The Gunns Group. Report by Administrators. Pursuant to Section 439A of the Corporations Act February 2013

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1 The Gunns Group Report by Administrators Pursuant to Section 439A of the Corporations Act February 2013 Administrators: Daniel M Bryant Ian M Carson Craig D Crosbie (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED)

2 Table of Contents Section Page 1. DISCLAIMER EXECUTIVE SUMMARY APPOINTMENT BACKGROUND SECOND MEETING OF CREDITORS (SECOND MEETING) ADMINISTRATORS RECOMMENDATION ESTIMATED RETURN TO CREDITORS ADMINISTRATORS OVERVIEW INVESTIGATIONS FINANCIAL BACKGROUND PROGRESS OF ADMINISTRATION ENQUIRIES SECOND MEETING PURPOSE OF SECOND MEETING MEETING REGISTRATION GROWERS ADMINISTRATORS RECOMMENDATION LIQUIDATION DOCA ADMINISTRATION TO END ESTIMATED RETURN TO CREDITORS ESTIMATED RETURN TO SECURED CREDITORS ESTIMATED RETURN TO OTHER CREDITORS ESTIMATED RETURN TO GROWERS GROWERS WHO RANK AS UNSECURED CREDITORS SCHEMES INVESTMENTS RETURNS BANK GUARANTEES INVESTIGATIONS LIMITATIONS ON INVESTIGATIONS SUMMARY OF KEY FINDINGS POSSIBLE BREACHES OF DIRECTORS DUTIES EXAMINATION OF OFFICERS OF THE GUNNS GROUP DIRECTORS AND OFFICERS INSURANCE DIRECTORS PERSONAL FINANCIAL POSITION DIRECTORS EXPLANATION FOR THE GUNNS GROUP S DIFFICULTIES ADMINISTRATORS REASONS FOR THE GUNNS GROUP S FAILURE BOOKS AND RECORDS... 30

3 7.10 AUDITOR DUTIES INSOLVENT TRADING VOIDABLE TRANSACTIONS OTHER INVESTIGATIONS GUNNS GROUP FINANCIAL BACKGROUND GUNNS GROUP GPL GUNNS HOLDINGS DIRECTORS RATA GUNNS GROUP BACKGROUND INFORMATION GUNNS GROUP GPL GUNNS HOLDINGS STATUTORY INFORMATION CREDITORS CLAIMS SHAREHOLDERS APPOINTMENT BACKGROUND EXTENSIONS OF CONVENING PERIOD FIRST MEETING OF CREDITORS OTHER MEETINGS PROGRESS OF ADMINISTRATION GENERAL ADMINISTRATION INFORMATION DECLARATION OF INDEPENDENCE, RELEVANT RELATIONSHIPS AND INDEMNITIES (DIRRI) REMUNERATION ADMINISTRATORS REMUNERATION METHODS OF REMUNERATION SCHEME COSTS ADMINISTRATORS DISBURSEMENTS SUMMARY OF RECEIPTS AND PAYMENTS LIQUIDATORS REMUNERATION & ROLE OF COMMITTEE OF INSPECTION... 75

4 Appendix Listing A B Timeline of Key Events Form 529 Notice of Meeting of Creditors Form 532 Appointment of Proxy Informal Proof of Debt Form for the Purpose of Voting C Receivers Update D Scheme Information E GPL s RE Duties F Restructure Process G IPAA Publication Creditor Information Sheet: Offences, Recoverable Transactions and Insolvent Trading H Gunns Group Corporate Structure I Statutory Information J Secured Creditors K Top 10 Unsecured Creditors L ASIC Publication Insolvency information for directors, employees, creditors and shareholders M Declaration of Independence, Relevant Relationships and Indemnities N Administrators Remuneration Report for 25 September 2012 to 10 February 2013 Administrators Estimated Remuneration Report for 11 February 2013 to the Second Meeting (5 March 2013) O ASIC Publication Approving Fees: A Guide for Creditors P Administrators Actual and Estimated Disbursements for 25 September 2012 to Second Meeting (5 March 2013) Q Receipts and payments for 25 September 2012 to 10 February 2013 R PPB Advisory Schedule of Fees S Liquidators Estimated Remuneration Report and Estimated Disbursements

5 Glossary Abbreviations Definitions Act Corporations Act 2001 (Cth) Administrators Messrs Daniel Bryant, Ian Carson and Craig Crosbie of PPB Advisory as Joint and Several Administrators AFSL Australian Financial Services License ASIC Australian Securities and Investments Commission ASX Australian Securities Exchange ATO Australian Taxation Office AUD Australian Dollar BDMT Bone Dry Metric Tonnes b Billion c. Circa COI Committee of Inspection Committee Committee of Creditors DEEWR Department of Education, Employment and Workplace Relations Directors The Gunns Group directors as provided at Appendix I DIRRI Declaration of Independence, Relevant Relationships and Indemnities DOCA Deed of Company Arrangement EOI Expression of Interest Federal Court Federal Court of Australia FEG Fair Entitlements Guarantee, a legislative safety net scheme established by the federal government FOB Free On Board FY Financial Year (e.g. the financial year 1 July 2010 to 30 June 2011 would be expressed as FY11) GF Gunns Finance Pty Ltd GFP Gunns Forest Products Pty Ltd GMT Green Metric Tonnes GPL Gunns Plantations Limited GPL Schemes GPL Woodlot Schemes (established between 2000 to 2009 and 2008 to 2009) Growers Investors in the Schemes GS Schemes Great Southern Schemes (established between 1998 to 2006) GT Assets Green Triangle forestry estate land and timber assets Gunns Gunns Limited Gunns Consolidated The Gunns Group excluding: Group Gunns Holdings GPL Gunns Group Associated Forest Holdings Pty Ltd Auspine Ltd Auspine Plantations Pty Ltd Auspine Tree Farms Pty Ltd East Coast Pastoral Co Pty Ltd GTP Alexandra Pty Ltd GTP China Pty Ltd GTP Heyfield Pty Ltd GTP Holdings Pty Ltd GTP Seymour Pty Ltd GTP Southwood Pty Ltd Gunns Consolidated Investments Pty Ltd Gunns Finance Pty Ltd Gunns Forest Products Pty Ltd Gunns Holdings Pty Ltd Gunns Ltd Gunns New Zealand Pty Ltd Gunns Plantations Ltd Kauri Timber Company Ltd

6 Abbreviations Definitions Kvvic Pty Ltd Manna Holdings Pty Ltd Northern Forest Investments Pty Ltd S.E.A.S. Estates Pty Ltd S.E.A.S. Plantations Pty Ltd S.E.A.S. Sapfor Forests Proprietary Ltd S.E.A.S. Sapfor Harvesting Proprietary Ltd S.E.A.S. Sapfor Investment Services Proprietary Ltd Sapfor Trading Proprietary Ltd Sorisdale Pty Ltd South East Afforestation Services Proprietary Ltd Tasmanian Pulp & Forest Holdings Ltd Tasmanian Softwoods Pty Ltd Taspine Pty Limited Tbvic Pty Ltd Timbersales Proprietary Ltd Wesley Vale Engineering Pty Ltd Gunns Group Gunns Group directors, officers and employees Representatives Gunns Holdings Gunns Holdings Pty Ltd Ha Hectares IFM IFM (Securities) Pty Ltd IPAA Insolvency Practitioners Association of Australia ITC ITC Timber Pty Ltd k Thousand Lenders Collectively, the parties providing credit facilities under a Facility Agreement dated 31 January 2007 m Million Moelis Moelis & Company Holdings LP M+K Lawyers Macpherson and Kelly Lawyers PDS Product Disclosure Statements PPSA Personal Property Securities Act 2009 (Cth) PPSR Personal Property Securities Register Pulp Mill project Proposed development plans to build a plantation based bleached kraft pulp mill adjacent to the existing wood fibre operations in the TAS Estate in Bell Bay RATA Report As To Affairs RE Responsible Entity as defined in the Act Receivers Messrs Mark Korda and Bryan Webster of KordaMentha as Receivers and Managers Report The Gunns Group report by the Administrators in accordance with s439a of the Act about the business, property, affairs and financial circumstances of the Gunns Group Review Period 1 July 2007 to 25 September 2012 Richard Chandler Richard Chandler Capital Corporation Pte Ltd Schemes Managed investment schemes collectively, the GPL Schemes, GS Schemes and GPL Winegrape Projects 2004, 2005 and 2007 S.E.A.S. Sapfor S.E.A.S. Sapfor Forests Pty Ltd GT Assets subject to covenants Covenants Second Meeting Meeting held pursuant to s439a of the Act where creditors determine the future of each Gunns Group company scheduled for 5 March 2013 at 11:00 AM AEDST Supreme Court Supreme Court of Victoria TAS Estate Tasmanian Plantation Estate URS URS Australia Pty Ltd Valuation Valuation of the TAS Estate prepared by Moelis on 3 July 2012 YTD Year to date

7 1. DISCLAIMER In reviewing this Report, creditors should note the following: This Report is based upon our preliminary investigations to date. Any additional material issues which are identified subsequent to this Report may be the subject of a further written report and / or tabled at the forthcoming meeting of creditors. The statements and opinions given in this Report are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated, we reserve the right to alter any conclusions reached on the basis of any changed or additional information which may be provided to us between the date of this Report and the date of the second meeting of creditors (Second Meeting). Neither the Administrators, PPB Advisory nor any member or employee thereof is responsible in any way whatsoever to any person in respect of any errors in this Report arising from incorrect information provided to us. In considering the options available to creditors and formulating their recommendation, the Administrators have necessarily made forecasts of asset realisations and total creditors. These forecasts and estimates may change as asset realisations progress and claims are received from creditors. Whilst the forecasts and estimates are the result of the Administrators best assessment in the circumstances, creditors should note that the outcome for creditors may differ from the information provided in this Report.

8 2. EXECUTIVE SUMMARY 2.1 APPOINTMENT BACKGROUND Messrs Daniel Bryant, Ian Carson and Craig Crosbie were appointed as Joint and Several Administrators of the Gunns Group on 25 September On the same date, Messrs Mark Korda and Bryan Webster of KordaMentha were appointed as Receivers and Managers of Gunns Group by the parties who provided credit facilities to the Gunns Group under a Facility Agreement dated 31 January 2007 (the Lenders). The Receivers were not appointed to GPL in its capacity as responsible entity (RE) of the managed investment schemes (Schemes). This Report has been prepared in accordance with s439a of the Corporations Act 2001 Cth (Act) and is based on information obtained from the Gunns Group s books and records, financial systems, in some instances from the directors and key management staff, and from our own enquiries and investigations. In most cases the Report refers to the Gunns Group as a whole and encompasses information relevant to all Gunns Group entities to avoid repetition. However, some information for the entities listed below are presented separately in accordance with a Supreme Court of Victoria (Supreme Court) order made on 2 October 2012: Gunns Plantations Limited (GPL) Gunns Holdings Pty Ltd (Gunns Holdings) Gunns Group excluding GPL and Gunns Holdings (Gunns Consolidated Group). 2.2 SECOND MEETING OF CREDITORS (SECOND MEETING) Administrators are required to hold a meeting of creditors within five business days of the statutory convening period ending. The principal purpose of the Second Meeting is for creditors to decide the future of each individual company within the Gunns Group, by voting for one of the following three options for each company being that: 1. The company be wound up (liquidation). 2. The company execute a Deed of Company Arrangement (DOCA). 3. The administration of the company ends (and control of the company reverts to its directors). Should creditors decide to place any or all of the Gunns Group companies into liquidation, creditors will be invited to form Committees of Inspection (COI) for each company (as applicable). The Second Meeting of the Gunns Group will be held on Tuesday, 5 March 2013 at 11:00 AM AEDST at The Boathouse on Northbank, 55a Lindsay Street, Invermay, Launceston, Tasmania The meetings for all companies in the Gunns Group will be held concurrently. To enable orderly registration for the meeting, please attend at least 45 minutes prior to the meeting time. Arrangements have been made for this meeting to be broadcast live via a web link for those creditors who are unable, or do not wish to attend in person. To listen to the Second Meeting via the internet, please follow the link: ADMINISTRATORS RECOMMENDATION We recommend that the creditors vote that each Gunns Group company be placed into liquidation as it is in the best interests of creditors. If we receive a DOCA proposal capable of being put to creditors prior to the Second Meeting we may seek creditor approval to adjourn the Second Meeting by up to 45 business days (Section 4). 8

9 2.4 ESTIMATED RETURN TO CREDITORS The following table summarises approximate claims for each class of creditor across all entities within in the Gunns Group and prior to consolidation. Creditor class Amount ($ 000) Total Amount ($ 000) Secured creditors: The Lenders 445,753 Other secured creditors 190, ,932 Employee entitlements: Priority creditors 9,629 Excluded employee entitlements (unsecured creditors) ,030 Unsecured creditors: Trade creditors 61,820 Other creditors and liabilities 73, ,836 TOTAL EXTERNAL CREDITORS CLAIMS 780,798 Intercompany loans 2,242,420 Total Gunns Group debts prior to consolidation 3,023,219 Note: Potential claims of Growers are not included in the above table. Estimated return to creditors is based on a liquidation scenario (i.e. if creditors vote to liquidate each Gunns Group company). If we receive a DOCA proposal capable of being put to creditors prior to the Second Meeting we may seek creditor approval to adjourn the Second Meeting by up to 45 business days (Section 4). This Report provides further information on creditors claims at Section Secured creditors The Lenders hold first ranking security interests over all the Gunns Group and as such are entitled to the proceeds of all asset sales in priority to general unsecured creditors, but will rank behind the claims of priority creditors (e.g. employees) in regard to circulating (formerly known as floating charge ) assets. Circulating assets typically include debtors, stock and cash. As at the date of our appointment the Gunns Group was indebted to the Lenders for c.$446m (Appendix J). We understand from discussions with the Receivers that it is unlikely that there will be sufficient proceeds from secured asset realisations to satisfy the Lenders debt (Section 5.1.1). Other secured creditors should contact the Receivers regarding potential returns from any non-circulating (formerly known as fixed charge ) asset realisations over which they hold a security interest (Section 5.1.2) Employees/priority creditors Employee claims include unpaid wages, unremitted superannuation, leave and termination entitlements. As at the date of our appointment the Gunns Group employee entitlements totalled c.$10m (Section 9.5.2). Generally, employee claims have a priority to the proceeds of circulating assets (typically debtors, stock and cash) over the Lenders claims. The Receivers estimate employee priority claims will be met in full from circulating asset realisations, however, the timing of any payment remains uncertain. In the event that the Receivers realisations from circulating assets under their control are insufficient to meet employee claims, we do not expect that liquidation recoveries (excluding any potential recoveries from voidable transactions or other claims brought by a liquidator) will cover any shortfall (Section 5.2.1). Former employees are likely to be eligible for payment under the Fair Entitlements Guarantee (FEG) which is administered by the Department of Education, Employment and Workplace Relations (DEEWR) if the Gunns Group is placed into liquidation. Please note all payments advanced under FEG are at the DEEWR s absolute discretion. Additionally, the DEEWR has a right of subrogation in respect of the employees claims once it has paid these amounts (Section 9.5.2) Unsecured creditors As at the date of our appointment the Gunns Group s unsecured creditor claims totalled c.$2.4b (including intercompany loans of $2.2b) (Section 9.5.3). 9

