Delta inc. and pink tree case analysis

A Case Study in Corporate Financial Reporting
Case #3 : Receivables Management

A case study in BA 219 submitted in partial fulfillment of the requirements for the degree of
Master of Business Administration (University of the Philippines – Cebu)
By: Joyce Ann Abella-Bait

A Case Study in Corporate Financial Reporting | 2

TABLE OF CONTENTS

I. Case Overview 3

II. Problem Definition 5

III. Objectives 5

IV. Analysis of Relevant Case Facts 6

V. Financial Analysis 7

VI. Recommendation 12

VII. Appendix 13

VIII. Bibliography 23


I. Case Overview

Company Background
Delta Inc. was formed by two financial tycoons, Thomas Dake and George Roberts in 1998. The firm is
providing discount brokerage services and financial transactions to companies. With its expertise in debt,
equity and accounts-receivable financing, the firm maintained well established relationships in the
leadership of George Roberts as CEO and Thomas Dake as CFO.

The business lifestyle of Delta Inc. threads from different equity sponsors, regional fiduciary institutions
and non-traditional financing entities which gave their clients a vast array of financing assistance. These
lenders gave breath to Delta’s sales & revenue through brokerage fees and commissions.

Excelling in customer relationship management, CFO Thomas Dake says, "Delta always seeks to be
more aware of how the strategic decisions and the changing operations of our clients may impact the
services they require. Client knowledge is critical to a satisfactory relationship." For the company, their
client relationships revolve around these key areas: communication, accessibility, responsiveness to client,
market and product knowledge. No wonder that Delta captured the hearts of many businesses, and
individual customers.

Apart from a superior service-based firm, the company was also an active member of the Maryland
Chamber of Commerce. Delta Inc. participated in various networking events and activities of the chamber
which enabled them to socialize with new prospect clients, co-players in the industry, supporters and
government officials. Delta was able to develop several relationships with clients and financial institutions
through the Chamber's programs.

How Delta Inc. Works
Operation procedures are not that hard for any customer in Delta Inc. A business/individual may apply
through easy steps they crafted for more attractive service impact in the market. First step is the
application process; the firm will require certain information from prospective clients. Second, the client
must be willing to submit/provide their company and/or personal information such as registration, financial
statements, and tax returns. The company will then set up its recommendation to the said client, extending
ultimate assistance in choosing the right loan to apply, and the flexible lender to supply.

The company is well stocked with a flock of consultants, ranging from lawyers to investment banking
professionals. This is the firm’s strategy to structure, manage and negotiate complicated financial
transactions. With its mastery, the company can then easily offer a creative and timely solution in the form
of debt, equity or account-receivable accounting. Clients who belong to certain businesses find Delta Inc.’s
method to assist in meeting their working capital needs, acquire debt, provide added liquidity in a turn


around and satisfy off-balance sheet financing needs. Delta works closely with its client to define the
objectives of the transaction, identify the appropriate financing structure, and negotiate terms to influence
the capital procurement process."

Partnership with Pink Tree Finance
Among the leading lenders to Delta’s clients was Pink Tree. Specializing in providing loans, Pink Tree
often deals with risky consumers through their five percent down payment scheme. This strategy allowed
the company to close transactions easily.

Streaming revenues with each transaction wasn’t that hard for Delta Inc., having Pink Tree as its
partner. First, the company would receive commissions for referral agreements to Pink Tree. Delta's
strategy was to forego a second revenue stream completely in order to increase the number of applications
processed and accepted thereby significantly increasing their commissions. With this, it is important to
note that the first revenue stream is not increased by Delta to offset the loss of revenue from the second. It
is not a marketing ploy; Delta is truly a discount broker. Thus in a highly competitive industry, Delta created
a niche for itself by providing superior client service free of cost to the borrower. This resulted in a
substantial increase in operating performance.

New Business Opportunity
Although the firm regarded new client and lender relationships as opportunities for growth, it also
sought out opportunities outside its line of business. Having been actively participating in Maryland
Chamber of Commerce, a new investment identified as the "West Baltimore Project" emerged.

