Thunderbird Case

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Synopsis and Situational Context (Please do not reveal the solution of the case.)
Anna Amphlett, a recent MBA hired by Southern Cross Investments LLC, had been asked to prepare a report on Liberator Medical Holdings, Inc.’s recent financial performance for an upcoming meeting in which Southern Cross would decide which companies it would acquire for its Service Sector Portfolio. Liberator was considered a good candidate for acquisition because the company was led by a management team that was experienced in selling products to senior citizens covered by Medicare, a segment that was expected to grow rapidly in the future. Liberator Medical pitched its products on late night television by asking listeners to call a toll-free number for free samples of its catheter products, and told listeners it would handle the paperwork for billing Medicare, the government funded insurance program for senior citizens. Hadenburd Khalmann, a financial advisory firm, recently established a price target of $1.50 per share. Amphlett was aware that some financial analysts were critical of the company’s accounting policy of capitalizing and amortizing direct response advertising expenditures to acquire new customers because it tended to inflate earnings. Southern Cross had realized significant losses when Pre-Paid Legal Services stock price dropped after the company revealed that its accounting for direct response marketing outlays were being investigated by the U.S. Securities & Exchange Commission.

Students are asked to consider several issues in the case. First, students are asked to explain how Liberator Medical makes money, to evaluate its business strategy for accomplishing this objective, and to evaluate how successful execution of this strategy is likely to be observable from the company’s financial performance. Second, students are asked to analyze the company’s cash flow situation, and recent financial performance, including its profitability, asset management, and leverage. Third, students are asked to consider the quantitative impact on the company’s financial statements of capitalizing and amortizing direct response advertising outlays. Students are also asked to evaluate whether Liberator Medical used accounting methods that were consistent with generally accepted accounting principles (GAAP). Finally, students are asked to consider the communication and disclosure issues the company faced in responding to analyst criticism of its method of accounting for direct response advertising. The case has been used successfully in MBA programs to cover corporate financial reporting issues, and in bank training programs focused on credit analysis and quality of earnings issues.


17 pages
Published Material—Quotations constitute bulk of case with introduction by author.