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Chapter One

PREAMBLES TO CASE STUDY

A case study represents a body of information describing a particular problem situation. In an organizational context, it is an amount of thought, behavior and interpersonal relationship among managers, employees and clients as well as an account of general environment conditions and priorities that characterised a specific decision action field. Such cases are to be analysed rather than solved.

Analysis may evolve through classroom discussion or be offered in a written report. In either form, each analysis starts with a focus in a central issue or question representing an accurate refection of the total problem or situation.

Within this definition, alternative course of action may be hypothesised. An argumentative thesis explaining further detail of important action element of the case can then be developed. This argument should be supported by factual and interpretative evidence from the case itself not from vague generalizations and opinion. A final step in the analysis may be a set of recommendation and opinions suggesting action or decision logically following such argumentation.

Purposes of Case Analysis

Increase awareness of environmental conditions Add to Knowledge of Organizational Behaviour Strengthen abilities in Identifying Situational Problems Enhancing Skill in Framing appropriate Questions Improve Skill of Problem Solving

Variety of processing models used in case analysis will include the following:

i. A problem solving formatii. Llevel of analysis

iii. Ssolution strategy and decision ruleiv. Aanalytical technique

Problem Solving Format:

The traditional approach to a case analysis is the format described above. However, the learning experience may relate more fully to social interactions where, e.g a group of participants is assigned the case. Moreover, a particular phase of the problem solving definition may be emphasized.

Level of Analysis:

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A case study will usually present a genetic focus on a generalized area of concern, e.g, it may concentrate on:

a) Institutional / political interfacing with the external environment, where strategic issues of long run survivals are paramount.

b) Internal managerial judgmental issues where questions of polices on co-ordination and effectiveness dominates.

c) Technical tactical concerns with efficiency, where questions on procedures and methods require solutions.

Solution Strategy and Decision Rules

Various solution strategies are available for analysis of case. They include straight forward computational method, working backwards etc.

Furthermore, various decision rules may be more appropriate or less to the case under study. These rules include optimistic gambling, regret minimization and computed mathematical expectation. Each will direct a different solution and one of them should be applied scientifically.

Analytical Technique

A number of data collections/ analytical technique can be applied to a case study. Most case involves analyzing precedent conditions and future expectations. On the other hand, if knowledge about relations exist, statistical and finance analysis may be made.

Preparation of Analysis

There is no best way to analyse a case, nor is there a standard form in which to present the data. The manner of presentation depends on:

i. TThe nature of the caseii. TThe need for detailed and supporting evidence.

iii. TThe purpose for which the analysis is being mad.

Unless instructed to the contrary, the governing principle is brevity and conciseness. It is well to remember that difficulties of reporting multiply at a rate greater than an increase in the details contained on the analysis.

The following suggestions will help in the preparation of case analysis whether oral or written:

- Read the case thoroughly and completely; .- If the case description is long, review notes or summaries of pertinent information before proceeding with the analysis, lawyers call this “phase briefing a case”. - Formulate in writing a precise statement of the problem. Superficial question in the case may not penetrate real dimension of the problem.- Elaborate on the problem statement

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- Describe alternative decisions or causes of action that can be taken- Raise question concerning the various hypothesis- A useful evaluation model include two types of assessment

Cost/ benefit of a particular action versus

Testing such evaluations against accepting/ rejecting that decision.-Organize the evidence so as to substantiate a specific recommendation, while stating conclusion clearly.

What is a Case Study?

A case study presents materials about problem situation to be studied in detail, with the student being required to come up with a reasoned solution to the problem. The case material usually consists of a detailed description of a real life situation and the student is expected to demonstrate through his analysis how he can deal with the problem.

Case studies are designed primarily for training would be (future) managers because they help to develop skills in problem analysis and resolution. Characteristically, a case attempt to present, in classroom suitable facts about a real life happening in its context or milieu, that is, to say complete with its relevant and perhaps, not so relevant associated incident. It is for the student to study the case carefully, identify the problem(s) involved, sieve from the available information such fact as would assist in the resolution of the problem and such other data which are not so readily available but which may need to be assumed in formulating a solution.

Developing the appropriate solution would usually consist of outlining and considering possible alternative courses of action, and assessing their merits and demerits, cost and benefits as well as the feasibility or otherwise, recognizing their implications or outfaces with other problems and in the end developing a strategy for implementation which minimizes any possible adverse effect on the organizations ability to achieve it’s other goals.

What is examined or taught in a case study is not how much knowledge a student has about the particular problem but the methodology or technique for dealing with complex situation, for analyzing problems for logical thinking and decision making for developing solutions which have reasonable efficacy in the context presented.

Features of Case Study

Case studies attempt to present in a realistic manner, problems, the like of which a manager would expected to find in real life.

To effect a solution of declining profitability could conceivably involve actions and remedies on several managerial functions such as marketing, production, finance, personnel etc.

Case study test, in a practical way, the relevant processes of decision making of developing an acceptable solution to a problem

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There is also no question of access to unlimited information.

Searching for complete information as possible before reaching conclusion is helpful.

Procedures for Dealing with Case Study

Stated below are comprehensive procedures to be adopted in analyzing a case:

Student should ensure, in the first instance, which they have a thorough grasp of solution presented. This will be acquired through several readings of the case taking note of critical incidence.

Student should identify the root problem(s). if the question already identifies this, for example, when a specific question is asked, it is a help and the student should pay close attention to and confine his/her answer to it.

He should, next ascertain the relevant fact. This must be a fact that has direct or indirect bearing on the problem.

Student should outline the alternative courses of action available and then, establish their cost and benefit.

Student should select the best course of action. The best course of action on any rational situation is one which procures the greatest advantage for the least cost.

The option selected should be implemented. This will involve developing and operational plan where ‘it is called for, bearing in mind demand power, equipment and financial implication as well as any organization changes that may be required.

What is required of students?

This means that on how students can score good marks. Three major skills tested on is paper are:

1. Analytical skill2. Communication skill3. Familiarity with professional ethics.

Breaking down these skills you have eleven (11) distinct abilities:

1) Ability to read and comprehend quickly, accurately and assimilate facts.2) Ability to distill a mass of fact and identify which is relevant.3) Ability to marshal information into useable from to sustain valid decisions.4) Power of logical thinking that is, ability to interpret situations correctly.5) Ability to see relationship that is, how problems interrelate with each other.

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6) Ability to anticipate reactions to alternative propositions.7) Ability to determine cost-benefit implications of recommended solution.8) Ability to communicate clearly, simply and effectively. This includes

grammar and action.9) Familiarity with ethical issues.10) Ability to manage time11) Ability to write report by observing the golden rule of reporting.

Competencies Case Study is out to test-Demonstrate the understanding of a scenario-Demonstrate understanding of data and information-Select and use a tool appropriately-Identify, State and explain opportunities, risk, problems and issues.-Identify, state and explain the available options-Evaluate the options - Compare the choice of options-Demonstrate understanding of drivers of choice-Assess and explain the risks of using given data, information and tools-Make reasoned and reasonable inferences-Show professional skepticism-Demonstrate professional and business ethical awareness-Know when to and how to constructively challenge-Move to and state conclusions-Make appropriate qualifications and reservations-Devise and state appropriate recommendation-Create a required deliverable-Draft a defined report with two requirements:

Professional analysis, application and evaluation skills

Rendering of professional advice

The Tools to apply to Case Study Examination- Analysis of a basic set of financial statements consisting of statements of comprehensive income, financial position and cashflow.- Budgets and forecasts on management information- Strategic tools such as PESTEL, Five Force analysis, SWOT etc.- Financial engineering assessment tools- Business Valuation tool.

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Chapter Two

CASE ONE

VIRTUES ENTERPRISE LTD is an old established formerly successful company manufacturing containers and plastic injection molders. For many years they held dominance in the trade but in recent times, although still sound and financially successful, they had been overtaken and left behind by competitive organizations. After many years of growth the market for container work was static and indications were that contraction was imminent. Momentary stillness was in the air but the future looked dark and there were already ominous rumblings in the trade indicating more stormy times ahead.

ORGANISATIONAL STRUCTURE

The current organisation structure is as shown in Exhibit I. The company’s key directors and senior management team are as shown below:

Alhaji Abd-Razaq (MD/Chief Executive)

Nelson Maduka (Technical Director)

Mr. Oshinowo (Financial Director)

John Emeka (Gen. Manager-Production/sales)

Mallam Audu (Chief Accountant)

Mrs. Yusuf (Company Secretary/legal Adviser)

The Managing Director and Chief Executive Report directly to a well-constituted Board of Directors. The company’s external auditors are ADE, BELLO, CHUKWU & CO. – a firm of Chartered Accountants in Abeokuta.

It is pertinent to comment briefly on the personality of the managing director and chief executive of the company. Alhaji Abd-Razaq was a large, hearty, volcano of man who gave a first impression of an excessively breezy extrovert. A greater knowledge of his character revealed a more enigmatic person who at other time would appear

abstracted and moodily aloof or frosty and hard bitten with an inclination to be testy if his prejudices were challenged.

What was certain was that he could not be ignored – liked or disliked everyone knew he was a positive force. He was drafted to join the board of VIRTUES ENTERPRISE LTD on a three year secondment arrangement for the time it was ripe for change and new creative thinking particularly in view of the severe challenge the organization would undergo over the next few years. This outline description of the man has been given because, without question, his style of

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management and dominant personality were to have a weighty influence over the corporate planning activities of VIRTUES ENTERPRISE LTD.

ESTABLISHMENT OF A CORPORATE PLANNING UNIT

A corporate planning unit was created within the first month of his appointment. This justification was given by Alhaji Abd-Razaq at the preceding board meeting:

“I am enthusiastically and whole heartedly committed to and convinced of the value of corporate planning for virtues entity.

It has been perhaps a little late but I do not wish to be critical and will accept that information planning has worked well in formal times”

“This company cannot assure that its product and technology will be the same ten years from now. We are about to operate in a complex and rapidly changing environment which the company must continuously monitor and adapt if it is to survive, let alone prosper. Your existing system of budgeting and budgetary control is effective but such a system is concerned with the short-term planning activaties- we need to develop a coherent long- term strategy”.

“I know from experience that this task of preparing a long-term plan will be the most demanding of managing skills. With respect, fellow member of this board too little of corporate planning and lack of the required debt of knowledge. There will be little point in setting long-term objective in broad terms; they will do nothing but sound virtues. All factors must be considered in details as we fashion our corporate objectives”.

“For the time being, I therefore intended to lead the corporate planning unit-not that I wish to be seen as Elijah, prophesying the future providing all the solutions.

In time, management by objectives will be my style, setting sub-objective right down to individual target, scrupulously avoiding top- down planning as much as extended budgeting. I have not fully worked out the terms and membership on our unit, but I have decided upon its slogan – Vision 2020 A. D. Starts TODAY”.

Jane Okafor was posted to corporate planning unit. In her early 20s and studying for final professional examination of the Institute of Chartered Accountants of Nigeria, it fell her lot to dig and delve, doing much routine work at the bidding of her superior officers. The cooking relationships were excellent and the unit seemed to have purpose and drive.

Alhaji Abd-Razaq had broken the corporate planning task into two stages which he described as:

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STAGE 1

Where this company is now, and its relationship to competitors? Why did we arrive in this position and what will happen to us if we continue in this way?

STAGE 2

Where the company should be heading…..? What opportunities will be open to us naturally in the future and what opportunities must we create for ourselves?

Jane Okafor became deeply involved in the routine of Stage 1… sifting through published accounts and other data filed with the registrar of companies, obtaining competitor firms’ product price, pouring over information abstracts and more general press or merger releases.

There was available, fortunately, quite a variety of data of an inter-company nature some published openly, some obtained in a more clandestine manner. Although the information was not entirely satisfactory or completely accurate. It did teach VIRTUES ENTERPRISE LTD. much about their organization. The vital statistics of VIRTUES ENTERPRISE LTD. and other companies in the same industry are carefully summarized in Table I to this case study.

For Jane Okafor, although much of the work was repetitive and time-consuming. It did wonders in her examination capabilities, particularly in such areas as interpretation of accounts and ratio analysis for example, it was necessary to analyze the accounts of a smaller competitor who had not participated in any ratio schemes. The summarized accounts for three year are as given Table 2 and 3 to this case study. The information has been largely drawn from published accounts although some have been estimated based on other sources.

The company’s auditor has recently completed their audit and their report is shown as Exhibit 2 to this case study. During the course of the audit, the audit senior discovered that Alhaji Bagudu –the partner in charge of the audit bought 10,000 shares in the company when the share price was at the lower level possible.

At a recently held workshop on advanced corporate finance for executives, Alhaji Bagudu met one of the company’s bank managers and the following conversation took place;

Bank Manager: Good Day to you Alhaji, how is life with you and your family.

Alhaji Bagudu: Fine, thank you.

Bank Manager: I phoned Alhaji Abd-Razaq last week to find out the position of the audited report. The bank is very worried and concerned about VIRTUES ENTERPRISE LTD’s borrowings and was keenly awaiting the audited accounts for the year ended 30th September, 2008.

Alhaji Bagudu: We have completed our audit and our report was duly signed and submitted to them two days ago.

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Bank Manager: I understand that you are a personal friend of Alhaji Abd-Razaq. Do you think that the company can meet up its financial obligations?

Alhaji Bagudu: Hm! That is a multi-million naira question - which is difficult to answer at this stage. All I can tell you now is that you are not alone. Even our audit fees have not been paid. VIRTUES ENTERPRISE LTD. is our major client and we cannot afford to let the audit go. Hence we have to be cautious in our approach to collect our outstanding fees. From my personal relationship with Alhaji Abd-Razaq, I discovered that he suddenly developed interest in the political situation of the country. I think whatactually affected them is the large sum of money given as donations to two of the political parties in the early part of the year.

Bank Manager: Thank you for your useful information. We shall see again after the workshop.

LIST OF TABLES AND EXHIBITS

TABLES

1. Inter Company Ratios2. Income statement 2006 – 20083. Balance Sheet 2006 – 2008

EXHIBITS

1. Organizational Structure2. Report of the Auditors

TABLE 1

INTER-COMPANY RATIOS

COMPANIES VELSMALLCOY

M N O

1 Operating Profit/operating assets (%) 17.0 24.0 20.4 19.0 12.22 Operating Profit/Sales (%) 14.0 18.0 14.0 12.5 10.63 Sales/Operating assets (multiple) 1.2 1.4 1.5 1.5 1.2

Functional Cost (as a % of Sales)

4 Production 78.0 72.5 77.0 79.0 80.05 Distribution 3.0 5.8 5.0 6.5 4.06 Administration 4.0 4.0 4.0 2.5 5.1

Production costs (as a % of sales)

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7 Materials 34.0 32.0 34.0 33.0 34.08 Labour 26.0 17.0 23.0 27.0 22.09 Production Overheads 18.0 23.0 20.0 20.0 24.0

Asset Utilization (per 1’000 of sales)

3(a) Operating assets 830 750 700 670 87010 Current assts 460 350 250 340 37011 Fixed assets 380 400 420 320 500

Current Assets Utilization (per 1’000 of sales)

12 Raw material 130 45 70 70 6013 Work-in-progress 125 80 80 60 7014 Finished Stock 50 80 30 80 14015 Debtors 155 145 70 130 100 Fixed Asset utilization (per 1’000 of sales)

16 Land and building 200 100 220 130 28017 Plant and Machinery 172 280 180 160 20018 Vehicles 8 20 20 30 20

TABLE 2

STATEMENT OF COMTREHENSIVE INCOME

(INCOME STATEMENTS)

2006 2007 2008

N’000 N’000 N’000 N’000 N’000 N’000

Cash Sales 90 84 82

Credit Sales 1,200 1,420 1,600

1,290 1,504 1,682

Stock 60 70 58

Materials 540 590 670

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Wages 140 148 160

Factory Overheads 340 400 440

1,080 1,208 1,328

Less Stock 70 58 72

1,010 1,150 1,256

Gross Profit 280 354 426

Admin Overheads 140 145 152

Distr. & Mkt Overheads 90 130 174

230 275 326

Net Profit 50 79 100

Company Tax 27 39 50

Net Profit after Tax 23 40 50

Ordinary Dividend 20 20 30

Addition to reserves 3 20 20

TABLE 3

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

2006 2007 2008

N’000 N’000 N’000 N’000 N’000 N’000

Ordinary Shares of N1 each 250 300 300

12% Debentures 100 100 100

Reserves 50 70 90

400 470 490

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Current Liabilities

Creditors 90 110 138

Taxation 27 39 50

Proposed dividends 20 20 30

Bank Overdraft - - 100

137 169 318

537 639 808

Non- Current Assets 180 319 474

Current Assets

Stock 70 58 72

Debtors 256 258 262

Cash at Bank 31 4 -

357 320 334

537 639 808

Analysis of Non-Current Assets

Land & Buildings Plant & Machinery

N’000 N’000 N’000 N’000 N’000 N’000

Opening cost 240 240 240 240 240 240

Additions during the year - - 60 5 160 153

Disposals during the year - - - (8) - (3)

240 240 300 177 337 487

Accumulated depreciation 120 126 134 117 132 129

120 114 166 60 205 308

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Number of employees

2006 - 322

2007 - 334

2008 - 336

EXHIBIT 1

ORGANIZATION STRUCTURE

BOARD OF DIRECTORS

MD/CEO

FINANCIAL DIRECTOR TECHNICAL

DIRECTOR

COMPANY SECRETARY/

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LEGAL ADVERSIER

CHIEF ACCOUNTANT GEN. MANAGER

(PRODUCTION/SALES)

FINANCIAL COST SALES PRODUCTION

ACCOUNTANT ACCOUNTANT MANAGER MANAGER

REPORT OF THE AUDITORS TO THE MEMBERS OF VIRTUES ENTERPRISES LTD

We have audited the financial statements for the year ended 30th September 2008

The company’s directors are responsible for the operation of the financial statements. It is our responsibility to form an independent opinion, base on our audit, on these statements and to report our opinion to you.

We conducted our audit in accordance with generally acceptable auditing standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. The financial statements are in agreement with the books of accounts which have been properly kept and we obtained the information and explanations we required.

In our opinion, the financial statements give a true and fair view of the state of affairs of the company as at 30th September, 2008 and of the profit and cash flow of the company for the year ended on that date and have been properly prepared in accordance with the companies and Allied matters decree 1990 and relevant statements of accounting standards issued by the Nigerian accounting standards Board.

ADE, BELLO. CHUKWU & Co.

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Chartered Accountants.Abeokuta, Nigeria

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Required

Using the information above prepare a draft report to VIRTUES ENTERPRISES LTD. Your report should comprise:

1. Basic steps to corporate planning, key operational and financial business indicators compared to other companies, guidance to financial management and policies of the company and highlighting ethical issues in this case.

2. Summarize the main areas in which the Chief accountant could contribute to long term planning and enumerate factors to be .considered in creating corporate objectives for the company.

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Chapter 3CASE TWO

RESOLUTE FARMS LTD

INTRODUCTIONResolute Farms limited is an agricultural private limited liability company, which is engaged inthe production of Special Palm Oil (SPO). The company was established 25 years ago by a group of private promoters. It purchased a total of 10, 000 hectares of farm land from some families in a local community. The company had developed 60% of the land and the palm trees are fully matured. The remaining 40% of the land is not yet developed. The company had been doing well since the planted area matured. The financial statements of the past five years are contained in Appendices 1 and 2. The company had been able to get sufficient labour for its various operations from the local community.

The gestation period for the type of palm trees planted is a maximum of five years and by the beginning of the sixth year of existence, the company had started to produce Fresh Fruit Bunches (FFB) for sale. The production schedule of FFB since the company’s plantation matured is contained in Appendix 3. The company commenced the processing of its FFB in its seventh year of its existence. The company had devoted its resources mainly to the production of SPO, hence it did not acquire a palm kernel crushing plant along with the palm oil processing mill.

The Company’s SPO had enjoyed a very good market, with a market share of about 30%. There are seven other companies in the industry, of which four are quoted. The buyers of the company’s SPO usually pay (between four to six weeks) in advance before any supply is made. This system provides a good source of working capital for the company. Though the company is a private limited liability company, it compares favorably with quoted companies in the industry in terms of turnover and profitability. The average P/E ratio of a good quoted company with stable earnings and dividend for several years in the industry is 9.5 while that of Resolute Farms limited is 9.8. The share holders have not been willing to get the company quoted so as not to dilute the ownership structure.The Company’s operations are seasonal. The main season is usually from February to May and the light season runs from September to November. The company must take advantage of the main season in order to ensure that sufficient cash is realized to be able to operate during the off -season. The company, during its early years of operations, when the palm trees had not matured made use of casual labour. It was discovered when SPO processing started, that the system of using casual labour was inadequate.

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Since the peak period coincides with the land preparation for local farming activities, It becomes difficult for the company to get sufficient labour during the peak period. To retain its labour force throughout the year, the company makes effective use of its labour for plantation upkeep during the off-season. The company also has a policy of retaining any casual labourer who had worked conscientiously for a period of one year.

In the early years of SPO processing, the company made it a policy to grant an annual scholarship award to indigenes of the community from which the land for the plantation was purchased. The company also assisted on some community development projects and strived to give indigenes preference in the recruitment of personnel.

In view of good relationship, the community seven years ago, indicated its intention to give more land to the company for its expansion programme when the 4, 000 hectares are fully developed.

The shareholders of the company had been declaring 80% of its distributable profits as dividends for the first five years and ploughing back the balance. The amount ploughed back had been invested on purchase of posh cars for the directors and top management of the company. Very little amount was invested in agricultural equipment which had been a limiting factor for the effective harvesting of the FFB needed for the production of the company’s product.

MARKET SITUATION Usually, the customers of the company had to pay four to six weeks in advance for any purchase. The company, being in a sellers market, had always passed any increase which may be due to inefficiency in its operations to the customer. The demands for the company’s product is fairly inelastic. Considering the present state of encouragement by the government for investment in palm plantation and the ever increasing foreign exchange rate which has made it unattractive to import SPO or its substitutes into the country, the company could still enjoy this fairly inelastic demand for the next few years.

Currently, as a result of the problems listed below, the company’s customers may have to pay three month in advance for any supplies:

(i) Incessant breakdown of the mill which is now aging;(ii) Low extraction ratio due to inefficiency of the mill;(iii) Low staff productivity due to low morale; and (iv) Inability to procure spare parts in time for the mill and other farm equipment due to

liquidity problems.Recently, a customer, FATHIA Palm Products Limited (FPPL) paid for 150 tonnes of SPO at N50, 000 per tone. The supply had been delayed for four month. The company increased its price to N65, 000 per tone and FATHIA Palm Products Limited was requested to pay an additional N15, 000 per tone before supply could be made to it. The company had also offered to refund N7.5 million paid by FPPL if the latter could not afford to pay the additional N15,

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000 per tone. FPPL had taken the company to court to press for the supply at the price demanded and for which it had paid.

STAFF DEVELOPMENT

The company has a total work force of 500, of which 150 are casuals. In the past, the casual labourers were converted to permanent staff after a year’s service but at present there is no such opportunity as casual labourers are laid off during the off season. Rather than making use of them for the usual farm upkeep, contractors are now used for farm upkeep. These contractor are connected persons to top management. In most cases, the contracts were poorly executed but were paid for. These contractors, in most cases, made use of the laid off casual labourers.

The remaining 350 permanent staff is in the following cadres:-

Top management 4Senior management 21Middle management 30Supervisory 50Junior 245

350Most staff do not attend any staff improvement courses or training programmes except members of top management and a few favoured staff in the senior and middle management cadres. The junior staff cadre does not enjoy any training opportunity at all.

MANAGEMENT STRUCTUREThe management of the company is headed by a Managing Director who holds a first degree in Physiotherapy. He is a cousin of the Chairman, a major promoter of the company. The Executive Director (Finance) has an Ordinary Diploma in Accounting. He rose through the ranks to this position. He enjoys good rapport with the Managing Director. He is fond of telling the Managing Director any adverse comments by any other management staff. The Executive Director (Operations) is a specialist in the field of agriculture. He has a good knowledge of the industry but his performance was impaired as the Managing Director and the Finance Director did not co–operate with him. Most equipment needed for effective operations are always not provided. The Executive Director (Technical) holds a diploma in Automobile Engineering. He was recruited 15 years ago to take charge of the Mechanical Workshop. He rose to the present position a year ago through the assistance of his in-law, who is related to a Director and one of the promoters of the company. The former Technical Director who holds a degree in production engineering and Masters Degree in Business Administration was frustrated out of the company. His problems started when he advised that the company be prudent by setting aside funds for the refurbishment or replacement of the mill rather than encouraging the shareholders to distribute almost all the profits.

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CURRENT PROBLEMS OF THE COMPANYThe immediate problems of the company are as follows :-(1) The company is currently experiencing a liquidity crisis arising from low production of

SPO. Delays in supplying customers had discouraged many from making advanced payment which had been a good source of working capital in the past.

Management had estimated that the company would need N5 million to buy essential spare parts for the mill. This amount would sustain the mill till a major refurbishment or replacement would take place which should not be later than a year if the company is to avoid a complete shutdown. It would take three months before any repayment can be made from the sales proceeds. The company could not raise the fund from its bankers as it could not service its present commitments.

The agricultural loan of N25million taken 5 years ago for the planting of undeveloped land was diverted to the construction of a sophisticated office complex in the plantation. The loan has a three–year moratorium. The principal has not been repaid at all and the loan has not been serviced effectively.

The two options now available to get the funds required for the spare parts are:-(a) To borrow from a local finance company at an annual interest rate of 42%.

The repayment of capital will start after three months and will be spread equally over three months.

(b) The spare parts could be obtained at exorbitant prices from a supplier who is ready to supply the parts needed on credit or for cash. The supplier is ready to allow six months credit.

(2) There is an urgent need to refurbish the mill within the next one year. The repairs to be carried out as a result of the problem listed above are only a temporary measure. The mill should be replaced as it has become technologically obsolete. The cost implication of refurbishing and replacing the mill are contained in Appendices 4 and 5.

(3) The company had been selling its uncracked kernel to local mini kernel crushers, but substantial revenue is lost in the process. In the light of these, the company planned to purchase a palm kernel crushing plant. The production of palm kernel will require three grades of labour. Grade I and II will have to be recruited at the inception of operating the palm kernel crushing plant. Grade III labour is available in the company and they are currently not engaged. They are being retained because their sevices will be required in a year’s time when the company’s planting programme is expected to have fully matured. It is reckoned that by this time the company will recruit Grade III labour for the palm kernel plant, if required.

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The cost implications of buying and running the palm kernel crushing plant are contained in Appendix 6.

(4) Due to the current financial crisis, the company had stopped granting scholarships to deserving indigenes and had not aided any community based project in recent times. This situation had generated a lot of bad feelings from the host community.

(5) The company is presently experiencing a serious encroachment problem on its undeveloped land. The local farmers have recently gone to the extent of planting permanent cash crops on the land. The recent inability of the company to aid the community on its development projects had reduced the support being given by the chiefs and leaders of the community who had been preventing their subjects from encroaching into the company’s farmland,The company would need to plant 1,500 hectares within the next three years, in order to stop the community from encroaching on its property. Failure to plant, may result in the community taking over the property completely. Any attempt to dislodge any trespassers could lead to crises.The cost implications of planting the 1, 500 hectares are given in Appendix 7. The planting may be spread over three years at 500 hectares per annum.

FUTURE PLANApart from solving the immediate problems, the company is proposing in the medium term to:-(a) Plant the remaining 2,500 hectares if it is able to plant the 1,500 hectares in an area

prone to encroachment within the next three years; and(b) Produce refined palm kernel oil which is enjoying increased demand and can be a

good foreign exchange earner for the company.

MANAGEMENT CONSULTANCYThe company has commissioned its external auditors to look into its problems and

make recommendations to show them. The External Auditors had been auditing the company’s financial statements for the past 15 years and the audit constitutes 50% of its practice income. The firm has good rapport with the management. The top management had intimated the auditors that the shareholders would not like the company to go public in order to avoid dilution of the present ownership structure and that the current shareholders may not be able to inject further funds into the company.

Required:Draft a report to the management making necessary recommendations and appropriate advises after:

STARRY GOLD ACADEMY

1. Reviewing, appraising and making computations as far as possible given the special highlights and appendices in the case.

2. Comment on the litigation instituted against the company by FATHIA Palm Products Limited, and the ethical issues surrounding your appointment as management consultant considering the fact that you are also the external auditor.

APPENDIX 1RESOLUTE FARMS LIMITED

FIVE YEARS BALANCE SHEET AS AT 31 DECEMBER

2010 2009 2008 2007 2006

N’000 N’000 N’000 N’000 N’000

Paid up share capital

25,000 25,000 25,000 25,000 25,000

Long term loan

25,000 25,000 25,000 25,000 25,000

Profit and Loss Account

36,500 33,000 26,000 20,000 16,000

86,500 83,000 76,000 70,000 66,000

Represented by:

Fixed assets 88,750 79,500 73,400 64,370 61,000

STARRY GOLD ACADEMY

Current Assets:

Stock of spare

Parts 2,000 4,000 3,500 6,500 7,000

Trade debtors 1,500 1,200 1,750 950 1,050

Pre payment 750 1,050 600 800 720

Cash and bank balances

4,500 3,750 2,860 3,450 2,770

Less current Liabilities

(11,000) (6,500) (6,110) (6,070) (6,540)

Net current assets (Liabilities)

2,250 83,000 76,000 70,000 5,000

86,500 83,000 76,000 70,000 66,000

STARRY GOLD ACADEMY

APPENDIX 2RESOLUTE FARMS LIMITED

FIVE YEARS INCOME STATEMENTS FOR THE YEAR ENDED 31 DECEMBER

2010 2009 2008 2007 2006

N’000 N’000 N’000 N’000 N’000

Turnover346,00

0387,00

0313,10

0304,00

0300,30

0Cost of production

211,060

215,460

172,000

158,080

154,150

Gross profit134,94

0162,54

0141,10

0145,92

0146,15

0Administrative andDistribution Expenses

109,940

112,540 98,243

117,169

123,150

Other income 2,000Profit before tax 25,000 50,000 42,857 28,751 25,000Tax 7,500 15,000 12,857 8,751 7,500Profit after tax 17,500 35,000 30,000 20,000 17,500Dividend 14,000 28,000 24,000 16,000 14,000Retained profits 3,500 7,000 6,000 4,000 3,500

STARRY GOLD ACADEMY

APPENDIX 3RESOLUTE FARMS LIMITED

20 YEARS FRESH BUNCHES (FFB) PRODUCTION SCHEDULE

Year FFB Production in (tonnes)2000 51,0001999 54,0001998 55,0001997 59,0001996 61,0001995 72,1801994 72,0001993 72,8501992 71,0001991 60,0001990 72,0001989 72,5001988 71,5001987 71,1901986 73,1501985 70,5001984 72,0001983 54,0001982 36,000

STARRY GOLD ACADEMY

1981 36,000

NOTE: The palm trees were expected to achieve the standard production of 12 tonnes of FFB per hectare by year 1984 and the normal standard should be maintained for the next 20 years.APPENDIX 4

RESOLUTE FARMS LIMITEDCOST OF DATA FOR MILL REFURBISHMENT

Cost of refurbishmentN150,000,000

Life span if refurbished 5 yearsSalvage value

N30,000,000Production capacity (SPO) p.a.Production cost per tonne of SPO other than FFB:

Labour N 1,200Material other than FFB N

4,800Fixed overheads of which depreciation comprises

40% N 4,000

STARRY GOLD ACADEMY

Selling price per tonne N65,000Value of the mill if sold now N20,000,000Notes;

(i) Necessary farm upkeep operations would be carried out to bring production to normal standard of 12 tonnes of FFB per hectare.

