FOREIGN-TRADE ZONE HOW TO OBTAIN THE SAVINGS Steve Bowie: Port Director, Winston-Salem, NC - U.S. Customs and Border Patrol Mark Hardison: Director Supply Chain – Banner Pharmacaps, Inc. Trudy Huguet: Vice President – Foreign-Trade Zone Corporation Penny Whiteheart: Executive Vice President – Piedmont Triad Partnership January 17, 2012

Foreign-Trade Zone – A specially designated area, in or adjacent to a U.S. Port of Entry, which is considered to be outside the Customs territory of the United States. Established by Congress under the Foreign-Trade Zones Act of 1934 Purpose is to “expedite and encourage foreign commerce” Designed to: Stimulate International Trade Create Jobs and Capital Investment in the United States WHAT IS A FOREIGN TRADE ZONE?

TYPES OF ZONES General Purpose May be multiple sites May be non-contiguous sites Must be in or adjacent to a port of entry Subzone Special purpose conditional site Limited scope Generally a single firm site

GRANTEE DESIGNATION OF ZONE ELIGIBLE PROPERTY Traditional Site Framework (TSF) provides grantees the ability to designate general-purpose FTZ sites with management through expansions or minor boundary modifications. Alternative Site Framework (ASF) provides grantees flexibility to designate and manage general-purpose FTZ sites. Through ASF, Grantees can accommodate prospective users in a more expedited manner so that new zone sites can be quickly established for companies ready for FTZ benefits

FTZ PROGRAM KEY OVERSIGHT AGENCIES Foreign-Trade Zones Board (FTZB) Secretary of Commerce International Trade Administration –Import Administration –FTZ Board Executive Secretary and Staff Secretary of Treasury Office of Enforcement Department of Homeland Security U.S. Customs and Border Protection Port Directors are FTZ Board Representatives at POEs

ADMINISTRATION OF THE FTZ PROGRAM

KEY STATISTICS (FY 09) $430 billion in foreign and domestic merchandise received at US FTZs $249 billion (58%) of value received was domestic (US product or previously imported/duty paid) $28 billion exported 330,000 direct employment >250+ approved general purpose zones >450+ approved subzones in 50 states FTZ employment —330,000 *Rounded from latest FTZ Board Annual Report to Congress

THE ROLE OF THE GRANTEE FTZ No. 230 Piedmont Triad Area Grantee: Piedmont Triad Partnership 416 Gallimore Dairy Rd. Ste M Greensboro, NC Penny Whiteheart (336) Fax (336)

Foreign Trade Zone #230

FTZ NO. 230 SUBZONES 230A United Chemi-Con (Ashe County) 230B Unifi, Inc. (Yadkinville) 230C Banner Pharmacaps, Inc. (High Point) 230D Klaussner Furniture Industries, Inc. (Asheboro) 230E VF Jeanswear (Mocksville)

FTZ ACTIVITY IN NORTH CAROLINA FTZ #57Charlotte (NCDOC) FTZ #66Wilmington (NCDOC) FTZ #67Morehead City (NCDOC) FTZ #93Raleigh (Triangle J COG) FTZ #214 Kinston (Global TransPark) FTZ #230Piedmont Triad (PTP)

Vision To be the leading specialty pharma company in gelatin-based drug delivery technologies. Mission To create and market superior healthcare products serving our global community and enabling societal wellness. Who we are Banner has done, and are currently doing, business with the majority of the top 15 pharmaceutical companies in the world.

Business and Manufacturing Locations Around the Globe Global Management Center Gelcaps de México Banner Pharmacaps (Canada) Ltd. U.S. Corporate Headquarters Unites States Manufacturing Banner Pharmacaps (Europe)

IF YOU HAVE TAKEN ANY OF THESE…

BANNER’S BUSINESS CASE FOR AN FTZ Identified imported raw materials with substantial duties in late 1990s If raw materials were converted into “medicaments,” would “substantially transform” the product to HTS classification without duty Task to implement appeared too difficult Banner backed away

BANNER’S BUSINESS CASE FOR AN FTZ Large customer came to Banner in 2007 Wanted Banner to develop a softgel with their imported active pharmaceutical ingredient (API) Projected annual duty > $4 million USD Award of business contingent on Banner establishing an FTZ with permission to manufacture

BANNER’S BUSINESS CASE FOR AN FTZ A substantial business opportunity +Banner’s own savings potential =Banner pursuing a foreign-trade zone

