MBA-IT/0006/T.

2009 1

Title: Financial Statements Analysis of Two Companies

Industry/Sector: Computer Software

Student Name: Ireneus Kagashe

Student ID: MBA-IT/0006/T.2009

Module Name: Financial Statements Analysis for Managers

Module Code: IAA58BUS

Module Lecturer: Prof. Mohan Lal Arora

Due Date: 18th January 2010

MBA-IT/0006/T.2009 2

Abstract

This report intends to address module learning outcomes of Financial Analysis for Managers

module mapped to the evaluation of performance, financial position and cash flows of two

companies in the same industry, selection and application of appropriate financial analytical

tools for evaluation, recommendation on which company to invest and recommendation for

improvement to underperforming company.

The report will start by giving an introduction on what the report is all about followed by brief

background information of the two companies i.e. Company X and Y.

It will be followed by financial analysis of the two companies which involves selection and

application of appropriate financial analytical tool for evaluation.

Following that is the decision, as an investor, on which company to invest at and finally is the

recommendation to the management of the underperforming company for improvement.

MBA-IT/0006/T.2009 3

Contents

Abstract ........................................................................................................................................................ 2

1. Introduction ........................................................................................................................................... 4

2. Background ........................................................................................................................................... 4

2.1 Company X background ..................................................................................................................... 4

2.2 Company Y background ..................................................................................................................... 5

3. Financial analysis of companies ........................................................................................................... 5

3.1 Ratios Analysis ................................................................................................................................... 6

3.1.1 Liquidity ratios ............................................................................................................................. 6

3.1.2 Leverage ratios ............................................................................................................................. 9

3.1.3 Activity ratios............................................................................................................................. 12

3.1.4 Profitability ratios ...................................................................................................................... 15

3.1.5 Investment ratios ........................................................................................................................ 19

3.1.6 Cash flow ratios ......................................................................................................................... 22

4. Investment decision ............................................................................................................................ 24

5. Recommendations to management of underperforming company ..................................................... 25

6. Conclusion .......................................................................................................................................... 26

References ................................................................................................................................................... 27

Appendices.................................................................................................................................................. 28

Appendix A: Five years financial statements for Company X ............................................................... 28

Appendix B: Five years financial statements for Company Y ................................................................ 33

MBA-IT/0006/T.2009 4

1. Introduction
In assessing the performances of organizations belonging to the same industry/sector it is

misleading to perform direct comparison of figures such as profit or revenues. This is because

there are always differences in the organizations in terms of scale of operations and therefore you

cannot conclude that company A that has made a profit more than company B is performing

better than the other without considering other factors.

Using financial analytical tools, however, the problem of scale is eliminated and comparison can

be made between organizations in the same industry in terms of their performances.

This report through the use of financial analytical tools is going to evaluate performance,

financial position and cash flow of two organizations in the computer software industry namely

Company X and Company Y. Moreover it will recommend on which company to invest to and

why following the assessment and what measures the management of the underperforming

company should take to improve performance.

2. Background
2.1 Company X background

Company X is a dedicated security technology company that secures systems and networks from

known and unknown threats. It allows home users, businesses, government agencies, service

providers and its partners with the ability to block attacks, prevent disruptions, and continuously

track and improve their security and compliance. The Company operates its business in five

geographic regions: North America; Europe, Middle East and Africa (EMEA); Japan, Asia-

Pacific, excluding Japan; and Latin America. Its product lines are system security, network

security and vulnerability and risk management.

MBA-IT/0006/T.2009 5

2.2 Company Y background

Company Y provides security, storage and systems management solutions to help businesses and

consumers secure and manage their information. The Company conducts its business in three

geographic regions: Americas, which includes United States, Canada, and Latin America;

EMEA, which includes Europe, the Middle East and Africa, and Asia Pacific Japan (APJ). Its

delivery network includes direct, inside, and channel sales resources that support its ecosystem

of more than 40,000 partners, as well as various relationships with original equipment

manufacturers (OEMs), Internet service providers (ISPs), and retail and online stores. It provides

customers with software and services that protect, manage and control information risks related

to security, backup and recovery, storage, compliance, and systems management. The Company

operates primarily in three markets within the software sector: security, storage and systems

management.

3. Financial analysis of companies

There are several tools for analyzing performances of companies given their financial statements.

The tools are like trend analysis, common-size analysis, ratio analysis and industry analysis.

Trend analysis method analyzes statements for a number of years to study the trend as compared

to a base year. In common-size analysis a base for comparison in financial statements is provided

and components of the base are compared to find their contribution to the base. In ratios analysis,

ratios of various components of statements are calculated to analyze performances.

Since this assignment demands analysis and comparison of performances of two companies in

the same industry, the method that I will use is ratio analysis. This decision has been made

because trend analysis may not provide accurate results as the base year chosen for comparison
MBA-IT/0006/T.2009 6

could be a bad year. Common-size analysis has this weakness of not having benchmarks as to

how much the percentages of the items/components of the statements should be.

3.1 Ratios Analysis

Financial ratios provide quick and relatively simple means of assessing the financial health of a

business (Atrill, P and McLaney, E 2006). There are about five categories of ratios namely,

liquidity, leverage (gearing), activity (efficiency), profitability and investment. A small number

of ratios calculated, however, can help to build a good picture of the performance and position of

a business. For the context of this assignment ratios used are liquidity’s current ratios, leverage’s

debt-to-equity ratios, activity’s total assets turnover ratios, profitability’s return on net worth

ratios, investment’s price earnings ratios and cash flow’s cash flow per share ratios.

