-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WzAMdg+/mFXccNK1TYSXlI1GYHpYQFAk1mcIa478Yfn6z8monw2i7yh8LJWpVryG QaLV+bP6T2Os8enc2bBeJg== 0001047469-98-036875.txt : 19981012 0001047469-98-036875.hdr.sgml : 19981012 ACCESSION NUMBER: 0001047469-98-036875 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980731 ITEM INFORMATION: FILED AS OF DATE: 19981009 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAMES & MOORE GROUP CENTRAL INDEX KEY: 0000878549 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 954316617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-11075 FILM NUMBER: 98723350 BUSINESS ADDRESS: STREET 1: 911 WILSHIRE BLVD STE 700 CITY: LOS ANGELES STATE: CA ZIP: 90017 BUSINESS PHONE: 2136831560 MAIL ADDRESS: STREET 1: 911 WILSHIRE BLVD STREET 2: STE 700 CITY: LOS ANGELES STATE: CA ZIP: 90017 FORMER COMPANY: FORMER CONFORMED NAME: DAMES & MOORE INC /DE/ DATE OF NAME CHANGE: 19930328 8-K/A 1 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT AMENDMENT NO.1 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): July 31, 1998 DAMES & MOORE GROUP (Exact name of registrant as specified in its charter) Commission File Number 1-11075 DELAWARE 95-4316617 (State of incorporation) (I.R.S. Employer Identification No.) 911 WILSHIRE BOULEVARD, SUITE 700 LOS ANGELES, CALIFORNIA 90017 (Address of principal executive offices) (Zip Code) (213) 996-2200 (Registrant's telephone number, including area code) ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS The Financial Statements, Pro Forma Financial Information and Exhibits set forth in Dames & Moore Group's Form 8-K dated July 31, 1998 are hereby amended to read in their entirety as follows: (a) Financial Statements of Businesses Acquired Included as Exhibit 99.4 hereto, and incorporated herein by reference are the audited consolidated financial statements of Radian International LLC and subsidiaries as of December 31, 1997 and 1996, and for the years then ended. Included as Exhibits 99.3 hereto, and incorporated herein by reference are the consolidated unaudited financial information of Radian International LLC and subsidiaries as of June 30, 1998 and December 31, 1997; and for the six-month periods ended June 30, 1998 and June 30, 1997. (b) Pro Forma Financial Information On July 31, 1998, Dames & Moore Group ("DMG") acquired all of the membership interests of Radian International LLC ("Radian"). The purchase price of $117 million was allocated to the estimated fair value of assets acquired and liabilities assumed, using the purchase method of accounting. DMG is awaiting additional information related to the fair value of certain assets acquired, liabilities assumed and the restructuring plans for Radian. The purchase price in excess of the fair value of the assets acquired is classified as goodwill and is being amortized over 40 years. The following pro forma combined financial statements give the effect of the acquisition of Radian. The pro forma combined financial statements are based on historical audited and unaudited consolidated financial statements and notes thereto of DMG and Radian. The unaudited pro forma combined financial statements are presented for illustrative purposes only to show how the acquisitions might have affected historical results of operations if the transaction had occurred at an earlier time. The pro forma results are not necessarily indicative of the combined financial position or results of operations for future periods or the results that actually would have been realized had DMG and Radian been combined during the specified periods. The pro forma combined consolidated financial information does not reflect any potential cost savings which are expected to be achieved following the acquisition. The pro forma combined financial statements, including notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical consolidated financial statements of DMG and Radian, including the notes thereto, incorporated herein by reference. 2 DAMES & MOORE GROUP AND RADIAN INTERNATIONAL LLC UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DMG RADIAN June 26, June 30, PRO FORMA PRO FORMA 1998 1998 ADJUSTMENTS COMBINED ------------ ------------- ------------- ------------- ASSETS Current: Cash and cash equivalents $ 11,135 $ 1,793 $ $ 12,928 Marketable securities 785 - 785 Accounts receivable, net of allowance for doubtful accounts 149,169 48,848 198,017 Unbilled receivables 63,678 29,734 93,412 Deferred income taxes 4,303 1,034 1,510 (g) 6,847 Prepaid expenses and other assets 13,285 4,799 481 (e) 27,072 8,507 (f) Inventories - 5,685 5,685 ---------- -------- --------- --------- Total current assets 242,355 91,893 10,498 344,746 Property and equipment, net 24,305 30,616 54,921 Goodwill of acquired businesses, net 121,896 16,885 (16,885)(a) 132,308 10,412 (b) Investments in affiliates 7,221 1,735 8,956 Other assets 14,499 16,092 3,078 (d) 33,669 ---------- -------- --------- --------- $410,276 $157,221 $ 7,103 $ 574,600 ---------- -------- --------- --------- ---------- -------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current: Current portion of long-term debt $ 14,281 $ 44,215 $ (44,165)(c) $ 4,331 (10,000)(d) Accounts payable 35,040 9,557 300 (i) 44,897 Accrued payroll and employee benefits 29,103 15,705 44,808 Current income taxes payable 6,256 336 (1,498)(e) 5,094 Accrued expenses and other liabilities 24,799 4,938 (2,424)(d) 45,696 3,500 (g) 15,000 (h) (117)(c) ---------- -------- --------- --------- Total current liabilities 109,479 74,751 (39,404) 144,826 Long-term debt 139,000 - 137,641 (d) 276,641 Other long-term liabilities 6,134 7,815 (553)(d) 13,396 Contingencies Shareholders' equity: Preferred stock - - - - Common stock and capital in excess of $0.01 par value 108,010 102,831 (102,831)(j) 108,010 Retained earnings 108,905 (28,055) (2,607)(e) 93,100 (11,208)(f) (1,990)(g) 28,055 (j) Treasury stock (58,614) - (58,614) Accumulated other comprehensive income (2,016) (121) (2,137) Other shareholders' equity (622) - (622) ---------- -------- --------- --------- Total shareholders' equity 155,663 74,655 (90,581) 139,737 ---------- -------- --------- --------- $410,276 $157,221 $ 7,103 $574,600 ---------- -------- --------- --------- ---------- -------- --------- ---------
The accompanying notes are an integral part of these pro forma financial statements. 3
DAMES & MOORE GROUP AND RADIAN INTERNATIONAL LLC UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) THREE MONTHS ENDED --------------------------- June 26, June 30, 1998 1998 PRO FORMA PRO FORMA DMG RADIAN ADJUSTMENTS COMBINED ------------ ------------- -------------- ------------- Gross revenues: $189,150 $ 70,091 $ $ 259,241 Direct costs of outside services 60,346 24,779 85,125 -------- -------- ------- --------- Net revenues 128,804 45,312 - 174,116 -------- -------- ------- --------- Operating expenses: Salaries and related costs 90,013 32,057 122,070 General expenses 24,290 8,150 32,440 Depreciation and amortization 2,251 2,677 4,928 Amortization of goodwill 1,187 210 (210)(a) 1,299 112 (k) -------- -------- ------- --------- 117,741 43,094 (98) 160,737 -------- -------- ------- --------- Earnings from operations 11,063 2,218 98 13,379 Investment and other income (loss) (155) 1,043 - 888 Interest expense (2,663) (621) 620 (c) (5,216) (2,552)(l) -------- -------- ------- --------- Earnings before income taxes 8,245 2,640 (1,834) 9,051 Income taxes 3,558 51 268 (m) 3,877 -------- -------- ------- --------- Net earnings $ 4,687 $ 2,589 $(2,102) $ 5,174 -------- -------- ------- --------- -------- -------- ------- --------- Cash dividends declared per share $ 0.03 $ 0.03 -------- --------- -------- --------- Earnings per share- Basic $ 0.26 $ 0.28 -------- --------- -------- --------- Earnings per share - Diluted $ 0.26 $ 0.28 -------- --------- -------- --------- Weighted average number of shares - Basic 18,262 18,262 -------- --------- -------- --------- Weighted average number of shares - Diluted 18,336 18,336 -------- --------- -------- ---------
