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The Wilson Corporation.* * This case was prepared by Kyle V. Maryanski, PricewaterhouseCoopers. Company Background Wilson Corporation (hereinafter referred to as the Company) is a
The Wilson Corporation.*
* This case was prepared by Kyle V. Maryanski, PricewaterhouseCoopers.
Company Background
Wilson Corporation (hereinafter referred to as the Company) is a Delaware corporation, which was organized and commenced business operations in 1995. The Company is a public company traded on the New York Stock Exchange since its initial public offering in 1997.
The Companys primary business is the manufacture and distribution of the Wilsons Antacid and Wilsons Diet Aid products to the consumer through the over-the-counter marketplace. Wilsons Antacid is a magnesium-based antacid lozenge proven to reduce the duration and severity of ulcer and heartburn symptoms by nearly half. Wilsons Antacid is an established product in the health care and antacid market. Wilsons Diet Aid is a dietary supplement and weight management program competing in the nutrition and weight management marketplace.
Since its inception, the Company has conducted research and development into various types of health-related food supplements and homeopathic remedies for ulcer and heartburn symptoms. Prior to the year ended December 31, 1999, the Company had minimal revenues from operations and as a result suffered continuing losses due to research and development and operations expenses. However, the Companys product line has been developed, and during the year ended December 31, 2000, significant revenues materialized from its national marketing program and increased public awareness of its Wilsons Antacid lozenge product. 
Since 1999, the Company has concentrated its business operations exclusively on the manufacturing, marketing, and development of its proprietary Wilsons Antacid products and on development of various product extensions. The Companys products are based upon a proprietary magnesium formula, which has been shown to reduce the duration and severity of ulcer and heartburn symptoms. Wilson Corporation acquired worldwide manufacturing and distribution rights to this formulation in 1997 and commenced national marketing in 1999. The product is patented in the United States, United Kingdom, Sweden, France, Italy, Canada, and Germany. During 2001, Wilsons Diet Aid, a new product line, was launched in the nutrition and weight management program industry.
Currently, Wilsons Antacid is sold exclusively in lozenge form. The Company intends to market this product in liquid form in the future. This product is presently being marketed by the Company and also through independent brokers and marketers.
The business of the Company is subject to federal and state laws and regulations adopted for the health and safety of users of the Companys products. The Wilsons Antacid product is a homeopathic remedy, which is subject to regulation by various federal, state, and local agencies, including the FDA and the Homeopathic Pharmacopoeia of the United States. These regulatory authorities have broad powers, and the Company is subject to regulatory and legislative changes that can affect the economics of the industry by requiring changes in operating practices or by influencing the demand for, and the costs of, providing its products.
The Company competes with other suppliers of antacid products. These suppliers range widely in size. Some of the Companys competitors (which include SmithKline Beecham, Pfizer, Warner-Lambert, and Glaxo-Wellcome) have significantly greater financial, technical, or marketing resources than the Company. Management believes that its Wilsons Antacid product offers a significant advantage over many of its competitors in the over-the-counter antacid market. Wilsons Diet Aid has the same competition challenges to gain acceptance by the consumer. The uniqueness of this product along with the Wilsons Antacid product will be marketed with proven advantages over their respective competition. The Company believes that its ability to compete depends on a number of factors, including price, product quality, availability and reliability, credit terms, name recognition, delivery time, and post-sale service and support. The Company has had significant success in this highly competitive industry in its short history. The Company has begun to experience some price competition. Its product is high priced by comparison to competitors, based on the fact that it is the only product clinically proven to reduce the duration and severity of ulcer and heartburn symptoms by 50 percent.
The Companys management philosophy and operating style can best be described as entrepreneurial. While the Company has experienced extremely rapid growth in sales and profits in the past two years, its management philosophy and operating style has not changed. The CEO is still active in the day-to-day operations of the business and several relatives and close longtime friends of the CEO are employed by the Company or are used as outside consultants. The CEO makes all business decisions, with little influence from the executive management team. The Companys board of directors is dominated by the executive management team (four of the six members are executives of the Company. The Companys two outside board members are a former attorney of the Company and the CEO of a vendor of the Company (which relies on the Company for a large percentage of its business). The Company maintains an audit committee comprised of the CFO of the Company and the two outside directors. They meet annually with the outside auditors to discuss the results of the annual financial statement audit. There is no internal audit function.
