| Fri 28 Jun 2002, 0:00 | | Unifer - Announcement |
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Unifer - Announcement
Johannesburg, 28 June 2002
UniFer Holdings Limited has released comprehensive information concerning
investigations over the past six months into the losses in the UniFer Group.
The view of the board following the investigations is that the losses at
UniFer are largely attributable to a number of significant management
failures.
The investigations concerned:
- A review of UniFer`s net asset value.
- An investigation into the accounting treatment of R27 million income at
Lantern
- An investigation into UniFer`s corporate governance
- Investigations into brokers
- An investigation of directors` dealings in UniFer shares
There are ongoing investigations to assist the forensic and legal processes.
Disciplinary steps have been taken, more will follow and a number of civil
and criminal prosecutions may also result. No individuals are being named at
this stage.
The information provided at a briefing on 28 June 2002 is contained in this
announcement.
Neil Lazarus, senior counsel and an executive director of CorpCapital,
introduced the presentation. CorpCapital is the corporate advisor to the
UniFer board. Attorneys Werksmans and Routledge-Modise are the legal
advisers to UniFer.
He said the advisers referred to have been retained to advance the legal and
commercial interests of UniFer and not the interests of individual
directors, employees or third parties.
The investigative reports commissioned by UniFer were done with the
following objectives in mind:
- to give the board a comprehensive understanding from the vantage point of
independent forensic experts as to what went wrong at UniFer, and what and
whom was responsible for the failure.
- to place the board in possession of the necessary facts so that legal and
other proceedings can be launched against wrongdoers after UniFer has taken
legal, commercial and strategic advice.
- to avoid the same mistakes being repeated and
- to use the information in the reports as a platform for restoring the
business of UniFer to sustainable profit.
The investigative reports contain legally privileged information. Disclosure
of their contents might prejudice UniFer and is therefore not appropriate.
It is also not appropriate for suspected wrongdoers to be named. To do so
would not only compromise UniFer but also the individuals concerned. They
should only be publicly named after due legal process has been followed. In
addition, the company might prejudice its case in subsequent legal
proceedings by engaging, at this stage, in the making of unilateral and
untested accusations.
The information divulged by the board`s representatives will be subject to
these constraints.
The UniFer non-executive chairman, Dr Larry Lipschitz, said he was speaking
with the authority of the UniFer board. The board undertook to report back
on the ongoing, extensive forensic investigations by many legal and
accounting teams into what went wrong at UniFer.
The UniFer board, during the period under investigation, comprised 5
executive and 10 non-executive directors. The non-executive board comprised
four senior Absa, four senior Super Group, one senior Liberty and one
independent non-executive. Despite this strength the business still failed.
Some of the key contributors to the failure of UniFer will be dealt with
later on in the presentation.
The UniFer board believed it should close the book on UniFer properly, by
telling the market what had been learned in the past six months of intensive
investigation and review. The disclosure was made in the interest of
transparency and commercial morality.
Over the past six months the board had asked the question: "How is it
possible that losses of this magnitude could happen without the board seeing
it in time to prevent it?" There is no simple answer. There is no single
point that the board could find that should have been the defining red light
to prevent the disaster. Certainly, there were warning lights, and, at the
time, the board thought it had taken the correct remedial action based on
the information provided.
The purpose of the presentation was not to try to whitewash failure, but
rather to understand it. As much information as possible was being provided
within the constraints of legal advice. The board did not wish to
jeopardise UniFer`s ability to pursue actions against certain individuals or
entities.
The losses at UniFer highlight the complex relationship between a management
and its board.
The UniFer chief executive officer (CEO) Gavin Kretzschmar gave the
chronology of the events leading to the announcement about problems at
UniFer in January 2002. He was appointed CEO in June 2001 and therefore his
comments about events before his appointment were based on information made
available to him.
The chronology: Discovery of the problem
Year 2000
Two extremely important events impacted on UniFer in 2000:
- June 2000 - Persal collection system suspended
- November 2000 - Decentralisation of credit vetting to brokers
March 2001
- Towards the end of UniFer`s financial year in March 2001, the then
managing director (MD) of Unibank, Gerrit van der Merwe, went on a three-
month sabbatical to Harvard University in the United States.