10 The Receivers realisations from assets under their control will be insufficient to produce any return to the ordinary unsecured creditors of the Gunns Group. Additionally, we do not expect sufficient funds will be realised from the liquidation of the Gunns Group (excluding any potential recoveries from voidable transactions or other claims brought by a liquidator) to provide for a distribution as we are unaware of any assets falling outside of secured creditors interests (Section 5.2.2) Grower investors (Growers) There are 48,984 Growers with original investments totalling c.$1.6b across all the Schemes (Appendix D). Potential returns to Growers under their investments remain dependent on either: the continued management of the Schemes and harvest on maturity of the plantations. This will depend on the assessed ongoing viability of the Schemes and the ability to engage a new RE as discussed in Sections and a replacement RE does not occur then winding up of the Schemes and the short term harvest and/or sale of Scheme assets. The search for a replacement RE is continuing as at the time of this Report (Section 6). Growers may also have claims against GPL as unsecured creditors if the RE has breached its duties to the Growers. In many instances it is too early to establish what (if any) claims Growers may have as creditors (Section 6). 2.5 ADMINISTRATORS OVERVIEW We make the following general comments in relation to our investigations into the business, affairs and financial circumstances of the Gunns Group Events leading to insolvency The Gunns Group recognised from around mid-2010 the need to restructure its operations. This followed the recognition that: hardwood export volumes, and to a lesser extent, prices had begun to materially reduce in the market in which the Gunns Group participated, and as a result: revenues and profitability had begun to see similar declines (Gunns Group booked a net loss before tax of $103m in FY10) asset impairments were being booked against its forestry assets ($138m booked for FY10) the Schemes for which it acted as RE were financially onerous and a significant drain on cash there was a need to reduce debt to more sustainable levels (noting its debt facilities were due to be repaid on 31 December 2012) potential investors of the Gunns Group s developed plans to build a plantation-based bleached kraft pulp mill (Pulp Mill project) expressed concerns about the Gunns Group s level of debt, the impact of social factors (e.g. environmental groups), complex and diverse business structure and various litigation. As a result of these emerging issues from 2010, a broad restructure program was implemented to achieve: a series of non-core asset sales to reduce debt and stabilise operations an equity partner for its Pulp Mill project (to vertically integrate its hardwood resources) capital raisings the sale of the Tasmanian Plantation Estate (TAS Estate) (as an alternative if the other capital raising options were not successful) the buyback of the GPL Woodlot Schemes (GPL Schemes) from Growers to sell the TAS Estate (which were considered a cash drain). 10

11 Some of the above restructuring attempts were progressed but not enough to avoid voluntary administration. Some of the key events that transpired during this time are noted below. During 2011 there were further declines in hardwood export volumes and prices in the market in which the Gunns Group participated, resulting in further revenue reductions and net losses after tax ($454m for FY11). By late 2011 the Gunns Group had announced further asset write-downs of $23.7m to the market, and had requested its Lenders provide some flexibility around the impending expiry (on 31 January 2012) of its remaining $452m debt facility. The Lenders agreed to certain amendments to the facility agreement which allowed the desired flexibility, but also provided for a repayment of debt by 31 December In early 2012 Gunns Limited (Gunns) announced an equity partner had proposed a $150m capital investment subject to a $130m rights issue for existing shareholders. However, by March 2012 the equity partner withdrew from the process. Around mid-march 2012 the Gunns Group investigated raising capital of $450m, however by May 2012 feedback from potential institutional investors highlighted a number of concerns with investing in the Gunns Group, which suggested there was uncertainty about the Gunns Group s ability to raise equity. At this point the Gunns Group amended the capital raising to a smaller sum ($200m) which would: be used to reduce the debt, and fund working capital requirement for 12 months allow asset sales to continue allow further time for a partner for the Pulp Mill project to be found. On 2 July 2012, Gunns announced to the market further substantial impairments to its forestry assets following further erosion in hardwood export prices in the market in which the Gunns Group participated. The next day, the Gunns Group met with the Lenders to explain how the recent reduction in hardwood export prices had again negatively impacted: major asset values forecast cash flow requirements the ability to progress the Pulp Mill project. The Gunns Group also identified to the Lenders its immediate funding requirement including the need to retain $54m from asset sales over the six months to 31 December Shortly after this the Lenders appointed an independent accountant to investigate the Gunns Group s position. A full timeline of the key events leading to insolvency is attached at Appendix A. 2.6 INVESTIGATIONS Whilst our investigations remain ongoing, we summarise our findings to date below: Date of insolvency: Our preliminary view is that the Gunns Group was insolvent from at least 21 September 2012 when it had insufficient funds to meet its debts as and when they fell due. However, the Gunns Group may have had solvency concerns potentially from: 12 September 2012 being the date at which the Gunns Group requested short term cash funding from its Lenders (via retention of proceeds from asset sales). That request was ultimately declined on 21 September July 2012 when the Gunns Group announced to the market further declines in hardwood export prices in the market in which the Gunns Group participated, that it had been unable to execute a capital raising, and that it was now wholly reliant on the ongoing support from its Lenders (via retention of asset sale proceeds), suggesting significant going concern uncertainty at this time. March 2012 when an equity partner withdrew its proposal, the ability to source alternative equity appeared challenging with hardwood export prices in the market in which the Gunns Group participated continuing to decline, further eroding the viability of the Gunns Group. We understand that the Gunns Group took independent advice in relation to the issue of solvency during this timeframe. We are yet to form a conclusive view on the date of insolvency. Additional investigations will be required by a liquidator (if appointed) before a final view may be formed (Section ). 11

12 We are also continuing to investigate the practices of the Gunns Group in respect of its use of third party funds (e.g. Schemes harvest proceeds) (Section 7.3.1). If these practices are found to be improper, and had the relevant transactions not occurred, it may have resulted in an earlier appointment of a voluntary administrator, and potentially an earlier date of insolvency. Voidable transactions: We have not finalised our investigations into voidable transactions as we are yet to form a conclusive view on the date of insolvency. A liquidator (if appointed) may identify voidable transactions that warrant further investigation and has the power to pursue those claims (Section 7.12). Auditor duties: The Gunns Group made material asset impairment charges in FY10, FY11 and FY12. As the FY10 and FY11 accounts were audited, and given the impact these charges had on the Gunns Group s financial performance and position for these years, we believe further investigations should be made into whether any Australian Auditing Standards may have been breached (Section 7.10). Insolvent trading: As we are yet to form a conclusive view on the date of insolvency we are unable to state definitively whether the Gunns Group traded whilst insolvent. Additional investigations will be required by a liquidator (if appointed) before a view may be formed (Section 7.11). Breaches of director duties: We have identified a number of potential breaches that require additional investigations by a liquidator including: insolvent trading (Section 7.11) use of third party funds by the Gunns Group for working capital purposes (Section 7.3.1) potential breaches of RE duties by GPL (Section 7.3.2). A liquidator (if appointed) may identify further potential breaches that warrant further investigation and has the power to pursue those claims (Section 7.3). Books and records: The Gunns Group books and records appear to have been adequately maintained (Section 7.9). 2.7 FINANCIAL BACKGROUND The Gunns Group s trading operations peaked in FY08, with modest operating profits generated in FY08 and FY09. Financial difficulties began to emerge from FY10, corresponding with major structural changes in the global hardwood market in which the Gunns Group participated that impacted negatively on the Gunns Group s export volumes and prices. In addition, large supplies of competitor product came on line from the maturity of significant areas of hardwood plantations established across Australia between 1997 and Additional plantations matured over the next 8 years, that would likely place further pressure on future timber prices. As a significant proportion of the Gunns Group s asset base related to its hardwood timber interests, adverse movements in hardwood prices in the market in which the Gunns Group participated also had negative implications for its asset values, with significant asset impairments and write-downs recorded between FY11 to 25 September 2012 (c.$1.4b in impairments and write-downs mostly relating to hardwood interests). Figure 1: Summary of Gunns Group financial performance and position FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts and Administrators analysis 12

13 Figure 2: Summary of Gunns Group cash flow performance from FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts and Administrators analysis Cash flows from operations were insufficient to fund investment costs (e.g. property, plant and equipment, timber and plantation assets, and payments for investments), even after sale of $529m of non-current assets. Share proceeds were used to partly repay debt and fund these acquisitions, however, high debt and associated borrowing costs resulted in net cash over the period from FY08 to appointment date being eroded by c.$44m to negative $31m. Further details are provided at Section PROGRESS OF ADMINISTRATION Since our appointment the major work undertaken by the Administrators of the Gunns Group is summarised as follows: commenced and progressed an expressions of interest (EOI) campaign for a replacement RE of the Schemes trade on activities to manage the Schemes including, maintenance activities, and insurance issues conducted initial statutory and financial investigations into the complex affairs of the Gunns Group as reported herein held the first meeting of creditors prepared creditor reports and held meetings with creditors, committees of creditors, Australian Securities and Investments Commission (ASIC), Growers and Grower representatives prepared various updates to Growers including: seven fact sheets 16 Grower group representatives meetings held information sessions in Melbourne and Sydney attended by over 450 Growers sought various court orders regarding the convening of the first meeting of creditors and Second Meeting and extension of the Administrators rent free period investigated the Gunns Group s compliance with financial reporting requirements under the Act actioned employee, creditor and shareholders enquiries responded to over 5,800 Grower related enquiries planning and reviewing administration process issues. Further details are provided at Section

14 2.9 ENQUIRIES If you have any questions please contact the Gunns Group Hotline on (03) or We will address all material matters that come to our attention after the date of this Report at the Second Meeting. Should any significant information affecting the creditors decision regarding the future of the Gunns Group come to light, we shall endeavour to advise creditors prior to the Second Meetings by posting such information on our website at DATED 25 th day of February 2013 Daniel M Bryant, Ian M Carson and Craig Crosbie Joint and Several Administrators The Gunns Group 14

15 3. SECOND MEETING The Second Meeting of the Gunns Group has been convened for: Date: Tuesday, 5 March 2013 Registration: Meeting time: Location: 9:00 AM AEDST 11:00 AM AEDST The Boathouse on Northbank 55a Lindsay Street, Invermay Launceston, Tasmania 7248 To enable orderly registration for the meeting, please attend at least 45 minutes prior to the meeting time. Arrangements have been made for this meeting to be broadcast live via a web link for those creditors who are unable, or do not wish to attend in person. To listen to the Second Meeting via the internet, please follow the link: PURPOSE OF SECOND MEETING The primary purpose of the Second Meeting is for the respective creditors of each Gunns Group company to decide its future by choosing one of three options, being that: 1. the company be wound up (liquidation) 2. the company execute a DOCA 3. administration come to an end (and control reverts to its directors). Creditors will also be asked whether they wish to replace the existing Administrators with a new liquidator or deed administrator (as applicable) should creditors resolve to place the Gunns Group into liquidation or approve a DOCA for the Gunns Group (respectively). Otherwise, the incumbent Administrators automatically become the liquidators or deed administrators (as the case may be). 3.2 MEETING REGISTRATION For the purpose of the Second Meeting the following forms are attached at Appendix B: Form 529 Notice of Meeting of Creditors Form 532 Appointment of Proxy Informal Proof of Debt Form for the Purpose of Voting. Please ensure your informal proof of debt form and any relevant proxy form are completed and returned to this office or by to gunns@ppbadvisory.com by no later than 5:00 PM AEDST on Friday, 1 March 2013 to enable timely registration. All corporate creditors are required to submit a proxy form should they wish to be represented at the Second Meeting in accordance with the Act. Creditors who are unable to attend the Second Meeting and wish to be represented should ensure that the attached proxy form, power of attorney or evidence of the appointment of a company representative is completed. Please note proxy forms lodged by creditors for the first meeting of creditors can not be used for the Second Meeting (i.e. new proxy forms need to be completed). In order to receive any future reports and/or notices via , rather than by regular post, please provide your contact details on the informal proof of debt form. PPB Advisory 15

16 3.3 GROWERS Consistent with the approach at the first meeting of creditors and with guidance of the courts, the Administrators will permit Growers to attend the meeting of GPL as contingent creditors on the basis that the value of potential claims is yet to be quantified. Growers will be admitted to vote at the GPL Second Meeting for a nominal amount of $1. In order to be entitled to vote at the Second Meeting, Growers must complete and submit the informal proof of debt form including adequate particulars about their claim, prior to the Second Meeting. This Report provides further information on the estimated return to Growers at Section 6. Please note the purpose of the Second Meeting is to decide the Gunns Group s future and not the future of each Scheme. It is presently the Administrators intention to hold a separate meeting to decide the future of the Schemes. Growers will be notified of the timing of this meeting once details are finalised. PPB Advisory 16

17 4. ADMINISTRATORS RECOMMENDATION Pursuant to s439a(4)(b) of the Act, we recommend that the creditors vote that each Gunns Group company (including GPL and Gunns Holdings) be placed into liquidation as it is in the best interests of creditors. If we receive a DOCA proposal capable of being put to creditors prior to the Second Meeting we may seek creditor approval to adjourn the Second Meeting by up to 45 business days. Given that each Gunns Group company is insolvent, it is not in the interests of creditors to end the administrations and return control of the Gunns Group companies to their respective directors. At the Second Meeting, creditors will resolve the future of each company within the Gunns Group. It is our obligation under the Act to make a recommendation to creditors of each Gunns Group company on which of the following alternatives available is in their best interests, being that: the company be wound up (liquidation) the company execute a DOCA the administration of the company ends (and control of the company revert to its directors). We have considered the options available on a company-by-company basis and formed our opinion as follows: 4.1 LIQUIDATION Each Gunns Group company is insolvent and hence should be placed into liquidation. A liquidator (if appointed) will be empowered to: pursue various potential recoveries under the Act, such as voidable transactions complete a thorough investigation into: the Gunns Group s dealings and affairs actions of the Directors and the RE report their findings to ASIC pursuant to the Act. Additionally, liquidation would allow any recoveries made to be distributed in accordance with the priority provisions the Act. 4.2 DOCA If we receive a DOCA proposal capable of being put to creditors prior to the Second Meeting we may seek creditor approval to adjourn the Second Meeting by up to 45 business days, as provided by s439b(2) of the Act. 4.3 ADMINISTRATION TO END Each Gunns Group company is insolvent and unable to pay its debts as and when they fall due. Therefore, reversion of control of the Gunns Group to their respective directors would not be in the interests of creditors. PPB Advisory 17

18 5. ESTIMATED RETURN TO CREDITORS Upon their appointment, the Receivers took control of predominantly all of the Gunns Group s assets for the benefit of the Lenders in accordance with their circulating (floating) and non-circulating (fixed) security interests. The only assets falling outside the Lenders security interests are: assets subject to other security interests ranking ahead of the Lenders (refer to Section 5.1.2) property held by GPL as RE for the Schemes, such as harvest or insurance proceeds (but not GPL s beneficial interest in the Schemes) Schemes-related tree crop and associated benefits. The last two asset groups are effectively assets of the Schemes managed by GPL (as RE) on behalf of the Growers. These are discussed further in Section 6. Estimated returns to the various classes of creditors from the realisation of the Gunns Group s assets are discussed in the sections below. If we receive a DOCA proposal capable of being put to creditors prior to the Second Meeting we may seek creditor approval to adjourn the Second Meeting by up to 45 business days. 5.1 ESTIMATED RETURN TO SECURED CREDITORS The Lenders The Receivers have advised that it is unlikely there will be sufficient proceeds from secured asset realisations to satisfy the Lenders debt of c.$446m. Security interests of the Lenders are registered on the Personal Property Securities Register (PPSR) against the Gunns Group. In each case, the collateral is noted as all present and after-acquired property no exceptions, thus including all assets known as circulating and non-circulating assets. In essence, this equates to the pre-personal Property Securities Act 2009 (Cth) (PPSA) concept of an all assets charge over all present and future property of a company and includes, for example: cash debtors stock property, plant and equipment land contractual rights. The Lenders claims have priority on non-circulating (fixed) assets over all other creditors (subject to other security interests under the PPSA). Employee claims have priority on circulating (floating) assets (typically debtors, stock and cash) over the Lenders claims (as discussed in Section 5.2.1). The Receivers advised it is unlikely there will be sufficient proceeds from secured asset realisations to satisfy the Lenders debt. Accordingly, we do not expect any surplus funds from the receiverships will be available for distribution to ordinary unsecured creditors. This Report provides further information on: the progress of the receivership at Appendix C the Lenders claims at Section shares and units other capital goodwill rights to dividends PPB Advisory 18

