MEMORANDUM TO: Stewart Cole CC: Kevin OBrien FROM: Edin Hadzimusic D TE: !

anuar" #$% &##& RE: CHICKEN EGG INDUSTRY

E'EC(T)*E S(MM R+ ,er mana-ements re.uest% ) did a /rie0 stud" o0 t1e c1ic2en e-- industr" in BiH3 T1e -oal o0 t1e stud" was to determine w1et1er BF s1ould lend to t1is industr" or ta2e ot1er action3 To ma2e suc1 a recommendation% ) reviewed BFs e45osure to t1is industr"% introducin- t1e reader to 5ast e45eriences wit1 c1ic2en e--s 0arms in BF 5ort0olio% underlinin- reasons 0or successes60ailures% and recommendin- ste5s t1at (S )DBF ma" ta2e in t1e 0uture3 )t is m" o5inion t1at t1e c1ic2en e--s 5roduction industr" in Bosnia and Herze-ovina tends to /e e4tremel" vulnera/le% unsta/le% and ris2" 0rom a credit 5oint o0 view due to man" 0actors t1at can /e divided into internal and e4ternal 0actors3 7enerall"% 0rom t1e lendinview5oint% t1is is a 1i-18ris2 industr" t1at re.uires continuous attention and 5recaution3 B CK7RO(9D From t1e /e-innin- o0 t1e 5ro:ect% Business Finance 1as considered &$ loans to &; com5anies in c1ic2en e-- industr"3 T1ree loans were re:ected% < wit1drawn% ; is accounted as a 5ros5ect% w1ile &# loans were dis/ursed to ;< com5anies3 So 0ar% onl" one o0 t1ese &# loans 1as /een re5aid =D:eno8;st loan>3 Five com5anies are usin- two loans3 To 0our o0 t1ese 0ive% loan amounts were com/ined in one loan;3 Ta/le /ellow lists t1e current situation =Decem/er &##;> in BF 5ort0olio: Ta/le ;
Borrower -rotr-ovina doo rme48Commerce doo Beta8Commerce doo Brod:ani 55 Bro2o2a doo D:eno doo D:eno doo E--s8,rodu2t doo Es2o8,rom )s2ra8Komerc d:l Ko2a8BK 5o ,is2avica d:l ,,O), doo Sami:a ,romet d:l Tal8,rom doo *ecomFHS doo TOTAL OutstandinBalance &<&%@A#3BC CD%;;B3&# &CB%BA&3A< C#%###3## ;@;%@A&3D# B;%B$C3#A @DB%$AB3<# &@%BD&3A# <##%B$#3C; B##%###3## C3;<$3DD BB@%<C;3$A A<%$<A3;; A<%B<A3BD CB%&;&3## ;$@%###3#C 3,130,419.9 3 Status Foreclosure Delin.uent Delin.uent Current Delin.uent Current Current Current Delin.uent Delin.uent Foreclosure Delin.uent Delin.uent Delin.uent Current Current Da"s Delin.uent &&< ;#;< ;#B # ;$< # # # $A@ ;#;< # A$< ;BC CB@ # # ?ocation Central BiH Tuzla RS RS Tuzla ,osavina ,osavina Tuzla Brc2o Ee8Do RS Tuzla Ee8Do Tuzla Tuzla Tuzla Commitment CCD%###3## @#%###3## B$D%&##3## D#%###3## B$<%###3## &<$%###3## @A#%###3## <C%@&<3<$ @##%###3## B##%###3## &;#%###3## B@#%###3## ;;<%###3## ## ;@#%###3## ;;C%C@#3## &$D%###3## 4,736,395.59 55roval Date #;6#A6$$ 05/14/97 05/04/98 #;6#A6$$ 05/14/97 ;#6#D6$A #<6;<6#; #$6&&6$A 05/14/97 #B6;D6$A #C6;C6$A 05/04/98 ;;6;D6$A 05/14/97 #$6;D6$A ;#6#D6$A

) didnt consider industries S)C #&<; 8 /roiler 5roduction and S)C #&<$ G 5oultr" 5roduction w1ere we 1ave some /orrowers w1o 5roduce e--s /esides t1eir /asic 5roduction3

