<PAGE>
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)
<PAGE>
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
<PAGE>
DAMES & MOORE GROUP
AND RADIAN INTERNATIONAL LLC
UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DMG RADIAN
June 26, June 30, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
---------- -------- --------- ---------
---------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
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
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
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
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
4
<PAGE>
DAMES & MOORE GROUP
AND RADIAN INTERNATIONAL LLC
UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
March 27, Dec. 31,
1998 1997 PRO FORMA PRO FORMA
DMG RADIAN ADJUSTMENTS COMBINED
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
5
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
(UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS, JUNE 30, 1998 AND DECEMBER 31, 1997
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DEC 31,
ASSETS 1998 1997
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
-1-
<PAGE>
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
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)
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C>
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
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
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:
<TABLE>
<CAPTION>
Inventories at June 30, 1998 consisted of the following:
<S> <C>
Raw materials and supplies $2,369,810
Work-in-progress 2,163,149
Finished goods 1,152,383
----------
Total $5,685,342
----------
----------
</TABLE>
-4-
<PAGE>
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
------------- --------------
<S> <C> <C>
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)
------------- --------------
------------- --------------
</TABLE>
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-
<PAGE>
----------------------------------------
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
Consolidated Financial Statements for
the Years Ended December 31, 1997 and
1996 and Independent Auditors' Report
<PAGE>
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
<PAGE>
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
ASSETS 1997 1996
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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)
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
RADIAN INTERNATIONAL LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------
TOTAL DOW HSB
<S> <C> <C> <C>
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
RADIAN INTERNATIONAL LLC
(A Delaware Limited Liability Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
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:
<TABLE>
<S> <C>
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
-------------
-------------
</TABLE>
-6-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1997
------------------------------------------
GROSS
UNREALIZED
ESTIMATED GAINS
COST FAIR VALUE (LOSSES)
<S> <C> <C> <C>
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)
<S> <C> <C> <C>
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)
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
-8-
<PAGE>
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:
<TABLE>
<S> <C>
Current assets $ 3,441,829
Long-term assets 459,289
Goodwill 8,045,200
Current liabilities 1,927,781
-------------
Net assets $ 10,018,537
-------------
-------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
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-
<PAGE>
6. NOTES RECEIVABLE
At December 31, 1997 and 1996, the Company held the following notes
receivable:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
-10-
<PAGE>
8. PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, property and equipment, recorded at cost,
comprised the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
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:
<TABLE>
<S> <C>
1998 $ 20,462
1999 20,462
2000 20,462
2001 20,462
2002 20,462
2003 and thereafter 122,772
---------
Total $ 225,082
---------
---------
</TABLE>
-11-
<PAGE>
10. INCOME TAXES
During 1997 and 1996, the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
Current Deferred Total
<S> <C> <C> <C>
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
<S> <C> <C> <C>
State and local $ 292 $ 302,208 $ 302,500
Foreign 113,145 (159,312) (46,167)
----------- ----------- ------------
Total $ 113,437 $ 142,896 $ 256,333
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Minimum Sublease Net Minimum
Lease Payments Receipts Lease Payments
<S> <C> <C> <C>
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
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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%
</TABLE>
The expense of the plans for the years ended December 31, 1997 and 1996,
determined in accordance with SFAS No. 87, was as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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<PAGE>
A reconciliation of the funded status of the plans at December 31, 1997 and
1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
Net periodic postretirement benefit cost for 1997 and 1996 included the
following components:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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<PAGE>
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
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<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Goodwill $ 24,205,663 $ 31,414,482
Accumulated amortization 7,173,653 6,638,008
------------- -------------
Total $ 17,032,010 $ 24,776,474
------------- -------------
------------- -------------
</TABLE>
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.
******
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