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 | 2TABLE OF CONTENTSI. Case Overview 3II. Problem Definition 5III. Objectives 5IV. Analysis of Relevant Case Facts 6V. Financial Analysis 7VI. Recommendation 12VII. Appendix 13VIII. Bibliography 23
A Case Study in Corporate Financial Reporting | 3I. Case OverviewCompany Background Delta Inc. was formed by two financial tycoons, Thomas Dake and George Roberts in 1998. The firm isproviding 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 theleadership of George Roberts as CEO and Thomas Dake as CFO. The business lifestyle of Delta Inc. threads from different equity sponsors, regional fiduciary institutionsand non-traditional financing entities which gave their clients a vast array of financing assistance. Theselenders 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 bemore aware of how the strategic decisions and the changing operations of our clients may impact theservices they require. Client knowledge is critical to a satisfactory relationship." For the company, theirclient 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, andindividual customers. Apart from a superior service-based firm, the company was also an active member of the MarylandChamber of Commerce. Delta Inc. participated in various networking events and activities of the chamberwhich enabled them to socialize with new prospect clients, co-players in the industry, supporters andgovernment officials. Delta was able to develop several relationships with clients and financial institutionsthrough the Chambers programs.How Delta Inc. Works Operation procedures are not that hard for any customer in Delta Inc. A business/individual may applythrough easy steps they crafted for more attractive service impact in the market. First step is theapplication process; the firm will require certain information from prospective clients. Second, the clientmust be willing to submit/provide their company and/or personal information such as registration, financialstatements, and tax returns. The company will then set up its recommendation to the said client, extendingultimate 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 bankingprofessionals. This is the firm’s strategy to structure, manage and negotiate complicated financialtransactions. With its mastery, the company can then easily offer a creative and timely solution in the formof debt, equity or account-receivable accounting. Clients who belong to certain businesses find Delta Inc.’smethod to assist in meeting their working capital needs, acquire debt, provide added liquidity in a turn
A Case Study in Corporate Financial Reporting | 4around and satisfy off-balance sheet financing needs. Delta works closely with its client to define theobjectives of the transaction, identify the appropriate financing structure, and negotiate terms to influencethe capital procurement process."Partnership with Pink Tree Finance Among the leading lenders to Delta’s clients was Pink Tree. Specializing in providing loans, Pink Treeoften deals with risky consumers through their five percent down payment scheme. This strategy allowedthe company to close transactions easily. Streaming revenues with each transaction wasn’t that hard for Delta Inc., having Pink Tree as itspartner. First, the company would receive commissions for referral agreements to Pink Tree. Deltasstrategy was to forego a second revenue stream completely in order to increase the number of applicationsprocessed and accepted thereby significantly increasing their commissions. With this, it is important tonote that the first revenue stream is not increased by Delta to offset the loss of revenue from the second. Itis not a marketing ploy; Delta is truly a discount broker. Thus in a highly competitive industry, Delta createda niche for itself by providing superior client service free of cost to the borrower. This resulted in asubstantial increase in operating performance.New Business Opportunity Although the firm regarded new client and lender relationships as opportunities for growth, it alsosought out opportunities outside its line of business. Having been actively participating in MarylandChamber 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 commercialspaces that would generate rental income. The entire project was estimated to cost $10.5 million. Deltaexecuted the purchase agreement for the existing West Baltimore Street property in September, 2001. Thefirm paid the purchase escrow of $30,000 from its cash on hand. In the fourth week of October, 2001, Deltaapplied 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 depositof $100,000 on executing the term sheet. The funds were refundable if the loan was not approved andaccepted 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 fewdays to close the loan for the West Baltimore Project to be realized.
A Case Study in Corporate Financial Reporting | 5II. Problem DefinitionThis case study supports Delta Inc.’s aim in pursuing the West Baltimore Project. With the bankruptcy thatPink Tree was facing, the company also endeavors to check on their management system. This studyintends 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 Deltas business strategy impact the firms accounts receivable and cash flowproblems?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 Deltas operations would you make?8. What recommendations related to Deltas financing of the $100,000 would you make?III. ObjectivesThe 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.
A Case Study in Corporate Financial Reporting | 6IV. Analysis of Relevant Case FactsDelta’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 anybodycan avail to a loan through Delta Inc. With their simple guidelines, loan offers from Pink Tree sold out aspancakes. Because of fast client referrals, Delta’s commission from Pink Tree reached heights. Commissionagreement between these two companies seemed to be flexible enough for both sides. Delta accepts eachcommission with a leeway for Pink Tree. The latter can then easily play with its revenue before outlayingcash as payment to Delta Inc. When Pink Tree announced its bankruptcy, this transaction cycle was heavilyaffected. As it is known, Delta’s preferred lender was Pink Tree. This lender uplifts interest among manyconsumers in the marketplace. Because of their aim to generate more profits in loan interest rates, strictscreening is often not an option. A large part of their clients came from Delta Inc. The commission ratesthat 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 ofbusiness 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, itspecializes in completing the transactions for which clients ask. They charge lower commissions than otherbrokers 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 viaspecial arrangements are also provided. Complimentary stock reports, check writing, reinvestmentservices, 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 firmsalso give free information about the recent volume for the day, stock price, up to date dividend andearnings forecasts. Because of discount brokers, nearly anybody can afford to invest in the market. In theU.S., the Financial Industry Regulatory Authority (FINRA) oversees brokerages, and consumers can do anonline search to check the brokers standing.