Bolded dates in t1e ri-1t column o0 t1e Ta/le ; re0er to loans a55roved at t1e time o0 t1e H/i5us1I 0or c1ic2en e-- and /roiler 5roducers3 Currentl"% BF 1as ;D loans to ;< com5anies in t1e c1ic2en e-- industr" =S)C #&<&>3 T1eir outstandin- /alance% as o0 Decem/er &D% &##; was KM B%;B#%C;$3 T1e total amount committed to t1ese com5anies was KM C%@BD%B$<% w1ic1 means t1at BC3AJ o0 t1e committed amount 1as /een re5aid3 T1is is a 1i-1l" delin.uent industr" sector in BF 5ort0olio wit1 ;# delin.uent loans =as o0 Decem/er &D% &##;> or D&3<J o0 total num/er o0 loans a55roved in t1is industr"3 T1e outstandin- delin.uent amount is KM &%#&@%#BC or D<3DJ o0 t1e total outstandin- amount in t1is industr" sector =as o0 Decem/er &D% &##;>3 T1e ta/le /elow s1ows t1e trend o0 delin.uenc" in t1is sector over t1e last two "ears3 Ta/le &
s o0 Date Dec3 ;$$$ Marc1 &### !une &### Se5t3 &### Dec3 &### Marc1 &##; !une &##; Se5t3 &##; J ot total BF outstandin/alance B3; B3; B3# B3B B3& B3& B3B B3# Balance =KM millions> C3&# B3$< B3@# B3AD B3<< B3C& B3B# B3#< Delin.uent Balance =KM millions> B3;# ;3AC ;3<@ ;3<< ;3<C &3<< &3&B &3#& Delin.uent J o0 OutstandinBalance @B3A CD3@ C&3C C#3; CB3C @C3D D@3D DD3& 9o3 o0 ?oans in industr" &B &# ;A ;$ ;$ ;$ ;A ;< 9o3 Del3 ?oans in )ndustr" ;B < D D D ;# ;# $ J o0 num/er o0 ?oans <D3< &<3# BB3B B;3D B;3D <&3D <<3D D#3#

K 9um/er o0 loans reduced /" B in t1e Brd .uarter o0 &##; /ecause BF Credit some com5anies were later classi0ied as in ot1er industries3

dministration did a review o0 S) Codes and

s indicated in t1e ta/le% total e45osure o0 BF e4tended 0unds to t1is industr" is not si-ni0icant =a55ro4imatel" BJ o0 total outstandin- /alance o0 around B million KM>L delin.uenc" count o0 t1is industr" =&3#& millions as o0 Se5tem/er &##;> in total BF 5ort0olio delin.uenc" =<@ millions> is not si-ni0icant eit1er3 not1er im5ortant 0act t1at can /e noticed 0rom t1e ta/le a/ove is t1at num/er o0 delin.uent loans 1as increased si-ni0icantl" in t1e last "ear% 0rom 0ive as o0 t1e Marc1 &### to ten as o0 toda"% w1ic1 s1ows t1at ris2 is e.uall" s5readin- amon-st man" /orrowers in t1is sector rat1er t1an /ein- concentrated wit1 a 0ew /orrowers3 T1e causes 0or t1is increase can mostl" /e attri/uted to mar2et 5ro/lems =ille-al im5orts>3 T1e 0acts a/ove 5rove t1at t1is industr" is di00icult to lend into and maintenance is ver" 1i-13 Seven o0 ;# delin.uent /orrowers are in t1e S5ecial ssets 5ort0olio% meanin- t1at t1is industr" 1as /een an on-oin- 5ro/lem 0or BF3 Five o0 ;< loans 1ave /een restructured once in t1e last ;A mont1s% and B o0 < =D#J> remain delin.uent% meanin- t1e 5ro/lem is in1erited /" t1e nature o0 industr"3 Most o0 t1e loans in t1is industr" sector were ori-inated in Tuzla BF /ranc1 as can /e seen in Ta/le ;3 Five loans were e4tended in ;$$@ =one re5aid>% $ in ;$$A% & in ;$$$% and one loan in &##;3 T1is data -oes alon- wit1 num/er o0 loans in t1is industr" /ein- delin.uent and in t1e S5ecial ssets 5ort0olio3 O/viousl"% BF 1as learned a/out t1is industr" alon- t1e wa"% t1ere0ore t1e num/er o0 loans a55roved 1as reduced in last two "ears and 1as a55roved onl" one loan to D:eno% t1e com5an" t1at 5roved to 5er0orm well3

