Reference no: EM13490537

Apex Assist Proprietary Limited ('Apex Assist') was founded in 1992 by two brothers, Andre and Devon Visagie. The company designs and  manufactures timber roof trusses, which are triangular wooden frameworks used in roof construction to support roof decks. Apex Assist is able to source the main raw material used in the manufacture of a roof truss, namely sawn timber, from timber mills within close proximity to their factory premises in Port Elizabeth.

The company has traded successfully over the years, mainly as a result of limited competition and the ability to source timber at reasonable prices. It has become the leading supplier of timber roof trusses in the Eastern Cape. Apex Assist has expanded operations by opening branches in other provinces. These branches are responsible for marketing, customer relations and order processing within their regions. All products are sourced by branches from Apex Assist's factory in Port Elizabeth.

Shareholders and management

Apex Assist implemented a black economic empowerment (BEE) transaction in 2006 in which the Visagie brothers sold shares to Ms Jessica Nyathi and Mr Siyabonga Mdodana.

After the conclusion of the BEE transaction the shareholders were as follows:
Andre Visagie 26%
Devon Visagie 26%
Jessica Nyathi 30%
Siyabonga Mdodana 18%
The shareholding has remained unchanged since that date.

All of the shareholders are directors of the company. Ms Nyathi serves as the chairperson of the Board of Directors and is also the Chief Executive Officer of Apex Assist. Mr Andre Visagie oversees the finance function while his brother, Mr Devon Visagie, is the Human Resources Manager. Mr Mdodana is a qualified engineer and is the company's Operations Manager.
Recent performance
Apex Assist performed exceptionally well in the years leading up to and including the financial year ended 31 August 2010, as a result of the boom in the construction industry. However, revenue declined steadily during the second half of 2010 and in its 2011 financial year ('FY2011') resulting in the company reporting its lowest profits in five years. The decline was mainly due to the continued decrease in sales volumes which the entire construction industry has experienced.
The directors of Apex Assist are concerned about the company's investment in working capital. Apex Assist has made a concerted effort to reduce inventory levels in line with reduced demand. There has been a decrease in cash customers (cash sales as a percentage of total sales decreased from 25% in FY2010 to 15% in FY2011), while credit customers have taken longer to pay. Furthermore, creditors have demanded settlement of outstanding accounts within a shorter period. These factors have resulted in an increased investment in working capital.

The company increased its overdraft facility with its commercial bankers on 1 September 2010 from R250 000 to R1 000 000. The overdraft bears interest at 2% per annum above the prevailing quoted prime overdraft lending rate (which is currently 9% per annum). Two of the conditions of the overdraft facility are that Apex Assist must have an interest cover ratio of five times or more and that its debt : equity ratio not exceed 50%. 8

Extracts from Apex Assist's most recent annual financial statements are presented below:
APEX ASSIST
STATEMENT OF FINANCIAL POSITION AT 31 AUGUST
2011 2010
R'000 R'000
Non-current assets 5 140 4 940
Current assets 7 375 7 345
Inventories 2 935 3 700
Trade and other receivables 4 430 3 540
Cash and cash equivalents 10 105
Non-current liabilities
Deferred taxation 30 25
Current liabilities 3 610 3 895
Bank overdraft 720 15
Trade and other payables 2 800 3 650
Taxation 90 230
APEX ASSIST
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDING 31 AUGUST
2011 2010
R'000 R'000
Revenue 27 628 35 916
Cost of sales (19 480) (24 601)
Operating profit 748 4 113
Finance income 2 5
Finance costs (40) (10)
Profit before taxation 710 4 108
Profit for the year 510 2 960
New business opportunity

Apex Assist was recently approached by Mandlovu Limited ('Mandlovu') which obtained a local government contract for the renovation of electrical substations within the Eastern Cape Province. The contract period is three years and Mandlovu intends to purchase all the roof
trusses required for the replacement of the substations' roofs from Apex Assist. Only one shape and size of roof truss is required for this contract, namely the J815D truss. Mandlovu requires a discount of 5% on the normal selling price of J815D roof trusses, which is currently quoted at R500 each. Furthermore, Mandlovu requires that Apex Assist has sufficient inventory of the J815D truss to ensure it is able to deliver to any destination within the Eastern Cape within 48 hours of an order being placed. Apex Assist is under pressure to make a final decision on the Mandlovu opportunity, as the start date of the local government contract is 1 March 2012.
9
The standard cost of the J815D truss is as follows:
Note R
Sawn timber 140
Other direct materials 105
Direct labour 1 35
Allocated overheads 2 70
Total 350
Notes
1 Factory labourers are full-time employees who earn a fixed weekly wage, irrespective of their productivity levels, based on a 40-hour work week.

2 Manufacturing overheads are allocated to trusses at 50% of the sawn timber cost. Based on past experience, 40% of manufacturing overhead costs are variable in nature.

Further details relating to the potential supply of roof trusses to Mandlovu:

· Apex Assist will have to purchase two additional trucks dedicated to delivering the roof trusses to Mandlovu sites, at a cost of R250 000 per truck. The trucks can be sold at the end of the supply period for R85 000 each. Apex Assist will be able to claim a straight-line wear and tear allowance of 33,3% per annum in respect of the trucks for income tax purposes. Each truck will also require a driver with an expected annual cash cost each of R117 000 to the company.

· Mandlovu has provided the following estimates of roof trusses required during the duration of the contract:
Year ending 28
February
Quantity of J815D
trusses
2013 4 840
2014 5 640
2015 5 820
· Apex Assist is planning to hold inventories equivalent to 10% of the estimated order quantities of roof trusses for the forthcoming year of the contract. Additional working capital requirements, excluding inventory, are expected to amount to R20 000 once the supply of roof trusses commences.
· A vacant warehouse on premises adjacent to the current factory will need to be rented from the beginning of March 2012 for storing the required roof truss inventory and for parking the delivery trucks. The annual rental will be R90 000, payable in advance. The landlord requires that Apex Assist should enter into a four-year rental agreement. It is unlikely that Apex Assist will need the space after the supply arrangement with Mandlovu comes to an end. The company therefore intends to sub-lease the warehouse from March 2015.
· Other cash operating costs arising from and associated with supplying Mandlovu are expected to total R50 000 per annum.
· The company's factory will have sufficient available capacity to manufacture the required roof trusses.
10
The Board of Directors of Apex Assist uses a hurdle rate of 20% to evaluate any investment or expansion opportunities. This hurdle rate is used irrespective of the nature of the funding for projects, whether it is in the form of equity, shareholder loans or external borrowings. The
same hurdle rate will be used to evaluate the after-tax cash flows of the Mandlovu opportunity.
Financing options
Mr Andre Visagie estimates that Apex Assist will need additional funding of R750 000 in order to pursue the Mandlovu opportunity. The commercial bankers of Apex Assist have indicated that they are not prepared to advance an additional R750 000 to Apex Assist given their current exposure to the company.
Although the Board of Directors of Apex Assist has explored various financing options, only one option is available at present. Mr Jeremy Greed, a friend of the Visagie brothers, has offered to advance a loan of R1 million (the minimum amount he is prepared to lend) to Apex Assist subject to the following terms and conditions:
· The loan will bear interest at a fixed rate of 12% per annum, payable semi-annually in arrears;
· The capital amount of the loan will be repayable in a single bullet repayment three years after the advance of the loan; and
· Apex Assist will be required to pay an initiation fee of 5% of the loan amount to Mr Greed upon signature of the loan agreement.