A Case Study in Corporate Financial Reporting | 7V. Financial AnalysisFinancial 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 IndustryNet Working Capital CA-CL $ 238,772 ---- $ 44,156 ---- $ (82,938) ----Current Ratio CA/CL 1.46 3.27 1.12 3.20 0.58 3.22Cash Ratio Cash/CL 0.16 ---- 0.17 ---- 0.25 ----ActivityAR Turnover Ratio Net Credit Sales/Ave.AR 1.23 5.36 1.48 5.86 3.51 4.14Ave. Collection Period 365 days/AR Turnover 297.70 68.10 246.68 62.29 103.86 88.16Total Asset Turnover net sales/ave.total assets 0.57 ---- 0.48 ---- 0.28 ----Leverage/Solvency Total Liabilities/TotalDebt Ratio 0.66 ---- 0.74 ---- 0.80 ---- Assets TotalDebt/Equity Ratio Liabilities/Stockholders 1.96 ---- 2.81 ---- 3.88 ---- Equity Net Cash Flow providedCurrent Cash Debt by Operating 0.04 0.15 0.05 0.08 0.02 ----Coverage Ratio Activities/Ave. Current Liabilities Cash Flow fromCash Debt Coverage Operations/Total 0.02 ---- 0.02 ---- 0.01 ----Ratio LiabilitiesProfitabilityProfit Margin Net Income/Net Sales 0.24 ---- 0.24 ---- 0.27 ---- Cash flow from OperatingCash Flow Margin 0.02 ---- 0.03 ---- 0.02 ---- Activities/Net Sales Net Income/Ave. TotalROI or ROA 0.14 ---- 0.12 ---- 0.08 ---- Asset
A Case Study in Corporate Financial Reporting | 8Pink 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 LiabilitiesCritical Issues Delta Inc. faces a risk of failure in their receivables management. The financial flexibility of thecompany 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 loanbrokers. For years, dealing with Pink Tree Finance resulted to Delta’s failure of responding to unexpectedsituations, especially when the company needed cash for its West Baltimore Project. The figures aboveshow that Delta is experiencing a poor management in its account receivables. As for its liquidity, thecurrent 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 simplyimplies that the company is not doing well compared to other players in the industry. Current cash debtcoverage ratio was 0.05 in 2000 and 0.04 in 2001 while the industry averages were 0.08 and 1.15respectively. 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 ratiomeasures the company’s ability to pay its liabilities when they come due. The latter ratio is a refinement ofthe Current Ratio. Its debts ratios are also low, with 0.66 in 2001, 0.74 in 2000 and 0.80 in 1999. This meansthat debt is large compared to its assets. The collectability of Delta’s receivables is another critical issue that must be assessed. The companyshould evaluate the risk of financial distress in relation to their major business partners such as Pink TreeFinance. A plan must be made in case a major partner suffers bankruptcy unexpectedly. Furthermore, Deltashould revisit and revise their receivables management policies. A lot of options must be explored and themanagement must take a deeper look on how to secure their receivables and analyze regularly the defaultrisk of all receivables. On the other hand, Pink Tree’s bankruptcy could have been predictable basing on its financialstatements. The nature of business for Pink Tree is granting loans to risky consumers. Therefore, it isexpected that they will have huge part of uncollected accounts. Its current cash debt coverage ratio of 0.03in 2001 and 2000 is too low compared to industry averages of 0.17 and 0.5 respectively. Pink Tree’s debt to
A Case Study in Corporate Financial Reporting | 9total asset ratio is also very low, comparing to the industry average. It has recorded 0.91 versus theindustry’s 6.05 for 2001. In the year 2000, its debt to asset ratio is only 0.90 compared to industry average of5.56. This would tell Delta Inc. a go signal of referring to other lenders. The ratios conclude that Pink Treeexists more for its liabilities than its assets. Hence, any payables to Delta Inc. would be impossible due totheir 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 PinkTree 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 isrealized. The delay in collecting brokerage fees contributed to Delta’s low receivable liquidity and increasedthe 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 industryaverage. Receivable turnover was only 1.23 times in 2001, compared to 5.36 times in the industry. Thecompany recorded 1.48 times versus the 5.86 as industry average in 2000. This reflects long collectionperiods from Delta. The average collection period of the company dates from 298 days in 2001, 147 days in2000 and 104 days in 1999. These are far too long compared to the industry averages which are 68 days, 62and 88 days respectively. It almost takes 9 months for the company to collect its receivables. This leads topoor cash flow since Delta needs cash to maintain its operations while anticipating the collected brokeragefees 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 asolid foundation of policies in their receivables. Here are some most important factors that Delta Inc. canimprove: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
A Case Study in Corporate Financial Reporting | 10 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.