?E9D)97 9D S,EC) ? SSETS TE M )9,(T The following observations and facts have been gathered from Lending Associates who shared their experiences with the management. Discussion below is based on their comments on internal and external factors that influence this industry, which are as follows: )9TER9 ? F CTORS RE: ;3 Di00icult monitorin- o0 sales =cas1 sales>L &3 Misuse o0 0undsL B3 Dealin- wit1 ine45erienced mana-ementL )ne45erienced mana-ement seems to /e t1e most in0luential i !"# $% 0actor t1at 1as :eo5ardized /orrowers in t1is industr" in t1e 5ast3 Bad mana-ement decisions% lac2 o0 2nowled-e w1en it comes to mana-in- wor2in- ca5ital% wron- :ud-ments o0 0uture mar2et 0luctuations% etc are some o0 e4am5les o0 t1is 5ro/lem3 E'TER9 ? F CTORS RE: ;3 ?ac2 o0 -overnment re-ulation on e-- im5ortL &3 Fluctuation o0 cost =5rice> o0 c1ic2en 0eedL B3 nimal diseases T1e most in0luential "&!"# $% 0actor is t1e lac2 o0 -overnment re-ulations and en0orcements on t1e im5ort o0 e--s3 E--s are ille-all" im5orted to Bosnia 0rom 0orei-n countries and sold 0or e4tremel" low 5rices3 )n t1e last "ear% e-- 5rices varied 0rom KM #3#A to KM #3&#3 For most o0 our /orrowers% cas1 0low su00icient to service our loans re.uires t1at 5rices /e KM #3;C to KM #3;A3 However% at times w1en lar-e .uantities o0 ille-all" im5orted e--s 5enetrate BiHs mar2et% local 5roducers 1ave to reduce 5rices to sta" com5etitive% w1ic1 is w1en t1e 5roducers /e-in to loose mone" and lac2 wor2in- ca5ital to re5lace la"ers3 On t1e ot1er 1and% t1e 5rice o0 corn =commodit"> is increasin-% w1ic1 ma2es material e45enses 1i-1er3 Re-ardin- t1e more success0ul clients in t1is industr"% most o0 t1em 5re5are t1eir own 0eed3 BFs e45erience is t1at /orrowers w1o 5roduce /ot1 c1ic2en e--s and /roilers% and t1eir own 0eed 1ave a /etter c1ance 0or success0ul /usiness at times w1en im5orted e--s :eo5ardize domestic 5roducers3 E.ui5ment and 0acilities 0or /roiler and e-- 5roduction are similar% and /orrower ma" swi0tl" switc1 /etween t1e two% 1avin- minimal loss3 Recentl"% t1ere 1as /een considera/le discussion at t1e -overnment level =/ot1 Federation and RS> on stren-t1enin- t1e /orders3 Our 2nowled-e is t1at not1in- 1as /een done "et3 However% some e45ect t1at in t1e near 0uture t1e -overnment will 5rotect domestic 5roducers wit1 /etter8en0orced controls% levies% etc3 )n terms o0 demand 0or t1is 5roduct% e--s are an im5ortant 5art o0 ever"ones dail" diet% and t1ere is no dan-er o0 t1e mar2et /ein- overw1elmed wit1 t1e 5roduct3

CO9C?(S)O9 E-- 5roduction is an e4tremel" volatile industr"% w1ic1 de5ends on man" e4ternal 0actors t1at cannot /e controlled /" BF3 Historicall"% t1e countr" 1as lac2ed e00ective -overnment 5olic" and control to 1el5 t1is industr"3 Conse.uentl"% t1e ille-al im5ort o0 e--s in Bosnia and Herze-ovina 1as :eo5ardized domestic 5roducers w1o were 0orced to reduce e-- 5rices in order to sta" com5etitiveL t1ere0ore e45eriencin- 0inancial loss3 Business Finance e45erience wit1 e-- 5roducers tau-1t us t1at /orrowers in t1is industr" 1ave 1i-1 delin.uencies% and cannot /e e00ectivel" controlled /ecause o0 t1e lac2 o0 BiH -overnment resolutions and Delin.uent t1eir en0orcement3 )n terms o0 Delin.uent J J o0 t1e 5ercents% DD3&J o0 t1e outstandinin t1e s o0 Date BF /alance in t1is industr" is delin.uent% )ndustr" ,ort0olio w1ic1 is associated wit1 D#J o0 total @B3A <$3# Dec3 ;$$$ num/er o0 loans e4tended to CD3@ CC3C Marc1 &### /orrowers in t1is sector3 Com5ared C&3C C<3A !une &### to t1e delin.uenc" o0 t1e BF C#3; CA3< Se5t3 &### 5ort0olio t1is is 1i-1er t1an avera-e CB3C <;3& Dec3 &### =delin.uent /alance o0 5ort0olio is @C3D <D3B Marc1 &##; <<3@J% w1ile delin.uent amount o0 D@3D <@3A !une &##; loans is B<3AJ as o0 Octo/er B;% DD3& <D3C Se5t3 &##; &##;>3 To t1e le0t is com5arison o0 delin.uenc" in t1is industr" versus delin.uenc" rate o0 w1ole BF 5ort0olio3 RECOMME9D T)O9 Based on t1e a/ove discussion% ) recommend t1at Business Finances Mana-ement s1ould consider 0ollowin- ste5s: ;3 rran-e =5ossi/l" usin- 1el5 o0 (S Em/ass"> a meetin- wit1 BiH 7overnment o00icials3 -oal o0 t1e meetin- s1ould /e to '"!"#(i " i0 BiH 7overnment is serious a/out im5osin- restriction on ille-al im5ort o0 c1ic2en e--s =t1at /ein- reco-nized as t1e /i--est dan-er to t1is industr">3 &3 )n case t1at BF -ets serious assurance 0rom BiH 7overnment% t1at ille-al im5ort =t1ere0ore t1e 5rices> o0 e--s will /e controlledL BF s1ould care0ull" consider new a55lications 5rovidin- 5ros5ects 1ave sta/le 1istor" o0 /usiness3 B3 )n case t1at BF is not a/le to -et 0irm insurances 0rom BiH 7overnmentL BF s1ould sto5 lendin- to t1is industr" and s1ould consider a wit1drawal 5lan aimed to save as muc1 0unds invested in t1is industr" as 5ossi/le3 C3 n" additional lendin- contem5lated in t1is industr" s1ould /e onl" 0or com5anies t1at 1ave 5roduct lines w1ic1 include /roiler as well as e--s and w1ic1 5roduce t1eir own 0eed3