Miniscribe

Background:

Miniscribe was founded in the 1980s when the personal computer was on the rise. It had great potential during this period and large growth capacity. During the first years the company grew fast and furious. By 1983 it has outgrown its ability to remain private and needed the public investment to continue to grow its operations and gain greater equity. In 1983 the company went public for $11.50 a share. As soon as it went public, new entrants into the market and the decline in consumer demand for personal computers had caused the market to decline. Miniscribe was on the verge of going down with many other companies that could not make it through the economic slump. During 1985 an investment banker, Hambrecht and Quist, invested 20 million into the company helping turn the company’s fortunes around. The new chairman, Mr. Q.T. Wiles, brought in his own team and placed them in key positions to install new policies and procedures to get the company under his control. Mr. Wiles basically restructured the procedures of the company.

Management:

Mr. Wiles wanted to restructure the management of the company and how it handled financial reporting. He believed by breaking down the company into smaller more manageable segments it would increase the employees’ abilities to run their departments to meet goals he set. This is a reasonable assumption as long as the goals are attainable.

He gave incentives to meet goals by offering bonuses that could equal up to the employee’s salary. Incentives can be a great way to get employees motivated but it can also lead to employees altering financial information to attain goals. He increased reporting activities to weekly and monthly that helped management see where problems may be and correct them before they got out of control. This could be helpful but could also be excessive and employees have to dedicate much more time to reporting than to finding new alternative methods to production.

He also placed non-financial controllers in each department so that they could provide financial goals to employees and report information about these goals directly to him. Along with the controller the accounting department was separated from the day to day operations. This is an unusual way of implementing accounting policies and goals. Usually the accounting department is involved in day to day operations and trying to attain goals. These methods seemed to be a way of keeping accountants from discovering the methods the controllers and Mr. Wiles were using to report record numbers. Mr. Wiles did not keep anyone in any position too long also another method of keeping the employees in the dark.

Financial reporting was done through Mr. Wiles. He reported only positive information and when there was a discrepancy there was what seemed to be a logical reasoning. He released information that had no foundation such as the IBM contract that was not confirmed by IBM. A closer look at the financial statements presents several areas of concern.

Financial Statement Analysis:

The Balance Sheet

Many aspects seem out of proportion for the company on the balance sheet. The net receivables are increasing every year. Possibly bad debt is increasing and not being taken off the books. Showing higher receivables gives an impression that there is money coming in but when it is bad debt that increase can be misleading. Another possibility of receivables being high in 1988 is maybe the company is channel loading convincing customers to purchase excess products at year end.

Below in the Asset Utilization chart and the following ratios show a gradual decrease in all areas: Cash turnover, AR turnover, Inventory turnover, and PPE turnover.

Year Cash Turnover Accounts Receivable Turnover Inventory Turnover PPE Turnover Total Assets Turnover

1985 5.32 5.49 4.75 6.31 1.51

1986 5.89 5.15 2.92 1.74 0.42

1987 8.88 5.30 2.95 1.72 0.44

1988 7.83 3.39 2.41 1.39 0.33

The inventory has been steadily increasing until 1988 and then nearly triples. A technology company must be careful of having too much inventory since technology is upgrading quickly. Inventory becomes obsolete quickly thus having inventory that cannot be sold. Inventory could be overstated also if it has become impaired. Increase in property plant and equipment for a growing company is normal but for one that should be past it rapid growth it may not be a good idea. Inventory turnover is decreasing over time confirming inventory is becoming harder to sell or they are producing too much in a market that is not purchasing it quickly.

Property, Plant and Equipment in a growing firm is expected to be increasing. Property plant in equipment is increasing but the turnover or the rate at which the assets are being used are decreasing.

Accounts payable is increasing every year with a substantial growth in 1988 which may be due to a large amount of unpaid balances that will reduce assets. Accrued expenses increased dramatically in 1988. The long term debt was manageable in 1985 and 1986 but in 1987 quadruples. Being leveraged is good to some extent such as in 1985 and 1986 but in 1987 and 1988 it becomes being too leveraged.

In 1987 and 1988 the long term debt increased dramatically possibly due to increased loans to manage cash flows. See Capital Structure and Solvency graph and ratios below.

Total debt to equity Long-term debt to equity

1985 1.05 0.52

1986 1.06 0.36

1987 1.70 0.97

1988 2.15 0.69

The Income Statement

The Income Statement prior to 1984 and 1985 showed a Net loss for both years but in 1986 Miniscribe turned out a $22 million net income. A turn around such as that implies that Miniscribe took a big bath writing off as much as possible during the year. This is common in restructuring so the company can start with a clean slate and increase earnings for following years. In 1986 the SG&A expenses almost doubled possibly for the new management staff that was put into place. The Gross Profit