Delta Inc. planned to develop a property on West Baltimore Street into senior housing and commercial
spaces that would generate rental income. The entire project was estimated to cost $10.5 million. Delta
executed the purchase agreement for the existing West Baltimore Street property in September, 2001. The
firm paid the purchase escrow of $30,000 from its cash on hand. In the fourth week of October, 2001, Delta
applied to a bank in Baltimore for a commercial loan of $10.5 million to purchase and develop the property.
The term sheet provided Delta with 90 days to close the loan transaction. It required a refundable deposit
of $100,000 on executing the term sheet. The funds were refundable if the loan was not approved and
accepted by both parties, for any reason, within a period of 90 days, after which, the funds would be non-
refundable if the loan was approved.

Delta planned to use the collections from its accounts receivable (mostly from Pink Tree) to raise the
$100,000 refundable deposit. In the middle of January, 2002, Pink Tree filed for Chapter 11 bankruptcy. The
$87,000 cash on hand cannot be used as it is needed to cover operating expenses such as rent, salaries,
utilities, etc. The management of Delta Inc. was now in a difficult situation of raising $100,000 in just a few
days to close the loan for the West Baltimore Project to be realized.


II. Problem Definition
This case study supports Delta Inc.’s aim in pursuing the West Baltimore Project. With the bankruptcy that
Pink Tree was facing, the company also endeavors to check on their management system. This study
intends to answer the following specific questions:

1. What is the critical issue facing Delta Inc.?

2. In relation, what are some topics in receivables management?

3. To what extent did Delta's business strategy impact the firm's accounts receivable and cash flow
problems?

5. How should Delta report the Pink Tree debt in its financial statements?

6. What are the major constraints against the continued success of Delta as a discount broker?

7. What suggestions related to the liquidity and solvency of Delta's operations would you make?

8. What recommendations related to Delta's financing of the $100,000 would you make?

III. Objectives
The purpose of this study is to address the following concerns:

1. To evaluate the methods used by Delta Inc. pertaining to their receivables management.

2. To recommend suggestions that will allow the company to improve their account receivables and cash
flow problems.

3. To offer a fair solution on possible financing alternatives that the company is likely to take in pursuing
their new project.


IV. Analysis of Relevant Case Facts

Delta’s Client Transaction Cycle (refer to Appendix A: Exhibit 1)

This table highlights how the company does business with their clients. It is noticeable that anybody
can avail to a loan through Delta Inc. With their simple guidelines, loan offers from Pink Tree sold out as
pancakes. Because of fast client referrals, Delta’s commission from Pink Tree reached heights. Commission
agreement between these two companies seemed to be flexible enough for both sides. Delta accepts each
commission with a leeway for Pink Tree. The latter can then easily play with its revenue before outlaying
cash as payment to Delta Inc. When Pink Tree announced its bankruptcy, this transaction cycle was heavily
affected. As it is known, Delta’s preferred lender was Pink Tree. This lender uplifts interest among many
consumers in the marketplace. Because of their aim to generate more profits in loan interest rates, strict
screening is often not an option. A large part of their clients came from Delta Inc. The commission rates
that they have to pay out Delta Inc. accumulated which increased the latter’s receivables.

Delta Inc. As A Discount Broker
Discount brokerage firms have reached the peak of its fame in the investment world. This kind of
business is best described to companies which provide transaction services predominantly or exclusively.
That is, a discount broker provides clients with little or no research or investment advice; rather, it
specializes in completing the transactions for which clients ask. They charge lower commissions than other
brokers and rely on a high volume of orders for a profit.

In addition, a variety of services is tendered by these brokers; including Delta Inc. Free joint purchases via
special arrangements are also provided. Complimentary stock reports, check writing, reinvestment
services, as well as stock quotes are also given usually at no cost. This is the main reason why Delta Inc.
employed a pool of consultants who will help them in assisting their clients. Most of the brokerage firms
also give free information about the recent volume for the day, stock price, up to date dividend and
earnings forecasts. Because of discount brokers, nearly anybody can afford to invest in the market. In the
U.S., the Financial Industry Regulatory Authority (FINRA) oversees brokerages, and consumers can do an
online search to check the broker's standing.


