Receivables management: a case study.

Amoah, Nana ; Rao, Arundhati

CASE DESCRIPTION

The primary subject matter of this case concerns receivables management. Secondary issues examined include the impact of a client's financial distress on a firm's cashflows; the use financial accounting data to challenge a firm's going concern principle and the formulation of new business strategies when the unexpected happens to a firm. The case is appropriate for first year graduate level. The case is designed to be taught in two class hours and is expected to require five hours of outside preparation by students.

CASE SYNOPSIS

Delta Inc. was formed in 1998 by Thomas Dake and George Roberts. The firm was organized and located in Baltimore, Maryland. It provided brokerage services for a wide range of financial transactions for businesses in the state of Maryland. Delta's strategy was to position itself as a discount broker because it perceived that borrowers' resistance to broker fees was much weaker when the lender paid the fees. Pink Tree Finance, a public company listed on the New York Stock Exchange, was Delta's major business partner. About 60 percent of Delta's receivables were due from Pink Tree. Although Delta regarded new client and lender relationships as opportunities for growth within the brokerage business, it also looked for opportunities in other businesses. As a result, the firm identified the West Baltimore Senior Housing Project as a good investment opportunity.

Delta planned to develop a property on West Baltimore Street into a senior housing facility and commercial spaces. 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. In 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 fee of $100,000 on executing the term sheet. Delta planned to use the outstanding brokerage fees to be collected from Pink Tree to close its loan transaction. In the middle of January, 2002, Pink Tree filed for chapter 11 bankruptcy. Mr. Thomas Dake, CFO of Delta Group was now in a difficult situation of raising $100,000 to close the loan and to ensure that the West Baltimore Senior Housing Project would be realized.

INTRODUCTION

Although business failures are not new phenomena it is given very little coverage in the accounting curriculum. This case study introduces students to an important aspect of receivables management--the need to monitor your client's financial health and decreasing your reliance on few clients. The case investigates a discount brokerage firm owned and operated by two highly qualified individuals who were involved in expanding their business but failed to see the obvious signs of financial distress. "How much of our receivables, if any, can we collect from Pink Tree after they've filed for Chapter 11 bankruptcy (1)?" George Roberts, CEO of Delta Inc. asked the CFO, Thomas Dake. It was in the middle of January, 2002, and the partners of Delta Inc. were at an emergency meeting after they heard about Pink Tree's financial crisis. They were expecting to receive outstanding brokerage fees from Pink Tree that week. Delta was relying on these funds to close a loan transaction for a new business opportunity at West Baltimore Street.

As Mr. Thomas Dake left the emergency meeting, he reflected on the difficult situation his firm was experiencing. He had assured his partner he would come up with a solution but he knew it was not going to be easy given the little time they had. According to their attorney, Jeff Mathews, "If Delta does not come up with $100,000 to close the loan within two weeks, the transaction will be terminated and that would be the end of our new venture." The cash on hand was needed to meet all the other regular business expenses such as rent, salaries, etc.

Mr. Dake was in his office and reflected on why everything had suddenly gone wrong. He was very confident about Delta's finances until the unexpected happened. About 60 percent of Delta's accounts receivable was due from Pink Tree, so the firm's bankruptcy was a devastating problem for Delta. His thoughts were about finding a quick and effective solution as well as whether this situation could have been avoided. Mr. Dake thought back of some business courses he had taken in college in which a professor had discussed predicting bankruptcies using the Altman Z-score. Since then several newer probabilistic models have also been developed. Mr. Dake was an optimist and had never thought this academic topic would ever be of interest to him or his business. Now he wondered what the firm's future would be if the new business venture was not pursued. Would they lose the $30,000 in escrow? Would they recover anything from Pink Tree? Would the business survive without its biggest client in the future?

COMPANY BACKGROUND

Delta Inc. was formed in 1998 by Thomas Dake and George Roberts. The firm was organized and located in Baltimore, MD. It provided brokerage services for a wide range of financial transactions for businesses in the state of Maryland. Mr. Roberts was a principal and the CEO of Delta. Prior to founding Delta, Mr. Roberts had several years of financial management. His previous work experience included working as a licensed investment broker and managing logistics and supply chain integration. Mr. Roberts graduated with a Bachelor of Science in Urban & Regional Planning. Mr. Dake was also a principal and co-founder of Delta. Previously, Mr. Dake was a financial analyst at a bank. He had a Bachelor of Business Administration degree.