19 5.1.2 Other secured creditors Other secured creditors should contact the Receivers regarding potential returns from any non-circulating asset realisations over which they claim to hold a security interest. As at the date of our appointment the Gunns Group s other secured creditor claims totalled c.$190m. The Lenders security interests may rank behind other security interests, including (but not limited to): security interests that are registered ahead in time claims of other secured parties having the benefit of a purchase money security interest under the PPSA (e.g. creditors with valid retention of title claims over stock) temporarily perfected security interests, including transitional security interests that are temporarily perfected until 30 January 2014 (that is, two years after the PPSA commencement time) a security interest that is perfected by possession or control and is not registered on the PPSR. Accordingly, other secured creditors should contact the Receivers regarding potential returns from non-circulating asset realisations over which they have an interest. This Report provides further information on other secured creditor claims at Section and Appendix J. 5.2 ESTIMATED RETURN TO OTHER CREDITORS In a liquidation scenario, the potential return to priority and unsecured creditors depends substantially on: circulating (floating) assets (typically debtors, stock and cash) that employee claims have priority to over the Lenders claims pursuant to the Act any surplus from the realisation of company assets after the discharge of the security holder s debt (Section and 5.2.2) recovery of voidable transactions, including uncommercial transactions or other claims that may be brought by a liquidator, the outcome of which is dependent upon further investigations (Section 7) Priority creditors (employees) The Receivers have advised they estimate that employee priority claims should be met in full from circulating asset realisations, however, the timing of any payment remains uncertain. In the event that the Receivers realisations from circulating assets under their control are insufficient to meet employee claims, we do not expect that liquidation recoveries (excluding any potential recoveries from voidable transactions or other claims brought by a liquidator) will cover any shortfall. However, former employees are likely to be eligible for payment under the FEG if the Gunns Group is placed into liquidation. Employee claims include unpaid wages, unremitted superannuation, leave and termination entitlements. As at the date of our appointment the Gunns Group employee entitlements totalled c.$10m. Generally, employee claims have a priority to the proceeds of circulating assets (typically debtors, stock and cash) over the Lenders claims. The Receivers estimate that employee priority claims should be met in full from circulating asset realisations, however, the timing of any payment remains uncertain. In the event that the Receivers realisations from circulating assets under their control are insufficient to meet employee claims, we do not expect that liquidation recoveries (excluding any potential recoveries from voidable transactions or other claims brought by a liquidator) will cover any shortfall. Former employees are likely to be eligible for payment under the FEG by the DEEWR if the Gunns Group is placed into liquidation. Please note all payments advanced under FEG are at the DEEWRs absolute discretion. Additionally, the DEEWR has a right of subrogation in respect of the employees claims once it has paid these amounts. This Report provides further information on priority creditor claims at Section PPB Advisory 19

20 5.2.2 Unsecured creditors Due to the extent of the Lenders claims against the Gunns Group s assets, it is unlikely there will be any surplus assets or funds available to a liquidator (if appointed). Accordingly, it is not expected there will be any return to ordinary unsecured creditors of the Gunns Group. This position may change if any recoveries from voidable transaction or other actions brought by the liquidator (if appointed) are made. Further investigations are required to determine whether any such recoveries are possible, and the potential quantum (Section 7). This Report provides further information on unsecured creditor claims at Section PPB Advisory 20

21 6. ESTIMATED RETURN TO GROWERS Potential returns to Growers may be derived from the realisation of Growers woodlots via: the continued management of the Schemes and associated tree crop under a new RE where net proceeds may be available upon harvest a sale of the Scheme assets under a wind-up of the Schemes (i.e. a replacement RE does not occur) undistributed tree crop sale proceeds in Scheme custodial accounts at our appointment date insurance proceeds from tree crop damaged by fire during the period of the administration. Certain Growers may also have a claim against GPL for breaches of RE duties. Further details on total Growers are provided at Appendix D. 6.1 GROWERS WHO RANK AS UNSECURED CREDITORS Growers are not automatically entitled to claim as a creditor of GPL. Whether a Grower is a creditor is a question which must be determined upon the facts of each case, and with objective regard to the Administrators existing obligations to known creditors of the Gunns Group. Under the Act, certain obligations and duties are to be performed by the RE for the benefit of Growers. Should the RE breach its statutory duties in respect of a particular Scheme, a Grower may be entitled to claim as a creditor of the RE (i.e. GPL in this case). In many instances it is too early to establish what, if any, claims individual Growers may have as creditors of GPL. This matter remains under review by the Administrators and their legal advisors. Until the review is completed, the Administrators will treat Growers as contingent creditors. From our investigations to date, Growers may ultimately rank as unsecured creditors of GPL for the following potential breaches: c.$5m to $11.2m of Scheme tree crop harvest sale proceeds from FY12 and FY13 that were not transferred into the Schemes custodial bank accounts (further discussed at Section ) c.$1.2m paid by GPL Schemes Growers who elected to obtain insurance for FY13 and paid relevant premiums, however they were never remitted to the insurers (further discussed at Section ). The above claims are not relevant to all Growers. Regardless of whether such claims are admitted, Growers are unlikely to receive a return from these claims (refer Sections 5.2.2). 6.2 SCHEMES INVESTMENTS RETURNS Harvest and/or sale of tree crop Potential returns to Growers under their investments remain dependent on either: the continued management of the Schemes and harvest on maturity of the plantations. This will depend on the assessed ongoing viability of the Schemes and the ability to engage a new RE as discussed in Sections and the winding up of the Schemes where a replacement RE is not found and the short term harvest and/or sale of Scheme assets. The search for a replacement RE is continuing as at the time of this Report, as discussed below RE Expression of Interest (EOI) campaign On 15 October 2012 the Administrators commenced an EOI campaign seeking parties to replace GPL as RE of the nine Great Southern Schemes (GS Schemes) and nine GPL Woodlot Schemes (GPL Schemes). Key steps taken in this campaign included: background review and assessment of: the RE role and obligations Grower assets and liabilities PPB Advisory 21

22 plantation leases and other legal documents Scheme viability. identifying and dealing with interested parties, including: placing an advertisement in a national publication contacting potential interested parties identified from our own networks/databases and publically available information managing an online data room and question and answer facility assessment of interested party proposals engaging an independent valuation of the tree crop extensive discussions and negotiations with parties to understand their interest and/or proposals. 21 initial EOI were received by 23 October 2012 of which 10 parties were granted access to a data room. Four of these parties submitted indicative proposals by 30 October 2012 to become RE of certain Schemes, however, two of these proposals were subsequently excluded as being incomplete or deficient. The two remaining interested parties submitted final proposals on 12 November One of these parties advised the Administrators on 4 February 2013 that they were formally withdrawing from the EOI process. The Administrators remain in discussions with the remaining party to finalise its proposal. At the time of this Report, it is planned that meetings of the Schemes will be held possibly around late March 2013, where Growers may vote to appoint a new RE (where this option is available) or have the Schemes wound up. Growers will be advised of the Administrators plans in respect of the Schemes in due course Scheme viability Our initial investigations suggest that from a Grower perspective, some Schemes may not be financially viable. Analysis on the Schemes viability has been provided to Grower Representatives as listed in Section Given the Schemes were (generally) non-contributing Schemes (explained further in Section 8.2.1), in the absence of financial support from Gunns, the future of the Schemes is further complicated as maintenance and lease costs will need to be funded. This could either be achieved by changing the Schemes constitutions to convert them to contributing Schemes, otherwise a new RE with the willingness (and financial backing) to fund the upfront and ongoing costs needs to be found. Either way, for the Schemes to continue, a new RE needs to be engaged, as discussed in Section above. We have engaged forestry experts URS Australia Pty Ltd (URS), to undertake an independent viability analysis of the Schemes in order to assist the Administrators in evaluating proposals or offers that may be received for a replacement RE of the Schemes Schemes custodial bank accounts At the date of the Administrators appointment, c.$1.9m was held in the Schemes custodial bank accounts, predominately from tree crop harvests undertaken in FY11. Upon their appointment, the Receivers assumed control of the Gunns Group s bank accounts, including the Schemes custodial accounts. The Receivers do not have authority to transact on custodial accounts without the prior instruction of the Administrators as the Schemes custodial bank accounts fall outside the Lenders security interests. The Gunns Group s management and the Receivers have significantly progressed reconciling the funds held in the custodial accounts. The Administrators will review the reconciliation once completed and advise Growers of the outcome accordingly Insurance proceeds A limited number of Scheme plantations have been damaged by fire since the date of our appointment. GPL, together with Gunns Forest Products Pty Ltd (GFP), and the insurance assessors, have commenced the process of making an assessment of the damage to the plantations. This process can take several months due to: in some instances, Scheme plantations being too hazardous to visit from continued fire activity PPB Advisory 22

23 fire affected trees taking a minimum of four weeks to begin to regrow to allow an assessment of the level of damage and the ability of impacted plantations to regenerate the orderly completion of the insurer s assessment process. Once the assessment is complete we will work with the insurer to understand which specific woodlots have been damaged and the level of any prospective claims. 6.3 BANK GUARANTEES GPL held the following bank guarantees in its capacity as RE as a contingency in case of an insolvency event by Gunns (refer to Section for further details): $4m issued to GPL in its capacity as RE to be used in the event of Gunns financial difficulties $3.5m for maintenance of various GS Schemes. The Administrators attempted to draw on these bank guarantees shortly after the administration date, however the Receivers maintained that the bank guarantees fell within the Lenders security interests. The Administrators negotiated with the Lenders to receive $2.5m of the total value of the bank guarantees. This was approved by the Supreme Court on 19 December 2012 (court order S CI ). The Administrators are using the bank guarantees for the Growers benefit to fund the Schemes costs including: fire maintenance and suppression services regulatory compliance services general forestry maintenance management services viability assessment of the Schemes by URS administration costs of GPL. It is currently estimated that the $2.5m will be fully consumed by the costs of the above activities during PPB Advisory 23

24 7. INVESTIGATIONS An administrator s investigations need to identify matters that a liquidator, if appointed, may seek to pursue by: undertaking more detailed investigations recovering voidable transactions seeking compensation for breaches/contraventions by the directors/officers and/or other parties. Funds recovered by a liquidator would be available for distribution to creditors of the relevant Gunns Group company, subject to the Act s priority provisions. Certain recoveries (e.g. from voidable transactions) are claims that can only be pursued by a liquidator. Potential recoveries available to a liquidator would not be available to a deed administrator should creditors vote to accept any DOCA proposal. As Administrators, we have conducted investigations to the extent possible in the available time and will continue to review all the issues so far identified should creditors vote to place the Gunns Group into liquidation. As noted above, a liquidator has greater powers to pursue recoveries than an administrator or deed administrator. Each Gunns Group company was financially reliant on Gunns. Accordingly, discussions on the Gunns Group s solvency apply to all companies. 7.1 LIMITATIONS ON INVESTIGATIONS We have conducted investigations into the business, affairs and financial circumstances of the Gunns Group, as well as the conduct of the Gunns Group directors, officers and employees (Gunns Group Representatives). Our investigations to date have been limited for the following reasons: the short timeframe in which to undertake investigations and report to creditors, given the size and complexity of the Gunns Group s operations the volume of the Gunns Group s books and records to review the complexities and scale of the Schemes. Our investigations to date are based on information obtained from various sources including: Review of the Gunns Group s books and records including: board minutes financial statements/management accounts and reports legal documents Accounting and database information systems used by the Gunns Group Discussions with Gunns Group Representatives Reports as to Affairs (RATAs) and detailed questionnaires prepared by the Gunns Group directors (Directors). External professional reports, including audit reports Discussions with the Gunns Group s solicitors Publically available information (e.g. ASIC, Australian Securities Exchange (ASX)). 7.2 SUMMARY OF KEY FINDINGS Whilst our investigations are ongoing, we summarise our findings to date below: Reasons for failure: The Gunns Group ultimately failed due to an inability to meet its cash flow requirements following the emerging of a number of key issues/events from 2010 including: Continued declines in woodchip demand and prices in the market in which the Gunns Group participated, which negatively impacted nearly all facets of the business including: cash flows and profitability PPB Advisory 24

25 asset value impairments viability of the Pulp Mill project ability to raise capital The obligations of the Schemes were onerous and a significant drain on cash Restructuring attempts including challenging equity raisings were ultimately unsuccessful. Despite a series of asset sales to generate cash (to reduce debt and stabilise operations), the failed attempts to raise sufficient equity and the eventual loss of the Lenders support led to the Directors of the Gunns Group appointing the Administrators (Section 7.8). Date of insolvency: Our preliminary view is that the Gunns Group was insolvent from at least 21 September 2012 when it had insufficient funds to meet its debts as and when they fell due. However, the Gunns Group may have had solvency concerns potentially from: 12 September 2012 being the date at which the Gunns Group requested short term cash funding from its Lenders (via retention of proceeds from asset sales). That request was ultimately declined on 21 September July 2012 when the Gunns Group announced to the market further declines in hardwood export prices in the market in which the Gunns Group participated, that it had been unable to execute a capital raising and that it was now wholly reliant on the ongoing support from its Lenders (via retention of asset sale proceeds), suggesting significant going concern uncertainty at this time. March 2012 when an equity partner withdrew its proposal, the ability to source alternative equity appeared challenging with hardwood export prices in the market in which the Gunns Group participated continuing to decline, further eroding the viability of the Gunns Group. We understand that the Gunns Group took independent advice in relation to the issue of solvency during this timeframe. We are yet to form a conclusive view on the date of insolvency. Additional investigations will be required by a liquidator (if appointed) before a final view may be formed (Section ). We are also continuing to investigate the practices of the Gunns Group in respect of its use of third party funds (e.g. Schemes harvest proceeds) (Section 7.3.1). If these practices are found to be improper, and had the relevant transactions not occurred, it may have resulted in an earlier appointment of a voluntary administrator, and possibly an earlier date of insolvency. Voidable transactions: We have not finalised our investigations into voidable transactions as we are yet to form a conclusive view on the date of insolvency. A liquidator (if appointed) may identify voidable transactions that warrant further investigation and has the power to pursue those claims (Section 7.12). Auditor duties: The Gunns Group made material asset impairment charges in FY10, FY11 and FY12. As the FY10 and FY11 accounts were audited, and given the impact these charges had on the Gunns Group s financial performance and position for these years, we believe further investigations should be made into whether any Australian Auditing Standards may have been breached (Section 7.10). Insolvent trading: As we are yet to form a conclusive view on the date of insolvency we are unable to state definitively whether the Gunns Group traded whilst insolvent. Additional investigations will be required by a liquidator (if appointed) before a view may be formed (Section 7.11). Breaches of director duties: We have identified a number of potential breaches that require additional investigations by a liquidator including: use of third party funds for Gunns Group working capital purposes (Section 7.3.1) potential breaches of RE duties by GPL (Section 7.3.2). A liquidator (if appointed) may identify further potential breaches that warrant further investigation and has the power to pursue those claims (Section 7.3). Books and records: The Gunns Group books and records appear to have been adequately maintained (Section 7.9). PPB Advisory 25

26 7.3 POSSIBLE BREACHES OF DIRECTORS DUTIES We have identified certain areas of concern relating to actions of the Gunns Group Representatives which should be investigated further by a liquidator including: use of third party funds for Gunns Group working capital purposes (Section 7.3.1) potential breaches of RE duties by GPL (Section 7.3.2). If any offences are established, a liquidator may be able to recover funds for the benefit of creditors by: making a claim against Gunns Group Representatives (Section 7.6) claiming against insurance policies held by the Gunns Group (Section 7.5). We have notified the Gunns Group insurers of circumstances that may lead to potential claims. The following sections discuss potential breaches of the Gunns Group Representatives fiduciary duties to the Gunns Group. The Gunns Group Representatives have various fiduciary and statutory duties imposed on them by the Act. In particular, s180 to s184 require that directors and other officers of a company act: with due care and diligence in good faith and for a proper purpose properly with respect to using their position and information. GPL has a number of additional fiduciary and statutory duties conferred on it as RE by the Schemes constitutions and the Act. A summary of these duties is provided at Appendix E. Additionally, a company is required to keep written financial records that correctly record and explain its transactions, financial position and performance, and enable true and fair financial statements to be prepared and audited under s286 of the Act. The Administrators have commenced investigations to determine whether the Gunns Group and the Gunns Group Representatives breached their duties and powers. Our investigations are not complete due to the complexity of the issues involved. In the event the Gunns Group is placed into liquidation and a breach is established, a liquidator may: make a claim against any Gunns Group Representatives (Section 7.6) publicly examine any Gunns Group Representatives (Section 7.4). Insurance policies held by Gunns (refer Section 7.5) may provide an alternative source of recovery to creditors if any breaches are established by a liquidator. Notification of circumstances which may give rise to potential claims were provided by the Administrators to the Gunns Group s insurers on 30 November Use of third party monies to fund the Gunns Group s operations Initial investigations by the Administrators have found at least three instances whereby third party funds have likely been used by the Gunns Group for general working capital purposes (discussed in further detail below). Further investigations are required to identify: the magnitude of the funds due to each of the affected parties whether the actions of the Gunns Group constituted a breach of Directors duties whether the actions of GPL constituted a breach of RE duties, including breach of the Act, applicable constitutions, deeds and contracts. PPB Advisory 26

