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

$5,774,728

$4,060,563

$4,980,251

$4,563,672

$4,298,727

Expenses:

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

Page 3 of 9

The Charter Company

Exhibit 2 The Charter Company

Consolidated Balance Sheets 31-Dec

(In thousands)

Assets 1983

Current assets:

Cash & Cash Equivalents.......................... $64,031

Receivables:

Trade accounts............................................ 294,715

Other............................................................. 22,756

Affiliates........................................................ 31,030

Short-term notes and current installments of

long-term receivables............................... 2,868

351,369

Less: Allowance for doubtful receivables................................................. 10,951

Net receivables............................................ 340,418

982

1981

1980

1979

$59,939

$69,283

$94,112

$95,632

262,646

343,862

322,237

296,344

18,736

25,967

32,142

41,488

30,106

11,479

16,312

499

24.744

8,815

3,133

8.745

336,232

390,123

373,824

347,076

8,622

14.464

6,062

14.005

327,610

375,659

367,762

333,071

Inventories

Petroleum..................................................... 352,162 228,462 111,313 270,094 319,001

Other............................................................. 17,554 11,287 25,374 25,477 29,179

Total Inventories.......................................... 369,716 239,749 136,687 295,571 348,180

Assets held for sale.................................... 15,260

Prepaid expenses........................................ 12,302 14,578 27,316 16,217 16,971

Total current assets.................................... 801,727 641,876 608,945 773,662 793,854

Investments

Bahamas refinery affiliates 311,151 374,913 389,060 407,402 408,635

Charter Security Life & other

affiliates...................................................... 261,115 125,955 76,751 83,190 55,060

Other............................................................. 4.237 41.515 41.160 39.990 44.342

Total Investments........................................ 576,503 542,383 506,971 530,582 508,037

Property, plant & equipment....................... 426,415 407,814 403,187 468,851 395,188

Less: Accumulated

depreciation and depletion....................... 152.343 140.977 124.409 122.225 92.889

Net property, plant &

equipment.................................................. 274,072 266,837 278,778 346,626 302,299

Net assets of discontinued operations.................................................. - 26,282 2,717

Intangibles from acquisitions (net) 61,877 59,110 74,115 44,293 73,023

Other assets................................................. 99.020 91.558 69.800 51.097 51.481

Total assets.................................................. $1.813.199 $1.628.046 $1.541.326 $1.746.260 $1.728.694

Page 4 of 9

The Charter Company

Exhibit 2 (cont.)

Liabilities and Stockholders' Equity

Current Liabilities:

Notes payable...........................................

Current installment of long-term debt....

Accounts payable.....................................

Payable to

affiliates......................................................

Accrued expenses....................................

Income taxes.............................................

Total current liabilities.............................

Long-term debt excluding

current installments................................

Long-term debt payable to unconsol-

idatd, wholly owned subsidiaries.........

Subordinated debt, net of discount,

excluding current installments.............

Net liabilities of discontinued

operations................................................

Deferred income taxes............................

Deferred credits and other.....................

Stockholders' equity

Preferred stock(a).....................................

Common stock (b).....................................

Additional paid-in-capital on common

stock...........................................................

Retained earnings....................................

Net unrealized gain on investment securities of unconsolidated subsidiaries, net of taxes............................

Total liabilities & stockholders' equity....

$144,000

28,317

419,967

39,143

54,579

14.749

700,755

111,134

94,000

189,261

20,554

32,504

50,864

129,312

16,587

35,635

429,298

3.295

$3,250

29,342

416,924

21,257

48,261

21.625

540,659

133,086

91,000

154,200

16,068

52,242

114,787

21,570

53,721

448,924

1.789

614.127

1.813.199

640.791

1.628.046

$50,500

17,192

309,275

54,939

27.217

459,123

251,425

81,673

43,820

50,704

117,608

21,592

67,233

447,555

593

654.581

1.541.326

$76,563

21,402

348,312

71,747

17.433

535,457

404,631

81,316

27,377

19,793

117,917

21,592

67,202

470,476

499

677.686

1.746.260

$858

23,363

374,387

74,499

28.208

501,315

416,087

84,412

41,728

36,828

125,372

20,166

57,268

449,629

(4.1111

648.324

1.728.694

Page 5 of 9

The Charter Company

Exhibit 3

Working capital provided by operations Earnings from continuing operations.... Charges (credits) to earnings affecting working capital:

Depreciation, depletion, and

amortization..............................................

Gain on exchange of investment in St.

Joe Paper Company.................................

Deferred income taxes and other.............

Equity in net earnings of Charter Life

and other affiliates...................................

Equity in net losses of Bahamas refinery

affiliates included in cost of sales...........

Write-off of certain units in Bahamas

refinery........................................................

Write-down of tanker..................................

Total working capital provided by operations..................................................

The Charter Company Schedules of Working Capital Provided by Operations Years Ended December 31

(In thousands)

$50,382

37,939

(17,125)

7,850

(117,958)

12,511

49,428

7.772

$30.799

$29,830

36,074

(7,631)

(43,402)

18,542

$55,946

32,511

4,254

(14,080)

27,548

$50,237

35,085

1,928

(661)

16,775

$33.413 $106.179 $103.364

$367,726

28,851

4,843

(2,357)

10,376

$409.439

Page 6 of 9

The Charter Company

Exhibit 4

THE CHARTER COMPANY Selected Notes of 1983 Financial Statements

1. Significant Accounting Policies and Other

A. Basis of Financial Presentation. The accompanying consolidated financial statements include the accounts of The Charter Company and its majority-owned subsidiaries ("Charter") other than Charter Security Life Insurance Company (Louisiana) and subsidiaries ("Charter Security LIFE"), COFI Credit Corporation ("COFI") and First Charter Savings Bank ("First Charter") which are accounted for by the equity method. Charter's Bahamas refinery affiliates and other affiliated companies, all 31% to 50% owned, are also accounted for by the equity method. All significant intercompany accounts and transactions for Charter have been eliminated in consolidation.