During its formative years, the Company lacked financial resources and entered into several agreements for services with outside providers. Many of the contracts were not formalized or endorsed. Also, management frequently issued shares of its stock or stock options in exchange for services. Since its success commencing in 2000, the Company has been subject to numerous lawsuits alleging breach of contract and other allegations related to many agreements the Company made with previous contractors, consultants, and employees. The Company still enters into numerous contracts with suppliers, customers, employees, and consultants that are not properly endorsed.
During 2001, the Company continued to apply its resources to the manufacture and marketing of the patented Wilsons Antacid lozenge. In the preceding year, Wilsons Antacid established itself as the dominant remedy available to counteract the effects of ulcer and heartburn symptoms. The uniqueness of the product was established following the publication of a second double-blind study in 1999, showing that Wilsons Antacid significantly reduced both the duration and severity of ulcer and heartburn symptoms. Continued advertising and promotional activity during 2001 has increased the public awareness of the product, along with various independent television programs highlighting the products desirability as an antacid. During the second half of 2001, the Company commenced selling the product internationally with sales to Canada and Mexico. Late in the fourth quarter, the Company launched the all-natural nutrition and weight management program called Wilsons Diet Aid.
Most of the Companys employees are shareholders of the Company. All salaried employees participate in a stock option program. All hourly and salaried employees participate in a defined contribution plan 401(k). All members of management and many relatives and close friends of the CEO are significant stock and stock option holders. Additionally, many vendors and outside consultants are shareholders through a variety of service contracts paid with stock or stock options. Management and the employees are also recipients of annual bonuses based on the Companys performance. The Companys management, its employees, and outside service providers are consistently focused on the Companys short-term earnings and stock price and many decisions are made with this short-term focus.
The Company continues to use the resources of independent national and international brokers to represent the Wilsons Antacid and Wilsons Diet Aid products, thereby saving capital and other ongoing expenditures that would otherwise be incurred. The Companys advertising and compensation costs have increased rapidly over the past two years as the rapid growth of the Company has occurred.
The year 2000 saw Wilsons Antacid become a formidable force in the marketplace as a unique remedy to reduce the severity and duration of ulcer and heartburn symptoms. This resulted from the release of the results of The Johns Hopkins Study in 1999, a national marketing program that commenced in the fourth quarter of 1999, and national exposure in the media, such as the ABCs Nightline network national news program and Dateline on NBC in early 2000. Sales in the transition quarter ended December 31, 1999 were substantial, thereby commencing the current trend of Wilsons Antacid being a major player in the antacid market. The Company had significant working capital at December 31, 2001 and 2000. The Company has no long-term debt. However, in the event of the Company expanding significantly in the near future, the Company has an available line of credit of approximately $10 million.
Selected Financial Data
(Amounts in thousands) except per share data)
Year Ended
December 31, 2001
Year Ended
December 31, 2000
Year Ended
December 31, 1999
Statement of Income Data:
Net Sales
$70,173
$36,354
$1,050
Gross Profit
48,745
25,477
766
Net Income (loss)
20,967
6,809
(694)
Basic earnings per
common share
$1.72
$0.51
($0.08)
Diluted earnings per common share
$1.43
$0.46
($0.08)
Weighted average common
shares outstanding:
Basic
12,181
13,335
8,131
Diluted
14,634
14,944
8,131
As of December 31, 2001
As of December 31, 2000
As of December 31, 1999
Balance Sheet Data:
Working capital
$41,141
$43,024
$911
Total assets
49,847
48,611
1,368
Stockholders equity
41,748
44,607
1,243
Company Structure
Management and Employees
Stephen Wilson formed the Company. He actively participates in the day-to-day operations of the Company as CEO, president, and chairman of the board. The COO, David Jamison, and CIO, Daniel Mason, have been with the Company since its inception in 1995. They have been affiliated with Stephen Wilson for a number of years, through a series of business ventures. The CFO, Jack Gavin, joined the Company subsequent to the IPO in 1994. Several family members of the CEO are active employees of the Company. The Company has 112 employees. Their functions are as follows:
CEO, president, and chairman of the board: background in sales and marketing
COO: background in sales and marketing
CFO: CPA and experienced in accounting and finance
CIO: self-educated in IT, not much experience outside of current Company
R&D director (a medical doctor with research experience), a manager of financial reporting (limited experience in US accounting), an accounting manager of accounts payable (no accounting background and wife of CEO), a sales administrative assistant (directly assisting the COO), three accounting staff (responsible for the general ledger, revenue cycle and payroll cycle [daughter of the CEO], respectively) and an administrative employee
Manufacturing division: a plant manager, a plant accountant (responsible for the inventory cycle), 2 plant administrative assistants, 6 maintenance workers and 50 laborers. Production is done in two shifts.