(ii) The total planted and matured area is 6000 hectares.(iii) Production of FFB will increase every 5 years by

20% due to maturity of new planting.(iv) FFB not processed could be sold for N6,000 per

tonne.(v) The refurbishment could be carried out every 5

years at a cost of N 150 million for each refurbishment. The refurbishment cannot be carried out for more than three times after which the mill has to be scrapped finally. The final salvage value of the mill is the same value of the refurbished mill after 5 years of usage.

(vi) The production capacity after every refurbishment remains constant at 10,000 tonnes of SPO per annum.

(vii)The extraction ratio of SPO is 12.5% of FFB input.

STARRY GOLD ACADEMY

APPENDIX 5RESOLUTE FARMS LIMITED

COST IMPLICATIONS OF A NEW MILL

Cost of purchase, including installations costsN 2.4 billion

Estimated life 15 yearsProduction capacity (SPO) p.a.

24,000 tonnesProduction cost per tonne of SPO other than FFB

Material other than FFB N Labour 2,400Fixed overhead of which depreciation comprise 40%3,000

Selling price per tonne65,000

Salvage value25,000,000

Notes:(i) The total estimated production of FFB is currently

72,000 tonnes per annum. FFB that cannot be processed could be sold for N 6,000 per tonne.

STARRY GOLD ACADEMY

(ii) Production of FFB will increase every five years by 20% as a result of maturity of new planting.

(iii) The extraction of SPO is 20% of FFB input.

APPENDIX 6

RESOLUTE FARM LIMITEDCOST OF AQCUISITION AND OPERATION OF PALM

KERNEL CRUSHING PLANT

Cost of acquisition including installation

Useful life N

15,000,000

Salvage value 10 years

One engineer (salary p.a.) N

1,500,00

Our technical supervisor (salary p.a.) N

1,350,000

STARRY GOLD ACADEMY

APPENDIX 7

VARIABLE COSTS OF PRODUCTION OF ONE

TONNE OF PALM KERNEL

10 hours of grade I labour20 hours of grade II labour20 hours of grade III labourOther variable costs N500

Notes:

(i) Grades I, II and III are paid N25, N15 and N10

respectively per hour.

(ii) The expected production of FFB is 72,000 tonnes

per annum. Uncracked kernel production is 75% of

FFB input.

(iii) Extraction ratio of palm kernel is 50% of untracked

kernel.

(iv) One tonne of untracked kernel can be sold for

N2,500

STARRY GOLD ACADEMY

(v) The plant is capable of processing all palm kernel

produced.

(vi) Selling price of tonne of palm kernel is N7,000

APPENDIX 8

RESOLUTE FARM LIMITED

COST OF NEW PLANTING

Cost of initial land clearing per hectare N

Cost of seedling per stand 5,000

Cost of planting per stand 180

Supervision cost per hectare p.a. 70

Plantation upkeep per hectare p.a. 2,500

Cost of fertilizer per hectare p.a. 4,500

Notes:

(i) Number of palm trees per hectare 150 stands

(ii) The planting will be spread over three years. 500 hectares new planting will be done

annually.

STARRY GOLD ACADEMY

Chapter FourCASE THREE

BFI HOSPITALS PLC

In the early fifties, private health institutions were very few and they were mostly mission health institutions which were established as social services for the people and not necessarily for profit making. Government or mission hospitals were established primarily for civil servants and missionaries and to provide limited medical care for the citizens. As the population grew. More health institutions were built by government and mission both at the federal and state levels.

Despite the increase in the numbers of public health institutions, the expectation of the people for “Health for all in year 2000” could not be realized while their health problems continued to deteriorate. General hospitals, teaching hospitals, health centers and dispensaries were overcrowded and could not cope with the demand for health care by the people. Patients had to wait for hours before they could be attended to or treated and they had to queue for hours before they could collect prescriptions from the pharmacy. They also had to wait for weeks or months for surgical operations. Lack of maintenance culture was another reason for the poor state of public health institutions. These institutions could not cope with the demand for healthcare delivery services. This resulted into deterioration in the quality of health care delivery services. Urbanization of the rural areas resulted to the establishment of private hospitals with profit motive.

In view of the above situation, Doctors BELLO, FUNSHO and IKECHUKWU resigned their appointments with the Federal Civil Services commission and took the risk in private health care to establish their individual clinics in different locations in Oyingbo, Iyana-ipaja and Ejigbo areas of Lagos City. Each clinic was managed by each of the doctors for several years until they met at a management course where merger of private health institutions was extensively discussed and its advantages were explained by the Management Consultants who handled the course. Doctors BELLO, FUNSHO. and IKECHUKWU knew each other well before the course while they were civil servants and they still maintained contacts with each other and sometimes provided their specialized knowledge to each other when needed.

The issue of a merger never crossed their minds until they attended this management course on merger of private health institutions. They considered the course as an “eye opener” and they decided to re-examine the possibility of merging their clinics after the course had been concluded.

They subsequently held several meetings and later agreed to form a company to bring all the three clinics under “one management”. The merger agreement was signed by the three doctors and the clinics commenced operation under a new name – BFI HOSPITALS LIMITED . The individual clinics were allowed to operate independently but under the management of BFI HOSPITALS LIMITED which controlled the operations of the clinics. The merger operated successfully for

STARRY GOLD ACADEMY

several years. In their efforts to consolidate the success and gains already achieved, they decided to amend the memorandum and articles of association of the company for listing on the stock exchange. The memorandum and articles of association were duly amended and they were registered with the corporate affairs commission.

The name was changed to BFI HOSPITALS PLC. BFI HOSPITALS PLC was then the biggest private health care provider in the country and the first to be listed on the Stock Exchange.

Senior civil servants in The Federal and State Civil Services were among the largest number and most important patients of the hospitals and clinics. A new 150-bed hospital was built in LAGOS city to provide modern medical care that were formerly obtained overseas, especially for top civil servants who could afford to pay the cost and also to save foreign exchange for the country.

The group continued to grow in the provision of the medical care for its patients under its innovative management. BFI HOSPITALS PLC was committed to making a difference in health care services, enhancing the future of al patients, breaking new ground in health care delivery, achieving excellence, advancing professional capability and changing the world in which we live.

It provided expectations for the patients and family, rebuilt hope, confidence, self-respect and desire to continue providing clinical expertise to benefit patients through creative and progressive techniques.

The ethical and performance standards required the management to spare no effort to achieve the best possible results. In each community, the patients considered it a partner in providing the best possible medical care. The reputation of BFI HOSPITALS PLC was based on its responsiveness, high standards and effective systems of quality assurance. The relationship was open and proactive. The approach to health care fulfils the responsibility to provide investors with high rate of return through consistent growth and profitability.

BFI HOSPITALS PLC became a fast growing private health care provider specializing in providing patients cost effective health care delivery service. The group management consisted of: -

Dr.Bello - Chairman/Medical Director

Dr. Funsho - Joint Medical Director/Chairman,Obstertrics & Gynaecology

Dr. Ikechukwu – Joint Medical Director/Chairman, Surgery Division

Dr. Yaqub - Chairman, General Medcine Division

Dr. Isiaq - Chairman. Paediatrics Division

Mr. Mustapha, FCA – General Manager

STARRY GOLD ACADEMY

Mr. Izuna - Chief Accountant

As part of the innovative management, the management board meets on Tuesday of each week.

On one of such meetings, Mr. Mustapha, General Manager, presented a report in which he identified the movement of Federal Civil servants to Abuja, as one of the factors responsible for the decline in the number of patients during the year so far.

He recommended that a new hospital should be considered for Abuja, the new Federal Capital, to cater for the civil servants who had already moved there.

The recommendation was well received, but the Chairman, Dr. BELLO, demanded for the evidence of the decline and the cost of building a new hospital project in Abuja.

Dr. FUNSHO, in his contribution agreed with the recommendation but he was concerned about the cost of living in Abuja and the cost of building a new hospital there.

Dr. IKECHUKWU, however, felt that the issue of cost was secondary, but obtention of land for the building should first be considered because that might create difficulty. He suggested that, as a first step, an application should be made to the Minister of the Federal Capital Territory or to the Chairman, Abuja Development Authority for allocation of land.

It was agreed that the General Manager should submit an application to the appropriate authorities and ensure that the land was allocated to the company in a highbrow area of the city.

It was further agreed that the chief Accountant should contact Mr. Muyiwa of MUYIWA FOLORUNSHO &Associates (Quantity Surveyors) and Mr. Felix of FELIX &Associates (Architects) to obtain estimates for a modern 100-bed hospital with state of the art equipment and facilities.

Mr. IZUNA, the Chief Accountant, was further to prepare report using proper appraisal methods to determine whether the project will be viable and profitable, and particularly, to determine the period it would take to recoup the cost of the investment.

The management would want an appraisal using the Net present value method to be used and based on 20 percent return for the appraisal of the investment.

Mr. IZUNA, after consultation with Mr. Muyiwa of MUYIWA FOLORUNSHO &Associates (Quantity Surveyors) and Mr. Felix of FELIX & Associates (Architects), reported that the project would cost N300 million to complete. While he was presenting the report to management he commented, “In my view, the project will yield a return of (N441.6m - N300 m) N141.6 million in the next five years (see Appendix V), if appraised on simple profitability percentage which represents 15.28 percent, although it is below the internal rate of return in the private health sub-sector”. He however, recommended that management may not have many options than to implement the project as indicated in its operational results (Appendix II) because most of the top

STARRY GOLD ACADEMY

Federal civil servants who were the key patients of the hospital and the associated clinics had moved to Abuja, the seat of the government, and this has contributed to the decline in the number of patients treated (See Appendix I).

The management, after careful consideration of the report, agreed to accept and implement the report as presented.

The board of directors resolved to build a new 100-bed hospital at a cost of N300 million in Abuja. In view of the high cost of the project, the directors decided to source the fund for financing the project by a public offer. Although the company was a public company by its memorandum and articles of association, it had not been listed on the stock exchanged and its shares had not been quoted as well. In order to use this medium for sourcing fund, the board decided to apply to the Stock Exchange to be listed and shares to be quoted. It was further decided that management should arrange for the listing and quotation of the shares on the Stock Exchange. Messrs, MUSTAPHA and IZUNA, the General Manager and the Chief Accountant, respectively, were instructed to contact ZENITH MERCHANT BANK PLC the company’s bankers, for the requirement for the listing of the company on the Stock Exchange.

The bank, after receiving the required information, applied to the Stock Exchange, and the company was duly listed, and 40 percent of its shares were quoted at N1.50 per NN 1.00 ordinary shares based on its five year operational results (See Appendices XI and XII). The shares were fully subscribed and the amount realized was to be used to finance the building of the new 100-bed hospital project in JABI district of Abuja. For this purpose, a new company, JABI Hospitals Plc was incorporated with authorized share capital of 200 million ordinary shares of N 1.00 each.

BFI HOSPITALS PLC held 80 percent of the share capital in JABI HOSPITALS PLC and UCHENNA PHARMACY LTD held the remaining 20 percent. The projected results for JABI HOSPITALS PLC for three years were submitted to management as shown on appendices VII and IX.

The management, at one of its meetings, asked the Chief Accountant to establish the break-even point to show the number of patients that must be treated to make the revenue equal the cost of operations in order to guide management in its decision making process on the project. (See Appendix III).

UCHENNA PHARMA LTD

Uchenna Pharma Ltd. manufactures drugs, materials and consumables for health care sub-sector and is the major suppliers of drugs, material and consumables to BFI Hospital Plc.

BFI Hospitals Plc. holds 80 percent of the share capital in UCHENNA Pharma Ltd and UCHENNA Pharma Ltd holds 20 percent of the shares of JIDEOBI Pharma Stores Ltd, a major marketing company, and the largest distributor of UCHENNA Pharma Ltd, products.

STARRY GOLD ACADEMY

JIDEOBI Pharma Stores Ltd obtained a loan of N50 million from HALLMARK Bank Plc, but due to the recession of the economy, the company defaulted and has been unable to pay the arrears of interest on the loan which accumulated with the principal sum to N75 million. The debenture holders requested the debenture trustee to appoint a Receiver Manager for the company to recover the principal sum and the accumulated interest according to the terms of the debenture deed. The Debenture holders who were the legal preferential creditor appointed Mr. Rufus, Jamiu & Co. (Charted Accountants) as the Receiver Manager of JIDEOBI Pharma Ltd, but the action by the debenture trustees might affect the interest of UCHENNA Pharma Ltd in JIDEOBI Pharma Stores Ltd as the largest creditor of the company.

In order to protect its interest and the interest of the shareholders and other creditors of JIDEOBI Pharma Stores Ltd, UCHENNA Pharma Ltd filed a court action against the Receiver Manager, Mr. Rufus, claiming that he was not legally qualified to be appointed a Receiver Manager and consequently the appointment was null and void. It was further claimed that the company could be turned around without the intervention of the Receiver Manager.

BFI HOSPITALS PLC – SHARE BUY—BACK

BFI Hospitals Plc had earlier sold 40 percent of its share on the floor of the Stock Exchange to finance the new hospital in Abuja city. At one of the quarterly meetings of the board of directors, Dr. BELLO asked his colleagues on the board, whether the company could buy back its shares earlier sold to the public. Dr. FUNSHO asked him to hold on, so that he could ask the company’s legal adviser.

He got through to Dr. SULAIMAN, who holds a PhD in commercial and Company law. The discussion went thus:

Dr.FUNSHO: “Hello, can I speak to Dr.Sulaiman

Dr.SULAIMAN: Yes, speaking,

Dr.FUNSHO: Dr.Funsho on the line from BFI

Dr. SULAIMAN: Yes! What can I do for you doctor?

Dr.FUNSHO: I am at the board meeting now and we

wanted to Know whether it would be

legally acceptable to buy- back the shares of the company which were sold to the shareholder some years ago.

Dr.SULAIMAN: Well, on the face of it, there should be no problem in buying –back the shares of the company provided the Articles of the Association of your company permit it”.

Dr.FUNSHO: Thank you Dr.Sulaiman, bye for now”.

STARRY GOLD ACADEMY

Based on this advice it was resolved to amend the Memorandum and Articles of Association of the company to empower the company to buy-back its shares. The resolution was filed with the Corporate Affairs Commission with the amended Memorandum and Article of Association.

It was further agreed that 50 percent of the 40 percent of shareholdings earlier subscribed by the public, should be bought back by the company on the floor of the stock Exchange to reduce the publicly held shares to 20 percent.

These decisions on share buy-back were communicated to the company’s Stock Brokers, RESOLUTE Stockbrokers International Plc and the Stock Exchange. The required numbers of shares were accordingly bought on the floor of the Stock Exchange.

MANAGEMENT OF PERSONAL CASH CHEQUES

The issues of control and management of personal cash cheques in the community were raised by Dr. FUNSHO the current Medical Director. He expressed his disappointment about the performance of the Internal Auditor and the External Auditors for failing to inform management about outstanding personal cash cheques. He explained that he had received the latest information from the Treasurer, Mr. TUNJI, who had prepared the latest reconciliation statement which showed that a total amount of N235, 000 was outstanding as uncleared personal cheques issued by Mr. MUSTAPHA General Manager, for cash exchange. In addition, an amount of N70, 000 was outstanding on an unauthorized advance collected and approved for self by Mr. MUSTAPHA.

He held the views that the outstanding cheques should not appear on the reconciliation statement because they were cash entries according to his understanding. He issued queries to Mr. MUSTAPHA to explain why disciplinary action should not be taken against him because the issues seemed fraudulent. He should explain why his personal cheques were presented and returned unpaid by his bank after he had collected cash from the treasury. He should also explain why he authorized for himself, the sum of N70, 000 without the approval of management.

A similar query was issued to the Internal Auditor who reports to the General Manager under the company’s Management Structure. The Internal Auditor cited his latest report which included the issue of outstanding cheques, but the report was suppressed by the General Manager and was not forwarded to the Chief Executive.

Mr. MUSTAPHA claimed ignorance of the outstanding cheques because the Treasurer had never brought it to his knowledge but he accepted blame for authorizing

N70, 000 for himself without approval of the chief Executive. He further claimed that the amount had since been refunded to the treasury.

Management decided that Mr. MUSTAPHA should resign his appointment which he did; but to Mr. MUSTAPHA’S surprise management did not pay him any of his entitlements when he was leaving the company because management claimed that he had committed fraud under the terms

STARRY GOLD ACADEMY

of Staff Retirement and Pension Scheme Contract. Mr. MUSTAPHA was entitled to approximately N680, 000 under the company’s Retirement and Pension Scheme.

The Chairman further threatened him that if he should continue to lay claim to his entitlements, he would report him to the Institute of Chartered Accountant of Nigeria for disciplinary action.

NATIONAL HEALTH INSURANCE SCHEME – CAPITATION SYSTEM

Dr. FUNSHO informed management that the BFI Hospital Plc has been registered with the National Health Insurance Scheme and the Scheme would adopt the capitation system to pay the health care providers under the scheme effective from year 3(See Appendix XIV).

The Health Management Organisations, the corporate bodies established under the scheme would be responsible to pay the Health care providers capitation on behalf of the insured contributors who registered with the health care providers in every quarters and the payment would not be affected whether the insured contributors attended or did not attend the practice of the healthcare providers. In view of this new development under the scheme ,Dr. FUNSHO requested the Chief Accountant to calculate how this would affect the income of the hospitals assuming that the capitation rate was N5,000 and N8,500 per patient per quarter (See Appendix II)for patients in LAGOS and JABI respectively.

BILLING SYSTEM

The billing system would conform with the innovative time management style being introduced and would ensure that all charges for services were never omitted from the medical bills. It would also ensure that consultation fees will be relative to the time spent with the patients as shown on the Consultation and Prescriptions Notes and thus represent the recovery of the remuneration of the consultants/doctors.

Under the old billing system, patients were charged for medicare on arbitrary basis since consultants/doctors would enter the amount on their cards without reference to any predetermined standard rate. The Chief Accountant claimed that the new billing system would replace the old system with charges based on the predetermined standard overhead rate. (See Appendix XIII).

Doctors in the hospitals objected to the aspect of billing patients based on consultation time fee because the patients would object to it and they might stop patronage of the hospitals and clinics.

The Chief Accountant claimed that the new billing system would lay more emphasis on the scientific application of time management by the consulting doctors and surgeons and it would increase the time related earnings of the hospitals. Dr. FUNSHO appealed to the doctors to give the new billing system a chance. He however raised the fundamental issues concerning the impact of the new investment on the financial position of the group, the case of tax liabilities, the share of dividends from the associated hospital and companies. He was also worried about the decline in the number of patients and the related revenues. He would want to be advised about the financial impact, if BFI Hospitals Plc decides to contract out of the National Health Insurance Scheme .It

STARRY GOLD ACADEMY

was noted that the average medical fees per patient was N30,000 and N40,000 charged for patients in LAGOS and JABI respectively before the introduction of capitation payment (See Appendix II).

Required:Assume you are Mr, IZUNA the Chief Accountant who is being considered to replace Mr. MUSTAPHA, the General Manager who was asked to resign. Draft a report to the management making necessary recommendations and appropriate advises after:1. Reviewing, appraising, making computations and deploying all necessary tools

and assumptions as far as possible given the special highlights and appendices in the case.

2. In a separate report examine and comment on:-

(a)Developments that led to the resignation of Mr. MUSTAPHA

(b)The action taken and threat issued by Dr. FUNSHO

(c) The professional integrity of Mr. MUSTAPHA.

(d)The management structure with reference to the position of the Internal Auditor

(e) Comment on the statement by the Medical Director thus “I feel disappointed about the performance of the Internal Auditors for failing to inform management about the outstanding personal (cash) cheques and N70, 000 unapproved personal loan”.

INDEX TO APPENDICES

APPENDIX NO

I. Table of Patients Treated

II. Table of Summary of Patients Treated and Estimated Income

III. Table of Contribution per patient treated.

IV. Depreciation provision – JABI Hospital Plc

V. Cash Flow Projection – JABI Hospital Project

VI. Net Present values Discount Factors at 20%

VII. JABI Hospital Plc - Profit and loss account

STARRY GOLD ACADEMY

VIII. UCHENNA Pharam Ltd – Profit and Loss Account

IX. JABI Hospital Plc – Balance Sheet

X. UCHENNA Pharam Ltd –Balance Sheet

XI. BFI Hospitals Plc – Balance sheet

XII. BFI Hospitals Plc – Profit and Loss Account

XIII. Standard Overhead Rates Sheet - BFI Hospitals Plc

XIV. Table of numbers of Patients without Registration with National Health Insurance Scheme.

APPENDIX I TABLE OF PATIENT TREATEDYR BFI JABI CLINICS JABI

OYI IY EJ1 5000 2500 1300 1270 1350 -2 4250 2810 1450 1300 1410 -3 3820 3230 1600 1400 1510 15004 3910 3800 1720 1540 1620 16505 3710 4260 1810 1650 1700 1810

APPENDIX IITABLE OF SUMMARY OF PATIENTS TREATED

AND ESTIMATED INCOMELAGOS CITY ABUJA CITY

STARRY GOLD ACADEMY

YR No. of Patients treated

RateN

Est. Income.(N’000)

12345

89208410833087908870

30,00030,00020,00020,00020,000

267,600252,300166,600175,800177,4001,039,700

No. of Patients

Rate N

Est. Income(N’000)

2,5002,8104,7305,4506,070

40,00040,00034,00054,00034,000

100,000112,400160,820185,300206,380764,900

APPENDIX IIITABLE OF CONTRIBUTION PER PATIENT TREATED

LAGOS CITY

N

ABUJA CITY

NAverage Medical fee per patient treatedVariable cost per patient treatedContribution per patient treatedFixed Cost

24,00010,00014,000

N900,000

36,40012,00024,400

N5,000,000

APPENDIX IV DEPRECIATION PROVISION

COST RATE DEPRECIATION

Land and BuildingPlant and MachineryHospital EquipmentOffice Furniture and Equipment

180,000,00060,000,00030,000,00020,000,00010,000,000

2%10%20%100%100%

3,600,0006,000,0006,000,00020,000,00010,000,000

STARRY GOLD ACADEMY

Fixtures and Fittings 300,000,000 45,600,000

APPENDIX V CASH FLOW PROJECTIONS

YearEstimated

No. of Patients treated

Average Income

per Patient(N’000)

Estimated Income

(N’000)

Average cost per Patient

(N’000)

Estimated cost

(N’000)

Net Income

(N’000)

12345

25002810475054506070

4040343434

100,000112,400161,500185,300206,380765,580

1515151515

37,50042,15071,25081,75091,050323,700

62,500 70,250 90,250103,550115,330441,880

APPENDIX VINET PRESENT VALUES DISCOUNT FACTORS AT 20%

YEAR VALUE1 0.8333

2 0.69443 0.5787

4 0.48235 0.4019

APPENDIX VIIJABI HOSPITAL PLC

PROFIT AND LOSS ACCOUNT FOR THE YEAR2006

(N’000)2007

(N’000)2008

(N’000)Medical Income/SalesCost of drugs etc

100,000 27,370

112,400 29,500

161,400 40,370

Gross Profit 72,630 82,900 121,030

STARRY GOLD ACADEMY

Operating Cost 10,130 12,650 30,780Profit before taxationTaxation

62,50027,875

70,25024,587

90,25031,588

Profit after taxationProposed dividend

40,62532,500

45,66336,530

58,66246,930

Retained profit 8,125 9,133 11,732

APPENDIX VIII

UCHENNA PHARAM LTD.PROFIT AND LOSS ACCOUNT FOR THE YEAR

2005 (N’000)

2006 (N’000)

2007 (N’000)

2008 (N’000)

Medical Income/SalesCost of drugs etc

338,30070,800

389,00076,400

447,30069,500

503,20083,900

Gross ProfitOperating Cost

267,500158,300

312,600160,100

377,800172,000

419,300172,900

Profit Before TaxationTaxation

109,200 38,200

152,500 53,400

205,800 72,000

246,400 86,200

Profit After TaxationProposed Dividend

71,000 42,600

99,10059,500

133,800 80,300

160,200 96,100

Retained Profit 28,400 39,600 53,500 64,100

STARRY GOLD ACADEMY

JABI HOSPITAL PLCBALANCE SHEETS FOR THE YEAR

2006 (N’000)

2007(N’000)

2008 (N’000)

Fixed assetsLess Depreciation

Current assetsLess: Current Liability

Represented by:-Share Capital:Authorised and Paid- upCapital reserveProfit and loss accountRetained Profit

300,000 (50,000) 250,000175,015

(116,890) 58,125 308,125

200,000 100,000

8,125 -308,125

300,000 (100,000) 200,000308,128

(190,870) 117,258 317,258

200,000100,000

9,133 8,125317,258

372,000 (157,200) 214,800327,460

(213,270) 114,190 328,990

200,000100,000

11,732 17,258328,990

STARRY GOLD ACADEMY

APPENDIX XUCHENNA PHARMA LTD

BALANCE SHEET FOR THE YEAR2005

(N’000)2006

(N’000)2007

(N’000)2008

(N’000)Fixed assetsLess Depr.

Current assetsLess: Current Liability

Represented by:-Share Capital:Authorised and Paid upCapital reserveProfit and loss accountRetained Profit

254,000 (5,000)249,000

177,720(148,320) 29,400278,400

250,000

-

28,400 - 278,400

254,000(10,000)244,000240,080(166,080) 74,000318,000

250,000

-

39,600 28,400 318,000

254,000(15,000)239,000341,970(209,470) 132,500 371,500

250,000

-

53,500 68,000 371,500

254,000 (20,000)234,000442,500(240,900) 201,600435,600

250,000

-

64,100121,500435,600

STARRY GOLD ACADEMY

APPENDIX XII BFI HOSPITALS PLC

PROFIT AND LOSS ACCOUNT FOR THE YEAR2005(N’000)

2006(N’000)

2007(N’000)

2008(N’000)

2009(N’000)

PROJ. (2010) (N’000)

Medical Income

267,600 252,300 182,600 196,800 205,000 370,330

Cost of Drugs, etc.

46,950 40,860 27,240 26,500 55,840 113,430

Gross Profit

226,650 211,440 155,360 170,240 149,160 256,900

Operating Costs

149,520 136,560 90,040 89,680 84,480 147,870

Profit Before Tax

71,130 74,880 65,320 80,560 64,680 109,030

Taxation 24,890 26,210 22,860 28,200 22,640 38,160Profit After Tax

46,240 48,670 42,460 52,360 42,040 70,870

APPENDIX XIII BFI HOSPITALS PLC

STANDARD OVERHEAD RATES SHEET

NConsultation time per 0.5hr per patient 48.78Building Depreciation per patient per day 21.00Tenement per patient per day 5.50Overhead cost for auxiliary staff per patient per day 7,00Remuneration for Nursing staff per patient per day 91.43Other fixed cost per patient per day 10.30Other overhead cost patient per day 3.00

STARRY GOLD ACADEMY

187.01

APPENDIX XIVBFI HOSPITALS PLC

TABLE OF NUMBER OF PATIENTS WITHOUT NATIONAL HEALTH INSURANCE SCHEME

YR BFI CLINICS TOTALOYI IY EJ

1 5,000 1,300 1,270 1,300 8,9202 4,250 1,450 2,300 1,420 8,4103 3,920 1,200 1,000 1,100 7,1204 3,910 1,150 1,050 950 7,0605 3,710 900 950 950 6,510

STARRY GOLD ACADEMY

Chapter Five CASE FOUR

UNGA-VIRTUES SALT NIG PLC BACKGROUND INFORMATIONPrior to commercializing the activities of VIRTUES VENTURES, the company was mainly concerned with the manufacture of defense products, i.e. explosives, ammunitions, etc.But in 1994, the Board of Directors met and approved the proposal for the corporation to invest in business ventures for the sole aim of raising money from the public and some private individuals to develop VIRTUES SALT.That approval led to the incorporation of VIRTUES NIG. LIMITED towards the end of 1994. The company was then a 60% : 40% joint venture between VIRTUES NIG LIMITED and itstechnical partners. “SUMA”The company commenced business in January 1995 with the importation of bagged salt, under the VIRTUES NIG LIMITED label to develop a market share and see if the market share will be large enough to warrant the establishment of a salt processing factory to serve the market.By 1997, a small factory had been opened at a sub-urban jetty near Lagos called “IBEJU” Lighter age Terminal. VIRTUES NIG. LIMITED started importing bulk salt, does some refining process and sells the product through the company’s established distributorship network.VIRTUES NIG. LIMITED then began to grow in leaps and bounds. The growth and popularity quickly overshot those of other existing and older salt companies particularly the COOK.A ‘salt war’ developed almost instantly. In 1998, the VIRTUES NIG LIMITED salt factory was closed down by the Ministry of Health and the Standards Organization of Nigeria, which accused the salt company of producing sub-standard products which was injurious to the health of consumers.The owners were not pleased with the decision and therefore opted for national test conducted by the three independent laboratories.Meanwhile, before the result of the test was made known, the Technical partners ‘SUMA’ decided to float a new company sited in a prominent port city in Rivers State. The result of the national ‘Test’ claimed VIRTUES salt as number one salt in the country and the factory in Lagos was re-opened after nine month of closure.

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TECHNICAL AND LABORATORY DEVELOPMENTThe VIRTUES NIG. LIMITED factory was upgraded and an ultra modern salt laboratory was put in place for analytical works and the company secured the best producer of food-grade bulk salt supplied from Malaysia. This was attested to by the standard set by QUDEX AILMENTARIUS COMMISSION of the Foods and Agricultural Organization (FAO) of the United Nations and World Health Organization (WHO)GROWTH IN SALES AND PROFITABILITYThe company has experienced tremendous improvement and increased business patronage ever since it was re-opened in 2009. Pioneer status was granted to the company for a period of 5 years with effect from the production date of August 1, 1999, by the Federal Ministry of Industries. Having switched over to bring in bigger ships of 36,000 metric tonnes capacity discharging mid-stream at Apapa port and Warri port, a merger between VIRTUES NIG. LIMITED and UNGA took place in 2002 resulting in a change of name to UNGA-VIRTUES NIG Salt Company’. The company was privatized and was listed on the Nigerian Stock Exchange (NSE) on 23rd September, 2003After privatization, the shareholding position changed as follows:

SUMA Ltd 40%VIRTUES Salt 20%UNGA-VIRTUES NIG Salt Staff’s Trust Fund 6%Individual Nigerians 34%

100%

EXPANSION INVESTMENT AND GLOBALISATION:

By 2003, when UNGA-VIRTUES SALT NIG PLC went public, the technical partners ‘SUMA’ embarked on a search for an affordable salt production facility to pave way for entry into the world market as producers of bulk salt and be in a position to develop a source of foreign exchange. The search culminated in the negotiations and purchase of the salt facility HARRIMA NIJAR BR, the third largest salt company in Brazil in 2006.