V. Financial Analysis

Financial Ratios (refer to Appendix B: Exhibit 2- Delta Inc.’s Financial Statements)
Delta Inc. – Year 1999 to 2001 (based on Loan Brokers Industry)

Liquidity Formula Used 2001 Industry 2000 Industry 1999 Industry

Net Working Capital CA-CL $ 238,772 ---- $ 44,156 ---- $ (82,938) ----
Current Ratio CA/CL 1.46 3.27 1.12 3.20 0.58 3.22
Cash Ratio Cash/CL 0.16 ---- 0.17 ---- 0.25 ----

Activity

AR Turnover Ratio Net Credit Sales/Ave.AR 1.23 5.36 1.48 5.86 3.51 4.14
Ave. Collection Period 365 days/AR Turnover 297.70 68.10 246.68 62.29 103.86 88.16
Total Asset Turnover net sales/ave.total assets 0.57 ---- 0.48 ---- 0.28 ----

Leverage/Solvency

Total Liabilities/Total
Debt Ratio 0.66 ---- 0.74 ---- 0.80 ----
Assets
Total
Debt/Equity Ratio Liabilities/Stockholder's 1.96 ---- 2.81 ---- 3.88 ----
Equity
Net Cash Flow provided
Current Cash Debt by Operating
0.04 0.15 0.05 0.08 0.02 ----
Coverage Ratio Activities/Ave. Current
Liabilities
Cash Flow from
Cash Debt Coverage
Operations/Total 0.02 ---- 0.02 ---- 0.01 ----
Ratio
Liabilities

Profitability

Profit Margin Net Income/Net Sales 0.24 ---- 0.24 ---- 0.27 ----
Cash flow from Operating
Cash Flow Margin 0.02 ---- 0.03 ---- 0.02 ----
Activities/Net Sales
Net Income/Ave. Total
ROI or ROA 0.14 ---- 0.12 ---- 0.08 ----
Asset


Pink Tree Finance’s Leverage/Solvency Ratios – Year 2000 to 2001 (based on Lenders Industry)

(Refer to Appendix C: Exhibit 3 – Pink Tree’s Financial Statements)

Pink Tree Finance 2001 Industry 2000 Industry
Total
Debt to Asset
Liabilities/Total 0.91 6.05 0.90 5.56
Ratio
Assets
Net Cash Flow
provided by
Current Cash Debt
Operating 0.03 0.17 0.03 0.5
Coverage Ratio
Activities/Ave.
Current Liabilities

Critical Issues
Delta Inc. faces a risk of failure in their receivables management. The financial flexibility of the
company in relation to the amount and timing of its cash flows are key issues as well. As a discount broker,
Delta has been sacrificing its one stream of revenue just to survive in a highly competitive market of loan
brokers. For years, dealing with Pink Tree Finance resulted to Delta’s failure of responding to unexpected
situations, especially when the company needed cash for its West Baltimore Project. The figures above
show that Delta is experiencing a poor management in its account receivables. As for its liquidity, the
current ratios are too far below from the industry averages. Current ratio of the company is1.46 in 2001,
1.12 in 2000, and 0.58 in 1999 while the industry averages were 3.22, 3.20, and 2.27 respectively. It simply
implies that the company is not doing well compared to other players in the industry. Current cash debt
coverage ratio was 0.05 in 2000 and 0.04 in 2001 while the industry averages were 0.08 and 1.15
respectively. Basing on liquidity measures, Delta Inc. is unable to pay its debt as they come due.

It is important to note that these figures in Delta’s Statement of Cash Flow are used to calculate cash-
based figures instead of the usual accrual-based. A Current Ratio and Current Cash Debt Coverage ratio
measures the company’s ability to pay its liabilities when they come due. The latter ratio is a refinement of
the Current Ratio. Its debts ratios are also low, with 0.66 in 2001, 0.74 in 2000 and 0.80 in 1999. This means
that debt is large compared to its assets.

The collectability of Delta’s receivables is another critical issue that must be assessed. The company
should evaluate the risk of financial distress in relation to their major business partners such as Pink Tree
Finance. A plan must be made in case a major partner suffers bankruptcy unexpectedly. Furthermore, Delta
should revisit and revise their receivables management policies. A lot of options must be explored and the
management must take a deeper look on how to secure their receivables and analyze regularly the default
risk of all receivables.

On the other hand, Pink Tree’s bankruptcy could have been predictable basing on its financial
statements. The nature of business for Pink Tree is granting loans to risky consumers. Therefore, it is
expected that they will have huge part of uncollected accounts. Its current cash debt coverage ratio of 0.03
in 2001 and 2000 is too low compared to industry averages of 0.17 and 0.5 respectively. Pink Tree’s debt to


total asset ratio is also very low, comparing to the industry average. It has recorded 0.91 versus the
industry’s 6.05 for 2001. In the year 2000, its debt to asset ratio is only 0.90 compared to industry average of
5.56. This would tell Delta Inc. a go signal of referring to other lenders. The ratios conclude that Pink Tree
exists more for its liabilities than its assets. Hence, any payables to Delta Inc. would be impossible due to
their current financial status. Their cash flow reflects “loss” instead of profit. Delta, on the first place,
created a diversity in their partnerships by exposing themselves to other business partners and not to Pink
Tree alone.