PROJECT MILESTONES Summer 2007 – Decided to pursue FTZ Fall 2007 – Evaluated of software and consulting service providers January 2008 – Engaged FTZ Corporation February 2008 – FTZ application out for public review April 2008 – Project funding approved FTZ consulting services FTZ compliance software September 2008 – Received approval November 2009 – Activate

BENEFITS RELIZED FIRST YEAR Improved cash flow Obsolescence, waste, and scrap Re-export of raw material Merchandise processing fee savings Brokerage fee savings Return on Investment Cash positive

IF WE COULD DO IT OVER AGAIN, WE WOULD... Have engaged consulting services before starting Used an FTZ expert to develop our FTZ application Included all of our products in initial application filing

IF WE COULD DO IT OVER AGAIN, WE WOULD... Networked with other FTZ operators early on Not have underestimated ALL potential inventory transactions Dedicated full-time resources to project

IF YOU ARE CONSIDERING IMPLEMENTING AN FTZ... Get professional help to get results sooner and do a better job of implementing Use a single solution provider for both the software and consulting Assign daily responsibility to a customs compliance specialist

IF YOU ARE CONSIDERING IMPLEMENTING AN FTZ Build a relationship and trust with your CBP Port Director and Grantee along the way Train and communicate effectively with your Leadership Employees Suppliers

CONSULTANT Provide Expertise Ensure Compliance Successful Solutions Remote Operations THE ROLE OF THE SERVICE PROVIDER SOFTWARE PROVIDER Compliant System Accurate Reporting Inventory Control

WHERE DOES THE FTZ SAVINGS COME FROM?

FINANCIAL BENEFITS Relief from Inverted Tariffs - Duty reduction/elimination

CALCULATING THE INVERTED TARIFF RELIEF BENEFIT Motor admitted to zone HTSUS Duty rate = 5.3% Motor manufactured into vacuum cleaner Vacuum HTSUS Duty rate = FREE Duty rate applied to motor would be FREE Duty reduction = 5.3%

EXAMPLE OF INVERTED TARIFF RELIEF BENEFIT MOTOR IMPORTED FROM CHINA DUTY RATE 5.3% NEW AGE VACUUMS SUBZONE FACILITY VACUUM SOLD IN DOMESTIC U.S. MARKET DUTY PAID AT FREE VACUUM RATE 5.3% REDUCTION IN DUTY ON DOMESTICALLY SOLD PRODUCT

INVERTED TARIFF RELIEF BENEFIT VENDOR MANAGED INVENTORY MOTOR IMPORTED FROM CHINA DUTY RATE 5.3% NEW AGE VACUUMS SUBZONE FACILITY VACUUM SOLD IN DOMESTIC U.S. MARKET DUTY PAID AT FREE VACUUM RATE G.P. ZONE WAREHOUSE 5.3% REDUCTION IN DUTY ON DOMESTICALLY SOLD PRODUCT

FINANCIAL BENEFITS Duty Deferral - No duty is paid until the merchandise enters the commerce of the U.S.

EXAMPLE OF DUTY DEFERRAL BENEFIT MOTOR IMPORTED FROM CHINA IN JANUARY, 2010 DUTY RATE 5.3% NEW AGE VACUUMS SUBZONE FACILITY MOTOR SOLD AS SERVICE PART IN DOMESTIC U.S. MARKET ON AUGUST, 2010 DUTY PAID AT 5.3%, BUT ONLY AFTER SOLD THE DUTY ON THE MOTOR IS DEFERRED FOR 7 MONTHS

FINANCIAL BENEFITS No Duty on Reexports - U.S. Duty is not paid on merchandise exported from the zone

EXAMPLE OF REEXPORT BENEFIT MOTOR IMPORTED FROM CHINA IN DUTY RATE 5.3% NEW AGE VACUUMS SUBZONE FACILITY MOTOR SOLD AS SERVICE PART AND SHIPPED TO EUROPE NO DUTY IS EVER PAID 5.3% SAVINGS THE DUTY IS NEVER PAID ON EXPORTED MERCHANDISE

FINANCIAL BENEFITS Duty reduction or elimination on scrap - U.S. Duty is not paid on merchandise destroyed in the zone Duty elimination on waste and yield loss - No duty is paid on merchandise or raw materials lost in the production process

DUTY ON WASTE AND YIELD LOSS (NO FTZ) TANK OF CHROMOZINE 10% DUTY RATE VALUE OF $300,000 $30,000 DUTY PAID GREENCHEM INC. BEFORE BECOMING SUBZONE TANK OF TRIGOLFERINE SOLD IN DOMESTIC U.S. VALUE OF CHROMOZINE LEFT AFTER PRODUCTION $210,000 DUTY IS PAID AT THE TIME THE MATERIAL COMES INTO THE U.S. 30% OF CHROMOZINE LOST DURING PRODUCTION

