Direct Response Advertising at Liberator Medical Holdings, Inc.

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.