Sales division: 40 salespersons covering the entire United States and CanadaInformation Systems
The Companys information systems are a combination of manual processes and processes using internally developed software for operating, manufacturing, and human resource functions, as well as the financial accounting system, MAS 90, for general ledger, accounts payable, accounts receivable, inventory, and other accounting functions. The internally developed software has limited capability in accumulating and tracking customer information, reporting, and other functions. It was created for specific purposes when the Company was in formation and the Companys transactional volume has exceeded the capabilities of the internally developed software. The Company has experienced some difficulty in obtaining useful information for management operating decisions. The Company maintains an information system at the manufacturing plant independent of the Companys other information systems. There is no automated interaction between these two information systems. There is no restriction on access to either of these information systems. MAS 90 is a basic accounting package used by many small companies in the formative stages. While it is serviceable for maintaining a general ledger, accounts receivable and payable transactions, and other core accounting functions, it is limited in its ability to provide useful financial information essential for the Companys current and future size. Access to key financial information is not password restricted. The Company has several personal computers and backs up information on a monthly basis.
Operating Environment and Processes
Sales
The Company has a sales staff of 40 individuals, who report directly to the COO. Their compensation is based primarily on commission. Contracts are negotiated by the COO and approved by the CEO. Frequently, the sales and commission agreements with the salespersons are oral or informal. The Company has commenced direct sales to customers via the Internet. They currently do not account for a material percentage of the Companys sales.
The Companys clinically proven product, positive media coverage, and pleasant taste have afforded the Company some degree of product differentiation during the past two years. This has enabled them to maintain a very lucrative sales price.
Sales are generated through a customers sales order. A sales order is requested by the salesperson for a specific customer and submitted to the staff accountant of the Company responsible for sales, billing, and collection accounting (the revenue cycle). The sales order contains the sales price, quantity, and expected delivery date and collection terms. This information is provided by the salesperson and is supposed to agree to contracts with the customers. Frequently, salespeople change terms at the request of the customer. A staff accountant then enters the customer sales order into the internally developed customer database. The staff accountant reviews the credit terms for the customer. No periodic review of open customer sales orders is performed. The same staff accountant then prepares a sales order, which is sent to the Companys manufacturing plant accountant and the salesperson. The staff accountant (responsible for the revenue cycle) retains a copy of the sales order. The plant accountant then determines if the requested inventory is on hand or if it needs to be manufactured. When it is determined that the product is available, the plant accountant informs the plant manager, who ships the inventory and faxes a shipping confirmation to the staff accountant at the Company who initiated the transaction. The shipper obtains no signed documentation of receipt by the customer. (The shipper is an independent third party chosen by the plant manager. Currently only one shipping company is utilized and no competitive bidding has been performed. The president of the shipping company is the uncle of the plant manager.) The same staff accountant who entered the customer sales order into the customer database receives the fax from the manufacturing plant manager verifying the shipment has been received, matches the price and quantity, and if there is no discrepancy enters the sale into the internally developed information system. This results in the generation of an invoice, which is entered into the MAS 90 accounting by the staff accountant.
Customers
The Wilsons Antacid products are distributed through numerous independent and chain drug and discount stores throughout the United States, including the Walgreen Company, Revco, American Drug Stores, CVS, RiteAid, Eckerd Drug Company, Phar-Mor Inc., Drug Emporium, Kmart Corporation, and wholesale distributors.
The Company is not dependent on any single customer as the broad range of customers includes many large wholesalers, mass merchandisers, and multi-outlet pharmacy chains, five of which account for a significant percentage of sales volume. These five represent 38, 68, and 62 percent of sales revenue for the years ended December 31, 2001, 2000, and 1999, respectively.
Credit, Customer Service, and Changes to Customer Accounts
All new customers complete a credit application reviewed by the staff accountant responsible for the revenue cycle. The same staff accountant checks the customers references and determines the credit limit for the customer. This is to be reviewed by the COO prior to the first order being filled. This is not evidenced with documentation. The staff accountant then enters the customer information into the internally developed customer database and the customer can then buy on credit. The limits are supposed to be checked by the staff accountant responsible for entering sales into the system when sales are made. There is no automated control to detect excess of credit limit and there is no documentation prepared or signed-off evidencing review of the credit limit prior to the processing of a sale. The staff accountant responsible for the revenue cycle is responsible for maintenance of the customer information.
