..

OUR REF:

YOUR REF:

()

u

ANZ.030.003.0538

Contains Confidential lnformatior

First Floor FLOR-HANLY AND ASSOCIATES

Cnr. Sydney & Gordon Streets. P.O. Box 456, Mackay. 0 . 4740 . Telephone: (07) 4951 6000 Faxstream No.: (07) 4957 2579 Email: general@florhanly.com.au

AO

I orh February, 2011.

Mr. A. Husking and Mr. K. Weybury, ANZ PO Box 550, SYDNEY, NSW. 2001.

c 1 Confidential Confide and Andrew Busch.

Dear Adrian and Keith,

Re: conconfide1

Since our meeting in October I have worked closely wit financial position and prepare detailed cash flow projec future direction.

Confidential Confide , . . . . . . ·~ .. review their

determine their

I have endeavoured to keep Adrian up to date on our progress. However I do apologise for the additional time it has taken to get to this point.

The business

'R:S!@•P'!have been operating t Stud for some fiv~ years. Prior to t is t ey were mem ers of a larger consorti embers who operated the FBC

Confidpnt•<>1

Confide

Confid

Brahman stud- and his family have been involved in breeding stud Brahman cattle all his life.

TheWllfiistud is held in high regard within the industry and many of the leading studs across Au~een sourcing PBF genetics. Prices achieved have been the highest received in the industry. In addition it has a large following of commercial beef producers as well as overseas customers.

The business depends heavily on intensive artificial breeding to achieve these results. The core breeding herd is small compared to the average stud herd (ie stand alone stud businesses). The artificial breeding technology used allows any number of offspring to be produced limited only by finances and logistics. By doing this large amounts of capital do not need to be locked up in large breeding herds and in land on which to accommodate them. The trade-off is the expense of the technology.

The business engages other cattlemen to provide recipient cows to produceUllllllElxogeny. ( /. ./::;, Weaners are then accommodated on agisted country until they are ready fo~ C ~. ~"' ... t: , dv

The ezmmml have constructed their own selling complex on their property This facil~d for their annual bull sale and for female sales from time to time.

Confidential

1

@ Chartered Account ants

Liability limited by a scheme approved under Professional Standards Legislation.

' .

0

ANZ.030.003.0539

Contains Confidential Information

Strengths

•

•

•

•

•

Demand. The Stud has exclusive access to some of the leading genetics in the world. It has a high quality herd and attracts large numbers of buyers at ofi$ales. It is very difficult for a new stud to crack into the market. The position that 1 • • Iii - as would be envied across the stud industry; Marketing. The standard of marketing and promotion is exceptional. The importance of this cannot be stressed enough. & is a very talented marketer. He has an eye for detail and demands perfection in prese. on. This is clearly evident by looking through sale catalogues and promotional material. He is also very good at networking and relationship building. These skills are not very common in the grazing industry and there are many studs who have quality cattle that do not succeed due to lack of marketing; Production. As discussed above, the use of artificial breeding techniques allows mass production of high quality hiahJ sou ht after genetics; Genetic supply agreements. • • • - as entered into several agreements to supply access I Co"b~c~ to their genetics. This has been one se ectively. One such agreement entered into was for $1 j1f.JJ,.,cf .,,/! million paid upfront for the supply of 180 calves. Others have been made for $250,000 and -f ;.......e_ $500,000. This again highlights the demand for the genetics; · A very large stock of semen is held. Invitations for the purchase of semen packages have just been mailed out to other studs.

Weaknesses

• •

Financial position. The level of debt the business is carrying is excessive; Lack of real security. The market value of the land owned is much less than the debt carried . A large portion of the businesses assets is in livestock and semen stocks. These are not readily convertible to cash for debt reduction;

•

•

Cost of production is very high. A high cost of preparation is incurred with the main focus of selling livestock via on property sales. This is in addition to the costs of artificial breeding; The home property has been over capitalised with the selling complex etc. The cost incurred may not be recovered if the property is sold;

• The neighbouring property pmtms not fully fenced to run cattle on. It is planned to produce hay each year. The two portions not purchased are being leased but as the planned purchase has not occurred, this lease may not continue indefinitely.