The accompanying notes are an integral part of these pro forma financial statements. 4 DAMES & MOORE GROUP AND RADIAN INTERNATIONAL LLC UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED --------------------------- March 27, Dec. 31, 1998 1997 PRO FORMA PRO FORMA DMG RADIAN ADJUSTMENTS COMBINED ------------ ------------ ------------- -------------- Gross revenues: $ 703,902 $ 287,578 $ $ 991,480 Direct costs of outside services 221,398 115,040 336,438 ---------- ---------- -------- ----------- Net revenues 482,504 172,538 655,042 ---------- ---------- -------- ----------- Operating expenses: Salaries and related costs 337,474 123,453 460,927 General expenses 88,401 53,451 (5,150)(o) 136,702 Depreciation and amortization 9,216 10,077 19,293 Amortization of goodwill 4,600 1,018 (1,018)(a) 5,048 448 (k) Impairment of goodwill - 7,246 (7,246)(n) - ---------- ---------- -------- ----------- 439,691 195,245 (12,966) 621,970 ---------- ---------- -------- ----------- Earnings (loss) from operations 42,813 (22,707) 12,966 33,072 Investment and other income 997 441 - 1,438 Interest expense (10,292) (2,594) 2,381 (c) (20,754) (10,249)(l) ---------- ---------- -------- ----------- Earnings (loss) before income taxes 33,518 (24,860) 5,098 13,756 Income taxes 14,188 1,140 (9,436)(m) 5,892 ---------- ---------- -------- ----------- Net earnings (loss) $ 19,330 $ (26,000) $ 14,534 $ 7,864 ---------- ---------- -------- ----------- ---------- ---------- -------- ----------- Earnings per share: Basic $ 1.08 $ 0.44 ---------- ----------- ---------- ----------- Diluted $ 1.07 $ 0.44 ---------- ----------- ---------- ----------- Cash dividends declared per share $ 0.12 $ 0.12 ---------- ----------- ---------- ----------- Weighted average number of shares - Basic 17,890 17,890 ---------- ----------- ---------- ----------- Weighted average number of shares - Diluted 18,048 18,048 ---------- ----------- ---------- -----------
The accompanying notes are an integral part of these pro forma financial statements. 5 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS Note 1- BASIS OF PRESENTATION The unaudited pro forma combined and condensed statement of financial position of DMG and Radian has been prepared as if the acquisition of Radian was completed on June 26, 1998, and combines DMG's unaudited June 26, 1998 statement of financial position and Radian's unaudited June 30, 1998 statement of financial position. The unaudited pro forma combined and condensed statement of earnings assumes the acquisition took place as of the beginning of the periods presented. The statement of earnings ending in June combines DMG's unaudited consolidated statement of earnings for the three-month period ended June 26, 1998 and Radian's unaudited consolidated statement of earnings for the three months ended June 30, 1998. The statement of earnings ending in March combines DMG's consolidated statement of earnings for the year ended March 27, 1998 and Radian's consolidated statement of earnings for the year ended December 31, 1997. Note 2- PRO FORMA ADJUSTMENTS (a) To eliminate goodwill and related amortization recorded at Radian. (b) To record the excess of the purchase price and related acquisition costs over the fair value of assets acquired and liabilities assumed. (c) To eliminate the debt, interest expense and related accrued interest which was not assumed by DMG. (d) To record the restructured debt obligations, including repayment of principal and interest and related deferred financing costs incurred by DMG in connection with the Radian acquisition. (e) To record the effect to equity and income taxes for the charges to income resulting from the early extinguishment of DMG's debt. The pro forma statements of earnings excludes the charge for early extinguishment of debt due to its non-recurring nature. (f) Reflects the write-off of purchased in-process research and development technology costs identified in the preliminary allocation of the purchase price and the related tax effects. The pro forma statements of earnings excludes the write-off of purchased in-process research and development technology costs due to its non-recurring nature. (g) To reflect the estimated restructuring charges expected to be incurred by DMG in connection with the consolidation of certain facilities, and operations. The amounts recorded are management's estimates which may be revised upon completion of the restructuring plan. The pro forma statements of earnings excludes DMG's restructuring charge due to its non-recurring nature. 6 (h) To reflect the estimated restructuring charges expected to be incurred in connection with the Radian acquisition. The restructuring plans include the consolidation of certain facilities, and operations. Furthermore, additional insurance reserves have been reflected, due to Radian's adoption of DMG's insurance programs. The amounts recorded are management's estimates which may be revised upon completion of the restructuring plan and reflected as a charge to purchase price. (i) To reflect estimated costs of the transaction. (j) To reflect the elimination of Radian's equity accounts. (k) To record amortization of goodwill over 40 years, based upon the estimated balance of goodwill. (l) To record the incremental interest cost and amortized financing costs on the restructured debt obligations incurred by DMG in connection with the Radian acquisition. (m) Radian is a limited liability company and therefore is not directly subject to most income taxes. The tax liability flows through to DMG, therefore a provision for income taxes is being recorded including a provision for the pro forma adjustments based upon an estimated combined tax rate. (n) To eliminate the charge to earnings for impairment of goodwill, due to its non-recurring nature. (o) To eliminate the restructuring charge recorded by Radian, due to its non-recurring nature. Note 3- NONRECURRING CHARGES DMG will also be incurring charges for the consolidation of certain facilities and operations. Management has estimated these costs to be $1,990,000 net of taxes; additionally, a charge for in-process research and development technology costs of $11,208,000 net of taxes will be recorded; both of these charges have been reflected in the pro forma balance sheet but not the pro forma statement of earnings. Note 4- LONG-TERM DEBT The funding of the Radian acquisition resulted in the early extinguishment of DMG's Senior Notes and certain bank lines of credit. DMG's new long-term debt facility includes a term commitment of $265,000,000 and a revolving commitment of $75,000,000. Interest is charged under several options, including the bank's reference rate or at LIBOR plus a spread, at the Company's option. Interest is payable quarterly for reference rate borrowings and for LIBOR borrowings the earlier of the last day of the interest rate period or three months from the first day of the interest rate period. The agreement contains limitations on additional indebtedness, sales of assets, acquisitions and capital expenditures, as well as maintenance of certain financial ratios. The term loan requires quarterly principal payments commencing on June 30, 1999, with the 7 unpaid balance of $140,000,000 due in full on June 30, 2004. The revolving commitment also matures on June 30, 2004. Furthermore, mandatory principal pre-payments or commitment reductions are required in the event of the occurrence of certain transactions, as defined in the agreement. 