On October 29, 2006, the technical partners invited UNGA-VIRTUES SALT NIG. PLC to participate in the venture by offering 40% of SALINA to UNGA-VIRTUES SALT NIG. PLC for U$7.2m. The Board scrutinized all the purchase documents and gave a provisional approval for UNGA-VIRTUES SALT NIG. PLC participation, subject to the satisfactory inspection of the SALINA Salt field by the entire members of the Board. The inspection took place on February 27, 2007, and thereafter UNGA-VIRTUES SALT NIG. PLC and its Technical Partners owned 6,800 acres of the salt field. “The SALINA DIAMENTE BRANCO” which is registered as “Diamond Bronze Salt” in CANADA.

SALES AND DISTRIBUTION NETWORK.

Hitherto, the company has been making use of MDS for distribution of the company’s products to various demand locations around the country giving rise to frequent and varying transportation

STARRY GOLD ACADEMY

problems. Planning for the distribution of goods and services from the three supply locations to ever increasing demand locations even though major distribution centres have been mapped out with a proposal from a renowned consultant to a three month trial period for a determined quantity of goods available at each supply location to match the quantity of goods required in the demand locations to be specified particularly in regional distribution centres.

INDUSTRIAL ACCIDENTS AND REMEDIES

During the course of operating years, a few industrial accidents and disputes were recorded amongst which was a forklift driver by name ‘Chukwudi’, when UNGA-VIRTUES SALT NIG. PLC was returning an empty forklift truck to the warehouse after discharging some pallets of bags of salt at the loading bay. His way was blocked by a lorry. The driver tried to drive the lorry out of his way, unmindful of the lorry driver and the stock keeper standing behind the lorry. The store keeper got injured loosing a limb. The company has not gone far enough, and referred the matter to a solicitor who pressed for increased compensation and threatened a court action, in case they refused to yield to their request.

RE – ENGINEERING, OPERATIONAL AND FINANCIAL PROBLEMS AND BOARD LEVEL CHANGES.

Mr. MORUFDEEN, a director in charge of logistics whose responsibilities included procedure, contract acquisition negotiations has been advised to resign his board appointment on account of breach of contractual obligations.

Mr. MORUFDEEN, the newly elevated Marketing and Sales Director, has created increased demand for the company’s product by his various marketing efforts. New depots have been opened in strategic locations all over the country to be fed by supplies from regional distribution centres, by self-collection system.

As a result of recently published and circulated quarterly accounting and marketing reports, distribution and other marketing costs were observed to have risen so highly and eaten deep into the company’s profitability; hence the problem of transportation costs of the company’s products from three processing plants, Lagos, Warri and Port-Harcourt to four regional distribution centres, Kano, Sokoto, Ibadan and Kaduna should be carefully reviewed.

Mr. OLORUNLEKE, an experienced financial and management consultant was appointed to the board. On reviewing the company’s financial and operational reports, his recommendations include a set of broad strategy to achieve some major thrusts viz:

I. Improving competitiveness in terms of costs and value added.II. Changing company’s shape in terms of product and territorial spread.

III. Reducing company’s dependence on mono-product.IV. Taking advantage of capital allowances claim in view of huge investment on fixed assets

having expired tax holiday on the pioneer status.

STARRY GOLD ACADEMY

BENJAMIN BASIL began his business career as a junior accountant at WILLIAMS & CO., carrying out the worst job he claimed he had ever had. “We had to wear helmets and overalls and spent days in warehouses carrying out stock audits”. He held financial positions at NIGATEX Mills PLC (five years) NTM (four years under Alhaji Yisa Danjuma with exposure to Konga theories about making acquisition and managing broad diversifications). Trustgate-Olivesoap (one year) and BIOCHEM PLC (Seven years where he played key role in BIOCHEM acquisition of SWEETEX FRIED CHICKEN). He spent seven years at Silicon Technologies, a large fortune ‘50’ company noted for the aggressive way it pursued diversified growth via acquisition. At Silicon Technologies, BASIL rose through the ranks to occupy the number two position of Group Executive Director. At the time of his selection as UNGA-VIRTUES SALT NIG. PLC, CEO, he was perceived by some people as a strong-willed financial manager whose chief accomplishment had been engineering acquisition campaigns on behalf of BIOCHEM and Silicon Technologies.

He was attracted to UNGA-VIRTUES SALT NIG. PLC by the opportunity to run his own show in an upcoming ‘blue-chip’ company. Unlike his predecessor, when BASIL came on board, he was well aware that UNGA-VIRTUES SALT NIG. PLC was what one industry analyst described as a cloggy, mono-commodity chemical company, that was not growing or building stockholder value or even providing its employees with a very interesting place to work.

BASIL hit the ground running at UNGA-VIRTUES SALT NIG. PLC not only because there was rumor of Nigerian Stock Exchange share rating being lowered and also because there were signs that UNGA-VIRTUES SALT NIG. PLC might be target of an acquisition takeover by chemical companies using salt as basic ingredient. Having just moved over, BENJAMIN BASIL; would not be interested in UNGA-VIRTUES SALT NIG. PLC being acquired.

BENJAMIN BASIL REVATILISATION EFFORT

By mid- 2009 BASIL formed a policy and management committee consisting of six top managers. Over the next six months, the committee focused its discussion on what changes to institute, within the entire organization. Through the committee, BASIL got widespread support for re-vitalization plan made up of four parts:

- Diversification by acquisition- Divestiture of business that was loosing money, or only just marginally profitable.- Decentralization of operating responsibilities to the business and divisional levels.- Upgrading internal administrative systems, incentive compensation package and the company’s image.

NEW ACQUISITIONS

Between late 2008 and early 2011, BASIL spearheaded a series of important acquisition moves that gave UNGA-VIRTUES SALT NIG. PLC business portfolio a new look. In

STARRY GOLD ACADEMY

December, 2008, acquired HAFFAR-BEST Industries, a diversified manufacturer of consumer and industrial goods, including batteries, motor cable and athletic footwear.HAFFAR-BEST with a net worth of almost N392 million, sales – N1.01 billion and net income of N48.0 million, was acquired at a total cost of approximately N598.0 million by UNGA-VIRTUES SALT NIG. PLC. Since acquisition, some of HAFFAR-BEST business divisions had been sold off and several others were up for sale in 2011 by acquisition of preferred stock and ordinary stock.

In 2009, acquired BOCA JUNIORS INDUSTRIES, a producer of electrical and electronic connectors, information system and specialty textiles, with a net worth of N176.8 million. Sales at N468 million and net income of N27m. UNGA-VIRTUES SALT NIG PLC’s total cost was approximately N347m in cash and preference stocks of N250million. AQUARIUM SCIENTIFIC COMPANY, a manufacturer of a scientific laboratory equipment and supplies with a net worth of nearly N112 million approximately. Sales at N425million and a net profit of N16million. Cost of UNGA-VIRTUES SALT NIG PLC was approximately N311million in preferred stocks and cash. January 2010, acquired BRADFORD LABORATORY LTD, producers of biomedical and analytical instruments, to add more high technology products to the health and scientific products line, acquired with AQUARIUM SCIENTIFIC. BRADFORD LABORATORY LTD had revenues of N137.6 million and a net income of N4.6million in 2009. UNGA-VIRTUES SALT NIG PLC paid approximately N115 million in cash and ordinary stock (N55.0 million). Acquired STEPHENSON ALLUMINIUM LTD, manufacturer of components for high-reliability semi-conductor packages to expand UNGA-VIRTUES SALT NIG PLC position as a leading supplier of chemicals and components of the semi-conductor industry.

STEPHENSON ALLUMINIUM LTD’S 2009 sales were 70.0 million. UNGA-VIRTUES SALT NIG PLC paid N97.0million in cash and ordinary stock (N55.0 million)

This acquisition led UNGA-VIRTUES SALT NIG PLC in year 2010 to organize into three core business groups. To reflect the scope and corporate strategy being pursued by BENJAMIN BASIL, the company is proposing to change its name from UNGA-VIRTUES SALT NIG PLCto ADEPT CONSOLIDATED GROUP, with effect from August 1, 2010. All necessary paper has been filed with the Corporate Affairs Commission at Abuja. The following is an integral part of the case:

Appendix I ADEPT CONSOLIDATED GROUP – Analysis of business group into principal products, Markets/Industries and results of Operations by sector,

Appendix II Three months production capacity/product market demand projection for UNGA-VIRTUES SALT NIG PLC.

Appendix III UNGA-VIRTUES SALT NIG PLC

STARRY GOLD ACADEMY

Balance Sheet as at July 31, 2008.

Appendix IV UNGA-VIRTUES SALT NIG PLC

Profit and loss Account for the year ended July 31, 2008.

Appendix V UNGA-VIRTUES SALT NIG PLC

Cash flow statement for the year ended July 31, 2008

Appendix VI Five –year financial Summary and Notes to the account (2) – (17).

Required:Draft a report to the management making necessary recommendations and appropriate advises after:

1. Reviewing, appraising and making computations as far as possible using valuation, SWOT etc given the special highlights and appendices in the case.

2. In another subsidiary report: (a) Highlight what would you include as the requirements of Employee faithful service to his employer (support with case laws where necessary).(b) As the aggrieved victim of an industrial accident threatening your

employer with legal action for insufficient compensation, justify your action with explanations and case laws.

(c) Is Mr. Morufdeen Justified in declining to resign his board appointment? (d) Explain with the aid of case laws why you think he must or must not

resign.

Appendix II

UNGA-VIRTUES SALT NIG PLC

3- MONTH PRODUCTION CAPACITY/PRODUCT MARKETDEMAND PROJECTION

PROCESING PLANT PRODUCTION CAPACITY

LAGOS 5,000 (tons)

STARRY GOLD ACADEMY

PORT HARCOURT 6,000 (tons)

WARRI 2,500 (tons)13,500

DISTRIBUTION THREE MONTHCENTRE DEMAND PROJECTION

KANO 6,000 (tons)

SOKOTO 4,000 (tons)

IBADAN 2,000 (tons)

KADUNA 1,500 (tons)13,500

TRANSPORTATION COST PER TON DESTINATION

DESTINATION

PLANT KANO SOKOTO IBADAN KADUNA

N’000 N’000 N’000 N’000

LAGOS 3 2 7 6

P.H 7 5 2 3

STARRY GOLD ACADEMY

WARRI 2 5 4 5

APPENDIX II

BALANCE SHEET AS AT JULY 31, 2008Note 2008 2007

N’000 N’000 Fixed assets (2) 1,893,358 1,384,934Investments (3) 548,358 411,500

2,441,616 1,796,434Current assetsInventories (4) 380,710 324,882Receivable and prepayments

(5) 981,756 1,404,206

Cash at bank and in hand

54,174 65,698

1,416,640 1,795,056Current liabilities (6) (1,405,928) (1,345,748)Net current assets 10,712 449,308

Total asset less liabilities

2,452,328 2,245,742

Capital and reserves:Share capital (8) 140,000 140,000Retained profit (9) 1,606,840 1,400,254Capital reserve 85,618 85,618General reserve 619,870 619,870

2,452,328 2,245,742

STARRY GOLD ACADEMY

APPENDIX IVPROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED JULY 31, 2008Note 2008 2007

N’000 N’000TURNOVER 6,107,390 5,436,370COST OF SALES (5,228,110) (4,558,284)Gross profit 879, 280 878,086Administration Expenses

(206,778) (207,670)

672,502 670,416Other Income (10) 1,080 1,474Interest & similar charges

(11) (23,316) (22,530)

Profit before taxation

(12) 650,266 649,530

Taxation (14) (51,680) (23,016)Profit After Taxation

598,586 626,344

Dividend (15) (392,000) (476,344Retained profit for the year

206,586 150,344

STARRY GOLD ACADEMY

APPENDIX V

CASH FLOW STATEMENT

FOR THE ENDED JULY 31, 2008

2008 2007N’000 N’000

CASH FLOWS FROM OPERATING ACTIVITIESProfit before taxation 650,266 649,360Depreciation of fixed assets 209,118 172,808Profit on sale of fixed assets (1,080) (20)Interest on loan 4,214 3,058CASH FLOWS BEFORE CHANGES IN WORKING CAPITAL

862,518 825,206

CHANGES IN WORKING CAPITAL:Increase in inventories (55,828) (324,206)Decrease in receivable and payments

422,450 663,518

Increase payables and accruals 30,780 14,476397,402 353,112

Tax paid (196)NET CASH INFLOW FROM OPERATING ACTIVITIES

1,259,920 1,178,122

CASH FROM INVESTING

STARRY GOLD ACADEMY

ACTIVITIES Purchase of fixed assets (717,542) (214,514)Proceeds from sale of fixed assets 1,080 20Purchase of investment (136,758) (391,500)NET CASH OUTFLOW FROM INVESTING ACTIVITIES

(853,220) (605,994)

CASH FLOW FROM FINANCING ACTIVITIESDividend paid (414,280) (621,164)Interest on loans (4,214) (3,058)NET CASH OUTFLOW FROM FINANCING ACTIVITIES

(418,494) (624,222)

Net decrease to cash and bank balance

(11,794) (25,094)

Cash and bank balance at the beginning of the year

65,968 118,062

Cash and bank balance at the end of the year

54,174 65,968

STARRY GOLD ACADEMY

APPENDIX VIFIVE YEAR FINANCIAL SUMMARYJuly 31 July 31 Dec. 31 Dec. 31 Dec. 312008 2007 2006 2005 2004

Capital employed

N’000 N’000 N’000 N’000 N’000

Share Capital 140,000

140,000

140,000

120,000 100,000

Capital res. 85,618 85,618 85,618 85,618 85,618General res. 619,870 619,870 619,870 619,870 619,870Retd profit 1,606,840 1,400,254 1,249,910 963,854 645,822

2,452,328 2,245,742 2,095,398 1,328,342 1,451,310Fixed assets 1,893,358 1,384,934 1,343,228 1,328,028 879,004Investments 548,258 411,500 20,000 20,000 20,000Working capital

10,712 449,308 732,170 441,314 552,306

Net Tangible assets

2,452,328 2,245,742 2,095,398 1,789,342 1,451,310

TURNOVER 6,107,390 5,436,370 5,651,640 5,400,820 3,538,308Profit before taxation

650,266 649,360 726,198 820,478 996,554

Taxation (5,680) (51,016) (142) (2,446) (732)Profit after taxation

598,586 626,344 726,056 818,032 995,822

Dividend (392,000) (476,000) (420,000) (480,000) (350,000)Profit retd. 206,586 150,344 306,056 338,032 645,822

STARRY GOLD ACADEMY

Note to the Financial Statements for the year ended July 31, 2008

2. FIXED ASSETS

Lease hold Land & Building

Plant & Mach.

Furn. & Fixt.

Motor Vehicle

Barges & Boats

Total

N’000 N’000 N’000 N’000 N’000 N’000Cost or valuationAt August 1, 1997

609,354 914,520 233,224 103,514 202,860 2,063,472

Additions 9,680 603,518 17,626 18,221 68,276 717,542

Disposals (3,232) - (102) - (3,334)

At July 31, 1998

619,034 1,514,806 250,850 121,633 271.136 2,777,680

Depr.:At August 1, 2007

96,042 284,976 61,398 76,218 159,904 678,538

Charge for the year

30,970 136,776 25,086 4,686 11,600 209,118

Disposals - (3,232) - (102) - (3,334)

At July 31, 2008

127,012 418,520 86,484 80,802 171,504 884,322

STARRY GOLD ACADEMY

NBV:At July 31, 2008

492,022 1,096,286 164,366 41,052 99,632 1,893,358

At July, 2007

513,310 629,544 171,826 27,296 42,956 1,.384,934

All the fixed assets, except furniture and fixtures, were re-valued at open market value by Messrs KELANI, GBOYEGA Nigeria in March 2002. The aggregate surplus arising there from amounted to N85.618million. No provision has been made in this account for capital gains tax liability that may arise on realization of the revaluation surplus.

3. INVESTMENT

2008 2007N’000 N’000

(a)Quoted – 40million ordinary shares in Ceramics Manufacturing Nig LtdMarket Value July 31, 2008 –N10.0m)July 31, 2007 – N18,000,000

20,000 20,000

(b)Investment in “The SALINA 528,258 391,500

STARRY GOLD ACADEMY

DIAMENTE BRANCO” -BRAZIL

548,258 411,500The investment in “The SALINA DIAMENTE BRANCO” - BRAZIL, a private company represents the $5.76 million (2007 : $4.5m) part payment as at a year –end out of the $7.2 million of 40% ordinary shares applied for in this foreign company, having a 6,000 hectares salt field in Brazil.

4. INVENTORIES :

Salt 363,322 308,360Packaging Material 17,388 16,522

380,710 324,882

5. RECEIVABLES AND PREPAYMENTSTrade receivable 456,014 537,328Sundry receivables 121,256 136,974Other receivables 18,282 10,132Prepayments 300,030 719,722Intercompany receivables 24,090 -Deposit for shares- Search and Spot Ltd

62,084 -

981,756 1,404,206

The N62,084 million represents the cost, so far on 100% acquisition of search and spot Limited pending finalization of the transaction. Valuation by Messrs KELANI,

STARRY GOLD ACADEMY

GBOYEGA Nigeria placed a value of N356 million on search and spot Ltd. The liabilities of search and spot limited, however were not taken into consideration in arriving at this value. The shares of the company were valued by KENNICS CONSULTING LTD at between N4.00 and 23.70 per share.

6. CURRENT LIABILITIES2008 2007

N’000 N’000Bank Overdraft (unsecured) 470,866 210,828Payables and accruals (Note 7) 417,992 647,250Dividend (Note 15) 440,022 462,302Taxation (Note) 77,048 25,368

1,405,928 1,345,748

7. PAYABLES AND ACCRUALSTrade payables 205,028 553,186Customers’ Deposit 8,522 8,262Accruals 181,458 63,598Others payables 22,984 22,204

417,992 647,250

8. SHARE CAPITAL 2008 2007Authorized: N’000 N’000

STARRY GOLD ACADEMY

400,000,000 ordinary shares of 50k each

200,000 200,000

Called-up and fully paid140,000,000 ordinary shares of 50k each

140,000 140,000

9. RETAINED PROFITMovement in retained profit is as follows:At the beginning of the year 1,400,254 1,249,910Retained profit for the year 206,586 150,344At the end of the year 1,606,840 1,400,254

10. OTHER INCOMEThis is analyzed as follows:Sundry income 954Profit on sale of fixed assets 1,080 20Rental income - 500

1,080 1,474

11. INTEREST AND SIMILAR CHARGESLoan interest 4,214 3,058Bank charges 19,102 19,472

23,316 22,530

STARRY GOLD ACADEMY

12. PROFIT BEFORE TAXATIONProfit before taxation is stated after chargingDepreciation 209,118 172,808Staff Costs 386,860 373,760Auditors fees 3,200 2,600Directors’ Remuneration 1,884 1,712

601,062 550,880

13. TAXATION2008 2007N’000 N’000

At beginning of the year 25,368 2,548Current yearCharge: Corp. tax 21,962

Educ. tax 29,718 51,680 23,016 23,01677,048 25,564

Payment during the year - (196)At end of the year 77,048 25,368

The pioneer status period was further for two years to expire July 31, 2006. The company was therefore not liable for tax on its operating profit during the pioneer status period. However, the company is now liable to corporate tax effect from August 1, 2006 and the certificate of acceptance of its fixed assets is being

STARRY GOLD ACADEMY

processed with the Federal Ministry of Industries to enable the company claim appropriate capital allowances.

14. DIVIDENDSAt the start. of the year 462,302 607,466Payment during the year (414,280) (621,164)

48,022 13,698

Proposed dividend 392,000 476,302At the year end 440,002 462,302

15. POST BALANCE SHEET EVENTSN85 million of Ordinary Shares of ESSENCE Bank Plc at N0.70 per share costing N59,500,000 were acquired subsequent to the balance sheet date. This includes 42.5million shares purchased on behalf of PATTERSON Group Holding Inc. USA.

16. CONTIGENT LIABILITIESThere are no contingent liabilities as the end of the year other than as already provided for in the financial statement (July 31, 2007 : Nil)

17. CAPITAL COMMITMENT

STARRY GOLD ACADEMY

There is a special commitment of N122.4 million (U$1.4 million) being the balance outstanding in respect of $7.2 million shares applied for in “The SALINA DIAMENTE BRANCO”-BRAZIL No provision has been made for this capital commitment in the financial statements.

STARRY GOLD ACADEMY

Chapter 6

CASE FIVE

ADEOLA SHOES MANUFACTURING NIGERIA PLC

BACKGROUND

Footballing, for ages, has been a popular game across the nations of the world. The world’s first international football match played in Glasgow in 1872 between Scotland and England. However, the first competitive international football match took place in 1884 between Ireland and Scotland when the British championship was inaugurated.

The growth of football tournaments all over the world gave birth to the world football body, the Federation of International Football Association (FIFA), a body which is responsible for organizing and managing international football tournaments.

Football tournaments provide opportunities for many investors who venture into various commercial activities like marketing, promotions, advertising, sales and supply of sporting equipments, manufacturing of sporting shoes and sales of sporting shirts and others wares.

ADEOLA SHOE MANUFACTURING NIGERIA PLC is based in Oregun Industrial Estate, Lagos.. The company manufactures and distributes all types of footwears including athletic shoes. It uses materials such as leather, vinyl, plastic and textile in various combinations for customers of both gender and ages. Even though the company is currently growing at a slow pace, it is characterized by dynamic changes due to its innovations in product technology, sourcing strategies and customers’ tastes.

The company which was incorporated in 2006 decided in 2010 to promote sporting activities through the sponsorship of football tournaments nationwide.

This decision was informed by a survey conducted by the marketing department on the viability of promoting the company’s products through a variety of channel.

A football tournament is adjudged all over the world to be a money spinning event hence the belief of the management of ADEOLA SHOE MANUFACTURING COMPANY in football sponsorship. It is the strong view of the Chief Executive Officer, Mr. CHARLES OGBEIDE that the company’s products would be highly promoted through its advertisement on the football pitch and many other avenues through which sporting events are promoted.

STARRY GOLD ACADEMY

COMPETITION

The company’s products enjoy a fairly intense competition as the two main competitors are based in Aba and Kaduna.

NNENA SHOE MANUFACTURING COMPANY LIMITED based in Aba achieved a revenue of N3.8 Billion in 2008 while SULE SHOE MANUFACTIRING LIMITED N2.9 Billion in the same period. A third competitor, OLUWATOBI SHOE INDUSTRIES LIMITED with its factory based in Ibadan, Oyo State mainly produces Athletic shoes but recorded a low revenue of N0.4 Billion during the 2008 year. It is important to note that these three companies experienced their growth through an expansion in the consumption of athletic products during the past decade. Production of non-rubber footwear increased by less than 1% in 2008 while women and children’s shoes accounted for the largest increase. The market share by types of Athletic shoe is as contained in Appendix 1.

MAIN STRATEGY IN THE SHOE INDUSTRY

ADEOLA SHOE MANUFACTURING NIGERIA PLC was set up to produce footwear in Nigeria and in the neighbouring countries of West Africa. The main market supply is to market the shoes as fashionable, high-quality products that are based on advanced and modern technology. The use of air chambers, inflation devices and flashing lights has provided customers with unique product to choose from. Other advances such as the use of composite materials, lighter and stronger shoe designs have affected the general consumers as well as the professional athletes. In addition, coaches are given endorsement contracts to use and promote particular brands, especially in basketball. The company spent large portion of its advertising budget in building and keeping brand awareness. These tactics have transformed athletic shoes into an important element of the typical casual wardrobe of the fashion conscious.

In order to build brand awareness for themselves, SULE SHOE MANUFACTIRING LIMITED and NNENA SHOE MANUFACTURING COMPANY LIMITED recently started to promote their businesses on the internet. This new innovation enables choice of symbol that allow anyone to find out about the history of the company, its altruistic endeavors, new product and technological information and their upcoming schedule of sponsored programmers and events.

Generally, the target market for athletic footwear is the 18 to 34 year old group. The competitors can be grouped into a primary and a secondary tier with ADEOLA in the first tier and SULE and NNENA in the second, more volatile, tier. Because size has its advantages in the athletic shoe industry, profits have been concentrated in ADEOLA, but the other producers have seen some improvements recently. In early 2000s, ADEOLA had nearly equivalent market share around 55% with SULE slightly ahead. ADEOLA has continued to grab market share from the other competitors especially from SULE and NNENA.

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RECENT TRENDS

Average usage of shoe is up slightly, with consumers currently focusing on form, function and comfort rather than brands exclusivity, as was typical in the past. Consumption of non-rubber footwear in 2003 was up by 2% over 2002, to an estimated 1.1 Billion pairs. Average usage of both rubber and non-rubber footwear was 5.65 Billion pairs in 2003, down from 2002 because of a drop in consumption of rubber/canvas footwear. Personal Consumption Expenditure (PCE) on all footwear were up by 0.4 percent in 2003 to an estimated N32.4 Billion, which is an actual decrease of almost 2% in constant (1997)Naira.

Recently, consumers of ADEOLA, SULE and NNENA (footwear manufacturers) started buying more from discount outlets, rather than from full-service retail outlets. In the past location was of primary importance, with footwear stores typically providing the most traffic.

Recently too, consumers have been willing to journey to less expensive stores such as mass marketers liken LEVENTIS STORES and UAC STORES opened in all parts of the country.

POTENTIAL NEW ENTRANTS

Because consumers are beginning to change their focus from brand name to form, function and comfort, smaller companies have a better chance to enter the market. The tremendous entry barriers imposed by the massive marketing expenditure of ADEOLA have begun to decrease. Although other small companies cannot afford the large endorsement contract offered to athletes and coaches that many of the large companies can, they do use cheaper alternatives such as trade shows, brochures and catalogues event sponsorship and performance based rewards using their shoes.

In the past, a tremendous market pull originating from customers brand awareness existed, which forced retailers to carry certain high- demand brands. Recently, brand awareness has declined and consumers are shopping with open mind about the brand of shoes they want to purchase.

MANAGEMENT

ADEOLA SHOE MANUFACTURING NIGERIA PLC is structured into the functions of production, marketing, finance, engineering, purchasing, personnel and corporate affairs. The management is headed by Engineer CHARLES OGBEIDE who reports to the Board of Directors. Most management decisions evolve from policies formulated by the top management while operational decisions are made through line manager’s weekly meetings. The company’s departmental managers are responsible for the achievement of overall corporate objectives. Each manager is given autonomy is making routine decisions regarding his or her area of jurisdiction.

As a recent meeting of the board of directors, a resolution was passed on the need to re-structure the operation of ADEOLA SHOE MANUFACTURING NIG. PLC. The restructuring is expected to strengthen the core areas of the company’s business, while some services are being considered

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for outsourcing. The company’s Chief Executive Officer was mandated to set up machineries for the actualization of the proposed re-organization.

HUMAN RESOURCES

The management of ADEOLA SHOE MANUFACTURING NIGERIA PLC is currently facing some challenges in its human resources management. Lack of effective human resource planning has been identified as one of the factors responsible of the inadequacy of skilled manpower in the production and finance department. To address these inadequacies the management recently carried out a human resources inventory. This was done through the distribution of forms to employees to provide information such as name, education, training, prior employment, language spoken, special abilities and special skills.

The company recently, in its search for an experienced Finance Manager to head its Accounting and Information Processing system department, resorted to head hunting. In recruiting employees, applicant are usually subjected to vigorous interviewing process while written tests are always administered during the selection of management trainees.

The company has a robust welfare policy for its work force and gives priority attention to qualitative management training for its managers. Employees at the junior level however are not given enough opportunities for training.

It is also part of the company’s policy that employees are given opportunities to advance their career in the organization by providing them with opportunities to acquire additional education and skills through study leaves, part-time courses and skill acquisition training.

FINANCE AND INFORMATION SYSTEM

The finance and information system department reports to the managing director. The reporting system of ADEOLA SHOE MANUFACTURING NIGERIA PLC was recently streamlined by the implementation of an IBM AS 400 Computer System. This new system, after implementation, resulted in the reduction of staff in the administrative and account offices.

The new system has assisted the management in steamlining the financial reporting process while extending reporting to field salesmen and customers. A marked improvement has also been recorded in the order and cost tracking systems. The morale of staff was boosted while management reports were timely obtained.

PURCHASING AND MATERIALS MANAGEMENT

With the present size of ADEOLA SHOE MANUFACTURING NIG. PLC, management is considering the centralization of its purchasing functions as opposed to the current system where

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these functions are part of responsibilities of finance, maintenance, stores, administration and marketing departments.

The Production Director is, however, vehemently opposed to this idea because he was of the opinion that such a policy is capable of creating bottlenecks on their various stages of production. He was of the view that in most companies the procurement of materials departmentally usually enhances speedy production process. To further buttress his point, he said that the complexity of industrial materials increase constantly and a buyer who does not fully comprehend the significance of materials’ major technical and manufacturing characteristics cannot perform effectively.

MANAGEMENT INTERRACTIVE STRATEGY

ADEOLA SHOE MANUFACTURING NIGERIA PLC recently introduced a five-year forward planning and a preliminary meeting was scheduled to consider the plan. The plan is contained in Appendix 2.

During the meeting, the Managing Director/CEO said: “we believe that the accomplishment of the past years have laid the ground work upon which we can build to achieve our ultimate objective –to make ADEOLA SHOE MANUFACTURING NIGERIA PLC a leader in footwear industry and one of the admired companies in Nigeria”. The following additional contributions were made:

Sales Director - “This year our sales hit N5 Billion for the first time and there is no reason we should not expect these to continue increasing. Indeed I would say that we should achieve the results contained in the five year plan”.

Managing Director - “Given the inflation rate, that does not sound so very impressive to me”.

Sales Director - “Oh no – these figures are in present day prices, obviously, if there is inflation our prices will rise accordingly”.

Managing Director - “Good – if we maintain our ratio of net profit after tax to sales of 10%, we will be showing a substantial increase in our profit as well”.

Finance Director - “If profit go up, our shareholder will expect dividends to go up as well”.

Managing Director - “Our past policy has always been to have an earnings retention rate of 50% and I see no reason to change this”.

Production Director - “This is all very well but while our plant and equipment are fairly modern, there will have to be some replacements. However, there is a limit to what we can put into our present space.

Finance Director - “The same also applies to our working capital needs”.

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Managing Director - “These aspects will obviously have to be worked out to in detail, but I think will find that our total net assets turnover which is at present 0.8 times will not vary very much from year to year and our capital requirements currently is N1,857 million”.

Finance Director - “What about our long- term borrowing?”

Managing Director - “You know my views on that. I do not think we should ever let our equality fall below 70% of our capital structure.”

Finance Director - “But we are at that level already”.

Managing Director - “Ok –we will consider that along with other relevant matters at the next meeting next week”.

In order to achieve its corporate five-year plan, ADEOLA SHOE MANUFACTURING NIGERIA PLC decided to take the following actions:

(i) Plan and co-ordinate the various activities;

(ii) Measure actual performance;

(iii) Compare the actual performance with the plan (i.e. the targets set out in the budgets);

(iv) Analyse by causes the difference between the actual results and the budgeted figures;

(v) Take appropriate action in order to improve actual performance in future and/or to revise the planned (budgeted) figures if this is considered to be necessary.

