8503-oco I
SUPERFUN
FINANCIAL
ASSESSMEN
SYSTEM
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8503 - OOo I
SUPERFUND FINANCIAL ASSESSMENT SYSTEM
INSTRUCTION MANUAL
Prep'ared for
ECONOMIC ANALYSIS DIVISION
OFFICE OF POLICY AND RESOURCE MANAGEMENT
U.S. ENVIRONMENTAL PROTECTION AGENCY
Prepared by
INDUSTRIAL ECONOMICS, INCORPORATED
30 BOYLSTON STREET
CAMBRIDGE, MASSACHUSETTS 02138
25 May 1982
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TABLE OF CONTENTS
CHAPTER 1
KEYPOINTS TO REMEMBER 1
Introduction 1
Key Features of the System 1
Organization of the Manual 3
CHAPTER 2
SIGN-ON PROCEDURE 4
Introduction 4
Signing on the System 4
Accessing the Program 6
Aborting the Program 6
CHAPTER 3
COMPILING THE DATA 9
Introdution 9
Compiling the Required Data 9
Examples of Data Sources 15
CHAPTER 4
ENTERING THE DATA 33
Introduction 33
Initial Data 34
Rules for Entering Financial Data 35
The Financial Data 37
Correcting Input Errors 38
CHAPTER 5
OUTPUT OF FINANCIAL ASSESSMENT SYSTEM 46
Introduction 46
Calculation of Ability to Pay 47
Financial Ratios 48
Intermediate Calculations 50
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TABLE OF CONTENTS (continued)
APPENDIX A
ESTIMATING NET INCOME FOR ADDITIONAL YEARS 57
APPENDIX B
UPDATING KEY PARAMETERS 61
Introduction 61
Tax Rate. . . 62
Depreciation to Fixed Assets 62
Interest Rate 62
Reinvestment Rate 63
Exponential Smoothing Factor. 63
Updating the Estimate 64
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TABLE OF EXHIBITS
EXHIBIT 2-1
SAMPLE OF SIGN-ON PROCEDURE 8
EXHIBIT 3-1
WORKSHEET 22
EXHIBIT 3-2
EFFECTS OF MISSING DATA 23
EXHIBIT 3-3
VALUE LINE REPORT 24
EXHIBIT 3-4
WORKSHEET 25
EXHIBIT 3-5
EXCERPT FROM DUN & BRADSTREET REPORT 26
EXHIBIT 3-6
WORKSHEET 27
EXHIBIT 3-7A
ANNUAL REPORT INCOME STATEMENT 28
EXHIBIT 3-7B
ANNUAL REPORT BALANCE SHEET 29
*
EXHIBIT 3-7C
ANNUAL REPORT STATEMENT OF CHANGES IN FINANCIAL POSITION..30
EXHIBIT 3-7D
NOTES TO FINANCIAL STATEMENT 31
EXHIBIT 3-8
WORKSHEET 32
EXHIBIT 4-1
INITIAL DATA ENTRY 40
EXHIBIT 4-2
FINANCIAL DATA ENTRY 41
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TABLE OF EXHIBITS (continued)
EXHIBIT 4-3
SUMMARY OF DATA 43
EXHIBIT 4-4
CORRECTING ERRORS 44
EXHIBIT 4-5
SUMMARY OF DATA 45
EXHIBIT 5-1
AFFORDABLE REMEDIAL ACTION COSTS 52
EXHIBIT 5-2
FINANCIAL RATIOS 53
EXHIBIT 5-3
FINANCIAL WARNING 54
EXHIBIT 5-4
INTERMEDIATE CALCULATIONS 55
4
EXHIBIT A-l
DUN & BRADSTREET REPORT , 59
EXHIBIT A-2
WORKSHEET 60
EXHIBIT B-l
UPDATING THE KEY PARAMETERS 66
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KEYPOINTS TO REMEMBER
CHAPTER 1
INTRODUCTION
This manual provides step-by-step instructions in the
use of the Superfund Financial Assessment System. The com-
panion document, the Technical Support Document, describes
the design and the underlying rationale of the system and
the interpretation of the results.
This chapter describes the key features which the an-
alyst should bear in mind when using the Superfund Financial
Assessment System. The organization of the remainder of
this manual is then provided.
KEY FEATURES OF THE SYSTEM
The Superfund Financial Assessment System is an inter-
active system designed to calculate the remedial action
costs affordable by'the firm. The system asks the user to
provide certain data on the firm being analyzed. This data
may be found in one of the following sources:
• The company's annual reports or 10K state-
ments filed with the Securities and Exchange
Commission (SEC),
• A Value Line report on the firm, or
• A Dun & Bradstreet Business Information
Report.
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If data are not available from these sources, the necessary
data should be requested "from the company.
After gathering the data, the data should be entered
into the system. At least three years of income data must
be entered or the system will not operate.
The following rules should be remembered when entering
the data:
• The carriage return should be pushed after
each data entry.
• Non-numeric data may be entered for case
name, party name, date case was filed,
location, and today's date. The dates
are limited to 8 characters? while the
names and locations 'are limited to 20
characters.
• Omit dollar signs, percentage signs,
commas, and other non-numeric data when
entering financial data.
» All decimal points should be included.
• Enter 999.9 when financial data are un-
known. Enter "unknown" for non-numeric
data which are not known.
• If any actual financial data have values
between 999.0 and 999.999, round these
values to 1000.0.
• Do not convert data to constant dollar
equivalents.
• Use consistent units.
• The tax rate may be entered either in per-
centage form (46.0) or decimal form (0.46).
If a tax rate greater than 100.0 is entered,
a default rate of 40.0 percent will be used
instead.
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• To correct data before the RETURN key
is pushed, press the BACKSPACE key or
hold the CONTROL key down and press H
to backspace to the appropriate place
and re-enter the data.
The system then uses these data to compute the afford-
able remedial action costs and three financial ratios.
ORGANIZATION OF MANUAL
The remainder of the Instruction Manual is organized
as follows:
Chapter 2 describes the sign-on procedure
for EPA's IBM system.
Chapter 3 reviews the compilation of the
necessary data.
Chapter 4 provides detailed instructions
for entering the data.
Chapter 5 describes the resulting output
from the system.
Appendix A discusses some suggestions for
estimating income data when these data are
not available.
Appendix B describes how the system pro-
grammer can update key parameters in the
system.