8 (c) Exhibits: 2.1 Equity Purchase Agreement by and among Dow Environmental, Inc., TCM Technologies, Inc. and Radian Acquisition Corp. dated as of June 23, 1998 (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q [File No. 1-11075] for the quarter ended June 26, 1998). 4.1 Credit Agreement among Dames & Moore Group, as Borrower, The Several Lenders from Time to Time Parties Hereto and Canadian Imperial Bank of Commerce, as Administrative Agent, dated as of July 31, 1998 (incorporated herein by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K [File No. 1-11075] July 31, 1998). 23.1 Consent of Deloitte & Touche LLP 99.1 Press Release dated June 24, 1998 (incorporated herein by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K [File No. 1-11075] July 31, 1998). 99.2 Press Release dated August 3, 1998 (incorporated herein by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K [File No. 1-11075] July 31, 1998). 99.3 Unaudited consolidated balance sheet of Radian International LLC and subsidiaries as of June 30, 1998 and the related consolidated statements of operations and cash flows for the six-month periods ended June 30, 1998 and June 30, 1997. 99.4 Audited consolidated balance sheets of Radian International LLC and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, members' equity and cash flows for the years then ended. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized. DAMES & MOORE GROUP Date: October 7, 1998 MARK A. SNELL ---------------------------- Mark A. Snell Executive Vice President and Chief Financial Officer (Principal Financial Officer) 10 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-70758, 33-47303 and 333-61807 on Form S-8 and Registration Statement No. 333-51435 on Form S-3 of Dames & Moore Group of our report dated January 30, 1998 (relating to the consolidated financial statements of Radian International LLC and subsidiaries as of December 31, 1997 and 1996 and for each of the two years in the period ended December 31, 1997) appearing in the current report on Form 8-K/A No. 1 dated July 31, 1998 of Dames & Moore Group. Deloitte & Touche LLP Houston, Texas October 7, 1998 EX-99.3 3 EXHIBIT 99.3 RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS, JUNE 30, 1998 AND DECEMBER 31, 1997 - ---------------------------------------------------------------------------
JUNE 30, DEC 31, ASSETS 1998 1997 CURRENT ASSETS: Cash and cash equivalents $ 1,793,282 $ 2,319,038 Trade accounts receivable, net 78,324,280 75,969,419 Inventories 5,685,342 4,602,934 Other current assets 4,756,489 7,902,832 ------------ ------------ Total current assets 90,559,393 90,794,223 PROPERTY AND EQUIPMENT, Net 30,615,927 32,583,658 GOODWILL, Net 16,885,310 17,032,010 RETAINAGE RECEIVABLE 6,389,870 6,242,905 OTHER ASSETS 12,770,455 13,058,922 ------------ ------------ TOTAL ASSETS $157,220,955 $159,711,718 ------------ ------------ ------------ ------------ LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 44,215,334 $ 37,882,381 Current portion of long-term debt - 20,462 Trade accounts payable 5,024,389 11,250,385 Accrued payroll and related items 12,656,220 12,154,016 Accrued income taxes 335,775 511,361 Restructuring and termination liabilities 3,048,958 5,155,748 Other current liabilities 9,470,414 13,645,636 ------------ ------------ Total current liabilities 74,751,090 80,619,989 EMPLOYEE BENEFIT PLANS 6,916,749 6,529,643 LONG-TERM DEBT - 204,620 OTHER LONG-TERM LIABILITIES 512,814 606,590 ------------ ------------ Total liabilities 82,180,653 87,960,842 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST IN SUBSIDIARIES 385,145 427,806 MEMBERS' EQUITY 74,655,157 71,323,070 ------------ ------------ TOTAL LIABILITIES AND MEMBERS' EQUITY $157,220,955 $159,711,718 ------------ ------------ ------------ ------------
-1- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 1997 REVENUE: Commercial contracts $ 80,517,485 $ 93,018,550 United States government contracts 56,773,815 63,366,374 -------------- -------------- Total revenue 137,291,300 156,384,924 COST OF SERVICES AND SALES 78,859,082 96,505,041 -------------- -------------- GROSS PROFIT 58,432,218 59,879,883 OVERHEAD AND GENERAL AND ADMINISTRATIVE EXPENSES 54,528,498 58,832,720 INTEREST EXPENSE 1,118,750 1,224,083 GAIN ON SALE OF BUSINESS UNITS (965,873) - -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES 3,750,843 (176,920) PROVISION FOR INCOME TAXES 248,780 1,260,146 -------------- -------------- NET INCOME (LOSS) $ 3,502,063 $ (1,437,066) -------------- -------------- -------------- --------------
See notes to condensed consolidated financial statements. -2-
RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - ---------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1998 1997 OPERATING ACTIVITIES: Net income (loss) $ 3,502,063 $ (1,437,066) Depreciation and amortization 5,797,402 4,160,328 Gain on sale of business units (965,873) - Deferred taxes (38,504) (1,248,510) Unrealized gain on investments 418,422 - Currency translation adjustment (236,920) (74,934) Changes in assets and liabilities: Trade accounts and retainage receivable (2,501,825) (11,949,221) Other receivables 3,463,889 (5,045,387) Inventories (1,082,409) 217,409 Other assets 214,947 (882,546) Trade accounts payable (6,225,996) (6,714,266) Accrued payroll and related items 502,204 (146,222) Restructuring and termination (2,106,790) (3,443,000) Employee benefit plans 119,904 2,909,884 Other current liabilities (4,425,461) 9,049,089 -------------- -------------- Cash used in operating activities (3,564,947) (14,604,442) -------------- -------------- INVESTING ACTIVITIES: Purchases of property, equipment and leasehold improvements - net (3,541,111) (2,264,350) Proceeds from sale of business units 1,102,413 - Investments and other assests (545,702) 1,021,857 -------------- -------------- Cash used in investing activities (2,984,400) (1,242,493) -------------- -------------- FINANCING ACTIVITIES: Proceeds from short-term borrowings 13,784,795 48,205,000 Repayments of short-term borrowings (7,472,304) (32,216,727) Repayments of long-term debt (204,620) (43,275) Tax distributions to members (84,280) - -------------- -------------- Cash provided by financing activities 6,023,591 15,944,998 -------------- -------------- CHANGE IN CASH AND CASH EQUIVALENTS (525,756) 98,063 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,319,038 1,847,715 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,793,282 $ 1,945,778 -------------- -------------- -------------- -------------- SUPPLEMENTAL DISCLOSURE - Cash paid for interest $ 450,801 $ 1,026,746 -------------- -------------- -------------- --------------
