103 is an off shore oil producer who owns obsolete inventory. The obsolete
inventory has a book value of $15 million, but a market value of only $8
million.
Trade facilitator 116 enters into a contract with client 103 to buy the
obsolete
s inventory and receive a cross sell option (CSO) contract valued at 25
million
cross sell units (CSUs). Client 103 transfiers the obsolete inventory
(transfer
108) to trade facilitator 116, and trade facilitator 116 transfers $15 million
in cash
(transfer 106) to client 103.
Trade facilitator 116 sells to financial institution 120 a portion of the
trade
receivables corresponding to the 25 million CSUs. Financial institution 120
buys
the 25 million CSUs (indicated as a transfer 122) and pays $15 million in cash
(indicated as a transfer 124) to trade faalitator 116. Trade fadlitetor 116
transfiers the $15 million cash to client 103, as described above. Trade
fadlitator
116 also sells the obsolete inventory (transaction 118) on the open market
(global market) for $8 million (transacctieon 119) and uses the proceeds as
working capital.
Trade facilitator 116 conducts numerous transacfions with his trading
partners 135 (indicated as transfers 128 and 130) in order to sell goods or
services to client 103. Based on an order from trade facilitator 116, a
trading
2o partner (one of partners 135) provides goods or services to client 103
(indicated
as transfer 131 ), and client 103 pays for the nrceived goods or services, as
indicated by transfer 133. The fieasibility of these transactions depend on
the
cost spread trade facilitator 116 can achieve. The purchased portion of the
trade
reoeivables goes to financial insti~ion 120 (transfer 138).
2s In general, a CSO contract gives a trade facilitator an option to acquire
from his client goods or services in acoorclanae with a mutually agreed
procedure. Prior to forming a CSO contract, the trade fiadlitator and the
client
jointly identify the existing, historical and expected future abilities of the
client to
provide goods or services. They also establish benchmark pricing based on tl~
3o market forces and the trade facilitator's history. Based on this
information, the
parties agree on a specified number of CSUs. A CSO contract term is limited to
a speafied number of years, or the consumption of a specified number of CSUs,
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whichever occurs first. Thus, the CSUs are also a measure of the CSO contract
term. For a trade facilitator, the number of CSUs is a measure of their trade
obligation. For a financial institution, the number of CSUs is a measure of
the
purchased trade receivables. To account for the risk associated with the
purchase, financial institution buys a portion of the trade receivables at a
large
discount (e.g., 25 million CSUs for $15 million in cash). Similarly as a CPO
contract, a CSO contract may be structured in several different ways.
There are several types of the CSO contract. A client may grant to a
trade facilitator (i) an option to acquire a product credit, (ii) a product
credit, (iii)
~o the right to acquire specific goods or services at the client's cost of
production or
cost of sale, or (iv) the right to acquire specific goods or services for a
specified
price, at a specified time (which may be similar a forward contract). However,
the CSO contract cannot create a financial liability according to GAAP, or the
International Accounting Standards.
~5 Trade facilitator 116 uses the product credit as partial payment when
purchasing goods or services from client 102 or 103 (i.e., option grantor).
For
example, based on the CPO contract, trade facilitator 116 will pay for the
purchased goods or services using 20% of the price in product credits and 80%
in cash. This relative amount of product credits to cash may range from 100%
2o product credits and no cash to one or two percent in product credits and
the rest
in cash.
Based on the above CSO contract, trade facilitator 116 has an option to
buy or a right to buy oil from client 103. Even if the CSO contract is only an
option to purchase oil only under the ordinary commercial terms of client 103
2s (i.e., the current market price at the time of sale during the CSO term),
trade
facilitator 116 still may be able to generate the spread in his transactions
based
on assured stable supplies, advantageous locations or other factors.
Periodically, before any sale of goods or services, client 103 enters the
terms of the sale into client computer 36 and provides this data via network
12 to
3o facilitator network 20. The sale data is entered into the database stored
in
storage device 26, used by trade facilitator 116. As described above, the
trade
facilitator's system links one or more different transactions for the purpose
of
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generating the cost spread. If the average cost spread for trade facilitator
116 is
five percent, trade facilitator 116 has to generate transactions in the amount
of
$500 million to retire all CSUs over the predetermined period of the CSO
contract.