Changes to customer accounts can occur for several reasons including billing errors, standing data changes, price list changes, customer term and credit limit changes, etc. Generally, customers through salespersons initiate changes. The staff accountant responsible for the customer database investigates the potential changes and processes the changes. These changes are supposed to be reviewed by the COO. No documentation of this review is maintained.
Suppliers
The Company currently uses one main supplier for the magnesium (primary ingredient) used to produce Wilsons Antacid in lozenge form. The Company has a long-standing relationship with the supplier, who is a personal friend of the CEO. This supplier is reliant on the Company for a majority of its business. The supplier has capacity for additional volumes of business as the Companys sales grow. The form of magnesium used as a raw material is readily available from multiple sources, some of which have offered reduced prices for the Companys business.
Production and Inventory Management
As mentioned above, the Company manufactures its products at a single manufacturing plant it owns, using two production shifts. The plant manager is responsible for production, management of inventory, raw materials, and the operations of the plant. The plant accountant is responsible for all accounting functions related to the inventory cycle and coordination with the accounting department responsible for the general ledger.
Since the Companys products (primarily the antacid) are homogeneous, they produce during two shifts, five days a week. Since there are peak demand periods, the plant manager determines if overtime production is necessary. The plant manager performs a production schedule for batches of inventory on a monthly basis. This schedule determines the manufacturing effort for the subsequent month. Upon receipt of the sales order from the staff accountant responsible for the revenue cycle, the plant accountant then determines if the requested inventory is on hand or if it needs to be manufactured. Generally, the Company stocks enough inventories for anticipated sales to reduce customer lead time.
To commence production (which is done in batches), the laborer responsible for the batch requisitions raw materials from the storeroom (administered by the plant accountant). The requisition form is completed, signed off by the laborer, and recorded in the manufacturing information system by the plant accountant, thus updating the raw materials inventory listing. Monthly, the plant accountant summarizes raw material inventory records and submits them to the staff accountant responsible for the general ledger. The plant manager also receives the monthly information of raw materials and determines the amounts to be ordered for the next months manufacturing. He also monitors supplies and other purchased goods. Upon determining appropriate purchases, the plant manager requisitions goods from vendors. As the goods are received, the plant manager approves the receipt and receives the invoices from the vendors. No receiving report is prepared. He approves the invoices and forwards them to the accounting manager, who is responsible for the payment cycle. He also forwards the invoice to the plant accountant for recording into the manufacturing information system.
As batches are completed, they are moved to the finished goods storage area to await shipment. Upon finishing the batch, the laborer returns the completed batch form to the plant accountant who records the finished goods into the manufacturing information system. Monthly, the plant accountant summarizes finished goods inventory records and submits them to the staff accountant responsible for the general ledger.
When the plant accountant receives the sales order from the staff accountant responsible for the revenue cycle, he forwards it to the plant manager. The plant manager accumulates sales orders and, on a weekly basis, arranges with the shipping company to pick up the finished goods and ships them. The plant manager prepares a bill of lading, copies of which are provided to the plant accountant to update the finished goods inventory records in the manufacturing information system, the shipper, the customer, and the staff accountant responsible for the revenue cycle, who then generates an invoice.
Human Resources
The CEO is responsible for approval of the hiring and termination of all salaried employees. The COO is responsible for approval of the hiring and termination of all salespersons. The plant manager is responsible for approval of the hiring and termination of all manufacturing employees. The accounting supervisor maintains the employee database. He is responsible for the initial entry of data into the database upon hiring of employees. He also is responsible for input of any changes to the employee file (pay increases, vacation, etc.). The CFO also has access to the employee database (which is internally developed). The CEO is supposed to approve all changes to payroll standing data but no formal authorization of transactions to payroll standing data exists.
Research and Development
The Companys research and development costs for the years ended December 31, 2001, 2000, and 1999 were $256,492, $79,784, and $41,856, respectively. Future research and development expenditures to develop extensions of the Wilsons Antacid product, including potential unrelated new products in the consumer health-care industry, are primarily supported by clinical studies for efficacious long-term products that can be coupled with possible line extensions derivatives for a family of products.
Monthly R&D staff meetings of the director of R&D, CEO, and COO are held to discuss potential new products. The director of R&D reviews the medical feasibility of potential new products, while the CEO and COO assess the business potential.
Accounting Environment and Processes
Billing/Accounts Receivable
Upon receipt of the bill of lading (evidencing shipment) from the plant accountant, the staff accountant responsible for the revenue cycle generates an invoice from the management information system. The staff accountant responsible for the general ledger enters the invoice into the MAS 90 accounting system.