A Case Study in Corporate Financial Reporting | 11Reporting Pink Tree’s Debt As a recall, Pink Tree Finance filed a chapter 11 bankruptcy in the middle of January, 2002. This eventleft Delta’s receivables unsecured. To ensure that the financial statements of Delta Inc. are properly takencare of, these accounts must be reported as uncollectible. The big part of these receivables must be takenout from the books by debiting allowance for doubtful accounts and crediting accounts receivable. PinkTree’s debt must be written off since there’s a small chance that it can convert to cash for Delta’s futureinvestments use.Constraints against Delta’s Success Delta’s success as a discount broker can be achieved. However, there are major constraints acting uponthe company’s success. Unless the company can overcome these constraints, financial and companygrowth will be harder to achieve.A. Timely collection of accounts receivables. The company must ensure that brokerage fees for servicesrendered 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 TreeFinance, and other remaining lenders. Being updated with partner’s financial position is a great tool tomaintain 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 enablethe company to respond when unexpected cash needs or new opportunities occur.
A Case Study in Corporate Financial Reporting | 12VI. RecommendationThis 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 andlow receivables turnover must be improved. Several suggestions are already made in Financial Analysissection of this case study. The company is recommended to focus on new methods of collecting paymentsfor its services rather than relying to a major business partner. Delta can enter into mutual agreements withits lender, with fair provisions such as, payments/commissions/brokerage fees must be given to them in areasonable 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 inreceivables. An effective collection system must be established with the future tenants of West BaltimoreStreet 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 isthe major headache of Delta Inc. After the bankruptcy filed by its biggest lender and partner, Pink TreeFinance, the company is recommended to obtain this amount through a financing program. The loanshould push through and this new project must be undertaken to keep the business alive. It isrecommended that Delta should get a bridge loan (also called swing loan), particularly, the fast-trackedfinancing. A bridge loan is an interim financing for an individual or business until permanent or the nextstage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. topay back) the bridge loan, as well as other capitalization needs. This kind of loan will allow them toaccumulate cash as fast as two weeks (normal procedure is 2 weeks to three years) to finance the escrowneeded for closing the project. The only disadvantage is higher interest rates but with the future success ofWest Baltimore Project, these interest rates can be conquered through big revenues, and efficientmanagement of future receivables. One greatest advantage in getting this financing support is, Delta canclose the loan to meet its deadline.
A Case Study in Corporate Financial Reporting | 13VII. AppendixAppendix 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.
A Case Study in Corporate Financial Reporting | 14Appendix 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 Members 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 Members equity 482,923 288,307 Total liabilities and Members 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 Members Equity: Accounts payable and accrued liabilities 195,224 Total current liabilities 195,224 Other liabilities 430,030 Total liabilities 625,254 Members equity 161,213 Total liabilities and Members equity $786,467
A Case Study in Corporate Financial Reporting | 15 Delta Inc. Statement of Operations For the Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999Revenue:Brokerage fees $631,054 $426,193 $156,082Commissions 146,240 77,528 47,528Other income 42,932 27,896 19,820Total revenue 820,226 531,617 223,430Expense:Compensation and benefits 439,253 250,643 95,225Professional and other fees 41,511 36,338 22,450Advertising and promotions 44,961 31,678 13,212Office operations 51,229 44,013 16,218Other expense 48,656 41,851 15,112Total expense 625,610 404,523 162,217Net Income $194,616 $127,094 $61,213 Delta Inc. Statement of Cash Flows For the Years Ended December 31, 2001, 2000, and 1999 2001Cash flows from operating activitiesNet income $194,616Adjustments to reconcile net income to net cash providedby operating activitiesless: Increase in accounts receivable -309,647add: Decrease in accounts payable and accrued liabilities 133,241Net cash provided by operating activities 18,210