In general, a client can convert its capacity to sell goods or services into a
marketable and saleable asset regardless of any value recovery process (i.e.,
even if the client doesn't have any inventory or real estate with diminished
value). A client can grant to a trade facilitator a CSO contract that
guarantees a
supply of goods or services for a specified period of time according to
prevailing
o market terms and conditions. When exercising a CSO contract, a trade
facilitator retires after each sale a specified amount of CSUs, which are an
indicator of the price differential applied to the prices of the traded goods
or
services. Overall, a trade facilitator exercises the CPO contracts (right to
sell to
a client) and the CSO contracts (right to buy from a client) and provides the
goods and services to different clients.
Client 102 (or 103) derives an important advantage from the CPO (or
CSO) contract by avoiding a write-off when disposing a deficient asset. The
CPO (or CSO) contract provides immediately to client 102 (or 103) $15 million
in
cash which is equal to the book value of the obsolete inventory. Furthermore,
2o client 102 (or 103) grants a CPO contract (or CSO contract) that includes
purchase or sale terms tied to the client's usual and ordinary course of
business.
Thus, client 102 (or 103) does not need to realize any loss, according to GAAP
in the U.S., the International Accounting Standards, or counterpart accounting
principles used in other countries. (A standard "put" or "call" contract
instead of
the present CPO or CSO contract would cause the valuation imbalance likely
requiring the write-off.)
In other prior art situations, when an entity disposes a deficient asset
(such as obsolete inventory having the book value greater than its market
value),
the entity usually has to realize a loss if the transfer of the deficient
asset did not
3o generate a new asset that has a value equal to the book value of the
deficient
asset. The loss is mandated according to GAAP or the International Accounting
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Standards and thus the entity has to write-off the difference in their
financial
statements.
Specifically, in the example of Fig. 2, client 102 immediately received $15
million in exchange for both building 105 (having the book value of $15
million)
and a CPO contract. Since the CPO contract included purchase terms
according to the client's ordinary course of business, client 102 did not
grant in
the transaction any valuable asset, under GAAP or the International Accounting
Standards. Thus, client 102 does not need to record any loss equal to the
value
of the CPO contract. In the example of Fig. 3, client 103 again received $15
o million in exchange for both his obsolete inventory (having the book value
of $15
million) and a CSO contract. Furthermore, the CSO contract also include trade
credits given to trade facilitator 116. If the CSO contract also includes
terms
defining a relative amount of product credits to cash such that the cash
portion is
equal or higher than the cost of production (or the cost of sale), client 103
did not
grant in the transaction any valuable asset, under GAAP or the International
Accounting Standards. Thus, client 103 does not need to record any loss from
the transaction. Therefore, client 102 or 103 can derive an important
advantage
from these CPO or CSO contracts, respectively.
The above-described transactions are used to create various saleable
2o assets. If there is no sale of an obsolete inventory, or another asset
having a
diminished value, the above-described transactions can generate extra cash for
client 102 or 103.
Referring to Fig. 4, according to another example, a client 104 wants to
finance export (international trade) transactions. Client 104 is selling
tractors for
$10 million to an emerging market country 140, but the foreign buyer does not
have up-front cash or is not creditworthy. Trade facilitator 116 and client
104
enter into a CPO contract pursuant to which trade facilitator 116 gives to
client
104 $10 million in cash (transfer 106) and, in return, receives a CPO contract
(transfer 112) valued at 30 million CPUs. Furthermore, client 104 agrees to
3o provide to trade facilitator 116 with "supplier access" (also indicated by
arrow
112), as described below.
~ , CA 02376252 2001-12-05
. .
. . .. .. .. .. .. ..
.. .. . s . . . . . . . . .
. . . . . . . . ... . . . .
. . . ... . . . . . . . . . .
. . . . . . . . . . . .
.20. . .... .. .. .. .. ..
As part of the transaction, client 104 assigns to trade facilitator 116 the
payment of $10 million from foreign buyer 140 for the delivered tractors.
Foreign
buyer 140 can send the payment of $10 million (indicated as transfier 142) to
trade facilitator 116 immediately upon delivery of the tracers (indicated as a
transfer 141 ) or over a predetermined period, depending on the agreement.
