Case 1: Purchase Point Media Corporation (PPMC)

INTRODUCTION

This case is based on actual financial projections developed and provided by a publicly traded firm, Purchase Point Media Corporation (PPMC). Carefully examine the PPMC projections, which are presented in a sequence and format suitable for break-even calculation and analysis. After you calculate the break-even point, use additional, publicly available informa- tion to come to a decision with respect to market potential. The increase in the price per share of PPMC stock suggests that, over time, the market may have reacted to their results and analyses, using a comparable methodology.

OBJECTIVES

When you complete this case, you’ll be able to

• Identify discernable errors, irregularities, and impropri- eties in style and format within publicly reported data

• Meet financial statement presentation requirements for a specific “real world” example

• Determine whether financial information provided follows generally accepted accounting principles (GAAP) or is presented in “good form”

• Distinguish between the substance and form of financial statements

• Estimate variable and fixed costs for a publicly traded company

• Assess publicly disseminated information from publicly traded companies to determine the feasibility of market potential and market penetration

• Exercise enhanced critical-thinking skills

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CASE BACKGROUND

Purchase Point Media Corporation (Pink Sheets: PPMC) is what some refer to as a thinly traded “corporate shell.” The firm held patents in the United States, Canada, United Kingdom, and Germany for a shopping-cart display device, but was a nonreporting and nonoperating entity.

On March 18, 2002, PPMC reported its intention to sell these patents and related trademarks. The initial estimates sug- gested a stock price of nearly $2.50 per share, before related per-share deductions for sale-related broker’s commissions and legal fees. At the time of the news release, the firm’s stock was trading at $0.04 per share. In less than 60 days the stock was trading at more than $0.60 per share (Cataldo 2003, 55–60), for a 1,400 percent increase in price per share. (Note that investors and speculators alike would view this as a very risky investment, and the price per share for PPMC stock would be expected to fall short of or sell at a significant discount to the “anticipated” selling price for the firm’s intan- gible assets. See Arbel and Strebel 1982 and 1983; Arbel, Carvell and Strebel 1983; and Arbel 1985 for guidance on thinly traded or “neglected” firms.)

While this initial news release attracted speculators, causing the stock price to rise, after months without any additional news releases, the stock price drifted down again. On August 20, 2003, PPMC again announced its intention to sell the firm’s intangible assets (Business Wire 2003).

In the second announcement, PPMC management referred interested investors to their corporate Web site. Among the data provided, PPMC included a financial projection and other items they felt might be of interest to potential pur- chasers of the firm’s intangible assets (see Exhibit 1, Purchase Point Media Corp. statement, which follows).

To begin this case, review and comment on the “form” of the public disclosure circulated by PPMC. Then use the “substance” of this information to develop per-unit, sales- based contribution margins and break-even points for the first year of operations. Last, gather other publicly available information to determine the market feasibility of achieving its break-even point.

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SUPPLEMENTAL INFORMATION

Brand Name versus Generic Stocks

Graphs

Supplemental information is provided in Figures 1 and 2. Figure 1 illustrates the price per share for PPMC common stock for the time period August 20, 2003 through September 27, 2004. The latter date represents the specific event when PPMC filed their 10QSB. Figure 2 compares the PPMC price per share with comparable index measures, such as the Dow Jones Industrial Average, Standard and Poor’s 500, NASDAQ, and Russell 2000 indices, for the same period of time.

Brand Name Stocks Generic Stocks

Less information risk More information risk

Higher quality of information Lower quality of information

Large sample of consensus estimates

Small or no sample of consensus estimates

Monitoring service or fee No monitoring service or fee

Lower return Higher return

Higher price (premium) Lower price (discount)

Lower uncertainty Higher uncertainty

More consistency Less consistency

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FIGURE 1—The price per share for PPMC common stock, August 20, 2003 through September 27, 2004, when PPMC filed their 10QSB

FIGURE 2—Comparison of the PPMC price per share over comparable index measures, such as the Dow Jones Industrial Average, Standard and Poor’s 500, NASDAQ, and Russell 2000 indices, for the same time period

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References

Arbel, A. 1985. Generic Stocks: An old product in a new package. The Journal of Portfolio Management 68: 4–13.

Arbel, A., Carvell, S., and Strebel, P. 1983. Giraffes, Institutions and Neglected Firms. Financial Analysts Journal 39: 57–63.

Arbel, A., and Strebel, P. 1982. The Neglected and Small Firm Effects. The Financial Review: 201–18.

Arbel, A., and Strebel, P. 1983. Pay attention to neglected firms! The Journal of Portfolio Management 9: 37–42.

Business Wire. 2003. Purchase Point Media Corp.: Corporate Update (August 20).

Cataldo, A. Information Asymmetry: A Unifying Concept for Financial and Managerial Accounting Theories (including illustrative case studies). Studies in Managerial and Financial Accounting 13, 2003. Oxford, England: Elsevier Science (JAI). Series Editor: Marc Epstein.

