6
QUESTION 2 40 marks
Supremo Tankers (Pty) Ltd (‘Supremo’) operates a fleet of trucks and trailers to provide logistical services to brick manufacturers in the Gauteng and Mpumalanga provinces. These services mainly entail the transport of bricks on behalf of brick manufacturers to their customers. Supremo owns 100 trucks together with ‘flat-bed’ trailers. These transport vehicles have loading equipment specially designed to load and unload bricks. The logistical services are offered to customers on one of the following bases:
• An annual contractual basis to transport bricks from the brick manufacturer’s premises to specified locations, based on a minimum number of loads per week. These contracts provide for a fixed monthly charge subject to changes in diesel fuel prices. Contracts specify that diesel fuel represents 20% of the total charge to customers and Supremo adjusts monthly charges to customers with immediate effect in the event of a change in the retail price of diesel fuel; or
• A per load basis in terms of which Supremo charges an agreed transport fee per kilometre travelled from the brick manufacturer’s premises to the delivery destination. These charges also fluctuate depending on diesel fuel prices, based on the principle that diesel fuel costs represent 20% of the total per kilometre charge to customers.
The shareholders in Supremo are Sergio Parisse (70%) and BWI Holdings (Pty) Ltd (‘BWI’) (30%), a black economic empowerment investment company owned by three prominent black businesswomen. Mr Parisse started Supremo in 1985 and has been instrumental in developing the business into the leading logistics provider to brick manufacturers in the provinces in which it operates. Supremo focuses exclusively on services to brick manufacturers.
Supremo’s profitability has declined significantly in the 2009 and 2010 financial years, mainly because of lower activity levels in the brick manufacturing industry. Research by an industry association revealed that sales volumes of brick manufacturers were 25% lower in 2009 than in the previous year and that sales volumes declined by a further 5% in 2010.
The decline in demand for its services that Supremo has experienced has also had an effect on its capacity utilisation. Prior to 2009 Supremo was able to optimise load volumes and to ensure that it carried full loads on most occasions. This changed in 2009 and now many of the trailers are empty on one or more legs of a journey. For example, bricks may be delivered to a destination but the trailer remains empty until the truck reaches the next customer.
DAB Bank is the commercial banker to Supremo. DAB Bank has exclusively financed the acquisition of trucks and trailers by Supremo over the past five years on an instalment sale basis. DAB Bank requires a deposit of 20% of the purchase price of new vehicles when financing Supremo’s acquisition of trucks and trailers. The instalment sale is repayable in equal monthly instalments over six years and the capital outstanding bears interest at the prevailing prime overdraft rate (currently 10%).
The bank overdraft balance with DAB Bank at 31 December 2010 was R28 405 000. As a result of the ongoing operating losses, DAB Bank has informed Supremo that they are required to reduce their bank overdraft balance to R5 million by 28 February 2011. If this overdraft balance is not reduced then DAB Bank will withdraw the overdraft facilities.
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Supremo has historically adopted a policy of trading in or disposing of trucks after five years. Supremo has found that after this period, trucks become very expensive to maintain and repair costs increase exponentially. This does not apply to trailers as Supremo has workshop facilities where it overhauls and cost-effectively maintains trailers to extend their useful life to more than ten years.
The demand for used trucks has declined dramatically over the past two years, which has had an adverse impact on disposal prices. The strength of the rand has also impacted on used truck prices. The trucks that Supremo uses are imported and a strengthening rand has resulted in minimal price increases of new trucks, which in turn affects the resale values of used trucks. Prior to 2009 Supremo generally disposed of trucks at prices which were higher than the carrying values.
The financial results and financial position per the management accounts for the year ended 31 December 2010 are summarised below:
SUPREMO TANKERS (PTY) LTD
EXTRACTS FROM THE STATEMENTS OF COMPREHENSIVE INCOME
Year ended 31 December
Notes
2010
2009
R’000
R’000
Revenue
1
102 920
128 650
Cost of sales
2
(66 120)
(76 820)
Gross profit
36 800
51 830
Operating and administrative costs
3
(23 500)
(21 400)
Loss on sale of vehicles
(2 600)
(2 500)
Earnings before interest, tax, depreciation and amortisation (EBITDA)
10 700
27 930
Depreciation
(14 380)
(16 750)
EBIT
(3 680)
11 180
Finance costs
(12 100)
(12 400)
Loss before taxation
(15 780)
(1 220)
Taxation
–
–
Loss after taxation
(15 780)
(1 220)
8
SUPREMO TANKERS (PTY) LTD
EXTRACTS FROM THE STATEMENTS OF FINANCIAL POSITION
As at 31 December
Notes
2010
2009
R’000
R’000
Non-current assets
Property, plant and equipment
4
157 200
149 200
Current assets
19 225
22 050
Inventories
925
950
Trade and other receivables
18 300
21 100
TOTAL ASSETS
176 425
171 250
Equity
31 970
47 750
Share capital
5 000
5 000
Distributable reserves
26 970
42 750
Non-current liabilities
83 650
86 400
Interest-bearing liabilities
5
80 050
82 800
Deferred taxation
3 600
3 600
Current liabilities
60 805
37 100
Trade and other payables
11 100
12 700
Current portion of interest-bearing liabilities
5
21 300
23 200
Bank overdraft
28 405
1 200
TOTAL EQUITY AND LIABILITIES
176 425
171 250
Notes
1 Revenue declined by 10% in the 2009 financial year compared to 2008. Supremo did not increase annual or per kilometre charges to customers in 2009 and 2010 except for changes relating to diesel fuel price fluctuations.