Opportunities

• To enter into further genetic supply agreements. A new agreement is currently being negotiated with a client who previously entered into a $250,000 agreement. The possibility of the client entering into several yearly agreements rather than a one off agreement is being discussed;

• The large stock of semen presents marketing opportunities. Besides the outright sale of semen parcels, the opportunity to market AI Programs using this semen is being investigated. Commercial cattlemen would be presented the opportunity to do large scale AI programs using elite PBF geneticWWf lould co-ordinate the program for a fee in addition to the sale of the semen used.

• ••. s in discussion with some USA based studs who are interested in PBF genetics; • ·s in discussions with a retiring stud breeder to see if any opportunities to lease his

property and breeding herd exists; • The genetic deals that PBF has done in the past are unprecedented in the industry. The fact

that they have been able to negotiate such deals in the first place is very impressive. If the business is to have a future these will need to become a core part of the business;

2

' '

0

ANZ.030.003.0540 Contains Confidential Information

• Joint ventures/equity partners. The business would work in well with a large pastoral com. anting it's own stud and artificial breeding operation. The intellectual property that • • =-s could be applied to any breeding program with any breed.

Threats

• Obviously the debt the business carries causes major cash flow stress; • Competition is ver strona in the industry. Maintaining the stud's position in the industry

will be a test for • The industry co resulting in less demand for PBF genetics .•• nd ~ill need to continually evaluate this. Their current position is evidence a ey have ~ good at such judgement to date;

• Maintaining average prices. A drop in their average prices for whatever reason would be very detrimental to their financial survival. Other leading studs have managed to maintain such averages;

• If they cannot enter into sufficient genetic deals year in year out the business will not be sustainable just on livestock sales;

• 1 Confidential Loss of personnel. If a way forward can be foun eed to review their life insurances;

• Financial wellbeing of clients. If the beef industry suffers any downturn or bad seasons this will impact studs like PBF. Having said that 2009 was a tough year for the beef industry both seasonally and financially and although many other stud sales suffered, the PBF sale was still strong achieving average prices for bulls of $10,714 and $12,100 for heifers which was a remarkable achievement;

• Success of clients. If clients who have been investing heavily in PBF genetics don't succeed in the sale ring themselves then they no doubt will reduce or cease investing further;

• Market saturation. As more and more females are sold to other studs, the hold on the market may be lessened. It is important that the stud retains it's very best females and continues to carefully source exclusive genetics;

• Production risks. If the desired number of calves is not obtained cash flow will be negatively affected;

• Loss of the lease of the neighbouring land. It should be assessed if this is indeed needed. If so we recommend a long term lease be negotiated if possible as purchasing it is out of the question.

Statement of Financial Position

Enclosed is a draft statement of financial position. We are waiting on Ken Mccaffrey, a noted stud stock agent, to provide an appraisal of the herd and semen stocks. However from my experience in the industry I consider the values applied in this report are reasonable. We will update these once we hear from Ken.

Although the report shows net equity of $3,143,889 we raise the following concerns:

• Limited real property. Total landed assets are approximately $2.15 million to perhaps $2.5 million. This is a concern for bank security purposes;

• Livestock. Being high quality stud cattle to realise the animals full value they would need to be marketed carefully. A dispersal sale may not achieve this. We are not sure of ANZ's policies however we understand other banks will accept half of the market value of stud stock as security and Ken McCaffrey's appraisals are considered acceptable for this purpose. We will update this report once it is received. Ken is busy organising sales at present so this may take some time;