MANAGEMENT FRAUD

In the first two years of its plan company performed satisfactorily when actual results were compared with the budgets. In Year 3 there was a general lull in the shoe industry and the company did not performed as expected. The company suffered reduced profitability in relative and absolute terms.

The directors, in order to show an impressive position, influenced overstatement of closing stock by N50,000,000 and disclosed N20,000,000 as profit after tax. The auditor witnessed the stocktaking exercise and checked the accuracy of the stock sheets but failed to detect this material fraud.

At the end of Year 3, Mr. AFOLAYAN (FCA) was appointed Managing Director to replace Mr. OLUWADARE who was retiring. In Year 4 of the company’s plan MR. AFOLAYAN who was suspicious of the company’s result in the previous year called for the audited financial statements to study the trend; comparing Year 3 with the previous years.

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He requested the management accountant to give him the value of opening stock, the purchases made in the year and cost of sales. By merely adding opening stock to purchases and detecting cost of sales, he discovered that the value of closing stock was overstated by N50,000,000.

He immediately called the meeting of Executive Directors to intimate them of the fraud. The directors were asked how it happened and they confessed that the stocksheets were manipulated in order to save the company from embarrassment by shareholders. In addition they did not want their commission as a percentage of profit after tax to fall below what obtains in the industry.

The directors who were involved were relived of their posts without benefits and new directors were appointed to replace them. The auditors, Messrs ABC & Co (Chartered Accountants), in order to save their face from embarrassment and sanctions by the Institute of Chartered Accountants of Nigeria, quickly resigned their appointment.

The Institute of Chartered Accountants of Nigeria wanted to intervene, but the company refused to submit documents relating to the account to the Institute.

The company’s shares were quoted. The Securities & Exchange Commission waded in to investigate the remote cause of the fraud to restore confidence of shareholder and the public in the company.

A NEW DIRECTION

In the already crowded athletic footwear coupled with the recent lull in the industry, the various competitors are continually jockeying for a better market position and competitive edge. Currently, women’s brand are, and will probably continue to be the fastest growing segment of the athletic footwear market.

This unparalled growth in the woman’s athletic footwear market is the most important trend in the sporting goods industry today and it is on this niche that ADEOLA SHOE MANUFACTURING NIGERIA PLC is staking its future.

While other competing companies were merely making smaller sizes of men’s footwear, ADEOLA SHOE MANUFACTURING NIGERIA PLC developed a fitness shoe built specifically for women with a patented design for better shock absorption and durability. ADEOLA SHOE MANUFACTURING NIGERIA PLC had a first mover advantage in this segment and had a sustained competitive advantage in that none of the other companies in the athletic shoe industry can boast of having a business strategy focused on woman.

After establishing a solid foundation in aerobics footwear category, ADEOLA SHOE MANUFACTURING NIGERIA PLC again turned its attention to product differentiation.

To make sure its footwear were not perceived as “too specialized” ADEOLA SHOE MANUFACTURING NIGERIA PLC also designed a dual-purpose walk/run footwear for women who complemented their walking routine with running, but did not want to own footwear for every

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activity. ADEOLA SHOE MANUFACTURING NIGERIA PLC is now considering entering the medical footwear market because an increasing number of podiatrists and chiropractors are recommending teen walking footwear to their patients.

MANAGEMENT OF FINANCE

ADEOLA SHOE MANUFACTURING NIGERIA PLC is considering the purchase of a new computer controlled packing machine to replace the two machines which are used to pack its products. These computers are different from IBM AS400 bought in 2003. The new machine would result in reduced labour costs because of the more automated nature of the process.

In addition, it would permit production levels to be increased by creating greater capacity at the packaging stage. With an anticipated rise in the demand for its products, it has been estimated that the new machine will lead to increased profits in each of the next three years. Due to uncertainty in demand, however, the annual cash flows resulting from purchases of the new machine cannot be fixed with certainty and therefore been estimated as shown in Appendix 3..

In view of the overall uncertainty in the sales of the new product-women’s athletic footwear discussed under “a New Direction” –it has been decided that only three years cash flows will be considered in deciding whether to purchase the new machine. After allowing for the scrap value of the existing machines will be N42,000.

APPENDIX 1

MARKET SHARE BY TYPE OF ATHLETIC SHOE

S/N SHOE TYPE MARKET SHARE(%)

1 Basket 27

2 Cross training 17

3 walking 12

4 tennis 10

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5 running 10

6 aerobic 6

7 Golf 6

8 Cleated 4

9 Others 8

Total 100

APPENDIX 2.

FIVE-YEAR PLAN

CURR. YR

YR 1 YR 2 YR3 YR 4 YR 5

N’000 N’000 N’000 N’000 N’000 N’000

Sales 5,000,000 5,300,000 5,700,000 6,200,000 6,800,000 7,750,000

Cost of Sales

3,150,000 3,415,000 3,720,000 4,282,000 4,616,000 5,410,000

Gross Profit

1,850,000 1,885,000 1,980,000 1,918,000 2,184,000 2,340,000

Admin Costs.

1,230,000 1,237,000 1,318,000 1,238,000 1,464,000 1,520,000

NPBT 620,000 648,000 662,000 680,000 720,000 812,000

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Taxation 120,000 118,000 92,000 60,000 40,000 37,000

NPAT (10%)

500,000 530,000 570,000 620,000 680,000 775,000

APPENDIX 3.

ANNUAL CASH FLOWS (N’000)

Year 1 Prob. Year 2 Prob. Year 3 Prob.

10 0.3 10 0.1 10 9.315 0.4 20 0.2 20 0.520 0.3 30 0.4 30 0.2

APPENDIX 4

DISCOUNT TABLE

Year Discount Factor @ 15%

1 0.8696

2 0.7561

3 0.6575

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Required:Assume you are the Finance Director, draft a report to the management making necessary recommendations and appropriate advises after:Reviewing, appraising, making computations and deploying all necessary tools and assumptions as far as possible given the special highlights and appendices in the case.

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Chapter 7

CASE SIX

CEECEE RETAIL FASHION CASE

Industry overview

Over the last decade, the European clothing market has grown by almost 20% (as measured by sales revenue). However this headline sales figure hides many of the underlying tensions involved when competing in this market sector. The clothing market has suffered from strong deflationary pressures due to the influx of “value” retailers and intense competition. “Value” retailers are defined as low price retailers which import low cost clothing manufactured principally in Asia. These “value” retailers include some High Street chains as well as supermarket chains that sell clothing.

Generally it is accepted that there are 3 tiers of clothing retailers, which are:

• Couture houses and top designer labels

• High Street retailers of fashion clothing

• “Value” retailers (as defined above) which retail at the inexpensive end of the market.

There are a wide variety of retailers which compete in High Street and shopping centres all over

Europe (and some globally) whose prices, quality and branding varies greatly.

Historically, clothing-only retailers dominated the market, taking nearly two thirds of all sales, with large department stores coming second. More recently large supermarket retailers, known principally for their grocery lines, have gained market share with a major push into non-food sales. Furthermore, in an increasingly competitive market, “value” retailers are also growing quickly. The major force for change in the clothing retail market came from the “value” retailers which began to offer clothing at extremely low prices. This sector caused traditional retailers to question all aspects of their business models. The sometimes breathtakingly low prices offered by the “value” retailers changed shoppers’ attitudes.

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Branding and differentiation were considered to be critical for retailers operating outside the “value” sector. To achieve effective differentiation, greater focus was required in the areas of quality of design and customer service.

A further opportunity, and challenge, was the introduction of online shopping. The key for shop-based retailers is to integrate the online shop with the wider brand proposition, while building the social and product experience at each shop.

In European surveys of “consumer’s clothing wants”, four key trends in consumer behaviour were identified. These impact on the development of clothing retailers’ future strategies and are:

• Customers increasingly demand a wider range of sizes and fittings. This creates challenges for larger shops, as well as online operators.

• Improvements within each shop such as better stock availability, quicker service and improvements to changing rooms.

• Half of all clothing shoppers look at the price tag first when looking at clothes. About a third believed that cheap cannot be consistent with quality. This indicates that there is clearly more to selling clothing than simply price.

• Shoppers are increasingly turning to online shopping, but this has not yet had a significant impact on sales in shops, as research has shown that half of all shoppers think it is necessary to touch or try clothes on before buying. Therefore, making the product accessible is a key weapon for retailers fighting against an online threat.

Another factor in the traditional clothing industry is that the design and production processes often result in long lead times to getting clothing to the shops. Often up to six months is required between the initial design of a garment and its delivery to shops. This model effectively limits manufacturers and distributors to just two or three collections per year. Predicting consumer tastes ahead of time presents inherent difficulties. Therefore clothing retailers face the constant risk of being left with unsold inventory that has to be marked down considerably and sold off. This can often result in over 20% of inventories being sold off in end of season sales at write down prices, often only barely covering the cost of the production.

CeeCee overview and history

Carla Celli founded CeeCee in 1989 and is currently the Chief Executive Officer (CEO). She is a designer by trade and built up her experience of the industry working for other fashion retailers. When Carla Celli opened her first shop, she used a new business model which is known as “fast fashion”. Fast fashion essentially replicates the principles of the manufacturing technique of “Just In Time” (JIT). For details on the fast fashion business model, refer to the paragraph

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“Business model and supply chain” on page 4.

Carla Celli opened her first shop in 1989 in her home country with the aim of focussing on up to the minute fashion styles for women at affordable prices. This first shop featured reasonably priced “look alike” clothing ranges which were very similar to higher-end clothing fashionshops. The shop proved to be a success, particularly with young professional women who wanted to wear stylish clothing but who had limited budgets.

While her initial inspiration was driven by her keen following of fashion trends, she realised that if she wanted to scale up her business model to cover more cities she would have to become much more business minded and try to think “outside the box”. Following meetings in early 1990 with Paulo Badeo, who had been working as a logistics IT consultant, she decided to implement her ideas for the fast fashion model for a greater number of retail shops. Within six months of their initial meeting Carla Celli had convinced Paulo Badeo to join the Board of CeeCee. The company was able to open 5 shops during 1991 and this was the start of CeeCee as a European-wide retailer.

CeeCee’s personnel are detailed in Appendix 1.

From the outset some traditionalist logistics professionals argued that the fast fashion model would inevitably fail because the costs of constantly changing and shipping new fashions could not be recouped by high enough margins. They argued that the last twenty years of “mass” fashion industry experience showed that the way to go was long production runs and the outsourcing of production to low cost producers in Asia. In order to try and address these concerns Carla Celli had recruited a set of experienced professionals in the design, finance and logistics areas to help implement effective cost management, while at the same time allowing the fast fashion model to develop.

By the late 1990’s CeeCee was a favourite with European “young professional” shoppers. At this stage, CeeCee was retailing only women’s clothing but Carla Celli had plans to expand into menswear, children’s clothing and some home furnishings.

In 2000 CeeCee was listed on a major European stock exchange. The cash raised at the time of the listing enabled a faster rollout of shops across Europe. The listing also gave CeeCee access to less expensive debt finance. At the end of 2000 there were 280 CeeCee shops across Europe.

With cash generated from operations and from the listing, CeeCee has opened around 40 shops each year. At the end of 2008, CeeCee had 610 shops across 18 European countries. Due to the weak economic climate during 2009, CeeCee only opened 20 new shops, bringing the total number of shops to 630 by the end of 2009. All shops are rented under short term rental agreements. CeeCee operates and manages all of its shops.

CeeCee now sells men’s clothing, children’s clothing and a range of home furnishings at selected medium and larger size shops. At the end of 2009, around 500 out of the 630 shops

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sold men’s clothing and around 300 sold children’s clothes and home furnishings. However, CeeCee is still considered to be mainly a ladies fashion clothes shop.

CeeCee achieved an overall gross margin of 60.1% during the year ended December 2008. The gross margin is defined as selling price, net of sales tax, less the purchase cost of the product. Neither delivery costs nor any direct sales staff costs have been charged in arriving at the gross margin. All costs, except the purchase cost of the product sold, are included in overhead costs.

The range of home furnishings that CeeCee now sells includes textiles, such as bed, table and bathroom linen, as well as tableware items including cutlery, glassware and decorative home items such as mirrors and picture frames. The home furnishing ranges are constantly being updated and new designs launched, which are proving very popular with CeeCee’s target customers of young professionals, as they set up their own homes. The home furnishings range, which represents only 4% of total sales revenue, generates a higher gross margin than average at 72%.

Another product range that generates high gross margins is clothing accessories, such as handbags, hats, shoes, men’s ties and jewellery. All CeeCee shops stock limited ranges of accessories, whereas in large sized CeeCee shops, the full range of accessories is on display throughout the shop to encourage shoppers to purchase, for example, new shoes together with a new dress. The gross margin achieved on accessories averages 75%, but some products generate an even higher gross margin. Accessories are a product range which Juliette Lespere, the Sales and Marketing Director, would like to expand.

A summary of CeeCee’s shops and relevant key statistics is shown in Appendix 2. The successof CeeCee’s shops is attributed to several key factors, including its innovative business model, as detailed below. However, the 5 key factors are considered to be:

1. Prime locations for all of its shops, and in some city centres CeeCee has seized the opportunity to use historic buildings in key shopping areas.

2. Spacious shops which use sophisticated architectural details and designs to make shops appealing to customers to browse and to provide a comfortable environment in which to shop.

3. Carefully designed shop window displays which are changed at least once each week, allowing the latest clothing designs to be “show cased” to prospective customers.

4. Careful and visually appealing layout of clothing displays, so as to attract customers to choose coordinating clothes and accessories and to maximise sales revenue.

5. Excellent customer care. CeeCee carefully recruits and trains all of its employees to ensure that the customer is put first. This philosophy is behind all aspects of the work in all of CeeCee’s shops. The emphasis is put on providing an un-crowded pleasant shopping experience where the customer is not approached by shop staff unless asked,

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but shop staff are constantly available if required. All shop managers encourage team work and the building of long term working relationships to improve the standard of customer care.

Business model and supply chain

The traditional method of high inventories and long lines of products to prevent “stock-outs” where demand exceeds supply has been ignored. In traditional retail sales, a “stock-out” is considered to be the worst scenario. However, CeeCee’s business model aims to generate sales in an entirely different way.

CeeCee targets its customers by making its clothes appear to be exclusive by having short production runs of many designs. Indeed in 2009, CeeCee had over 250,000 product lines each year (each size or colour of the same clothing item represents a different product line).

Each shop stocks limited numbers of each design and there is an air of exclusivity, since only a few products of each range are on display. This has resulted in customers making quick decisions to buy what they see, as they know that there is a chance that if they do not buy when they first see the item, they may lose the chance if it is sold out or not available in the size or colour that they would like.

This fast fashion concept relies on 4 key factors:

• Sophisticated IT systems that feedback sales data to Head Office daily

• Close contact, via IT systems, with all of CeeCee’s manufacturers

• Fast creation and supply to shops of small numbers of new products

• Swift sale of new inventory items, shortening the product life cycle

CeeCee employs over 180 designers, all of whom are young (with an average age of 27) who create approximately 15,000 new designs each year. CeeCee uses a range of clothing manufacturers, both in Europe and in Asia, who are contracted to work exclusively for CeeCee. They work closely with CeeCee’s designers and are linked into CeeCee’s IT inventory control systems and have daily updates on what items to produce and what products to discontinue.

CeeCee manages to produce very fast turnarounds for its fashion designs. CeeCee’s designers have the systems in place to ensure that the time taken from final design to the product being in the shops has reduced. Currently, with CeeCee’s IT support systems, it is able to get some new product designs into its shops within just 10 to 15 days.

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This fast fashion system depends on a constant exchange of information throughout every part of CeeCee’s supply chain, which includes shop managers, designers, production staff, buyers and external clothing manufacturers. The supply chain also includes complex logistics to enable the correct level of inventory to be delivered to shops at the right time.

CeeCee’s logistics run well and are very reliant on good outsourced distributors and its own sophisticated IT systems.

CeeCee’s fast fashion model results in its retail stock being constantly changed with new designs. Instead of having 2 or 3 “seasons” of clothes each year, CeeCee has a rolling production of new designs with new clothing designs appearing in shops every 3 weeks on average. This encourages customers to return often to its shops, with the average number of visits to a CeeCee shop being around 17 times each year rather than 4 times a year for traditional fashion retailers.CeeCee’s customers know that clothing items will only be available for a short time and this encourages them to make their purchases more quickly, as they know that if they returned a day or two later, the CeeCee shop might no longer have the item in stock.

CeeCee also prices its clothing in a different way from traditional retailers. Instead of using the cost plus principle, CeeCee prices its clothes in a competitive way in each of the countries in which it competes. The price tag on each product displays the price in Euros as well as the local currencies of the countries in which CeeCee operates, where the Euro is not the national currency. However, the price shown in local currencies may not equal the price in Euros based on recent exchange rates, as the prices in local currencies take account of the pricing levels that can be achieved in each country. CeeCee’s Sales and Marketing Director, Juliette Lespere, is aware that if the clothes are priced too cheaply, they will “appear” as if the quality is low. Therefore each product is priced based on an element of exclusivity which ensures that the price is competitive but at a premium to that of lower quality competitors.

When CeeCee first launched its fashion range in its first shops in the 1990’s, CeeCee used a network of small “sewing cooperatives” in rural areas of Carlo Celli’s home country. As the number of shops grew and the range of products expanded, the company appointed a range of manufacturing companies to produce its clothing. CeeCee still uses the original sewing co-operatives for some of the quality stitching on its top of the range products.

CeeCee’s Operations Director, Paulo Badeo, has set out a number of specific criteria to its potential suppliers. These have ensured that long-term working relationships, that are beneficial to both parties, are being achieved. Obviously CeeCee has chosen its suppliers well, as it has had very few major problems with any of its suppliers and almost all of them are still supplying clothes and furnishings to CeeCee. Furthermore, the clothes are selling well and sales revenue is at an all time high.

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The criteria CeeCee uses in the selection of its suppliers are:

• Quality of production• Ethical workplace practices including safety issues and minimum age for workers• Agreed code of conduct• Ability to be flexible to meet the changing needs of CeeCee’s customers• Meets CeeCee’s purchase price targets• Operates in a country that recognises the legal protection of intellectual property rights(IPR’s)

CeeCee also audits all of its suppliers on a regular basis to monitor a variety of key production aspects. CeeCee has established a close relationship with all of its suppliers, all of which are sharing in CeeCee’s growth and success. At the end of 2009 CeeCee had over 350 suppliers.

The locality of supply has changed over the last decade, due to the low cost of production in Asia and also some Eastern European countries. Initially 100% of CeeCee’s production was sourced in Europe. In 2001, CeeCee started sourcing some of its standard products (including woollens and cotton T-shirts) from Asia. By the end of 2009 over 30% of products were manufactured in Asia. The remaining 70% are manufactured in a number of European countries. Around a third of the clothing manufactured in Asia is air freighted to Europe, rather than being shipped by sea, to speed up the time taken from design board to shops.

CeeCee has a large distribution centre in Northern Europe, close to a shipping port, which enables it to move all products, with the minimum of handling, to meet the inventory requirement for each of its shops.

CeeCee’s Head Designer, Laura Russo, is keen that all of CeeCee’s designs are innovative and at the leading edge of the current trends, without making the clothing too dramatic. The designers all follow the fashion shows of leading fashion designers and use the current trends for their designs. The designers are not allowed to copy another designer’s idea, due to intellectual property rights owned by the original fashion house. However, they can change aspects of the garment to make it slightly different, but still appear to be a High Street copy of a “designer label” clothing item. It is a fine line, but Laura Russo always wants CeeCee’s designs to have a style of their own rather than a copy of other designers. Indeed, several other High Street retailers have in the past launched their own version of CeeCee’s designs.

Inventory analysis

As stated above, CeeCee does not concern itself with “stock-outs” and has a continuing stream of new products arriving at its shops throughout the year. If a product is selling well, then further manufacturing runs may be agreed, depending on what other new replacement products are due at the shops.

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CeeCee carries a reasonable level of inventory at each of its shops and also its central distribution centre carries some inventory for its vast numbers of product lines. There are often peaks and troughs in inventory levels due to different factors that affect inventory, such as:

Seasonal factors – larger numbers of “party” clothes are stocked in the period up to Christmas

• More sales are made in the middle and end of each month, coinciding with the date that monthly paid customers get paid and have cash available for purchases

• Large deliveries of new clothes arriving at the distribution centre in Europe

The average number of days for inventory was 97 in 2008, a small increase from 90 days in 2007. The latest forecast for 2009, is a decrease to 94 days.

CeeCee has a policy that slow moving product lines are withdrawn from the shop floor within 21 days. These products are rarely put in “end of season” sales. They are sold in bulk at very low prices,sometimes below the cost of production, to distributors who will sell them through other sales channels. These alternative sales channels include selling at market stalls or through smaller clothes shops that sell only “end of lines” from a variety of other High Street clothing retailers.

CeeCee is fortunate that as a result of its short production runs and its ability to closely monitor sales, only about 10% of its volume of purchases is sold off in this way. Many other retailers experience wastage or unsold items of over 20% of their volume of purchases.

CeeCee’s integrated inventory system (see below) has enabled management to develop and closely monitor its flexible supply chain and this allows the company to maintain greater control over its inventory. Due to the detailed inventory control system, inventory of slow moving items are written down (or written off) on a regular weekly basis, so that inventory is correctly valued at the lower of cost or realisable value.

IT systems

CeeCee has invested in its IT systems to enable the fast fashion model to work. CeeCee employs its own IT staff but it also outsources some specialised design and update work to a leading global IT solutions specialist company. This enables CeeCee to take advantage of continuing enhancements in retail and inventory management systems.

Its integrated inventory, production and logistics system, known as CCIPL, has had to be continuously improved and enhanced to meet the changing number of shops, suppliers and numbers of product lines. It had recently undergone a large upgrade at a cost of over €40 million to enable allshop managers to be able to review sales data and amend orders using a handheld PDA (PersonalDigital Assistant).

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At the end of 2009, CeeCee invested over €10 million in the launch of its website to offer online shopping to its customers. The newly launched website is clear and easy for customers to use and allows customers to view inventory levels. It also enables customers to zoom in closely on all angles of each product, thereby allowing them to get as “close” to the product as online shopping allows.

CeeCee’s finance systems, CCF, interface directly with the CCIPL system. The CCIPL system feedssales data, cost of sales data, inventory and many other costs directly into the CCF system enabling the production of monthly management accounts and annual statutory accounts. The system also has the ability to generate weekly and daily sales revenue and margin information for management to monitor actual against plans.

The management team and all executive Directors have access to an executive information system, called CCIS, which highlights key variances from agreed budgets and plans. This system identifies where sales revenue differs (either higher or lower) from plans and generates exception reports on margins or fast-selling production lines. The CCIS allows the management team to drill down to identify what is happening at each shop, or by country or product line or product category. This enables the management team and the designers to closely monitor sales data within 1 working day and to compare data to plans and to take action where a new product appears to be successful, or unsuccessful, in the shops.

CeeCee’s competitors

CeeCee is operating in a very competitive market. Furthermore, in the current economic environment, CeeCee is trying hard to retain its customers, some of which are now making purchases from “value” retailers who are not direct competitors.

CeeCee has shops in key locations in High Streets and shopping centres in cities across 18 countries in Europe. All fashion retailers have had to react to increased competition and the effect the economic situation has had on customers’ spending.

A summary of key statistics for CeeCee and for some of its many competitors is shown below:

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All figures for year ending in 2008

CeeCee Comp.1 Comp.2 Comp.3

Sales revenue €m(excl.sales tax)

Gross margin % No.of shops (end year)

No.of countries

Sales area – end year

(sqm)

2,700

60.1

610

18

632,000

9,400

56.2

3,850

75

2,140,000

3,700

59.0

900

35

850,000

2,500

55.7

600

20

650,000

Financial results and business plan

CeeCee is a highly profitable business with an operating profit margin, before finance costs and tax, of 22.8% for the year ended 31 December 2008 (based on operating profit of €616 million).

As noted above, all sales revenue figures exclude any sales tax (such as VAT) and gross margins are stated after the purchase cost of the manufactured products only.

Extracts from CeeCee’s Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity are shown in Appendix 3.

CeeCee’s Finance Director, Diane Innes, is pleased that the latest full year forecast for 2009 is not as bad as was first feared, although it was lower than originally planned. The full year forecast for the year ended 31 December 2009 generated an operating profit (before finance costs and tax) of €634 million.

The accounts for the year ended 31 December 2009 have not been finalised, or audited, yet. However, Diane Innes is confident that the actual accounts will reflect the results shown in this latest full year forecast for 2009.

The latest 5 year plan has been prepared and was approved by the CeeCee Board at the end of November 2009. It includes sales from online shopping as well as the roll out of new shop openings, with 800 CeeCee shops in operation by the end of 2014. These new shop openings include expansion outside of Europe. Sales revenue is planned to rise from current levels of nearly €3 billion to over €5.1 billion by 2014.

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CeeCee currently has 2 loans, totalling €300 million, with a total of €32 million payable in finance costs each year on these loans. One of the loans is for €200 million, at 12% interest per year, and it is repayable in October 2014. It is planned that a new loan will be taken out in 2014 to cover the repayment of this loan and to generate funds required to meet the agreed expansion plans. The second loan is for €100 million, at 8% interest per year, is due for repayment in July 2016.

Extracts for CeeCee’s 5 year plan, together with the latest forecast for 2009, is shown in Appendix 4. All financial figures shown in the plan are based on 2009 prices.

Trading conditions in the last 12 months

CeeCee, as well as many other retailers, experienced exceptionally difficult trading conditions at the end of 2008 and during 2009 due to the world recession. The start of 2009 was particularly difficult with low numbers of customers at all of its shops across Europe. Some countries fared better than others, although the number of people going shopping and making purchases fell considerably. Some shopping centre statistics stated that the footfall (defined as the number of people visiting a shopping centre) was down over 40% from previous comparable periods.

CeeCee’s like for like sales (based on same selling space) during 2009 were down 2%. Some other clothing retailers ceased trading, whilst others experienced sales revenue falling by 20% or more. Overall, Carla Celli considered that CeeCee had survived this particularly difficult trading periodrather well. CeeCee only opened 20 new shops during 2009, compared to the original plan of 40, and the additional shops added 5.1% to the total sales area for all CeeCee shops at the end of 2009, to a new high of 664,000 square metres.

2009 was an unusual year for sales of different product lines. Sales of suits and white shirts, for men and ladies, increased substantially. These products replaced previously high sales volumes of “party” clothing, as more young professionals purchased smart clothes for work rather than for social occasions. However, there was a large inventory write down for clothing ranges that had not sold as expected and most of these clothes were sold at below cost price. Children’s clothing stayed more or less at the same volume as 2008, and home furnishings were down by 10%. However, as the home furnishings products have a longer “selling life” (as they do not go “out of fashion” as quickly), there were fewer inventory write downs on the home furnishings products. Overall, despite inventory write downs, the forecast operating profit margin remained at 22.8%.

CeeCee reduced the number of employees at some shops in the early part of 2009, with fewer part-time employees. CeeCee, as a responsible employer, did not make any full-time employees redundant at all, but there were some full-time positions that were not filled when an employee left the company.

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At the end of 2009, CeeCee had just over 44,000 employees. However, the majority of these employees work part-time, with an average of only 12 hours worked each week. The number of full-time equivalent (FTE) posts was 12,880 at the end of December 2009.

Marketing

Juliette Lespere is CeeCee’s Director of Sales and Marketing and she joined the company in 2008. She has been trying to introduce a number of changes to the way in which CeeCee markets itself and has been fighting for a larger marketing budget. So far she has been unsuccessful as CarlaCelli considers that the CeeCee designs and the shops are the group’s greatest assets and that money spent on marketing is not necessary.

With the difficult trading conditions in 2009, Juliette Lespere was under pressure to deliver sales revenue as close to the original planned level as possible. A number of new marketing initiatives were trialled, and some were more successful than others. She considered that the company did well with sales only down 2% from 2008 on a like for like basis.

CeeCee has a marketing budget of 0.5% of sales revenue, which in 2009 was around €14 million. Many other High Street retailers have marketing budgets of 6 or 7 times this amount at approximately 3 to 4% of sales revenue.

Instead of advertising on TV and in fashion magazines, the CeeCee fast fashion business model is based on the shops being the main medium for advertising. By selecting prime locations for its shops and having its new clothing displayed in limited quantities in its shop windows, this entices customers into its shops. Furthermore, market research has shown that CeeCee customers visit its shops more frequently than they might other clothing retailers. In a recent survey, retailcustomers were asked how many times each year they went shopping for clothes. In respect of the usual High Street retailers, the answer averaged only 4 times per year compared with 17 times each year for CeeCee’s customers.

Juliette Lespere wants to have a larger marketing budget so that she can allocate funds to shop managers to run local events to attract customers into their shops and boost sales revenue. She also considers that e-marketing is a tool not used as effectively as it could be. She is working with Roberta Downs, the IT Director, to get automated links to customers who make online purchases, so that this data can be used to ask the customer to complete a short feedback survey and to reward them with discount vouchers against further purchases.

Juliette Lespere is also concerned that a small number of shops (fewer than 10) are not in the best location for those cities. When they were opened, some over 15 years ago, they had a prime site, but now newer shopping centres have opened, and she wants the CeeCee shops moved to a better location. She is working closely with Ruth Giddens, the Head of Property Management, to secure better locations. The other Board members agree that whilst Juliette Lespere has been impatient for change, she has brought a fresh outlook to the company and has an eye for detail that could make CeeCee shops even more successful.

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Capital expenditure and shop opening plan

At the end of December 2009, CeeCee had 630 shops open. A summary of shops and relevant key statistics is shown in Appendix 2.

In order to maintain flexibility and to grow the chain of CeeCee shops as quickly as possible, all shops are rented. The only premises that CeeCee owns are:

• Head Office building which accommodates all departments, including designers,administration, IT and purchasing.

• Distribution centre – all products that have been procured from Asia arrive at this centre, together with the majority (but not all) of products manufactured in Europe. Where possible, goods are delivered direct to shops rather than moving into, and then out of, the distribution centre.

At the end of 2009, CeeCee’s gross value of non-current assets was €2,472 million. This represents the costs of the shop fittings at all 630 shops, the Head Office, the distribution centre, IT equipment and owned vehicles (not delivery lorries as delivery is outsourced). The accumulated depreciation provision at 31 December 2009 was €985 million; resulting in net non-current assets of €1,487 million (at 31 December 2008 net non-current assets were €1,438 million).

CeeCee’s policy is to completely refurbish all shops about every 7 years, and sometimes more quickly. Shop fittings are depreciated over 7 years. IT equipment installed in shops (to capture inventory and sales details by product line) as well as all Head Office IT equipment is depreciated over a 4 year life. The fixtures and fittings at CeeCee’s owned premises (Head Office and distribution centre) are depreciated over an 8 year life, and the value of the buildings is depreciated over a 50 year life.

The capital expenditure on new shop openings currently runs at around €100 million each year. A further €70 million was spent on shop refurbishments during 2009. As the number of shops increases over the next 5 years, the cost of the rolling refurbishment programme increases to over €162 million during 2014.