2 Details of the cost of sales are set out in the table below:
2010
2009
R’000
R’000
Fixed costs
Insurance, employee costs (truck drivers and workshop employees), vehicle licenses and workshop fixed overheads
32 920
33 990
Variable costs
33 200
42 830
Diesel fuel
20 580
25 730
Other variable costs (oil, maintenance, tyre replacement costs)
12 620
17 100
Total cost of sales
66 120
76 820
Diesel fuel prices decreased on average by 35% during the 2009 financial year. In 2010, diesel prices increased on average by 8%.
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3 Operating and administrative costs are mainly fixed costs, with only 5% of these total expenses being variable in relation to revenue and activity levels in the 2009 and 2010 financial years.
4 Supremo owns the property in Johannesburg from which it operates. The net book value and tax base of land and buildings at 31 December 2010 was R17 120 000. The property was acquired in 2002 for R19 million and a further R1 million was immediately spent on refurbishing the premises. Buildings are depreciated to a zero residual value on a straight-line basis over 50 years (the depreciation charge for the 2010 financial year was R360 000). At 31 December 2010 the net book value of the vehicle fleet was R139 300 000 (2009: R130 900 000).
5 Interest-bearing liabilities represent the balance outstanding on instalment sale agreements.
Reduction of the bank overdraft
The shareholders of Supremo have met to discuss plans of action to reduce the bank overdraft to R5 million by February 2011. BWI has indicated that it has no cash resources available to subscribe for shares in Supremo or to advance a shareholder’s loan to the company. Mr Parisse has in principle agreed to purchase the land and buildings owned by Supremo for R30 million, which represents the fair market value. He has furthermore agreed to lease the property to Supremo for five years at a market-related rental of R200 000 per month, subject to annual inflation escalations. The proceeds from the sale of the property will be used to reduce the company’s bank overdraft.
QUESTION 2 40 marks
Supremo Tankers (Pty) Ltd (‘Supremo’) operates a fleet of trucks and trailers to provide logistical services to brick manufacturers in the Gauteng and Mpumalanga provinces. These services mainly entail the transport of bricks on behalf of brick manufacturers to their customers. Supremo owns 100 trucks together with ‘flat-bed’ trailers. These transport vehicles have loading equipment specially designed to load and unload bricks. The logistical services are offered to customers on one of the following bases:
• An annual contractual basis to transport bricks from the brick manufacturer’s premises to specified locations, based on a minimum number of loads per week. These contracts provide for a fixed monthly charge subject to changes in diesel fuel prices. Contracts specify that diesel fuel represents 20% of the total charge to customers and Supremo adjusts monthly charges to customers with immediate effect in the event of a change in the retail price of diesel fuel; or
• A per load basis in terms of which Supremo charges an agreed transport fee per kilometre travelled from the brick manufacturer’s premises to the delivery destination. These charges also fluctuate depending on diesel fuel prices, based on the principle that diesel fuel costs represent 20% of the total per kilometre charge to customers.
The shareholders in Supremo are Sergio Parisse (70%) and BWI Holdings (Pty) Ltd (‘BWI’) (30%), a black economic empowerment investment company owned by three prominent black businesswomen. Mr Parisse started Supremo in 1985 and has been instrumental in developing the business into the leading logistics provider to brick manufacturers in the provinces in which it operates. Supremo focuses exclusively on services to brick manufacturers.
Supremo’s profitability has declined significantly in the 2009 and 2010 financial years, mainly because of lower activity levels in the brick manufacturing industry. Research by an industry association revealed that sales volumes of brick manufacturers were 25% lower in 2009 than in the previous year and that sales volumes declined by a further 5% in 2010.
The decline in demand for its services that Supremo has experienced has also had an effect on its capacity utilisation. Prior to 2009 Supremo was able to optimise load volumes and to ensure that it carried full loads on most occasions. This changed in 2009 and now many of the trailers are empty on one or more legs of a journey. For example, bricks may be delivered to a destination but the trailer remains empty until the truck reaches the next customer.
DAB Bank is the commercial banker to Supremo. DAB Bank has exclusively financed the acquisition of trucks and trailers by Supremo over the past five years on an instalment sale basis. DAB Bank requires a deposit of 20% of the purchase price of new vehicles when financing Supremo’s acquisition of trucks and trailers. The instalment sale is repayable in equal monthly instalments over six years and the capital outstanding bears interest at the prevailing prime overdraft rate (currently 10%).