PROJECT REQUIREMENTS

Substance versus Form and Critical Thinking

Step 1

In the infamous Enron bankruptcy case, the form of the financial statements prepared by the Enron Corporation and WorldCom was very professional; however, the substance was lacking, leading to audit and market failures and the eventual bankruptcy of both of these big-cap, or large- capitalization firms. PPMC represents a reverse case, in which the form of the data contained in the PPMC news release and corporate Web site was very poor.

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To begin, read the PPMC report, focusing on problems with the form of the report. There are many, including font changes that have been corrected for printing here. Prepare a typed, clearly communicated summary of all errors or weaknesses you find in the form of this report. There’s no magic number of errors that you must identify and different students will produce variations in their responses to this part of the assignment. Simply identify as many problems as you find, including spelling, punctuation, and usage errors. Although the PPMC report isn’t well-written, don’t attempt to correct or rewrite the report.

Here are a few examples of the kinds of errors you may find and how you’ll present them.

Summary of Errors in the Form of the PPMC Report

1. There are two sentence fragments, plus a spelling error, in the introductory paragraph, as follows:

Safe harbor statement under the private securities litigation act of 1995.

Changes in assumptions or changes in other factors effecting such statements.

2. The second sentence in the introductory para- graph refers to a “project” statement of net income (“This project statement of net income contains . . .”). It appears that the author of this report intended to refer to a “projected” statement of net income, although that’s not a conventional accounting term.

3. The third sentence in the introductory para- graph refers to “Corporate house,” in which the first word of what appears to be a firm’s name is capitalized and the second isn’t.

4. The last sentence in the introductory paragraph uses “risk” in the singular form when it requires the plural: “You should independently investi- gate and fully understand all risk before making investment decisions.”

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Next, reread the PPMC report, focusing on problems with the substance of the report. Identify the obvious errors or problems first by focusing on the addition or math errors. Prepare a typed, clearly communicated summary of all errors or weak- nesses you find in the substance of this PPMC report. A few examples follow:

Summary of Errors in the Substance of the PPMC Report

1. The report refers to a “Projected Statement of Net Income” having been prepared in “accor- dance with generally accepted accounting principles.” I have never heard of this financial statement or any such GAAP requirement.

2. Note 6 of the report contains an apparent math error in the table. Specifically, there appears to be a transposition error for the 3rd quarter in the “15% commissions” column. The $5,382,000 amount should be $5,832,000.

Sometimes an issue may appear to represent both form and substance problems. In these cases, identify the problems with the form of the PPMC report first. After completing this requirement, build on these results by identifying substance problems with the PPMC report. This methodological approach will save you time and make it easier for you to organize your thoughts as you progress through these requirements.

Step 2

Below is a recommend framework for the analysis and com- putation of the PPMC break-even point in terms of carts and stores (Table 1). The PPMC Note column refers to the notes in the PPMC source document. In fact, the PPMC notes appear to be organized by cost behavior. This is similar to the approach you used in your Managerial Accounting course. You should follow this approach or framework as you compute the PPMC break-even point in terms of carts and stores. Begin with rev- enues, follow with variable costs (VCs), develop the contribution margin (CM; in aggregate), followed by fixed costs (FCs), and, finally, compute PPMC’s net operating income (NOI) and break-even point in terms of both carts and stores.

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There’s some potential for variation in answers, but your conclusion should approximate a break-even point between 3,000 and 4,000 stores for the first year of operations.

Step 3

Now study Table 2, which presents a recommended framework for the analysis and computation of the amount of market share required to achieve break-even in stores for PPMC. The composition of the stores in the example will change over time. Using your own research skills and abilities, determine the number of grocery stores in the United States. For example, you could go to Yahoo!Finance to identify a stock for a publicly traded grocery retailer (e.g., KR for Kroger), then use the Yahoo!Finance feature that allows you to view stocks for competing firms in the same industry. Once you’ve done that, go to the Web site for each firm, where the vast majority list the number of retail outlets.

Table 1

PPMC First year

Note J F M A M J J A S O N D Annual

Stores

Multiply by 200 carts

Total Carts

Multiply by revenue per cart

Total revenues 1

Variable costs (VC)

Amortization (2 year S/L) 2

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Writing Guidelines Refer to the “Submitting Your Work” section at the end of this book for details on submission requirements for the PPMC Case assignment.

Table 2

Stock Ticker No. of Stores Firm Name

KR Kroger

ABS Albertson’s

Safeway

Ahold

SUPERVALU

Winn-Dixie Stores

Publix Super Markets

Great Atlantic & Pacific

Smart & Final

Ingles Markets

Blue Square-Israel

Pathmark

Ruddick

Whole Foods Market

Weis Markets

Marsh Supermarkets

Nash Finch

Fresh Brands

Wild Oats Markets

Spartan Stores

Eagle Food Centers

Gristede’s Foods

Village Super Market

Foodarama Supermarkets

Arden Group