The properties are well managed by Ruth Giddens, the Head of Property Management. When a city is selected for CeeCee’s expansion, she works hard to find and secure a competitive rental agreement on a suitable shop. She is proud to state that the expansion programme has never been held up by a delay in finding a suitable location for the next CeeCee shop. Furthermore, Ruth Giddens is working closely with other CeeCee Board members to secure better locations in somecities that have opened new shopping centres, to ensure that CeeCee shops are always sited in a position to attract its target customers.

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CeeCee’s shareholders and relevant financial statistics

CeeCee became a listed company almost 10 years ago and the company has seen strong growth in sales, number of shops and earnings per share (EPS). The company has 100 million shares in issue and the majority are held by institutional shareholders.

The company made a profit (after finance costs and tax) of €416 million in 2008, resulting in EPS of €4.16 per share. The profit for the year ended 31 December 2009 is expected to be €424 million, which is in accordance with the forecast. This equals EPS of €4.24, a growth of only 1.9%. Investors were generally pleased with the forecast performance in 2009, particularly in a difficult trading period.

The Board has indicated that dividends will remain at the same payout rate per share as paid in 2008 and 2009.

CeeCee’s share price at 31 December 2009 was €33.70 per share with a market capitalisation of €3.37 billion. Prior to the recession, CeeCee’s shares were trading at over €45.00 per share.

Corporate Social Responsibility (CSR)

As would be expected of a listed company such as CeeCee with over 44,000 employees and operating in 18 European countries, it takes its CSR responsibilities seriously.

Jeroen de Joost, CeeCee’s Head of Environmental Impact is responsible for all aspects of CeeCee’s CSR reporting. This involves developing initiatives, getting proposals approved, data capture and monitoring and regular reporting on CeeCee’s CSR aims.

An extract from the draft CSR report for the year ended 31 December 2009 is included in Appendix 5.

CeeCee’s corporate aims

The Board of CeeCee is focused on the following priorities, particularly in the current economic environment:

1. Consistently delivering products that align with our target customers

2. Improving customer experience and continuing to invest in shops to achieve an improvement in return on invested capita

3. Managing inventory to protect operating profit margins

4. Monitoring and improving gross and operating profit margins by improving operational efficiency.

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Appendix 1

CeeCee personnel

Non-executive Chairman - Frank Bartoli

Frank Bartoli, aged 48, joined the CeeCee Board just before the company became listed in 2000. He brings a wealth of commercial experience having been in senior positions for a leading global fashion brand for many years. He has enjoyed the challenges of CeeCee’s fast growth and has aspirations for expansion of the group outside of Europe.

Chief Executive Officer (CEO) - Carla Celli

Carla Celli is 52 years old. After starting her career as a designer, she moved on to managing retail fashion shops before she launched CeeCee. Her idea for CeeCee was to employ young designers, often recent graduates of Italian fashion schools, to “re-interpret” current catwalk

fashions. CeeCee’s shops soon became favourites with young professional women who wanted to look fashionable but at a reasonable cost.

Operations Director - Paulo Badeo

Paulo Badeo, who is 53, is an old school friend of Carla Celli’s and they had kept in touch while he studied for an engineering degree at a prestigious Italian University and then a masters degree in operations research at a leading US graduate school. Paulo Badeo had worked for around 10 years in the USA for a leading IT company and then subsequently for a specialist IT logistics consultancy company. Paulo Badeo joined CeeCee in 1990 and was instrumental in the roll out of the CeeCee brand across Europe. He also manages all supplier purchases, helped enormously by a very competent procurement manager.

Finance Director - Diane Innes

Diane Innes is 42 years old. Instead of the more ‘traditional’ career path of working for years in a large Italian conglomerate or audit partnership, Diane Innes had studied economics and accounting inthe UK at undergraduate level before qualifying as an accountant for an internationally recognisedaccounting body. She had been employed in a middle management finance role for 10 years and had established a good reputation for managing change. She

joined CeeCee in 1999, just before CeeCee was listed, and has driven through some tough changes and cost management techniques throughout the company.

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Head Designer - Laura Russo

Laura Russo is 39 years old and a graduate of a prestigious postgraduate school of fashion based in Italy. After leaving fashion school, she started her own design studio and also opened a shop in Italy. Although her designs had repeatedly received plaudits in the Italian fashion press, she found the administration concerned with managing a shop distracted her from her passion of designing. She joined CeeCee as a designer in 1995, and worked her way up to the role of Head Designer in 2003. She actively recruits talented young designers to ensure that there is a pool of designers who can achieve the vast number of new designs that are required each year to maintain CeeCee as a leader of fashion clothes for both men and women.

Head of Logistics - Jim Bold

Jim Bold is a 52 year old engineering graduate but has worked in logistics roles all over the world. He joined CeeCee in 2002 and has been instrumental in improving the time taken to get new designs from the design board to the finished clothing item in over 600 shops across Europe.

Human Resources Director - Alan Howard

Alan Howard is 48 years old and has held a senior position at a leading HR consultancy company. He wanted a challenge, and after working closely with CeeCee in a consultancy role, joined thecompany around 10 years ago. He has seen the number of employees rise from 2,000 to the current level of over 40,000. Many shop based employees work part-time, and in total, including Head Office, there were over 44,000 employees, equivalent to 12,880 full-time equivalent (FTE) posts at the end of 2009.

IT Director - Roberta Downs

Roberta Downs is 38 years old with considerable experience working for major IT consultancy firms. She is a very accomplished manager and had a reputation for meeting both deadlines and clients’ expectations. Her friends were surprised when she left the “big IT league” to join CeeCee. She argued that she needed the challenge of something new rather than working on huge IT projects, and wanted to become part of a new wave of IT professionals working at the cutting edgeof the fashion industry, although she did mention in confidence to a close friend that she onlyintended to stay at CeeCee for a maximum of 5 years to gain experience, before setting up her own specialist fashion IT consultancy.

Sales and Marketing Director - Juliette Lespere

Juliette Lespere is a 35 year old graduate with an MBA from a world class USA based business school. During her MBA studies, she discovered a passion for marketing and then she worked briefly as a marketing manager for two USA based Internet start up companies. Then she

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worked for a fashion house in the USA, which sparked her interest in the challenges of fast fashion. She joined CeeCee in 2008 after the Sales and Marketing Director left for a rival retailing company.

Head of Property Management - Ruth Giddens

Ruth Giddens is 58 years old. She has worked in property management all of her career, latterly for an international property developer. She wanted a more challenging role and brought a wealth of experience to CeeCee when she joined in 2005.

Head of Environmental Impact - Jeroen de Joost

Jeroen de Joost is 48 years old and worked for a global oil company for the last 22 years. He had progressed through the ranks of the organisation moving between jobs in general management before finally settling in the corporate social responsibility (CSR) department as a junior manager. After more than 22 years with the company, a sustained period of low commodity oil prices resulted in a number of redundancies in middle management and he was made redundant. He was pleased to join CeeCee which takes its CSR responsibilities seriously.

Non-executive directors

CeeCee has 6 non-executive directors on the Board.

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Appendix 2

Summary of CeeCee’s shops and relevant key statistics

Y/E

31 Dec. 2007

Y/E

31 Dec. 2008

Y/E

31 Dec. 2009Actual Actual Latest full year forecastNo. of shops:

Y/S:

Large Medium Small

Total

N/ shop openings

Large

Medium

Small

60

164

80

190

100

210524 570 610

20

26

20

20

10

1046 40 20

80

190

100

210

110

220570 610 630

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Total

Y/E

Large Medium

70

177

90

200

105

215 547 590 620

Total sales area (all shops) (sqm)

- end year568,000 632,000 664,000

Average sales revenue per

Operating profit €m (before finance costs and tax)

534 616 634

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Appendix 3

Extracts from CeeCee’s accounts:

Statement of Comprehensive Income YE YE

31/12/08 31/12/07

€m €m

Sales revenue 2,700 2,358 Operating costs 2,084 1,824 Operating profit 616 534 Finance costs (net) 22 26 Tax expense (effective tax rate is 30%) 178 152 Profit for the period 416 356

€ million

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Statement of Financial Position

31st Dec. 2008 31st. Dec. 2007

€million €million Net Current Assets 1,438 1,363

Current Assets:

Trade Receivables 24 20

Inventories 286 234

Cash and Cash Equiv. 313 174

623 428

Total Assets 2,061 1,791

Equities & Liab.:

Equity Share Cap. 50 50

Share Premium 40 40

Retained Earnings 1,038 830

1,128 920

Non.curr. Liab. 300 300

1,428 1,220

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Current Liab.

Trade Payables 455 419

Tax Payable 178 152

633 571

Total equities & liab. 2,061 1,791

Appendix 4

2009 Full year forecast and extracts from 5 year plan

Latest Fullyear forecast

Extracts from 5 year plan

Note: All figures shown in the financial data below are

2010 2011 2012 2013 2014

No. of shops:

End year 630 650 672 702 750 800

Sales area for all shops

(sqm)

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Sales rev. * Operating profit

€ m

2,781

€ m € m € m € m € m

2,985 3,319 3,781 4,390 5,156

634 690 780 896 1,045 1,237

* Sales revenue for 2010 to 2014 includes sales revenue generated by shops and online trading

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Appendix 5

Extracts from CeeCee’s

Corporate Social Responsibility (CSR)

Report for the year ended 31 December 2009

Product Suppliers

In 2009 the company audited and pre-qualified all new suppliers for compliance with the existing Code of Conduct for suppliers, which states that our goods must be produced lawfully, without exploiting thepeople who made them, in decent working conditions and without damaging the environment.

Actions for 2010: the company will publish a new Guidebook to the Code of Conduct. The number of supplier audits will increase to ensure that all suppliers are visited at least once each year.

Product Quality

In 2009 the system of independent product testing, to ensure that no substances are used that are recognised to pose a threat to human or environmental health, was expanded to ensure that all products are tested annually.

Actions for 2010: the system of independent product testing will be further expanded to test all new products before they are sold. The range of Fair trade products and organic cotton products will beexpanded.

Suppliers’ employees

In 2009 a number of studies and pilot projects explored the extent to which suppliers paid workers a “living wage.” These showed that the suppliers concerned paid more than “neighbouring” companiessupplying other customers and appeared to pay more than any legal minimum wage in force locally. These studies considered all payments made, including overtime.

Actions for 2010: studies are planned to enable CeeCee to assess further what a “living wage” is. Studies are also planned to understand some of the potential problems CeeCee’s suppliers have, in respect of the suppliers’ employment of migrant workers.

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Energy efficiency

In 2009 a decision was taken that every major shop refurbishment would include re-wiring work to isolate essential and non-essential lighting during non-trading hours. Changing from high energy lighting to energy efficient alternatives has continued during the year.

Actions for 2010: it is planned to finish the installation of energy efficient lighting at all shops and at Head Office. A new project will commence to install smart meters to minimise waste of electricity

Transport

In 2009 our road transport partners delivering clothing and home furnishing products to shops continued to reduce emissions per delivery. They achieved this by using more efficient scheduling of deliveries and by replacing vehicles on a three year cycle to keep up to date with the latest fuel efficiency technology.

Actions for 2010: a new vehicle tracking system will be introduced to monitor mileage and to reduce“miles per product”.

Packaging, recycling and waste

In 2009 all shops made great efforts to recycle waste. Some 85% of waste in shops is polythene and cardboard, and virtually 100% of this is collected and recycled.

Actions for 2010: a number of schemes will be initiated to recycle clothes hangers.

The decision has been taken to reduce the size and weight of plastic carrier bags. The new bags will be phased in as existing contracts for the supply of the current carrier bag come up for renewal.

A CeeCee branded organic cotton carrier bag will be launched at a low price, so that all customerscan re-use the bag that they purchased CeeCee clothing in.

Product packaging standards were reviewed in 2009 and it is planned to further reduce the amount of packaging by eliminating the use of tissue paper and also to use thinner polythene.

Health and Safety

In 2009 new procedures were introduced for training new staff in safe working procedures.

Actions for 2010: these procedures will be reviewed and rolled out to all shops. All staff will be offered first aid courses.

Workplace diversityIn 2009 the company reviewed and reworded a policy statement that demonstrated that the company is fully committed to the elimination of unlawful and unfair discrimination in recruitment and employment.

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Actions for 2010: independent auditors will conduct a review of practices in a range of shops and the extent to which practice is consistent with group policy

Required:

You are the Management Accountant of CeeCee.

Carla Celli, the CEO, has asked you to draft a report that prioritises, analyses and evaluates the issuesfacing CeeCee and makes appropriate recommendations.

Chapter 8CASE SEVEN

V AND Y PRODUCTIONS –

TV PRODUCTION COMPANY

Background and industry definitions

A large number of independent television (TV) production companies have been making TV programmes for transmission by TV broadcast companies in the UK and Europe for the last 30 years. Independent TV production companies are generally referred to as “indies”.

Some independent TV production companies specialise in their choice of programme content, such as comedy, drama, current affairs or documentaries. Independent TV production companies are usually commissioned by a TV broadcast organisation to make a series of programmes, to meet specific criteria and for an agreed fixed contract price.

TV broadcast organisations include the BBC, ITV, Channel 4, Channel 5 and Sky in the UK and other commercial broadcast organisations in other European countries. All of the programmes that these broadcast organisations transmit to the viewing public come from 3 sources. These 3 sources are:

1. “In-house” productions – where programmes are produced by their own production teams. “In-house” productions generally include news programmes, sports and events.

2. “Acquired” programmes – which are programmes originally created for another broadcaster. Typically these include USA-made TV programmes and films.

3. “Third party content providers” – this includes the range of programmes made by independent TV production companies.

Some of the TV broadcast companies in Europe are listed companies, whereas others are state-owned organisations. In the UK, the BBC is funded through a licence fee and it has an obligationto commission a minimum percentage of its programmes from independent productioncompanies. It is currently exceeding the minimum percentage of commissioned programmes.

This case study is based on the third category above, concerning the production of TV programmes by an independent TV production company.

The definition of an independent TV production company (an “indie”) is a company which does not have a licence to broadcast programmes, but which is commissioned by TV broadcast companies to make TV programmes for transmission (both for transmission on terrestrial channels and satellite channels).

The ability to make successful TV programmes is a mixture of good ideas, good production skills and the ability to sell the programme ideas to TV broadcasting companies. It is a very entrepreneurial industry which attracts highly skilled and artistic people. Many of the

independent TV production companies are small businesses which are owned and managed by experienced TV production people. Most of these companies are private limited companiesand are not listed. The shares are usually fully owned by the founder (s) of the company. Some independent TV production companies are highly geared, as debt has been used extensively to finance TV programme-making operations as well as to finance the capital expenditurerequired for the purchase of high technology programme-making equipment.

A small number of TV production companies are larger and have established a good brand reputation by consistently making highly popular TV programmes. Many of these larger TV production companies (referred to as 'super-indies') make a large number of long-runningseries of TV programmes.

The total value of commissioned programmes in the UK was over £2.0 billion in 2008, an increase of 2.5% in value terms from 2007. For example, the BBC commissions its programme

from a range of independent TV production companies, and it commissions around 37% of its programme output from “indies”. The remaining output comprises programmes it makesitself and acquired programmes.

Some of the independent TV production companies have an international division which sellsits completed programmes, or the programme format, to TV broadcast organisations in other countries. However, the ability of the TV production companies to sell the programme, or the programme format, depends on who holds the intellectual property rights (IPRs). It is usual for the TV broadcast company which commissioned the programme in the first place to own the IPRs for the initial broadcast of the programme as well as secondary rights for repeat broadcasts in the home geographical region (such as the UK). The independent TV production company usually owns all (or part) of the IPRs for sales made to TV broadcast companies elsewhere in the world. In addition, the broadcast company may also own the IPRs (or sharethe IPRs) for other media apart from television, such as the programme website, books and merchandise including toys and T-shirts. The international sale of programmes is explained further.

V and Y Productions Ltd

V and Y Productions (VYP) is an independent TV production company (an “indie”). The company was established in 2003 by two experienced TV programme directors whopreviously both worked directly for TV broadcast companies in the UK.

VYP is based in the UK and it makes TV programmes commissioned by the BBC, ITV, Channel 4and Channel 5. VYP is not listed on either a main stock exchange or the Alternative InvestmentMarket (AIM).

The aim of VYP is to make successful programmes for profit.

The 2 founders of the company, Steve Voddil and John Young, are both experienced programme makers, who have held programme director roles when they worked as employees for TV broadcast companies. They both wanted the freedom to do what they do best, which is to make TV programmes. The company was established in 2003, with only 12 employees, butnow employs 60 people directly and outsources much of the routine TV production work toother small specialised companies. The outsourced companies provided VYP with theequivalent of around 400 person years of work in the year ended 31 March 2010. More detailsare shown in the section headed “Programme-making” on page 8.

The key employees in the company, who own shares in VYP, in addition to Steve Voddil and John Young, are Raj Shah and Paul Maas who are Directors of Videotape (VT) Editing, Janet Black, who is the Finance Director and Les Fisher, the Business and Legal Affairs Director.

A summary of VYP’s key personnel is shown in Appendix 1.

The reputation of VYP is intrinsically linked to its people, especially Steve Voddil and John Young. They both are actively involved in winning new commissioned programmes from the broadcasting company, and they work alongside the relevant TV programme directorwho is proposing the programme idea. In this industry it is the people and their reputationand track record that determines the company’s success.

VYP enhanced its reputation last year with several new series of programmes which were considered to be successful in terms of audience viewing figures. During the last 3 years VYP has won several TV programme awards which recognised the content of its programmes was excellent or innovative. VYP has established a reputation for the production ofdocumentaries which allow the general public to make their views known on topical issues.

VYP generated total revenues of £28.6 million in the financial year ended 31 March 2010,which was almost 39% growth in total revenues from the previous year. This resulted in VYPhaving a market share of commissioned TV programmes in the UK of around 1.4%. There are

hundreds of small independent TV production companies making programmes, and thereforethis is a

reasonable share of the market. This places VYP within the top 20 companies making TV

programmes in the UK.

An extract from VYP’s Statement of Comprehensive Income is shown in Appendix 2

Programme commissioning

Programme commissioning is concerned with the stages that are undertaken by anindependent TV production company, such as VYP, with any of the broadcast companies forwhich it wishes to make TV programmes. In the past there were some TV productioncompanies which made “pilot”, or trial, programmes in order to sell the programme concept.This is rarely done now due to cost. All of the TV programmes made by VYP are commissionedand contracted with a broadcast company before the production of the programmecommences. The risk of a series of programmes being poorly accepted by its viewers lies entirely with the broadcast company

which commissioned the series of programmes. This results in broadcast companies being cautious about which TV production companies, and which style of programmes, they decideto commission.

There are 3 steps in the process of getting a programme, or a series of programmes, commissioned. These are:

1. Programme proposal submission. VYP will submit a programme proposal to thechosen broadcast company for approval of the programme content. This proposal willdetail the genre of the programme (drama, comedy, documentary etc), theprogramme content and the number of programmes in a series. A re-commissioningof programmes (where a previous series has already been commissioned, made andtransmitted) will often be approved quickly if the previous, or first, series wassuccessful. Success is usually determined by externally audited audience ratingfigures.

2. Business approval. VYP will submit to the relevant broadcast company the detailed budget for making the programme, or series of programmes, for approval. Broadcast companies do not negotiate these proposed costs on a line-for-line basis if the totalcost falls within their “cost per hour” criteria for the genre of the proposedprogrammes. The factors that will influence approval of the budget will be the style of the programme and whether outside filming will be required, the location of anyfilming, as well as the fees required for any famous actors for the programmes. A newinfluence on costs is the use of computer generated imaging or computer graphics.

3. Contract approval. This stage is reached when all aspects of the programme content and the budgets for the programme(s) have been approved by the broadcastcompany. It is only after contracts have been signed with the respective broadcastcompany that VYP can start to make the programme and the contracted revenue is paid to VYP. For most commissioned programmes, the full contracted revenue is paidto VYP soon after contracts are agreed.

When VYP has agreed a contract with a broadcast company for a commissioned programme,or series of programmes, then the actual costs incurred in the making of the programme arethe responsibility of VYP. The profit, or loss, for each programme is determined by thedifference between the contracted commissioned revenue and the actual costs incurred byVYP in the making of the programme. This therefore puts the emphasis of cost control withVYP.

In terms of cash flow, most of the broadcast companies fund part, or all, of thecontracted commissioned revenue at the time the programme is commissioned. In otherwords, the broadcast company funds the programme production and pays for thefinished programme before it is made. There are some exceptions, for example, when aprogramme is commissioned and is not expected to go straight into production.

There has been an increasing trend for broadcast companies to delay funding forcommissioned programmes, which has put VYP and other independent production companiesunder cash flow

pressure. However, usually the funding for making the programmes is provided within weeksof the contracts being signed for new commissioned programmes.

The elapsed time from approaching a broadcast company through to signing contracts varies considerably. It is usual for the process to take 8 to 12 weeks. For larger, more expensive programme proposals, the process can take far longer. The minimum time is usually 6 weeks.

The time taken from signing contracts for a commissioned programme to completion of the finished programme also varies considerably. The average time is around 6 months. Some programmes take only 2 months, whereas others, such as some documentary or drama programmes, take over 1 year to complete the production of the entire commissioned seriesof programmes.

Some programmes require a script to be written, such as scripted comedy programmes or drama programmes. VYP will not outsource script writing until the programme is commissioned. Therefore, the making of scripted programmes takes longer, as theprogramme cannot go into production until the script is complete and been agreed. There is also the problem that the required actors may not be immediately available.

The broadcasting of programmes by the broadcast company which commissions them also varies and is outside the control of VYP. The contract is fulfilled when VYP handsover the finished programme on the required media (usually on a broadcast qualityvideotape).

The fee paid for commissioned programmes varies by the programme genre and also the anticipated transmission time of the programme by the broadcast company. Programmesthat are transmitted in “Peak” viewing times can command a higher fee. “Peak” viewingtimes in Europe are defined as 17.30 to 24.00 every evening.

There is higher commissioned revenue for making programmes that are to be transmitted in “Peak” times, because higher numbers of viewers are watching TV at these times. Additionally, there are greater advertising revenues generated by the commercial channels at “Peak”viewing times. Almost all of VYP’s programmes are made for transmission in “Peak” viewingtimes.

It is the responsibility of each of VYP’s programme directors to come up with ideas for new programmes and to develop these ideas with either of the 2 Managing Directors, Steve Voddil and John Young. It is vitally important that Steve Voddil and John Young nurture the artisticand visionary skills the programme directors have in identifying suitable programmes to make.

After the programme director has firmed up on the idea, the programme proposal is putbefore the monthly VYP commissioning committee, which is chaired by Sara Mills, as Head of Programme Commissioning. She has huge experience of what type of programme she can approach a broadcast company with, to try to get it commissioned. Sara Mills is always very nervous about new programme proposals, as there is a fine line between what is innovativeand what will attract the majority of viewers. It is always a balancing act, for example,between new types of humour in a comedy programme and ensuring that the audience willbe amused, rather than offended.

When a programme idea has been developed into a workable format for a programme, thenthe programme director will work with Sara Mills and her small team to get the idea ready in a detailed proposal format. This detailed proposal will then be used to market the programmeidea to one of the broadcast companies. A detailed programme budget will be prepared tocover all aspects of the making of the programme. This will show details of all of theoutsourced work and outsourced facilities, for which standard daily rates will be used forestimating purposes. It will also include the costs associated with VYP’s programme-makingemployees and the use of VYP’s in-house facilities which will be used for making theprogramme

Programmes made by VYP

VYP produces 4 programmes genres. These are:

1. Documentaries - defined as programmes which are informative to the viewing audience.

2. Drama series – these are a series of programmes, usually transmitted once a week,which have regular characters and tell a continuing storyline.

3. Scripted comedy programmes - defined as programmes which are intended to amuseand entertain the viewing audience, and which retain the same characters but have avariety of short storylines each week.

4. General entertainment programmes – these vary considerably from quizzes, tocookery programmes to comedy.

VYP established its reputation in comedy and entertainment with several series of popular programmes. It has made several series of documentary programmes and some have wonTV awards many times over the last 7 years. Broadcast companies have identified that therehas been a renewed interest from viewers for documentary programmes in Peak viewingtime. The specific requirement from broadcast companies is for documentary programmesto be both informative and entertaining. VYP has gained some new commissions fordocumentary programmes as it is experienced in this area of TV programme-making.

During the last year VYP was commissioned to make 2 drama series. Prior to these 2 drama series, VYP had not made this genre of programme. These drama series have been popular and have attracted high numbers of viewers. VYP incurred large initial costs with these 2 new series of programmes, which resulted in lower margins than had been planned. This is shown in

Appendix 4.

In the last financial year ended 31 March 2010, VYP has completed a total of 197programmes, varying in length from 26 minutes to 58 minutes. The average revenue per hourachieved by VYP in the last financial year was around £225,000. The 197 programmes

completed in the year endedtime, and included a range of

The analysis of programmes cMarch 2010 is shown in Appen

The profit, or loss, made on ecompleted (rather than the cooccurs when each programmWhen the programme is actuHowever, any additional reveVYP’s accounts when the revecommissioned programme.

Commissioned programmes

A key statistic for TV broadcaThis is defined as the cost perThis is the same as the “reventhe programmes for the TV broa

The commissioning revenue ffactors: The genre of t

The length of each co

Programmes are made to “fit”Depending on whether the broprogramme promotion trailersprogramme will usually be betransmission slot and betweetransmission slot.

The indicative commissionedcompanies is willing to spendexample, a documentary willbetween £100,000 and £300,contrast, the indicative comm£200,000 and £400,000 per hrevenue for a programme is

£300,000 per hour and the cocontracted revenue will be £1minutes).

d 31 March 2010, represented a total of 121.3 hoof commissioned series of programmes.

completed, by each of the 4 genres, in the finanpendix 3.

n each programme is recognised when each progracompletion of the commissioned series of progra

me is sent to the broadcast company which comms actually transmitted is not relevant to VYP for accou

enues payable to VYP for repeat transmissions areenues become due, in accordance with the contra

revenue per hour

ast companies is the “cost per hour” of programr hour of output from the TV broadcast companinue per hour” from the viewpoint of VYP, which

broadcast companies.

for each programme will be determined by 2of the programme being commissioned

ommissioned programme

t” into a 30 minute or 60 minute “transmission sbroadcast company is going to insert advertisingers into the programme, the finished contractedetween 26 minutes and 29 minutes long for a 30en 52 minutes and 58 minutes long for a 60 min

ed revenue per hour is the amount that each of thnd and it is determined by the genre of the progra

l be expected to have commissioning revenue p0,000 for a programme to be broadcast in Peak vimissioning revenue for a scripted comedy prograhour. Therefore for illustrative purposes, if the co

ontract is to make a programme that is 26 minu130,000 per programme (i.e. £300,000 / 60 min

ours of broadcast

ncial year ended 31

programme is programmes) and this

missioned it.unting purposes.are recognised intract for each

mmes transmitted. nies’ perspective. h makes some of

slot”.ng breaks or

d length of a 0 minute

nute

he broadcast gramme. Forper hour of viewing times. In

programme is betweencommissioned

utes long, the nutes x 26

The control of programme-mcontracted commissioned revis considered by the broadca10% on commissioned reven

If a programme, or series of progracommissioned the programmprogrammes. This is called reprogrammes tend to be 10%savings represented by factors

The studio “sets” hav

Ideas and research ha

Experience from makfurther efficiencies on

VYP finds re-commissioned prograreduced budget and to maintprogrammes represent a gro

VYP’s equipment, manpower

VYP, as a small independent Tmake TV programmes at its ohigh cost of equipment. Ther(VT) crews for VT filming, althto work with programme dire

VYP’s skills lie with its creativskilled programme makers whomaking of a programme andthe actual programme-makingsome are small specialised co

As soon as a programme, or sarray of freelance and outsouThese freelance people and fthe programme and then theskills and facilities required to

making costs, to ensure that the costs do not excvenue to VYP, lies entirely with VYP. The commi

broadcast company to be adequate to provide a profit tonue.

programmes, is successful, the TV broadcast comme is likely to commission a second or subsequee-commissioning. The fees payable to VYP for re

to 20% lower than the original fees. This is to retors such as:

ving already been designed and made

aving already been conducted

king the programmes in the previous series leadion subsequent programmes.

programmes a challenge to be able to keep withntain programme standards. However, re-commowing proportion of VYP’s revenues.

er and premises

TV production company, cannot afford to fully eown rented premises. This would not be cost effrefore VYP does not own any studios or employ

though VYP does have 4 VT editing suites and emectors, editing together the final finished progra

ve and artistic programme-making people. Thesewho contract to bring in the required people to h

hire the required facilities. Therefore, VYP outsong to other people, some of them are freelanceompanies.

series of programmes, is commissioned, VYP wiurced skills which are required to make those prfacilities will be hired only for the specific time reqeir short-term contracts will end. Everything is foto make each commissioned programme.

xceed theissioned revenueto VYP of around

mpany which ent series of e-commissioned eflect the

ing to

thin themissioned

equip itself toffective due to the

any videotapemploys VT editors

programme.

e employees are help with theources much of individuals and

ill recruit therogrammes.required to makeocused on the

Of VYP’s 60 employees, 16 are involved in HR, finance, administration and contract handling work. The remaining 44 employees are directly involved in programme-making activities. These 44 employees include all of the Executive Directors of VYP.

The success of VYP is based on nurturing creativity and solid personal relationships with key members of staff. Programme directors and producers receive performance bonuses based on several factors, including meeting agreed programme-making budgets, but more importantlyon the success of their programmes. Any programme nominated or receiving an award resultsin bonuses payable and performance related bonuses are additionally payable for repeat commissions and also for viewing figures exceeding those expected for the genre of the programme. It is important that programme makers are rewarded well in order to retain their skills and keep them loyal to VYP.

Over the last 7 years only a handful of programme directors and producers have left VYP, and these have all been by mutual agreement. The remaining programme-making employees have grown in confidence as the company has grown. Steve Voddil, in particular, is excellent at fostering and building team spirit. The positive atmosphere at VYP is a strength of thecompany.

The one area that the programme directors felt should be retained “in house” is videotape (VT) editing. A VT editor is a skilled individual who can help contribute to the success of the programmes using his experience and intuitive skills of what to leave in, or edit out, of the finished programme. The VT editor reviews all of the VT recorded for each programme, often10 times the length of the required finished programme. The VT editors that VYP employs work closely with the programme directors to achieve the desired finished programme. It is logistically convenient to have this function within VYP’s offices.

The company initially had just 2 VT editing suites and outsourced the rest of the VT editing. During 2009, a further 2 editing suites were purchased and installed at VYP’soffices as its existing editing suites were almost always fully utilised. Sometimes, due tohigh demand at certain times, external VT editing suites need to be hired by VYP on adaily basis.

The company rents its single Head Office which provides office space for its employees, aswell as for the 4 VT editing suites.

Programme-making

Like many independent TV production companies, VYP’s success lies with the people involved in all stages of making a programme. This starts with the programme concept and the programme genre. There are many considerations that will influence the type of programmeand its cost profile, such as:

Will the programme be recshould be noted that all outquality VT and the use of a

Will the programme involvethe overall costs considerab

Will there be extensive use

VYP employs TV programme dirthe bulk of TV programme-mak

The programme director is thewho sometimes (but not alway

The programme producer, andprogramme. This involves plannbookings of outsourced peopleoutside filming. The producer andBlack’s finance staff.