- The CEO of UniFer, Joel Klotnick, was appointed caretaker MD of Unibank
during this period.
Annual Results F2001 - March 2001
- When UniFer began preparing the year-end accounts, the Global Insurance
loss was discovered.
- At that time, the company recognised the need for a CEO with more banking
experience and a search was launched to find a replacement.
Board meeting - May 2001
- At a board meeting in May 2001, the board questioned the quality of the
underlying assumptions in the budget for the year ahead, and referred the
budget back.
- During this meeting some board members, specifically Nallie Bosman, were
of the opinion "that the growth was too high and management must be careful
that the correct procedures were implemented in granting credit." Other
board members advised that management should ensure that the systems were in
place to cope with volume and that good credit risk procedures were adopted
within the organisation.
- The meeting also approved the combining of Unibank and UniFer boards into
one.
- Kretzschmar`s appointment as CEO was confirmed at the same meeting.
Remuneration committee meeting - July 2001
- At a remuneration committee meeting in July 2001, allegations were tabled
that a senior manager received what may have been irregular payments.
- This matter was referred for legal advice.
Board meeting - 25 July 2001
- The board meeting in July was the first meeting of the combined board of
Unibank and UniFer.
- As CEO, Kretzschmar presented a summary of what he saw as right and wrong
with the company.
- He presented an action plan to tighten controls, and this was approved.
- Board members raised concerns about advances in excess of R1 billion
having been made over three months. This had happened, at coalface level,
despite the board`s previous caution to curtail the advances growth. The
board agreed to institute an increased focus on collections. At that stage,
the board did not know the extent to which the advances book was already
suspect.
- The board began detecting weaknesses in the collection infrastructure
needed to support a retail collections model.
August 2001
- In August last year UniFer published its annual financial statements.
- The audit report was unqualified.
- At the same time, Absa announced that it had acquired a further 7% of
UniFer, bringing its holding to 60%. (Absa made its initial investment in
UniFer in April 2000.) Absa would not have made the further investment, had
it known about the problems which would later have to be dealt with as a
result of the sizeable provision for bad debt which was subsequently
required.
Presentation by UniFer Financial Director - September 2001
- The presentation highlighted the nature of the change in the risk profile
as a result of the transition from payroll lending to retail lending.
- Lending was curtailed drastically in this month, with a full focus on
collections.
October 2001
- In October 2001 Gerrit van der Merwe and Joel Klotnick resigned all their
directorships and left the Group.
- UniFer approved the appointment of management consultants and held many
workshops to develop corrective action.
- The audit committee reviewed interim results presented by management.
November 2001
- The interim results were announced in November 2001, with a steep upward
adjustment in provisions for bad debt.
- It was at this time that Dolf Wright was seconded to UniFer from Absa, to
focus on collections.
Board meeting - November 2001
- At a board meeting in November 2001, after the publication of the interim
results, UniFer management presented the board with forecasts for the
financial year to March 2002.
- Directors expressed concern that these forecasts would not be met, given
the rapid growth in advances and the possibility of a corresponding increase
in bad debt.
- However, the management team still believed that UniFer could trade out of
the problem, given the information it had at the time, the focus on
collections and some early successes.
December 2001
- UniFer continued grappling with the fundamental change in the business
model. As the indications of potential problems increased, the audit
committee met on 7 December 2001. The audit committee instructed management
to fully quantify and age all arrears.
- On 27 of December, UniFer reported its concerns to the Reserve Bank about
UniFer`s bad debts, setting out possible alternatives for UniFer`s future.
January 2002
- By January UniFer and Absa had estimated the extent of the bad debt
problem and explored various alternatives to address the matter. Special
meetings of the UniFer and Absa audit committees and boards estimated
additional provisions at R1,5 billion, after independent reviews by Ernst &
Young and Deloitte & Touche.
- The Absa board approved recapitalisation proposals for UniFer.
- UniFer and Absa made the situation public through SENS and media
announcements.