3.1.1 Liquidity ratios

These ratios measure the firm’s ability to meet its maturing short–term obligations.

- Current ratios

This ratio compares the assets of the business soon to be turned into cash with the current

liabilities i.e. the extent to which the claims from short term creditors are covered by

current assets.

Current Ratio = Current Assets

Current Liabilities
MBA-IT/0006/T.2009 7

Year 2004 2005 2006 2007 2008

Company X 3.14 3 2.72 2.94 2.6

Company Y 2.17 1.12 1.23 0.98 0.94

Benchmark 1.5 1.5 1.5 1.5 1.5

Table 3.1: Current ratios

Graph 3.1: Current ratios graph

Year 2004 2005 2006 2007 2008

X trend 100 95.54 86.62 93.63 82.8

Y trend 100 51.61 56.68 45.16 43.32

Table 3.2: Current ratios trend

MBA-IT/0006/T.2009 8

Graph 3.2: Current ratios trend

Company X Analysis

From the calculated ratios we see that in both years the ratios were higher than the

industry average of 1.5times. It should be noted that the higher the ratio the higher the

liquid the company is. In 2004 the ratio was 3.14 times, which is above the industry

benchmark of 1.5 times. In subsequent years the ratios have been decreasing but not

reaching the industry benchmark though. Despite the higher ratios being favourable,

sometimes they have negative implications as it might mean that funds are tied up in cash

or other liquid assets and are not, therefore, used as productively as they might otherwise

be. So the company should try to lower the level of current assets to match the

benchmark. In the trend analysis of ratios taking year 2004 as a baseline, we see that the

ratios are decreasing by small percentages from year 2005 onwards. This is a good sign

that the company is trying to lower ratios so as to match the industry benchmark.
MBA-IT/0006/T.2009 9

Company Y Analysis

In years 2005 and 2006 the ratios were below the industry benchmark which implies that

the company in those years was decreasing in liquidity. In years 2007 and 2008 the ratios

were 0.98 and 0.94 times which meant the company could not cover claims from short

term creditors using current assets. The trend of current ratios show that, taking year 2004

as baseline which is a good year as it was above industry average; the percentage in year

2005 dropped by to 51.62%, in 2006 dropped to 56.68% and continued to drop in the

subsequent years i.e. 2007 and 2008 below the percentages in year 2005 and 2006. This

means as years went by, the company became less liquid which is not a good sign and

management should strive to either increase the value of current assets or decrease the

current liabilities.

3.1.2 Leverage ratios

These ratios measure the extent to which the firm has been financed by debt.

- Debt to Equity ratios

This ratio shows what proportion of equity and debt (total liabilities) that the company is

using to finance its assets (Investopedia ULC 2010).

Debt to equity ratio = Total Debt

Total Equity
MBA-IT/0006/T.2009 10

Years 2004 2005 2006 2007 2008

Company X 0.87 0.84 0.96 0.78 0.97

Company Y 0.52 0.31 0.53 0.65 1.7

Benchmark 1.09 1.09 1.09 1.09 1.09

Table 3.3: Debt-to-equity ratios

Graph 3.3: Debt-to-equity ratios

Years 2004 2005 2006 2007 2008

Company X 100 96.55 110.34 89.66 111.49

Company Y 100 59.62 101.92 125 326.92

Table 3.4: Debt-to-equity ratios trend

MBA-IT/0006/T.2009 11

Graph 3.4: Debt-to-equity ratios trend

Company X

From the calculated ratios versus industry benchmark in all years the debt to equity ratio

values are lower than the industry benchmark. This means something good is happening

to this company as it is paying down its debts in a well good proportion as we know that

paying down debts saves the company from paying high interest rates meaning the

money that could have been used to pay interest rates would be used to pay higher

dividends. From the trend of ratios taking year 2004 as a base line, we see that in year

2005 the percentage dropped to 96.55% which implies in 2005 the Company X paid off

more debts in 2005. In 2006 however, the percentage was 110.34% which implies that

the company borrowed more than during the baseline year which is not a good sign. In

2007 the percentage was 89.66% in comparison with the base year which is a good sign.

In 2008 however the percentage shot to 111.49% which is not a good sign as it indicates

that the company was borrowing more than paying off debts.
MBA-IT/0006/T.2009 12

Company Y

From the ratios it is observed that in year 2004 the ratio was below the industry average

which is good. In 2005 the ratio was also down than the average and down than the ratio

of its previous year 2004 which meant company was paying off debts. In 2006 and 2007

the ratios rose a bit but still below the average which is the safe side. However in 2008

the ratio was higher than the industry average meaning the company was in a bad shape

as it was not paying off debts or it was borrowing more than paying off debts. The more

they borrow the ability to pay interest on the debts becomes uncertain.

The trend of ratios taking year 2004 as the baseline which was a good year, reveal that

the trend from year 2005 through year 2008 was increase in percentage. This is not a

good sign as the company was borrowing more that setting off its debts. Even though

borrowing sometimes is the cheaper way to fund the company than stock selling or using

retained profits, the management of company Y should try to minimize the borrowings as

some debts bear higher interests which is not good for the company.