The bank overdraft balance with DAB Bank at 31 December 2010 was R28 405 000. As a result of the ongoing operating losses, DAB Bank has informed Supremo that they are required to reduce their bank overdraft balance to R5 million by 28 February 2011. If this overdraft balance is not reduced then DAB Bank will withdraw the overdraft facilities.
7
Supremo has historically adopted a policy of trading in or disposing of trucks after five years. Supremo has found that after this period, trucks become very expensive to maintain and repair costs increase exponentially. This does not apply to trailers as Supremo has workshop facilities where it overhauls and cost-effectively maintains trailers to extend their useful life to more than ten years.
The demand for used trucks has declined dramatically over the past two years, which has had an adverse impact on disposal prices. The strength of the rand has also impacted on used truck prices. The trucks that Supremo uses are imported and a strengthening rand has resulted in minimal price increases of new trucks, which in turn affects the resale values of used trucks. Prior to 2009 Supremo generally disposed of trucks at prices which were higher than the carrying values.
The financial results and financial position per the management accounts for the year ended 31 December 2010 are summarised below:
SUPREMO TANKERS (PTY) LTD
EXTRACTS FROM THE STATEMENTS OF COMPREHENSIVE INCOME
Year ended 31 December
Notes
2010
2009
R’000
R’000
Revenue
1
102 920
128 650
Cost of sales
2
(66 120)
(76 820)
Gross profit
36 800
51 830
Operating and administrative costs
3
(23 500)
(21 400)
Loss on sale of vehicles
(2 600)
(2 500)
Earnings before interest, tax, depreciation and amortisation (EBITDA)
10 700
27 930
Depreciation
(14 380)
(16 750)
EBIT
(3 680)
11 180
Finance costs
(12 100)
(12 400)
Loss before taxation
(15 780)
(1 220)
Taxation
–
–
Loss after taxation
(15 780)
(1 220)
8
SUPREMO TANKERS (PTY) LTD
EXTRACTS FROM THE STATEMENTS OF FINANCIAL POSITION
As at 31 December
Notes
2010
2009
R’000
R’000
Non-current assets
Property, plant and equipment
4
157 200
149 200
Current assets
19 225
22 050
Inventories
925
950
Trade and other receivables
18 300
21 100
TOTAL ASSETS
176 425
171 250
Equity
31 970
47 750
Share capital
5 000
5 000
Distributable reserves
26 970
42 750
Non-current liabilities
83 650
86 400
Interest-bearing liabilities
5
80 050
82 800
Deferred taxation
3 600
3 600
Current liabilities
60 805
37 100
Trade and other payables
11 100
12 700
Current portion of interest-bearing liabilities
5
21 300
23 200
Bank overdraft
28 405
1 200
TOTAL EQUITY AND LIABILITIES
176 425
171 250
Notes
1 Revenue declined by 10% in the 2009 financial year compared to 2008. Supremo did not increase annual or per kilometre charges to customers in 2009 and 2010 except for changes relating to diesel fuel price fluctuations.
2 Details of the cost of sales are set out in the table below:
2010
2009
R’000
R’000
Fixed costs
Insurance, employee costs (truck drivers and workshop employees), vehicle licenses and workshop fixed overheads
32 920
33 990
Variable costs
33 200
42 830
Diesel fuel
20 580
25 730
Other variable costs (oil, maintenance, tyre replacement costs)
12 620
17 100
Total cost of sales
66 120
76 820
Diesel fuel prices decreased on average by 35% during the 2009 financial year. In 2010, diesel prices increased on average by 8%.
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3 Operating and administrative costs are mainly fixed costs, with only 5% of these total expenses being variable in relation to revenue and activity levels in the 2009 and 2010 financial years.
4 Supremo owns the property in Johannesburg from which it operates. The net book value and tax base of land and buildings at 31 December 2010 was R17 120 000. The property was acquired in 2002 for R19 million and a further R1 million was immediately spent on refurbishing the premises. Buildings are depreciated to a zero residual value on a straight-line basis over 50 years (the depreciation charge for the 2010 financial year was R360 000). At 31 December 2010 the net book value of the vehicle fleet was R139 300 000 (2009: R130 900 000).
5 Interest-bearing liabilities represent the balance outstanding on instalment sale agreements.
Reduction of the bank overdraft
The shareholders of Supremo have met to discuss plans of action to reduce the bank overdraft to R5 million by February 2011. BWI has indicated that it has no cash resources available to subscribe for shares in Supremo or to advance a shareholder’s loan to the company. Mr Parisse has in principle agreed to purchase the land and buildings owned by Supremo for R30 million, which represents the fair market value. He has furthermore agreed to lease the property to Supremo for five years at a market-related rental of R200 000 per month, subject to annual inflation escalations. The proceeds from the sale of the property will be used to reduce the company’s bank overdraft.
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