Delta's expertise was in debt, equity, and accounts-receivable financing. Delta maintained relationships with equity sponsors, regional fiduciary institutions and non-traditional financing entities that provided financing to the firm's clients. The firm obtained its brokerage fees and commissions from lenders. A substantial portion of Delta's brokerage fees and commissions were from Pink Tree, a public company listed on the New York Stock Exchange. Between 2000 and 2001, Pink Tree's market value of equity increased by almost eight percent. The firm's assets increased by seven percent while revenues increased by ten percent during the same period.

Pink Tree was the leading lender to Delta's clients. Pink Tree specialized in providing loans to risky consumers and the firm had a new lending program that required only a five percent downpayment to close transactions. In addition to it's relationships with lenders, Delta also had referral agreements with other brokerage firms to which they could refer financing deals that were not in their area of expertise for a fee.

Delta Inc. retained a pool of consultants (attorneys, accounting and investment banking professionals) to structure, manage and negotiate complicated financial transactions. According to Mr. Roberts, "Our investment team works closely with and is supported by extremely talented in-house credit advisors who can quickly and effectively offer a creative and timely solution in the form of debt, equity or account-receivable financing. Such financing can often be tiered and used to meet working capital needs, acquire debt, provide added liquidity in a turn around, satisfy off-balance sheet financing needs, or otherwise fund a special situation or event-driven financing. 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."

The first step is the application process; this enables Delta acquire information about prospective clients. The second step is due diligence. Clients have to provide their company and/or personal information including registration, financial statements, and tax returns. At this point, Delta develops a case analysis report and executes an engagement contract with the client. From the case analysis report, Delta determined the best financing option for prospective clients. When asked about the relevance of Delta's role as a broker, Mr. Dake responded, "We originate the loan. A borrower must complete a comprehensive application and disclosure process before a lender evaluates the loan request. We simplify this process for the borrower and lender, by conducting this research, counseling our clients on their loan package choices, and enabling them to select the right loan. We serve as an expert mentor and guide to our clients through the complex lending process. We also offer our clients more extensive choice of loan programs and access to more affordable loans."

As a loan broker Delta would typically have two revenue streams from each completed loan transaction. First, the lender such as Pink Tree would pay them a commission for finding them an acceptable borrower. The second revenue stream would be a fee from the borrower for finding them an institution that will loan them the money. Delta's strategy was to forego the second revenue stream completely in order to increase the number of applications processed and accepted thereby significantly increasing the first revenue stream. 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. Delta's revenues and net income had increased by 267 percent and 217 percent respectively in just two years.

Regarding Delta's customer relationship management, Mr. 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." The key to a superior customer relationship management for Delta was communication, accessibility, responsiveness and client, market and product knowledge. This made Delta the broker of choice for their clients.

Delta Inc. was an active member of the Maryland Chamber of Commerce. The firm participated in numerous networking events held by the Chamber each year. This gave the company opportunities to interact with other business leaders, government officials and potential clients and mentors. Delta was able to develop several relationships with clients and financial institutions through the Chamber's programs. Although the firm regarded new client and lender relationships as opportunities for growth, it also sought out opportunities outside its line of business. As a result of this strategy the firm identified the "West Baltimore Project" as a great investment opportunity.

NEW BUSINESS OPPORTUNITY

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 at $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.

DISCUSSION QUESTIONS

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

2. List some topics related to receivables management.

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

4. Calculate the Altman's Z-Score for Pink Tree and discuss whether Delta Inc. should have anticipated the risk of dealing with Pink Tree?

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?

CASE LEARNING OBJECTIVES, IMPLEMENTATION GUIDANCE, AND OUTCOME ASSESSMENT

Case Learning Objectives

This case raises issues of accounts receivable management and the perils of having one major credit customer. Students are motivated to critically analyze the source of a firm's liquidity problems and develop preventive strategies. The students are introduced to the subject of bankruptcy and its implications for related parties. The case has the following specific learning objectives:

* To provide students with the opportunity to evaluate the impact of inadequate risk assessment of accounts receivables as well as insufficient financial flexibility.