3.1.3 Activity ratios

These ratios measure how effectively a firm is using its resources.

- Total assets turnover

This ratio takes into account total assets of the firm in relation to turnover. The higher the

ratio the better position the company is in.

Total assets turnover = Sales

Total Asset
MBA-IT/0006/T.2009 13

Year 2004 2005 2006 2007 2008

Company X 0.4 0.37 0.41 0.39 0.46

Company Y 0.46 0.23 0.29 0.32 0.58

Benchmark 0.8 0.8 0.8 0.8 0.8

Table 3.5: Total assets turnover ratios

Graph 3.5: Total assets turnover ratios

Year 2004 2005 2006 2007 2008

Company X 100 92.5 102.5 97.5 115

Company Y 100 50 63.04 69.57 126.09

Table 3.6: Total assets turnover trend

MBA-IT/0006/T.2009 14

Graph 3.6: Total assets turnover ratios trend

Company X

In the calculated ratios, in both years (2004 through 2008) the ratios were below the

industry benchmark. This means company X in all years was not generating enough

revenues in comparison with the industry average. The management of company X

should either increase turnover or some inefficient assets should be disposed off. Also

taking base year as 2004, the trend analysis of ratios don’t give enough information as

whether the company is trying to improve or what as the base year itself was a bad year

(below industry benchmark). This is because in 2005 the trend percentage dropped to

92.50%, in 2006 it rose to 102.50%, in 2007 it dropped again to 97.50 and in 2008 it rose

to 115%.

Company Y

In the calculated ratios, in both years (2004 through 2008) the ratios were below the

industry benchmark. This means company Y in all years was not generating enough
MBA-IT/0006/T.2009 15

revenues in comparison with the industry average. The management of company Y

should either increase turnover or some inefficient assets should be disposed off. Also

taking base year as 2004, the trend analysis of ratios for year 2005 shows the trend

percentage dropped to 50%, in 2006 it rose to 63.04%, in 2007 it was 69.57 and in 2008 it

rose to 126.09%. The trend shows that even though the ratios were below the average but

company Y was trying to improve the ratios as after the drop of 2005 the percentages

have been increasing and hopefully the ratios will match or surpass the benchmark.

3.1.4 Profitability ratios

These ratios measure management’s overall effectiveness as shown by the returns generated on

sales and investment.

- Return on net worth or return in equity (ROE)

The number tells shareholders how effectively a company and its management are using

their money as it measures how much a company earns on each dollar that investors in its

common stock have put into the company. The higher the ROE than the industry

benchmark the better the position the company is in.

Return on net worth = Net income after taxes x 100

Net worth

Year 2004 2005 2006 2007 2008

Company X 18.3 8.24 9.63 8.76 9.9

Company Y 14.46 11.49 3.49 4.23 -169.1

Benchmark 14.3 14.3 14.3 14.3 14.3

Table 3.7: Return on net worth ratios

MBA-IT/0006/T.2009 16

Graph 3.7: Return on net worth ratios

Year 2004 2005 2006 2007 2008

Company X 100 45.03 52.62 47.87 54.1

Company Y 100 79.46 24.14 29.25 -1169.4

Table 3.8: Return on net worth ratios trend

MBA-IT/0006/T.2009 17

Graph 3.8: Return on net worth ratios trend

Company X

We can see from the ROE ratios, in 2004 the ratio was 18.3 which was higher than the

benchmark which is a good sign that as a climbing return on equity inevitably leads to a

climbing stock price as investors realize that each shilling invested in the company is

earning more and more. In years 2005, 2006, 2007 and 2008 the ROE values were below

the industry benchmark which is not a good sign. This fall below benchmark could

indicate that the company’s customers weren’t willing to pay as much for the company’s

product or that the product is getting more expensive to produce. New competition could

be forcing the company to spend more on marketing and sales support

Trend of ratios taking year 2004 as baseline indicates a significant fall from 2004 to 2005

as the percentage in 2005 as compared to baseline was 45.03%. This is not a good sign as

the fall was more than 20%. This meant something wrong was cooking for a while and a
MBA-IT/0006/T.2009 18

company could not be able to see it. In 2006 the percentage was increased a bit as

compared to the previous year but not well enough as compared to the base year which

again is not a good sign. In 2007 the percentage dropped a bit as compared to its previous

year which is still not a good sign as it is way below the base year percentage. In 2008 the

percentage increased as compared to year 2007 but still the percentage was well below

the base year. This fall from 2005 to 2008 of return on equity inevitably should have led

to falling stock prices as investors should have realized that each shilling invested in the

company is earning less and less.

Company Y

We can see from the ROE ratios, in 2004 the ratio was 14.46 which was higher than the

benchmark which is a good. In years 2005, 2006, 2007 and 2008 the ROE values were

below the industry benchmark which is not a good sign. This fall below benchmark could

indicate that the company’s customers weren’t willing to pay as much for the company’s

product or that the product is getting more expensive to produce. New competition could

be forcing the company to spend more on marketing and sales support

Trend of ratios taking year 2004 as baseline indicates a significant fall from 2004 to 2005

as the percentage in 2005 as compared to baseline was 76.46%. This is not a good sign as

the fall was more than 20%. This meant something wrong was cooking for a while and a

company could not be able to see it. In 2006 and 2007 the percentages as compared to the

base year base year were 24.14% and 29.25% which again is not a good sign. In 2008 the

percentage fell to negative 1169.43 which is a worse case. This fall from 2005 to 2008 of
MBA-IT/0006/T.2009 19

return on equity inevitably should have led to falling stock prices as investors should

have realized that each shilling invested in the company is earning less and less.