As sales are generated and entered into the MAS 90 accounting system, the accounts receivable master file is updated. The staff accountant responsible for the revenue cycle monitors the accounts receivable aging and calls customers with long outstanding balances (greater than their payment terms).
Cash Receipts
As payments are received (by the staff accountant responsible for the general ledger), the staff accountant responsible for the general ledger identifies the appropriate sale and records the receipt in the MAS 90 accounts receivable file. The same staff accountant then prepares a deposit slip for the payments and makes the daily bank deposit. The same staff accountant reconciles the daily ledger entries to the deposit slip. Any adjustments to the accounts receivable file for incorrect payments are made by the same staff accountant.
Accounts Payable
The accounting manager receives vendor invoices (including invoices related to purchases made by the manufacturing plant manager). The accounting manager then enters the invoice into the accounts payable system in MAS 90. No reconciliation is performed to assure the amount of the bills per the invoice for goods or services purchased matches actual goods or services received. The appropriate individual (ranging from administrative assistant for office supplies to CEO for major purchases) authorizes these normal procurements. The accounting manager then authorizes the printing of checks. The accounting manager, CFO, COO, and CEO have check-signing ability. There is no requirement for multiple signatures on checks at any dollar level. The accounts payable detail is reviewed periodically by the accounting manager. Bank reconciliations are performed monthly by the accounting manager. The accounting manager reviews the bank reconciliations for outstanding checks and assures the accuracy of the general ledger cash balances compared to the bank statements. Invoices are marked paid and retained by the accounting manager upon disbursement of the payment.
Inventory Accounting
The staff accountant responsible for the general ledger receives monthly reports from the plant accountant that summarize raw materials and finished goods inventory (WIP is not material). The staff accountant then inputs this information into the MAS 90 accounting system. The same staff accountant is responsible for reconciling the Companys inventories records to the general ledger. The plant manager performs quarterly physical inventories and reports any book to physical adjustments to the plant accountant. The plant accountant adjusts the manufacturing information system and reports these adjustments to the staff accountant responsible for the general ledger, who then records the adjustments in the MAS 90 accounting system.
Payroll
The Company uses ADP (an outside service provider) for payroll processing. Bi-weekly, employees submit their hours worked to the staff accountant responsible for payroll and the employee database. No formal time reports are prepared or maintained. The same staff accountant accumulates this information and prepares a submission for ADP. ADP then processes the bi-weekly payroll. The same staff accountant then prepares the journal entries and records them in the MAS 90 system. These entries are supposed to be approved by the CFO but there is no evidence of authorization. ADP submits the payroll checks to the Company. The same staff accountant compares the ADP submission to the general ledger entries and if there is no discrepancy the checks are disbursed.
Financial Reporting
The Company is a public company registered on the New York Stock Exchange. As such, they have quarterly and annual filing requirements under the laws regulated by the Securities and Exchange Committee (SEC). The CFO is ultimately responsible for all external and internal financial reporting. The director of financial reporting gathers information from the MAS 90 general ledger and prepares certain monthly financial information for review by senior management (CEO, COO, and CFO). This information is not in the form of complete financial statements under the U.S. generally accepted accounting principles the Company is obligated to adhere to. Quarterly, the director of financial reporting prepares the Companys Form 10-Q, which includes interim financial statements required by the SEC. The CFO and the independent auditors review this information. Annually, the director of financial reporting prepares the annual report and Form 10-K for filing with the SEC and for distribution to shareholders. This information is reviewed by the CFO and audited by independent auditors assigned by the board of directors.
Case Requirements
Identify Wilson Corporations critical success factors and primary objectives. Create a mission statement for Wilson Corporation that would address these primary objectives.
Develop a current organizational chart for Wilson Corporation.
Analyze the current internal control environment and identify specific control weaknesses that should be addressed by a new system. Use COSO categories as the format of this analysis. The analysis should include a document flowchart (including manual and automated procedures) of the current system.
Design a new system for Wilson Corporation. This exercise should contain the following: a. Utilize aspects of MRP, ERP, and EDI as information system options and identify the benefits of these tools. b. A revised organizational chart for Wilson Corporation.
Using SAS 99 in your analysis, analyze the potential for fraud in the Wilson Corporation and identify opportunities to improve the control environment to prevent fraud.
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Foundations Of Financial Management
Authors: Stanley B. Block, Geoffrey A. Hirt, Bartley R. Danielsen
13th Edition
0073382388, 978-0073382388