- Both companies issued profit warnings.
- What followed then was the suspension of trading in UniFer`s shares, while
independent reviews and investigations were launched.
February 2002
- The Board started implementing a turnaround plan for UniFer and the
company`s shares resumed trading in February.
March 2002
- In March, Absa presented to the media and investor community what some
investigations had shown to date.
The chronology of these events provides a context for understanding the
investigations better.
UniFer`s non-executive chairman, Dr Larry Lipschitz, dealt with the
investigations and findings.
Answering the key questions: Report on the investigations into the factors
that contributed to the losses at UniFer
Findings of the investigations
The UniFer board instituted a number of investigations into the losses at
the company. It asked all the key questions and had been through a process
of discovery. Various of these matters have been referred to UniFer`s legal
advisors for a decision as to what action, if any, should be implemented.
Independent investigations and/or reviews
- A review of UniFer`s net asset value.
- An investigation into the accounting treatment of R27 million income at
Lantern
- An investigation into UniFer`s corporate governance
- Investigations into brokers
- An investigation of directors` dealings in UniFer shares
- There are ongoing investigations to assist the forensic and legal
processes.
Independent net asset value review
- The purpose of the net asset value review was to establish the true
position on which UniFer could base the numbers with confidence, going
forward and to facilitate a fair offer to minorities.
- Net asset value was fully quantified at a negative R1 144 million as at 31
December 2001.
- The investigation was conducted jointly by accounting firms Ernst & Young
and Deloitte & Touche, with Barnard, Jacobs Mellet advising minorities.
Accounting treatment of income at Lantern - Scope of the investigation
- Deloitte & Touche Forensic Services conducted the investigation into the
accounting treatment of the R27 million income at Lantern.
- UniFer`s audit committee and the UniFer board accepted their findings and
recommendations.
- Based on these findings, these matters have been forwarded for legal and
disciplinary review and are receiving attention at this moment.
Accounting treatment of income at Lantern - Actions taken
Based on the findings, the following actions have been taken:
- The R27 million has been adjusted in the year-end accounts for the 2002
financial year, and is incorporated into the negative net asset value
adjustment.
- Legal and disciplinary processes arising from the Lantern accounting
treatment issue are under way.
Corporate governance investigation - scope of the investigation
- Deloitte & Touche Forensic Services conducted the corporate governance
investigation.
- They looked at corporate governance, at credit risk management, at the
extension of R1,8 billion in loans over a five-month period, the R3 billion
loan facility and at the brokers` role in what happened.
- Legal and disciplinary processes arising from the corporate governance
investigation are underway.
Corporate governance investigation - findings
In reviewing the findings of the corporate governance investigation, it was
concluded that a number of factors contributed to the losses:
- Firstly, events at UniFer took place in the context of certain significant
macro-economic changes, which adversely impacted UniFer`s businesses. Most
notable was the dramatic effect which the cancellation of the Persal
collection mechanism had within the microlending industry.
In addition, market conditions (such as the lack of a secure deduction
mechanism, the absence of a fully functional loans register and the
prevailing culture of non-payment) also had an adverse impact.
Secondly, a number of significant management failures also contributed to
the losses. These include the following:
- The management structure was, in certain respects, not conducive to sound
corporate governance (for reasons which ranged from the exercise of
insufficient control to personality conflicts among members of management);
- The presence of certain untenable conflicts of interest;
- The abolition of funding constraints with regard to various businesses;
- Certain management allowing unsustainable growth in the volume of loans;
- There were unauthorised granting of loans to certain brokers;
- Certain questionable contractual frameworks and contractual amendments to
broker agreements were concluded;
- Certain executives received inappropriate payments from certain of the
affected brokerages
- The breakdown in certain critical controls through the unauthorised
provision of override codes in respect of certain credit control systems;
- The failure on the part of certain management to play a more pro-active
role in the implementation and maintenance of effective systems and
controls;
- Certain board and management changes, which impacted adversely on
continuity of management.
Thirdly, the view is also that:
- the board could have detected signals of pending problems more timeously;
- the board could have been more pro-active in ensuring that concerns raised
by the board were in fact addressed by management.