B. Inventories. Inventories are stated at the lower of cost or market. Certain petroleum inventories aggregating $115,242,000 at December 31, 1983 and $83,664,000 at December 31, 1982 were determined under the last-in, first-out method ("LIFO"). Such petroleum inventories, if stated at current costs, would have been $41,554,000 and $48,051,000 higher, respectively. If the first-in, first-out method ("FIFO") of inventory valuation had been used for such inventories, reported net earnings would have been lower by $6,497,000 ($a.28 primary and fully diluted earnings per share) for 1983., $6,015,000 ($.21 primary and fully diluted earnings per share) for 1982 and $12,750,000 ($.45 primary and fully diluted earnings per share) for 1981. The cost of the remaining petroleum and other inventories is determined under the FIFO method. Crude oil and product exchange balances are reflected in petroleum inventories.

Certain petroleum inventories at December 31, 1983 were less than inventory levels at December 31, 1982 or the date of acquisition resulting in a liquidation of LIFO layers which were carried at lower costs. If such inventories had replaced at current costs, net earnings for 1983 would have been lower by approximately $12,803,000 ($.56 primary and fully diluted earnings per share). Certain petroleum inventories at December 31, 1981 were less than prior year levels resulting in a liquidation of prior years' LIFO layers which were carried at lower costs. If such inventories had been replaced at current costs, net earnings for 1981 would have been lower by approximately $15,686,000 ($.56 primary and fully diluted earnings per share).

F. Change in Accounting Principle. Effective January 1, 1983, Charter changed its accounting method of expensing the cost of spare parts at the Houston refinery to inventorying the spare parts and changing the cost to operations as utilized. This change was made to improve the matching of costs of spare parts to the benefits derived from their usage and establish financial control over these items. Net earnings for the first quarter of 1983 have been restated by $5,463,000 to reflect the cumulative effect of the change on prior years. The effect of this change was not material to 1983 earnings from continuing operations. The pro forma and cumulative effects on net earnings of prior years is not determinable because the necessary data is unavailable.

G. Miscellaneous Policies. Refining, marketing and other facilities are depreciated principally by the straight-line method over their estimated useful lives. During 1983, Charter revised the

Page 7 of 9

The Charter Company

estimated useful lives of certain property, plant and equipment. The effect of this change in accounting estimate was an increase in net earnings of $3,003,000 ($.13 primary and fully diluted earnings per share). During the fourth quarter of 1983, Charter renegotiated a contract and recorded a gain of $33,600,000.

5. Investment in Bahamas Refinery Affiliates

Charter's investment in the Bahamas refinery affiliated includes three 50% owned joint ventures: Bahamas Oil Refining Company ("BORCO"), BORCO Desulfurization Company ("BODCO") and BORCO Marine Company ("MARCO"). These joint ventures receive fees from the partners for use of the refinery and related facilities. The operations of these joint ventures do not reflect the partners' purchases of crude oil, sales of refined products and processing or storage agreements with third parties. Charter's share of the net operating losses of these ventures was $12,511,000, $18,542,000 and $27,548,000, for 1983, 1982 and 1981, respectively, including depreciation and amortization related to the excess of the appraised value over the historical cost of the assets allocated to property, plant and equipment at the time of the acquisition, charter's share of the losses of these ventures is recorded as cost of sales and operating expenses in its consolidated statements of earnings because these joint ventures are part of Charter's crude oil refining system. In addition, BARCO and BODCO wrote-off certain units during 1983 since use of such units is not anticipated in the foreseeable future. Charter's share of the write-off plus the write-off of the related excess of the appraised value over the historical cost of these asses was $49,428,000.

Page 8 of 9

The Charter Company

Exhibit 5

The Charter Company Quarterly Earnings per Share, Cash Dividends, and Common Stock Price

For the Fiscal Year 1983 and the First Two Quarters of 1984

First

Quarter

1983

Second

Quarter

Third

Quarter

Fourth

Quarter

1984

First

Quarter

Second

Quarter

Fully diluted earnings per share:

From continuing operations........

Net earnings..................................

Common dividend per

share.....................

Market price:

High

Low

$(0.31)

(0.05)

0.25

13.375

11.125

$0.51

0.43

0.25

13.750

10.750

$1.34

1.34

0.25

12.500

10.250

$0.23

0.23

0.25

12.250

8.000

$(1.49)

(2.38)

0.25

12.875

8.500

$(2.84)

(35.14)

9.750

2.000

EXHIBIT

Net Income. Working Capital. and Operating Cash Hows Fortune Top 100 Industrial Oil Companies (n = IB) 1or Fiscal Years Ending DetemBer 31. 1379 Ifi 1S83

Billions

60-

Cash provided by operations

Working capital prlvlded by operations

Income from continuing operations + Depreciation expense

Income from continuing operations

Operating current assets

83 Operating current liabilities

-10

Page 9 of 9