See notes to condensed consolidated financial statements. -3- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION: The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the Company's 1997 consolidated financial statements for the years ended December 31, 1997 and 1996. The condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) which management considers necessary to present fairly the financial position of the Company as of June 30, 1998 and December 31, 1997 and the results of operations for the six-month periods ended June 30, 1998 and June 30, 1997. Certain items in the prior year's financial statements have been reclassified to be consistent with the 1998 presentation. The results of operations for the interim periods are not necessarily indicative of operating results to be expected for the full year. NOTE 2 - RESTRUCTURING AND TERMINATION ACCRUALS: During 1997, the Company reorganized its operations, resulting in the termination of approximately 50 employees, and accrued termination payments of $3,149,000, which will be substantially paid out within 1998. At June 30, 1998 approximately $2,055,000 remains to be expended to complete the restructuring. Additionally, at December 31, 1997, the Company accrued $2,001,000 related to amounts to be paid to three former executives under consulting agreements, at June 30, 1998; approximately $993,000 remains to be paid. NOTE 3 - INVENTORIES:
Inventories at June 30, 1998 consisted of the following: Raw materials and supplies $2,369,810 Work-in-progress 2,163,149 Finished goods 1,152,383 ---------- Total $5,685,342 ---------- ----------
-4- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 4 - COMPREHENSIVE INCOME: The Company adopted Statement of Financial Accounting Standard (SFAS) No. 130 "Reporting of Comprehensive Income", effective in 1998. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components. Other comprehensive income of the Company consists of unrealized gains or losses on marketable securities, foreign currency translation adjustments, and minimum pension liability adjustments. SFAS No. 130 does not affect the measurement of the items included in other comprehensive income; it affects only where those items are displayed and how they are described. Comprehensive income is as follows:
SIX MONTHS ENDED JUNE 30, 1998 1997 ------------- -------------- Net income (loss) $ 3,502,063 $ (1,437,066) Other comprehensive income, net of tax: Unrealized gain on marketable securities 418,422 - Realized loss on marketable securities - 17,429 Foreign currency translation adjustments (236,920) (74,934) Minimum pension liability adjustment (267,202) (36,908) ------------- -------------- (85,700) (94,413) ------------- -------------- Comprehensive income $ 3,416,363 $ (1,531,479) ------------- -------------- ------------- --------------
NOTE 5 - SALE OF BUSINESS UNITS In February 1998, the Company sold its Materials & Mechanical Engineering business unit to Hartford Steam Boiler Inspection and Insurance Company for $1,102,413. A gain of $965,873 was recognized. NOTE 6 - SUBSEQUENT EVENT On July 31, 1998, the members sold 100% of their interest in Radian International LLC to Dames & Moore Group. In connection with the sale, the sellers or their affiliates forgave the Company's outstanding borrowings of $40,780,843 under the revolving credit agreement. -5- EX-99.4 4 EXHIBIT 99.4 ---------------------------------------- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) Consolidated Financial Statements for the Years Ended December 31, 1997 and 1996 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Members Committee Radian International LLC Austin, Texas We have audited the accompanying consolidated balance sheets of Radian International LLC and subsidiaries (a Delaware limited liability company) (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, members' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas January 30, 1998 RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------- ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 2,319,038 $ 1,847,715 Trade accounts receivable, net 75,969,419 74,094,266 Inventories 4,602,934 5,727,062 Other current assets 7,902,832 4,697,229 ------------- ------------- Total current assets 90,794,223 86,366,272 PROPERTY AND EQUIPMENT, Net 32,583,658 30,460,753 GOODWILL, Net 17,032,010 24,776,474 RETAINAGE RECEIVABLE 6,242,905 6,307,292 OTHER ASSETS 13,058,922 9,299,655 ------------- ------------- TOTAL ASSETS $ 159,711,718 $ 157,210,446 ------------- ------------- ------------- ------------- LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 37,882,381 $ 979,266 Current portion of long-term debt 20,462 1,883,333 Trade accounts payable 11,250,385 14,589,375 Accrued payroll and related items 12,154,016 7,688,617 Accrued income taxes 511,361 229,179 Restructuring and termination liabilities 5,155,748 3,443,000 Other current liabilities 13,645,636 2,864,100 ------------- ------------- Total current liabilities 80,619,989 31,676,870 EMPLOYEE BENEFIT PLANS 6,529,643 5,833,557 LONG-TERM DEBT 204,620 26,772,422 OTHER LONG-TERM LIABILITIES 606,590 463,024 ------------- ------------- Total liabilities 87,960,842 64,745,873 COMMITMENTS AND CONTINGENCIES (Note 16) MINORITY INTEREST IN SUBSIDIARIES 427,806 475,005 MEMBERS' EQUITY 71,323,070 91,989,568 ------------- ------------- TOTAL LIABILITIES AND MEMBERS' EQUITY $ 159,711,718 $ 157,210,446 ------------- ------------- ------------- -------------
See notes to consolidated financial statements. -2- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------
1997 1996 REVENUE: Commercial contracts $ 166,395,723 $ 174,391,128 United States government contracts 121,623,359 117,795,426 ------------- ------------- Total revenue 288,019,082 292,186,554 COST OF SERVICES AND SALES 177,841,179 170,092,658 ------------- ------------- GROSS PROFIT 110,177,903 122,093,896 OVERHEAD AND GENERAL AND ADMINISTRATIVE EXPENSES 132,444,322 126,701,090 INTEREST EXPENSE 2,593,680 1,684,408 GAIN ON SALE OF BUSINESS UNITS (2,357,062) ------------- ------------- LOSS BEFORE INCOME TAXES (24,860,099) (3,934,540) PROVISION FOR INCOME TAXES 1,139,869 256,333 ------------- ------------- NET LOSS $ (25,999,968) $ (4,190,873) ------------- ------------- ------------- -------------
See notes to consolidated financial statements. -3- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - ----------------------------------------------------------------------------------------------- TOTAL DOW HSB INITIAL CONTRIBUTION - January 1, 1996 $ 90,581,645 $ 54,348,987 $ 36,232,658 Contribution of subsidiaries 10,663,136 6,397,882 4,265,254 Tax distributions to members (4,585,780) (2,751,468) (1,834,312) Additional minimum pension liability (281,300) (168,780) (112,520) Unrealized loss on investments (17,492) (10,495) (6,997) Currency translation adjustment (179,768) (107,861) (71,907) Net loss (4,190,873) (2,514,524) (1,676,349) ------------- ------------- ------------- MEMBERS' EQUITY, DECEMBER 31, 1996 91,989,568 55,193,741 36,795,827 ------------- ------------- ------------- Contributions of investments 571,418 342,852 228,566 Capital contribution 100,744 60,446 40,298 Return of excess tax distributions 4,361,534 2,616,920 1,744,614 Additional minimum pension liability 322,475 193,485 128,990 Unrealized gain on investments, net 42,554 25,532 17,022 Currency translation adjustment (65,255) (39,153) (26,102) Net loss (25,999,968) (15,599,981) (10,399,987) ------------- ------------- ------------- MEMBERS' EQUITY, DECEMBER 31, 1997 $ 71,323,070 $ 42,793,842 $ 28,529,228 ------------- ------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements. -4- RADIAN INTERNATIONAL LLC (A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------------------------------------- 1997 1996 OPERATING ACTIVITIES: Net loss $ (25,999,968) $ (4,190,873) Depreciation and amortization 11,095,210 