Fourthly, weaknesses in the communication of timeous, complete and relevant
information between management and the board had a material adverse effect:
- That management failures played a defining role in the fact of the
respective Unibank and Unifer boards of directors not receiving adequate
and/or timeous information to address failures in corporate governance and
operational control
- That systems deficiencies resulted in the respective boards not being able
to rely on the existing internal audit, credit risk management and
compliance functions fulfilling their reporting roles satisfactorily.
Other contributory factors related to critical decisions taken at UniFer.
These included:
- a drive to increase profits
- a management restructuring at Unibank in early 2001
- The incentivisation of brokers based on the increase in their new loans,
while simultaneously giving these brokers credit-vetting functions.
- The abolition of funding constraints.
Corporate governance investigation - actions taken
The following steps have been taken in the light of the investigations:
- The possible direct responsibility of certain executive directors for some
of these events has been referred for legal evaluation.
- Disciplinary inquiries are being instituted in all relevant cases.
- Forensic and legal actions are being taken regarding prejudicial related-
party transactions
- Top management has substantially been replaced, with the secondment of
over 70 managers from Absa.
- A turnaround project is underway, based on:
- Enterprise-wide credit and risk management
- Compliance
- Financial controls and
- IT systems management
The R3bn credit line
- Was approved to be applied over two financial years and at a maximum of
R200 million per month (covered by 120% debtors security)
- UniFer only exceeded the R200 million per month limit once, in June 2001,
with approval, inter alia, for dividend payments
- The draw-down was curtailed by UniFer at R2,3 billion
- It was concluded that no adverse information in terms of the Absa facility
was presented.
Dealings in UniFer shares by its directors
- A legal team investigated share trades by directors of UniFer.
- All directors involved in share transactions submitted defensible
explanations of transactions to date.
Conclusion
It is considered that the key contributors to the losses at UniFer therefore
relate to the following:
- Adverse changes in the microlending environment in 2000
- Suspension of Persal deductions
- Lack of secure deduction mechanisms
- Switching of bank accounts
- Over-indebtedness of clients
- Prevailing culture of non-payment
- Absence of a fully-functional national loans register
- Management failure, which was exacerbated by the poor risk management
environment and lack of effective systems.
- Poor systems - affecting the adequacy of provisions and the availability
of relevant information
- Certain critical decisions, considered collectively, contributed to the
losses:
- Growth drive
- Incentivisation of brokers based on volumes and decentralisation of
credit vetting
- Certain management restructuring
- Funding restraints were disregarded
- Certain corporate governance failures, especially at Unibank and
subsidiaries, during the relevant period.
- The communication of inaccurate, incomplete and misleading information to
the board.
- The failure to communicate relevant information to the board timeously.
- Certain conflicts of interest
In conclusion, the problems at UniFer cannot be attributed to one single
cause, but to a combination of all these factors and more.
Bert Griesel, the newly appointed UniFer executive deputy chairman,
discussed the results achieved through the turnaround so far and the lessons
learned.
The losses at UniFer and subsequent events have been painful. However, with
the bad news behind it, UniFer was now in a position to move forward.
Obviously, UniFer is determined to benefit from the lessons it had learned
the hard way. While much has already been done to clean up the operations,
there was a long road to success ahead. The first encouraging signs that
the turnaround was beginning to pay off, considerably underpinned his
confidence about UniFer`s eventual success.
His presentation dealt with:
- A brief report-back on the Scheme of Arrangement (Section 311);
- The revised business scope of UniFer following a strategic review of the
business;
- The focus areas of the turnaround plan; and
- Activities undertaken to date.
Scheme of arrangement
Absa instituted a Section 311 Scheme of Arrangement to facilitate the rescue
of UniFer. The outcome was as follows:
- 95% of all eligible shareholders voted in favour of the scheme
- The Scheme of Arrangement (Section 311 process) was approved by the High
Court
- The delisting of UniFer took place on 19 June 2002
- UniFer is now a 100% owned subsidiary of the Absa Group
- UniFer is aligned with Absa`s Flexi Banking Services market value
proposition
- UniFer is positioned in the interim as a stand-alone entity with regard to
issues like branding and staff.