3

o/

ANZ.030.003.0541

Contains Confidential Information

• Semen stocks. I have adopted the value have used in the appraisal they have done. This totals $2,756,920. Seven sires are pnce at ,000 per straw. These are leading USA based sires that PBF has exclusive Australian marketing rights to. These prices are supported by limited sales at auction. They total $304,000. The balance of the semen stocks is priced from $20 - $200 per straw. Reviewing the semen listed for sale on the Queensland DPI website indicates that these prices are quite reasonable. Of concern is the quantity held. For example 5483 straws of semen are held for one sire JDH Palestimo (deceased) a bull PBF imported and have had great success with. $200 per straw would in my opinion be a fair price if someone was to purchase some semen. However it would not be possible to sell all of it quickly for any price. As such I believe the value used for the semen is reasonable however it is not readily convertible to cash. I do consider that there are opportunities to use these semen stocks to generate additional cash flow year by year;

• Plant & equipment. These values may be reasonable however what would be achieved at a clearing sale could be much less;

• Bank debt. This is very high given the available security;

Please note that no liability is shown on this report for the obligation to supply genetics to Jenkins and / Atkinson who paid $1,000,000 up front. .-;--~" ,,../-G-f o<.R. ~Ir ~I, :1 ;Q cl cv" -14.. µ._

Historical Financial Analysis co """"f I e...J-ecl

Attached are two reports looking at how the business has pe1formed in past years. These have been compiled from financial statements prepared by CE Smith & Co. We do not warrant their accuracy. They are hopefully accurate enough to be meaningful.

• Past year analysis - debt history report.

This report shows the total debt at the end of each financial year from 2005 to 2010. There has been very large increments year by year. 2007 incorporates the purchase of part of the neighbouring property, Alrose.

It shou ld be noted that the proceeds of the female reduction sale had not been received as at 30 June, 2010 and as such the debt is effectively some $897,000 less.

It should also be noted that in 2010 $1,000,000 was received in advance from Jenkins and Atkinson for the supply of 180 calves over subsequent years. Until this contract is filled this is effectively a liability.

The number of changes in financiers over this period is noticeable.

• Past year analysis - Trading history

These figures for 2007 to 2010 have been sourced from the annual financial statements and have been rearranged to what is hopefully a more meaningful layout. 2010 includes the female reduction sale proceeds.

The combination of both of these reports shows that the business has not had sufficient cash flow to service debts resulting in further borrowings to cover shortfalls. This has resulted in borrowings now being out of control.

As an outsider I struggle to see how Westpac could have justified lending the money for the purchase S'find I find it even more difficult to see how Landmark could have justified refinancing

es pac and then lending even more. These lending practices to me are cause for concern if not

4

ANZ.030.003.0542

Contains Confidential Information

negligent and have allowed theftfr@'; to get into the financial trap they are now in. If finance had been denied at those points and a review like we are undertaking now was done, much damage may have been mitigated. Unfortunately for ANZ they have inherited this situation from Landmark.

Cash Flow Projections

Also enclosed are the following reports which incorporate projections from 2011 to 2014 financial years: • Stock Flow Worksheets; • Feed Budget; • Cash Flow projections Appendix A to E

• Stock Flow Worksheets

These have been prepared from l November 2010. The accompanying notes on these reports indicate assumptions made. They incorporate IVF Program requirements to produce the required number of offspring to meet both PBF needs and genetic contractual requirements.

Desired year in year out production is not achieved until 2014. When bull calves to be produced from this year's program are sold at the annual sale in October 2013.

We have worked on the basis that 20 females are retained each year and the balance sold. The breeder herd as such grows to 102 females by June 2014 (cows and mated heifers).

The sale prices assumed are high by industry standards but are supported by PBF's historic sales.

20 heifers will be sold at the annual October sale each year. Other heifers will be sold privately if possible to reduce costs and hopefully have more control on prices.

The stock flow worksheets apply to all cash flow projections.

0 • Feed Budget

This is to support the cash flow projections.

• Cash Flow projections Appendix A

This set of forecasts assumes the business continues on as it with no new genetic deals trying to survive purely on livestock sales.