Trade facilitator 116 receives $10 million (transfer 142) for the delivered
tractors from the fioreign buyer. Furthermore, trade faalitator 116 receives
from
client 104 the existing supplier aa;ess (transfer 112). That is, client 104
will
arrange for trade facilitator 116 meetings with existing suppliers 150 and
will help
trade fiadlitator 116 to obtain goods and services under similar terms. If
client
104 is a large manufacturer purchasing goods or services in large volumes,
client 104 may get preferred rates from suppliers 150. Thus, trade facilitator
116
may have trading opportunities to obtain goods and services at signficant
savings.
For example, client 104, who is a tractor and truck manufiacturer, may
have existing agreements (156 and 158) with suppliers 150 to buy steel, paint
or
tires at significant discx~unts due to a high volume of purchase oniers. Trade
facilitator 116 may be able to utilize the same discount. Suppliers 150, in
tum,
can increase their market share and gain ac~,ss to the trade facilitator's
2o database of goods and services (shown as transfers 152 and 154). Thus, the
supplier access granted to trade facilitator 116 by client 104 is a valuable
business instrument for creating the cost spread.
Referring still to Fig. 4, trade fadlitator 116 conducts numerous
transactions with his trading partners 136 (indicated as transfers 128 and
130) in
order to sell goods or services to client 104. Based on an order from trade
facilitator 116, a trading partner (136) provides goods or services to client
104
(indicated as transfer 134), and client 104 pays to the received goods or
services
(transfer 132). The feasibility of these transactions depends on the cost
spread
which is sent to trade facilitator 116 (transfer 130).
so As described above, the CPS contract, granted to trade facilitator 116 by
client 104, may be structured as a right of first refusal to client 104 with
the
goods or services as needed in the ordinary course of business. If trade
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facilitator 116 can supply the needed goods or services to client 104, he has
the
right to do so under the CPO contract 110. After each transaction is
completed,
trade facilitator 116 "retires" a certain amount of the CPUs. Trade
facilitator 116
received a cash flow (transfer 130) that corresponds to the spread between the
purchase price paid by trade facilitator 116 and the sale price to client 104
(and
other transactional costs to trade facilitator 116).
The entire trading process and the process of retiring the CPUs may be
computerized, for example, using the network of Fig. 1. Client 104 enters via
computer 30 the description of goods and services as needed in their ordinary
o course of business. This description is transmitted via network 12 to trade
facilitator network 20. Trade facilitator 116 uses computer network 20 to
determine if the client's requirements can be met; that is, whether he can
generate a sufficient cost spread for the transaction. If trade facilitator
116 can
generate a sufficient spread, the transaction is automatically confirmed over
~5 network 12 and is executed. After executing the transaction, trade
facilitator 116
automatically "retires" the corresponding amount of the CPUs.
Referring still to Fig. 4, client 104 can also finance export transactions by
granting a CSO contract to trade facilitator 116 as described in connection
with
Fig. 3. Specifically, trade facilitator 116 enters into an agreement with
client 104
2o pursuant to which trade facilitator 116 gives to client 104 $10 million in
cash
and, in return, receives a CSO contract valued at 30 million CSUs. In each of
the above-described examples, client 104 can receive up to 100% cash payment
and recognize an unconditional sale under GAAP or the International Accounting
Standards.
2s According to another example, the client wants to finance export
(international trade) transactions. An Export Credit Agency (ECA), such as the
U.S. EXIM Bank, makes funds available to promote commerce. The EXIM Bank
can guarantee only a portion of the funding up to 85% of a given transaction.
To generate the remaining 15% in cash (or more depending on the guaranteed
3o portion), the client issues a CPO contract (or a CSO contract) to a trade
facilitator, and the trade facilitator provides the 15% cash portion. Thus,
the
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-22
client can generate the needed cash in a situation, where commercial banks
will
not participate because they do not want the foreign loan exposure.
According to yet another example, the client wants to sponsor a not-for-
profit organization, but does not have the cash to provide funding. Depending
on
the type of business, the client issues a CPO or CSO contract to a trade
facilitator, and the trade facilitator provides in return an asset (e.g., cash
payment, goods or services) to the not-for-profit organization. Thus the
client
turned his ability to buy or sell goods or services, into a new asset (e.g.,
cash)
donated to the not-for-profit organization without incurring a cost or
liability.
o According to yet another example, the client wants to create a reserve to
fund potential exposure to warranty claims. The client issues a CPO or CSO
contract to a trade facilitator, and the trade facilitator provides in return
cash to
fund a warranty reserve. According to yet another example, the client wants to
finance mergers and acquisitions. In an acquisition, a seller (i.e., a party
to be
s acquired) seeks a higher price than the client is willing to pay. The client
issues
a CPO or CSO contract to a trade facilitator, and the trade facilitator
provides in
return cash to fund the acquisition. In these transactions, the trade
facilitator
carries the risk of the CPO or CSO contract.