The exhibits to each chapter and appendix are located at the
end of the chapter or appendix.
The companion document, the Technical Support Document,
describes the rationale behind this system, the supporting
evidence from the literature, and the interpretation of the
results.
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SIGN-ON PROCEDURE
CHAPTER 2
INTRODUCTION
This chapter reviews the procedure for signing on to
the EPA IBM computer system and for accessing the Superfund
Financial Assessment System. Procedures for aborting the
session are also provided. Should the analyst encounter
difficulties in accessing the system, the analyst should
consult David Erickson, Economic Analysis Division, Office
of Policy and Resource Management.
SIGNING ON THE SYSTEM
Exhibit 2-1 provides a sample of signing on the EPA
IBM system. All responses required by the user are under-
lined. Each step of the sign-on procedure is reviewed below.
After entering the response required at each step, the ana-
lyst should push the RETURN key.
1. Dialing in to the system; The user should
dial the appropriate local phone number to
access the system. In Washington D.C. this
phone number is currently 488-15151. ^ loud
piercing tone is heard when the system has
been reached. The telephone receiver should
then be placed into the coupler and the RETURN
key pushed.
This number may be periodically changed. Check with User
Services at EPA if no response occurs at this number.
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If the computer terminal is hardwired to
the IBM system, the analyst need not use.
the telephone to access the system. The
terminal need only be turned on and the
RETURN key pushed.
Enter terminal identifier1: Once the an-
alyst has dialed into the computer, the
computer will respond by asking you to
"PLEASE TYPE YOUR TERMINAL IDENTIFIER."
For most standard terminals, the user
should respond by typing A. If the ter-
minal is not standard, the user should
consult User Services for the appropriate
terminal identifier.
Login Procedure: The computer will now
respond by printing the remote access
mode and port number of your terminal
"NNNN-PPP" and then ask the analyst to
"PLEASE LOG IN:". To log in the analyst
should hold down the CONTROL key and type
H. The analyst should then release the
CONTROL key and type IBMEPA1;NCC.2
Entering the time sharingmode; The com-
puter will now respond with the number of
the host computer port, "P ###" and "IBM1
IS ON LINE". The analyst now types TSO
to enter the time sharing mode on the com-
puter.
Logging on the computer: The computer will
now ask the analyst to "ENTER LOGON". The
analyst should type LOGON EPADME/SFUND.
l-Some terminals at EPA may skip this step and step 3 of the
procedure. In this case, the analyst should skip to step
4 and enter TSO in response to the computer's question
"TSO or OBS."
2Pressing the CONTROL and FI suppresses the echoing of the
characters being typed on this line. If the analyst fails
to type CONTROL H, the computer will still respond to the
IBMEPA1 but it will be echo back to the user as IIBBMMEE-
PPAA11. This does not present a problem and the user should
continue.
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Entering the account number; Finally,
the computer will ask for the account
number "ENTER ACCTUID NUMBER-". The
analyst should enter the account number
"XXXXXXXXX".1
System responds; The system will now
respond by printing that logon is now
in process and relaying any system
messages. When the system is ready, the
word "READY" will appear. The analyst
may now access the Superfund Financial
Assessment System.
ACCESSING THE PROGRAM
Once the computer responds with "READY" the user may
access the Superfund Financial Assessment System. As indi-
cated in Exhibit 2-1, to access this system, the user types
SPFUND and then pushes the carriage return. At this point
the interactive program begins to function and the program
will ask the user for specific data. These data and ex-
amples of the program operation are provided in detail in
the next two chapters.
ABORTING THE PROGRAM
If the user encounters any difficulties with the system
and wishes to abort the session, certain procedures should
be followed. If the analyst is not yet logged on to the
system {that is, the system has not responded that the logon
is in progress), the analyst may simply hang up and redial
the phone. If the system has printed "READY" and the user
decides to stop the session, the word LOGOFF should be typed
in, followed by a carriage return. LOGOFF should also be
typed when the program has completed its analysis and re-
sponded again with "READY".2 Finally, if the user wishes
-'-The account number may be obtained from David Erickson,
Economic Analysis Division.
2If the user wants to run the program again, he should type
SPFUND.
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to stop the program in mid-operation, the user should push
the BREAK key.l After pushing the BREAK key, the computer
will again respond "READY", the user may then enter LOGOFF
to exit the system or SPFUND to restart the program.
the BREAK key does not terminate the program, check
with User Services for the appropriate way of stopping
the program.
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COMPILING THE DATA
CHAPTER 3
INTRODUCTION
This chapter describes procedures for compiling the data
required to run the financial assessment system. -The first
section identifies the types of data required and describes
potential sources for the required data (including Annual Re-
ports, Value Line and Dun & Bradstreet). The next section
provides sample copies and worksheets containing data from
each of these sources.
The user may find it convenient to compile all the re-
quired data in a single place before beginning to use the
program. A worksheet which organizes the data in a conven-
ient format is provided as Exhibit 3-1.1
COMPILING THE REQUIRED DATA
The financial assessment system requires financial data
on the subject firm for some recent time period. The re-
quired data may be obtained from the firm's own financial
statements (for example, as shown in Annual Reports or in
filings with the Securities and Exchange Commission (SEC)),
or from such services as Dun & Bradstreet or Value Line.
^Exhibits can be found at the end of the chapter.
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Dun & Bradstreet's Business Information Reports (D&B)
is a confidential service providing credit ancT other types
of information on a large number of companies. Subscribers
to the service have access to reports which include infor-
mation on personnel,,, financial condition; credit record,
operations and history of the firm. D&B usually provides 3
years of financial data for each firm. EPA's Office of Waste
Programs Enforcement has a subscription to the service. Re-
ports on individual firms may be ordered by contacting Kathy
Summerlee.
The Value Line Investment Survey is a loose-leaf service
reporting on approximately 1500 firms with publicly-traded
stocks. A single-page report on each company includes key
financial data for a 10 year period. The service is updated
on a rotating basis, with the report on each company being
revised quarterly. The data reported in Value Line may also
be obtained from the firm's published financial statements,
but the Value Line Investment Survey provides the data in a
consistent and convenient format.
Other financial services which may provide published
financial data in a convenient format include:
• Moody's Investors Service, Moody*s Industrial
Manual,
• Moody's Investors Service, Moody's OTC Indus-
trial Manual,
• Standard & Poor's Standard Corporate Descrip-
tions ,
• Standard & Poor's N.Y.S.E. Stock Reports,
• Standard & Poor's A.S.E. Stock Reports, and
• Standard & Poor's Over-the-Counter and Regional
Exchange Stock Reports.
_ Some of the firms of interest may not publish financial
statements, especially if their stocks are not traded pub-
licly. In other.cases, the firm of interest is a subsidiary
of a larger firm and its financial statements are consolidated
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with those of the larger company.1 In the latter case, it
is appropriate to use the parent company's financial data
in the program since the parent will generally be respon-
sible for the liabilities of the subsidiary and the parent
firm's ability to pay remedial action costs may determine
the potential for recovery of these costs. Where neither
the firm itself nor a parent firm publishes financial state-
ments, D&B is likely to be the only available source of
financial data.
The financial assessment system requires a minimum of
three and preferably five years of annual data on net in-
come and depreciation. In addition, data on financial con-
dition for the most recent year are required. In general,
income statements data should be obtained for the most
recent complete fiscal year and for two to four previous
years.2 The balance sheet data used should be that reported
as of the end of the most recent complete fiscal year, to be
consistent with the income statement data used.
In general, use of data from a single source is pre-
ferred. If data are compiled from several different sources,
care must be taken to ensure that dollar figures are ex-
pressed in the same units, consistent time periods are
covered, and the definition of "net income" and other finan-
cial terms is the same.
It may not be possible to obtain all of the data re-
quested by the program for a particular firm. The program
is designed to make whatever calculations are possible when
some of the data are not available. Exhibit 3-2 indicates
which calculations will be omitted if the indicated data are
not provided.
-One of two sources may be consulted to identify affiliated
companies: the Directory of Corporate Affiliations {Nation
al Register Publications Co.)or Funk & Scott Index of
Corporate Change (Predicasts, Inc.).
it is less desirable to use quarterly data restated to an
annual basis, even if quarterly data are available for more
recent periods. Quarterly results may be quite unrepre-
sentative if the business' earnings are subject to seasonal
fluctuations.
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The remainder of this section describes the types of
data required.
Net Income
After-tax income is reported on a firm's annual income
statement or may be obtained from Dun & Bradstreet or Value
Line Reports. Net income may also be referred to as after-
tax "profit", and is equal to revenues less operating costs,
other accrued expenses, interest and taxes.
Data on net income are needed for a minimum of three
years for the program to calculate the firm's cash flow and
then estimate the amount the firm could afford to pay for
remedial action. If data on income are not available, the
program will calculate one of the financial ratios (ratio of
total liabilities to net worth), but will skip calculations
of the other ratios and the estimate of affordable remedial
action costs.
Because so many of the program's calculations require
data on net income, every effort should be made to obtain
the minimum three years of data. If data are available only
for one year, however, the user may estimate income for the
other years in order to run the program. An example of such
an estimate is provided in Appendix A to this manual. The
user should keep in mind that the data used will reflect
only one year's results accurately and will in most cases
understate the true variability of the firm's earnings. The
effect will likely be to overstate the firm's ability to pay
remedial action costs, as described in Appendix A.
Notes to the financial statements may indicate that the
results for a particular year are significantly affected by
some unusual event, such as gain on a sale of assets or a
loss due to discontinuation of a subsidiary. If the event
in question is not representative of the firm's normal earn-
ings or losses, and therefore if future earnings are not
likely to be affected by similar events, the net income fig-
ures used should exclude the effects of those events where
possible. An adjustment to income to account for extraordin-
ary earnings and losses is illustrated in the sample compila-
tion of data from an Annual Report provided in the next sec-
tion.
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Depreciation
Depreciation is reported as an expense on an Income
Statement or may be obtained from Value Line. Data on de-
preciation are needed for each year in which net income is
reported.
Depreciation may in some cases be included in a single
"cost of operations" or "operating costs" figure in an In-
come Statement. In that case, depreciation may be obtained
from a "Statement of Changes in Financial Position," where
it is reported as a source of internal funds. Depreciation
may also be reported separately in the notes to the financial
statements.
If depreciation is not reported separately and there-
fore cannot be provided, the program will estimate depreci-
ation as 5 percent of fixed assets annually (if fixed assets
data are available) or as zero (if not). This estimate will
be used only for purposes of calculating ability to pay; the
ratio of cash flow to total liabilities will not be calcu-
lated without actual data for depreciation.
Amortization expenses, which reflect periodic write-off
of intangible or other assets (for example, patents or lease-
hold improvements), are similar to depreciation in that both
are non-cash expenses. Where reported,' amortization should
be included in depreciation for purposes of this analysis.
Similarly, if depletion is reported, it should be added to
depreciation for the purposes of this analysis.
Fixed Assets
Data on fixed assets are required only if data on de-
preciation are not available. The program uses data on fixed
assets to estimate a value for depreciation. The year-end
value of assets can be obtained from the "Assets" side of the
balance sheet. Current assets (including cash, accounts re-
ceivables, inventories, prepayments and the like) should not
be included in fixed assets. Fixed assets include such items
1See the Technical Support Document for a discussion of this
ratio.
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as property, equipment and intangible assets. Some sources
report only "current assets" (or several categories of cur-
rent assets) and "other assets." In those cases, the "other
assets" figure should be used.
Current Liabilities
Current liabilities are needed only for the final year.
Current liabilities include all obligations falling due with-
in one year, including accounts payable, short-term debt and
the portion of long-term debt due within the year. Total
current liabilities may be obtained from the "Liability and
Stockholders' Equity" side of a balance sheet.
Long-Term Liabilities
Long-term liabilities are needed for the final year only
and are obtained from the "Liability and Stockholders' Equity"
side of the balance sheet, or from Value Line or D&B. "Long-
term debt" is the most common long-term liability. Deferred
taxes and other deferred items may also be reported. Where
data are obtained from a balance sheet, long-term liabilities
can be calculated as all liabilities reported on the "Liability
and Stockholders' Equity" side except current liabilities and
Stockholders' Equity.!
Net Worth
Net worth as of the end of the year can be obtained from
a balance sheet or from Value Line or D&B. Net worth is cal-
culated as total assets less total liabilities (current and
long-term).
^-Stockholders' Equity includes common stock (par value, addi-
tional paid in capital and retained earnings) less the value
of treasury stock (if any). Preferred stock should be treat-
ed as a long-term liability.
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Interest Expense
Interest expense for the final year can be obtained
from the firm's Income Statement or can be calculated from
information provided in Value Line reports.
Tax Rate
The tax rate for the final year should be calculated
by dividing taxes (as reported on an Income Statement) by
pretax income. The tax rate can be obtained directly from
a Value Line report. If a tax rate is not provided, the
program will use 40 percent as a default value.
EXAMPLES OP DATA SOURCES
This section illustrates methods for compiling the re-
quired data using three sources. The first two described—
Value Line and Dun & Bradstreet reports--are relatively
straightforward. The third source--^a firm's reported finan-
cial statements—'-may be more complicated to use because data
are generally provided in more detail than in the other two.
The final example using Annual Reports illustrates some of
the complications that may arise. Where the amounts in-
volved are minor, the adjustments described may not be worth
the additional effort they require. If the adjustments
would significantly change the figures used, however, the
program's results will be more reliable if appropriate ad-
justments are made to the input data.
Value Line
Value Line reports provide most of the data needed for
the financial assessment system in a convenient format. -*-
Exhibit 3-3 shows a Value Line report for Pfizer, Inc. as an
example. Exhibit 3-4 is a sample worksheet completed with
data from the Pfizer Value Line report. The circled numbers
lvalue Line uses a "d" placed in front of a figure to indicate
a negative (deficit) number.
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identify the location in the Value Line report of the data
used for each line of the worksheet. Most of the data items
are self-explanatory. Note that years for which Value Line
estimates financial data (1981-1983) are not used—1980 is
the final year for which actual results are reported, and
hence is the final year of data used in the program.
Interest expense is not reported directly in the Value
Line report. However, because the Value Line report provides
a figure for "total interest coverage" (6B), interest expense
can be estimated. Value Line calculates the ratio of oper-
ating income to interest expense. Operating income can be
calculated using reported "operating margin" and "sales" data
(6A). Therefore,
Operating income = operating margin x sales
= 19.9% x 3029.3
and
572.5
interest expense = operating income *
"total interest
earned" ratio
- 572.5
= 119.3
T 4.8
This figure for interest expense is used by the program to
calculate a similar "interest coverage" ratio (based on total
income before taxes and interest rather than operating income)
Note that no data are reported for fixed assets. These
data are not needed by the program, however, because depre-
ciation data are available.
Dun and Bradstreet, Inc.
D&B credit reports are likely to be the only source of
financial data for some of the companies investigated. The
formats of D&B reports vary depending on the amount of infor-
mation published or reported by the company, its banks or
other sources. Exhibit 3-5 shows the "Finance" section from
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a typical D&B report. {The subject company's name'and other
information from the report have been deleted to preserve
confidentiality.) Exhibit 3-6 is a completed worksheet for
the sample D&B report. The circled numbers identify the loca-
tion of each data item in the sample D&B report. Note that
this sample does not report data on depreciation, interest
expense or income tax rate, but does provide net income fig-
ures for each of the three years. Appendix A to this manual
provides another sample D&B report in which required data on
net income are not available for three years, to illustrate
how net income might be estimated for missing years.
Note that a D&B report may include two sections report-
ing financial data, the typical "Finance" section illustrated
in Exhibit 3-5 and a "Statement Update" section with more
current but unreviewed financial data. (The sample D&B re-
port in Appendix A includes a "Statement Update" section.)
If the data reported in the "Statement Update" section are
for a full year, those figures should be used as well as the
three years of data reported in the "Finance" section.
These data should not be used if only part of a year is
covered.
V
Annual Report
The subject company may publish annual financial re-
ports, which can be obtained from the company itself. The
data reported in Annual Reports are also available for firms
with publicly-traded stocks from required filings with the
Securities and Exchange Commission. SEC 10-K reports include
standard financial data, often in more detail than in Annual
Reports, and may be obtained from the SEC or from the company.
Exhibit 3-7 provides copies of three standard financial
reports from the 1981 Annual Report of SCA Services, Inc.:
the Income Statement (Exhibit 3-7A), the Balance Sheet (Ex-
hibit 3-7B) and a Statement of Changes in Financial Portion
(Exhibit 3-7C). The notes to the financial statements often
contain useful information for interpreting the reported
data; excerpts from the notes in SCA Service's Annual Report
are reproduced as Exhibit 3-7D. Note that the financial
statements report consolidated data for SCA and its sub-
"sidiaries. These statements provide the appropriate data,
even if the company being investigated is a subsidiary of
SCA, as long as the parent corporation is potentially liable
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for the activities of the subsidiary.
Three years of data are provided on the Income State-
ment shown in Exhibit 3-7A. Where possible additional data
should be obtained from historical Annual Reports. Only
three years of data are used here to simplify the example.
There is substantial variation in the level of detail
and format for reporting in financial statements. The SCA
statements are typical, however, and they illustrate several
adjustments that may be required when data are compiled.
Exhibit 3-8 is a sample worksheet completed from data in the
SCA Annual Report. The worksheet is filled out as if "XYZ,
Inc.", a hypothetical subsidiary of SCA Services, is the
party to the case in question. The circled numbers and
notes in the worksheet margin identify where the required
data can be found in the financial statements.
Net Income is obtained from the Income Statement. Note
that income for 1979 includes two non-recurring items, which
are described in the Notes: a write-off of claims receiv-
able (-$2000} and a gain on the sale of an investment (+$2925).
The reported income before-tax is adjusted to exclude the
effects of these unusual gains and losses, and taxes then
estimated, as follows:
Reported income, before tax
Plus unusual losses
(write-off of claims receivable)
Less unusual gains
(gain on sale of investment)
Adjusted income, before tax
Less estimated income tax^
Adjusted income, after tax
$13,522
2,000
(2,925)
$12,597
(5,795)
$ 6,802
the subsidiary is not wholly-owned by the parent company,
the parent's liability may be limited to its ownership share
of the subsidiary.
^Income taxes are estimated at the average tax rate (described
below—in this case 46 percent).
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The purpose of this adjustment is to estimate what net in-
come would have been had these unusual events not occurred,
and therefore to base calculations of ability to pay on
more "typical" results.
Depreciation expense is reported in the Income State-
ment. Note that both depreciation and amortization are re-
ported in the sample Income Statement and the combined
figure is used in the program. If depreciation/amortization
is not reported separately in the Income Statement, these
figures may be obtained from the Statement of Changes in
Financial Position or from the Notes.
Fixed Assets data are not required because depreciation
is reported. If these data were required, data reported in
the Balance Sheet would be used. In the case of SCA Ser-
vices, the required figures for 1981 would be the sum of any
assets which are depreciated or amortized: net property and
equipment ($178.0) plus net intangible assets ($23.8), for a
total of $201.8. The Notes to the financial statement often
indicate whether an asset is being depreciated or amortized;
the use of the term "net" may also indicate that assets are
being written off over time. In general, it is better to
locate actual data on depreciation in the financial statements
or the associated notes than to rely on the program's estimate
using fixed asset data. In any case, as in SCA Services' fi-
nancial statement, data on fixed assets are often not reported
for the required minimum of three years. In this case, his-
torical statements should be obtained if necessary.
Current Liabilities can be obtained from the right-hand
side of the Balance Sheet.
Long-Term Liabilities are also obtained from the right-
hand side of the Balance Sheet, and may often be most easily
calculated as:
Total Liabilities and Stockholder's
Equity1
Less Current Liabilities
Less Stockholders' Equity
Equals Long-Term Liabilities
$263.9
- 48.8
-130.3
$ 84.8
The total of the right-hand side of the Balance Sheet.
-------
-20-
The same result would be obtained by adding all long-term
debt and other long-term liabilities (including deferred
taxes):
Long-Terra Debt
Minority Interest
Deferred Income Taxes
$ 52.1
2.4
20.3
Long-Term Liabilities $ 84.8
Net Worth is calculated from the Balance Sheet as Total
Assets (the total of the left-hand side of the Balance Sheet)
less Total Liabilities (Current plus Long-term):
Total Assets
Less Current Liabilities
Less Long-Term Liabilities
Equals Net Worth
$263.9
- 48.8
- 84.8
$130.3
In many cases, such as SCA Services, net worth is actually
shown on the Balance Sheet as "Total Stockholders' Equity"
and need not be calculated.
Interest Expense may be reported in the Income State-
ment, as it is in the SCA Services example. The Income
Statement indicates that a net interest figure is reported;
the associated Notes state that interest earnings of $2.1 and
capitalized interest of $0.3 have been offset against interest
expenses of $7.6. Where possible, gross rather than net in-
terest expense should be used—$7.6 in the SCA Services
example.
Income Tax Rate may be estimated by calculating an
average tax rate, if income taxes are reported as an expense
in the Income Statement or the accompanying notes. The tax
rate is calculated as income tax expense divided by before-
tax income:
Tax Rate = Income Tax Expense * Before-tax Income
13.9 T 30.5
= 46%
-------
-21-
The next chapter of this manual describes procedures
for entering data into the program.
-------
-22-
Exhibit 3-1
WORKSHEET
(dollar figures expressed in
Name of Party
Name and Address of Subject Company
(if different)
Relationship to Party
Name and Location
of Case
Financial Year
Ends:
Estimated Remedial
Action Cost
Financial Data for Subject Company:
Year Net Income Depreciation
Fixed Assets
(end of year)
19
Additional Financial Data for Final Year 19_
Current Liabilities
(end of year)
Long-Term Liabilities
(end of year)
Net Worth
(end of year)
Interest Expense
Income Tax Rate
Source of Data:
Notes:
-------
-23-
Exhibit 3-2
EFFECTS OF MISSING DATA
If the following
data are not
provided:
Net Income
Depreciation/Fixed
Assets
Current Liabilities
Long-term Liabilities
Net Worth
Interest Expense
Income Tax Rate
The program will not calculate:
Cash Flow to Ability
Total Liabilities Total Liabilities Interest to
(Beaver's ratio) to Net Worth Coverage Pay
X
X
X
X
X
X
**
If depreciation data are not entered, the program will estimate depreciation
as 5 percent of fixed assets (if data on fixed assets are provided) or as
zero (if data on fixed assets are not available). This estimate will gener-
ally result in an over-estimate of the firm's ability to pay. This estimate
.will not be used to calculate financial ratios. Fixed assets data are needed
only if depreciation data are not provided.
**
If an income tax rate is not provided, the program will assume 40 percent as
a default value. The income tax rate is used in the calculation of interest
coverage.
-------
Exhibit 3-3: VAiUE LINE REPORT
PFIZER INC.NYSE.PFE
-24-
1265
16.9K-
31.0 25,3 35.3 38.3 43.1
45.0 36.9 31.1 29.6 39.0 41.8 63.8
?.k+..L?3-8 26.4 13.8 25.6 29.O 32.0
18.0 J
1984 1985 1986
Nov. 20. 1981 ViluiUm
Options
TndtOn
ASE
nVwftft Pnct Piifoiiiv
•nci Ntit 12 Mas.
RMnhra Me* Ivtnglli
nslder Decl* font 1981
J AS ONDIJ F MAMJ J AS
to BUY ooozaojac-ooioooo
Ssil i i i o o o o o o o 1 i .i o o
(Salt: 1 Highttt to S Umitl
1984-8S PROJECTIONS
Mo fefe teal T«W
Man
110 (+130%) 25%
90 (+90*1 ia%
Institutional Decisions
20-80 30-80 40-aO ia'81 20*81
to Buy' .101 IIS 104 116 11O
to Sell 101 120 110 109 122
HMg-ilOOO) 39111 41048 42052 42315 41040
Pttc*mi6.0
fhtm i4.0
traded 2.0
19661.19671 1968 1969)1970 1971
Sifeiptrth
"CuhFI«H"perik
(A)EirnlR|ipZO%
CK-
1*78
1979
1980
1981
1982
Cat
tudir
1978
1979
1980
1981
1982
imdtr
1977
1978
1979
1980
1981
QUARTERU MIES (J fflllL)
Har.31 lmiJBj«pi30 Dtt.31
546.9 585.3 SB9.7 640.2
640.8 677.5 683.9 743.8
710.1 7345 759.4 825.3
818.2 797.8 819,1 SS4.S
SIS 895 8H> BSD
236Z
2746.(
3029.
3300
3650
, EARNINGS PER SHURE
Met. 31 JBM38Stpl30 Otc.31
Ml Fu«
.78
.71
..80
.89
.96
1.00 .80
.78
.88
.79 .92
.85 .19
.95
.78
.80
.88
.80
.as
QUHRTERLt DIVIOErtDS >MD
•tr. 31 June 30 Sept 30 OK. 31
.24
,27
.33
.36
.40
.24
.30
.33
.36
.40-
.24
.30
.27
.30
.33 .33
.36 .36
.40
Fun
Ten
Yur
2.93
3.26
3.48
2.80
3.80
wl Fun
•TtIT
.99
1.1J
1.3;
1.4*
BUSINESS: Pfizer Inc. is ,a major producer of Phar-
maceuticals; • animal health' lines; specialty chemicals;
toiletries and cosmetics. Also makes iron oxides and
specialty metals. Important product names include •
Vibrant-felt (antibiotic); Mlnipress (antihypertensive
aa.nl}: Felftfrts (antiarthrittc agent); Dlabinese
(antidiabetes agent); and Coly (cosmetics). Int'l bus., 60%
of sales {63% of operating profits);' R&D, 5.3%; employee
'costs. 30%. '80 doprec. rate: 5.8%.,Est'd plant aget 9 yre,
Has 41,200 errtpls.. 59.0OO stkhldrs. Diri own 1% of stk.
Chrhnn.: E.T. Pratt, Jr. Pros.: G.D. Laubach. Inc.: Del. Ad-
dress: 235 E. 42rtd St., New York, N.Y. .10017.
Pfizer will be glad to get 1981, out of the
way. We estimate shard' earnings at $2.80,
20% below 1980*8 high-water mark. A $45
million-(590 a share) writeoff on the disposal
of the unprofitable CT Scanner business is'
one reason for the shortfall. Another is the ex- ••
ceptional strength of the dollar. With over
60% of its business denortiinated in overseas
currencies, Pfizer suffered exchange losses of
90C a share in the first nine months.
Prospects for 1982 appeal brighter, assum-
ing currency 'fluctuations ease. The absence
of the profit-draining CT scanner operation'
will'boost operating results. Too, consumer
products and the metafe-related materials
science business should continue posting
good results despite sluggish economic con-
ditions. (Sales in both divisions were up 20%
in the third quarter.) So should the all-im-
portant' pharmaceutical business, which is
benefiting from successful new' products.
Feldene, the most promising new entry, has
met with enthusiastic physician response in
the 20 overseas countries where it's already
available. We estimate sales of Feldene will
more than double to $300 million, with a bot-
tom line contribution of 50C-60C a share in
1982. The expected launching of the product
in the lucrative U.S. market early next year
will boost sales further. ,
Pfizer'. is .on the prowl for 'acquisitions.
Although its large cash positon— $495 million
at midyear— is earning high interest, Pfizer
would father put the money to work in an
ongoing business. That way its returns won't
suffer as interest rates fall. , The recent
purchase of Shiley Inc., a $60 million maker
of artificial heart valves, could be dwarfed in
importance by a really big acquisition.
.This conservative issue is best suited for
its 3- to 5-year recovery potential. The pay-
off from new drugs and acquisitions will en-
sure that earnings advance at 10%-15% an-
nually to 1984-86, giving rise to worthwhile
stock price appreciation over that time span.
Since we don't expect profit comparisons to
improve until next year, there's no partic-
ular rush to buy these shares. They will prob-
ably trail the market averages over .the next
twelve months. ' R.C.C./L.K,
H«»mtd SUM dad Pratu thcmm in Bmxm Un»
.
HMMi Cm
Agridlwd
'1978
. Mtt
1MI
IKOfl3.IV
i?7i
14W.<| 22.6%)
177 j | f.7%] 093 1 9?XI *S18 |mi
W7.8 I UK) 3144 1 6.3X1 416J (U%)
Omaiw 533.9 15.6\l t43.sls.Hl} 3S].0|f.l%)
Md«>b Sana JIM («.4<| ' 841.7 JSJ%1 253.7 I MM
Comcaiy Intel ?399.3I I6.IXI }74t»l 15.8X1 M».3( lt,3%| nOtttl.}%)
(A> Based on. avg. shs. putst'g. Nextlto UFO. <"*4 <"
Compemi-s Finenciel Strength A+*
Sloek's Price Stability as
Price Growth Persistence 25
Earnings Predictability 100
-------
-25-
Exhibit 3^4
WORKSHEET
(dollar figures expressed in millions}
Name of Party PFIZER, INC.
Name and Address of Subject Company
(if different) SAME
Name and Location
of Case
Financial Year
Ends;
Estimated Remedial
Action Cost
December 31
N/A
Relationship to Party
Financial Data for Subject Company:
Year Net Incomeu'
197S
19
159.9
17.5.4
206,3
237.9
254.8
DepreciatiorQy Fixed Assets *
(end of year)
59,0
67.6
73,6
80,0
86.6
N/A
N/A
N/A
N/A
N/A
Additional Financial Data for Final Year 19#£:
Current Liabilities fend of year) 1080.2
Long-Term Liabilities (end of year)
Net Worth (end of year)
Interest Expense * *
Income Tax Rate
1572.9
119.3
36.4%
(3)
©
Oft
Source of Data: Value Line Report> 11/20/81
Notes:**Estimated from "Total Interest Coverage" (4.8x) and operating income
(operating margin 18.9% x sales $3029.. 3):
(30.2-9.3 x ,189} v 4,8 =-129.3
*Not needed if depreciation data are available
-------
-26-
Exhiblt 3-5
EXCEPT FROM DUN & BRADSTREET REPORT
INAHCE
* A FINANCIAL SPREAD SHEET OF COMPARATIVES, RATIOS, AND INDUSTRY AVERAGES
* MAY BE AVAILABLE. ORDER A DUNS FINANCIAL PROFILE VIA YOUR DUNS PRIHT
* TERMINAL OR LOCAL D£B OFFICE
Curz Assets
Curr Liabs
Current Ratio
Net Working Capital
Other Assets
Long Term Debt
Worth
Sales
Net Income
Consol/Fiscal
Cash $
Accts Rec
Inventory
Overpayment of
Taxes
Ppd Expenses
Prepaid Taxes
Curz Assets
Fixed Assets
Unamoztized
Mortgage
Other Assets
Consol/Fiscal
Dec 31 1978
1,856,951
347,031
5.35
1 ,509,920
2 , 4 1 3 . 82j9.
2, mi , 698
1 ,782, 051
6,756, 171
.1*12, 1 50.
statement dated
1,220, 186
820,266
910,430
27,659
57,329
2,723
Consol/Fiscal
Dec 31 1979
2,953,330
2, 131,794
3.4
2,090,396
j> r fi-7 i) , n 1 A.
2,131,794
2,632,620
11,991,149
.850.569.
DEC 31 1980 :
Accts Pay $
Accruals
L/T Debt Due
Current
Consol/Fiscal
Dec 31 1980
3,038,593 ,
49Q.H3S.<
b . 1
2,548,158
ft . A i p . n •> 3.
?.. o A 2 . f> ?. s
tn, too ,"b"u2
178,269
245, 186
66,980
3,038,593
2,779,297
27,832
3,944
Curt Liabs
L.T. liab-Other
CAPITAL STOCK
Capital in Excess
of Pax
RETAINED EARNINGS
490,435
2.082.625
40,000
300
3,236,305
Total Assets 5,849,666 Total 5,849,666
From JAN 01 1980 to DEC 31 1980 sales $10,100,582; net income $643,980. Fire
insurance on mdsa I fixt I bldg $4,000,000.
Submitted SEP 04 1981 by office mgr. Prepared from statement(s) by
Accountant' CPA's. Prepared from books without audit.
— 0 —
Fixed assets shown net loss $2,325,261 depreciation. Fixed assets shown consists
of property, plant and equipment, apartment buildings, autos, trucks furniture,
fixtures and rental property. Accruals in current liabilities are wages and bonuses
and pension expense. Other assets - miscellaneous assets. Current debt clue within
one year and the long term liabilities consists of a 95J first inortgae noto payable
$12,810 monthly, balance $1,300,927. Secured by real estate, Normandy Park Apartment
Complex. ~ ,
Second note owed $783,006; payable $6,850 monthly. Secured by real estate, the
Third note $7,316; payable $250 monthly, secure by land.
Fourth note $17,815; payable, at $487 monthly, secured by office equipment-
Fifth note $18,975; payable $146 monthly, secured by
monthly, secured by
real estate.
real estate and
represents the subject and its one
payable
Sixth note $18,975; payable at $184
obligations under capital leases $13,635.
Note this consolidated fiscal statement
subsidiary.
On Sep 4 1981, officers Mere unavailable for an interview. The subject is well
establsihed and has operated successfully for years. Trade payment history is
good. The current ratio is 6.1, which is high for the industry. Operating capital is
good. Subject shows a continued growth in the stockholder's equity over the last 3
years. Sales show a sales decrease for 1980. Financial condition is strong. Trend
of business steady.
-------
-27-
Exhlbit 3-6
WORKSHEET
(dollar figures expressed in dollars)
Name of Party "XXX INC."
Name and Address of Subject Company
(if different) SAME
Relationship to Party
Name and Location
of Case
Financial Year
Ends:
Estimated Remedial
Action Cost
December 31
N/A
Financial Data for Subject Company:
Year Net Incomen) Depreciation
1978
19££
19££
19_
19
422,150.00
850*569.00
643,986.00
N/A
N/A
N/A
Fixed Assets
(end of year)
2,413,829,00
2,674,018.00
2,810,073.00
Additional Financial Data for Final Year 19_£3
Current Liabilities Cend of year) 490,435.00
Long-Term Liabilities (end of year) 2,082,625.00
Net Worth (end of year)
Interest Expense
Income Tax Rate
Source of Data: D&B Keport, 9/4/81
Notes:
3,276,606.00
N/A
N/A %
K *Not needed if depreciation data are available.
-------
-28-
Exhibit 3-7A
ANNUAL REPORT INCOME STATEMENT
Years ended March 31,
1981
1980
1979
In thousands except per shore data
Revenues
Costs and expenses;
Operating
Setting, general and administrative
3 Depreo'at/on and amortization (Notes i(b)
and t(c))
Income from operations
Other income (charges):
I Interest expense, net (Note 1 (d))
{Write-off of claims receivable (Note 1 1)
Gain on sale of investment in unconsolidated
affiliates (Note II)
} Income before income taxes
) Provision for income taxes (Notes l(e) and 7)
y Net income
Average common shares outstanding
Per share of common stock (Note l(f))
$269,120
166,160
38,864
28,401
233,425
35,695
(5,1931
—
30,502
/J,945
$ 16,557
tt.007
$ 1.27
$230,217
147,969
31,27*
24,157
203,402
26,815
(5,014)
—
_
21JBQI
10,050
$ 11,751
11,619
$ 1.01
$207,764
137,292
29,591
21.639
188,522
19,242
(6,645)
(2,000)
2,925
13.522
5,893
$ 7,629
1 1.505
$ .66
See Accompanying Notes to Consolidated Financial Statements
-------
-29-
O (N o
8
*O •*• rv l*>
S> 00 "I O
fs» QJ "ij* ^^
x>
I--,
I
•H
•a
>o
rsi
-O
I — 00
o-
. LO LO
O rn
S
l/\
I
g
5
I
s
3
. oo
oo
o
V
rsi
82
••*-
hC
a
-------
-30-
Exhibit 3-7C
ANNUAL REPORT STATEMENT OF CHANGES IN FINANCIAL POSITION
Years ended March 31,
1981
1980
1979
In thousonds
Working capital provided by:
Net income
Charges (credits) not affecting working capital:
Depreciation and amortization (£)
Deferred income taxes
Write-off of claims receivable
Amortization of deferred investment tax credits
Minority interest
Other
Working capital provided by operations
Disposal of property and equipment
Proceeds from sale of common stock
Increase in long-term debt*
Proceeds from debt placement
Other
Increase in equity applicable to business
acquisitions
Sale of investments in unconso/idated affiliates
Other, net
Total working capital provided
Working capital used for:
Purchases of property and equipment
Reduction in long-term debt
Term credit agreement
Other
Reciassification of deferred taxes for IK
settlement
Increase in intangible assets relating to acquired
businesses, net
Cash dividend
Total working capital used
Net increase (decrease) in working capital
Working capital at beginning of year
Working capital at end of year
Increase (decrease) in components of working
capital:
Cash, equivalents and short-term Investments
Accounts and notes receivable, trade
Notes and claims receivable
Prepaid expenses and other i
Accounts payable and accrued liabilities
Income taxes
Current portion of long-term debt
Net increase (decrease) in working capital
$16,557
28,401
6,379
—
(1,897)
663
(75)
50,028
1,712
24,620
—
12,520
1,506
_
2,234
92,620
71,117
—
15,253
5,946
6.001
702
99,019
(6.399;
M,249
H£50
$ (88)
6,969
607
1,432
(5,276)
(8,425)
ff.6/8J
$(6,399)
$11,751
24,157
6,939
—
(1,607)
782
163
42,185
4,480
-
-
1,326
_
—
626
48.617
48,446
—
4,900
—
247
—
53,593
(4.976)
19,225
$14,249
$ 349
2,4/3
(3,585)
(312)
(3,132)
877
(1,586)
$(4.976)
$ 7,629
21,639
3,359
2.000
(1.326)
100
115
33.5/6
3,392
_
57,000
10,430
_
1,375
1,880
107.593
35,102
51.000
8,042
—
195
—
94.339
13,254
5,971
$ 19,225
$ 5.278
3,614
3.468
913
(4,530)
(1,775)
6,286
$ 13,254
See Accompanying Notes to Consolidated Financial Statements
-------
-31-
Exhibit 3-7D
NOTES TO FINANCIAL STATEMENTS (EXCERPTS)
6. Intangible Assets
Intangible assets, relating to acquired bus/nesses, consist of the following:
AsofMarch3l, , I98_[ 1980
Cost of purchased businesses in excess of fair value of net assets
acquired, net of accumulated amortization of $4,253,000
($3,641.000 in 1980)
Covenants not to compete and customer lists, net of accumulated
amortization of $2.626,000 ($2,016,000 in 1980)
$22,155
1.644
$16,945
.2.075
$23,799 $19,020
The cost of purchased businesses in excess of fair value of net assets acquired is amortized
principally over forty years on a straight-line basis. Covenants not to compete and customer
lists are being amortized over the lives of the agreements or their estimated economic lives
which at March 31,1981 have a weighted overage remaining life of approximately four years.