UniFer`s business scope
- Unibank will be positioned as a stand-alone entity with a predominant
product focus.
- New business will be tightly managed. Of the anticipated volume of R100mn
per month, 70% will be from payroll-based lending and 30% dependent on the
retail model.
- UniFer`s distribution strategy will make use of Absa and Unibank outlets
in terms of its retail strategy as well as group schemes such as Ferreiras
and Teba regarding its payroll deduction strategy.
- The sales force is being focused on:
- The payroll-based model, where the Absa group schemes fulfilment team
and accredited agents will play the major role
- The retail model, relying on Absa consultants and accredited Unibank
consultants.
- The collection strategy has two pillars:
- 0-90 days: will be the responsibility of the Unibank and Lantern
collection teams, while;
- 90days+: will be dealt with through external debt collectors,
specialist teams, administration orders and post-write offs.
UniFer`s shor- term focus areas
UniFer`s first short-term focus is to secure the R4.8bn debtors book. It is
doing this aggressively through collections, cleaning of suspense accounts,
dedicated client management and a special focus on Unibank East London and
Unibank Johannesburg. While making acceptable progress so far, there is
still a long way to go.
The second focus area is to write new business in a tightly managed fashion.
This is being undertaken through Absa and UniFer outlets, as well as via
payroll deductions.
The third short-term focus area is to achieve a reduction of 60% in UniFer`s
cost base. This will be achieved by divesting from non-core businesses,
relocating UniFer`s offices as well as the drastic reduction in staff
numbers that it has already undertaken.
The final focus area is the alignment of UniFer with Absa. This includes
product conversions to Absa systems, the integration of UniFer`s call
centres with that of Absa`s, the migration of UniFer`s human resources
payroll to the Absa SAP system, Unibank branch redesign and closure, system
integration as well as operational alignment.
Activities undertaken to date
The turnaround of UniFer is being aggressively managed. The overhaul of
management practices and culture is being accelerated through the
implementation of new systems, policies and procedures based on the proven
Absa template. In implementing the turnaround strategy, UniFer has
undertaken a number of significant activities to date:
- Good progress was made with the stabilisation of systems and operations
- UniFer has established a comprehensive collection infrastructure
- Credit policy, controls and procedures have been revised and are strictly
applied
- There has been a significant reduction in costs
- UniFer has begun the repositioning of stand-alone core businesses and the
divestment from non-core businesses.
- It has also begun writing new business
.
Status to date - short-term focus areas
In general, things are going according to plan. UniFer has made acceptable
progress with regard to securing its debtors book. It is still early days
with regard to the writing of new business, as this only commenced in June
2002. With regard to cost reduction, UniFer has made significant progress
and are ahead of budget, while the alignment with Absa is progressing well.
Conclusion
The book on UniFer is being closed publicly. The answers to the key
questions have been found, albeit in hindsight. The investigators largely
attributed the losses at UniFer to a number of significant management
failures.
UniFer has identified the principal weaknesses and have taken steps to deal
with those weaknesses. As a consequence, the turnaround is well under way.
It will take a long time and it will take a lot of hard work. The extent to
which UniFer has already achieved results is a tribute to the new team of
competent and highly dedicated managers at UniFer.
Facts pointing toward irregular or unlawful conduct will be placed before
the relevant state authorities for a decision as to whether criminal
proceedings should be instituted. Internal actions will be determined by
UniFer`s disciplinary code.
Further investigation will be done where UniFer believes that there is a
good chance of finding more relevant and useful evidence for commercial and
criminal prosecution, or disciplinary action.
UniFer is now wholly owned by Absa and will be fully integrated into Absa in
every way. Over time the name UniFer will disappear as a corporate brand,
but the lessons learned will be burned into the corporate and individual
memories of all people and companies involved.
However, the board is confident that UniFer will be restored to a sound
footing.
end
Date: 28/06/2002 03:14:46 PM Produced by the SENS Department