The Cash Flow Problem
Delta, in literal terms, is a discount broker. Services are provided to clients without directly billing them.
The fees of services which Delta rendered are collected once the transaction of loans with the lender is
realized. The delay in collecting brokerage fees contributed to Delta’s low receivable liquidity and increased
the risk of the firm’s cash flow. In the discount brokerage industry, this might be a common practice, albeit,
Delta had a poor management on receivables. Its receivables turnover ratio is lower than the industry
average. Receivable turnover was only 1.23 times in 2001, compared to 5.36 times in the industry. The
company recorded 1.48 times versus the 5.86 as industry average in 2000. This reflects long collection
periods from Delta. The average collection period of the company dates from 298 days in 2001, 147 days in
2000 and 104 days in 1999. These are far too long compared to the industry averages which are 68 days, 62
and 88 days respectively. It almost takes 9 months for the company to collect its receivables. This leads to
poor cash flow since Delta needs cash to maintain its operations while anticipating the collected brokerage
fees from the lender.

Receivables Management

Delta Inc. maintained poor management policies in their accounts receivables for the past three years.
Although they are one of the most preferred discount brokers, the company can collapse anytime without a
solid foundation of policies in their receivables. Here are some most important factors that Delta Inc. can
improve:

A. Partnership: Delta must consider doing business with other lenders in town. Their revenue/collectibles
must not be only of one source which is Pink Tree. Also, apart from long-time business relationships,
the company should take a look at their partner’s financial health. Anticipating bankruptcy or business
failure should be a part of the company’s preparation in growing the business.

B. Establishing Credit Policy: A detailed review of a potential customer’s soundness should be made prior
to extending credit. Procedures such as careful review of the customer’s financial statements and credit
rating, as well as a review of financial service reports should be conducted by the company to its future
creditors. Delta’s credit guidelines should be based on credit investigation of clients such as examining


the payment record or history of clients as well as other risk factors such as business risk and
bankruptcy risk of clients. As financial health changes, credit limit must be revised.

C. Revisit Billing Policy: Delta lacked prompt billing to its service providers. This issue can only be solved if
the company will revisit and improve its billing policy. Since they cater to many clients, the company
must also maintain information on the status of their unbilled accounts. Large sales should be built
immediately.

D. Aging of Receivables: Maintaining adequate information concerning the age of outstanding bills and
claims for proper overall control of accounts receivable and related reserves for bad debts are keys to
keep aging of accounts on lower risk. Delta must collect, maintain, report, and act upon aging
information in a standardized and consistent manner. Tracking receivables through the use of software
programs is one way to easily monitor it.

E. Collection of Receivables: Efficient recording can help efficient collection of receivables. Delta must
program a team to record sales regularly, and to collect receivables regularly. A collection effort must
be immediately taken at the first sign of customer/partner’s unsoundness.

F. Insuring and Factoring Receivables: Companies sometimes need cash before customers pay their
account balances. In such situations, the company may choose to sell accounts receivable to another
company that specializes in collections. This process is called factoring, and the company that
purchases accounts receivable is often called a factor. The factor usually charges between one and
fifteen percent of the account balances. Factoring receivable invoices is the sale of an asset. The sale of
your invoices to a third party - known as a Factor - eliminates the sale-to-collection business cycle of
waiting for payment. A factor will purchase your invoices for up to 90% of the total amount. You get
your cash now and the factor takes on the risk of collecting the payments from your customers. The
creditworthiness of your customers is very important if you want to get a good rate from a factor. Delta
can obtain business line of credit based on the management expertise of the factoring company. Some
of the advantages for factoring receivables are: immediate cash with no waiting and without incurring
new debt, efficient handling of all invoicing and data entries, ability to take advantage to vendor
discounts, expanded growth capacity through increased production and total sales, and a good relief
from the responsibility for collecting no-pay and slow-pay clients.

G. Allowance for Bad Debts/Doubtful Accounts: Recoverability of some receivables may be doubtful
although not definitely irrecoverable. Delta must consider writing-off bad debts. The allowance for
doubtful debts is created by forming a credit balance which is deducted from the total receivables
balance in the statement of financial position. Aside from that, the company should have a reserve for
doubtful, uncollected, accounts. The purpose is not to tolerate bad debts but to guarantee that the
company can still survive while improving its debt/receivables procedure.


