Maxwell Communications Corporation plc

Information

On 2 December 1991 the Stock Exchange listing of the shares in "world leaders in
communications", Maxrvell Communications Corporation plc (MCC), were suspended lbr
the second time in a month. Since then there has been much media speculation about
fraudulent transactions and accounting deficiencies affecting MCC, The implication is that
unsuspecting MCC shareholders have losl their shirts lhrough no fault of their own, as it
would not have been possible for them to predict any potential business failure from the
given published accounting information.

Admittedly, it would have been difficult to predict that Robert Maxwell would be reported
"lost at sea" on Bonfire Night (causing the first suspension of MCC shares) but as his coming
retirement from the Board of Directors had previously been announced (14 June 1991) this
could not have been the cause of the company's demise. Indeed some might argue it was an
ffict of the company's demise.
While new stories regarding the Robert Maxwell empire still remain rife in the media, there
has been surprisingly little supporting formalanalysis of MCC's financial staternents. Hence,
the general public are once again led to believe that the accounts disguised the true situation
and were therefore unreliable, misleading and even fraudulent. This case study redresses this
balance a little by providing such an analysis of MCC's most recent set of published
accounts. prior to Robert Maxwell's disappearance.

A summary of MCC's financial statements for the last five years from the Micro-Extra
accounting database is provided (note a 15 month This represents a
convenient and widely available the company s More detailed
information was accessible by further interrogation of the database, and by direct inspection
of a hard copy of the accounts themselves. With such a detailed analysis, the following
information was obtained:

(a) That since 1988, MCC has secured ragid growth through leveraged buyouts - the
Iargest being MacMillan and OfJ'icial Airline Guides (OAG). These were funded
mainly by loans from a Midland Bank Syndicate (1.i billion) and a Credit Lyonnais
Syndtcate (l-3 billion). With every acquisition, there was a corresponding rise in the
group's assets (including intangible assets). By l99l a large majority of these loans
were due for repayment within five years.

(b) The values of intangible assets for the early years were as follows: 1986 - 275.2m;
1987 * 339.1rn; 1989 -484.0m. On the consolidation of MacMillan and OAG in the 1990
accounts, a further L7 billion was added to the value of intangible assets carried in the
consolidated balance sheet. This represented pubiishing rights, tities and other benefits.
The overall value of intangible assei fell to 2.1 billion the following year. According to
MCC Accounting Policies for this class of asset, no amortisetion charge is made unless
thsre is a permanent diminution in (their) vaiue as, the opinion of the directors, these
assets do not have a finite economic life. Subject to annual review, any pcrrnanent
diminution in value is charged to the profit and loss account.

CMA2TII Page 25
(c) During i991 MCC earned income other than from operating profit, as follows:

interest and inyestment income 43nr

Associated company profits 37m
Exceptional item (relating to the variation
company
of leasehold rights in a related 29m
Foreign exchange adjustments 81m
Other I
(d) in the 199i accounts, there was a disclosure of a "post balance sheet event", which
was the sale of Pergamon Press to Elsevier for f,446m. Pergamon contributed
approximately I30m to the consolidated profits of MCC in I 991 .

(e) The extraordinary items in the I99l Profit and Loss account reiates to the disposal of
printing assets and printing-related investments.

Required

l. it is a British
Calculate the Z-score for MCC for the last trvo accounting periods. As
cornpany the forrnula proposed by Taffler is probably the rnost approptiate.
Interpret the score.

?.. Interpret the "past performance" of MCC by calculating the follorving type of ratios:
(a) Profitability
. Profil Margin = Operating Profit/Sales
r Retum on Equity = Profit afler Ta#shareholder's Equity
(b) Liquidity
. Current Ratio = Current Assets/Current Liabiiities
. Acid 'Iest : Quick Assets (i.e. Cunent Assets less Stock)/Current
Liabilities
(e) Solvency
. Gearing: Debt (Bonowings),,Equity (Capital & Reserves)
r Interest Cover = EBlT/lnterest
(d) Asset Structure
' Intangible Ratio: lntangib)e Assets/Total Assets

J. Comment on the luture performance and likeiy direction of MCC in the subsequent
year.

Page 26 CMA2T1 I
 :,

Accounts Summary 1986 1981 r989 1990 L99t

Actuals (in millions of Pounds) Dtc 31 Dec 31 Mar 3l M*r 31 Mar3l
Properfy 96.8 136.6 )1< '' 205,3 179.6
Other mngible FA nE.8 393.5 481"2 132.0 I15.2
OI}er fixed assets 298.6 801 .3 I,838.3 3,219.8 2,6E7.6

Total Fixed Assets 674.2 1,331.4 2,5sfi.7 3.557.1 2,983.4

Stock 60.3 79.9 r00.3 r 08.4 I l0J

Debtors 132.4 179.7 447.2 43 1.4 468.4
Cash and Securities ?29.8 101.8 75.8 66.6 39.9
Other NCA (3E.4) 52.7 2\.4 14.6

Current Assets 38.1.1 364.7 676.A 627.8 633.?

Totel Assets 1,058.3 1,695.6 3,226.7 4,184.9 3,616.6

Shareholders' Equity 522.2', 1,003.4 I,019.4 r,006.3 *67.1

Non-currenl Iiabil ities 16.0 39.8 62.2 366.6 305.S
tong & medium loans 175.9 230.0 1,428.7 1,670.8 1,438.0
Short term loans 134.8 I38-8 296.3 505.5 350.9

Net Capitrl Ernployed 868.9 1,412.0 2,806.6 3,549.2 2,962-4

Creditors 111.9 142.8 310. r 472.t 462.1
Current tax due 32.4 55.6 34.7 67.8 96.2
Proposed dividends 45. I 85.2 75.3 9s.8 95.9

Current Liabilities 189.4 283.6 4?0.1 635.7 6s4.2

Liabilities and Equity 1,058.3 1,695.6 3,2?6.7 4,184.9 3,616.6

CMA2TI 1 Page 27
 lllcc PLC - Five Year Income Statement Summary

Accounts Summary 1986 I987 r989 r990 1991

Actuals millions of B*c,31 Dec 3l Mar 31 IUqr 3l Mar3l
Sales 461.7 884.1 r,390.5 1,242.1 996.9
Operating expenses 387-9 758.2 t,172.6 r ,01 6.5 841.3

Operating Profit 73.8 \?s.9 217.9 2?5.6 149.6

Other income r 9.0 69.8 92.8 162.6 l9?.0

Earnings Before lnterest & 'I'rx 92.8 t95.7 -t I.u. I i88.1 341.6
lnterest charge L?.5 29.7 1i8.7 2t5.9 196.1

Profit Before Tax 80.1 166.0 t92.4 172.3 I,15.5

Tax charge i 5.9 31.7 36.8 14.5 20.4

Pro{it After Tax 64.4 134,3 t55.2 137-8 125.1

lvlinority interest (0.2) 2.5 7.2 r 1.0 25"9

0ernings {r4.6 131.8 148.0 126.8 99.2

Extraordinary Items 4.3 (42,0) 25"7 49.5

Profit For The Year 60.3 131.8 190.0 101.1 49.7

Dividends 45.5 86.4 1 12.3 95.8 9s.9

Retained Profit 14.3 45.4 77.7 5.3 (46.2)

Yearend share price (in pence) ?24 240 219 I89 l?3
Adiusted number of shares (in
millions) 396j22 608.400 621.600 646.000 649"200

Pagc ?8 CMA2TII