27 Grower harvest proceeds Investigations indicate that harvest proceeds due to the Schemes are outstanding from Gunns comprising: c.$5m to c.$10m of proceeds from harvests in FY12 relevant to the GS Schemes. The quantum is dependent on the resolution of whether lease extension payments were reimbursable by Growers. Up to c.$1.2m of proceeds from harvest in FY13 (prior to our appointment) relevant to the 2000 GS Scheme. The quantum is also dependent on the resolution of whether lease extension payments were reimbursable by Growers. c.$7k of thinning proceeds in FY12 relevant to Option 2 Growers of the 2000 and 2001 GPL Schemes. In respect of the GS Schemes, under the Marketing and Services Agreement between Gunns and GPL, Gunns is required to deposit the gross harvest proceeds into the relevant Schemes custodial account for the benefit of Growers immediately upon reconciling the proceeds of sale, but no later than 2 weeks after the end of the month in which the sale occurred. Proceeds from harvests from the above GS Schemes harvests appear to remain outstanding. In respect of the GPL Schemes, under the Constitutions and Wood Sale Agreements between Gunns and GPL, Gunns is required to pay the harvest proceeds (including commercial thinnings) to GPL before the end of the month in which Gunns raises a tax invoice. Commercial thinnings from the above GPL Schemes appear to remain outstanding S.E.A.S. Sapfor Forests Pty Ltd covenant holder proceeds Gunns sold sections of the Green Triangle forestry estate land and timber assets (GT Assets) in March The GT Assets were subject to covenants (S.E.A.S. Sapfor Covenants). Accordingly, $27.6m of the GT Assets sale proceeds were attributable to covenant holders and were to be payable in five instalments in Additionally, $6.1m of harvest proceeds were due and payable to the S.E.A.S. Sapfor Covenant holders during August and September Investigations indicate these harvest proceeds were not paid to covenant holders. The trustee of the S.E.A.S. Sapfor Covenants (Australian Executor Trustees (SA) Limited) commenced proceedings in the Supreme Court in late October 2012 seeking declaration as to whether the sale and harvest proceeds were held on trust for the benefit of the S.E.A.S. Sapfor Covenant holders. On 6 February 2013, the Supreme Court determined a preliminary question in favour of the trustee and held that the proceeds: were subject to a trust in favour of the S.E.A.S. Sapfor Covenant holders and did not form part of the property of the relevant Gunns Group companies fall outside the scope of the property caught by the Lenders security interests have been used by Gunns for working capital purposes. Further investigations are required by a liquidator (if appointed) to identify whether the Gunns Directors have breached their duties by not quarantining the proceeds in accordance with the trust for the benefit of the S.E.A.S. Sapfor Covenant holders Grower insurance monies During June to August 2012 premiums of $1.2m had been paid to GPL by Growers that had elected to take out insurance for FY13 for the GPL Schemes. The premiums were not forwarded to the insurer, Agricola. Our investigations have identified that the premiums were initially paid into a GPL bank account and then periodically swept into a Gunns bank account which was used for working capital purposes. The Receivers have informed us that they are not able to trace the premiums paid through the Gunns bank account. Grower representative IFM (Securities) Pty Ltd (IFM) (representing certain Growers in the GPL Schemes) has asserted that the disappearance of these premiums constitutes fraudulent activity by the Gunns Group Representatives. Further investigations are required to identify whether the actions of the Directors constituted: a breach of director s duties a breach of RE duties fraudulent activity. Those Growers who paid the above insurance premiums will likely have an unsecured claim against GPL (as discussed in Section 6.1) although a reconciliation of these monies and identification of affected Growers will be conducted by a liquidator (if appointed). PPB Advisory 27

28 7.3.2 Potential breaches of RE duties The Administrators have conducted investigations to determine whether the RE breached any of its duties. Investigations are continuing due to the complexity of the issues involved. Areas of continued investigation include: controls and authorisations of the GPL bank account (including IFM claims) entering into the Wood Supply Agreement with Gunns the commerciality of the fees Gunns were charging as a cost of sale lease issues (including lease expiry and head lease issues) payment of Scheme proceeds into custodial accounts the claims of Growers being represented by Macpherson and Kelly Lawyers (M+K Lawyers) (refer to Section for further details). 7.4 EXAMINATION OF OFFICERS OF THE GUNNS GROUP Should creditors vote to place the Gunns Group into liquidation, the liquidator will consider the public examination of the Gunns Group Representatives and other persons of interest. We have not conducted examinations as: to date our investigations have not been sufficiently advanced the administrations are without funds to meet the costs of such examinations. We consider there may be merit in conducting public examinations around a number of areas of interest including, but not limited to, the possibility of insolvent trading and potential breaches of directors or RE duties of the Gunns Group. The provisions of Div. 1 of Part 5.9 of the Act provide that an eligible applicant, such as a liquidator, may examine officers of a company about its examinable affairs and any other person who may be able to provide information relating to such affairs. Examinable affairs is a comprehensive term of wide ranging application and includes: the promotion, formation, management, administration or winding up of the corporation other affairs of the corporation the business affairs of a connected company of the corporation insofar as they appear to be relevant to the corporation or its affairs. If a court is satisfied that a summons for examination should be issued, the examinee is usually required to produce at the examination any specified books that are in the person s possession and relate to the corporation. 7.5 DIRECTORS AND OFFICERS INSURANCE The Gunns Group had in place: Investment Management Insurance Directors and Officers Insurance. The insurance is designed to protect the Gunns Group Representatives against any third party claims. The policies were not renewed by the Administrators on expiry at 30 November 2012, although we put the insurer on notice prior to this date of certain potentially claimable events. We have not disclosed the terms of the policies in order to avoid prejudicing any potential claims. The policies will be subject to further investigation should the creditors place the Gunns Group into liquidation at the forthcoming Second Meeting. 7.6 DIRECTORS PERSONAL FINANCIAL POSITION In order for a claim to be considered commercially viable to pursue it would be necessary for directors to have assets of value to satisfy any such claim. PPB Advisory 28

29 In the event that creditors resolve to place the Gunns Group into liquidation, the Liquidators shall continue investigations into any personal liability that the directors may have and consider whether it is necessary to seek statements of financial positions to be completed. 7.7 DIRECTORS EXPLANATION FOR THE GUNNS GROUP S DIFFICULTIES The Gunns Group Directors attributed the Gunns Group s financial difficulties to a material adverse change in hardwood export prices in the market in which the Gunns Group participated. Particularly, a substantial decline in stumpage prices achieved in the hardwood woodchip market. The Directors believed that up until the Lenders decision to decline the Gunns Group s request to retain monies from asset sales (which ultimately led to the appointment of the Administrators) restructure attempts would ultimately be successful. The Directors have informed us that, in their view, the primary driver of the Gunns Group s strategic and financial difficulties was the material decline in woodchip prices exported to Asia in the market in which the Gunns Group participated. By July 2012, the Directors formed the view that for the Gunns Group to continue it would require: 1. a successful capital raising 2. further asset sales 3. the Lenders support for the Gunns Group to retain certain proceeds from asset sales. The Lenders provided support by agreeing to the Gunns Group s retention of asset proceeds totalling $20m on 3 August 2012 and $4.8m on 6 September The Directors advised that, throughout this period, they believed there was a reasonable basis for the capital raising to be executed successfully, asset sales to continue and that they continued to have the support of the Lenders. The Directors advised the Lenders on 12 September 2012 that a debt compromise of a material portion of their debt was required to remain viable. On 21 September 2012, the Lenders declined the retention of $3.9m from asset sales. Another restructuring proposal was presented to the Lenders on 24 September 2012 which was declined resulting in the Directors resolving to appoint Administrators on 25 September Throughout the period July to September 2012 the Directors maintain they sought ongoing and regular legal advice in respect of the ongoing position of the Gunns Group including its solvency position. We understand that the Gunns Group took independent advice in relation to the issue of solvency during this timeframe. 7.8 ADMINISTRATORS REASONS FOR THE GUNNS GROUP S FAILURE Ultimately, the withdrawal of the Lenders support in September 2012 led to the Gunns Group appointing the Administrators. However, the key events (as noted above) from around mid-2010 onwards highlight some of the significant strategic challenges facing the Gunns Group which were contributing factors in the lead up to the appointment, specifically: the dramatic reduction of woodchip export volumes and prices during 2010 to 2012 in the market in which the Gunns Group participated which significantly challenged ongoing viability the Schemes were a significant cash drain to operations and any buyback of Growers interests remained challenging and subject to significant execution risk the Gunns Group s risk profile made it extremely difficult to: find an equity partner for the Pulp Mill project (particularly given the social implications and brand damage concerns of any equity partners) raise capital to reduce debt and stabilise operations. By July 2012 it was evident that, following further erosion of the hardwood export volumes and prices in the market in which the Gunns Group participated, further impairments and losses being recognised and an impending liquidity crisis, without the continued support of the Lenders via the retention of certain asset sale proceeds, the Gunns Group was destined to fail The continued sale of non-core assets allowed it some time to explore a restructure or delay an insolvency event. PPB Advisory 29

30 Given the Gunns Group had yet been unable to raise capital, a debt compromise was proposed to its Lenders in September 2012, around which time the Lenders declined to release further assets sale proceeds, triggering the Directors appointing the Administrators on 25 September A full timeline of the key events leading to insolvency are attached at Appendix A. We provide further details on these matters in the date of insolvency at Section BOOKS AND RECORDS Our investigations indicate that the Gunns Group s books and records appear to have been adequately maintained. Pursuant to s286 of the Act, a company must keep written financial records that correctly record and explain its transactions, financial position and performance, and enable true and fair financial statements to be prepared and audited. The company must keep these records for seven years after the transactions covered by the records are completed. Key observations from our initial investigations include: the Gunns Group prepared formal accounts on a half-yearly and yearly basis the last annual audited accounts for the Gunns Group were prepared as at 30 June 2011 the last unaudited annual accounts were prepared as at 30 June 2012 the last audited half-yearly GPL Schemes accounts were prepared as at 31 December 2011 the last audited half-yearly GS Schemes accounts were prepared as at 30 June 2011 management accounts were prepared on a monthly basis to June the Gunns Group maintained filing and archive systems both on-site at its head office. A liquidator will continue investigations into whether any breaches of the Act have occurred in relation to the maintenance of proper books and records, including: Failure to keep proper financial records (s286) Failure to take all reasonable steps to comply with financial records reporting requirements (s344) Requiring officers to exercise a reasonable degree of care and diligence in the exercise of their powers and discharge of their duties (s180) AUDITOR DUTIES The Gunns Group booked $1.4b of impairment charges between FY10 and FY12. We note that only the FY10 and FY11 accounts have been audited by the Gunns Group s external auditor. A liquidator, if appointed, will continue to investigate these matters and whether any Australian Auditing Standards may have been breached, with particular regard to whether impairment charges recognised were sufficient. The Gunns Group s audit committee met approximately six to seven times a year and the external auditors appeared to have attended most of these meetings. Based on our review of the audit committee minutes, the Gunns Group stated regularly it had assessed its assets for potential impairment indicators. However, given the significant quantum of the impairment charges and the high degree of variation between the writedowns/impairments identified in the half year review accounts as compared to the charges recognised in the end of year financial statements, we recommend that a liquidator (if appointed) investigate in more detail the figures and estimates used to value the Gunns Group s assets, as well as an potential breaches by the auditor of Australian Auditing Standards. PPB Advisory 30

31 7.11 INSOLVENT TRADING As we are yet to form a conclusive view on the date of insolvency we are unable to state definitively whether the Gunns Group traded whilst insolvent. Additional investigations will be required by a liquidator before a conclusive view can be formed. Company directors have a positive duty to prevent insolvent trading by not incurring debt when there are reasonable grounds for suspecting that the company will be unable to pay its debts as and when they fall due (s588g of the Act). Section 7.6 details general information for creditors on pursuing the Directors for recovery of insolvent trading claims and potentially available defences Determining insolvency Section 95A of the Act provides the following definition of solvency and insolvency : 1. a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable 2. a person who is not solvent is insolvent. In order to establish if a company is insolvent at any single point in time, it is necessary to consider the entire financial position of the company. This includes factors such as the value of the company s assets relative to its liabilities, and the nature of those assets and liabilities. Additionally, the extent to which cash is expected to be generated from future trading activities or available from other sources (e.g. asset sales, investors, financiers, etc.) is relevant to the overall insolvency consideration. Whilst we are required to consider the solvency of each of the companies within the Gunns Group, as the various entities within the Gunns Group were financially reliant on Gunns, we have considered the solvency of the Gunns Group on a consolidated basis Date of insolvency Our preliminary view is that the Gunns Group was insolvent from at least 21 September 2012 when it had insufficient funds to meet its debts as and when they fell due. However, the Gunns Group may have had solvency concerns potentially from: 12 September 2012 being the date at which the Gunns Group requested short term cash funding from its Lenders (via retention of proceeds from asset sales). That request was ultimately declined on 21 September July 2012 when the Gunns Group announced to the market further declines in hardwood export prices in the market in which the Gunns Group participated, that it had been unable to execute a capital raising, and that it was now wholly reliant on the ongoing support from its Lenders (via retention of asset sale proceeds), suggesting significant going concern uncertainty at this time. March 2012 when an equity partner withdrew its proposal, the ability to source alternative equity appeared challenging with hardwood export prices continuing to decline in the market in which the Gunns Group participated, further eroding the viability of the Gunns Group. We understand that the Gunns Group took independent advice in relation to the issue of solvency during this timeframe. We are yet to form a conclusive view on the date of insolvency. Additional investigations will be required by a liquidator (if appointed) before a final view may be formed. We are also continuing to investigate the practices of the Gunns Group in respect of its use of third party funds (e.g. Schemes harvest proceeds) (Section 7.3.1). If these practices are found to be improper, and had the relevant transactions not occurred, it may have resulted in an earlier appointment of a voluntary administrator, and potentially an earlier date of insolvency. PPB Advisory 31

32 Insolvency analysis Trading performance Sales The financial statements of Gunns Group for more recent periods show a significant decline in sales. This is most pronounced in FY12 where sales reduced by 35% from FY11, following the exit from native forestry operations (resulting in lower sales volumes) and declining timber prices. As a result the Gunns Group incurred a $134.4m loss from operations. On a pro-rata basis, sales for the first three months of FY13 were comparatively low to FY12, although an operating profit of $13.0m was generated for the period. Operating profits declined significantly after FY10 and became negative in FY12 ($134.4m). This loss followed the Gunns Group s exit from native forestry operations (discussed above), an increase in financing costs of $46.5m from FY11 and incurring an income tax expense of $51.2m (vs. a FY11 tax benefit of $107.9m). Profit/(loss) Significant items (impairments and write-downs) of $1.4b were recognised between FY10 and YTD FY13, with $768.6m recognised in FY12. These large impairments resulted in significant losses being incurred in FY11 ($454.7m), FY12 ($1.0b) and YTD FY13 ($4.7m). However, given these items are primarily non-cash they do not necessarily affect the underlying performance of the Gunns Group, but have a significant (adverse) impact on the balance sheet position. Figure 3: Summary historical financial performance FY10 to 25 September 2012 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Draft Draft Sales 704, , ,673 67,834 Other income 39,730 67,665 41,183 24,693 Income tax benefit/(expenses) 131, ,904 (51,162) - Net financing costs (18,628) (24,811) (71,352) (5,578) Operating expenses (691,033) (656,222) (458,714) (73,938) Operating profit/(loss) for the period 165, ,218 (134,372) 13,011 Other (share of equity accounted investees, movement in 13,193 (98,515) (116,557) 974 foreign exchange and revaluation of property, plant and equipment) Significant items (impairments and write-downs) (138,001) (471,389) (768,596) (18,635) Profit/(loss) for the period 41,107 (454,686) (1,019,525) (4,650) Source: Audited financial statements and draft management accounts Balance sheet A balance sheet test can be used to assess the solvency of a company by reference to its net asset position (i.e. the level of total assets relative to total liabilities). Our review of the financial records has found that the Gunns Group s reported net asset position was positive throughout the Review Period. However, given the quantum and timing of asset write-downs recognised between FY10 and FY12 ($1.4b) it is possible that some asset values remained materially overstated. If asset values were further impaired, a net liability position may have been created, which could result in an insolvency date in the period prior to our appointment. A liquidator will investigate these matters further, should the creditors vote to wind up the Gunns Group at the forthcoming Second Meeting. It should be noted, however, that even if a liquidator finds that the Gunns Group had overstated its assets and was in fact in a negative net asset position, the mere fact that its liabilities exceed its assets does not necessarily establish insolvency. PPB Advisory 32