Reporting Pink Tree’s Debt

As a recall, Pink Tree Finance filed a chapter 11 bankruptcy in the middle of January, 2002. This event
left Delta’s receivables unsecured. To ensure that the financial statements of Delta Inc. are properly taken
care of, these accounts must be reported as uncollectible. The big part of these receivables must be taken
out from the books by debiting allowance for doubtful accounts and crediting accounts receivable. Pink
Tree’s debt must be written off since there’s a small chance that it can convert to cash for Delta’s future
investments use.

Constraints against Delta’s Success

Delta’s success as a discount broker can be achieved. However, there are major constraints acting upon
the company’s success. Unless the company can overcome these constraints, financial and company
growth will be harder to achieve.

A. Timely collection of accounts receivables. The company must ensure that brokerage fees for services
rendered must be collected on time. Delaying it more weakens the company’s cash flow.

B. Scrutinizing the financial risk of business partners. Delta should assess its partnership with Pink Tree
Finance, and other remaining lenders. Being updated with partner’s financial position is a great tool to
maintain the financial risk at a lower level.

C. Financial flexibility. Delta must ensure that it can act effectively to alter cash flow timings. This will enable
the company to respond when unexpected cash needs or new opportunities occur.


VI. Recommendation
This case study recommends the following based on the major problems mentioned:

A. Liquidity and Solvency

Revision is recommended for Delta’s Receivables Management. The long average collection period and
low receivables turnover must be improved. Several suggestions are already made in Financial Analysis
section of this case study. The company is recommended to focus on new methods of collecting payments
for its services rather than relying to a major business partner. Delta can enter into mutual agreements with
its lender, with fair provisions such as, payments/commissions/brokerage fees must be given to them in a
reasonable time, as immediate as the loan had closed with its lender.

With its new business opportunity, Delta is heading to a good start of improving their management in
receivables. An effective collection system must be established with the future tenants of West Baltimore
Street to avoid future doubtful accounts reigning in the company’s financial statements.

B. Possible Financing for West Baltimore Project

Having only two weeks to secure the $100,000 escrow for closing the loan in West Baltimore Street is
the major headache of Delta Inc. After the bankruptcy filed by its biggest lender and partner, Pink Tree
Finance, the company is recommended to obtain this amount through a financing program. The loan
should push through and this new project must be undertaken to keep the business alive. It is
recommended that Delta should get a bridge loan (also called swing loan), particularly, the fast-tracked
financing. A bridge loan is an interim financing for an individual or business until permanent or the next
stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to
pay back) the bridge loan, as well as other capitalization needs. This kind of loan will allow them to
accumulate cash as fast as two weeks (normal procedure is 2 weeks to three years) to finance the escrow
needed for closing the project. The only disadvantage is higher interest rates but with the future success of
West Baltimore Project, these interest rates can be conquered through big revenues, and efficient
management of future receivables. One greatest advantage in getting this financing support is, Delta can
close the loan to meet its deadline.


VII. Appendix
Appendix A: Exhibit 1. Delta’s Client Transaction Cycle

Step 1: Application Process
Delta Inc. acquire information from their prospects.

Step 2: Client Evaluation
The first information will be used to collect more relevant
papers from the clients. Registration, financial statements,
and tax returns are the basis of evaluation.

Step 3: Proposal
Delta Inc. will then develop their analysis with the facts they
have on hand. All loan requests are supported with a
contract agreement. Services at this stage includes
counseling the client on what loan package to take and to
where it should get from.

Step 4: Referral
With Pink Tree as its primary partner, Delta Inc. refers the
clients to this lender. After which, the lender will pay a
commission agreement to Pink Tree.