10,503,037 Gain on sale of business units (2,357,062) Restructuring liability 5,155,748 3,443,000 Deferred taxes (3,629) (142,896) Write-off of investment in subsidiary 129,000 Impairment of goodwill 7,246,007 Minority interest in subsidiaries (47,199) Currency translation adjustment 65,255 (179,768) Loss on disposal of property and equipment 4,870 Changes in assets and liabilities: Trade accounts and retainage receivable (1,810,766) (6,750,599) Inventories 1,124,128 1,533,805 Other assets (6,822,429) 153,552 Trade accounts payable, accrued payroll and related items, employee benefit plans and other current liabilities 9,818,804 2,827,387 ------------ ------------ Cash (used in) provided by operating activities (49,839) 4,844,453 ------------ ------------ INVESTING ACTIVITIES: Purchases of property, equipment and leasehold improvements - net (15,013,558) (13,681,459) Proceeds from sale of business units 2,600,000 3,105,000 ------------ ------------ Cash used in investing activities (12,413,558) (10,576,459) ------------ ------------ FINANCING ACTIVITIES: Proceeds from short-term borrowings 122,567,383 51,210,740 Repayments of short-term borrowings (106,518,333) (39,218,325) Cash balances contributed by members 100,744 1,982,288 Proceeds from long-term borrowings 74,131 Repayments of long-term debt (7,576,608) (1,883,333) Return of excess tax distributions 4,361,534 Tax distributions to members (4,585,780) ------------ ------------ Cash provided by financing activities 12,934,720 7,579,721 ------------ ------------ CHANGE IN CASH AND CASH EQUIVALENTS 471,323 1,847,715 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,847,715 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,319,038 $ 1,847,715 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE - Cash paid for interest $ 2,543,596 $ 3,055,291 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. -5- RADIAN INTERNATIONAL LLC (A DELAWARE LIMITED LIABILITY COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------- 1. BUSINESS AND ORGANIZATION BUSINESS - Radian International LLC and subsidiaries (the "Company") is an international engineering and technical services firm specializing in a broad range of engineering, environmental and remediation services to industry and governments worldwide. The Company is headquartered in Austin, Texas, and employs approximately 2,000 people in 33 U.S. offices and 10 international offices. Approximately 40% of the Company's revenues are from government agencies. ORGANIZATION - The Company was formed effective January 1, 1996 by The Dow Chemical Company ("Dow") and Dow Environmental, Inc. ("DEI"), a wholly owned subsidiary of Dow, together with the Hartford Steam Boiler Inspection and Insurance Company ("HSB") and Radian Corporation ("Radian"), a wholly owned subsidiary of HSB. Dow, DEI, HSB and Radian entered into an agreement (the "Contribution Agreement") which called for the contribution of substantially all of DEI's and Radian's operating assets to the Company and the assumption of their related liabilities by the Company. The related Limited Liability Company Agreement (the "LLC Agreement") formed the Company in Delaware as a limited liability company, owned 60% by Dow and 40% by HSB through December 31, 1999 and 65% by Dow and 35% by HSB, thereafter. Dow and HSB (the "member companies") have limited personal liability for the obligations or debt of the Company, per the LLC Agreement, which allows for one class of member. HSB has an option from December 31, 1997 through December 31, 1998 to require Dow to purchase HSB's interest in the Company for a specified amount, as defined in the Contribution Agreement (see Note 18). The assets and liabilities were reflected in the Company's balance sheet at the book value of the member company contributing the asset or liability. A condensed summary of the net assets contributed under the Contribution Agreement at January 1, 1996 is as follows: Current assets $ 78,538,733 Property and equipment, net 29,405,609 Goodwill, net 17,266,267 Other assets 11,291,081 Current liabilities (32,095,213) Long-term debt (9,416,667) Other liabilities (4,408,165) ------------- Members' equity $ 90,581,645 ------------- -------------
-6- 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Related-party accounts receivable and accounts payable are incurred and settled in the normal course of business. Net losses related to minority owners were $3,274 and $6,529 during 1997 and 1996, respectively. USE OF ESTIMATES - The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS - The Company considers all short-term cash investments with a maturity of three months or less at the time of purchase to be cash equivalents. INCOME RECOGNITION - The Company recognizes revenue from contracts as costs are incurred and includes estimated earned fees in the proportion of costs incurred to date to total estimated costs. Revenues under certain government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards are included in revenue at the time the amounts can be determined. Provision is made for losses on contracts at the time such losses become known. Income from other sales is recognized when earned. INVESTMENT SECURITIES - The Company classifies investment securities held in mutual funds as available-for-sale. Accordingly, these investments, which are included in other assets, are carried at their fair market value, with net unrealized gains and losses included in members' equity; however, unrealized losses that are other than temporary are recognized in earnings. FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of the Company's financial instruments, such as cash, cash equivalents, accounts receivable, accounts and notes payable and accrued liabilities, approximate carrying values at December 31, 1997 and 1996. The long-term debt and note payable to members, although with related parties, are at floating interest rates and management believes the carrying value approximates fair value for this debt. At December 31, 1997 and 1996, other current assets included notes receivable of $1,182,024 and $1,446,459, respectively, related to the sale of the Company's Environmental Protection Agency business. The fair value of these notes, based on current market interest rates, was $1,304,065 and $1,604,000 at December 31, 1997 and 1996, respectively. PROPERTY AND DEPRECIATION AND AMORTIZATION - Property is carried at cost less accumulated depreciation. Depreciation is calculated on equipment and vehicles on the basis of its estimated useful life (ranging from 3 to 15 years) using both straight-line and accelerated methods. Leasehold improvements are amortized over the term of the lease or the estimated useful life, if shorter. Upon retirement or replacement of an asset, gain or loss is included in operations. GOODWILL AND AMORTIZATION - Goodwill is amortized using the straight-line method over periods ranging from five to forty years. The Company periodically assesses the recoverability of goodwill by determining that the estimated undiscounted future cash flows are sufficient to recover the asset's carrying amount. When it is probable that undiscounted future cash flows will not be sufficient to recover the net carrying amount, such excess amounts will be written off (see Note 17). -7- INVENTORIES - Inventories are stated at the lower of cost or market. The dollar value weighted average and first-in first-out methods are used to determine the cost of inventories. The Company's inventories consist primarily of chemicals, computer components and gold. RESEARCH AND DEVELOPMENT - Research and development costs, which are charged to operations as incurred, aggregated approximately $1,114,858 and $1,488,697 in 1997 and 1996, respectively. TRANSLATION OF FOREIGN CURRENCIES - Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is reflected in members' equity. INCOME TAXES - The Company is classified as a partnership for federal income tax purposes and as such, any federal taxable income or loss generated will be included in the tax returns of the member companies. The Company has four US subsidiaries which file separate federal tax returns and the Company files separate state income tax returns. Foreign subsidiaries file separate returns in their respective countries. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," income taxes are recognized for (a) the amount of taxes payable or refundable for the current year and (b) the net change in deferred tax liabilities and assets to be recognized in the future. RECLASSIFICATIONS - Certain reclassifications of previously reported 1996 amounts have been made to be consistent with 1997 classifications. Such reclassifications have no effect on net income. 3. INVESTMENTS At December 31, 1997 and 1996, investment securities, which were included in other current assets, consisted of the following:
1997 ------------------------------------------ GROSS UNREALIZED ESTIMATED GAINS COST FAIR VALUE (LOSSES) Texas Commerce Bank - fixed income $ 2,010,945 $ 2,010,156 $ (789) Texas Commerce Bank - equity 2,435,000 2,495,835 60,835 ------------ ------------ --------- Total $ 4,445,945 $ 4,505,991 $ 60,046 ------------ ------------ --------- ------------ ------------ --------- 1996 ----------------------------------------- GROSS UNREALIZED ESTIMATED GAINS COST FAIR VALUE (LOSSES) Nations Fund - fixed income $ 1,405,476 $ 1,376,139 $ (29,337) Nations Fund - equity 1,804,021 1,815,866 11,845 ------------ ------------ --------- Total $ 3,209,497 $ 3,192,005 $ (17,492) ------------ ------------ --------- ------------ ------------ ---------
-8- 4. CONTRIBUTIONS OF BUSINESSES Effective July 1, 1996, the Ecobilan S.A. business and net assets were contributed to the Company by Dow (see Note 17). The contribution had been delayed pending consents from appropriate third parties. The net assets were recorded as an increase in members' equity and are summarized as follows: Current assets $ 3,441,829 Long-term assets 459,289 Goodwill 8,045,200 Current liabilities 1,927,781 ------------- Net assets $ 10,018,537 ------------- -------------
During 1997, HSB contributed two investments to the Company which are accounted for using the cost method. 5. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable at December 31, 1997 and 1996 consisted of the following:
1997 1996 Amounts billed $ 42,085,011 $ 45,234,909 Allowance for doubtful accounts (1,765,365) (1,901,672) Amounts unbilled 27,421,479 22,834,887 Due from members 8,228,294 7,926,142 ------------- ------------- Total $ 75,969,419 $ 74,094,266 ------------- ------------- ------------- -------------
Credit balances of $25,347,616 and $17,280,081 were included in amounts unbilled at December 31, 1997 and 1996, respectively, which represented billings in excess of costs incurred and revenue recognized on contracts in progress. -9- 6. NOTES RECEIVABLE At December 31, 1997 and 1996, the Company held the following notes receivable:
1997 1996 Note receivable from sale of Environmental Protection Agency business, due July 15, 2001; principal and interest due annually at 8.75% $ 1,182,024 $ 1,446,459 Note receivable from third party, principal due at the earlier of the Company's demand or January 17, 2000; interest payable monthly at prime plus 1.5% 350,000 350,000 Mortgage notes receivable from employees, secured by related property; monthly principal payments due through September 28, 2015; interest, as calculated in accordance with the note agreements, is contingent upon certain events and payable upon maturity 1,415,500 1,306,500 ------------ ------------ 2,947,524 3,102,959 Less current portion (556,573) (297,935) ------------ ------------ Long-term portion $ 2,390,951 $ 2,805,024 ------------ ------------ ------------ ------------
The above amounts are recorded in other current assets and other assets in the accompanying balance sheets. 7. INVENTORIES Inventories at December 31, 1997 and 1996 consisted of the following:
1997 1996 Raw materials and supplies $ 1,525,499 $ 1,956,163 Work-in-progress 1,882,211 2,355,828 Finished goods 1,195,224 1,415,071 ------------ ------------ Total $ 4,602,934 $ 5,727,062 ------------ ------------ ------------ ------------
-10- 8. PROPERTY AND EQUIPMENT At December 31, 1997 and 1996, property and equipment, recorded at cost, comprised the following:
1997 1996 Furniture, fixtures and leasehold improvements $ 17,185,881 $ 20,160,281 Machinery and equipment 30,948,114 23,114,474 Computer equipment 29,856,015 24,204,653 Equipment - construction in progress 2,905,440 6,823,902 ------------- ------------- 80,895,450 74,303,310 Accumulated depreciation and amortization (48,311,792) (43,842,557) ------------- ------------- Total $ 32,583,658 $ 30,460,753 ------------- ------------- ------------- -------------
9. LONG-TERM DEBT AND NOTES PAYABLE The Company maintains an uncollateralized revolving credit agreement with Dow which, at December 31, 1997, provided for borrowings of up to $50 million. At December 31, 1997, $35,692,553 was outstanding under this agreement. Interest is payable quarterly, at Dow's LIBOR rate plus 1/8% (5.85% at December 31, 1997); the principal is due on December 31, 1998. At December 31, 1996, such amounts were classified as long-term debt based on the maturity date then in effect. As of December 31, 1997 and 1996, foreign subsidiaries have borrowed $2,189,828 and $979,266, respectively, from local Dow affiliates under Intercompany Revolving Loan Agreements. The loans have no maturity date and bear interest at local market rates and are included in short-term borrowings in the accompanying balance sheets. During 1997, the Company terminated a $5 million uncollateralized short-term line of credit with a bank which had never been utilized. The line of credit was guaranteed by the members and provided for interest at the bank's prime lending rate less 1%. The Company has available letters of credit in the amount of $684,910, expiring from June 1998 through January 2000. At December 31, 1996, the Company had an uncollateralized note payable of $9,459,941 with HSB, providing interest at HSB's weighted average short-term bank borrowing rate, plus 0.5% (6.10% as of December 31, 1996). This note was paid in full during 1997. Maturities of long-term debt and notes payable for the five years subsequent to December 31, 1997 follow: 1998 $ 20,462 1999 20,462 2000 20,462 2001 20,462 2002 20,462 2003 and thereafter 122,772 --------- Total $ 225,082 --------- ---------
-11- 10. INCOME TAXES During 1997 and 1996, the provision for income taxes consisted of the following:
1997 ----------------------------------------------- Current Deferred Total State and local $ 126,265 $ (384,324) $ (258,059) Foreign 1,009,975 387,953 1,397,928 ----------- ----------- ------------ Total $ 1,136,240 $ 3,629 $ 1,139,869 ----------- ----------- ------------ ----------- ----------- ------------ 1996 ----------------------------------------------- Current Deferred Total State and local $ 292 $ 302,208 $ 302,500 Foreign 113,145 (159,312) (46,167) ----------- ----------- ------------ Total $ 113,437 $ 142,896 $ 256,333 ----------- ----------- ------------ ----------- ----------- ------------
