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.
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 Drake, 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...