3.1.5 Investment ratios

These ratios assess the returns and performance of shares held in a business from the perspective

of shareholders who are not involved with the management of the business

- Price earnings (P/E) ratio

This ratio is calculated by dividing market price per share with earnings per share and it

measures market confidence in the future of a business as it tells how many times a stock

is trading (its price) per each amount of earning per share (EPS).

Years 2004 2005 2006 2007 2008

Price earnings ratio (times) 19.47 8.84 9.5 9.35 8.04

Price earnings ratio (times) 4.74 11.11 27.97 19.5 5.96

Benchmark (times) 28.0 28.0 28.0 28.0 28.0

Table 3.9: Price earnings ratios

MBA-IT/0006/T.2009 20

Graph 3.9: Price earnings ratios

Year 2004 2005 2006 2007 2008

Company X 100 45.4 48.79 48.02 41.29

Company Y 100 234.39 590.08 411.39 125.74

Table 3.10: Price earnings ratios trend

MBA-IT/0006/T.2009 21

Graph 3.10: Price earnings ratios trend

Company X

From the calculated price earnings ratios, in 2004 we see that the ratio was 19.47 which is

below the industry benchmark of 28.0. This is not a good sign as it means the company’s

stock price fell disproportionately to its profits or its profits rose disproportionately to its

stock price. In years 2005, 2006, 2007 and 2008 the P/E ratios dropped significantly

below the industry benchmark which is also a very bad sign in terms of earnings power of

business.

Trend ratios calculated taking year 2004 as a baseline indicates that in year 2005 the

trend indicates a drop of about 54% compared to the base year. This should have alerted

investors who specialize in undervalued stocks because the trend has fallen by more than

25% compared to the base year. The case is the same for following years i.e. 2006, 2007
MBA-IT/0006/T.2009 22

and 2008 as the trend percentage has fallen by a large percentage (over (50%) which is

not good news for the company.

Company Y

In both years the P/E ratios were below the industry average. This is not a good sign as it

means the company’s stock price fell disproportionately to its profits or its profits rose

disproportionately to its stock price. From the calculated P/E ratios, in 2004 and 2005 we

see that the ratios were 4.74 times and 11.11 times which were below the industry

benchmark of 28.0 times indicating a bad sign. In year 2006 the ratio was 27.97 times,

which was approximately the same as the industry average signaling a good sign. In years

2007 and 2008 the ratios were below again the industry average which is also a very bad

sign in terms of earnings power of business.

Trend ratios calculated taking year 2004 as a baseline indicates that in year doesn’t have

much to offer in terms of analysis as year 2004 was a bad year in comparison with the

benchmark.

3.1.6 Cash flow ratios

These ratios act as good indicators of liquidity of a firm.

- Cash flow per share

This is a useful measure for the strength of a firm and the sustainability of its business

model

Cash flow per share = Cash flow from operating Activities – Pref. Dividend

Number of Equity share

MBA-IT/0006/T.2009 23

Year 2004 2005 2006 2007 2008

Company X ($) 2.21 2.5 1.82 2.45 2

Company Y ($) 1.7 1.48 1.85 2.17 2.04

Table 3.11: Cash flow per share ratios

Graph 3.11: Cash flow per share ratios

Year 2004 2005 2006 2007 2008

Company X 100 77.78 55.56 83.33 68.52

Company Y 100 84.15 94.54 114.75 109.84

Table 3.12: Cash flow per share ratios trend

MBA-IT/0006/T.2009 24

Graph 3.12: Cash flow per share ratios trend

Company X and Company Y analysis

Since there is no benchmark for this ratio, analysis of these two companies using cash

flow per share ratios will be based on comparison. It can be seen that from the calculated

ratios, on average for all years the cash flow per share values for Company X are higher

than those for Company Y. The higher the ratios the better position the company is. So

Company X is in a better position in that aspect as compared to Company Y.

4. Investment decision

An investor before deciding to invest at a certain business or company will be concerned with the

returns which are going to be obtained in relation to the risk associated with the investment. Thus

profitability, leverage and investment ratios will be used to determine on which company to

invest.
MBA-IT/0006/T.2009 25

From the profitability ratios i.e. return on net worth or return on equity (ROE), as shown in the

graph 3.7 and table 3.7 the ratios of Company X in general are higher than the ratios of Company

Y which means Company X is more profitable than Company Y.

From the leverage ratios calculated i.e. Debt-to-Equity ratios as shown in table 3.3 and graph 3.3,

it can be concluded that, on average for all years the Debt-to-Equity ratios for Company X are far

better than that for Company Y as the ratios for Company X are below the industry benchmark

which is a good sign.

From the investment ratios calculated i.e. price earnings ratios as depicted in table 3.9 and graph

3.9, on average in years 2004 through 2008, the cash flow per share ratios for Company X are

higher that for Company Y. this means Company X is stronger and sustainable businesswise as

compared to Company Y.

Therefore, from the comparison of profitability, leverage and investment ratios, I can conclude

that Company X is performing better than Company Y. So as an investor, from the above

conclusion, I would invest in Company X.