The finished quality of VYP’s prograwhereas the cost of the prograbetween what the programme

producer who manages the agrorder to make the programme

VYP outsources many of the cocommissioned, to outsourcingpeople and some small compan

During the financial year to theperson years of work to a rangecompanies.

For programmes that require thestudio. Studios are usually rentedof the comedy and drama progmost suitable studio available atexample, in the UK, a programmbe made in a studio hired from tmade. VYP’s bookings departmof the programme, whilst minim

corded in a TV studio, or will outside “filming” betside “filming” no longer uses “film”, but instead

of a VT crew, although it is commonly referred to as

e the use of actors or famous personalities, whosebly?

of computer imagery or graphics?

rectors and producers to make its TV programmking is outsourced to experienced freelance peo

creative head and leads the team making the pys) has initiated the original programme idea.

his or her production team, manages the produning the work and resources required and arran

e and outsourced facilities, such as studios and Vand his staff manage the programme budget, su

programmes is influenced by the skills of the progragramme is managed by the producer. There is often

e director wants and what the producer can afford.

reed programme budget and the outsourced proe idea come to fruition within budget.

constituent parts of making the TV programmes itspecialist companies. VYP tends to work with thenies work exclusively for VYP.

the end of March 2010, VYP outsourced the equivage of external specialised freelance individuals a

he use of a TV studio, VYP rents a suitably sizedted by the day, but sometimes block-bookings aregrammes that it makes. VYP’s bookings departmat the lowest cost for the exact day, or days, thame that VYP has been commissioned to make for

om the BBC. There are no rules concerning wherement will always try to maximise studio facilities

mising the cost of hiring the studio facilities.

be involved? Itad uses broadcastas “outside filming”

whose fees will affect

mes. However, ople.

programme and

uction work for the nging for all of the VT crews for upported by Janet

gramme director, ten a conflict ord. It is the

oduction staff, in

t has had the same freelance

alent of around 400and small

d and equipped are made for some ment will hire the at it is required. For or Channel 5 couldthe programme isto meet the needs

Studio time is very expensive and furthermore setting up of a studio with all of the necessary programme specific sets and lighting is time consuming. Therefore, VYP often block-books a studio for several days at a time, or even for 2 weeks at a time. For example, for a scripted comedy or a general entertainment programme, VYP will always plan to complete all of the studiowork for at least one 26 minute programme in one day in the studio. For a drama series, a studiowill be booked for several weeks and all of the studio work is recorded with scenes from programmes often being recorded out of sequence. Therefore in a block period, all of the studio scenes are recorded and will be edited together at the end, after all outside VT filming has been completed.

Computer graphics

Computer graphics are used widely in TV programmes and VYP has a small number of highly skilled employees who enjoy the challenges of finding innovative and often amusing ways to grab the audience’s attention at the start of its programmes.

The use of computer graphics within documentary programmes, in particular, has appealed to the commissioning TV broadcast companies as well as their viewers.

VYP has a computer graphics software package and has skilled graphics technicians who can create many effects. For certain specialised computer graphics effects, the technicians use outsourced specialist facilities to produce the desired effects. The graphics technicians who are employed by VYP are keen for the company to invest in a new software package.

Programme costing

Unlike accounting in most companies, which is focused on sales and costs incurred on a monthlybasis, accounting and cost control in VYP is all orientated on a project basis. This is where eachcommissioned programme (or series of programmes) is controlled and reported on as a separateproject. Costs are reported on the basis of costs incurred for each commissioned programme(s)in the month and cumulatively, irrespective of the financial year. Forecast costs for completion of the programmes are also prepared. In this way, all costs for the programme can be monitoredagainst budget.

VYP holds weekly programme management meetings, as well as monthly management meetings, in which finance and TV production staff are involved, with a view to ensuring thatthe costs for each commissioned programme remain within budget. There have been some instances over the last year where the agreed programme budget was exceeded. This was due to poor control by the programme producer and his production staff over the bookings required for outsourced freelance programme-making people and outsourced facilities. Furthermore, the

inaccurate forecasting of the remaining work and costs to complete the programmes,prepared by the programme producer and his production staff, resulted in the cost over-runs not being identified until the programmes were completed.

International sales of programmes by VYP

Most of the programmes that VYP makes are commissioned by TV broadcast companieswhich retain the intellectual property rights (IPRs) for transmission in the UK. However,VYP usually own the IPRs for sale of the programme in its finished format for the rest of the world. Much depends on the broadcast company which commissioned theprogramme and the actual contract. Sometimes, the revenue for international sales ofthe programme are shared with the broadcast company which commissioned the originalprogramme, even though it is VYP’s people who generate the interest and actually sellthe programme to a broadcast company elsewhere in the world.

Alternatively, it is possible to sell the international IPRs for the programme format. Thisusually involves allowing the use of the same set design or the style of the programme.The purchaser of a programme format would be a broadcast company in another country,such as Australia, which will then write its own scripts, and have its own presenters, butwill make the programmes using the acquired IPRs for the programme format.

VYP did not sell its programmes internationally until 2007. Tom Harrison, the Head of International Sales, had previously worked for another independent TV productioncompany and was head-hunted into VYP to generate international sales. He has beensuccessful in achieving sales of programmes and programme formats to several countries,including the USA.

In the financial year ended 31 March 2010, Tom Harrison achieved international sales of£1.3 million. His contract of employment includes a performance related bonus of 5% of all contracted international sales revenues.

The expenditure that VYP incurs in respect of international programme sales include legalcosts in connection with the contracts for the sales and travel and staff costs for TomHarrison and his small support team. The international sales of VYP programmes generatea high profit margin.

VYP’s IT Systems

VYP runs a nominal ledger and fixed assets register which uses a popular accounting software package. The finance department raises sales invoices for programmesimmediately they are commissioned. The revenue for commissioned programmes istreated as a prepayment in the accounts until the programme is completed.

The programme producer is reseries of programmes, has a proagainst, as in project costing. employees are chargeable agdays they work on each progracharged based on the overallper day charges are reviewedallocated directly to programmcharge, allocated on the basis

The company has a standard pnominal ledger. The bookingscommence with the completionrelevant programme. All invoithe actual charges agree to the orifinance department without hauthorisation.

At the end of each accounting pmonth and cumulative costs forproducers. Thi report also shocost headings. The reports are

To prepare a list of cosyet been invoiced to VY

To allow each produceragainst budget.

VYP uses a database system forto input the forecast costs thatprogramme, with an analysis ofprepare financial forecasts for ecommissioned programme, irreThe emphasis of cost control is aprogrammes rather than agains

esponsible for the programme budget. Each progrproject number to which all costs are coded and. VYP’s employee costs for programme-makinggainst the relevant programmes based on the n

programme. The costs for programme-making emplocost per day for each type of employee. The emannually. All Head Office overhead costs that are

mes are charged to programmes based on a stas of the number of production days for each progra

purchase ledger package that interfaces directlyfor freelance people or outsourced facilities m

on of a purchase order, authorised by the prodices are then matched with the original order, a

he original order, the paperwork is processed whaving to trouble the programme producer for f

period, reports on the actual programme costs or the programme are emailed to each of theows the detailed programme budget against e

are used for 2 purposes:

st accruals for work completed to date, but whiYP.

producer to check and closely monitor actual program

or the submission of forecast costs. This allows theat will be incurred to the end of the completion ofof costs by month. The finance department uses

each financial year as well as a forecast for eacespective of whether or not it spans a financials against the agreed budget for each programmst annual budgets.

programme, ord reportedng

number ofoyees aremployee costare not

tandard h programme.

y with themustducer for theand where

ed within thefurther

ts for thethe programme

each of the

ich has not

mme costs

the producersn of eaches this data to

chyear end.

me or series of

As programmes are commissioned and contracted, each producer will have severalprogramme budgets that he or she is responsible for. The value of the total budget eachproducer controls varies continuously by month and between financial years, aseverything is dependent on the individual programme budgets. The producer controlsthe budgets for programmes currently being made. Most of VYP’s producers managetheir planning and control of programme costs using spreadsheets.

Reduced commissioning revenues

In the current economic environment, the revenues generated for the commercial TVbroadcast companies from advertising have been substantially reduced. This hasaffected the commissioning revenues that the commercial TV broadcast companies areprepared to pay independent TV production companies, including VYP, for commissioned programmes. Additionally, the BBC, which is not funded by advertising revenue in theUK, has reduced its programme commissioning revenues in order to meet internal fundingconstraints.

Over the last year VYP has seen a reduction in the commissioned revenue perhour for programmes of a comparable composition and genre compared to theprevious year. For example, the average commissioned revenue per hour fordocumentary programme in the year ended 31 March 2010 was £184,100 (as shown inAppendix 3 on page 17), whereas in the previous year it was around £215,000 per hour, areduction of over 14%.

Furthermore, the revenues for re-commissioned programmes (second and subsequentseries) which is usually 10 to 20% lower than the first series, has also been reduced. VYPhas seen a reduction of 20 to 25% in the last 3 series of programmes that it has recently had re- commissioned.

However, VYP has been able to cut the level of fees that it pays to some of the artists and presenters used in its programmes. This has generated savings which have been used to finance other parts of the programme budget.

Programme directors and production staff are frustrated that the level of cost reductionhas led to economies and efficiency savings which have affected the finished quality ofthe programme. However, some of the TV broadcast companies have countered thisargument, stating that the viewing public will not necessarily notice the difference in programme quality.

Overall, VYP has seen its average operating profit margin on commissioned revenue fallfrom10.1% in the year ended 31 March 2009 to 9.4% in the year ended 31 March 2010. The analysis of margins by programme genre is shown in Appendix 4.

Cost reduction and quality targets

Both Steve Voddil and John Young are aware of the falling margins achieved in the lastfinancial year ended 31 March 2010. Operating profit margins fell to 9.4 % as a directresult of lower commissioning revenues. This has occurred across most programmegenres. VYP is aware that it needs to work even harder to secure contracts for newcommissioned programmes as well as to secure commissions for returning series ofprogrammes. VYP also recognises the need to make its programmes to tighterprogramme budgets.

The reduction in commissioning revenues puts VYP under increasing pressure to makecost effective programmes. However, the programme directors argue that not all of theemphasis should be based on cost effectiveness, as VYP needs to maintain its reputationfor delivering high quality programmes.

The Joint Managing Directors, Steve Voddil and John Young, consider that the best way forward inthis competitive market is to do what they set out to do when the company was established 7 years ago. That is to create innovative programme ideas that will appeal to its target audiences. Inthis way the programme is likely to be successful in terms of audience viewing figures. Making successful programmes profitably is VYP’s main aim. If programmes are successful then VYPis more likely to secure future programme commissions and also be well positioned for securingre-commissions for subsequent series of programmes.

Share ownership

VYP is a private limited company and is not listed on any stock exchange. It has 10 million shares in issue, each of £1 par value. The shares are held as follows:

Steve Voddil JohnYoung Raj Shah Paul Maas LesFisher Janet Black

No. of

shares held at

% Shareholding

Million

3.0

3.0

1.0

1.0

1.5

%

30

30

10

10

15

10.0 100

The company has an authorised share capital of 20 million shares.

The company is now generating reasonable profits and strong cash flows. The VYP Board declared dividends for the first time during 2009. A total dividend of £0.9 million waspaid to the equity shareholders during 2009.

Both of the Managing Directors are keen for some of the other key employees to sharein the profits of the company. They are considering whether a few more of the senioremployees should become shareholders in VYP.

Charity and community work undertaken by VYP

Steve Voddil has been involved for many years in making documentary programmes concerning natural disasters around the world, as well as documentaries about the plight of child labour. Havingseen these upsetting images first hand, he was determined to do something more than simply reportthem through the media of TV. He has convinced the Board of VYP to donate money on a regularbasis to several recognised charities that support his chosen causes. During the last financial year,VYP donated a total of £128,000. This is included in operating costs.

John Young is concerned that there are few positions available in TV now for young people to gaintraining or an insight into how TV programmes are made. He has set up a scheme which allowsschool children access to view VT filming of certain programmes several times each year. Thescheme involves schoolchildren from 20 schools across the UK. This scheme costs VYP around£24,000 each year in total. It has generated much interest and 2 young people who were particularly interested in making TV programmes are currently studying for degrees in media andjournalism. VYP is keeping a close eye on their progress and may offer them a full-time juniorposition with the company when they graduate.

Appendix 1

VYP’s key personnel

Non-executive Chairman – Ravi Patel

Ravi Patel, aged 48, has worked with Steve Voddil and John Young for many years and is a trustedfriend and experienced TV producer. He has taken on the Non-executive Chairman role as he brings awealth of experience and knowledge of the industry. He has been an advisor to the founders andcurrent Joint Managing Directors for the last 7 years.

Joint Managing Directors – Steve Voddil and John Young Steve Voddil

Steve Voddil, aged 39, worked for one of the commercial broadcast companies for 10years following his undergraduate degree in journalism. He has always had a flair foridentifying a different angle to make a documentary programme, which catches theviewers’ attention. He was a programme director of in-house made programmes for abroadcast company for several years. After winning several awards for his documentaries

and establishing his reputation in the industry, he was determined to set up his ownbusiness. However, he was too busy making programmes to take this step and it was notuntil he met John Young, that he decided to establish VYP 7 years ago.

John Young

John Young, aged 43, came from a similar background to Steve Voddil, except that hetrained and worked for a TV broadcast company, initially as a graphic designer and lateras a programme director. He was frustrated working for this TV broadcast companywhich did not allow him the freedom to make decisions on programme formats andcontent. He felt that he was in the role as programme director which should haveallowed him control over the programme, but in practice he had limited authority. Hisarea of experience was in scripted comedy programmes, where the quality of the scriptusually determined the success of the programme, rather than his skills as a programmedirector. He wanted to make a move into programme-making on his own to furthersatisfy his creative desires. He is very artistic and creative and has also won TVprogramme awards and admits that he is no good at managing budgets. Following achance meeting with Steve Voddil in 2002, and subsequent planning meetings, theyboth formed the idea of establishing VYP as an independent TV programme- makingcompany, which became operational in 2003.

Finance Director – Janet Black

Janet Black, aged 36, is a qualified accountant who has worked in a number of industries and was the Finance Director for a small music video production company before shejoined VYP. She was recruited based on a recommendation by the Non-executiveChairman, who had heard of her tough reputation. Janet Black has to work alongsidetalented artistic people, most of whom have a weak understanding of the financials andwho often are not interested in

controlling costs. This was just the type of person that Steve Voddil and John Youngrecognised they needed for the company they were setting up. They recruited Janet Blackand gave her a small shareholding in the company. She has proved her worth over the last7 years and has instilled good financial control over VYP’s programme-making. Janet Blackhas responsibility for all finance and administration functions. This includes the bookingmanagers, who book all of

the outsourced people and facilities required for making programmes. Her small financeteam works closely with the production team for each programme to closely monitor andcontrol costs against the agreed programme budget.

Directors of Videotape (VT) Editing – Raj Shah and Paul Maas

VYP currently employs 4 VT editors, but the senior 2 VT editors joined VYP when it wasformed as they had previously worked closely with Steve Voddil and John Young on several programmes. The Joint MD’s had identified the skills that these 2 editorspossessed and their ability to produce exceptionally good finished programmes. Raj Shahand Paul Maas were both given small shareholdings in VYP when the company wasformed.

Business and Legal Affairs Director – Les Fisher

Les Fisher, aged 48, has worked in the entertainment business for over 20 years andbrings a wealth of experience to the company. When VYP was first established itoutsourced all of its legal work, but as the company grew it was clear that it needed in-house legal expertise to manage the many contracts that VYP generates. VYP hascontracts with a variety of entities, including the broadcast companies that commissionthe work, the artists and presenters involved with the programmes and also the manycontracts with outsourcing companies and

freelance individuals. It is common in this industry to have in-house legal expertise to protect the company from all of the problems that can occur and to ensure that allcontracts are as “water- tight” as possible. He has 2 legal assistants who process much of the paperwork, but VYP programme directors are not allowed to commit to anything, in legal or business terms, before Les Fisher has seen and approved the contract. When LesFisher joined VYP in 2005 he

insisted on having an equity stake in the company.

Human Resources Director – Ralph White

Ralph White, aged 45, works part-time for VYP and outsources all aspects of HR andpayroll to a specialised company. The outsourcing of the HR functions has workedextremely well and allows VYP to maintain a small number of employees which helps itto maintain flexibility in this industry. Ralph White works closely with the programmeproducers to identify and hire skilled freelance people required to work on specificprogrammes.

Head of International Sales – Tom Harrison

Tom Harrison, aged 28, is responsible for selling TV programmes or the format ofprogrammes to overseas broadcast companies. The sale of programmes internationallygenerates much publicity for VYP and generates additional income. Tom Harrison joinedVYP in 2007 and in the last financial year he generated sales of £1.3 million.

Head of Programme Commissioning – Sara Mills

Sara Mills, aged 35, had previously worked for one of the UK’s commercial TV broadcast companies in the opposite role, where she used to select programmes to becommissioned from independent TV production companies. When Steve Voddil and JohnYoung decided to establish VYP, they knew the importance of having an experiencedperson to deal with all of the details concerning programme commissioning, includingunderstanding of programme budgets and programme concepts. As programme makers,both Steve Voddil and John Young recognised that she had an excellent grasp of detailsand a better understanding of the financial aspects of programme-making than they did.Sara Mills has been excellent at helping the company to achieve growth in programmecommissions each year. She has recently approached Steve Voddil and John Young to ask whether she can participate in the company’s success as she does not consider that herskills are being fully recognised and rewarded.

Programme Directors

VYP employs 14 programme directors. These programme directors are talented, highlypaid individuals who are the creative driving force behind the programmes that theycreate. Most of the time, the programme idea originates from the programme director.The programme directors see the idea through from original concept to getting theprogramme commissioned, and then through to the final edited version of eachprogramme. The director works along side almost all of the production people and is thesenior person involved with the making of each programme.

Appendix 2

Extracts from VYP’s Statement of Comprehensive Income

Y/E31/03/ 2010

Y/E31/03/2009

£’000 £’000

Sales revenue 28,610 20,620

Operating costs 25,228 18,116

Operating profit 3,382 2,504

Finance costs (net) 133 145

Tax expense (tax rate is 30%) 975 708

Profit for the period 2,274 1,651 Appendix 3

Analysis of Programmes and Revenues forProgrammes Completed In Financial Year Ended March

2010

Program No. of

Diff. types of program

Total

No. of program compl’d

Total

No. of programhour

s

Av.

Comm. revenue per

hour

Total

revenue

Documentaries

Drama series Scripted

comedy

General enter.

Totals / averages

6

2

4

45

23

90

36.4

16.0

41.4

£’000

184.1

426.3

251.4

£’000

6,700

6,820

18 197 121.3 225.1 27,310

Int’l sale of programs

Total revenue

1,300

28,610

Appendix 4

Analysis of margins by programme genre

Year ended

31 March 2010

Year ended

31 March2009

Programme genre Rev. Oper. Margn Revenues Operating Margin

profit % profit %£’000 £’000 £’000 £’000

Documentaries 6,700 660 9.9% 6,900 694 10.1%

Drama series 6,820 520 7.6% 0 0 -

Scripted comedy 10,410 985 9.5% 9,840 1,005 10.2%

Entertainment 3,380 407 12.0% 2,970 300 10.1%

Totals / Average 27,310 2,572 9.4% 19,710 1,999 10.1%

International sale 1,300 810 62.3% 910 505 55.5%

Totals 28,610 3,382 11.8% 20,620 2,504 12.1%

Required:

As the Chief Accountant of VYP.

Steve Voddil and John Young, the Joint Managing Directors, have asked you to provide advice and recommendations on the issues facing VYP through a report that prioritises, analyses and evaluates the issues facing VYP .

Chapter Nine

CASE EIGHT

BeeZed Construction Services (BZCS)

Construction industry background

Due to the current economic climate, the demand for building work in Europe has fallen overall byover 10% from 2008 levels. Furthermore, it is forecasted that the volume of construction work will not increase until the start of 2011. Many companies in the construction industry have suffered falls in profits as a direct result of the slowdown in new contracts being awarded.

Many European construction companies are involved in a large range of projects in many countries worldwide. Few large construction companies (except some house building companies) operate only within their national boundaries. Most construction companies have established a range of expertise in specific types of project, such as construction of office buildings, hospitals, airports, roads or schools. This expertise allows the constructioncompanies to use their skills and reputation to bid for, and win, further projects in Europe andin other countries around the world.

Many large construction projects are financed using Private Finance Initiatives (PFI). PFI is defined as private finance being used to fund public infrastructure work. Private finance is defined as finance provided mainly by banks, institutional investors and pension funds. The Private Finance Initiative (PFI) is a way of creating Public Private Partnerships (PPP). PPP is defined as agreements between public bodies or central governments and private construction companies to deliver the agreed projects. Examples of public infrastructure works are road building and construction of new schools. PFI projects also involve the private sector construction company taking on responsibility for providing an on-going service. This typically includes maintaining and managing the project over the life of the building or for a fixed term of

20 years or longer. Therefore, PFI projects generate revenue streams for the construction company for the initial construction project as well as for long-term maintenance and management of the asset. PFI projects involve the private construction company as a partner in

the project and this has generated favourable outcomes in respect of the percentage of projects completed on time and completed to the agreed budget.

In the construction industry there are 3 main types of contract, which are:

1. Fixed price contracts – this is where the revenue for the private construction company is fixed at the contract stage, subject to changes in specifications agreed during construction.

2. “Cost plus” contracts – this is where the revenue for the private construction company will comprise all of the actual costs of the project plus an agreed profit element.

3. Long-term PFI projects – this is where the revenue for the private construction company will include the contracted construction revenue as well as revenues for on-going maintenance and property management for a long-term project, typically 20+ years.

The process for private construction companies to win a new contract for a large construction project is summarised in the following steps:

1. A company or government body will invite tenders

2. The construction company will tender for the contract by preparing a detailed bid

3. A company or government body will select its “preferred contractor”

4. The bid price and the contract details will be negotiated and agreed

5. Contracts are then signed

6. Selection and appointment by the construction company of suppliers for manpower resources (sub-contractors), as well as for materials

7. Work commences

It should be noted that during construction work, there are often many requests for changes to theoriginal contract specifications or design which are submitted to the construction company. These changes usually affect costs and manpower. All of these change requests have to be negotiated and additional revenues agreed before the changes can be made.

BeZed

BeeZed is a construction and property management company listed on a European stock exchange.

BeeZed has 3 wholly ownedsubsidiary companies which are:

� BeeZed Construction Services (BZCS) – concerned with a wide range of construction projects

� BeeZed Professional Services (BZPS) – concerned with offering consultancy services

� BeeZed Building Support Services (BZBSS) – concerned with property management and maintenance services.

In respect of PFI projects, the parent company, BeeZed, will sign the overall contract for the project. BZCS will be involved only with the construction work and BZBSS will manage the ongoing maintenance and property management work. When a PFI contract is signed, the parentcompany, BeeZed, will agree on how the revenues will be split between BZCS and BZBSS.

This case study is concerned ONLY with BeeZed Construction Services (BZCS).

BZCS

BZCS has many construction projects around the world, ranging from road building, construction of public sector buildings, including hospitals, schools and university buildings to commercial contracts for office buildings. Some of the construction projects that BeeZed is involved with are financed by PFI. However, only the revenue related to the construction project is allocated to BZCS. The revenue relating to the ongoing maintenance and property management work is allocated to BZBSS and is not included in this case study. BZCS has a good reputation in this industry for quality and safety as well as its ability to deliver projects on time. These are all critical success factors for keeping its existing customers content and for providing a basis for winning future business.

BZCS has 6 divisions, which are:

1. Office Buildings Division – includes building bespoke office buildings for specific company orders, as well as speculative construction of office buildings in city centres or onbusiness park complexes.

2. Sports Facilities Division – includes the construction of large sports stadiums as well as the construction of small regional sports facilities.

3. Environmental Projects Division – includes the construction of water treatment facilities, the construction of sophisticated waste management facilities and marine projects, including the construction of container terminals and marinas.

4. Infrastructure Projects Division – includes road building and airport construction.

5. Community Projects Division – includes the construction of hospitals and smaller healthcare facilities as well as schools and university facilities.

6. Energy Projects Division – includes the construction of gas storage facilities and power stations.

Each of these 6 divisions is headed by a Commercial Director who is responsible for all of the projects undertaken by that division.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in

Appendix 1 .

In the year ended 30 September 2010, BZCS generated total revenues of €1,267 million and operating profit of €34.7 million.

BZCS is a wholly owned subsidiary of BeeZed. An extract from the accounts for BZCS is shown in Appendix 2.

All of the non-current liabilities represent inter-company long-term loans from its parent company, BeeZed. BeeZed has a range of non-current liabilities with several external bodies including bank loans.

BZCS’s cash flow statement for the year ended 30 September 2010 is shown in Appendix 3.

Geographical analysis of revenues

BZCS currently has construction projects operational throughout Europe, the USA, the Middle East and in some other countries, mainly in Asia.

The geographical analysis of the total construction services revenue of €1,267 million for the yearended 30 September 2010 was as follows:

Europe €690 m

USA €369 m

Middle East €110 m

Rest of World €98 m

Analysis of revenues and operating profit by division

The revenues and operating profit for each of BZCS’s 6divisions for the year ended 30 September 2010 are shownin a table on the next page

Revenue Operating

profit€ million € million

Sports facilities 145.2 3.4

Environmental projects 193.1 4.2

Infrastructure projects 365.2 16.8

Community projects 213.6 1.3

Energy projects 129.9 0.5

Total 1,267.0 34.7Financials

The operating profit margins achieved by BZCS are low, as is the norm for this industry. However, for some of BZCS’s PFI construction projects, BZBSS, which is part of the BeeZed group, earns additional revenues for a further 10 to 30 years for the ongoing maintenance and property management of the PFI projects.

Whilst BZCS prepares annual financial accounts, all of the accounting for each construction projectis accounted for on a project basis. All direct costs are allocated to the respective project, includingsalary and associated costs for all of BZCS’s employees working on each project as well as sub-contractor costs. All non-project based overhead costs are allocated to projects using activity basedcosting techniques based on appropriate cost drivers.

The monthly management accounts show the following information for all on-going operational construction projects:

� Contract revenues and costs

� Approved change requests to contracts and amended revenues and costs

� Cumulative costs to date for the project (spanning current and past financial years)

� Forecast of costs for the remainder of the project (which are split between costs to be incurred in the current financial year and costs to be incurred in future financial years)

BZCS uses a project management system called BZPM. Each Project Manager is responsible forall direct costs incurred on the project for which he / she is responsible.

Each Project Manager is responsible for presenting the projects’ financial and operational issues that have occurred for each project on a monthly basis. These presentations are to senior management groups chaired by the Commercial Director for the relevant division of BZCS. Thesepresentations cover all aspects of the project, including safety issues, forecasts for the delivery of the project against plan and any significant operational problems or successes. If there is asignificant problem, the Project Manager will be expected to travel to BZCS’s Head Office topresent the information to the BZCS Board. Where there are no operational or financial concerns,the Project Manager conducts his monthly presentation by video conferencing.

Order book

At 30 September 2010 BZCS had an order book valued at over €2,400 million. This is 30% higher than the level of BZCS’s order book at the 30 September 2009. The order book representsthe value of contracts signed which have either not yet been commenced or are currently inprogress..

Project Management

BZCS uses a project management system to plan each project, called BZPM. The contract detailsand agreed key stages are set up in BZPM when the contract is signed for each new constructionproject. A Project Manager is appointed for each project. He or she is responsible for controlling allstages of the project using BZPM. This includes control of resources, both BZCS employees and

outsourced sub-contractors, timings for each stage of the project, project planning and managingcontract change requests. The Project Manager is also responsible for control and reporting of costsagainst the original contract and the updated budget for the project.

The finance system interfaces directly with BZPM allowing data on payments for materials and sub-contractors, payroll costs and revenues to be directly allocated to each stage of the relevant project. The Project Manager and his team, assisted by the Finance Department, prepare monthlyaccruals based on activities undertaken in the month, which have not been invoiced. BZPM is ableto generate reports on all aspects of each project, including forecast timings for all activities andcosts, by the end of day 3 after each month end.

Corporate Social Responsibility

BZCS takes its Corporate Social Responsibility (CSR) very seriously. The BZCS Board is committed to safety on all projects and also to the reduction of waste from sites and the reduction of carbon emissions. It is also very aware of environmental concerns and works closely with the communities in which it operates.

BZCS’s commitment to health and safety and environmental issues is shown below.

Health and Safety

Health and safety is a top priority for BZCS. BZCS continues to enhance its culture of safety throughout the company and its supply chain, to ensure that its employees, sub-contractors and thepublic are safe. BZCS also ensures that environmental safety is adhered to, so as to try to ensurethat the communities in which it operates are not damaged or polluted.

BZCS, like all construction companies, adheres to all Health and Safety legislation and BZCS goes beyond what is required by law. It trains all of its employees to ensure their competency andfull understanding of what and why safety is so important in all aspects of the company. Thistraining covers all aspects of health and safety, from construction work at building sites to transportation of materials and disposal of waste. BZCS continues to measure its performance against a range of key Health and Safety indicators.

BZCS’s annual accident frequency rate has fallen over the last 7 years and is currently 0.16 accidents per 100,000 work hours. This is the lowest accident rate ever achieved by BZCS and is amongst the lowest of the top construction companies globally. 20,000 person days of Health andSafety training has been provided by BZCS during the last financial year ended 30 September 2010.

BZCS recognises that it is also important that its supply chain is fundamental to the safe delivery of all construction projects and it works closely with the companies in its supply chain. It tries to ensurethat best practice is promoted and that a positive safety culture is created. BZCS provides Health andSafety awareness training to its key suppliers to ensure that they meet BZCS’s challenging Healthand Safety requirements. BZCS also conducts audits of its suppliers. Recently some suppliers’contracts were not renewed as they did not meet the criteria set by BZCS for Health and Safetystandards.

Environmental issues

BZCS is committed to complying with a European Union (EU) wide programme to reduce the volume of waste that goes to landfill sites. Where possible waste from construction sites is sorted by category of material (such as earth, packaging or materials which can be recycled) andis recycled or disposed of in a safe way. BZCS has a range of waste management contractorswhich manage the safe disposal of site waste. They have demonstrated their abilities to divertwaste from landfill sites. Last year, ended 30 September 2010, BZCS’s target was to dispose of,or recycle, 60% of site waste that would otherwise have ended up in landfill sites. BZCSexceeded this target and disposed of, or recycled, 62% of its waste from its construction sites.

BZCS is committed to reducing its carbon footprint and to minimising its impact on the environment. BZCS uses the latest technology on its construction projects so that new buildings areable to operate in an environmentally responsible way and utilise efficient electrical fittings. Manyof the buildings contracted by European government departments, such as schools and hospitals,use renewable energy sources and BZCS works closely with the architects to ensure that thebuildings will help to deliver planned reductions in carbon emissions.