* To expose students to the details of accounts receivable issues such as default risk and using accounts receivable as collateral for short-term borrowing.

* To provide students practice in assessing the liquidity and solvency of firms as it relates to bankruptcy prediction.

Implementation Guidance

This teaching case is designed to be used in the introductory financial accounting course in an MBA class. The case can be used in the section on ratio analysis or receivables management. The prerequisites for this case are, understanding the preparation, content, usefulness, and limitations of financial statement.

The recommended approach for teaching the case is to first assign the case to students individually or in groups before having a classroom discussion. The instructor may assign the discussion questions before or during the class discussion. As many students have diverse work experience, a less structured discussion is recommended. A preferred teaching strategy is to assign the case to the students in groups and have each group present their analysis in class. This will give the students an opportunity to discuss and identify the cause of Delta's predicament.

Each group should be asked to identify the critical issues facing Delta Inc., provide alternatives, recommend a solution and provide justification for the recommended solution. The presentation must include an analysis of whether Pink Tree's bankruptcy was predictable. After the group presentations, the instructor can lead a discussion on the role of financial accounting in formulating business strategies before summarizing the case.

Outcome Assessment

This case was tested successfully in a graduate class. One of the co-authors tested the case during the fall 2006 semester in a Financial Accounting course in the MBA program taken by students who do not have an undergraduate degree in business. The students were given a hardcopy of the case and it was discussed in class for thirty minutes. The students were also given information about the bankruptcy predictive model: Altman's Z-score and a copy of industry statistics

Seven groups were formed comprising of three students each. The students were instructed to analyze the case and answer the discussion questions at home. The following week one hour of class time was devoted to this case; each group was called upon to lead the discussion on one or two questions; the questions were not pre-assigned to any group in particular. The instructor gave the students two percent extra credit for submitting written responses and participating in the discussions. Each group's response was graded for completeness and accuracy, although it did not affect the extra credit points. Overall, the students' performance was above average and the students responded very well to the case study method of teaching; they said they gained a better understanding of the subject than the regular lecture style of teaching.

After the discussions were concluded, an anonymous survey of students' experiences with the case was conducted in class.

All 21 students participated in the survey. As shown on a five-point scale from strongly disagree (1) to strongly agree (5), for eight of the ten questions the means were four or five, indicating that students had strong positive perceptions about the case. As expected, 95 percent of the students believed the case to be a good example of real-world problems of accounts receivables management (Question 1). 85 percent found the case to be a good illustration of a real-world application of cash management (Question 2) and believed the case is a good demonstration of a real-world application of financial flexibility (Question 3). 76 percent believed the case provides good practice with ratio analysis (Question 4) and also found the case interesting (Question 5). 80 percent believed the case increased their understanding of accounts receivables management (Question 6). 66 percent believed the case increased their understanding of bankruptcy prediction using Altman's Z score (Question 7). 90 percent believed the case increased their understanding of accounts receivables management (Question 8). 95 percent found the case encouraged them to think critically about cash management (Question 9). 71 percent found the case to be a good illustration of bankruptcy prediction (Question 10). All the results are consistent with the case objective of enhancing the students' critical thinking skills.

ACKNOWLEDGMENTS

The authors thank Franklyn Manu, Tim Edlund, Augustus Abbey and participants at the North American Case Research Association and Allied Academies International Conferences for insightful comments and suggestions.

Nana Amoah, Old Dominion University

Arundhati Rao, Towson University

Table 1
Pink Tree's Financial Statements - 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

Table 2
Pink Tree's Financial Statements - Statement of Operations
December 31, 2001, 2000 and 1999
(Amounts in millions)

                                       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

Table 3 Pink Tree's Financial Statements - Statement of
Shareholder's Equity
December 31, 2001, 2000 and 1999
(Amounts in millions)