ELIMINATION OF DUTY ON WASTE AND YIELD LOSS TANK OF CHROMOZINE 10% DUTY RATE VALUE OF $300,000 $30,000 DUTY NOT PAID WHEN ADMITTED TO THE ZONE 30% OF CHROMOZINE LOST DURING PRODUCTION GREENCHEM INC. SUBZONE FACILITY TANK OF TRIGOLFERINE SOLD IN DOMESTIC U.S. ONLY $21,000 DUTY PAID ON REMAINING CHROMOZINE IN FINISHED PRODUCT NO DUTY PAID ON PRODUCTION LOSS FOREIGN-TRADE ZONE SAVINGS= $9,000

FINANCIAL BENEFITS Reduction in Customs fees -A process called “weekly entry” can reduce the merchandise processing fee

REDUCTION IN CUSTOMS FEES Customs entries made on per shipment basis Every entry is charged a fee based on.21% times the value of the merchandise There is a cap on the fee of ($485) per entry Zone admissions are not Customs entries, therefore not subject to Customs fees

MPF WITH NO ZONE OLD AGE VACUUMS FACILITY Mon MPF=$485 Tue MPF=$485 Wed MPF=$485 Thu MPF=$485 Fri MPF=$485 TOTAL MPF WITH NO WEEKLY ENTRY =$2,425

MPF WITH FTZ (WEEKLY ENTRY) NEW AGE VACUUMS SUBZONE FACILITY ONLY ONE ENTRY IS MADE FOR ALL THE WEEKS SHIPMENTS Mon Tue Wed Thu Fri SHIPPED TO DOMESTIC U.S. FTZ Savings of $1,940 TOTAL MERCHANDISE PROCESSING FEE FOR WEEK WITH ZONE $485 Mon MPF=$0 Tue MPF=$0 Wed MPF=$0 Thu MPF=$0 Fri MPF=$0

DUTY DEFERRAL-PRODUCTION EQUIPMENT Duty is paid only when equipment is put into production Duty reduction may be available if production equipment is imported piecemeal and then assembled in the zone Do the parts of your production equipment have a higher duty rate than the machine itself?

OTHER BENEFITS Administrative Efficiencies Weekly Entry Procedures Direct Delivery Reduced Entry Fees Reduced Inventory Taxes Quotas Zone to Zone Transfers

COMMUNITY & NATIONAL BENEFITS Competitive advantage for community in site selection process Retain jobs, increase investment during company resource allocation Cluster driver for international trade industries

STEPS TO REALIZING FTZ BENEFITS

BASIC QUESTIONS FOR FTZ BENEFIT Do you import goods into the US? What is your annual cost for Customs duties? Do you participate in the “Drawback Program?”

PERFORM COST BENEFIT ANALYSIS Service Provider may perform Free of Charge Include all savings and investment including fees set by FTZ Board, Grantee, 3 rd Party Operator and/or Service Providers

STEPS TO REALIZING FTZ BENEFITS Obtain Foreign-Trade Zone Status For Distribution Firms You must be located in an existing FTZ or You must apply for Foreign-Trade Zone status by –Expanding or Modifying a General Purpose Zone –Apply for Subzone Status For Manufacturing Firms Even if you are located in an existing FTZ –Apply for Foreign-Trade Zone Manufacturing Status –Apply for Subzone Status All applications and requests to obtain FTZ status are made to the Foreign-Trade Zones Board in Washington D.C.

STEPS TO REALIZING FTZ BENEFITS Activate Your Facility With CBP Set up compliant procedures, and observe strict audit trails required by CBP Possibly the most important part of activation is choosing an FTZ Inventory Control System. Operate Compliantly to Realize Benefits

49 Securing America’s Borders to Protect the American People and Our Economy.

THE ROLE OF CUSTOMS AND BORDER PROTECTION (CBP)  Responsible for the transfer of merchandise into and out of the FTZ;  Responsible for matters involving the collection of revenue (any applicable duties and/or taxes);  Permit the admission of merchandise into the zone;  Permit the handling and disposition of merchandise in the zone;  Permit the removal of merchandise from the zone; and  Supervises the zone via periodic checks and visits.

51 Border Challenges Just How Tough Is It?

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68 Although Fighting Terrorism Is Still Our #1 Priority, Drug Interdiction is Very Important

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75 Steve Bowie, Port Director Customs and Border Protection Port of Winston-Salem 532C N. Regional Road Greensboro, NC

Questions?