According to yet another example, the client may be a governmental
20 organization. The governmental organization may need initial cash for an
infrastructure project and thus can grant a CPO contract for purchase of goods
or services needed in the infrastructure project. The trade facilitator (e.g.,
a
grantee) provides the initial cash in return for the CPO contract. If the
initial cash
is a large amount not available to a trade facilitator, the trade facilitator
sells to a
25 financial institution the trade receivables, corresponding to a specified
amount of
CPUs, at a large discount. Thus here the financial institution carries the
risk, but
the governmental organization generates cash from the private sector (or
another part of the public sector).
Fig. 5 illustrates the operation of a system for managing trade finance
3o insurance. In step 160, a perspective client (e.g., client 102, 103 or 104)
submits to trade facilitator 116 an application in the form of a request for
proposal. In the request, the client discloses the asset, where he would like
to
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achieve asset valuation recovery. Alternatively, the client identifies any
other
form of saleable asset (marketable asset) to be generated.
In step 165, the client describes his own purchasing and sale activities,
and any other expenditures expected to occur within the next three years (or
another predetermined period). This client data is entered over client
computer
network 30 and provided to trade facilitator computer network 20. (In the
embodiment where no network is used, the client may provide the above
information in any other suitable form.) Storage device 26 stores the provided
client information, and any one of trade facilitator's computers (i.e.,
computer 25,
28A or 28B) processes the client data.
In step 170, the trade facilitator's computer classifies the client data
based on the selling or purchasing activities of the client and all relevant
commercial terms associated therewith. In step 170, the system also identifies
a
potential CPO contract or a potential CSO contract. The system also performs a
~5 GAAP expense classification such as operating expense, cost of goods or
capital expenditures.
In step 180, the system accesses an internal database of various goods
or services available for purchase or sale. This database of goods and
services
is created and frequently updated by receiving buyer data from buyer computer
2o network 40 (step 190) describing goods or services needed by a buyer, and
by
receiving seller data from seller computer network 45 (step 200) describing
goods or services offered for sale.
In step 210, the system determines and reports various trade links by
using the database. The system searches for goods and services available for
25 sale or needed to be purchased. The system then determines a future value
of
the client's purchasing and selling activities based on trade capabilities
determined using a number of factors. The trade capabilities depend on (a)
investments in time-sensitive products and excess capabilities (or other
capabilities); (b) marketing alliances; (c) purchasing alliances; and (d)
trade
3o positions and other information stored by trade facilitator 116 in a
database.
These trade capabilities also include options to acquire and options to sell
positions.
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In step 210, the system also takes into account the trade capabilities
obtained from prior investments and the trade capabilities based on marketing
or
purchasing alliances. Different alliance agreements may restrict the type of a
product or service or the amount of a product or service that can be acquired
for
an existing customer or purchased from an existing customer that is an
alliance
partner. Therefore, the system also classifies the individual clients and
compares them to lists of existing alliance partner customers. In this
process,
the system evaluates the client's request for a proposal and determines
possible
direct links (direct transactions in step 220), or indirect links (indirect
transactions
o in step 230) if there are no direct links or the indirect links generate a
larger
spread. In step 240, the system displays the direct links found in step 220.
In step 250, the system displays various alternative trade route "maps"
that show the required trades to supply goods or services to a client under a
CPO contract, or to purchase goods or services from a client under a CSO
~5 contract. One aim of the system is to determine the value of a potential
CPO
contract by evaluating the cost spreads for the individual transactions.
Another
purpose of the system is to determine the value of a potential CSO contract
again by determining the value of the cost spreads for the individual
transactions
for the corresponding trade route.
2o In steps 260 and 265, the system evaluates demand for trade capabilities
and the demand on trade positions held. As the result, the system determines
the necessary CPUs or CSUs associated with the proposed CPO or CSO
contracts (step 270). As described above, the difference between an
acquisition
price and the sale price for linked goods or services forms the cost spread.
