The Demise of Resources Unlimited

Presentation by Sheila R West

Dr. Henry Dorr, InstructorBellevue University

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• Company formed in 1985 through merger of two natural pipelines

• Largest gas distribution network covering southwestern and mountain states to northeastern and Midwestern regions

• Federal de-regulation of gas industry occurred after merger• Much uncertainty and unsteadiness; daily changes in

supply and demand• Purchase costs and sales prices began to swing wildly

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•    Envisions de-regulation of gas industry as an opportunity, not a problem.•    Vision is to resolve gas industry uncertainties by using derivatives and hedges to absorb risk of the cost and price swings.

•    Not able to baseline projected earnings due to incomplete data furnished to analyst in New York.

•   Company could not estimate the variant number of gas accounts expected in the period from 1988-1990.

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• Memo to Senior Mgt. expressed concern about unrealistic corporate profits cited by national media.• Questioned CEO regarding the construction of the derivative model• Concerned about accuracy of quarterly sales reported by media and possibility of skewed data• CEO took no action

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• Accurate - Baseline average of eight quarters of data.Accurate - Baseline average of eight quarters of data.• Skewed - Baseline average of five quarters of dataSkewed - Baseline average of five quarters of data

Quarterly Profits (in millions) - $342, $267, $321, $157, $33, $349, $132, and $289Quarterly Profits (in millions) - $342, $267, $321, $157, $33, $349, $132, and $289

Resources Unlimited could not estimate variant number of accounts.

Our Assumption –Oil accounts estimated at 34% increase for 1990; same increase estimated for gas accounts.

Based on assumption above, gas accounts for 1990 forecasted as 43.

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• 500 gas accounts to produce enough revenue for 30 days

• In six days, company lost 1/5 or 100 of its gas accounts• After six days, CEO transfers 400 gas accounts to

dummy hedge fund

Mean Salary of 3 Highest Paid Accountants (All Males)

($50000 + $52000 + $55000)/3 =$52,333

Variance=(2333sq + 333sq + 2667sq)/3=(5442889 + 110889 + 7112889)/3=4222222.3

Standard Deviation=Square Root of 4222222.3=2054.81

Two Standard Deviations = 4109.62Mean Salary minus Two Standard Deviations

= $52,333 - 4,109.62= $48,223.38 (Appropriate Salary to

Avoid Discrimination Suit)

Appropriate Raise to Female Accountant

= $48,223.38 - $32,000 = $16, 223.38= $16,000 (nearest thous.)

ACCOUNTANT SALARIES/POTENTIAL DISCRIMINATION SUIT

Male 1 - $55,000Male 1 - $55,000

Male 2 - $52,000Male 2 - $52,000

Male 3 - $50,000Male 3 - $50,000

Female - $32,000Female - $32,000

Criteria for Discrimination Criteria for Discrimination Suit Suit More than two More than two standard deviations from standard deviations from the mean salary of top the mean salary of top three paid employees in a three paid employees in a job.job.

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Resources Unlimited went into bankruptcy in June, 1994

What contributed to the demise of Resources Unlimited?

• Lack of competent or technically trained people to develop the derivative model• Incomplete data submitted to Wall Street analyst for reporting• Lack of adequate communication with Wall Street Analyst• Senior Management’s non-adherence to the Accounting Departments concerns• Senior Management’s lack of communication with the Accounting Department• Senior Management’s non-inclusive style of management..