The underlying interest rate is assumed to be 11.5% which is approximately what they are paying now.

In addition to the livestock sales annual semen sales are assumed to be $70,000.

Hay is planned to be made on the neighbourin·· · 'all portions both owned and leased) and this is planned to continue year in year out.

5

ANZ.030.003.0543

Contains Confidential Information

In the 201 I figures in February I have shown other outlays of $4,866,906. This has been done simply / to move the total debt to the bottom line for planning purposes.

July to October are actual and from November on are budgets prepared on a GST exclusive basis. An adjustment to actual inflow of $242,793 has been included in January to get our overdraft amount to match actual. Discrepancies which have contributed to this are $116,906 of term loan interest not transferred out of overdraft, GST adjustments (GST collected from the annual sale is not yet remitted as part of the December quarter BAS not yet prepared).

As such this part of the projections is yet to be finalised. An amount should be allowed for the December BAS however it is possible that a payment plan could be entered into with the ATO.

Confidential The past year and a half has been very stressful for A combination of bank dealings and advice from colleagues scared them. This crippled their ability to work proactively in the business affecting cash flow and the generation of new genetic deals. This damage will take some time to mend as is reflected in all our figures.

{ Apart from these issues hopefully the four year projections provide guidance as to what is possible.

0

The $50,495 JD tractor payment for February is in the process of being refinanced to monthly payments to help cash flow.

2012 shows a net operating loss of $21,518 before financing costs. After finance costs the loss is $939,612 and the net shortfall is $1,023,612.

2013 improves with a net operating profit of $260,495. After finance costs the loss is $832,233 and the net shortfall is $892,233.

2014 improves further with a net operating profit of $695,498. After finance costs the loss is $289,147 and the net shortfall is $349,147.

Clearly from these figures, ramping up the breeding program alone will not get the business out of trouble with the level of debt it is carrying.

• Cash Flow projections Appendix B

The cash flow projections here assume exactly the same situation as Appendix A except that we have assumed the overall interest rate is reduced from 11.5% to 8% to see what impact the interest rate is having.

The net shortfall for 2012 is $768,449 a saving of $255,163;

The net shortfall for 2013 is $576,368 a saving of $315,865;

The net surplus for 2014 is $15,605 a saving of $364,752;

Overall the closing debt in this scenario at June 2014 is $1,013,725 less than the previous scenario just from a reduction in the interest rate to 8%.

I have used 8% in this case as that is what seems to be a fair rate for agribusiness loans at the moment. However it must be noted that such loans would have far better security positions than there is in this case and ANZ is entitled to charge a premium given the additional risk it has. However as we are

6

' '.

0

ANZ.030.003.0544

Contains Confidential Information

considering ways to help both the l$*1Q$and ANZ, we would suggest the bank consider dropping the rate as low as possible. Lower than 8% would be even better.

• Cash Flow projections Appendix C

In this scenario we assume that the 8% interest rate applies and in addition $480,000 per annum of genetic sales are generated. In past deals PBF has worn the cost of producing the calves. Going forward to help cash flow I have suggested the purchaser carries those costs and the monies paid are reduced accordingly. Asmi111as only now regained his confidence to go out and generate new deals the actual time it will take to get them happening could be six to ten months. We have recommended it would be better to try and generate more smaller deals than one large deal.

T he net shortfall for 2012 is $257 ,039 a saving of $511,41 O;

The net shortfall for 2013 is $22,51 1 a saving of $553,857;

T he net surplus for 2014 is $615,432 a saving of $599,827;

This scenario is better than breakeven. If it can be achieved debt would be able to be repaid from 2014 onwards. Income tax would become an issue. We have not accounted for it in our figures as Confidential have significant carried forward tax losses.

If genetic deals greater than those budgeted can be achieved even better. There would be some room to move should sale prices not realise our budgeted expectations.