At December 31, 1997 and 1996, deferred tax assets and liabilities included in other current assets and other long-term liabilities, respectively, comprised the following:
DECEMBER 31, ------------------------------ 1997 1996 Current deferred tax assets $ 1,057,278 $ 965,156 Current deferred liabilities (147,673) Noncurrent deferred liabilities (1,851) (61,031) ----------- ----------- 907,754 904,125 Valuation allowance (667,296) (667,296) ----------- ----------- Total deferred taxes - net $ 240,458 $ 236,829 ----------- ----------- ----------- -----------
The temporary differences which result in deferred tax assets and liabilities are primarily depreciation, benefit plan expenses, and restructuring expenses. The Company does not provide for taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted because it is the Company's intent to reinvest the undistributed earnings indefinitely. At December 31, 1997 and 1996, the accumulated undistributed earnings were not significant. As of December 31, 1997 and 1996, a valuation allowance of $667,296 was recorded for the net operating loss carryfowards of foreign subsidiaries due to the uncertainty of recovery of the benefit. -12- 11. LEASE COMMITMENTS The Company leases office facilities under operating leases which expire at various dates through 2008. Minimum lease payments and receipts under subleases in force at December 31, 1997 were as follows:
Minimum Sublease Net Minimum Lease Payments Receipts Lease Payments 1998 $ 12,004,850 $ 2,568,287 $ 9,436,563 1999 11,049,913 2,315,167 8,734,746 2000 6,823,489 974,216 5,849,273 2001 3,646,911 204,132 3,442,779 2002 2,407,870 2,407,870 2003 and beyond 2,645,434 2,645,434 ------------- ------------- ------------- Total $ 38,578,467 $ 6,061,802 $ 32,516,665 ------------- ------------- ------------- ------------- ------------- -------------
In 1997 and 1996, rental expense for facility and other leases aggregated approximately $10,180,692 and $11,508,561, respectively, net of sublease income of $1,924,819 and $310,888, respectively. 12. EMPLOYEE BENEFITS PLANS During 1996, the Company's employees participated in the benefit plans of DEI and Radian until new plans were established. The plan descriptions are as follows: DEI DEFINED CONTRIBUTION PLAN - DEI sponsored a 401(k) plan which covers substantially all employees. Under the provisions of the plan, the Company contributed the greater of $800 or 2% of the employee's salary up to the first $60,600. For amounts earned in excess of $60,600, DEI contributed 4% of the employee's salary. In addition, participating employees could defer up to 15% of annual compensation of which DEI would match 50% up to the first 4% of the participants' eligible compensation. Company contributions under the plan were $225,500 in 1996. Effective April 1, 1996, the participants in this plan became participants in the Radian 401(k) plan and this plan was terminated. DEI STOCK PURCHASE PLAN - DEI had a stock purchase plan that allowed participating employees to purchase, through payroll deductions, shares of Dow's common stock at the lower of the plan price or market price on the last day of trading prior to April 1, 1996. The plan was terminated January 31, 1996, and the Company made no contributions in 1996. DEI SUPPLEMENTAL OFFICER RETIREMENT PLAN - DEI maintained an unfunded, nonqualified deferred compensation plan for its officers. Under provisions of the plan, participating officers could defer up to 100% of their bonus and 15% of their salary to the plan, offset by the percentage deferred into the qualified 401(k) plan. DEI matched these contributions at the percentage matched for the qualified 401(k) plan and provided a basic contribution without regard for Internal Revenue Service Code limitation and reduced by amounts actually contributed in the 401(k) plan. Interest is earned and credited to the participant's account twice a year. This plan was frozen effective January 1, 1996. Radian 401(k) PLAN - Radian maintained an employee thrift plan which qualifies under section 401(k) of the Internal Revenue Code. The plan is a defined contribution plan. Effective April 1, 1996, this plan was amended and restated as the Radian International LLC 401(k) Thrift Plan and all employees of the Company who meet the service requirements specified in the plan are eligible for participation. Under the -13- provisions of the thrift plan, participating employees may defer up to 10% of annual compensation. The Company matches 75% of the contributions, but not in excess of 6% of the participants' eligible compensation. Company contributions under the plan were $4,936,281 and $5,186,200 in 1997 and 1996, respectively. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND SALARY CONTINUATION AGREEMENT - Radian maintained an unfunded supplemental executive retirement plan ("SERP") and an unfunded salary continuation agreement for certain executives. The plans provide for benefits which supplement those provided by the Company's other benefit plans. The salary continuation plan is recorded in accordance with SFAS No. 87, "Employers' Accounting for Pensions." At December 31, 1997 and 1996, the Company had designated and deposited $4,858,843 and $4,102,840, respectively, in a trust account for the SERP. In accordance with the provisions of SFAS No. 87, the Company was required to record an additional minimum liability at December 31, 1997 and 1996. This amount represents the excess of the accumulated benefit obligations over the fair value of plan assets to the extent possible because the asset recognized may not exceed the amount of unrecognized prior service cost. The balance of the liability at the end of each period is reported as a component of members' equity, net of applicable taxes. At December 31, 1997 and 1996, the cumulative additional minimum liability was $1,071,614 and $1,394,089, respectively. The present value of accumulated benefits as of December 31, 1997 and 1996, determined in accordance with SFAS No. 87, was as follows:
1997 1996 Actuarial present value of accumulated benefits: Vested $ 7,343,851 $ 5,688,229 Nonvested 1,338,163 1,979,261 ------------ ------------ Total $ 8,682,014 $ 7,667,490 ------------ ------------ ------------ ------------ Actuarial assumptions used were as follows: 1997 1996 Discount rates 7.00% 7.25%
The expense of the plans for the years ended December 31, 1997 and 1996, determined in accordance with SFAS No. 87, was as follows:
1997 1996 Annual pension expense: Service cost $ 125,186 $ 129,277 Interest cost 570,717 512,762 Amortization of unrecognized prior service cost 378,792 284,083 Amortization of unrecognized loss 21,715 48,613 ------------ ------------ Net periodic cost $ 1,096,410 $ 974,735 ------------ ------------ ------------ ------------
-14- A reconciliation of the funded status of the plans at December 31, 1997 and 1996 was as follows:
1997 1996 Projected benefit obligation $ 8,682,014 $ 7,667,490 Plan assets available for benefits ------------ ------------ Deficiency of assets over projected benefit obligation (8,682,014) (7,667,490) Unrecognized prior service costs 2,974,452 2,556,744 Unrecognized net loss 1,071,614 1,394,089 ------------ ------------ Accrued pension liability $ 4,635,948 $ 3,716,657 ------------ ------------ ------------ ------------
