Hidden weaknesses sank Mayflower

THE scale of the crisis at engineering group Mayflower - which called in the administrators last week - seems to have taken the market by surprise. But a closer look at the fine print in the company's accounts reveals ominous signs dating back several years.

Administrators from Deloitte & Touche were summoned to salvage what they could after the discovery of a £20m 'black hole' in the figures proved the final straw.

Mayflower was already in talks with bankers about renegotiating its debts after being hit by a huge investment programme and a slump in its core markets. The shares, 277p five years ago, were suspended at 6 3/4p.

Former Prime Minister John major, a non-executive at the group until last year, is among those embroiled in the affair.

The Financial Services Authority has launched an investigation into whether Mayflower disclosed information to the market in a timely fashion.

The group is only a medium-sized engineering firm. But the disaster there raises serious questions over the City's use of 'exceptional' and 'one-off' items to flatter annual results.

After three years of a brutal bear market, which is supposed to purge sloppy behaviour, these continue to be the norm.

Before counting 'exceptional' items, Mayflower, led by chief executive John Simpson, looked quite healthy until the end. Between 2000 and 2002, its headline profits totalled £105.7m. But after including all costs, that turned into a net loss of £3.2m.

As recently as the first half of 2003, Mayflower was reporting headline profits of £11.1m before such items - but that dwindled to a true profit of just £2.8m.

One broker notes that a sharp deterioration in Mayflower's underlying cash flow dating back three years was masked by perfectly legal financial engineering, including sale and leaseback deals and a £63m rights issue.

Overall these measures raised £101m. Yet over the three years its net debt barely fell, reducing from £211m to £196m.

'The cash position was being propped up by the sale of assets across the group,' he says. 'At the same time, the company had committed to massive capital spending. It was cash flow that got them.'

Directors, including Major, face awkward questioning over what they knew and when. It was widely noted that they failed to invest in the £63m emergency cash call in 2002 at 70p a share.

And although their shares and options are rendered worthless by the company's collapse, they have nonetheless collected £6.5m in pay over the past four years as the disaster developed.

That may not be much by City standards, but many will feel it is quite a lot for a company that made no profits overall.

Bosses in pensions clover

PENSIONS watchdogs are taking a keen interest in the running of Mayflower's troubled pensions schemes, writes Ruth Sunderland of the Daily Mail.

While workers face the prospect of their pension funds being wound up with a substantial shortfall, directors can still look forward to a gilt-edged retirement.

John Simpson, the ousted chief executive, has a £4.3m pension pot guaranteeing him £300,000 a year for life. He is aged 60 so he could draw a full pension immediately.

His former lieutenant David Donnelly, also 60, has built up a £114,000-a-year pension, while 55-year-old former executive John Fleming can look forward to £130,000 a year. Terence Whitmore, 58, a senior executive still with the company, is in line for £92,000.

Directors' pensions are believed to be safe because they are members of a separate scheme from workers so their nest eggs are protected.

More than 4,700 employees are members of the group's various pension schemes - four of them in the UK and four in the US.

If they are wound up, employees are likely to find their pension entitlements dramatically scaled back. The UK schemes, with assets of just £36m, are showing a deficit of £17.7m.

The National Association of Pension Funds says it is keeping 'a close eye' on the situation. The Occupational Pensions Regulatory Authority refuses to comment on whether it is planning to take action.

Administrators Deloitte & Touche were not immediately available for comment on the pension arrangements for directors.

Mayflower workers are unlikely to benefit from the Pensions Protection Fund, which is designed to act as a safety net. It is due to come into effect next year.