• Cash Flow projections Appendix D

One of the first options to consider would be the sale of the neighbouring land as quick as possible to reduce debt. We would assume that this would also mean that the lease of the balance of that property would also be terminated. It may not. It may be terminated regardless seeing as the right to buy hasn't been exercised .

• as expressed that he doesn't want to do this as he sees it as being critical to his operation. He rightly comments that once it is gone you would never get it again. However this is a trap many producers fall into when a neighbouring property comes on the market. If they cannot handle the financial commitments then they are far better to consider other options.

From the bank's perspective selling the property would result in less real assets to support the remaining debt.

Approximately 100 head of cattle are being grazed on part of this land. The balance is being used for hay production. As such if it is sold the hay proceeds would cease and fodder costs would increase. Hay purchases have been brought to account in the 2013 and 2014 years. Additional agistment applies from 2012 onwards.

It may be possible to realign boundaries to incorporate key parts of the place with the home farm.

We have assumed it is sold in May 2011 for $850,000. It is assumed that hay would be made beforehand providing some income in 2012 and limiting the need to purchase any to 2013.

We have assumed everything e lse wi ll be as per Appendix C.

7

~ .

Q

ANZ.030.003.0545

Contains Confidential Information

The net shortfall for 2012 is $153,224 a saving of $103,815 on that per Appendix C;

The net shortfall for 2013 is $95, 710 an increase of $73, 199 on that per Appendix C;

The net surplus for 2014 is $536,157 a decrease of $79,275 on that per Appendix C;

This shows that selling the additional land reduces debt and reduces assets but may not actually improve cash flow.

If this option is to be considered the ramifications should be examined carefully. The question is can the operation continue into the future without the use of this land?

• Cash Flow projections Appendix E D.e J f. &<'0; ./<.. -.a.s~

Here I have assumed the same situation as Appendix C but have reduced bank debt by $2,000,000 in February 2011. This reduces the debt to about where it was at the end of the 2007 financial year before the Landmark refinance.

The net shortfall for 2012 drops to $86,569.

For 2013 a surplus of $162,108 is achieved and for 2014 this increases to $815,374. This would put them in a much stronger position and give them room to move cash wise.

This scenario highlights to me what may have been achievable at the time if Landmark didn' t refinance the operation and the review we are now doing was done then. Allowing the operation to continue unchecked by providing further funds has not helped. I am also surprised as an accountant

: Confidential , that accountants did not raise any concerns.

Conclusions and Recommendations

If this was a typical commercial beef enterprise there would be very few options to consider. However the business is very different. It is not even typical of a stud stock enterprise. There would appear to be several opportunities to generate addition income by building on existing assets and know how.

Debt levels are excessive and have been allowed to get to this level by questionable lending (In my / ~uld be taking this matter up with Landmark) and by poor financial management by

Confidential To go forward eed to work very hard at generating new income for the business as well as increasing production and maintaining their selling program. They will need to be very careful with expenditure and should review their position month by month or at the very least quarterly working closely with their accountant and ANZ.

It will be difficult for them to service and repay existing debt especially if the cash flow projections are not achieved. We recommend ANZ consider significant interest rate relief and some permanent debt reduction. As ANZ purchased Landmark's loan book we would assume that they would have discounted what they were prepared to pay to allow for bad and doubtful loans and therefore scope to do this. This would help protect the banks remaining investment by allowing the operation a good chance of success.

Joint venture/equity partner opportunities should be explored. ANZ may even have some possible contacts or clients who could be worthwhile approaching.

8

· ...

n

u

ANZ.030.003.0546

Contains Confidential lnfonnation

I would also ask that ANZ consider paying our fees for this review.

Please note that this report and attachments has been submitted to allow some decisions to be made for a way forward long term. Once this has been dealt with we can then refine the immediate cash flow position to determine what is needed short term.

Should you have any questions or require further information please do not hesitate to contact me.

Yours faithfully,

FLOR-HANLY & ASSOCIATES

PER Confidential

• • Tony Director

9