Business Risks

Pale

International Expansion

The farland expansion has a business risk as the company will be managing operations in a foreign
country for the first time. Farland is remote so it would be difficult for the management team to have
regular visits. There may be different laws and regulations compared to the home juridistions so
there is an increased risk of non-compliance.

These create a risk that expansion may not be successful and would be a drain on the
management's time and resources.

Gold Standard Accreditation

There is a risk that gold standard may not be renewed with implecations for reputations and more
specifically the contract with Royal Co which largely accounts for an increase of 5.5% in the
company's revenue this year.

Several of the KPI's which need to be met retain the gold standard to be jeopardy for example
there has been a decline in the percentage of timber which is harvested in line with the gold
standard.

Legal Case

The legal action against the company is a significant risk and if the knowledge becomes public
knowledge there will be reputational problems and the amount being claimed of $19 Million
exceeds company's current cash balance. If the claim goes against the company then it would
struggle to find the funds to pay damages.

This also indicates poor corporate governance of the company because if decisions are made
which put lives of employees at risk and results in days lost due to accidents at work and the matter
seems to be dismissed as unimportant by the management team and legal advisers.

Damage to Assets

Recent storms have caused significant damage to the company's timber plantation asset.
Unpredictable weather patterns could cause further harm or even destry company's plantations of
timber. Assuming trees will be replanted to replace the damage but it can take many years for trees
to grow to a harvestable size so there is a deplition of its future cash inflows.

The risk is difficult to mitigate and the diversification into rainforest is a way to reduce the risk
exposure of the company's operations being concentrated in one geographical area.

RedBack Sports

Corporate Governance

The company lacks an audit committee and the internal audit team is small and lacks
independence as they report to finance director which makes the scope of their work very limited
due to insufficient resources and any recommendations could potentially be ignored by the finance
director.
This could lead to control deficiencies and considering business is looking to achieve a stock
market listing it would be good practice to implement stronger corporate governance procedures
sooner.

Health and Safety Regulations

There is a high risk of non-compliance with various laws and regulations as the sport and leisure
industry has strict health and strict safety regulations which must be complied with. If the company
is found not to be in compliance with the relevant regulations, its operating license could be
revoked which would have adserve reputational consequences. This could ultimately affect
company's going concern

Capital Expenditure and Maintenace Requirements

Company's depend upon the facilities being high standard which requires high annual expenditure
for example this year $5.5 million has been incurred on maintenance and repairs. Company could
face liquidity problems due to this.

Overtrading

Cash position is deterioting as the level has fallen from $5.6 million to $1.4 million in the year but at
the same time revenue and profit before tax are both projected to increase by 17.8% and 50%
respectively.

These kind of trends identify that the company is expanding too quickly and overtrading focusing
on generating revenue rather than managing cash flows appropriately, this can impact company's
plans for further expansion in the next few years.

Overcrowding

Members have increased by 12.4% and "pay as you go" customers have also increased by 5.3%.
Although there have been new centres but this might not be sufficient exapnsion and there may be
times the facilities would be overcrowded. This might lead to customers using other service
providers if the overcrowding becomes problematic. The "healthy kids" programme, and the
government initiative to provide free access to the unemployed will further highten this problem.

Expansion

The expansion plans could take the management attention away from running the business if the
potential targets becomes a time-consuming process over the next year. If the existing
shareholders for the expansion to be succesful management could be pressured into making
unwise decisions to increase the pace.

New Data Management System

Introducing a new system can create business risk in that insufficient training may have been
provided or appropriate internal controls may not have been designed or implemented in relation to
the new system and inaccurate recording could have taken place.

This would have a negetive impact on management's ability to monitor the company's
performance.

SunShine Hotel Group

Luxury Products
The group offers luxury products aimed at an exclusive market which is a business risk in itself as
the group's activities are not diversified and any decline in demand will immediately impact on profit
and cash flows.

Demand for luxury holidays will be sensitive to economic problems such as recession and travel to
international destinations will be affected by events in the transportation industry which could mean
less demand for group's hotels.

Inappropriate Business Startegy

The expansion policy is questionable as the problems with recent acquisituion include investments
at places of political instability and incompatible local legistations. The group has invested $98
million in these unsuitable locations and it is doubtful is approproate returns wouuld be made by
these. There is a risk that further unsuitable investments will be made as a result of poor strategic
decisions on where to locate the new hotels.

The strategy is to expand rapidly acquiring new sites and a hotel complex without properly
investigating their appropriateness and fit with the group's business model.

Moulin Blanche

$5 million been spent on an agreement which allows the company to use the name. This
represents a significant outflow of cash where the benefits may take time to materialise to the
externt of the investment. If there is any damage to the reputation of Moulin Blanche then this may
also have an effect on the branches at Sunshien Hotel Group resulting in a much lower return on
investment than anticipated.

International Operations

International operations expose the group to a number of risks one which relates to the local
regulatins with any international operation there is a risk of non-compliance with the local laws and
regulations which could affect business operations. Along that the political instability introduces
unpredictibility in the operations making it difficult to plan and budget for the group as seen in
recent investment as political instability didnt generate a return for the group. There are also foreign
exchange issues which unless properly managed though derivative can introduce volatility to profit
and cash flows.

Connolly

Licensing & Patents Risk

A significant regulatory risk relates to the nature of industry in which the company operates. If any
of the company's products fail to be licensed it would mean that costs incurred initially would be
wasted.

Connolly Co must be careful not to breach any competitor's existing patent. In the event of this
happening legal costs could be incurred in defending the company's legal position. Similarly if a
competitor were to be found in breach of one of the company's own patents then costs of bringing
legal action against them could be substantial.

Skilled Personnel

Since Connolly Co's operations depend upon a skilled workforce, losing out on them to competitors
would be a drain on the resources and it could delay developments. It may also be difficult to
attract and retain the staff given the pending court case and reputational damage to the company.

Overtrading
Connolly Co has diversified into a new market of animal health, which has commercial and
strategic advantages it can bring risks. Management may struggle to deal with the increased
number of operations which they need to monitor and they might focus too much on ensuring the
success of new business and the current activities would be neglected.

The fall in the operating marging from 24% to 20% is a warning but could be a one-off pressure but
since the revenue has increased by 5.2% there is a risk company could be overtrading.

Request for Finance

The fact that company has approched the bank for cash indicates that company is not very liquid
and is relying on the external finance. If the bank refuses the company would need to find finance
from other sources which may be difficult and expensive. The company already has a high gearing
which may deter further investors.

Considering the current cash position if the finance is refused the company may not be able to pay
liabilities as they fall due and other operational problems may arise. Ultimately this could all result
in a going concern problem.

Court Case

Court case against the company will create reputational damage. People suffering side effects
while participating in clinical trials will lead to bad publicity affecting market share as the
competitors will also take advantage of it. It is also likely that the bad publicity will lead to increased
scruitiny of the company's activities making it more vulnerable to future problems.

Reliance on a Single Supplier

All of the packaging is supplied by one supplier, this level of reliance is extremely risky as any
disruption to the supplier's operations for example due to financial difficulties or political
interferance could result in the curtailment of supply leading to problems such as stock outs and
disrupted production.