33 Figure 4: Review of net assets FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts, ASX market announcements and Administrators analysis The Gunns Group s net asset position at various points between FY08 and 25 September 2012 is shown in Figure 4. The chart indicates total assets exceed total liabilities between 30 June 2008 and 30 June 2011 by between $1b and $1.5b. Subsequent to 30 June 2010, approximately $1.4b of impairments were recognised, reducing the net asset position to c.$20m. However, the net asset position may have been overstated after 30 June 2012 based on the market update provided on 6 August 2012 which stated the Gunns Group expected its net tangible assets value would be in the range of negative $50m to $150m at 30 June Additionally, based on our high-level impairment review (refer Section 8.1.4) there may have been some delays in impairment recognitions surrounding changes in market conditions affecting Scheme-related receivables and timber-related assets. This matter should be investigated in further detail if a liquidator is appointed Cash flow test Another method for assessing a company s solvency is the cash flow test. This test is more subjective, and takes into consideration a broader range of factors as to whether a company can pay its debts when they fall due. Based on available financial records these indicate that the Gunns Group was generally able to pay its debts as and when they fell due during the Review Period. Working capital Working capital is typically defined as a company s net current asset position (i.e. current assets less liabilities). It tests whether a company can meet its short-term liabilities from its short-term assets (i.e. those assets which are readily convertible to cash). A net current liability position demonstrates potential liquidity issues and indicates that a company may have to rely on alternative sources of cash (e.g. asset sales, increased overdraft facilities) in the short-term to meet its debts as and when they fall due. On this basis, our preliminary analysis of the Gunns Group s working capital position indicates obvious liquidity, and potentially solvency, issues in FY12 and FY13 (black line in chart). However, if we exclude interest-bearing loans from current liabilities (on the basis that the majority of the Gunns Group s facilities were classified as current in FY11 due to facility breaches rather than the Lenders demanding immediate repayment), the working capital position is different (blue line in chart). This analysis is inconclusive and suggests that more detailed investigations into the nature of each asset and liability category is required before assessing the Gunns Group s solvency position. PPB Advisory 33

34 Figure 5: Current assets less current liabilities FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts and Administrators analysis Other issues The Gunns Group began to suffer from operating losses from around mid It was recognised by management that, for a number of reasons (discussed in Section 2.5.1) the Gunns Group needed to restructure its operations to remain viable. A broad restructure program was implemented from 2010 to 2012 in an attempt to: Raise cash to reduce debt and stabilise operations Divest non-core and/or burdensome assets Find an equity partner for its Pulp Mill project (to vertically integrate its hardwood resources) During this time (i.e. FY11 to YTD FY13), net cash flows generated by the Gunns Group were c.($20m) and concerns about the Gunns Group s ability to achieve some of the key goals of the restructuring program began to emerge (and continued through 2012 when an equity partner proposing a $150m capital investment withdrew from the process). Reliance on Lenders By late 2011 the Gunns Group had announced further asset write-downs of $23.7m to the market and requested its Lenders provide some flexibility around the impending expiry (on 31 January 2012) of its remaining $452m debt facility. The Lenders agreed to certain amendments to the facility agreement which allowed the desired flexibility, but also provided for an ultimate outcome of full repayment by 31 December The Gunns Group appeared to have going concern issues from at least 2 July 2012 following material negative changes to stumpage prices in the market in which the Gunns Group participated achieved in the hardwood woodchip market (announced to the ASX on 2 July 2012). This had a substantial impact on both forecast cash flows and the value of assets ultimately leading to the first request to the Lenders for the retention of asset sale proceeds to meet working capital requirements. This request was granted. The Gunns Group provided cash flow forecasts to the Lenders on 3 July 2012 demonstrating the requirement for retention of asset sale proceeds of $54m over the coming six months to December 2012 to meet cash flow obligations and stabilise continuing operations. The Gunns Group also indicated that the Lenders debt would need to be compromised under the proposed restructuring plan (however, did not indicate the magnitude of the compromise). Concurrently, the Gunns Group was in the process of raising additional capital to fund operations and repay the Lenders as part of a restructure. Between August and early September 2012, the Gunns Group had been permitted to retain $24.8m of asset sale proceeds approved by the Lenders to assist in meeting short term cash flow requirements through to early September 2012 (proceeds were subject to the Lenders security interest). As such the Gunns Group was reliant on Lender support to maintain solvency during this period. The Gunns Group Representatives sought legal advice on the Gunns Group s solvency from July On 12 September 2012 the Gunns Group: PPB Advisory 34

35 made an additional request for the retention of proceeds from asset sales to fund ongoing operations advised the Lenders that without access to asset sale proceeds the only alternative available for the Gunns Group was administration advised the Lenders under the proposed restructure plan they would need to compromise a material portion of their debt. The additional request for retention of asset sale proceeds was declined on 21 September Based on our preliminary investigations to date, the Gunns Group was insolvent from at least 12 September 2012 when it had insufficient funds to meet its debts as and when they fell due. We reserve our right to amend this opinion should further investigations indicate a different date of insolvency. Particularly we note the Administrators continue to investigate circumstances that may contribute to the conclusion of an earlier insolvency date including: indications from initial investigations that payments by Gunns Group of Scheme tree crop sale proceeds into the Schemes custodial accounts were overdue during FY12 without an apparent revised payment arrangement agreed with GPL. GPL issued a formal demand notice to the Gunns Group in July 2012 GPL received of a number of default notices from landlords during Rather than arriving at a definitive conclusion on the insolvency of the Gunns Group, this analysis demonstrates that a thorough review of each asset and liability category needs to be undertaken by a liquidator as part of an all-encompassing investigation into the Gunns Group s solvency. Further information is available on the following issues: a timeline of Timeline of Key Events leading to the administration of the Gunns Group - Appendix A the restructuring process Appendix F GPL GPL was operationally reliant on its parent Gunns. GPL sub-contracted all Schemes plantation maintenance and harvesting to Gunns under various contracts. Gunns was generally paid for these services under a deferred fee arrangement (i.e. fees for its services were to be paid out of harvest proceeds). Accordingly, GPL was insolvent from at least the date at which Gunns was unable to support GPL (i.e. the date of insolvency of the Gunns Group). Further investigations will be required by a liquidator before a conclusive view can be formed. GPL s financial reliance on Gunns is discussed in Section Gunns Holdings Gunns Holdings has been dormant since the time Gunns was listed in c.1983 and has no assets or liabilities. The determination of an insolvency date is therefore not required VOIDABLE TRANSACTIONS The identification of voidable transactions is dependent on establishing whether the Gunns Group was insolvent at the time the transaction took place. We have identified a number of potential voidable transactions, however, as our investigations into the exact date of the Gunns Group insolvency are ongoing we are unable to state definitively what quantum of potential voidable transactions exist. A liquidator will be able to conduct more thorough investigations (e.g. potentially by way of examinations) to gather additional information to support current potential claims and identify other possible claims. We are required by the Act to comment on this issue because it is relevant to creditors if they are being asked to choose between a DOCA and liquidation, given that voidable transactions can only be recovered in a liquidation scenario Voidable transactions where insolvency must be proved For preferences (s588fa of the Act) and uncommercial transactions (s588fb of the Act) to be voidable, the Gunns Group company entering into the transaction must have been insolvent at the time of, or because of, the transaction. As noted in Section 7.11, we have not yet finalised our opinion as to whether the Gunns Group traded whilst insolvent. Because of this, we have not carried out any specific testing for preference payments or uncommercial transactions. PPB Advisory 35

36 Voidable transactions where insolvency is not required to be proved The following transactions do not require the relevant Gunns Group company to have been insolvent at the time of, or because of, the transaction in order for them to voidable: Unfair loans (s588fd) Unreasonable director related transactions (s588fda) Circulating security interest created within six months of the relation back day (s588fj) Arrangements to avoid employee entitlements (s596ab). To date, we have not identified any of the above voidable transactions. We attach at Appendix G, an IPA creditor information sheet Offences, Recoverable transactions and Insolvent Trading that provides further detail on each of the voidable transactions listed above. Should creditors vote to wind up the Gunns Group, the liquidator will conduct further investigations into these matters OTHER INVESTIGATIONS Grower class action M+K Lawyers have issued correspondence to the Administrators on behalf of a number of Growers, seeking damages and compensation for loss suffered from alleged unlawful conduct of: Gunns GPL in its capacity as RE the respective directors of Gunns and GPL. M+K Lawyers have made the following allegations in their correspondence: GPL, under the control of its directors, engaged in misleading or deceptive conduct in breach of the Act and ASIC s rulings There was non-disclosure of material information relevant to Growers, particularly in relation to material concerning the viability of the Schemes Statutory duties were breached by GPL as RE under s601fc of the Act GPL as RE failed to comply with the disclosure obligations in connection with the Product Disclosure Statements (PDS) as required by the Act. M+K Lawyers has advised that it is yet to finalise the quantum of clients claims, though the amount will likely be calculated on the sum of the net losses the Growers have allegedly suffered, all interest and establishment fees, any interest and costs on defaulting loans and the incidental and legal costs of pursuing the claims. Creditors should note that pursuant to s440d of the Act, a legal action cannot be commenced against a company under administration without the written consent of the Administrator, or the leave of the court. These allegations and the prospect of these claims will be further investigated should Gunns and GPL be placed into liquidation Shareholder class action (Sean Foley vs Gunns Ltd. Federal Court of Australia (Federal Court): NSD 399 of 2011) In April 2011 Gunns was served with a statement of claim by Maurice Blackburn Lawyers, as lawyers for a group of Gunns shareholders who acquired their interests between 31 August 2009 and 19 February 2010 this period. The claim makes a number of allegations regarding market disclosures during this period. The applicants are seeking declarations and unquantified compensation and damages. The matter is currently subject to Federal Court proceedings Insider trading claim We are aware that in November 2011 ASIC brought insider trading charges against the former chairman of the Gunns Group. The matter is currently subject to Launceston Magistrates Court proceedings and therefore it is not appropriate for us to comment further. PPB Advisory 36

37 8. GUNNS GROUP FINANCIAL BACKGROUND The Gunns Group s trading operations peaked in FY08, with modest operating profits generated in FY08 and FY09. Financial difficulties began to emerge from FY10, corresponding with major structural changes in the global hardwood market in which the Gunns Group participated that impacted negatively on the Gunns Group s export volumes and prices. In addition, large supplies of competitor product came on line from the maturity of significant areas of hardwood plantations established across Australia between 1997 and Additional plantations matured over the next 8 years, that would likely place further pressure on future timber prices. As a significant proportion of the Gunns Group s asset base related to its hardwood timber interests, adverse movements in hardwood prices in the market in which the Gunns Group participated also had negative implications for its asset values, with significant asset impairments and write-downs recorded between FY11 to 25 September 2012 (c.$1.4b in impairments and write-downs mostly relating to hardwood interests). Figure 6: Summary of the Gunns Group s financial performance and position FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts and Administrators analysis Figure 7: Summary of the Gunns Group s cash flow performance from FY08 to 25 September 2012 Source: Audited financial statements, draft management accounts and Administrators analysis Cash flows from operations were insufficient to fund investment costs (e.g. property, plant and equipment, timber and plantation assets, and payments for investments (Auspine, ITC, GS schemes and Bell Bay saw mill)), even after sale of $529m of non-current assets. Share proceeds were used to partly repay debt and fund these acquisitions, however, high debt and associated borrowing costs resulted in net cash over the period from FY08 to appointment date being eroded by c.$44m to negative $31m. PPB Advisory 37

38 8.1 GUNNS GROUP Consolidated financial statements Gunns was required to prepare and present consolidated financial statements that included all subsidiaries under its control in accordance with Australian Accounting Standard AASB 127. As such, a reference to the Gunns Group in this Section includes all entities in the Gunns Group s corporate structure as represented in Appendix H Overview The following sections summarise the Gunns Group s consolidated financial statements (Statement of Comprehensive Income, Statement of Financial Position and Statement of Cash Flows) for the financial years ended 30 June 2008 to 2011 (all audited), and the (unaudited management accounts) 30 June 2012 and the period 1 July 2012 to 25 September 2012 (together the Review Period). We have provided separate analysis of the financial background of GPL, the RE of the Schemes, in Section 8.2, and commented on Gunns Holdings in Section 8.3. Creditors should note that the financial position of the Gunns Group presented in this Section is not a direction reflection of the various components used to estimate the expected return to creditors (refer to Sections 5 (creditors) and 6 (Growers) for this analysis) Key events Figure 8: Summary of historical financial performance and net asset position Source: Audited financial statements, draft management accounts and Administrators analysis FY08 FY08 has been selected as the starting period to assess the Gunns Group s historical performance as it recorded the Gunns Group s peak revenue ($862m) and profitability levels ($59m). By the end of FY08, borrowings also peaked at $1.1b following the acquisition of Auspine Limited and its subsidiaries (Auspine) during the year for c.$220m. To reduce debt to more sustainable levels, the Gunns Group undertook a capital raising via a retail share offer. FY09 During FY09 market prices for timber remained steady at FY08 levels, however the Gunns Group s volumes started to soften due to reduced demand from Japan (impacted by the global financial crisis and natural disasters). This, combined with reduced Scheme activity (as new Scheme offerings had ceased), resulted in a decline in revenue by $92.6m (10.7%) to $769m and a slight decline in operating profits to $56m. In FY09 the final Scheme offering was completed, and proceeds of $334m from the institutional entitlement (share) offer were received. FY10 In FY10, revenue declined a further $65.3m (8.5%) to $704m as major structural issues in the global forestry industry began to emerge. In addition to declining demand, large supplies of Australian timber became available from maturing competitor hardwood plantations which likely placed further pressures on timber prices. PPB Advisory 38

39 Large asset write-downs of $138m were recognised in the FY10 profit and loss account relate primarily to Scheme receivables and a revaluation of the wine business prior to reclassifying it as an asset held to sale. As a result, a net loss before tax of ($103m) was recorded. Additional proceeds of $145m from share offerings ($115m institutional entitlement offer and $30m retail share offering) were received and of this, $106m was used to acquire a hardwood sawmilling timber business, ITC Timber Pty Ltd (ITC), and the RE rights of the GS Schemes, with the balance of funds flowing to general working capital. At this time the Gunns Group commenced a broad-based restructure and major divestment process for non-core businesses (refer to Appendix F for further details). FY11 to YTD FY13 (25 September 2012) Revenue continued to decline from FY11 onwards as a result of the ongoing divestment of non-core businesses and continued adverse market conditions in the hardwood segment (the Gunns Group s primary revenue source). These factors also led to significant asset impairments in FY11 ($471m) and FY12 ($769m). As a result of declining revenue and recognition of large impairments and write-downs, losses were incurred from FY11 to 25 September 2012 totalling c.$1.5b Financial performance/profit and loss account Over the past two years, the Gunns Group reported large trading losses due to: significant decline in revenue from FY08 the closure of a number of forest and timber assets due to adverse market conditions resulting in significant impairment charges in the profit and loss account impairments recognised to the Grower loan book due to the underlying Scheme asset becoming impaired as timber prices declined in the market in which the Gunns Group participated (loans are secured by the value of the Growers investments in the Schemes) divestment of non-core businesses and write-down of related assets (e.g. construction and winery operations). Figure 9: Historical profit and loss accounts FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft TOTAL OPERATIONS Revenue 861, , , , ,673 67,834 Other income 46,089 61,925 39,730 67,665 41,183 24,693 Employee benefits expenses (123,971) (127,241) (124,044) (138,878) (60,444) (14,859) Impairments and write-offs (7,598) - (138,001) (471,389) (768,596) (18,635) Other expenses (638,376) (593,258) (566,989) (517,344) (398,270) (59,080) Profit/(loss) before financing costs 138, ,768 (85,260) (439,264) (780,454) (46) Net financing cost (60,695) (40,081) (18,628) (24,811) (71,352) (5,578) Share of profit/(loss) of equity accounted investees (896) 974 Profit/(loss) before tax 77,835 71,231 (103,304) (463,389) (852,702) (4,650) Income tax benefit/(expense) (18,679) (14,993) 131, ,904 (51,162) - Profit/(loss) for the period 59,156 56,238 28,498 (355,485) (903,864) (4,650) Other comprehensive income Foreign exchange translation differences (455) (18) - Revaluation of property, plant and equipment ,776 (98,746) (115,643) - Other comprehensive income for the period, net of tax ,609 (99,201) (115,661) - Total comprehensive income attributable to equity 59,156 56,238 41,107 (454,686) (1,019,525) (4,650) holders of the company Note: The financial statements split revenue between continuing and discontinuing operations based on an annual assessment by management (including restating prior year comparatives). The above table does not take into account any subsequent restatements of prior year results the figures reflect the current year of operations reported at the end of relevant period. Source: Audited financial statements and draft management accounts PPB Advisory 39