The
25 total cost spread (the total cost difference) must be at least equal to the
total
number of CPUs or the total number of CSUs. Trade facilitator 116 may want to
achieve (or project) a multiple of the calculated CPUs or CSUs to reduce their
risk. In such a case, the multiple is also taken into account by multiplying
the
CPUs or CSUs in step 270. Thus, the system calculates a total number of
3o CPUs or CSUs associated with a potential CPO or CSO contract and provides
it
to trade facilitator 116.
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The system may also include contract compliance criteria stored as a
checklist 310. Based on the above-described information, the system formulates
CPU or CSU consumption procedure specific to the client information (step
300).
In step 320, the system can automatically approve a proposed CPO or CSO
contract. Alternatively, a person working for trade facilitator 116 approves
the
proposed CPO or CSO contract. The automatic or "manual" approval may
depend on the projected cost spread.
The above transactions utilize the above-described CPO contract (or CSO
contract), a Cash Flow Assignment, a Consent Agreement, and a Countertrade
o Consumption Procedure. These agreements may be linked together by
conditions precedent or conditions subsequent. The Cash Flow Assignment is
used if the transaction also includes a financial institution. In the Cash
Flow
Assignment, a trade facilitator assigns a portion of the cash flow, arising
from the
CPUs, to the financial institution. This portion of the cash flow corresponds
to
~5 the profit the trade facilitator is expected to make by supplying a client
with the
goods or services.
In the Consent Agreement, a client acknowledges and consents to the
Assignment from a trade facilitator to a financial institution, transferring
all trade
facilitator's rights to receive the purchased portion of the cash flow. The
client
2o also acknowledges the trade facilitator's right, title and interest in and
to the CPO
contract as it relates to the assigned cash flows. As a condition for
receiving a
cash payment, a client agrees, in the Consent Agreement, to adhere to the CPO
contract, and to follow the Countertrade Consumption Procedures when
acquiring goods or services. The client also agrees that financial institution
shall
25 have the right to enforce all rights in accordance with the terms of the
CPO
contract.
The Consent Agreement may include additional clauses as follows: (a)
the financial institution is entitled to receive first any partial payment in
case of a
bona fide dispute between the client and the trade facilitator, (b) the client
3o agrees to give up any rights for obtaining any return or refund of the
assigned
portions of the cash flow transferred to the financial institution, or (c)
indemnification clauses for the benefit of the financial institution. The
Consent
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Agreement may also include several representations and warranties by a client
related to its ability to remain in good financial condition, but does not
need to
include any representations and warranties by the trade facilitator.
Alternatively,
the trade facilitator may provide several representations and warranties
related
to its ability to remain in good financial condition or perform under the CPO
contract.
In the CPO contract, a client agrees to acquire specific goods or services
from a trade facilitator, by following Countertrade Consumption Procedures,
and
may agree to assist the trade facilitator in finding finance for the cash
transferred
o initially as described above. Similarly, in the CSO contract, a client
agrees to sell
specific goods or services to a trade facilitator, by following the
Countertrade
Consumption Procedures. The Countertrade Consumption Procedure is a
written procedure describing expenditure policies and guidelines intended to
enable a trade facilitator to consume the CPUs.
~5 The above-described transactions possess numerous unique advantages
and features. While, in the prior art, there are several examples and
applications
of countertrade previously known, none of them creates a new and saleable
asset, as described above. Under GAAP or the International Accounting
Standards, the created saleable asset can be classified as a current asset
that
2o can be immediately sold for cash. Furthermore, the present system and
method
can avoid a financial liability associated with the sale of an underperforming
asset by a client, under GAAP or the International Accounting Standards.
Having thus described the invention and various illustrative embodiments
and uses as well as some of its advantages and optional features, it will be
25 apparent that such embodiments are presented by way of example only and not
by way of limitation. Those persons skilled in the art will readily devise
further
modifications developments and enhancements to and improvements on these
embodiments, such as variations on the disclosed methods and systems, as well
as additional embodiments, without departing from the spirit and scope of the
3o invention. It is impossible to enumerate all of the variations that will
quite quickly
occur to those in the art. Accordingly, the invention is limited only as
defined in
the following claims and equivalents thereto.
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What is claimed is:
