----------------------------------------
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-