By Ivan Uttley

1. By Ivan Uttley Using Scenario Planning in the Reason Prospect Assessment

2. Reasonable Prospects: Quantitative Part • We attempt to gather as much fact as we can. These facts should include: • “the likely costs of rendering the company able to commence with its intended business or to resume the conduct of its core business”; • “the availability of “cash resources” to enable the company to meet its daily expenses and the nature of the funding on which the company will rely; • Which will inform: • Our ability to assess and substantiate the realistic prospects of planning and implementing BRiL (Better Return than in Liquidation (S128(1)iii) • Our assessment to at best a single sigma the Quantum of PCF (Post Commencement Finance (funding)) the rescue will need.

3. Reasonable Prospects: Qualitative Part These two questions have a large qualitative component and for this we use scenario planning: “the availability of any other necessary resources, such as raw materials and human capital”; and “the reasons why the proposed business rescue plan will have a reasonable prospect of success”. Both of which will help us form a practical view on being able to implement the rescue plan (skills, costs and alignment) with the team at hand and not seek additional funding to contract in, skills needed in the implementation. For this quantitative section we will use scenario planning tools • Discuss & Document Industry Drivers and Forces • For each scenario be clear on what criteria define each of the 4 quadrants • Assign Trigger/Red Flag Ownership and agree on update frequency • Prioritise • Groups on certainty thenimpact & likelihood • Discuss & Document Business Drivers and Forces • Group the • drivers • logically • 2. a. What are the key uncertainties

4. Why not follow the Due Diligence approach typical of an acquisition? •  If we had the time, but we don’t you must adopt the tactics of a trauma or battle-field medic – triage. In some way through we need to access the Reasonable Prospects along the same dimensions as those of a typical due diligence. • Potential in the market and the ability to be unique to this market • Performance of business’s historical financial statements • Quality and relevance of assets • Contracts, Intellectual property, and patents • Human Capital and Technical expertise • Quality of all personnel and key management • Quality of projected cash flow and after tax earnings • We might just have to be a little more subjective, but with a failing business, there’s usually a lot of public evidence and data, and mostly to do with failure.

5. What reasons have led to or shaped this firm’s current position? • Ineffective Management Style. A president, founder or the corporate leadership is often reluctant to delegate authority or refuse to do so. No decision, big or small, can be made without prior consent. As a result, the rest of the management staff gains no solid experience or feeling of vested ownership in the business. Dishonesty or fraud may exist, yet go undetected or unreported. There is one single huge and terrible bottleneck in the business. • Dysfunctional Shareholders. Family issues can cause business decisions to be made on an emotional basis rather than on sound business principles. Sibling rivalry has ruined many privately held companies. Nepotism can cause bright, skillful managers who aren’t part of the family circle to take their talents elsewhere. Likewise in non-family businesses, shareholders can be disruptive and whimsical with great detriment ot the business. • Lack of Operating Controls. The company is operating without adequate reporting, accountability, and responsibility mechanisms. This is tantamount to flying an airplane without an instrument control panel. Management decisions based on inadequate, untimely, or inaccurate information can make a bad situation considerably worse. • Overdiversification. The business has yielded to pressure to diversify to reduce risk. However, too much diversification may cause a company to spread its managerial, financial, and competitive resources too thinly, diluting focus. As a result, bad things happen, lost customers, inability to dominate a particular segment, runaway costs etc

6. What reasons have led to or shaped this firm’s current position? • Weak Financial Function. A company with excessive debt, stringent covenants, and inadequate working capital is operating with little or no margin for error. Credit is overextended, inventories are accumulating, and fixed assets are underutilized. The introduction of better working capital policies and improved capacity utilization decisions are clearly warranted in such cases. Yet, incumbent management instead often engages in debilitating attempts to grow the company out of its problems. • Poor Lender Relationships. A weakened financial condition has led to the company developing an adversarial and unproductive relationship with its lending institution(s). Fearing that its loan relationships and facilities may be in jeopardy, the company tries to conceal financial information from its lenders. Telephone calls from the bank are not returned. Interim or periodic reports are not filed. Since money is the lifeblood of most any business, this kind of lender relationship only leads to more trouble and compounds the difficulty of managing the declining business operations. • Market Lag. Changes in the product and customer marketplace have bypassed the company, leaving it with sagging sales and declining market share. For some businesses, the source of the deficiency is technology; their equipment or products and services have become obsolete. For others, the problem lies in sales and marketing; the company hasn’t kept pace with the needs of the marketplace or the ability to distribute its products effectively to the customer base.