Appendix B: Exhibit 2. Delta Inc.’s Financial Statements
Delta Inc.
Statement of Financial Condition
For the Years Ended December 31, 2001, 2000, and 1999
2001 2000
Assets
Cash and cash equivalents $84,067 $65,857
Accounts receivable 668,982 359,285
Total current assets 752,999 425,142
Long-term assets 674,181 674,181
Total assets $1,427,180 $1,099,323
Liabilities and Member's Equity:
Accounts payable and accrued liabilities 514,227 380,986
Total current liabilities 514,227 380,986
Other liabilities 430,030 430,030
Total liabilities 944,257 811,016
Member's equity 482,923 288,307
Total liabilities and Member's equity $1,427,180 $1,099,323

1999
Assets
Cash and cash equivalents $48,711
Accounts receivable 63,575
Total current assets 112,286
Long-term assets 674,181
Total assets $786,467
Liabilities and Member's Equity:
Accounts payable and accrued liabilities 195,224
Total current liabilities 195,224
Other liabilities 430,030
Total liabilities 625,254
Member's equity 161,213
Total liabilities and Member's equity $786,467


Delta Inc.
Statement of Operations

2001 2000 1999

Revenue:
Brokerage fees $631,054 $426,193 $156,082
Commissions 146,240 77,528 47,528
Other income 42,932 27,896 19,820
Total revenue 820,226 531,617 223,430
Expense:
Compensation and benefits 439,253 250,643 95,225
Professional and other fees 41,511 36,338 22,450
Advertising and promotions 44,961 31,678 13,212
Office operations 51,229 44,013 16,218
Other expense 48,656 41,851 15,112
Total expense 625,610 404,523 162,217
Net Income $194,616 $127,094 $61,213

Delta Inc.
Statement of Cash Flows

2001

Cash flows from operating activities
Net income $194,616
Adjustments to reconcile net income to net cash provided
by operating activities
less: Increase in accounts receivable -309,647
add: Decrease in accounts payable and accrued liabilities 133,241
Net cash provided by operating activities 18,210


Cash flows from Investing Activities --
Cash flows from Financing Activities --
Net increase in cash and cash equivalents 18,210
Cash and cash equivalents at beginning of year 65,857
Cash and cash equivalents at end of year $84,067

2000
Net income $127,094
Net cash provided by operating activities 17146

1999
Net income $61,213
Net cash provided by operating activities 3,711


Appendix C: Exhibit 3. Pink Tree’s Financial Statements
Pink Tree Finance’s Balance Sheet
December 31, 2001 and 2000
(Amounts in millions)

2001 2000

Assets
Cash and cash equivalents 394.5 $665.50
Finance receivables 4,168.7 4,214.90
Investments 16,680.7 15,176.90
Goodwill -- 28.8
Other assets 984.1 751.9
Total assets 22,228.0 $20,838.00

Liabilities and Stockholder's Equity
Liabilities
Investor payables 8,918.2 $7,516.90
Other current liabilities 2,356.6 2,457.00
Long-term liabilities 9,003.7 8,774.90
Total liabilities 20,278.5 $18,748.80
Stockholder's Equity
Preferred stock 750.0 $750.00
Common stock and additional paid-in capital 1,209.4 1,209.40
Accumulated other comprehensive loss (108.6) -139.1
Retained earnings 98.7 268.9
Total shareholder's equity 1,949.5 2,089.20
Total liabilities and shareholder's equity 22,228.0 $20,838.00


Pink Tree Finance
Statement of Operations
December 31, 2001, 2000 and 1999

2001 2000 1999

Revenues:
Net investment income: 2,260.2 $1,945.00 $647.10
Finance receivables and other 51.5 106.6 185.1
Interest-only securities -- -- 550.6
Gain on sale:
Securitization transactions 26.9 7.5 --
Whole-loan sales Servicing income 115.3 108.2 165.3
Fee revenue and other income 229.7 277.5 207.4
Total revenues 2,683.6 2,444.80 1,755.50

Expenses:
Provision for losses 563.6 354.2 128.7
Interest expense 1,234.4 1,152.40 341.3
Other operating costs and expenses 642.4 770.8 697.2
Impairment charges 386.9 515.7 554.3
Special charges 21.5 394.3 --
Total expenses 2,848.8 3,187.40 1721.5
Income (loss) before income taxes (165.2) -742.6 34
Income tax benefit (62.5) -217.3 -13.9
Net income (loss) (102.7) ($525.30) $47.90


Pink Tree Finance’s Statement of Cash Flows
December 31, 2001, 2000 and 1999

2001 2000
Net investment income $2,141.20 $1,994.60
Points and origination fees 3.1 44.8
Fee revenue and other income 301.4 401.3
Interest expense -1,212.30 -1,038.70
Other operating costs -692.8 -846.6
Taxes -23.9 -72.8
Net cash provided by operating activities 516.7 482.6