BZCS’s Mission Statement and CSR initiatives are shown in Appendix 4.

Contracts

BZCS is continuously working on bids for possible new contracts. It has specialised teams headedup by Bid Managers in each of BZCS’s 6 divisions. When a bid has been won and a contractsigned, then a Project Manager is appointed to manage the project. Sometimes, on a particularlycomplicated project, the initial Bid Manager will become the Project Manager.

Each of BZCS’s 6 divisions usually has between 1 and 5 projects in progress at any point in time. Furthermore, each of the 6 divisions is usually involved in the bid preparation and the bidding process for several other proposed projects. Whilst BZCS has been the preferred supplierfor some European government departments in the past for infrastructure projects and communityprojects, these large customers are now imposing increasingly strict criteria for suppliers to meet.Bids need to be competitive in the current challenging economic climate. Therefore, BZCS, likemany other construction companies, is not successful in winning all of the projects for which it bidsfor.

In order to balance the risk of relying on specific construction sectors and a relatively small customer base, BZCS tries to win contracts from a wide selection of organisations. These includegovernment and private sector customers. BZCS also undertakes a wide range of different types of construction project.

BZCS has secured some construction projects for the London 2012 Olympic Games.

At any point in time BZCS usually has between 12 and 20 projects in progress, with bid preparations taking place for a further 10 or more projects. The bid value of a contract varies greatly, ranging from €5 million to over €800 million for individual contracts. Contract duration often spans more than 2 years.

As at the end of December 2010, BZCS has 14 projects currently operational, of which 10 are duefor completion during 2011 and the remaining 4 are due to be completed in 2012.

Bid tendering process

In the UK, the Government’s regulator, the Office of Fair Trading (OFT) has been undertaking investigations of “bid-rigging” in the construction industry. The OFT has established that there is widespread evidence of construction companies which have been involved in manipulating the bidding process. This has allowed specific companies to win Government awarded construction projects at higher prices than could be achieved through a fair competitive bidding process. This on-going investigation has involved the OFT accessing paperwork for over 100 contracts from 20construction companies. It will also impact on the ways that construction companies, includingBZCS, bid for new projects in the future.

In order to be treated leniently, BZCS has advised the OFT that it did have discussions with someother construction companies concerning the level of its bid for a UK hospital construction projectthat it won the contract for in 2008. The project is proceeding on time and it is forecast that it willnot over-run the agreed fixed price budget.

BZCS is waiting to hear the outcome of the OFT’s investigation into this specific contract. BZCS has included a provision for a contingent liability, for a possible fine, in the accounts for the currentfinancial year ending 30 September 2011.

Re-structuring of BZCS

During 2009 and the early part of 2010, BZCS underwent a re-structuring process to enable it to become more competitive following the downturn in construction projects due to the current economic environment. The Board of BZCS recognised the need to become more flexible and to sub-contract a greater volume of its core construction work. Following a Board decision in March

2009, BZCS reduced the number of its employees by 1,800 within 1 year. At the end of September2010, BZCS had 10,100 employees. Many of BZCS’s ex-employees have joined some of BZCS’ssupply chain companies, which are BZCS’s sub-contractors. Therefore some of these people workon the same project as previously but now are employed by sub-contractors or have become short-term freelance contractors to BZCS.

BZCS has also focused on winning a wider range of private construction projects as many European governments have cut the budgets on public sector projects and bidding is more competitive than ever.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in Appendix 1.

Within each division, the Commercial Director has responsibility for each of the Project Managers who are each responsible for one operational project. Projects that are operational aredefined as a project in which the contracts have been signed but construction is not complete.Each division also has Bid Managers responsible for preparing bids or tenders for new projects

and Sales and Marketing Managers for selling to, and liaising with, customers. Additionally thereis a Post Completion Manager responsible for all projects that have ongoing problems or requireminor rectification work after the project has been completed.

Re-structuring of the Procurement Department

Before the re-structuring of BZCS, each division was responsible for the procurement for each of the projects under its control. Effective from 1 January 2011, there is a new central Procurement Department for the whole of BZCS. This is under the direct control of an experienced ProcurementDirector, who reports directly to BZCS’s Managing Director. The new Procurement Director wasrecruited from a rival construction company and joined BZCS in October 2010.

The employees who worked in the procurement departments within each of BZCS’s 6 divisions have been brought together in one centralised Procurement Department, based in Europe. This should help to facilitate better control over purchases and achieve higher bulk discounts, especiallyfor some raw materials. On an operational level, all of BZCS’s Project Managers at constructionsites in each country will now make all purchases through the new centralised ProcurementDepartment. They will be given limited authority to purchase goods locally where no globalcontract is in place for particular materials.

The new centralised Procurement Department is in the process of selecting “preferred suppliers” within each country in which it operates. Where possible, the preferred supplier will be another large international company that can provide materials to BZCS in many of the countries in

which BZCS has on-going construction projects. The Finance Department is working closely with the Procurement Director in the selection and appointment of new and existing suppliers. The re-structuring of BZCS’s Procurement Department has resulted in an overall reduction in headcount in procurement employees. The new centralised Procurement Department will help meet BZCS’s target for Head Office cost savings

BZCS Finance Director

BZCS Procurement

Director

BZCS Public Relations and

Marketing Director

BZCS Human

ResourcesDirector

BZCS -

IT Manager

Office Sports Environmental Infrastructure Community Energy

Director Director Director Director Director Director

BZCS’s new organisational structure –Effective from 1 January 2011

Appendix 1

BZCS –Managing Director

BuildingsDivision –

Commercial

Facilities Division –

Commercial

Projects Division –

Commercial

Projects Division –

Commercial

Projects Division –

Commercial

Projects Division –

Commercial

Project Bid Managers Post Sales &Managers –

for each

– for each Completion

Manager

Marketing

Managers –project.

Within each Division

project

project

for each

9

€ million € million € million € million

Current assets

Equity and liabilities

Non-current liabilities

186.0 164.1

Inter-company loan

(provided by parent company BeeZed) 125.0 145.0Current liabilities

Appendix 2

Extracts from BZCS’s Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity

Statement of Comprehensive Income

Salesrevenue Costof sales Gross profit

Administrative expenses

Year ended Year ended

30 September 2010 30 September 2009

€ million

1,267.0

1,210.3

56.7

22.0

34.7

€ million

58.0

22.8

35.2

26.8

5.4

21.4As at As at

Statement of Financial Position 30 September 2010 30 September 2009

Trade receivables 167.0 167.8

Cash and cash equivalents 23.4 31.2

193.5 202.4

Total assets 434.5 436.4

Retained earnings 176.0 154.1

Statement of Changes in Equity

Share

Capital

Share Retained

premium earnings

€ million € million

Total

€ million € million

10.0 186.0

Tax payables 5.5 5.4

123.5 127.3

Total equity and liabilities 434.5 436.4

Note: Paid in share capital represents 10 million shares of €1.00 each at 30 September 2010 which

are 100% owned by parent company BeeZed

Appendix 3

Cash Flow Statement

Cash flows from operating activities:

Profit before taxation (after Finance costs (net))

Adjustments:

Depreciation

Finance costs (net)

(Increase) / decrease in inventories (Increase) / decrease in trade receivables Increase / (decrease) in trade payables

(excluding taxation)

Cash generated from operations

Finance costs (net) paid

Tax paid

Cash generated from operating activities

Year ended

30 September 2010

€ million € million

27.4

0.3

0.8

119.9

107.2

(95.0)

(7.8)

23.4

Appendix 4

BZCS’s Mission Statement and CSR initiatives

BZCS’s mission statement is:

“To be the preferred supplier for quality construction projects and to strive to implement a long-term relationship with our customers based on safety, quality and atimely service”

BZCS has the following CSR initiatives: Prudent use of natural resources:

� Reducing waste

� Improving design

� Improving the use of resources

� Improving its supply chain

� Increasing the use of locally sourced resources

Environmental issues:

� Reducing water pollution

� Reducing emissions into the atmosphere

� Reducing waste going to landfill sites

Social issues:

� Improving Health and Safety for our employees and sub-contractors

� Supporting our employees

� Giving due consideration to the communities in which we work

� Developing the skills of our employees

Economic growth

� Investing in the communities in which we operate

� Rewarding our shareholders

� Satisfying our customers

� Managing our risks

Required:

As the Finance Director of BZCS you are to send a mail to the Commercial Director ofthe Sports Facilities Division providing advice and recommendations on the issues facingthis division of BZCS after a thorough evaluation.

Chapter 10CASE NINE

Sustainable trading in the supermarket industry

The supermarket industry

There are many large international companies which operate supermarkets in a range of countriesaround the world using globally recognised brand names. Most of the supermarket chains have alarge market share in their home country and have expanded to other countries both byacquisition and by organic growth. There have been many acquisitions of smaller supermarketchains in order to achieve greater economies of scale and to expand the promotion of thesupermarket brand globally.

Most of the large supermarkets sell a wide range of products with food items comprising less than 75% of revenues. Non-food items include household and electrical goods as well as clothing and shoes.

The trend in the past was to build and operate larger and larger stores with the view that most people would make the journey to a large supermarket to shop. However, over the last decade there has been a reversal in this trend with the opening (mainly through acquisition) of smaller “convenience” stores enabling people to shop locally. A small “convenience” store is defined as a small retail store which is open long hours offering a limited range of food and household products and is located in city

centre or suburban residential areas. Within city centres, these convenience stores havegenerated increasingly high sales levels. This has encouraged supermarket chains to operate aportfolio of smaller “convenience” stores as well as large supermarket stores.

Some global food retailers operate a range of brands and have a portfolio of several types of stores, ranging from very large “hypermarkets” to smaller “convenience” local stores. A “hypermarket” is defined as a very large retail store which combines a grocery supermarket and a department store, situated at out-of-town locations and generally having a sales area of over 20,000 square metres.

The global supermarket industry is highly competitive and most brands compete primarily on price. There have been many changes in the way supermarkets operate over the last decade. These innovations include internet shopping, wider ranges of organic produce, wider ranges of non-food products and the expansion of “own brand” products and “value” ranges. “Own brand” products are food and household products which display the brand name of the store selling it rather than that of the company which made it. “Value” ranges are defined as goods sold at substantially lower prices than other comparable products under “own brand value range” labels, so that the target customers consider that they are getting exceptional value for money.

Background information on sustainable trading

Sustainable trading is defined as “a trading system that does not harm the environment or deteriorate social conditions while promoting economical growth” (source: European Union(EU) website).

Sustainable trading is also often related to the reduction in carbon emissions which is acknowledged to be an important factor linked to climate change. It is now argued that climate change is one of the greatest threats facing mankind.

Climate change is being caused by the build up of greenhouse gases (GHGs) in the atmosphere from human activities, primarily the burning of fossil fuels, to provide the energy for the goods and services that we use every day.

There are several gases that contribute to the greenhouse effect and the best known is carbon dioxide. These other gases have different effects, and are usually measured and reported as the equivalent amount of carbon dioxide. For the purposes of this case, all gases are described as “GHGs” or “Carbon emissions” although they include the equivalent amount of other harmful gases

The supermarket industry has been slow to react to the need for sustainable trading as there

has been a period of intense price competition and the focus of most supermarkets has been on maintaining customer loyalty and profitability. All global supermarket chains measure and report a range of statistics concerning their sustainability or “green” credentials, but some have not incorporated sustainability into their strategic plans.

Currently, around 2,500 organisations globally now measure and disclose their carbon emissions and climate change strategies. It is recognised that retail businesses can play an important role in tackling climate change but many businesses are slow to respond to the challenges. In a recent survey, it was found that 85% of Chief Executives believe that companies do integrate the measurement of sustainability into their businesses. However, only 64% of Chief Executives considered that their companies do so effectively. Clearly there is enormous scope for improvement by companies to monitor and improve their levels of sustainable trading.

A recent assessment of 500 global companies which have set themselves carbon emission reduction targets shows that only 19% of these companies have shown significant carbon emission reductions. The opinion of researchers demonstrates that the response of companies tomake significant reductions is “not equal to the global sustainability challenges faced”. Therefore there is huge scope for large reductions in carbon emissions if companies are focussed on achieving real change in the way that they operate.

Carbon credits

Carbon credits and carbon markets are part of the international attempt to reduce the growth of carbon emissions, which is primarily carbon dioxide. One carbon credit is equal to one tonne of carbon dioxide (or equivalent gases). One tonne is equivalent to around 1,000 kilograms (kg). All measurements of carbon emissions in this case study are shown in kg.

Carbon credits were created following the Kyoto Protocol in 1997 which aims to reduce carbon emissions. Since that date more than 180 countries have ratified their agreement to reduce the volume of carbon emissions.

Papy supermarkets

The Papy supermarket brand was formed in the early 1950’s in a European country and was initially a family-run business. It was listed on the stock exchange of its home country in 1960. The number of stores operated by the Papy group has grown considerably since.

The Papy supermarket chain now operates in its home European country as well as in 7 other European countries. It does not currently operate outside of Europe. Its Board considers that there is plenty of room for the company to grow within Europe, where its supply chain is established and works efficiently. It does not offer Internet shopping at present.

A summary of Papy’s key personnel is shown in Appendix 1.

The Papy chain had 1,156 stores operational at 31 December 2010. These stores generated totalsales revenues of over €12,900 million in the financial year ended 31 December 2010. The operating profit was €658 million.

Within the portfolio of 1,156 stores, 414 stores are large supermarkets, with an average store size of 2,800 square metres. The remaining 742 Papy stores are small convenience stores.

A summary of Papy’s stores and statistics is shown in Appendix 2.

Papy’s recent history

Over the last 10 years, trading conditions have been very competitive, but Papy has shown an increase in profits and earnings per share (EPS) each year. The company has not opened many large supermarkets in the last 10 years, but it has expanded the number of small convenience stores from 360 to 742 stores at 31 December 2010.

The company operates a dual pricing policy whereby some products are slightly higher priced at the small convenience stores, although still competitively priced. Customer numbers have increased across all stores in the last 5 years. Furthermore, the number of customers who regularly shop at Papy stores, as measured by loyalty card usage, has increased.

During 2010, the average sales revenue of all customers has shown a small increase when expressed as revenue per visit. For example, in supermarket stores, the average sales revenue per

customer per visit was €121.10 in the year ended 31 December 2010, which is a small increaseon the revenue per customer per visit of €118.75 for the year ended 31 December 2009.

Financials and shares

Papy generated sales revenue of €12,911 million in the financial year ended 31 December 2010,with a gross profit of €2,608 million (20.2%). Its operating profit was €658 million, a margin of 5.1%, up from 4.9% in the year ended 31 December 2009, due to both a small growth in the grossmargin and a small reduction in the administration costs as a percentage of sales revenue.

The earnings per share (EPS) for the year ended 31 December 2010 was €4.544 (year to 31December 2009 EPS was €4.219). This is an increase of 7.7%.

An extract from the accounts for Papy is shown in Appendix 3.

Papy’s Cash Flow Statement for the year ended 31 December 2010 is shown in Appendix 4.

There are 100 million shares in issue and 200 million authorised shares. The majority are held by large investors including institutional investors and the founding family has retained only around 5% of the shares.

Papy operates an employee share scheme which rewards all of its employees with free shares dependent on the achievement of individual store profitability targets as well as the achievement of a range of group financial targets. Papy’s employee share scheme currently purchases

shares already in issue to meet the requirements for shares given to employees. The total cost of shares given to Papy’s employees is included in administrative expenses in the Statement of Comprehensive Income.

Sustainable trading

There are many facets to sustainable trading in the supermarket industry. Some of Papy’s competitors, especially the largest global supermarket companies, have already started to address the need to become more sustainable companies. The facets of sustainable trading include the following:

� Reductions in energy consumption

� Reduction in carbon emissions

� Use of alternative sources of power

� Reduction in waste and improved levels of recycling

� Reduction in the volume of free plastic carrier bags given to customers

� Being a responsible employer and improving the well-being of employees

� Providing training to employees to enhance their career development.

� Paying a fair price to suppliers

� Sourcing products from suppliers which are also trying to be responsible and sustainable in the ways in which they operate

� Sourcing of paper and wooden products from recycled sources as well as from companies which operate sustainable forests

� Inspecting the working conditions at supplier sites and taking action where they do not meet company standards

� Selection and assistance to Papy’s supply chain companies to enhance their sustainable trading credentials

� Reviving local rural life with the opening of convenience stores in small communities.

Competitor analysis

Papy is operating in a competitive market in a total of 8 European countries. It is difficult to assess Papy’s overall market share across the European countries in which it operates. However, in its “home” country, Papy has a market share of around 19% and it is within thetop

3 supermarket chains, based on sales revenues, in this country.

The table below compares some key performance indicators of Papy against 3 of its competitors based on data extracted from the annual accounts and report for the latest available financial year.

Papy Competito Competito Competito

Revenue (total group) €million

12,911 53,900 64,020 11,820

Operating profit margin 5.1% 5.9% 3.4% 4.8%

Number of stores – Europe only 1,156 2,576 5,420 1,046

Market share in “home” country 19.0% 22.9% 28.9% 22.0%

Change in marketshare over last year

+ 0.3% + 0.1% + 0.8% + 0.2%

Free disposable plastic bags

(shown as per square metre of

549 506 266 580

Carbon emissions (GHGs)(shown as kilograms (kg) peraverage square metre of sales

1,042 681 243 1,005

Notes to the table above:

1. Revenue figures for each of the competitors include revenues generated from Internet shopping and revenues generated outside of Europe.

2. Market share in “home” country reflects a different “home” country for each of the competitors.

Recent Boardroom changes

Tobias Otte had been Papy’s Chief Executive for 12 years. However, due to poor health over the last 2 years, he had not given his full attention to the need for changes within the Papy group. The most notable area where Papy has fallen behind its competitors is in the monitoring and targeted reduction of energy and carbon emissions.

Tobias Otte retired in March 2011 and the in-coming Chief Executive, Lucas Meyer, is renowned for his ability to bring about change within the companies for which he has worked. His first action on arrival was to obtain Board approval for a new Board position of Corporate Affairs Director. He was then instrumental in recruiting Arif Karp, who had been working as a consultant advising companies on how to reduce carbon emissions and to improve the performance measures for these companies’ corporate social responsibilities.

An extract from a recent press announcement by Papy’s new Chief Executive is shown in Appendix 5.

Arif Karp joined Papy on 20 June 2011. He is currently establishing the range and the quality of the data currently being collected by Papy and assessing the integrity of the data. He plans to form a team to prepare and implement new proposals.

Corporate Social Responsibilities

Papy has made significant progress in many of the areas of its Corporate Social Responsibilities and in the last year it has had some major achievements but the group still faces many challenges. Papy’s CSR responsibilities have been split into 5 sections which are:

Nutritionand healthy eating

Our emplos

Sustainable trading

Communities

Papy’sCSR

responsibilities

ur oyee

Responsible tradi

Sustainable trading

The biggest challenge facing Papy, as well as many other companies worldwide in awide range of industries, is sustainable trading and the impact of its operations on theenvironment and on climate change. Papy currently has targets for its carbon emissions,which are measured as “carbon emissions in kilograms (kg) per square metre of salesarea”.

Papy is also reducing its waste materials and is improving the volume and range ofmaterials that it recycles. Papy is committed to reducing the volume and types of packaging for its products in order to reduce waste.

The availability of free disposable bags at checkouts is being discouraged and customersin some countries have been offered free re-usable shopping bags. Papy has reduced the weight and the type of plastic used in the manufacture of its carrier bags and is activelyencouraging customers to re-use bags, including a credit to customers’ loyalty cards forre-using carrier bags.

Some of Papy’s current sustainability measures are shown in Appendix 6.

Communities

In respect of the communities in which Papy operates, it has established a range of community and school projects and supports a range of charities. Additionally, Papy’semployees are encouraged to participate in community projects, both voluntarily andthrough paid secondments, to lend Papy’s skills to enhance community and charitableprojects.

Responsible trading

Papy would like to be considered as a responsible retailer which treats its suppliers andits customers fairly. During the last year, Papy expanded its range of ethically sourcedproducts, both “Fair Trade” labelled products and other ethically sourced products. “FairTrade” labelled products are defined as those produced by an organised socialmovement which helps small- scale farmers in developing countries to obtain bettertrading conditions than they could achieve individually, and ensures a fair price is paidto producers in order for them to earn a living wage.

Papy only procures fish from suppliers which meet the criteria set out in theinternational fishing industry’s guide to responsible purchasing practices.

In a survey of Papy’s supply chain, over 90% of suppliers considered they are treatedwith respect by Papy and that a fair price was negotiated. Some of Papy’s suppliershave entered into longer-term contracts than in the past, in order to reflect Papy’s

commitment, loyalty and support to agricultural producers worldwide. Papy alsoinspects the working conditions at supplier sites to ensure compliance with its policyfor suppliers’ working conditions.

Employees

Papy has almost 97,000 full-time equivalent (FTE) employees. Papy values itsemployees and has many dedicated training centres to enhance their skills. Papy isdeveloping more managerial level employees in each of the countries in which itoperates, in order to help to build upon its successful expansion. It has also beentraining its employees in order to raise their awareness of environmentally-friendlyactions.

Nutrition and healthy eating

Nutrition and healthy eating is another important CSR responsibility in which Papy is keen to find and promote the right message to help its customers make more healthyeating choices. Papy has expanded its ranges of healthy eating products and 100% of products are labelled with nutritional values.

IT systems

Papy has a range of sophisticated and integrated IT systems which range from logisticsto finance systems. Papy’s procurement IT systems are linked to over 70% of itssuppliers. Orders are tracked from supplier to distribution depots and onto each storelocation using the latest scanning IT solutions.

Because of Papy’s significant growth throughout Europe in recent years and theincrease in the number of stores in operation, Papy’s IT Director, Ziad Abbill, hasneeded to invest heavily in IT

hardware and software solutions. This ensures that the IT capacity is more than adequateto cope with the forecast growth in the volume of goods procured, control of inventory(which is so important in the food retailing industry as products have a short shelf life)and retail transactions.

To meet the requirements of consumer legislation, Papy’s computerised tills need to ensure all special offers, both group and local store offers, are correctly reflected inprices charged to its customers.

Ziad Abbill is currently having discussions with Arif Karp on the possible need for an Environmental Management System (EMS). This type of IT system would be used to

capture and report on a wide range of non-financial data. This could help Papy’smanagement team to track and report on a range of issues concerning sustainabletrading.

Carbon emissions

The Papy chain of supermarkets generates carbon emissions in many ways and reportsthese under sustainable trading within Papy’s CSR responsibilities (shown on page 6). Papy’s carbon emissions are generated in the following ways:

1. Heating, cooling and lighting at stores and distribution depots

2. Moving products to the stores

3. Construction of new stores

Furthermore, carbon emissions are generated by suppliers in Papy’s supply chain.Additionally, Papy’s customers generate their own carbon footprint by travelling to andfrom Papy stores and also in the way they use the products bought and dispose of itspackaging. Arif Karp also recognises that the majority of the carbon emissions whichare generated in the manufacture or processing of the products that Papy sells, originatefrom its supply chain. He would like to educate and encourage Papy’s suppliers in orderto assist them to reduce their carbon emissions.

Until recently, Papy’s Board has set targets for reductions in carbon emissions in anunstructured way with no real definition of what actions are required in order to makesignificant reductions. Therefore, whilst the spirit of reductions has been embraced byPapy’s management team, there has been no overall strategy developed in order to achieve the reductions. Whilst there has been a range of initiatives, which include moreefficient logistics for deliveries to stores, reduced packaging and the increased use of railtransportation rather than road, there has not been an integrated approach on a large scaleto tackle and reduce Papy’s carbon emissions.

The new Chief Executive, Lucas Meyer, wants to change the way in which the Papychain of stores operates, so that it can reduce its carbon emissions and become a moresustainable retailing company. Therefore, Arif Karp considers that Papy needs to settargets for the coming years and to plan how reductions in carbon emissions could be achieved.

Appendix 1

Papy’s key personnel

Non-executive Chairman - Dmitry Baludia

Dmitry Baludia, aged 58, became Non-executive Chairman in January 2010. Prior to thishe held an executive position on the Papy Board as Operations and Logistics Director.He was instrumental in Papy’s expansion into the 7 European countries in which it nowoperates. He has worked for Papy for over 22 years. Prior to this he held a senior role inanother food retailing company.

Chief Executive - Lucas Meyer (newly appointed)

- Tobias Otte (retired)

Tobias Otte, aged 55, was the Chief Executive of Papy for 12 years and he retireddue to ill- health in March 2011 after a period of poor health over the last 2 years.

Lucas Meyer, aged 47, was appointed Chief Executive on 1 May 2011. He previouslyheld the role of Chief Executive for a major European clothing retailer for 4 years. Priorto this role he had been the Finance Director for a global sportswear brand. The Boardconsiders that his experience in non-food retailing will bring new knowledge to Papy. Heis also known for his ability to bring about change and to introduce new ideas in thecompanies he has worked for. The new Chief Executive believes that the Papy group of supermarkets has not been taking its Corporate Social Responsibility seriously enough.He has been key in the creation of a new Board role of Corporate Affairs Director.

Operations and Logistics Director - Rafael Lucci

Rafael Lucci, aged 42, has worked for Papy for only 5 years. He joined as theOperations and Logistics Manager in one of the European countries that Papyexpanded into 5 years ago. He has proved himself to be a good manager and has worked closely with Ziad Abbill, the IT Director, to introduce new IT solutions toimprove operational efficiency and to save costs. He was promoted to his currentposition in January 2010 when Dmitry Baludia became Non- executive Chairman.

Corporate Affairs Director – Arif Karp

Arif Karp, aged 43, was appointed to this new role on 20 June 2011, in order to initiatechange within Papy. Arif Karp was previously in the role of a consultant for a leadingglobal consultancy company which advised companies on how to reduce carbonemissions and to improve their performance measures in respect of their corporatesocial responsibilities. This consultancy company agreed to allow him to take up thisposition at Papy without serving all of his notice period, as it believed that he wouldbring good publicity for the consultancy group with the work that he will undertake atPapy. He has worked with Lucas Meyer in his previous role and they have a goodrespect for each other’s skills.

Finance Director – Abdul Yarkol

Abdul Yarkol, aged 55, has been Papy’s Finance Director for 8 years after a memberof the founding Papy family retired. He has been frustrated at the lack of leadershipover the last 2 years, due to the ill-health of the now retired Chief Executive, TobiasOtte.

IT Director – Ziad Abbill

Ziad Abbill, aged 38 and the youngest Board member, has been on the Papy Board for 2years. He has proved himself as a committed, highly motivated individual who hasoverseen a number of significant changes in Papy’s IT systems. He is well liked andrespected as he has the ability to listen to the needs of the system’s users.

Marketing Director – Karen Wagnes

Karen Wagnes, aged 52, was appointed to the Papy Board 6 years ago having heldvarious managerial roles in marketing and store management for Papy in thepreceding 6 years. She had previously worked in a marketing role for a competingsupermarket company.

Human Resources Director – Simona Papy

Simona Papy, aged 45, joined the Papy Board 3 years ago. She is a member of thefounding Papy family and has worked in many roles throughout the company including aperiod as store manager at one of the largest of the Papy chain of supermarkets. In thisrole she identified the importance of staff motivation and took a post-graduate course inHuman Relations. She worked in a senior role in the HR department for several yearsbefore she was appointed, on merit, as HR Director, when the previous HR Director leftthe company.

Non-executive directors

Papy has 7 Non-executive directors

CSR Manager – Suzanna Nec

Suzanna Nec, aged 54, has worked for Papy for over 30 years and has been the CSRManager reporting to the Papy Board for the last 12 years but is not a Board Director.She has been involved in a period of great change for the company and has many skillsto offer. However, the new Chief Executive, Lucas Meyer, did not consider that she hadthe skill set required to be appointed to the new role of Corporate Affairs Director. Shereports directly to Arif Karp.

Appendix 2

Summary of Papy’s stores and statistics

Year ended 31

December 2009

Year ended 31

December 2010

Year ended 31

December 2011Actual Actual Latest fullyear forecastNumber of stores:

Start of yearSupermarkets 400 406 414Small convenience stores 700 716 742

Total 1,100 1,122 1,156

New store openings:Supermarkets 6 8 8Small convenience stores 30 32 22

Total 36 40 30

Closures:Supermarkets 0 0 0Small convenience stores 14 6 4

Total 14 6 4

End of year:Supermarkets 406 414 422Small convenience stores 716 742 760

Total 1,122 1,156 1,182

Average for the yearSupermarkets 403 410 418Small convenience stores 708 729 751

Total 1,111 1,139 1,169

Total sales area (all stores)- end year 1,351,600 1,381,800 1,409,600

- average for the year 1,340,800 1,366,700 1,395,700Average sales revenue per

square metre of sales area €

9,427 9,447 9,468

Average sales revenue per

FTE employee €

132,293 133,356 133,771

Extract from Papy’s Statement of Comprehensive Income,

Appendix 3

Statement of Financial Position and Statement of Changes in Equity

Statement of Comprehensive Income

Revenue Cost of sales Gross profit

Administrative expenses

Operating profit Finance income Finance expense

Profit before tax

Tax expense (effective tax rate is 25%)

Ye

31 D

ar ended

ecember 2010

Year ended

31 December 2009€ million

12,911.0

10,303.0

2,608.0

1,950.0

658.0

€ million

12,640.02,541.0

1,921.0

620.0

562.6

421.9

Statement of Financial Position

Non-current assets (net)

Current assets

Inventory

Trade receivables

Cash and cash equivalents

Total current assets

Total assets

Equity and liabilities

Equity

Share capital Share premium Retained earnings

Total Equity

As at

31 December 2010

As at

31 December 2009€ million € million

3,247.0

2,011.9

5,258.9

€ million € million

3,396.0

5,284.0

1,840.0

5,284.0

Note: Paid in share capital represents 100 million shares of €1.00 each at 31 December 2010

Statement of Changes in Equity

For the year ended 31 December 2010

Share

Capital

Share

premium

Retained

earnings

Total

€ million € million € million € million

Balance at 31 December 2009 100.0 635.0 1,105.0 1,840.0Profit - - 454.4 454.4Dividends paid - - 190.0 190.0

Balance at 31 December 2010 100.0 635.0 1,369.4 2,104.4Appendix 4

Cash Flow Statement

Cash flows from operating activities:

Profit before taxation (after Finance costs (net))

Adjustments:

Depreciation

Finance costs (net)

(Increase) / decrease in inventories (Increase) / decrease in trade receivables Increase / (decrease) in trade payables

(excluding taxation)

Cash generated from operations

Finance costs (net) paid

Tax paid

Year ended

31 December 2010

€ million € million

605.9

14.0 (14.0)

1,048.7

855.9

(392.0)

Cash generated from operating activities

Cash flows from investing activities:

123.9

603.9

Appendix 5

Press report on Papy’s announcement to become more sustainable

Date: 24 June 2011

The new Chief Executive of Papy, Lucas Meyer, announced yesterday his intention forthe Papy chain of supermarkets to change the way in which it operates, in order tobecome a more sustainable business.

He stated “the Papy chain will incorporate sustainability in its strategy and it will alsopromote the need for a more sustainable attitude in the food retailing business, both tocustomers and to its own supply chain”. He further commented “Papy should take agreater responsibility for the effect it has on the environment in which it operates”.