7. What reasons have led to or shaped this firm’s current position? • ExplosiveGrowth. The business has gone through a period of remarkable and unrestrained growth. A business that is a success at ZAR 5 million in sales a year can become a dismal failure at ZAR20 million. Companies achieving fast growth from concentrating on boosting sales often overlook the effects of that growth on the balance sheet and the cash requirements of funding it. Growth often carries a very high capital investment requirements, including significant investments in R&D, capacity, and working capital. Leveraging a company to meet these increased funding needs typically means that management must operate with little or no margin for error. • Business outgrew the management, Rapid growth has led to overwhelming the capabilities and effectiveness of management and employees alike. Management are just not able to work successfully at the new level. For example, management of engineering operations for a company with 12 plants is much different than managing a similar business with perhaps one or two plants. The same challenge applies to others in key positions in marketing, sales, operations, and manufacturing. A company can grow beyond its ability to manage. • Concentration Risk in the Customer Base. The business relies on a few big customers for most of its sales. If a manufacturer selling to large retail chains has two customers representing 60 percent of its business, the company obviously is vulnerable to the financial condition of its customer or the possibility of new suppliers displacing its relationship. The loss of just one of these key customers could put hundreds out of work and send the business into bankruptcy. Large customers also tend to demand a lot, and can erode value insidiously!

8. The Grouping exercise generates these categories

9. The Grouping exercise generates these categories

10. A Synopsis of the Rescue Approach

11. The Grouping exercise might look something like this Marginal - Strategic Position – Strong Weak - Operating Model–Robust Poor – Industry and Business Fundamentals–Promising <- Long term View <- Short term View Weak – Inspiring & Thoughtful Leadership–Strong

12. Rescue or Workouts Reasonable Prospect Assessment Second Internal and qualitative dimension refers to the enabling culture, fostered by an engaged leadership team Third External Dimension An unattractive market First Internal and quantitative dimension refers to technical business management competencies and enabling Op Model, assessed during the austerity phase. An uncertain market An attractive market

13. a Qualitative look at the Business Prospects Scenario set 1 In this instance we assume we are pretty clear on our assessment of the Inspiring Leadership and Capable Thought Leaders steering the business – it could very well have new management or ownership, and they are instilling an enabling culture whilst providing inspiring and creative leadership. However, often Leadership will have to change as they have been discredited and are not able to provide the inspiration, motivation and thought leadership needed. They may also be emotional and lack objectivity. Purgatory Milk & Honey An unlikely scenario, but one that may arise from time to time. This usually is an indication of fraudulent activity or asset stripping, with the single aim of defrauding shareholders and creditors. King iii provides sanction for this manipulative kind of Board resolution. Poor Industry & Business Fundamentals Great Entrenched Player , over-valued brand, complacent leadership, who squandered opportunity in a market full of value. They’re the Kodak of the day. They are the industry whipping boy, and nobody is proud to work at this old stodgy dusty place. Those who work there can’t get hired elsewhere. They live in the past when once they were really industry leaders, but only they remember those days! Distressed Fund Options Band of Rescue Prospect and Legitimacy Funny Money Qualitative Reasonable Prospects 10% 40% Decline & Fall Sweat Like A 30% 20%? Potentially a great scenario! But often Barriers to entry are high, investors with time horizons longer than a bank are needed and it also requires that rare leadership possessing an Adrian Gore style and brain Too little too late, by leadership whose negligence and absence should expect the harshest condemnation and censure Graceful and calm insolvency proceedings is the only way to go . Fools Time for Talent to Shine WeakOperating Model Robust

14. a Qualitative look at the Business Prospects Scenario set 2 Purgatory Milk & Honey Low Inflation Low Interest Rates Sovereign debt AAA rated Correctly Priced Markets Conflict Isolated and Contained Western Economies Relevant, but BRICS growing contributors. Political Leadership saves the day in Europe and the US. Difficult decisions on austerity have been made and adhered to Resources boom and Africa thrives . Poor Industry & Business Fundamentals Great Conflict is localized and contained, strong political leadership emerges. Politicians make difficult decisions and a new generational social contract emerges. WTO remains relevant, the value of Globalization understood, protectionism and trade barriers removed.Co-operation saves the day, although the turn around is slow but steady, lasting as long as 5 years. The downturn is medium term and business confidence restored by good In this instance we assume we are pretty clear on our assessment of the Inspiring Leadership and Capable Thought Leaders steering the business – it could very well have new management or ownership, and they are instilling an enabling culture whilst providing inspiring and cerative leadership Qualitative Reasonable Prospects 10% 40% Decline & Fall A New Order 30% 20%? Europe declines with little dignity and predictability, the EU becomes toothless and anemic, with weak leadership. Nationalism dominates EU politics with absent leadership, and domestic politics taking the focus – but nobody cares. BRICS maintain robust growth and power shifts noticeably to the East. The G8 becomes G12, and UN security council make up changes, with new voices and priorities. New rules of engagement arise, Africa is relevant through its Resources and Labour pool. Conflict becomes global triggered by Israel and Iran or Pakistan and India, tensions rise between China and the . Europe Union disintegrates with Germany leaving and re-instating the Deutshe Mark, Italy has defaulted and Western Economies enter long l. Social unrest increases. Nationalism emerges across Europe. The BRICS cannot assume the burden of maintaining global growth. Global stoke markets lose > 50% value, Riskless Rates lose meaning. Dark days for Africa. Trade Barriers and Protectionism abound. WeakOperating Model Robust