                                                   A         B

Balance, January 1, 1999                         2292.2        $-
Comprehensive income (loss), net of tax:
Net income                                         47.9        --
Change in minimum pension liability                 4.2        --
adjustment (net of taxes $2.6 m)
Change in unrealized depreciation of actively    (12.0)        --
managed fixed maturity investments and
interest-only securities (net of taxes $7.6m)
Total comprehensive income                         40.1        --
Issuance of common stock                          299.4        --
Tax benefit related to issuance of shares           3.3        --
under stock option plans
Dividends on common stock                       (200.0)        --
Balance, December 31, 1999                      2,435.0        --
Comprehensive loss, net of tax:
Net loss                                        (525.3)        --
Change in unrealized depreciation of actively   (120.3)        --
managed fixed maturity investments and
interest-only securities (net of taxes $70.6
m)
Total comprehensive loss                        (645.6)        --
Issuance of preferred stock                       750.0       750
Repurchase of common stock                      (126.0)        --
Return of capital                               (306.3)        --
Dividends on preferred stock                     (18.6)        --
Other                                               0.7        --
Balance, December 31, 2000                      2,089.2       750
Comprehensive income (loss), net of tax:
Net loss                                        (102.7)        --
Change in minimum pension liability               (3.9)        --
adjustment (net of taxes $2.6 m)

Change in unrealized depreciation of actively      34.4        --
managed fixed maturity investments and
interest-only securities (net of taxes $21.7
m)
Total comprehensive loss                         (72.2)        --
Dividends on preferred stock                     (67.5)        --
Balance, December 31, 2001                      1,949.5   $750.00

                                                    C           D

Balance, January 1, 1999                        $1,338.30    ($11.00)
Comprehensive income (loss), net of tax:
Net income                                             --
Change in minimum pension liability                    --         4.2
adjustment (net of taxes $2.6 m)
Change in unrealized depreciation of actively          --         -12
managed fixed maturity investments and
interest-only securities (net of taxes $7.6m)
Total comprehensive income                             --          --
Issuance of common stock                            299.4          --
Tax benefit related to issuance of shares             3.3          --
under stock option plans
Dividends on common stock                               -          --
Balance, December 31, 1999                           1641       -18.8
Comprehensive loss, net of tax:
Net loss                                                           --
Change in unrealized depreciation of actively          --      -120.3
managed fixed maturity investments and
interest-only securities (net of taxes $70.6
m)
Total comprehensive loss                               --          --
Issuance of preferred stock                            --          --
Repurchase of common stock                           -126          --
Return of capital                                  -306.3          --
Dividends on preferred stock                           --          --
Other                                                 0.7          --
Balance, December 31, 2000                       1,209.40      -139.1
Comprehensive income (loss), net of tax:
Net loss                                               --          --
Change in minimum pension liability                    --        -3.9
adjustment (net of taxes $2.6 m)

Change in unrealized depreciation of actively          --        34.4
managed fixed maturity investments and
interest-only securities (net of taxes $21.7
m)
Total comprehensive loss                               --          --
Dividends on preferred stock                           --          --
Balance, December 31, 2001                      $1,209.40   ($108.60)

                                                    E

Balance, January 1, 1999                          $964.90
Comprehensive income (loss), net of tax:
Net income                                           47.9
Change in minimum pension liability                    --
adjustment (net of taxes $2.6 m)
Change in unrealized depreciation of actively          --
managed fixed maturity investments and
interest-only securities (net of taxes $7.6m)
Total comprehensive income                             --
Issuance of common stock                               --
Tax benefit related to issuance of shares              --
under stock option plans
Dividends on common stock                            -200
Balance, December 31, 1999                          812.8
Comprehensive loss, net of tax:
Net loss                                           -525.3
Change in unrealized depreciation of actively          --
managed fixed maturity investments and
interest-only securities (net of taxes $70.6
m)
Total comprehensive loss                               --
Issuance of preferred stock                            --
Repurchase of common stock                             --
Return of capital                                      --
Dividends on preferred stock                        -18.6
Other                                                   -
Balance, December 31, 2000                          268.9
Comprehensive income (loss), net of tax:
Net loss                                           -102.7
Change in minimum pension liability                    --
adjustment (net of taxes $2.6 m)

Change in unrealized depreciation of actively          --
managed fixed maturity investments and
interest-only securities (net of taxes $21.7
m)
Total comprehensive loss                               --
Dividends on preferred stock                        -67.5
Balance, December 31, 2001                         $98.70