5. Recommendations to management of underperforming company

We have seen that Company Y is the underperforming company of the two. In order to improve

performance so at least to match Company X, the management of Company should work on the

following:

- The management of Company Y should try to minimize the total debts by paying them

off. Paying down debts is a good use of cash when the debt that’s being retired carries a

high interest rate. Instead money going out the door to pay banks in terms of interest, in

the future it will become earnings that should drive the stock price higher or pay higher

dividends.
MBA-IT/0006/T.2009 26

- The management of Company Y should thrive to increase the net income in order to

increase its net worth or return on equity. They should try to minimize unnecessary

selling, general and administrative expenses. Also unprofitable research and development

expenses should be cut off and unusual expenses should be avoided. With the above

suggested measures the net income of Company Y will increase and consequently will

increase the net worth and cash flow per share.

6. Conclusion

It is clear that, in assessing companies to see their performances it is requires the use of proper

financial tools for analysis rather than looking at absolute figures and concluding that one

company is performing better than the other. The use of financial ratios as a tool for analysis has

revealed that Company X is performing better than Company Y. This has come from the fact that

profitability, leverage and investment ratios of Company X performed better than those of

Company Y when compared. Even though ratios have led us in analyzing the performances of

the two companies and concluding the well performing company of the two, by themselves they

cannot explain why certain strengths and weaknesses exist, or why certain changes have

occurred. Only a detailed investigation will reveal these underlying reasons

MBA-IT/0006/T.2009 27

References

- Investopedia ULC (2010) Debt-Equity Ratio [online] available from

<http://www.investopedia.com/university/ratios.debtequity.asp> [11th January 2010]

- Atrill, P and McLaney, E (2006) Accounting and Finance for Non-Specialists. 5th Ed.

Essex: Pearson Education Limited

- Microsoft Corporation (2009) Advisor FYI Definitions [online] available from

<http://moneycentral.msn.com/investor/help/hfyiindx.asp> [7th January 2010]

- Microsoft Corporation (2009) Company Financial Statements [online] available from

<http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx> [5th January 2010]

MBA-IT/0006/T.2009 28

Appendices

Appendix A: Five years financial statements for Company X

Company X

Balance sheets as at 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Assets
Cash and Short Term Investments 524.08 1,044.89 605.35 732.93 510.75

Total Receivables, Net 146.38 159.13 170.86 232.06 322.99

Total Inventory 0 0 0 0 0
Prepaid Expenses 99.51 79.13 132.2 135 221.9
Other Current Assets, Total 200.46 283.19 268.23 280.19 349.15
Total Current Assets 970.43 1,566.34 1,176.63 1,380.17 1,404.79

Property/Plant/Equipment, Total – Net 91.72 85.69 92 94.67 114.44

Goodwill, Net 439.18 437.49 530.48 750.09 1,169.62
Intangibles, Net 107.13 80.09 113.57 220.13 315.8
Long Term Investments 400.6 212.13 634.82 585.87 82.97
Note Receivable - Long Term 0 0 0 0 0
Other Long Term Assets, Total 237.48 254.5 252.77 355.6 370.27
Other Assets, Total 0 0 0 0 0
Total Assets 2,246.53 2,636.23 2,800.27 3,386.52 3,457.88

Liabilities and Shareholders' Equity

Accounts Payable 32.89 34.68 35.65 45.86 41.53
Payable/Accrued 0 0 0 0 0
Accrued Expenses 135.45 191.24 171.33 250.61 277.33
Notes Payable/Short Term Debt 0 0 0 0 0
Current Port. of LT Debt/Capital 0 0 0 0 0
Leases
Other Current Liabilities, Total 546.4 652.41 823.4 853.55 1,009.77
Total Current Liabilities 714.74 878.32 1,030.38 1,150.02 1,328.63

Total Long Term Debt 0 0 0 0 0

Deferred Income Tax 204.8 147.13 149.92 0 0
MBA-IT/0006/T.2009 29

Minority Interest 0 0 0 0 0
Other Liabilities, Total 125.75 176.14 192.72 331.18 376.77
Total Liabilities 1,045.28 1,201.59 1,373.02 1,481.20 1,705.39

Redeemable Preferred Stock 0 0 0 0 0

Preferred Stock - Non Redeemable, 0 0 0 0 0
Net
Common Stock 1.62 1.71 1.73 1.73 1.81
Additional Paid-In Capital 1,178.86 1,443.74 1,527.84 1,810.29 2,053.25
Retained Earnings (Accumulated -4.81 31.81 169.28 364.08 536.28
Deficit)
Treasury Stock – Common 0 -68.4 -303.07 -303.27 -819.86
Other Equity, Total 25.58 25.78 31.47 32.5 -18.99
Total Equity 1,201.25 1,434.64 1,427.25 1,905.33 1,752.49

Total Liabilities & Shareholders’ 2,246.53 2,636.23 2,800.27 3,386.52 3,457.88

Equity

Total Common Shares Outstanding 162.27 167.69 159.92 160.55 153.53

Total Preferred Shares Outstanding 0 0 0 0 0

Company X

Income Statements for years ended 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Revenue 907.57 981.63 1,145.16 1,308.22 1,600.07
Total Revenue 907.57 981.63 1,145.16 1,308.22 1,600.07

