Assignment: Purchase Point Media Corporation (PPMC) INTRODUCTION
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 information 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 improprieties 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
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 suggested 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 intangible 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 purchasers 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, salesbased 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.
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 weaknesses 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 "accordance 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 computation 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 revenues, 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.