Cash flows from investing activities
Cash received from the sale of finance 867.2 2,501.20
receivables, net of expenses
Principal payments received on finance 8,611.30 8,490.10
receivables
Finance receivables originated -12,320.30 -18,515.90
Other 295.9 -262.3
Net cash used by investing activities -2,545.90 -7,786.90

Cash flows from financing activities
Cash contributed by parent resulting from -- --
asset transfer
Issuance of liabilities related to deposit 1,872.40 2,168.80
products
Payments on liabilities related to deposit -1,961.10 -1,166.00
products
Issuance of notes payable and commercial 11,755.60 20,452.10
paper


Payments on notes payable and commercial -9,666.90 -13,202.80
paper
Change in cash held in restricted accounts -241.8 -689.7
for settlement of collateralized borrowings
Repurchase of shares of common stock -- -126
Common stock dividends paid -- --
Net cash provided by financing activities 1,758.20 7,436.40

Net increase (decrease) in cash and cash -271 132.1
equivalents
Cash and cash equivalents, beginning of year 665.5 533.4
Cash and cash equivalents, end of year $394.50 $665.50

1999
Net investment income $1,009.00
Points and origination fees 390
Fee revenue and other income 383.1
Interest expense -293.5
Other operating costs -676.6
Taxes -188
Net cash provided by operating activities 624

Cash flows from investing activities
Cash received from the sale of finance 9,516.60
receivables, net of expenses
Principal payments received on finance 7,487.20
receivables
Finance receivables originated -24,650.50
Other -120
Net cash used by investing activities -7,766.70


Cash flows from financing activities
Cash contributed by parent resulting from 18.2
asset transfer
Issuance of liabilities related to deposit 1,128.80
products
Payments on liabilities related to deposit -288.3
products
Issuance of notes payable and commercial 22,220.30
paper
Payments on notes payable and commercial -15,321.30
paper
Change in cash held in restricted accounts -76.8
for settlement of collateralized borrowings
Repurchase of shares of common stock --
Common stock dividends paid -200
Net cash provided by financing activities 7,480.90

Net increase (decrease) in cash and cash 338.2
equivalents
Cash and cash equivalents, beginning of year 195.2
Cash and cash equivalents, end of year $533.40


Appendix D. Exhibit 4. Industry Averages for Lenders and Loan Brokers
Select Industry Financial Ratios
Source: Compustat

Lending
Institutions

1999 2000 2001

Current Ratio -- -- --
Current cash debt coverage ratio -- -- --
Accounts receivable turnover 2.49 2.57 2.41
Debt to Asset 4.38 5.56 6.05
Cash debt coverage ratio 1.37 0.5 0.17

Loan Brokers

1999 2000 2001

Current Ratio 3.22 3.2 2.27
Current cash debt coverage ratio 0.23 0.08 0.15
Accounts receivable turnover 5.36 5.86 4.14
Debt to Asset 0.6 0.63 0.64
Cash debt coverage ratio -- 17.67 10.55


VIII. Bibliography
Michal, Kenneth. “Analyzing the Brokerage Firms”. ALL Journal of Computer Investing. May
1999. 10 July 2012.

Aybar, Bulent. “Corporate Finance Module”. Working Capital Management. 10 July 2012.

Palani, A. “An Analysis of Cash & Receivables Management ”. South Asian Journal of Marketing
and Management Research. South Asian Academic Research Journals. Volume 2, Issue 4. April
2012. 10 July 2012.

“Bridge Loan.” Investopedia Dictionary. 11 July 2012.
< http://www.investopedia.com/terms/b/bridgeloan.asp#axzz20oMQi7ES>.

Katz,Robert, MS, CPA. “Ten Strategies to Improve Accounts Receivables Management”.
Surgical Futures. 11 July 2012.
< http://surgicalfutures.com/finances-and-accounting-cmf/ten-strategies-to-improve-accounts-
receivable-management>.

O’Berry, Denise. “Six Ways to Better Manage Your Accounts Receivables”. Beyond The Bank.
1 June 2010 . 11 July 2012.
< http://www.beyond-the-bank.com/681/six-ways-to-better-manage-your-accounts-receivable>

“How to Better Manage your Accounts Receivables.” Finance Comparison. 12 July 2012.
< http://www.financecomparison.com.au/business-loans-article-accounts-receivable.cfm>

“Financial Ratios and Its Importance”. The Financial Pipeline. 13 July 2012.
< http://www.finpipe.com/equity/finratan.htm>

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