Cost of Revenue, Total 153.91 170.04 246.84 305.74 383.53

Gross Profit 753.66 811.59 898.32 1,002.48 1,216.54

Selling/General/Administrative 498.11 423.58 536.15 566.02 709.23

Expenses, Total
Research & Development 174.87 176.41 193.45 213 250.91
Depreciation/Amortization 14.24 12.83 10.68 13.58 26.47
Interest Expense (Income), Net 0 0 0 0 0
Operating
Unusual Expense (Income) -218.82 57.36 19.01 50.06 58.89
Other Operating Expenses, Total -24.99 0 0 0 0
Operating Income 310.25 141.41 139.03 159.81 171.04
MBA-IT/0006/T.2009 30

Interest Income (Expense), Net Non- 14.65 26.7 0 0 0

Operating
Gain (Loss) on Sale of Assets 0 0 0 0 0
Other, Net -20.39 0 0 0 0
Income Before Tax 302.81 166.68 183.78 229.2 222.21

Income Tax – Total 82.8 48.46 46.31 62.22 50

Income After Tax 220.02 118.22 137.47 166.98 172.21

Minority Interest 0 0 0 0 0
Equity In Affiliates 0 0 0 0 0
U.S. GAAP Adjustment 0 0 0 0 0
Net Income Before Extra. Items 220.02 118.22 137.47 166.98 172.21

Total Extraordinary Items 0 0 0 0 0

Net Income 220.02 118.22 137.47 166.98 172.21

Total Adjustments to Net Income 0 0 0 0 0

Preferred Dividends 0 0 0 0 0
General Partners' Distributions 0 0 0 0 0

Basic Weighted Average Shares 160.51 165.04 160.95 159.82 156.21

Basic EPS Excluding Extraordinary 1.37 0.72 0.85 1.04 1.1
Items
Basic EPS Including Extraordinary 1.37 0.72 0.85 1.04 1.1
Items

Diluted Weighted Average Shares 177.39 169.25 163.05 164.13 159.41

Diluted EPS Excluding Extraordinary 1.24 0.7 0.84 1.02 1.08
Items
Diluted EPS Including Extraordinary 1.24 0.7 0.84 1.02 1.08
Items

Dividends per Share - Common Stock 0 0 0 0 0

Primary Issue
Gross Dividends - Common Stock 0 0 0 0 0
Depreciation, Supplemental 39.21 36.4 35.88 35.55 40.61

Normalized EBITDA 159.77 265.77 228.31 294.3 353.83

Normalized EBIT 91.43 198.77 158.04 209.87 229.93
Normalized Income Before Tax 83.99 224.04 202.79 279.26 281.1
Normalized Income After Taxes 61.03 160.07 151.81 203.45 222.24
Normalized Income Available to 61.03 160.07 151.81 203.45 222.24
Common

Basic Normalized EPS 0.38 0.97 0.94 1.27 1.42

Diluted Normalized EPS 0.34 0.95 0.93 1.24 1.39
MBA-IT/0006/T.2009 31

Amortization of Intangibles 29.12 30.6 34.39 48.87 83.28

Company X

Cash flow statements for the years ended 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Net Income/Starting Line 220.02 118.22 137.47 166.98 172.21
Depreciation/Depletion 68.34 67 70.27 84.43 123.89
Amortization 0 0 0 0 0
Deferred Taxes -24.84 -6.54 -34.98 0.15 -10.72
Non-Cash Items -126.21 38.68 43.97 64.74 84.05
Unusual Items -227.6 2.06 0.46 4.97 11.06
Purchased R&D 0 4 0.46 0 19.5
Other Non-Cash Items 101.38 32.62 43.04 59.77 53.49
Changes in Working Capital 221.61 202.11 73.76 77.11 -61.11
Accounts Receivable 33.93 -23.2 -2.1 -33.3 -68.21
Prepaid Expenses -8.3 -9.47 -55.41 -22.8 -77.3
Accounts Payable -1.32 3.54 -0.53 6.77 -7.78
Accrued Expenses 30.57 43.23 21.66 35.56 -33.49
Other Liabilities 166.73 188.02 110.14 90.88 129.36
Other Operating Cash Flow 0 0 0 0 -3.69
Cash from Operating Activities 358.91 419.46 290.49 393.42 308.32

Capital Expenditures -25.37 -28.94 -43.75 -42.87 -48.75

Purchase of Fixed Assets -25.37 -28.94 -43.75 -33.57 -48.75
Purchase/Acquisition of Intangibles 0 0 0 -9.3 0
Other Investing Cash Flow Items, -14 33.54 -408.59 -393.9 248.97
Total
Acquisition of Business -84.65 -20.2 -146.09 -333.38 -550.65
Sale of Fixed Assets 261.31 1.5 0 4.11 0
Sale/Maturity of Investment 1,033.40 896.14 1,002.92 862.25 1,053.69
Purchase of Investments - -793.58 - -927.26 -252.03
1,243.99 1,315.41
Other Investing Cash Flow 19.93 -50.32 49.99 0.38 -2.04
Cash from Investing Activities -39.37 4.6 -452.34 -436.77 200.23

Financing Cash Flow Items 3.78 0 4.96 1.09 14.64

Other Financing Cash Flow 3.78 0 4.96 1.09 14.64
Total Cash Dividends Paid 0 0 0 0 0
Issuance (Retirement) of Stock, Net -108.02 39.84 -202.67 9.6 -386.6
Issuance (Retirement) of Debt, Net -265.62 0 0 0 0
Cash from Financing Activities -369.87 39.84 -197.71 10.69 -371.96
MBA-IT/0006/T.2009 32