16. Mapping the Quantitative view – Creditor Return Charitable A Loud Voice There are 2 distinct quantitative inputs, the opportunity in cutting expenses and reducing operating costs, as well as the potential revenue uplift from divesting non-core assets, and rationalising the value chain. • RSA increases its competitiveness • A balanced Economy exists between internal growth fueling job creation and foreign exchange funding imports • Land reform has been handled quickly and sensitively • National Health Initiate implemented prudently • Booming times for Tourism, Resources and Entry into Africa • Education issues resolved • Labour Unions contained • Inflation moderate • Reserve Bank remains Independent • FDI increases • A Robust Member of BRICS High Risk of Failure Low • Strong Political Leadership has emerged • Sincere and appropriate measures taken to tackle Land Reform, Entrepreneurs, Education and Health • Nationalization is a concluded debate and rejected • A solid foundation for future growth has been prepared • We have invested in the youth • Business Confidence is Rising • Technocrats dominate Ideologues • Less Susceptible to Global Shocks – Terrorism, War and Pandemics. • Infrastructure concerns addressed (Energy and Water specifically) Well placed for rescue? 40% 25% Basket Case A Roll of the Dice 25% 10%? • Nationalisation becomes a reality – FDI drops to zero • Flight of Capital and Talent • State institutions crumble • Social unrest dominates Headlines • RSA becomes a footnote in history • Pack your bags and last person blow out the candle. • Global Economy carries the South African economy, but Nigeria and Ghana are eating our lunch. • We are the reluctant gateway to Africa but this is changing • Nigeria takes over as Africa’s biggest economy. • Growth in RoA outstrips RSA by factor or 2-3x • Politics dominated by pettiness and weak leadership • Angry youth demand more • Nationalisation debate continues • Land reform not addressed • Revenues from Tax drop alarmingly • Unemployment increasing • Talent flees the country Speculative Better Creditor ReturnExcellent

17. Combine Qualitative & Quantitative (which has some uncertainty in it) Well Positioned A Loud Voice We map the qualitative vs the quantitative • RSA increases its competitiveness • A balanced Economy exists between internal growth fueling job creation and foreign exchange funding imports • Land reform has been handled quickly and sensitively • National Health Initiate implemented prudently • Booming times for Tourism, Resources and Entry into Africa • Education issues resolved • Labour Unions contained • Inflation moderate • Reserve Bank remains Independent • FDI increases • A Robust Member of BRICS Weak Qualitatative Outcomes Healthy • Strong Political Leadership has emerged • Sincere and appropriate measures taken to tackle Land Reform, Entrepreneurs, Education and Health • Nationalization is a concluded debate and rejected • A solid foundation for future growth has been prepared • We have invested in the youth • Business Confidence is Rising • Technocrats dominate Ideologues • Less Susceptible to Global Shocks – Terrorism, War and Pandemics. • Infrastructure concerns addressed (Energy and Water specifically) Well placed for rescue? 40% 25% Another Stat A Spent Force 25% 10%? • Nationalisation becomes a reality – FDI drops to zero • Flight of Capital and Talent • State institutions crumble • Social unrest dominates Headlines • RSA becomes a footnote in history • Pack your bags and last person blow out the candle. • Global Economy carries the South African economy, but Nigeria and Ghana are eating our lunch. • We are the reluctant gateway to Africa but this is changing • Nigeria takes over as Africa’s biggest economy. • Growth in RoA outstrips RSA by factor or 2-3x • Politics dominated by pettiness and weak leadership • Angry youth demand more • Nationalisation debate continues • Land reform not addressed • Revenues from Tax drop alarmingly • Unemployment increasing • Talent flees the country Speculative Quantitative OutcomesExcellent

18. Example 1 • Customers have accepted Technology • More New Entrants into the market • Greater Demand for Talent • Customers shift channels • Innovation drives the Industry – Risk, Product and Technology • Competitors create pricing pressure • Need to Lock in Clients (Increased need - therefore how?) • Clients can switch with even greater ease than before • Rapid Market Response Vital • Real need to manage Volume vs Value channel dynamics • Pricing Pressure • Transition Stage to HELL • Few new entrants • Public Acceptance of Technology • Data Costs plummet • Mobile devices dominated by Androis and Apple • Customers are demanding Digital solutions Likely future Situation Current Situation • Transition Stage to Heaven • New Entrants are prepping for Public Acceptance of Tech • Big drive to establish brands • Competitors prep for WAR with stronger balance sheets • The poaching of top talent begins • Publicity Campaigns drive competitors agenda – digital channel uptake • Unlikely to remain for longer than 3 years • Time to build balance sheets • Time to attract talent • Time to tie in existing customer base • Time to invest in technology