40 A market update was released on 6 August 2012 indicating that management expected that the net tangible asset position would be negative $50m to $150m. The associated impairments have not been recognised in the table above (e.g. at or after 30 June 2012). Revenue Figure 10: Breakdown of total revenue FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Sale of goods 700, , , , ,885 55,524 Rendering of services 161, , ,304 98,473 99,789 12,310 Total revenue 861, , , , ,674 67,834 Source: Audited financial statements and draft management accounts Adverse market pressures appear to have accounted for most of the revenue decline from FY08 to FY11. In FY11 and FY12, substantial segments of revenue were discontinued, predominately relating to the sale of the Triabunna mill at the end of 2011 and the exit from the Tasmanian native timber industry in FY12. The contribution of key revenue streams to total revenue over the Review Period is set out in the figure below. Figure 11: Key revenue streams Note: The FY08 revenue shown in the chart above is overstated by c.$1m; management was unable to fully reconcile the segmented revenue back to the audited financial statements and has attributed the difference to intercompany sales. This discrepancy would only have a c.1.7% impact overall, and as such we consider the segmented revenue split in FY08 to be a reasonable representation. Source: Gunns Group management There are two main revenue categories, each with two sub-categories as described below: 1. Sale of goods: (a) Forest products forestry and plantation management and the processing and sale of wood fibre (b) Timber products processing, manufacture and sale of sawn timber, veneers and other timber products 2. Rendering of services: (a) Scheme income from the management of agricultural Schemes (primarily forestry) (b) Other includes revenue from construction, retail, wine and other minor operations. Management undertook a restructure of the business in FY10 to divest/close non-core or low yielding assets. The sales/closures occurred during FY11 and early FY Revenue sale of goods (forestry and timber products) Revenue from the sale of goods relates mostly to the sale of timber and forestry products including hardwood, softwood and sawn timber (both softwood and hardwood). It accounts for the majority of the Gunns Group s revenue, and has been heavily affected by the strong decline in the export components of this revenue category since FY08, as shown in the chart below. PPB Advisory 40

41 (a) Forest Products Figure 12: Segmented historical sale of goods revenue Source: Gunns Group Management and Administrators Analysis Hardwood Historical volumes Historically, hardwood woodchips was the Gunns Group s primary export product, with softwood being a comparatively minor income stream. Falling volumes of export hardwood woodchips has been a major factor in the decline of the Gunns Group s export revenue, with Tasmanian volumes dropping from 1.8m bone dry metric tonnes (BDMT) (approximately 3.6m green metric tonnes (GMT)) in FY08 to 0.07m BDMT (approximately 0.13m GMT) in FY12. The decline was driven by poor export woodchip market conditions and the Gunns Group s exit from native forestry operations which resulted in the subsequent sale of the Triabunna hardwood mill in 2011, as this predominately processed native forest wood. Figure 13: Export woodchips volumes and revenue Note: Hardwood volumes and revenue are exclusive of Scheme tree crop sales. Traded timber and forestry goods are usually measured in either GMT or BDMT. As a guide BDMT is roughly half GMT. Source: Gunns Group Management and Administrators analysis PPB Advisory 41

42 Figure 14: Hardwood woodchips historical export volumes and prices Note 1: The decline in the Gunns Group s FY12 volumes was due to the exit from native forestry operations and poor export woodchip market conditions. The improvement in the Gunns Group s (Tasmanian) average export price in FY12 compared to FY11 and the Tasmanian export market price is due to the exit from native forestry operations. Plantation timber generally attracts a premium price over native forest products. Tasmanian export price reflects the higher proportion of native forest woodchips, which sell at a discount to the plantation resource. Source: The Gunns Group s volumes and export prices per management. Australia volumes and export prices (WA and Tas) from the Australian Government Department of Agriculture, Fisheries and Forestry (ABARES), Australian Forest and Wood Products Statistics (AFWPS) March and June Quarters 2012 Export Statistics Historical prices The Gunns Group s Tasmanian operations achieved an average hardwood export price of $185/BDMT free on board (FOB) in FY09 dropping to $163/BDMT FOB in FY11 as a result of falling prices in the market in which the Gunns Group participated. The increase in the Gunns Group s average price (dark blue line) in FY12 was due to a change in focus to 100% plantation timber, which generally attracts a premium price as compared to native forest products. The move away from native forest sourced timber stemmed from ongoing social pressures and shifts in customer demand. The increase in the average hardwood export price achieved in FY12 did little to offset the impact of the significant decline in volumes following the exit of native forestry products (refer Figure 13 export woodchips volumes and revenue). Causes of volume and price deterioration The key factors that affected volume and price were: 1. Hardwood export market: Oversupply of hardwood woodchips and a decline in demand for paper created continued downward pressure on prices in the market in which the Gunns Group participated and demand for the hardwood export business. Domestic supply expanded from FY10 as significant areas of competition hardwood plantations reached maturity. This was further compounded by the discounting of hardwood woodchips by competitors over the past 12 months following the collapse of a number of managed investment scheme companies and stressed market participants. Simultaneously, there was an oversupply of woodchips from the South-East Asian region (in particular, Thailand and Vietnam). 2. Reduced demand from Japan: Japan is the largest importer of hardwood woodchips in the world and the largest importer of Australian woodchips. There has been a structural decline in the Japanese pulp and paper sector due to aging infrastructure and resultant closures of processing facilities. Additionally, Japan has experienced depressed market conditions over the past three years due to the global financial crisis and natural disasters (earthquake and subsequent tsunami). Combined, Japanese demand for hardwood woodchips significantly declined over the Review Period. 3. Strengthening Australian dollar: The AUD has continued to strengthen in recent years (appreciation of AUD vs USD of c.30 cents FY09 and 25 September 2012) eroding the competiveness of Australian exports and increasing domestic competition from relatively cheaper imported products. PPB Advisory 42

43 4. Reduced prices for Chinese hardwood exports in FY12: China has significantly increased activity as a result of a large increase in the consumption and production of pulp and paper products, with trade increasing 600% since FY07. Chinese customers pay less than Japanese customers, which has added to the continued downward pressure on prices. However, the impact of the increase in demand from China did not off-set the impact of the decline in demand by Japanese customers. Softwood Softwood woodchips are exported and sold domestically. Overall, softwood revenue has marginally declined since FY08, but as it makes up a small proportion of the total sale of goods revenue (FY08: 11.5%; FY %), the impact on the Gunns Group was minimal. Softwood woodchips exports have been influenced by many of the same drivers as hardwood woodchips including reduced demand from Japan and the strengthening of the AUD. This meant that softwood woodchip export prices (Tasmania) dropped from c.$90/gmt FOB to an average of c.$70/gmt FOB from FY10 onwards, negatively impacting revenue. (b) Timber Products Domestic sawn timber Figure 15: Historical sawn timber revenue (left chart) and pricing (right chart) Source: Gunns Group management and Administrators Analysis Sawn timber has historically been a small segment of the sale of goods revenue category (refer to Figure 15) but has increased in importance with the discontinuation of several revenue segments, predominately the exit from Tasmanian native forestry operations. The majority of sawn timber was sold domestically with very small amounts exported. Sawn timber prices have been relatively flat over recent years, mainly due to depressed demand from the domestic housing market. The later increases in the Gunns Group s sawn timber revenue were due to the acquisition of the Bell Bay saw mill in mid-fy11 from Forestry Enterprises Australia Ltd (FEA). This provided significant increases in volume, contributing 41% of domestic sawn timber revenue in FY Rendering of services Figure 16: Historical services revenue FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Scheme revenue 127,050 71,434 14,369 23,136 1, Construction 31,001 32,492 38,534 29,672 4,461 - Other 3,346 3,713 67,401 45,665 93,910 12,250 Total 161, , ,304 98,473 99,789 12,310 Source: Audited financial statements and draft management accounts Note: The FY11 the Gunns Group s financial statements have not been restated to take into account a change in accounting policy by GPL to exclude harvest proceeds attributable to Growers. GPL changed its policy in FY12 and restated the FY11 comparative figures. The net effect of this change is nil as revenue is reduced by amounts attributable to Growers and expenses are also reduced by the same amount (i.e. the amount which would have been paid to Growers). The effect of this change is that the Gunns Group s FY11 shown above is approximately $14m higher than GPL s restated revenue amount. PPB Advisory 43

44 This category of revenue is broadly broken down into: Scheme revenue (refer to section 10.2 for further detailed commentary on GPL s historical financial performance) Construction services Other - insurance premiums (provided by a captive insurer of the Gunns Group Evergreen Insurance), leasing and management services. The decline in rendering of services revenue is attributable to the following two key factors: (a) Cessation of new Scheme revenue Scheme revenue predominately relates to revenue generated by GPL (acting as RE) and the Gunns Group s management of Scheme plantations (as subcontracted from GPL) (i.e. amounts invoiced to Growers). During FY08 and FY09 this revenue was mainly derived from the provision of establishment and management services to the various woodlot, vineyard and walnut plantations/projects. Subsequent to FY09, no new projects were established. The increase in FY11 over FY10 was due to GPL acquiring the RE rights to the nine GS Schemes. (b) Discontinuation of non-core businesses A number of underperforming, non-core businesses were sold/closed during FY10 and early FY11, the largest being the Gunns Group s construction business. Revenue from other services grew after FY10 due to the acquisition of the GS Schemes RE rights. Gunns Forest Products Pty Ltd (GFP), a subsidiary of Gunns, provided leasing and management services to the GS Schemes. Upon harvesting of the GS Schemes, these costs are recouped plus a margin. However, if harvest proceeds were insufficient to cover costs already incurred, the shortfall is forgone as there is no recourse back to the Grower. The Gunns Group recognises this revenue over the life of the Scheme (on a straight line ( accrual ) basis) estimating the future harvest proceeds. The Gunns Group had a right to earn revenue from the Schemes through various sub-contracting arrangements (refer Section 8.2.2). Other income Figure 17: Other income FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Other income 46,089 61,925 39,730 67,665 41,183 24,693 Source: Audited financial statements and draft management accounts Other income relates to items such as: gains arising from fair value changes in assets gains on business acquisitions gains on sale of non-current assets other income received and not attributable to sale of goods or rendering of services. Expenses We have included commentary on the following key expenditure items which have contributed to the decline in profitability over the Review Period. Employee benefits expenses Figure 18: Historical employee benefits expense FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Employee benefits expenses (123,971) (127,241) (124,044) (138,878) (60,444) (14,859) Employee benefits expenses as % of sales 14.4% 16.6% 19.8% 22.6% 19.2% 24.1% Source: Audited financial statements and draft management accounts Employee expenses remained largely consistent from FY08 to FY10, with a small increase (by 12%) in FY11 which management attributes to changes in the mapping of employee expenses in the finance system. The significant reduction in FY12 is the result of the exit from various forestry products and timber producing assets, and non-core businesses. PPB Advisory 44

45 Whilst employee expenses reduced in FY12 in nominal terms, employee expenses have increased as a percentage of sales. Impairments, write-downs and other expenses We have focussed our commentary on impairment items to the period FY10 to YTD FY13 as the amounts recorded in FY08 ($7.6m) and FY09 (nil) are immaterial. We have included in the table below the impairments/write-downs presented in the half-year accounts for FY11 and FY12 to illustrate the significant variances between those figures and the impairments recognised at the end of the respective financial years. Given the quantum of these write-downs (particularly during FY12), if they had been brought forward, this may have impacted on the level of support the Lenders were willing to provide to the Gunns Group and potentially resulted in earlier solvency issues. Figure 19: Historical impairments and write-downs YTD $m FY10 HY11 FY11 HY12 FY12 FY13 Impairment and closure costs of forest products assets Impairment and closure costs of timber processing assets Impairment in forestry land and roads Impairment in Scheme services receivable Impairment of equity investments Impairment of FEA Limited Investment Impairment of goodwill and associated intangibles Impairment of loan receivables held for sale Impairment of pulp mill costs Impairment of wine business assets Loss from change in net market value of biological assets due to change in the export woodchip market Movement in fair value of Scheme investments (0.6) Provision for onerous contract Total impairments recognised through P&L Source: Audited financial statements and draft management accounts The impairments/write-downs recognised in FY10 ($138m) relate primarily to Scheme receivables and a revaluation of the wine business prior to reclassifying it as an asset held for sale. Factors underlying the $471m of impairments and write-downs in FY11 include: restructure of the Gunns Group exit of native forest based products decline in demand from Japanese customers (refer to revenue commentary). Figure 20: FY11 impairments and write-downs summary $m Description 218 Auspine assets (mostly reflecting depressed sale value for residual land and forest assets in the Green Triangle) 88 Exit from Tasmanian native forestry operations (sawmill, timber value, roads etc.) 88 From downward revaluation of remaining/residual forestry assets 77 Scheme related assets were impaired to reflect lower expected stumpage values and also the reduced market value of the Grower loan book. 472 Source: ASX market updates and financial report commentary Note: We have been unable to reconcile the summary impairment commentary provided in the ASX market updates and financial report commentary to the specific line-by-line impairment costs in figure 16. However, on balance, the values and commentary appear reasonable. PPB Advisory 45

46 During FY12, significant asset impairments of $769m were recognised as a result of: the reduction in timber/forestry prices in the market in which the Gunns Group participated in FY11/12 (refer to revenue commentary) the Gunns Group s decision to exit the native forest businesses uncertainty surrounding the Pulp Mill project (refer to Section 7 for further details). Figure 21: FY12 impairments and write-downs summary $m Description 360 Tasmanian forest estate write down 217 Impairment of the capitalised costs of the Pulp Mill project 172 Scheme asset impairments. The decline in forestry prices resulted in the Gunns Group services receivable (arising from costs already incurred in performing its leasing and management obligations, intended to be recovered from its interests in net harvest proceeds) being impaired and the recognition of a c.$87m provision for an onerous contract as the anticipated costs to complete its future leasing and management obligations based on current timber prices was greater than future estimated net harvest proceeds. 749 Source: ASX market updates and financial report commentary Note: We have been unable to reconcile the summary impairment commentary provided in the ASX market updates and financial report commentary to the specific line-by-line impairment costs in figure 16. However, on balance, the values and commentary appear reasonable. Net financing costs Figure 22: Net financing costs FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Financial income 19,789 21,151 24,339 20,806 14,926 3,876 Financial expenses (80,484) (61,232) (42,967) (45,617) (86,278) (9,454) Net financing cost (60,695) (40,081) (18,628) (24,811) (71,352) (5,578) Source: Audited financial statements and draft management accounts Net financing costs were comparatively high in FY08 and declined in FY09 and FY10 due to the Gunns Group undertaking a capital raising which was used to reduce debt (discussed in Section ). The increase in net financing costs in FY12 is attributable to facility extension fees ($40.4m). PPB Advisory 46