Foreign Exchange Effects 7.83 -26.46 20.6 37.2 -47.44

Net Change in Cash -42.5 437.44 -338.97 4.53 89.14

Net Cash - Beginning Balance 333.65 291.16 728.59 389.63 394.16

Net Cash - Ending Balance 291.16 728.59 389.63 394.16 483.3
MBA-IT/0006/T.2009 33

Appendix B: Five years financial statements for Company Y

Company Y

Balance sheets as at 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Assets
Cash and Short Term Investments 3,206.59 2,865.80 2,968.17 2,426.95 1,991.17
Cash & Equivalents
Short Term Investments
Total Receivables, Net 285.33 670.94 666.97 758.2 837.01
Accounts Receivable - Trade, Net
Accounts Receivable - Trade, Gross
Provision for Doubtful Accounts
Receivables – Other
Total Inventory 19.12 48.69 42.18 34.14 26.93
Prepaid Expenses 0 0 0 0 0
Other Current Assets, Total 177.25 322.51 393.73 510.63 445.03
Total Current Assets 3,688.28 3,907.93 4,071.05 3,729.92 3,300.14

Property/Plant/Equipment, Total - Net 382.69 946.22 1,092.24 1,001.75 973.27

Goodwill, Net 1,365.21 10,331.05 10,340.35 11,207.36 4,560.62
Intangibles, Net 158.36 2,679.38 2,155.52 1,892.47 1,638.68
Long Term Investments 0 48.61 0 150 96.94
Note Receivable - Long Term 0 0 0 0 0
Other Long Term Assets, Total 19.68 0 91.72 110.6 75.47
Other Assets, Total 0 0 0 0 0
Total Assets 5,614.22 17,913.18 17,750.87 18,092.09 10,645.13

Liabilities and Shareholders' Equity

Accounts Payable 74.69 167.14 149.13 169.63 190.3
Payable/Accrued 0 0 0 0 0
Accrued Expenses 231.58 463.05 307.82 431.35 374.47
Notes Payable/Short Term Debt 0 512.8 0 200 0
Current Port. of LT Debt/Capital Leases 0 0 0 0 0
Other Current Liabilities, Total 1,394.76 2,334.58 2,861.13 2,998.61 2,949.60
Total Current Liabilities 1,701.02 3,477.57 3,318.09 3,799.59 3,514.37

Total Long Term Debt 0 0 2,100.00 2,100.00 2,100.00

Long Term Debt 0 0 2,100.00 2,100.00 2,100.00
Deferred Income Tax 88.61 493.96 343.85 219.34 51.88
Minority Interest 0 0 0 0 0
MBA-IT/0006/T.2009 34

Other Liabilities, Total 119.13 273.19 387.42 999.98 1,030.90

Total Liabilities 1,908.77 4,244.71 6,149.36 7,118.91 6,697.14

Redeemable Preferred Stock 0 0 0 0 0

Preferred Stock - Non Redeemable, Net 0 0 0 0 0
Common Stock 7.11 10.41 8.99 8.39 8.17
Additional Paid-In Capital 2,412.95 12,426.69 10,061.14 9,139.08 8,941.07
Retained Earnings (Accumulated 1,114.53 1,128.16 1,348.44 1,665.91 -5,186.84
Deficit)
Other Equity, Total 170.87 103.22 182.93 159.79 185.59
Total Equity 3,705.45 13,668.47 11,601.51 10,973.18 3,947.99

Total Liabilities & Shareholders’ 5,614.22 17,913.18 17,750.87 18,092.09 10,645.13

Equity

Total Common Shares Outstanding 710.52 1,040.89 899.42 839.39 816.98

Total Preferred Shares Outstanding 0 0 0 0 0

Company Y

Income statements as at 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Revenue 2,582.85 4,143.39 5,199.37 5,874.42 6,149.85
Total Revenue 2,582.85 4,143.39 5,199.37 5,874.42 6,149.85

Cost of Revenue, Total 452.11 981.87 1,215.83 1,220.33 1,226.93

Gross Profit 2,130.74 3,161.52 3,983.54 4,654.09 4,922.93

Selling/General/Administrative Expenses, 961.89 1,728.47 2,324.43 2,762.91 2,728.79

Total
Research & Development 334.05 682.13 866.88 894.04 879.7
Depreciation/Amortization 5.42 148.82 201.5 225.13 233.46
Interest Expense (Income), Net Operating 0 0 0 0 0
Unusual Expense (Income) 10.13 328.14 70.98 111.23 7,554.54
Other Operating Expenses, Total 0 0 0 0 0
Operating Income 819.27 273.97 519.74 660.78 -6,473.57

Interest Income (Expense), Net Non- 0 0 0 0 0

Operating
Gain (Loss) on Sale of Assets 0 0 0 0 0
Other, Net 0.99 -1.65 17.07 4.33 12.04
Income Before Tax 858.13 362.72 631.62 712.52 -6,454.18
MBA-IT/0006/T.2009 35

