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The Charter Company

The Charter Company

Overview

The Charter Company was organized in 1959 as a consolidation of several existing corporations. The company’s primary line of business was petroleum production and marketing, although it also maintained a significant equity investment in the Charter Security Life Insurance Company.

In 1983, the Charter Company was listed by Fortune magazine among the 100 largest U.S. industrial companies. For the year ended December 31, 1983, revenues totaled $5.7 billion, and income from continuing operations was $50.4 million. For 1982, revenues were $4 billion, and earnings from continuing operations were $29.8 million.

In spite of the continuing worldwide glut in crude oil and petroleum products, Charter had maintained its quarterly dividend of $.25 per share from the second quarter of 1980 through the first quarter of 1984. During 1983 and early 1984, Charter’s common stock traded in a range of $8.00 to $13.75. In the latter half of 1983, however, a number of adverse articles began appearing in the financial press, questioning the quality of Charter’s reported earnings. Nonetheless, the company’s 1983 financial statements, released in early 1984, indicated no particular financial concerns. Moreover, the firm’s “Big Eight” auditing firm, Peat, Marwick, Mitchell & Co., had issued a “clean” opinion subject only to a consistency qualification (to which they concurred).

During the first week of April 1984, however, Charter reported a substantial first quarter loss and announced plans to cut oil production and lay off employees. The company’s common stock dropped in price from $9.50 per share on April 3 to $6.625 on April 5. The price then steadily decreased to $3.25 by the end of April.

On April 20, 1984, the Charter Company and 43 of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Act.

Copyright 1988: C. Norgaad and R. Kochanek

Page 1 of 9

The Charter Company

Discussion Questions

Answer these questions using the overview (p. 1) and 5 Exhibits (pp. 3 – 9). Write your responses in a new thread on the board.

1. Calculate the following ratios for each year during the period 1980-1983. Comment on the trend indicated by each ratio with respect to the financial performance and condition of the Charter Company.

a. Profitability:

Return on average total assets (assume a 46% income tax rate)

b. Turnover:

i. Accounts receivable (based on average gross trade receivables).

ii. Inventory (based on average total inventory).

iii. Total assets (based on average total assets).

c. Liquidity:

i. Current ratio

ii. Quick ratio

d. Solvency

i. Total liabilities to total equities

ii. Total long-term debt to total long-term debt plus owner’s equity

2. The Charter Company had a number of nonrecurring and/or noncash components of income from continuing operations in 1983. Beginning with the 1983 earnings from continuing operations, adjust this figure for nonrecurring and/or noncash items (information for these adjustments are included in Exhibit 1 (p. 3), Exhibit 3 (p. 6), and Exhibit 4 (pp. 7 – 8)).

3. Based on the information presented in the case, discuss the extent to which the stock market, in the aggregate, anticipated Charter’s problems and priced its common stock accordingly (see Exhibit 5 (p. 9)).

Page 2 of 9

The Charter Company

Exhibit 1

The Charter Company

Consolidated Statement of Earnings

Years Ended December 31

(In thousands)

	1983		1982		1981		1980			1979
Revenues	$5,656,770		$4,017,161		$4,966,171		$4,563,011		$4,296,370
Equity in net earnings of Charter
Security Life and other affiliates	117,958		43,402		14,080			661		2,357
Expenses:	$5,774,728		$4,060,563		$4,980,251		$4,563,672		$4,298,727
Cost of sales and operating	$5,364,820		$3,744,462		$4,512,215		$4,193,275		$3,624,619
Selling, general and administrative	99,987		101,968		190,656		112,694		154,608
Interest	80,886		69,879		89,196		77,133		44,000
Depreciation, depletion and
amortization	37,939		36,074		32,511		35,085		28,851
Write-off of certain units at
Bahamas refinery	49,428		-		-		-		-
Write-down of tanker	7,772		-			-			-			-
Total Expenses	$5,640,832		$3,952,383		$4,824,578		$4,418,187		$3,852,078
Earnings before income taxes, etc.	$133,896		$108,180		$155,673		$145,485		$446,649
Income taxes	83514	78350	99727	95248	78923
Earnings from continuing operations	$50,382		$29,830		$55,946		$50,237		$367,726
Discontinued operations, net	(1,950)	5,430	(48,229)	-		-
Extraordinary charge		-			-			-			-		(2,388)
Earnings before cumulative effect	$48,432		$35,260		$7,717		$50,237		$365,338
Cumulative effect on prior years of a
change in accounting principle	5,463		-			-			-			-
Net earnings	$53,895		$35,260		$7,717		$50,237		$365,338