47 8.1.5 Financial position/balance sheet The Gunns Group s financial statements reported a positive net asset position throughout the Review Period. However, the position deteriorated significantly after FY10 as a result of poor trading performances and material write-downs/impairments of significant assets. From FY10, net assets reduced from $1.5b to $19.6m as at 25 September The most significant reduction occurred between FY11 and FY12, with a negative movement in net assets of over ($1.0b). The Gunns Group s working capital position also deteriorated over the Review Period (i.e. current assets less current liabilities). Figure 23: Historical balance sheets 30-Jun-08* 30-Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current assets Cash and cash equivalents 9,522 8,068 7,365 12,067 7,047 6,073 Trade and other receivables 181, , , ,949 77,736 88,351 Inventories 167, , , ,524 13,547 52,688 Biological assets 39,370 31,005 33,180 1,698 2,815 2,822 Assets held for sale - 1,716 77, , ,171 - Income tax receivable 4,285-12, Other 2,325 11,334 9,546 6,456 2, Total current assets 404, , ,734 1,216, , ,911 Non-current assets Receivables 327, , ,868 91,914 82, ,870 Biological assets 485, , ,984 18, , ,444 Other financial assets 11,581 11,847 23,683 36,585 36,767 85,916 Investments in equity accounted investees 8,756 7,231 7,123 7, Property, plant and equipment 1,285,910 1,347,652 1,328, , , ,829 Intangible assets 56,540 55,240 62,860 48, ,985 Deferred tax assets 1, Total non-current assets 2,176,649 2,134,446 2,103, , , ,044 Total assets 2,580,801 2,456,245 2,564,354 1,912, , ,955 Current liabilities Trade and other payables, incl. derivatives 188, , , , , ,472 Interest-bearing loans and borrowings 353, , , , , ,394 Current tax payable - 18,071-5,016 5,906 5,906 Provisions 15,702 14,593 13,493 19,089 13,020 16,759 Liabilities held for sale - - 1,030 48, Other 19,225 4,823 4,969 2, Total current liabilities 576, , , , , ,179 Non-current liabilities Trade and other payables, incl. derivatives 56,481 55,900 56, ,646 31,648 Interest-bearing loans and borrowings 705, , ,924 35,000 33,714 22,011 Deferred tax liabilities 246, , , Provisions 13,099 12,140 18,708 18,226 95,739 99,518 Total non-current liabilities 1,021, , ,394 53, , ,190 Total liabilities 1,598,558 1,134,349 1,071, , , ,369 Net assets 982,244 1,321,897 1,492,891 1,054,719 24,250 19,586 Equity Issued capital 532, ,504 1,012,450 1,037,213 1,037,213 1,037,200 Reserves 269, , , ,232 57,172 57,172 Retained earnings 180, , ,008 (156,726) (1,070,135) (1,074,786) Total equity 982,244 1,321,897 1,492,891 1,054,719 24,250 19,586 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts PPB Advisory 47

48 Cash and cash equivalents Figure 24: Historical cash at bank and bank overdraft position 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Cash at bank 9,522 8,068 7,365 12,067 7,047 6,073 Bank overdraft (51,350) (9,502) (17,675) (71,489) (34,749) (37,026) Total (41,828) (1,434) (10,310) (59,422) (27,702) (30,953) Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts The cash/cash equivalents balance remained relatively consistent over the Review Period. The Gunns Group also operated an overdraft facility (which is included in current interest-bearing loans and borrowings in the balance sheet) that appears to have fluctuated significantly over the Review Period. As a result, the net cash position ranged between a low deficiency of ($1.4m) and a peak of ($59.4m) between FY08 and YTD FY13. Movements in the Gunns Group s cash position are discussed in more detail in Section Trade and other receivables Figure 25: Trade and other receivables 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current Trade debtors 88,767 63,255 86,052 56,097 42,831 35,288 Less: Accumulated impairment losses (3,366) (388) (516) (435) (91) (127) Trade debtors 85,401 62,867 85,536 55,662 42,740 35,161 Loans receivable 79,206 31,677 29,327 36,228 30,452 28,446 Less: Accumulated impairment losses (688) - - (750) - - Total loans receivable 78,518 31,677 29,327 35,478 30,452 28,446 Other debtors 17,686 11,817 14,419 11,809 4,543 24,744 Total current trade & other receivables 181, , , ,949 77,735 88,351 Non-current Other ,078 Loans receivable 211, , ,002 17, , ,901 Less: Accumulated impairment losses (5,401) (14,808) (19,837) (13,477) (47,336) (46,796) Loans receivable 206, , ,165 3,689 80,834 66,182 Deferred loan consideration 6,590 6,590 7,088-4,371 3,221 Receivable for services in relation to MIS 114, , ,615 88,225 (2,555) 58,467 Total non-current receivables 327, , ,868 91,914 82, ,870 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Trade and other receivables (current) reduced broadly in-line with the decline in revenue and fell significantly when the Scheme loan book ($35m) was reclassified to assets held for sale in FY12. Non-current loans receivable (includes loans to the Schemes Growers) decreased in FY11 due to most of the receivable being held for sale. It was later reversed in FY12. Additionally, Receivable for services in relation to Schemes was impaired subsequent to FY10. The further decline in FY12 was due to this item being reclassified as held for sale. PPB Advisory 48

49 Inventories Figure 26: Historical inventory 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Total inventories 167, , , ,524 13,547 52,688 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Inventories reduced significantly in FY12 to $13.5m (FY11: $140.5m) following the Gunns Group s exit from the Tasmanian native forestry operations, which resulted in the sale of remaining native forest hardwood timber inventories and reclassification of other timber assets to assets held for sale. Biological assets Figure 27: Historical biological assets 30-Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Draft Draft Current biological assets 31,005 33,180 1,698 2,815 2,822 Non-current biological assets 338, ,984 18, , ,444 Closing balance 369, ,164 20, , ,266 Source: Audited financial statements and draft management accounts Biological assets relate to standing timber and horticultural assets. Standing timber value was estimated by the Directors annually based on the fair value expected at the future harvest date, the direct and indirect costs of establishment, net present value of future cash flows of plantation timber and native forests (exited in FY11). Horticultural assets relate to grape vines and olive trees and were valued in a similar fashion to the standing timber assets. Current biological assets represent amounts to be realised from harvest within the 12 months following the balance sheet date. The significant reduction in biological assets in FY11 is attributed to the reclassification of c.$300m of biological assets as assets held for sale. This was reversed in FY12 as management deemed it was no longer appropriate to recognise these assets as held for sale. The total value was written-down by $146m, leaving a balance of c.$113m. Assets held for sale Figure 28: Historical assets held for sale 30-Jun Jun Jun Sep-12 $'000 Audited Audited Draft Draft Deferred lease & management fees ,495 - Green Triangle land and trees - 141, ,000 - Scheme loan book - 115, Tamar Ridge wines 35, Tasmanian forest estate - 654, Timber - hardwood & softwood 9,506 32,890 97,718 - Other 32,731 8,732 31,957 - Closing balance 77, , ,170 - Source: Audited financial statements and draft management accounts Management undertook an assessment at each reporting date to determine which assets meet the held for sale criteria. Assets (and associated liabilities) are reclassified to held for sale if their carrying amount will be recovered principally through sale rather than continuation of use. Amounts maybe reclassified out of the held for sale account if management believes circumstances have changed and the balance is more accurately classified in a different account. In FY11 the significant increase in the held for sale account was attributed to the reclassification of TAS Estate (c.$650m) from other asset categories. This was later reversed in FY12 following a decision to seek investment in the estate and retain the asset. PPB Advisory 49

50 Property, plant and equipment Figure 29: Historical property plant and equipment summary 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Carrying value at beginning of year 882,812 1,285,910 1,347,652 1,328, , ,832 Additions 410, , , ,011 43,305 1,149 Amortisation and depreciation (25,149) (28,511) (30,536) (25,702) (15,655) (2,539) Transfers/classified as held for sale (17,216) (1,716) (60,245) (500,852) 340,386 80,308 Disposals (12,184) (8,935) (30,310) (11,931) (20,613) (25,286) Impairments - (2,447) (19,841) (340,295) (321,861) (18,635) Revaluations (incl. foreign exchange) 47,121 (11,323) 4,123 (81,913) (238,149) - Total property, plant and equipment 1,285,910 1,347,652 1,328, , , ,829 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Property, plant and equipment reduced significantly from $1.3b in FY08 to $281m in FY12. Impairments associated with market price deteriorations and the exit and closure of loss-making businesses accounted for $684m of the reduction. A further $222m relates to the re-classification of various assets to assets held for sale, primarily due to the decision to exit from the Tasmanian native forestry industry. Additionally, significant devaluations in FY11 and FY12 reduced other asset values by over $300m. Intangibles Figure 30: Historical intangibles 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Intangible assets 56,540 55,240 62,860 48, ,985 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Intangible assets include the right to receive a share of the future harvest income from the GS Schemes. A large writedown from $48.8m to $7k was observed in FY11, which was mainly due to impairments of the GS Schemes assets following a review of harvest values. The increase in FY13 of $3.0m follows a reversal of the GS Scheme-related asset from assets held for sale. Trade and other payables Figure 31: Historical trade and other payables 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current Trade creditors 93,220 68,653 88,858 57,159 55,023 44,171 Derivatives at fair value 10,497 13,265 21,650 16,738 21,491 21,209 Cash flow hedge at fair value 3, Other creditors and accruals 81,456 56,266 59,573 61,923 95, ,092 Total 188, , , , , ,472 Non-current Covenant holder liability in relation to standing timber and land interest 56,481 55,900 55,733-31,216 31,219 Deferred payable Total 56,481 55,900 56, ,646 31,648 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Trade creditors steadily declined from FY10 ($88.9m) to 25 September 2012 ($44.2m) in line with the cessation of the majority of the Gunns Group s Tasmanian native forestry operations. PPB Advisory 50

51 Figure 32: Creditor ageing profile Note: The FY11 aged creditor profile contains a minor discrepancy totalling $619k (1.1%) compared to FY11 trade creditors figure of $57.2m. Source: Gunns Group Management Creditor ageing profile indicates how efficiently a business is meeting its creditor payments. The above chart highlights an increasing percentage of the creditor book shifted to the over 90 days category, which is consistent with a business experiencing cash flow pressures. Other creditors and accruals increased in FY12 and FY13 due to the capitalisation of debt extension fees of $40m and $38m respectively. Covenant holder liability reduced in FY11 and subsequently increased in FY12 due to a reclassification to liabilities held for sale (related to Green triangle land and trees) and then being reversed (refer to Section for further background on this item). Interest-bearing loans and borrowings Figure 33: Historical interest-bearing loans and borrowings 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current interest-bearing loans and borrowings 353, , , , , ,394 Non-current interest-bearing loans and borrowings 705, , ,924 35,000 33,714 22,011 Total 1,058, , , , , ,405 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Gunns Group substantially reduced its borrowings by c.$400m during FY09 following a capital raising and asset sales. Since then, further reductions of c.$200m have been achieved. The majority of interest-bearing loans became current in FY11 as the facilities became repayable within the following 12 month period. Tax balances Figure 34: Historical current and deferred tax balances 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Income tax recievable 4,285-12, Deferred tax assets 1, Current tax payable - (18,071) - (5,016) (5,906) (5,906) Deferred tax liabilities (246,670) (228,202) (147,240) - (13) (13) Total (241,076) (246,273) (134,483) (5,016) (5,920) (5,919) Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts General tax movements have been minimal over recent financial years. Current tax payable is the expected tax payable on the taxable income for the year, using tax rates as at the balance sheet date. It also takes into account any adjustments to tax payable in respect of previous years. PPB Advisory 51

52 The de-recognition of the deferred tax liability in FY11 is due to an increase in deferred tax assets recognised during the year, which negated the liability as at 30 June The majority of the reduction in deferred tax liability relates to recognition of $80m of tax losses. Provisions Figure 35: Historical provisions 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current provisions 15,702 14,593 13,493 19,089 13,020 16,759 Non-current povisions 13,099 12,140 18,708 18,226 95,739 99,518 Total 28,801 26,733 32,201 37, , ,277 Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Provisions increased significantly from $37.3m in FY11 to $108.8m in FY12 due to provisioning for onerous contracts associated with Scheme commitments. Liabilities held for sale Figure 36: Historical liabilities held for sale 30-Jun Jun Jun Jun Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Liabilities held for sale - - 1,030 48, Note: FY08 figures have been restated based on the FY09 financial statements to correct prior year misstatements. Source: Audited financial statements and draft management accounts Liabilities held for sale reflect assets that are being held for sale that are currently producing negative returns. The liabilities held for sale in FY11 is the covenant holder liability related to the GT Assets. PPB Advisory 52

53 8.1.6 Cash Flow Statement Gunns Group s operating cash flows reflected the declining financial performance of the business discussed in Section General market pressures also impacted the amounts realised from timber-related asset sales over the Review Period. If asset sales proceeds are excluded between FY10 and 25 September 2012, net cash outflows would have increased from $29.5m to $381.9m. Declining cash flows from operations and high debt servicing costs resulted in debt levels becoming unsustainable. Figure 37: Historical cash flow statements FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Total Cash flows related to operating activities Cash receipts in the course of operations 902, , , , ,779 43,349 3,601,621 Cash receipts - Scheme financing unsecuritised 27,634 48,994 10,172 4,038 6,761 2,148 99,747 Cash receipts - Scheme financing securitised 21,346 29,583 44,545 28,952 25,978 4, ,755 Cash payments in the course of operations (780,273) (758,027) (607,875) (621,279) (401,543) (69,885) (3,238,882) Payments for woodlot lease and maintenance (33,615) (27,535) (27,550) (20,004) (24,101) (4,289) (137,094) Dividends received ,031 Interest received 11,396 1,958 2,773 5,136 1,964 1,249 24,476 Borrowing costs paid (72,397) (64,530) (47,556) (48,168) (47,255) (920) (280,826) Income taxes received/(paid) (6,996) (984) 16,562 12,646 (89) - 21,139 Net cash provided by operating activities 69,517 55,267 61,969 36,971 47,088 (23,845) 246,967 Cash flows related to investing activities Proceeds on disposal of non-current assets 2,027 1,387 33, ,517 81, , ,774 Payment for purchases of property, plant and (105,254) (65,433) (59,480) (42,295) (33,870) (1,797) (308,129) equipment Payment for standing timber, plantation, orchard (38,437) (21,148) (24,264) (20,492) (11,225) (568) (116,134) & plantation establishment Proceeds from disposal of standing timber - 173, ,229 Payments for investments (221,224) (7,471) (106,070) (48,484) - (3,481) (386,730) Proceeds on disposal of investments 833-1, ,469 Net cash provided by/(used in) investing activities (362,055) 80,564 (154,729) (3,754) 35, ,544 (279,521) Cash flows related to financing activities Cash receipts from loan securitisation 25,156 44,573 16, ,997 Cash payments - Scheme financing securitised (21,346) (29,583) (44,545) (28,952) (25,978) (4,351) (154,755) Share issue proceeds - 334, ,534 25, ,927 Share issue costs (30) (18,788) (4,036) (237) (1,605) (14) (24,710) Proceeds from the realisation of derivatives 16,030 1, ,083 Proceeds from borrowings 560,384 35, , , ,000-1,252,306 Repayment of borrowings (298,890) (428,620) (315,958) (280,727) (115,510) (99,466) (1,539,171) Finance lease payments (5,110) (5,508) (11,586) (9,897) (17,241) (119) (49,461) Dividends/distributions paid (38,866) (28,727) (16,213) (8,248) (10,943) - (102,997) Net cash (used in)/provided by financing activities 237,328 (95,437) 83,884 (82,329) (51,277) (103,950) (11,781) Net increase/(decrease) in cash and cash equivalents held (55,210) 40,394 (8,876) (49,112) 31,720 (3,251) (44,335) Cash and cash equivalents at beginning of period 13,382 (41,828) (1,434) (10,310) (59,422) (27,702) 13,382 Cash and cash equivalents at end of period (41,828) (1,434) (10,310) (59,422) (27,702) (30,953) (30,953) Source: Audited financial statements and draft management accounts We have summarised the above table (Figure 37 Historical cash flow statement) below to draw attention to the key cash flows since FY08 (Figure 38 Summary cash flow statement). PPB Advisory 53