Lucas Meyer further stated that “with fossil fuel due to run out in 40 years time therehas never been a greater need for action. We can no longer wait for Governments tolegislate to force change upon us. We should not be complacent and wait for ourcompetitors to spur us into taking actions”.

He continued by stating “We, at Papy, are going to make changes in the way that weoperate that will affect our supply chain and our customers. However, we feel that thechanges we will make in the coming months, and years, are the right way to operate abusiness in the long-term. We are confident that our loyal customers will see that whatwe plan to do will help Papy to trade in a much more sustainable way. We aim to reducecarbon emissions and make changes in order to become a business that can maintain itslong-term presence in this industry”.

Lucas Meyer added “in order to survive in the competitive food retailing market we mustchange. Innovation is the key to our future success”.

By the end of trading on 23 June 2011, Papy’s share price had risen to €38.80 per share.

Appendix 6

Some of Papy’s current Sustainability Indicators for the period2008 to 2010

Required.

You are the Management Accountant of Papy.

Lucas Meyer, Chief Executive, has asked you to provide advice and recommendationson the issues facing Papy.

Chapter 11CASE TEN

JOT – TOY CASE

Industry background

There is a large number of companies of various sizes which design and sell toys to retailers globally. Most toy companies outsource the manufacture of their toys and currently 86% of the world’s toys are manufactured in China. Most of the rest of the world’s toys are manufactured in other Asian countries, with only low volumes of products manufactured in Europe and the USA.

The toy market is divided up into a variety of sectors, by children’s age range and the type of toy.There are different sectors with toys aimed for babies under one year old, children aged 1 to 3 yearsand pre-school children of 3 to 5 years. There is a further sector for children of school age of 5 yearsand upwards. Additionally the toy market is broken down into categories of toys. Research hasshown that children aged 2 to 4 years old receive the most toys in quantity but that the most money is spent on toys for the 6 to 8 year age group.

The current trend in toy sales is towards electronic toys and computer assisted learning. Many of these electronic toys are highly developed to be attractive to children. Sales of traditional toys andgames have achieved relatively low growth in the European market over the last 10 years, whereaselectronic toys and merchandise from popular films and TV programmes have seen reasonablegrowth. Merchandise from films and TV programmes are licensed to toy manufacturers or toyretailers which can achieve high short-term profits depending on the licensing arrangement and thevolume of sales. However, fashion trends are difficult to predict and toy retailers can be left withlarge volumes of unsold inventories if the toys are unpopular or less in demand than originallyanticipated.

The toy market is highly seasonal and is dominated by the pre-Christmas sales period. Typically, around 30% to 55% of toy sales occur in the fourth quarter of the calendar year (October to December).

China has established itself as a high quality, low-cost manufacturing base for a wide range of consumer products for global markets. It does not, as yet, principally design and create new products, but instead is capable of manufacturing products that have been created by Western companies. It is necessary for the companies which create the designs, whether the product is a toy,a range of clothing or a computer chip, to ensure that the design is protected by registering thedesign for intellectual property rights (IPR’s). However, in many instances small changes

can be made so that “copies” of the design do not breach the IPR. Legal protection of IPR’s is becoming increasingly important in today’s global markets, where resources are sourced in one area of the world, manufactured into finished products in another area (principally in China and other Asian countries) and then sold in other geographical markets.

Most toy retailers procure a range of products from many different toy companies. There is a widerange of companies, from small to very large multi-national companies, which operate as toydesign and distributing companies. These companies design, patent or license the toys and thenoutsource the manufacture to specialist toy manufacturers. The toy companies then sell theirproducts to toy retailers.

There are several global toy fairs each year which attract buyers from toy retailers across the world. One of the largest toy fairs is held in Hong Kong in January each year, where new toys arelaunched for the following Christmas market. Other global toy fairs are held in Europe, Russiaand the USA, also early in the calendar year. At these toy fairs, buyers will assess and choosewhich of the new toys may achieve high sales. The toy fairs attract a wide range of exhibitorswhich are launching new toys, both large listed companies and small companies.

The level of sales achieved by many toy companies will often depend on orders generated from buyers attending these international toy fairs. Therefore, it is important that prototype toys and marketing literature is ready in order to meet the requirements of these global buyers at the start of each calendar year.

Jot

The Jot brand was established in 1998 by husband and wife team Jon and Tani Grun. The company initially designed a small range of toys which were manufactured in their home European country. These toys proved to be very popular in their home country and Jon Grun then expanded the range of products.

By 2003, within five years of starting Jot, the founders were encouraged to see Jot’s products ordered by many large toy retailers across Europe. By this stage the company had grown considerably, and had annual sales of almost €2 million. Commencing in 2004, Jot started outsourcing all of its manufacturing to a range of manufacturing companies in China in order to reduce its cost base and to enable the company to price its products more competitively.

By the end of 2010 sales revenue exceeded €8 million and the company had achieved substantialsales revenue growth each year. Jot has seen its sales revenue grow by 16% in the year ended 31December 2010 and by almost 18% in the year to 31 December 2011 (unaudited figures).

A summary of Jot’s key personnel is shown in Appendix 1.

Jot’s product range

Jot currently has a relatively small range of 34 products aimed at only 2 age groups. These are thepre-school age group of 3 to 5 year olds and the next age group of 5 to 8 year olds. It currently

does not produce any toys aimed at babies aged less than one, toddlers aged less than 3 years oldor children aged over 8 years old.

Jot’s products include a range of toys designed by the company, for which it holds the IPR’s, as well as some licensed toys, for which it pays a license fee to the companies which hold the IPR’s.Jot’s products mainly include electronic features and this is seen as one of the strengths of itsproducts.

Jot currently launches around 5 totally new products each year. It also enhances certain aspects of some of its other products to refresh their appearance and features. It also has a range of

toys that sell consistently well and have not changed materially for a few years.

Jot’s products for the 3 to 5 year old age group include:

� Construction toys with sound effects and electronic actions.

� Learning products such as mini-computers which ask questions and the child responds by pressing different keys.

� Toy vehicles some of which have electronic features such as sounds and lights.

� Plastic toys which have “animatronics” to make the toys move, for example, toy dinosaurs.

� Toy cameras.

� Electronic learning products to aid learning the alphabet and basic mathematical skills.

� Licensed soft play toys based on film and TV programme characters.

� Licensed plastic figures, cars and machines based on film and TV programme characters, some of which include electronic features that generate movements and sounds, including theme tunes.

Jot’s products for the 5 to 8 year old age group include:

� Toy cameras and video cameras.

� Dolls and action figures, some of which move and make sounds.

� Small hand-held games boxes for playing computer games and educational learning products to improve mathematical and readings skills.

� A range of games and educational learning products for the hand-held games boxes.

Jot’s products are sold to toy retailers for between €7 and €38. These are Jot’s selling prices to toy retailers. Most of the retailers will then sell these toys at a large mark-up, which can be as much as 50% to 100%, i.e. a toy procured from Jot at €10 could be retailed to the end customer at €20.

In the year ended 31 December 2011 Jot’s actual sales volumes (unaudited) were over 706,000 units across Jot’s entire range of products. The total sales revenue for the year ended 31

December 2011 (unaudited) was €9,866,000, which resulted in an average selling price of just under €14 per unit. Over 80% of Jot’s product sales are sold to retailers for €20 or less.

Financials and shares

Jot has achieved a high annual growth in sales, with sales revenue reaching €9,866,000 in the year ended 31 December 2011 (unaudited), a growth of 17.9% from 2010 (€8,371,000 sales revenue for year ended 31 December 2010). Additionally, it has achieved an operating profit margin of 5.58% in the year to 31 December 2011, a rise from the previous year’s profitmargin of 5.41%.

An extract from Jot’s accounts (unaudited) for the year ended 31 December 2011 is shown in Appendix 2.

Jot’s Statement of Cash Flows for the year ended 31 December 2011 (unaudited) is shown in Appendix 3.

Jot is a young, growing company which is dependent on loan finance. Jot has three bank loans totalling €1,600,000, each at an interest rate of 10% per year, which are due for repayment as follows:

� Bank loan of €500,000 due in January 2014.

� Bank loan of €500,000 due in January 2015.

� Bank loan of €600,000 due in January 2020.

Jot’s bank has been very responsive to the company’s needs for cash in order to fund its growth but has indicated that at the present time it would not be able to provide any additional long-term finance.

Jot has an overdraft facility of €1,500,000, which the bank has stated is the maximum limit.The current cost of its overdraft is at an interest rate of 12% per year. At 31 December 2011,Jot’s overdraft was €960,000.

Jot’s business is highly seasonal with a significant proportion of sales occurring in quarters 3 and 4. As Jot builds up its inventory in preparation for higher levels of sales in quarters 3 and 4, cash flow is negative during the second half of the year. This is because outsourced manufacturing for the majority of all products occurs mainly from the end of quarter 2, duringall of quarter 3 and the beginning of quarter 4.

Jot is a private limited company and not listed on any stock exchange. It has 40,000 shares in issue, each of €1 par value. The company has an authorised share capital of 200,000 shares. To date, the Board of Jot has not declared any dividends. The shares are held as follows:

Number of shares

held at

31 December 2011

Percentage

shareholding

%

Jon Grun 12,000 30

Tani Grun 12,000 30

Alana Lotz 8,000 20

Boris Hepp 4,000 10

Michael Werner 4,000 10

Total 40,000 100

Production of toys

Jot has its own in-house team of designers who are involved in designing toys that are unique, innovative and fun to play with. The production of new toys is split into two stages. Firstly, the design stage involves the design team developing a new toy and after it has been approved, the second stage is where the operations team is responsible for contracting an outsourced manufacturer for the mass production of each product.

The head of Jot’s design team is Alana Lotz, Product Development Director. She is responsible for researching the market trends in toys globally and establishing the availability of new innovative technology which could be incorporated into new toy designs. This is what helps to make Jot’s product range innovative and at the “cutting edge” of new technology, as the products incorporate new technology electronic chip components.

Research and development work on new product development usually occurs between May and

December each year so that the new products have been fully tested ready for the annual launchof Jot’s new range of toys each January. Jot currently launches 5 totally new products each yearand the development costs are generally between €0.1 and €0.25 million for each new product.The total design and development costs are around €1.2 million each year. This is included in administration expenses in Jot’s statement of comprehensive income.

Jot has just finalised its range of new products for 2012, so as to allow time to produce marketing literature and prepare prototypes ready for the global toy fairs being held in January to March 2012 in various locations around the world.

The design team develops all new products through the following stages:

� Brainstorming for new ideas.

� Designing a new product using Jot’s CAD / CAM IT system.

� Production of first prototype.

� Market research and improvements through to production of second prototype.

� Sign off by design and management team.

� Application for intellectual property rights (IPR’s) for each product design.

Jot uses a specialised company, based in Europe for the manufacture and testing of all prototypeproducts and there are often two or three stages involved before the prototype product is produced to the satisfaction of the designers. Only when each product is signed off by the designand management team can Jot’s legal team apply for the IPR’s for the product design. Then theapproved new product designs go into production by outsourced manufacturers.

The designs are then electronically transferred to Jot’s operations team headed up by Michael Werner, Operations Director, for the selection and appointment of outsourced manufacturers. The stages in the production process are as follows:

� Designs are sent electronically to outsourced manufacturers for tender.

� Outsourced manufacturer(s) selected and appointed and volumes and delivery deadlines for production agreed.

�Packaging designs and artwork are prepared and approved.

� Production samples are reviewed by Jot’s in-house Quality Assurance team located both in Europe and in Asia.

� Production is commenced to meet agreed volume and delivery deadlines.

Michael Werner is responsible for the selection, appointment and monitoring of Jot’soutsourced manufacturers and all aspects of the management of the outsourced manufacturingprocess for Jot’s products. Jot’s products are all manufactured by a small number of specialisedoutsourced manufacturing companies which are all based in China. Jot is responsible for

shipments of all products from its outsourced manufacturers to its warehouses or sometimesdirectly to customers.

Outsourced manufacturers

Currently Jot uses 20 off-shore outsourced manufacturing companies. Off-shore outsourced manufacturing is defined as shifting work to foreign, distant companies in order to reduce production costs. Some of the outsourced manufacturers are small companies each of which manufactures just one of Jot’s products. Some of the larger outsourced manufacturing companies make several of Jot’s products. All of these outsourced manufacturing companies do not work exclusively for Jot but manufacture toys, as well as other products, for a number of international companies. All of Jot’s outsourced manufacturers are based in China.

When a product design has been approved and the IPR applied for, Michael Werner will send the product design with an indication of the number of products to be manufactured and the timescale for shipment, to a small range of outsourced manufacturers for them to tender for the manufacture of the product. Jot often asks the same outsourced manufacturing companies, which it has used previously, to tender for the manufacture of its new product designs each year. Therefore, there is a high level of “repeat business” and a good level of understandingand commitment established between Jot, based in Europe, and its outsourced manufacturers based in China.

When the tenders have been received, Michael Werner and his team review the outsourced manufacturing companies’ submissions and then select the outsourced manufacturer to be appointed. Jot’s designers and sales team will have already decided on an indicative selling price, so the unit price to be charged to Jot by the outsourced manufacturing company is often the determining factor when making the decision of which outsourced manufacturingcompany to use. Whilst other factors are considered, such as quality and ability to deliver therequired volume of products to the required timescale, it is the unit price which is important in order to achieve the planned level of gross margin. Gross margin is defined as sales revenueless the outsourced manufacturing cost of units sold and excludes all other costs.

Jot’s design team already knows the cost of making each product, based on the list of components required, so it is the cost of manufacturing that will vary between the different tenders. Generally, in most tenders, the unit prices quoted by different outsourced manufacturers are quite close to each other.

Most of Jot’s products are manufactured using basic raw materials, such as plastic and electronic components for the toys and plastic and paper products for their packaging. The majority of Jot’s products require a range of electronic components. These components are readily available from a variety of sources but are subject to price fluctuations. Each product design will specify which, and how many, of each component type is required. Some of the electronic components are specialised and contain “application-specific integrated circuits” (ASIC components) which are procured from specialist suppliers. Jot does not have any

agreements with these specialised suppliers as all components, including ASIC components, are procured directly by the outsourced manufacturer appointed to manufacture each of Jot’s products. Some of Jot’s outsourced manufacturers, which manufacture a range of electronic products for Jot and other companies, have on-going supply contracts in place for several key components, which helps them to price their products competitively.

The timescales each year for the production of Jot’s products is for tenders to be submitted and manufacturers appointed by the end of May. The major proportion of manufacturing occurs between June and early November each year. The last of the manufacturing occurs in early November to enable time for the products to be shipped to Jot’s warehouses in Europe and the USA, or sometimes directly to Jot’s customers, in time to meet the Christmas sales peak. All three of Jot’s warehouses are leased.

Over the last 10 to 15 years many companies have outsourced their manufacturing to companiesin China. However, with wage rates in China increasing, some companies have started toconsider “near-shoring”. Near-shoring is defined as the transfer of business processes tocompanies in a nearby country. Therefore, if Jot were to consider near-shoring, this wouldresult in having some outsourced manufacturers based in Europe.

Sales

Jot’s customers are mainly:

� Retailers – these include large toy retailers as well as supermarket chains and other retailers

� Distributors – these distributors purchase Jot’s products and sell them on to a wide range of smaller retailers.

Jot currently has three warehouses, two in Europe and one in the USA. Usually all products are shipped from each of Jot’s outsourced manufacturers directly to one of Jot’s three warehouses. In some instances, products are shipped directly to customers.

Jot’s terms of sale are for payment within 30 days of invoice. Invoices are produced automatically, on a daily basis, based on information transferred to the sales ledger from the inventory control IT system. However, Jot is very dependent on sales to large retailers, which often do not pay until at least 60 days after the invoice date. Jot has little influence over these retailers and does not want to jeopardise future sales by chasing them too aggressively.

Sales of Jot’s toys are highly seasonal as shown in the quarterly analysis of sales in Appendix 4.

In the year ended 31 December 2011, sales in quarter 3 (July to September) were 25% of annual sales and sales in quarter 4 (October to December) were 51% of annual sales.

Jot’s sales are highly dependent on seven large retailers. These seven large companies comprisetoy retailers, large international supermarket retailers, department stores and one on- lineretailer. Over 68% of Jot’s sales in the financial year ended 31 December 2011 were to these 7customers based in Europe and the USA. These key customers place their main orders in May orJune each year and sometimes earlier. If individual products are selling well or the retailersconsider sales may be higher than they originally thought, then the retailers would

place additional orders with Jot. This could happen at any time between June through to late October.

The remaining 32% of sales are to distributors as well as small and medium sized retailers around the world. Jot currently has around 350 customers in total, including the 7 large customers.

With the placement of orders from its large customers and the many smaller customers early in the year, Jot is able to place firm orders with its outsourced manufacturers with a reasonable degree of certainty of sales levels. However, there is always a balancing act between placing a large order to meet committed and expected sales and not holding enough inventory.

Licensed toys

Jot currently has 12 product lines which are licensed products from popular film and TV programmes for the manufacture and sale of toys. Licensed products are defined as toys which use a logo, design or character from a film or TV programme and the owner of the IPR will license each product under a strict licensing agreement, whereby a royalty is paid to the owner of the IPR for each unit manufactured. A licensed product is where the TV or film company owns the intellectual property rights (IPR’s) for the characters and licenses the manufacture and sale

of the products to another company in exchange for a license fee for each item produced (whether sold or not).

A fixed license fee is paid to the licensor in accordance with the licensing contract, and the fee is usually paid at the time Jot places an order with its outsourced manufacturer. The fee is between5% and 10% of Jot’s selling price to retailers.

Anna Veld, Licensing Director, joined Jot in 2009 and has negotiated all of the licensed products that Jot currently sells. She is very experienced in this field and in liaison with both Sonja Rosik and Boris Hepp, she has identified products for Jot to develop and sell. Licensed products now account for almost 10% of Jot’s sales, in terms of the number of units sold.

Inventory control

Michael Werner is responsible for logistics and inventory control. There is always a difficult decision to be made when placing orders with outsourced manufacturers, between ordering too much inventory and not selling it and the opposite of losing sales because of lack of inventory. This is further exacerbated due to the seasonal nature of sales, which are predominantly made in quarters 3 and 4 of each calendar year.

At the start of each calendar year, any unsold inventory for products that Boris Hepp, Sales Director, considers to be out of date, are offered to Jot’s customers at substantially reduced prices to clear them and the inventory value is written down. There are a few products which are sold on a regular basis throughout each year and their inventory value is not written down.

Inventory counts at the end of the financial year are reconciled with Jot’s IT inventory control system and any discrepancies are written off. Jot’s inventory is valued at the lower of cost or realisable market value, based on a first-in, first-out basis. Inventory value is based only on out-sourced manufacturing contracted charges, using the unit price from manufacturer’s invoices, unless the realisable value is lower.

Inventory also includes a reserve for the write-down in value in respect of slow-moving and obsolete products. This valuation is based upon Jot’s management team’s review of inventories taking into account for each product the estimated future sales demand, anticipated product selling prices, expected product lifecycle and products planned for discontinuation. The valuationfor inventory write down is reviewed quarterly. At 31 December 2011 the write-down reservewas €0.124 million. This is netted off against the value of the current inventory of products heldin Jot’s warehouses.

The Jot brand

The Jot brand name is synonymous with quality electronic toys. Jot’s products are innovative and appealing to the targeted age groups. Sonja Rosik, Marketing Director, joined Jot three years ago when the role was separated from that of the Sales and Marketing Director, leaving

Boris Hepp, Sales Director, free to concentrate on securing sales in wider geographical markets.

Marketing has become increasingly important in the promotion of new products. No longer can a company rely on a good product being identified by the key buyers for large retailers. It is of vital importance to market new products before, during and after the global toy fairs, which are held in several locations in the January to March period of each year. The toy fairs can often “make

or break” the success of each new product and the need to gain a positive reaction from buyers, based on sample products, is very important.

The launch plans for new products and the marketing support Jot’s customers receive can have an impact on the reaction of buyers at the global toy fairs. A significant volume of sales orders arise directly from these toy fairs and Sonja Rosik’s team has made a very strong contribution to achieving positive press reports for new products and providing buyers with good quality and clear marketing literature. Boris Hepp is very pleased with Sonja Rosik and her team, which helpshis sales team to secure firm sales orders for Jot’s products.

Additionally, Sonja Rosik, has been working on the establishment of links and promotion of the Jot brand in new geographical markets as well as further market penetration in Europe and the competitive USA market.

IT systems

Tani Grun appointed an external IT consultancy company some years ago to provide the IT systems required for Jot’s growing business. However, some of the systems are not ideal and do not provide Jot’s management team with all of the data that it requires. There is also some replication of data between different IT systems.

The Finance Department operates a multi-currency nominal ledger and integrated sales and purchase ledgers. However, these IT systems do not accept data directly from any of Jot’s other ITsystems. The Finance Department also operates a fixed assets register.

Jot outsources the logistics of its products, both the movement of manufactured products and the sales to customers, to a global logistics company. This company operates a fast efficient service and with the increase in sales volumes over the last few years, a reduction on the unit costs has recently been negotiated. The outsourced logistics company provides Jot with access toall tracking and logistics data for products moving into Jot’s three warehouses and prepares reports on products which have been shipped directly to customers.

The data concerning goods delivered to Jot’s three warehouses is transferred electronically to Jot’s inventory control system. This database system generates despatch notes for all orders thatare fulfilled from each warehouse. The majority of customer deliveries are fulfilled from Jot’s warehouses and not directly from the manufacturer. The despatch note data is transferred electronically to the Finance Department in order to raise invoices to customers for goods despatched. Information on customer orders which are delivered directly from the manufacturer is transferred by the outsourced logistics company to the Finance Department, in order to raise invoices.

All product designs and product drawings, which include a detailed listing of all parts and components, are prepared using a standard CAD / CAM IT system. This allows direct interface with Jot’s outsourced manufacturers. This ensures that each new product design can be transferred to the appointed outsourced manufacturer’s IT systems when the product is ready formanufacture, thereby eliminating any delays and confusion over the exact product specificationand design.

Target markets for growth

Jot would like to expand its sales by specifically targeting other areas of the world, including the Russian and the Asian markets. These two specific markets have a growing demand for the typesof product that Jot sells. Sonja Rosik has visited several countries in Jot’s target markets and metwith retailers and distributors of children’s toys. She has been working with Michael Werner toestablish distribution links for these markets and to arrange delivery of products direct tocustomers based in Asia, rather than have its products shipped to Jot’s European

warehouses for onward shipping back to Asia.

When Jot first entered the USA market in 2006, it was caught unawares by the higher than expected volume of demand and spent almost a year trying to meet the growth in demand for the products ordered. Jot has since discovered that it is necessary to manufacture larger numbers of each product, in order to ensure that its products are available if demand exceeds itsexpected supply levels, before launching into new geographical markets.

Extracts from Jot’s 5-year plan is shown in Appendix 5.

The 5-year plan shows growth in sales revenue at 17% for 2012 and around 13% to 14% for the remaining 4 years of the plan period as well as a small growth in operating profit margins.

Corporate social responsibilities and product safety

Jot’s management team is aware of the importance of its corporate social responsibilities (CSR) but so far it has not officially published what it does or how it will improve its CSR plans. This is anarea which Michael Werner and Alana Lotz plan to develop in the next year, so that Jot can publishits CSR achievements and targets.

However, Jon Grun has always impressed on all of Jot’s employees and managers the importance of its products exceeding, rather than simply conforming to, the required safety standards.

European Union (EU) law requires that all toys which are to be sold in any EU country must carrythe “CE” marking. The “CE” marking confirms that “Certification Experts” have carried out allapplicable testing to identify hazards and assess risks, in order to determine that the products meet the required product safety regulations of the EU. The “CE” marking may be on the toys themselves or on their packaging. In the EU a toy is defined as “any product or material

designed or clearly intended for use in play by children of less than 14 years of age”.

These EU safety regulations apply to all companies based in the EU which supply toys anywhere in the EU, and apply to all companies, whether they are manufacturers, importers, wholesalers,retailers or hirers. It is the responsibility of the toy company and the manufacturer to ensure thatthe product meets the safety regulations and that the “CE” marking is fixed on the product. Jotcannot delegate this responsibility.

Jot’s key personnel

Appendix 1

Jon Grun – Managing Director

Jon Grun, aged 48, is an engineer and has worked in a variety of large companies designing electrical products. He always wanted to establish his own company and was inspired to start the Jot toy company in 1998 when his children were young, as he felt there was a gap in the market for innovative, educational toys. Jon Grun owns 30% of the shares in issue.

Tani Grun – Finance and IT Director

Tani Grun, aged 44, is married to Jon Grun. She is a CIMA accountant and worked for some largecompanies in senior roles before taking on the Finance Director role for Jot when it was formedin 1998. Initially she worked part-time, but as the company has grown, she is finding the rolemore challenging. She is considering recruiting a new person to take responsibility for IT for Jotas she considers that outside experience is necessary to move the company forward. Currently,many of Jot’s IT solutions are out-sourced. Tani Grun owns 30% of the shares in issue.

Alana Lotz – Product Development Director

Alana Lotz, aged 44, has been Tani Grun’s friend for many years and trained as a design engineer and then worked for a global toy manufacturer for 12 years. Tani Grun recruited her when Jot was established in 1998 and she has been a leading force in the expansion of the range of new toys and in the recruitment and retention of Jot’s design team. She holds 20% of the shares in issue.

Sonja Rosik, Marketing Director

Sonja Rosik, aged 35, was recruited in 2009 when the role of Marketing Director was separated from the previous role of Sales and Marketing Director. She has brought a wealth of new ideas and dynamism to Jot’s marketing and has helped to expand Jot’s products to new geographical markets. She does not own any shares.

Boris Hepp – Sales Director

Boris Hepp, aged 42, joined Jot in 2003 when sales in Europe were starting to grow rapidly. He held the joint role of Sales and Marketing Director until 2009, when the Board decided that he would be best employed in concentrating on capturing sales in new markets. Boris Hepp had known Jon Grun for many years before he joined Jot and was very impressed at how quickly the company had grown. Boris Hepp holds 10% of the shares in issue which he purchased when he joined Jot in 2003.

Michael Werner – Operations Director

Michael Werner, aged 50, is responsible for all operations, including management of outsourced manufacturing, logistics and inventory control. All stages from the handover of each product design through to delivery to Jot’s customers are under Michael Werner’s control. He joined Jot in 2008 from a large European based electrical company. He enjoys meeting the challenges faced by Jot’s growth and also the freedom to manage operations without the large corporate culture that he found frustrating. He holds 10% of the shares in issue which he purchased when he joined Jot in 2008.

Anna Veld - Licensing Director

Anna Veld, aged 37, has extensive knowledge of licensing agreements from her previous roles working for a global film company which licensed its merchandising products and she has also worked for a large toy manufacturer. She has been instrumental in increasing the number of licensed products that Jot sells. She does not own any shares.

Viktor Mayer - HR manager

Viktor Mayer, aged 55, joined Jot in 2011 on a part-time basis to help with HR matters, which

Jon Grun used to manage with the help of an outsourced HR agency.

Extract from Jot’s Statement of Comprehensive Income,

Appendix 2

Statement of Financial Position and Statement of Changes in Equity

Statement of Comprehensive Income

Revenue Cost ofsales Grossprofit Distributioncosts

Administrative expenses

Operating profit Finance income Finance expense

Profit before tax

Tax expense (effective tax rate is 30%)

Profit for the period

Year ended

31 December 2011 (Unaudited)

Year ended

31 December 2010€’000

9,866

6,719

3,147

552

2,044

551

13

213

351

105

246

€’000

8,3712,756

478

1,825

453

12

201

264

79

185

Statement of Financial Position

Non-current assets (net)

Current assets

Inventory

Trade receivables

Cash and cash equivalents

As at

31 December 2011 (Unaudited)

As at

31 December 2010€’000

542

4,065

21

€’000

750

€’000

470

3,173

29

€’000

721

3,672

Total current assets

Total assets

Equity and liabilities

Equity

Issued share capital Share premium Retained earnings

Total Equity

Non-current liabilities

Long term loans

Current liabilities Bank overdraft Trade payables Tax payables

Total current liabilities

Total equity and liabilities

40

90

802

4,628

5,378

932

1,600

2,846

5,378

40

90

556

4,393

686

1,600

2,107

4,393

Note: Paid in share capital represents 40,000 shares of €1.00 each at 31 December 2011

Statement of Changes in Equity

For the year ended 31 December 2011 (Unaudited)

Share

capital

Share

premium

Retained

earnings

Total

€’000 €’000 €’000 €’000

Balance at 31 December 2010 40 90 556 686Profit - - 246 246Dividends paid - - - -Balance at 31 December 2011 40 90 802 932

Appendix 3

Statement of Cash Flows

Cash flows from operating activities:

Profit before taxation (after Finance costs (net))

Adjustments:

Depreciation

Finance costs (net)

(Increase) / decrease in inventories

(Increase) / decrease in trade receivables

Increase / (decrease) in trade payables (excluding taxation)

Finance costs (net) paid

Tax paid

Cash generated from operating activities

Cash flows from investing activities:

Purchase of non-current assets (net)

Cash used in investing activities

Year ended

31 December 2011 (Unaudited)

€’000 €’000

351

440

(421)

(279)

(72) (892)

543

(200) (79)

(269)

91

(269)

170

0

Cash flows from financing activities:

Increase in bank overdraft

Dividends paid

Cash flows from financing activities

Net (decrease) in cash and cash equivalents

Cash and cash equivalents at 31 December 2010

Cash and cash equivalents at 31 December 2011

170

(8)

29

21

Appendix 4

Quarterly analysis of sales for 2009 to 2011

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total

2011 Actual (unaudited) Sales €’000

988

10%

1,380

14%

2,490

25%

5,008

51%

9,866

100%

2010 Actual Sales €’000

730

9%

1,250

15%

2,360

28%

4,031

48%

8,371

100%

2009 Actual Sales €’000

548

8%

1,010

14%

2,025

28%

3,622

50%

7,205

100%

Extracts from Jot’s 5 year plan

Appendix 5

Actual

(Unaudited)

2011

Plan

2012

Plan

2013

Plan

2014

Plan

2015

Plan

2016

Revenue €’000

9,866 11,568 13,124

14,791 16,840 19,260

Gross margin 31.9% 32.3% 32.6% 32.9% 33.2% 33.6%

Operating profit €’000

551 694 820 961 1,137 1,348

Operating profit 5.6% 6.0% 6.2% 6.5% 6.8% 7.0%

Number of unit sales 706.3 868.5 977.5 1,102.0 1,240.0 1,405.0

Number of 22 23 25 28 32 36

Number of new 5 6 7 8 9 10

Required:You are the Management Consultant of Jot.

Prepare a report that prioritises, analyses and evaluates the issues facing Jot and makesappropriate recommendations.

In addition to your analysis in your report above, Tani Grun, Finance and IT Director, has askedyou to draft an email to Jot’s management team. This email should set out the key criteria for theselection of outsourced manufacturers in general, together with your recommendation on whichmanufacturer(s) should be appointed for products YY and ZZ.

STARRY GOLD ACADEMY