A = Total

B = Preferred Stock

C = Common Stock

D = Accumulated Other Comprehensive Income

E = Retained Earnings

Table 4 Pink Tree's Financial Statements - Statement of Cash Flows
December 31, 2001, 2000 and 1999 (Amounts in millions)

                                                    2001         2000
Cash flows from operating activities
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
Cash flows from operating activities
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

Table 5
Pink Tree's Market Value of Equity
December 31, 2001 and 2000

                           2000     2001

Market Value of Equity   3965.23   4266.01

Table 6
Delta's Financial Statements - 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

Table 7
Delta's Financial Statements - Statement of Operations
For the Years Ended December 31, 2001, 2000, and 1999

                                 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

Table 8 Delta's Financial Statements - Statement of Changes in Member's
For the Years Ended December 31, 2001, 2000, and 1999

                                Contributed   Retained     Total
                                   Capital    Earnings

Balances at December 31, 1999     $100,000     $61,213   $161,213
Net income                              --     127,094    127,094
Balances at December 31, 2000     $100,000    $188,307   $288,307
Net income                              --     194,616    194,616
Balances at December 31, 2001     $100,000    $382,923   $482,923

Table 9
Delta's Financial Statements - Statement of Cash Flows
For the Years Ended December 31, 2001, 2000, and 1999

                                                               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

Cash flows from operating activities
Net income                                                  $127,094
Adjustments to reconcile net income to net cash provided
by operating activities
less: Increase in accounts receivable                       -295,710
add: Decrease in accounts payable and accrued liabilities    185,762
Net cash provided by operating activities                      17146
Cash flows from Investing Activities                              --
Cash flows from Financing Activities                              --
Net increase in cash and cash equivalents                     17,416
Cash and cash equivalents at beginning of year                48,711
Cash and cash equivalents at end of year                     $65,857

                                                              1999

Cash flows from operating activities
Net income                                                  $61,213
Adjustments to reconcile net income to net cash provided
by operating activities
less: Increase in accounts receivable                       -87,543
add: Decrease in accounts payable and accrued liabilities    30,041
Net cash provided by operating activities                     3,711
Cash flows from Investing Activities                             --
Cash flows from Financing Activities                             --
Net increase in cash and cash equivalents                     3,711
Cash and cash equivalents at beginning of year               45,000
Cash and cash equivalents at end of year                    $48,711

Table 10 : Altman's Z-Score

Z-Score Bankruptcy Model

Z = 1.2(T1) + 1.4(T2) + 3.3(T3) + 0.6(T4) + 0.99(T5)

T1 = Working Capital / Total Assets
T2 = Retained Earnings / Total Assets
T3 = Earnings Before Interest and Taxes / Total Assets
T4 = Market Value of Equity / Book Value of Total Liabilities
T5 = Sales / Total Assets

Zones of Discrimination
Z > 2.99 = Safe Zone
1.80 < Z < 2.99 = Grey Zone
Z < 1.80 = Distress Zone

Table 11
Select Industry Financial Ratios
Source: Compustat

                                             Lending
                                          Institutions

                                   1999   2000   2001    1999

Current Ratio                        --     --     --    3.22
Current cash debt coverage ratio     --     --     --    0.23
Accounts receivable turnover       2.49   2.57   2.41    5.36
Debt to Asset                      4.38   5.56   6.05     0.6
Cash debt coverage ratio           1.37    0.5   0.17      --

                                    Loan Brokers

                                    2000    2001

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

Table 12
Feedback from Students
(n=21)

Questions                                        Mean   Median   Mode

1. The case is a good example of real-world      4.38     4       4
problems of ineffective accounts receivables
management

2. The case is a good demonstration of a         4.14     4       4
real-world application of financial
flexibility.

3. The case is a good illustration of a          4.14     4       4
real-world application of cash management

4. This case provides good practice with ratio   4.29     5       5
analysis

5. The case is interesting                       4.19     4       5

6. This case has increased my understanding of   4.05     4       4
accounts receivables management

7. This case has increased my understanding of   3.95     4       5
bankruptcy prediction using Altman's Z score

8. The case has encouraged me to think           4.33     4       5
critically about accounts receivables
management

9. The case has encouraged me to think           4.38     4       4
critically about cash management

10. This case is a good illustration of          3.86     4       4
bankruptcy prediction