POSTRETIREMENT BENEFITS - The Company provides certain medical insurance benefits to eligible retired employees. The defined-benefit plan covers substantially all employees. The plan for all retirees allows for a reimbursement credit of up to $50 per month for medigap premiums. Eligible retirees for the medigap plan must meet minimum active service requirements. The plan is unfunded. The Company has adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard requires that the expected cost of retiree benefits be charged to expense during the years that the employees render service rather than the Company's past practice of recognizing these costs on a cash basis. The plan's combined funded status at December 31, 1997 and 1996 is as follows:
1997 1996 Accumulated postretirement benefit obligation (APBO): Retirees $ 97,314 $ 97,314 Active plan participants, fully eligible 109,659 109,659 Active plan participants, not yet fully eligible 462,146 462,146 ---------- ---------- Total APBO 669,119 669,119 Unrecognized net loss from past experience different from that assumed and from changes in assumptions 202,872 53,692 ---------- ---------- Accrued postretirement benefits $ 871,991 $ 722,811 ---------- ---------- ---------- ----------
Net periodic postretirement benefit cost for 1997 and 1996 included the following components:
1997 1996 Service cost of benefits earned $ 61,845 $ 61,845 Interest cost on APBO 43,846 43,846 Amortization of unrecognized net gain and prior services cost 1,046 1,046 ---------- ---------- Net periodic postretirement benefit cost $ 106,737 $ 106,737 ---------- ---------- ---------- ----------
-15- The weighted-average discount rate used in determining the APBO was 7.25% in 1997 and 1996. The effect of a one percent increase in the assumed health care cost trend rates would be to increase the accumulated postretirement benefit obligation and the aggregate of the service cost and interest cost by $7,894 and $565, respectively. During 1996, the Company sold two business units. The reduction of employees which resulted from the sale of these business units was treated as a plan curtailment. The curtailment resulted in a reduction of the accrued postretirement benefit of $20,000. POSTEMPLOYMENT BENEFITS - The Company has adopted SFAS No. 112, "Employer's Accounting for Postemployment Benefits." The accumulated postemployment benefit obligation was $493,578 and $217,607 as of December 31, 1997 and 1996, respectively. SIGNIFICANT ESTIMATES - At December 31, 1997, the Company has recorded an obligation for the supplemental executive retirement plan, salary continuation agreement, postretirement and postemployment benefits of $7,367,716, of which $838,073 is included in accrued payroll and related items. At December 31, 1996, such amounts were $6,082,686 and $217,607, respectively. Significant assumptions used in determining the obligation and related expense include discount rates, rate of increase for future compensation, withdrawals, mortality and retirement rates and expected claim costs. 13. RELATED PARTY TRANSACTIONS The Company recognized $41,702,311 and $38,092,362 of revenue from member companies in 1997 and 1996, respectively. Interest expense on member company debt aggregated $2,380,645 and $1,595,879 in 1997 and 1996, respectively. During 1997 and 1996, certain Dow employees provided technical and engineering services to the Company under a Technology Services Agreement. The amounts charged by Dow related to this agreement during 1997 and 1996 were $681,000 and $2,015,589, respectively. At December 31, 1997 and 1996, accounts payable and accrued liabilities included $3,805,823 and $5,003,522, respectively, in amounts owed to Dow for technical services, administrative services, and facility costs. See Note 5 for information regarding amounts due from members included in accounts receivable. 14. RESTRUCTURING AND TERMINATION ACCRUALS In December 1996, the Company's management approved a restructuring of the Company and a realignment of the current workforce which resulted in the termination of 110 employees. The termination payments of $3,443,000, which were substantially paid out during 1997, were accrued as of December 31, 1996 as a component of general and administrative expenses. During 1997, the Company reorganized its operations, resulting in the termination of approximately 50 employees. The termination payments of $3,149,000, which will be substantially paid out within 1998, were accrued as of December 31, 1997 as a component of general and administrative expenses. Additionally, at December 31, 1997, the Company accrued $2,001,000 related to amounts to be paid to three former executives under consulting agreements. 15. SALE OF BUSINESS UNITS On June 14, 1996, the Company sold the contracts and certain fixed assets related to its Environmental Protection Agency business for $1,105,000 in cash and a note receivable of $1,446,759. A gain of $1,828,153 was recognized. The sale agreement provides for an adjustment to the sales price, based on -16- revenues earned on the sold contracts through July 15, 2001. Through December 31, 1997, there were no downward revisions of the sales price and management believes that the future performance of the contracts will be adequate to prevent any such revisions. On March 29, 1996, the Company sold its electronic assembly services unit for $2,000,000. A gain of $528,909 was recognized. On April 7, 1997, the Company sold its electronic paneling services unit for $2,600,000. No gain or loss was recognized. 16. CONTINGENCIES The Company is involved in various legal matters arising in the normal course of business. In management's opinion, the Company's ultimate liability or loss, if any, resulting from such legal matters will not have a material adverse effect on its financial position. The Company's contracts with the U.S. government are subject to examination by the Defense Contract Audit Agency ("DCAA"). Contracts and other records of the Company have been examined and reported upon by the DCAA through December 31, 1994. Management of the Company believes that adjustments, if any, resulting from potential renegotiation proceedings for years subsequent to 1994 will have no significant impact on the Company's financial condition or results of operations. The Company is self-insured up to certain limits for employee health benefits. Therefore, the financial statements include a reserve for claims incurred. The Company also retains a portion of risk for casualty losses. 17. GOODWILL At December 31, 1997 and 1996, goodwill comprised the following:
1997 1996 Goodwill $ 24,205,663 $ 31,414,482 Accumulated amortization 7,173,653 6,638,008 ------------- ------------- Total $ 17,032,010 $ 24,776,474 ------------- ------------- ------------- -------------
During 1997, the Company recorded an impairment write-down of $7,246,007 in general and administrative expenses related to the goodwill associated with Ecobilan S.A. Projected levels of business used to determine the purchase price of Ecobilan S.A. have not been achieved and management does not believe that the anticipated future activities support the recorded balance of goodwill. The impairment amount was calculated using discounted future cash flows. 18. SUBSEQUENT EVENT On January 2, 1998, HSB exercised its option to require Dow to repurchase its ownership interest in the Company. Effective that date, TCM Technologies, Inc., a wholly owned subsidiary of Dow, purchased HSB's ownership interest. ****** -17- -----END PRIVACY-ENHANCED MESSAGE-----