Income Tax - Total 321.97 205.87 227.24 248.67 221.63

Income After Tax 536.16 156.85 404.38 463.85 -6,675.81

Minority Interest 0 0 0 0 0
Equity In Affiliates 0 0 0 0 -53.06
U.S. GAAP Adjustment 0 0 0 0 0
Net Income Before Extra. Items 536.16 156.85 404.38 463.85 -6,728.87

Total Extraordinary Items 0 0 0 0 0

Net Income 536.16 156.85 404.38 463.85 -6,728.87

Total Adjustments to Net Income 0 0 0 0 0

Preferred Dividends 0 0 0 0 0
General Partners' Distributions 0 0 0 0 0

Basic Weighted Average Shares 660.63 998.73 960.58 867.56 830.98

Basic EPS Excluding Extraordinary Items 0.81 0.16 0.42 0.53 -8.1
Basic EPS Including Extraordinary Items 0.81 0.16 0.42 0.53 -8.1

Diluted Weighted Average Shares 738.25 1,025.86 983.26 884.14 830.98

Diluted EPS Excluding Extraordinary 0.74 0.15 0.41 0.52 -8.1
Items
Diluted EPS Including Extraordinary 0.74 0.15 0.41 0.52 -8.1
Items

Dividends per Share - Common Stock 0 0 0 0 0

Primary Issue
Gross Dividends - Common Stock 0 0 0 0 0
Interest Expense, Supplemental 12.32 18 27.23 29.48 29.71
Depreciation, Supplemental 90.84 176.7 267.61 250.11 251.36

Normalized EBITDA 956.83 1,241.93 1,402.17 1,596.12 1,918.33

Normalized EBIT 829.39 602.11 590.72 772.01 1,080.97
Normalized Income Before Tax 868.25 690.87 702.6 823.75 1,100.36
Normalized Income After Taxes 543.79 460.57 449.82 536.26 -1,765.36
Normalized Income Available to Common 543.79 460.57 449.82 536.26 -1,818.42

Basic Normalized EPS 0.82 0.46 0.47 0.62 -2.19

Diluted Normalized EPS 0.75 0.45 0.46 0.61 -2.19
Amortization of Intangibles 36.6 463.11 543.84 574 586
MBA-IT/0006/T.2009 36

Company Y

Cash flow statements as at 31st December

(Figures in millions USD)

2004 2005 2006 2007 2008

Net Income/Starting Line 536.16 156.85 404.38 463.85 -6,728.87

Depreciation/Depletion 90.84 639.82 811.44 824.11 837.36
Amortization 57.4 0 0 0 0
Deferred Taxes 60.86 -202.68 11.17 -180.22 -89.22
Non-Cash Items 100.97 418.04 155.28 207.26 7,685.35
Unusual Items 3.75 285.1 -19.94 40.16 7,471.23
Purchased R&D 3.48 0 0 0 0
Equity in Net Earnings (Loss) 0.7 4.27 2.84 1 53.06
Other Non-Cash Items 93.05 128.67 172.37 166.09 161.05
Changes in Working Capital 361.23 524.87 283.96 503.65 -34.01
Accounts Receivable -3.64 -87.43 33.71 -7 -84.96
Inventories -3.62 -29.83 10.32 10.79 5.81
Other Assets -23.92 -18.47 -23.33 81.12 66.32
Accounts Payable -0.96 40.17 -25.62 0.67 -48.99
Accrued Expenses 20.67 -22.23 23.17 97.13 -55.09
Taxes Payable 55.53 -26 -181.93 196.57 -28.7
Other Liabilities 317.18 668.66 447.64 124.38 111.6
Cash from Operating Activities 1,207.46 1,536.90 1,666.24 1,818.65 1,670.60

Capital Expenditures -92.34 -274.42 -433.05 -273.81 -272.24

Purchase of Fixed Assets -91.54 -267.22 -419.75 -273.81 -272.24
Purchase/Acquisition of Intangibles -0.8 -7.2 -13.3 0 0
Other Investing Cash Flow Items, Total -570.82 3,894.03 210.59 -1,252.41 -689.7
Acquisition of Business -424.21 541.6 -33.37 -1,162.46 -1,063.37
Sale of Fixed Assets 0 0 121.46 104.72 39.71
Sale/Maturity of Investment 3,713.82 5,085.04 349.41 1,189.28 685
Investment, Net -3.6 -2.69 0 0 -2
Purchase of Investments -3,856.83 -1,729.92 -226.91 -1,383.95 -349.04
Cash from Investing Activities -663.16 3,619.61 -222.46 -1,526.22 -961.94

Financing Cash Flow Items 0 0 351.64 22.01 2.27

Other Financing Cash Flow 0 0 351.64 22.01 2.27
Total Cash Dividends Paid 0 0 0 0 0
Issuance (Retirement) of Stock, Net -31.99 -3,418.60 - -1,275.84 -470.75
2,616.02
Issuance (Retirement) of Debt, Net 0 -491.46 954.81 188.28 -207.63
Cash from Financing Activities -31.99 -3,910.06 - -1,065.55 -676.11
1,309.57
MBA-IT/0006/T.2009 37

Foreign Exchange Effects 18.26 -22.25 109.2 104.31 -130.28

Net Change in Cash 530.57 1,224.19 243.41 -668.81 -97.72

Net Cash - Beginning Balance 560.86 1,091.43 2,315.62 2,559.03 1,890.23

Net Cash - Ending Balance 1,091.43 2,315.62 2,559.03 1,890.23 1,792.50