54 Figure 38: Historical cash flow statement (summary) FY08 FY09 FY10 FY11 FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Total Net cash provided by operating activities 69,517 55,267 61,969 36,971 47,088 (23,845) 246,967 Proceeds from disposal of non-current assets 2, ,616 33, ,517 81, , ,003 Payment for property plant and equipment (105,254) (65,433) (59,480) (42,295) (33,870) (1,797) (308,129) Payment for standing timber, plantation, orchard (38,437) (21,148) (24,264) (20,492) (11,225) (568) (116,134) & plantation establishment Payments (net) for investments (220,391) (7,471) (104,434) (48,484) - (3,481) (384,261) Net cash provided by/(used in) investing activities (362,055) 80,564 (154,729) (3,754) 35, ,544 (279,521) Net cash flow from operating and investing activities (292,538) 135,831 (92,760) 33,217 82, ,699 (32,554) Net share proceeds (30) 315, ,498 24,763 (1,605) (14) 479,217 Movement in borrowings 261,494 (392,850) (538) (59,995) 4,490 (99,466) (286,865) Other financing activities (24,136) (18,192) (56,076) (47,097) (54,162) (4,470) (204,133) Net cash provided by/(used in) financing activities 237,328 (95,437) 83,884 (82,329) (51,277) (103,950) (11,781) Net cash flow (55,210) 40,394 (8,876) (49,112) 31,720 (3,251) (44,335) Cash and cash equivalents at beginning of period 13,382 (41,828) (1,434) (10,310) (59,422) (27,702) 13,382 Cash and cash equivalents at end of period (41,828) (1,434) (10,310) (59,422) (27,702) (30,953) (30,953) The net operating activities for the Review Period resulted in cash inflows totalling $247.0m. Cash flows generally exceeded the profit and loss performance over the review period due to the significant non-cash write-downs/impairments which occurred after FY10 (totalling $1.4b). Operating cash flows were positive between FY08 and FY12 and only negative ($23.8m green circle) between 1 July and 25 September Investing activities over the same period resulted in a net cash outflows totalling $279.5m, largely as a result of business acquisitions (Auspine (FY08), ITC (FY10), GS Schemes (FY10) and Bell Bay saw mill (FY11)) totalling $386.7m (black circle net $380.8m after disposals of investments of $2.5m over the same period) and property plant and equipment purchases totalling $308.1m. Proceeds of $529.0m were received from the disposal of non-current assets and timber assets ($173.2m in FY09). Whilst operating cash flows were steadily reducing after FY10, non-core assets/businesses were also being sold (refer Section 8.1.5) and resulted in surplus cash from operations and investing activities of $216.9m between FY11 and 25 September Funds from these asset sales flowed to meeting the significant outflows from financing activities over the sale period (red circle). Financing activities generated a cash outflow of $11.8m for the period FY08 to FY12. Cash of $479.2m was raised through equity issues between periods FY09 - FY11 (blue circle) and appears to have been used to reduce existing debt facilities and partially fund investing activities. From FY11 asset sales and divestment of non-core businesses were used to fund increasing onerous borrowing costs, as operating cash flow was insufficient to meet these demands. Accordingly, a cash surplus of $13.3m at the beginning of FY08 was eroded over the Review Period as a result of investing and financing activities and declining profitability. PPB Advisory 54

55 8.2 GPL Creditors should note that the financial position of GPL presented in this Section is not a direction reflection of the various components used to estimate the expected return to creditors (refer to Sections 5 (creditors) and 6 (Growers) for this analysis). GPL, as RE, was responsible for the management and administration of various woodlot, winegrape and walnut Schemes (as discussed in Section 9.2). Typical tasks performed by GPL in this role included: Establishment: land acquisition (and/or leasing), land preparation, sourcing of genetic material and nursery stock, and planting Management/maintenance: pruning, weed control, fire and pest control Harvesting and marketing: harvesting, haulage, processing and marketing/sales negotiation. GPL s activities as RE were reduced to management, marketing (wood) and administration of the GS and GPL Schemes following the: cessation of the Schemes sales from FY09 the transfer of the walnut RE role to a third party in 2010 the winding up of the winegrape schemes. This resulted in a significant reduction in revenues and corresponding reduction in operating expenditure in more recent years Financial reliance on Gunns GPL was financially reliant on Gunns which funded the majority of costs associated with maintaining the Schemes as well as various GPL employee and administrative costs. In most cases Gunns was not remunerated for funding these costs until the Schemes plantations were harvested and proceeds received. Gunns was required to fund the Schemes costs as the GPL and GS Schemes were predominantly noncontributing. In other words, once Growers had paid their application fee (which was used to establish the plantations) they were not required to pay GPL any further monies except in limited circumstances including: contributing Schemes, which required the Growers to fund the ongoing costs of the Schemes in periodic payments over the life of the Schemes. The GPL 2000 and 2001 Schemes and the winegrape and walnut Schemes were contributing Schemes. if plantation pruning was required. Certain Schemes had different intended end products (e.g. timber veneers) which required the trees to be pruned periodically. Growers would be invoiced by GPL for the pruning costs. insurance. Growers electing to take up insurance were invoiced on an annual basis. The majority of the transactions between GPL and Gunns represented in GPL s financial accounts are accounting entries where no tangible funds changed hands. Historically, GPL received an annual letter from Gunns confirming its financial support (as noted in the annual reports of Gunns and GPL respectively). As at the date of the appointment of the Administrators, the letter of support for FY13 had not been received from Gunns. Given this financial reliance, as a contingency against a Gunns insolvency event the RE obtained: a $4m bank guarantee issued in favour of GPL in its capacity as RE with limited restrictions on its use in case of Gunns financial difficulty Maintenance Reserve Funds (MRF) for some of the GS Schemes as required under the Grower Meeting Booklets, for future maintenance services. These were not recognised as contingent liabilities in the accounts of GPL as management considered the probability of Gunns default as being very low. These items are discussed further in Section 6.3. PPB Advisory 55

56 8.2.2 Sub-contracting arrangement with Gunns Revenue and expenses for rent, supervision and management of the Schemes recorded in GPL s financial statements relate only to those services that GPL invoiced Growers i.e. pruning, insurance, costs for contributing Schemes. GPL subcontracted predominantly all of its woodlot management obligations of the non-contributing Schemes to Gunns under various agreements. Accordingly, expenses incurred in relation to non-contributing Schemes were capitalised in Gunns accounts. Additionally, RE fees received by GPL for services provided to the Schemes are recognised as revenue in GPL s accounts however these were paid to Gunns under the terms of the sub-contracting arrangements and a corresponding expense is recorded in GPL s accounts (i.e.no net effect) Presentation of financial statements The financial statements summarised and discussed in the following sections include: 30 June 2008, 2009 audited accounts 30 June 2010, 2011 audited accounts restated based on draft 30 June 2012 financial statements 30 June 2012 and the period 1 July 2012 to 25 September 2012 (YTD FY13) draft accounts. Note GPL s FY10 and FY11 financial statements are restated to reflect a change in GPL s accounting policies as detailed in the draft FY12 annual statutory accounts. This change was the adoption of the Agency Principle. The Agency Principle means any assets, liabilities and associated revenue and expenditure attributable to the Growers are excluded from GPL s financial statements. The FY12 accounts have not been subjected to an independent audit and therefore the FY10 to YTD FY13 results should be treated as draft and as for illustrative purposes only. As noted in Section 5, the woodlots are assets of the Schemes and not of GPL. They are therefore not included in GPL s accounts in accordance with the Agency Principle Financial performance/profit and loss account The following table summarises GPL s consolidated financial performance (Statement of Comprehensive Income) for the years ended 30 June 2008 to 2012 and the period 1 July 2012 to 25 September 2012 (together the Review Period). PPB Advisory 56

57 Figure 39: Historical profit and loss accounts FY08 FY09 FY10 FY11* FY12 YTD FY13 $000's Audited Audited Audited Audited Draft Draft Revenue Rendering of services Woodlot establishment and mgt. 101,247 46, Vineyard establishment, supervision and mgt. 1, Walnut establishment, supervision and mgt. 14,162 8, Rent, maintainence and harvest fees 7,026 12,087 13,672 7,880 3, Other revenue , Total revenue 124,642 67,377 15,256 8,712 3, Expenses Woodlot establishment and mgt. (39,104) (25,138) (2,507) (4,858) (1,571) - Vineyard establishment, supervision and mgt. (3,468) (4,150) (5,529) (1,400) (875) - Walnut lot establishment, supervision and mgt. (10,872) (9,836) (6,675) Administration (2,137) (2,086) (1,932) (3,272) (2,866) (558) Marketing (16,713) (6,772) (971) Employee (2,603) (2,687) (2,441) (1,820) (1,682) (371) Depreciation (10) (18) (13) (8) (16) (3) Total expenses (74,907) (50,687) (20,068) (11,358) (7,010) (932) Profit/(loss) before financing costs 49,735 16,690 (4,812) (2,646) (3,489) (776) Financial income 17,010 21,828 19,335 25,894 24,796 1,292 Financial expenses (13,794) (16,818) (14,911) (19,175) (18,694) - Net financing cost 3,216 5,010 4,424 6,719 6,102 1,292 Profit/(loss) before tax 52,951 21,700 (388) 4,073 2, Income tax benefit/(expense) (15,887) (6,510) 116 (1,222) (784) - Profit/(loss) from continuing operations 37,064 15,190 (272) 2,851 1, Note: FY11 figures have been restated based on the format of the FY12 draft financial statements Source: Audited financial statements and draft management accounts Revenue Rendering of services GPL s revenue in FY08 and FY09 predominately related to rendering of establishment and management services to the various Schemes. Subsequent to FY09 no new Schemes were established. Accordingly, establishment revenue was nil for the remainder of the Review Period. GPL acquired the RE rights to the GS Schemes in FY10, which resulted in an expansion of operations to include the management of these additional Schemes located in all States of Australia. Rent, maintenance and harvest fees Rent, maintenance and harvest fees predominantly include fees received from Growers of contributing Schemes, pruning fees and RE fees received following harvesting of plantations. The variance in revenue during the Review Period mostly relates to the amount of harvesting and pruning conducted, which can vary from year to year. Other revenue Other revenue relates to sundry income (e.g. insurance commissions which GPL earns from arranging Grower insurance). PPB Advisory 57

58 Expenses Woodlot, vineyard and walnut lot establishment, supervision and management expenses These expenses relate to the cost of establishing and managing the various Schemes and that were invoiced to Growers at the time they were incurred including: preparation pruning general maintenance harvesting. This category also includes any RE fees payable to Gunns under the sub-contracting arrangements. Administration expenses Administration expenses increased in FY11 and FY12 due to the engagement of independent experts and legal advisors to review the Wood Sale Agreement proposed by Gunns for the GPL Schemes tree crop. The independent experts and legal advisors consulted on the proposal to identify and assess any issues arising, and to also ensure the offer was in the best interests of Growers. Marketing and employee expenses Marketing expenses declined significantly after GPL ceased offering new Schemes from FY10. Management subsequently closed its offices on the mainland and reduced employee numbers and therefore employee expenses. Financing income and expenses Income is earned on receivables due from Gunns and another related party, Gunns Finance Pty Ltd (GF). It is charged on the average loan balance for the year at the 90 day bank bill rate plus a margin (reconciled annually based on actual balances and interest rates over the period). Refer to Section for further commentary and details of the related party receivables at each reporting date. Interest expense is charged by Gunns on the outstanding payable balance related to the provision of woodlot, walnut and winegrape establishment and maintenance services. The interest expense takes into account Gunns funding cost of providing these services. The calculation of the interest expense is consistent with the calculation of interest income noted above. The payable which interest is charged on is not shown separately in the annual report and is netted against the trade and other receivables balances. Refer to Section for details on this balance at each reporting date. PPB Advisory 58

59 8.2.5 Financial position/balance sheet The following table summarises GPL s consolidated financial position (Statement of Financial Position) over the Review Period. Figure 40: Historical balance sheets 30-Jun Jun Jun-10* 30-Jun-11* 30-Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Current assets Cash and cash equivalents 2,574 1, , Trade and other receivables 132, ,668 97,025 91,326 92,461 91,261 Total current assets 134, ,156 97,815 93,274 92,815 91,336 Non-current assets Trade and other receivables ,701 10,895 13,071 12,966 Property, plant and equipment Deferred tax assets 4, Total non-current assets 5,034 1,155 4,071 11,393 13,129 13,021 Total assets 139, , , , , ,357 Current liabilities Trade and other payables 31,715 12,474 3,807 4,191 4,000 1,934 Provisions Other 16,315 1, Total current liabilities 48,030 13,651 4,523 4,696 4,259 2,214 Non current liabilities Other Total non current liabilities Total liabilities 48,030 14,464 5,311 5,240 4,689 2,643 Net assets 91,657 96,847 96,575 99, , ,714 Equity Issued capital 2,000 2,000 2,000 2,000 2,000 2,000 Reserves 23,300 23,300 23,300 23,300 23,300 23,300 Retained earnings 66,357 71,547 71,275 74,127 75,955 76,414 Total equity 91,657 96,847 96,575 99, , ,714 Note: FY 10 & FY11 figures have been restated based on the format of the FY12 draft financial statements Source: Audited financial statements and draft management accounts Working capital Figure 41: Historical net working capital positions 30-Jun Jun Jun-10* 30-Jun-11* 30-Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Trade and other receivables 132, ,668 97,025 91,326 92,461 91,261 Trade and other payables (31,715) (12,474) (3,807) (4,191) (4,000) (1,934) Net working capital 100,364 96,194 93,218 87,135 88,461 89,327 Note: FY 10 & FY11 figures have been restated based on the format of the FY12 draft financial statements Source: Audited financial statements and draft management accounts Net working capital was positive throughout the Review Period, with a surplus working capital position of between $87.1m and $100.4m. We note, however, a significant component of this surplus is due to related entity receivables (Gunns and other) as discussed below. PPB Advisory 59

60 Assets Trade and other receivables Figure 42: Historical trade and other receivables Source: Audited financial statements and draft management accounts Figure 43: Net amounts receivable from related parties 30-Jun Jun Jun-10* 30-Jun-11* 30-Jun Sep-12 $000's Audited Audited Audited Audited Draft Draft Gunns Ltd 282, , , , , ,230 GFP (214,593) (265,811) (282,571) (302,816) (321,486) (321,486) Gunns Finance 8,909 10,980 13,888 14,221 15,068 15,075 Net amounts receivable from related parties 76, ,806 85,557 84,536 88,123 88,819 Note: FY10 & FY11 figures have been restated based on the format of the FY12 draft financial statements Source: Management accounts The majority of the trade and other receivables balance is attributable to amounts receivable from related parties including: Gunns: this receivable arose from Gunns sweep of the Schemes application and other monies (e.g. insurance) paid to GPL. It was adjusted periodically for transactions between Gunns and GPL (including other cash sweeps and costs paid by Gunns on behalf of GPL). GFP: for establishment costs, pruning fees, and on-going (subcontracted services) for rent and maintenance costs on contributing Schemes. GF: for rent, maintenance, and pruning fees owed on the Schemes investments (the interests acquired by GF from Growers defaulting on loans by virtue of GF s security over these assets). Related party loans will need to be investigated further by a liquidator (if appointed) in order to assess the reasonableness of these balances. Trade receivables are generally funds due from Growers for pruning, insurance etc. The balance was high at 30 June 2008 ($55.5m) as it included c.$43m of loans receivables from Growers under a terms arrangement (interest free loans, repayable within 12 months) with GPL. Management advises that circumstances existed at this time which required GPL to issue these loans (terms arrangements) as opposed to GF. Subsequent to 30 June 2008, these loans were collected and as result trade receivables reduced commensurately. Other debtors and prepayments of $2.6m at 30 June 2012 includes the current component of a Receivers lien associated with the GS Schemes ($1.2m, discussed below) and RE fees receivable from harvest proceeds held in the Schemes custodian bank accounts. The Receivers of the GS Schemes incurred expenses in the care, preservation, protection and realisation of Growers property in relation to the GS Schemes before GPL took on the role of RE. The Receivers made applications to the Supreme Court to determine the amount of expenditure and remuneration to be secured by the Receiver s Lien and an order to this effect was granted by the Supreme Court on 31 August This amount was subsequently paid to the Receivers of the GS Schemes by GPL when it became RE and is recoverable by GPL from the proceeds of the harvest of GS Schemes woodlots. PPB Advisory 60