A Case Study in Corporate Financial Reporting | 16Cash flows from Investing Activities --Cash flows from Financing Activities --Net increase in cash and cash equivalents 18,210Cash and cash equivalents at beginning of year 65,857Cash and cash equivalents at end of year $84,067 2000Cash flows from operating activitiesNet income $127,094Adjustments to reconcile net income to net cash providedby operating activitiesless: Increase in accounts receivable -295,710add: Decrease in accounts payable and accrued liabilities 185,762Net cash provided by operating activities 17146Cash flows from Investing Activities --Cash flows from Financing Activities --Net increase in cash and cash equivalents 17,416Cash and cash equivalents at beginning of year 48,711Cash and cash equivalents at end of year $65,857 1999Cash flows from operating activitiesNet income $61,213Adjustments to reconcile net income to net cash providedby operating activitiesless: Increase in accounts receivable -87,543add: Decrease in accounts payable and accrued liabilities 30,041Net cash provided by operating activities 3,711Cash flows from Investing Activities --Cash flows from Financing Activities --Net increase in cash and cash equivalents 3,711Cash and cash equivalents at beginning of year 45,000Cash and cash equivalents at end of year $48,711
A Case Study in Corporate Financial Reporting | 17Appendix 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 Stockholders 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 Stockholders 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 shareholders equity 1,949.5 2,089.20 Total liabilities and shareholders equity 22,228.0 $20,838.00
A Case Study in Corporate Financial Reporting | 18 Pink Tree Finance Statement of Operations December 31, 2001, 2000 and 1999 (Amounts in millions) 2001 2000 1999Revenues:Net investment income: 2,260.2 $1,945.00 $647.10Finance receivables and other 51.5 106.6 185.1Interest-only securities -- -- 550.6Gain on sale:Securitization transactions 26.9 7.5 --Whole-loan sales Servicing income 115.3 108.2 165.3Fee revenue and other income 229.7 277.5 207.4Total revenues 2,683.6 2,444.80 1,755.50Expenses:Provision for losses 563.6 354.2 128.7Interest expense 1,234.4 1,152.40 341.3Other operating costs and expenses 642.4 770.8 697.2Impairment charges 386.9 515.7 554.3Special charges 21.5 394.3 --Total expenses 2,848.8 3,187.40 1721.5Income (loss) before income taxes (165.2) -742.6 34Income tax benefit (62.5) -217.3 -13.9Net income (loss) (102.7) ($525.30) $47.90
A Case Study in Corporate Financial Reporting | 19 Pink Tree Finance’s Statement of Cash Flows December 31, 2001, 2000 and 1999 (Amounts in millions) 2001 2000Cash flows from operating activitiesNet investment income $2,141.20 $1,994.60Points and origination fees 3.1 44.8Fee revenue and other income 301.4 401.3Interest expense -1,212.30 -1,038.70Other operating costs -692.8 -846.6Taxes -23.9 -72.8Net cash provided by operating activities 516.7 482.6Cash flows from investing activitiesCash received from the sale of finance 867.2 2,501.20receivables, net of expensesPrincipal payments received on finance 8,611.30 8,490.10receivablesFinance receivables originated -12,320.30 -18,515.90Other 295.9 -262.3Net cash used by investing activities -2,545.90 -7,786.90Cash flows from financing activitiesCash contributed by parent resulting from -- --asset transferIssuance of liabilities related to deposit 1,872.40 2,168.80productsPayments on liabilities related to deposit -1,961.10 -1,166.00productsIssuance of notes payable and commercial 11,755.60 20,452.10paper
A Case Study in Corporate Financial Reporting | 20Payments on notes payable and commercial -9,666.90 -13,202.80paperChange in cash held in restricted accounts -241.8 -689.7for settlement of collateralized borrowingsRepurchase of shares of common stock -- -126Common stock dividends paid -- --Net cash provided by financing activities 1,758.20 7,436.40Net increase (decrease) in cash and cash -271 132.1equivalentsCash and cash equivalents, beginning of year 665.5 533.4Cash and cash equivalents, end of year $394.50 $665.50 1999Cash flows from operating activitiesNet investment income $1,009.00Points and origination fees 390Fee revenue and other income 383.1Interest expense -293.5Other operating costs -676.6Taxes -188Net cash provided by operating activities 624Cash flows from investing activitiesCash received from the sale of finance 9,516.60receivables, net of expensesPrincipal payments received on finance 7,487.20receivablesFinance receivables originated -24,650.50Other -120Net cash used by investing activities -7,766.70
A Case Study in Corporate Financial Reporting | 21Cash flows from financing activitiesCash contributed by parent resulting from 18.2asset transferIssuance of liabilities related to deposit 1,128.80productsPayments on liabilities related to deposit -288.3productsIssuance of notes payable and commercial 22,220.30paperPayments on notes payable and commercial -15,321.30paperChange in cash held in restricted accounts -76.8for settlement of collateralized borrowingsRepurchase of shares of common stock --Common stock dividends paid -200Net cash provided by financing activities 7,480.90Net increase (decrease) in cash and cash 338.2equivalentsCash and cash equivalents, beginning of year 195.2Cash and cash equivalents, end of year $533.40
A Case Study in Corporate Financial Reporting | 22Appendix 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
A Case Study in Corporate Financial Reporting | 23VIII. 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>