Amortization of intangible assets amounted to $1,222,000, $1.020,000 and $944,000 in
1981, 1980 and 1979, respectively.
C. Property and Equipment
Major renewals and betterments are capitalized. Ordinary maintenance and repair
costs are charged to expense as incurred. Repairs and maintenance costs amounted to
$18,046,000, $16,852,000 and $16,318,000 in 1981. 1980 and 1979, respectively. When
items of property and equipment are retired or otherwise disposed of, related cost and accu-
mulated depreciation are removed from the accounts and any resulting gain or toss is
included in income.
Landfill sites are recorded at cost and are depredated, principally on the basis of
capacity used, to estimated residual value. Landfill preparation costs and improvements are
capitalized and depreciated over their estimated useful lives or the life of the land/if!, which-
ever is shorter.
Depreciation and amortization of other property and equipment are provided using
the straight-line method over estimated useful lives as follows: buildings, 10 to 40 years;
equipment, 3 to 10 years; and leasehold improvements over the period of the applicable
leases. The weighted overage remaining life of each category as of March 31,1981 is 14
years, 4.5 years and 9,5 years, respectively.
Depredation and amortization of property and equipment amounted to t
$27,179,000, $23,137,000 and $20,695,000 in 1981, 1980 and 1979. respectively. {
D. Interest Expense
Commencing in 1981, interest has been capitalized in accordance with Statement of Finan-
cial Accounting Standards No. 34. Net interest expense consists of the following
components:
Years ended March 31,
Interest expense
Interest income
Capitalized interest
1981
$7,630
(2,114)
(323)
$5,193
1980
$7,268
(2,254)
$5,014
1979
$7,290
(645)
$6.645
Income before income taxes in fiscal 1979 included the effects of two items of a non-
recurring nature.
During fiscal 1976 and 1977, SCA commenced two lawsuits against its former Presi-
dent and others to recover excessive amounts estimated at $2,560,000 which it alleged he
caused SCA to pay for the purchase of certain assets in three transactions which occurred
while he was President. In the fourth quarter of fiscal 1979, SCA determined that it was
improbable that it would collect the full amount of these claims and charged $2,000,000 of
the claims receivable against income and reclassified the remaining $560,000 to current
assets. In the second quarter of fiscal, I960, the Company accepted payment of $525,000
from its insurance carrier and charged the remaining $35,000 against income.
Further, during the fourth quarter of fiscal 1979, the Company sold its investment in
a group of related unconsolidated affiliates for an aggregate of $4.300.000. which resulted
in a pre-tax gain of $2,925,000.
-------
-32-
Exhiblt 3-8
WORKSHEET
(dollar figures expressed in thousands)
Name of Party "x?z INC. "
Name and Address of Subject Company
(if different) SCAServiaes, Ina.
Name and Location
of Case
Financial Year
Ends: Maroh SI
Estimated Remedial
Action Cost N/A
Relationship to Party Parent
(wholly-owned
subsidiary)
Financial Data for Subject Company:
Year
19 JL*
19 J?
19j?
19
19
Net Income
6,802
* *
11,751
16,55?
Depreciation
21,639
24,157
28,401
Fixed Assets *
(end of year)
N/A
It/A
N/A
Exhibit 3-7A &
Exhibit 3-7D ©
^Exhibit 3-7A, 3-7B
or Exhibit 3-7D(z)
Additional Financial Data for Final Year
Current Liabilities (end of year)
Long-Term Liabilities (end of year)
Net Worth (end of year)
Interest Expense
Income Tax Rate
48,765
84,824
130,276
7,630.
Exhibit 3-7B(3)
Exhibit 3-7BQ)
Exhibit 3-7B(j)
Exhibit 3-7A and Exhibit 3-70©
Exhibit' 3-7A
Source of Data: 5^ serviees Inc., 1981 Annual Report
Notes: **Adjusted for the extraordinary gain & loss in 1979.
*Not needed if depreciation data are available.
-------
ENTERING THE DATA
CHAPTER 4
INTRODUCTION
The outline and- exhibits below illustrate the basic for-
mat and procedure for entering data into the financial assess-
ment program. The underlined items are those entered by the
program user. The program asks for information in the order
indicated by the exhibits, and in most cases, after printing
the request prompts the user's response by typing a question
mark. After typing the response the user should press the
RETURN key; data are not entered and the program will not pro-
ceed until RETURN is pressed. If the user wishes to halt
program operation he should press the BREAK key.l This com-
mand will terminate the-run. To restart the program after
termination, simply type SPFUND. Note that this returns the
program to its starting point; all data from previous run are
lost when the run is terminated, and must be re-entered.
It is important to remember that all data required to run
the financial assessment program must be entered in a form
which the program can read and correctly interpret. For ex-
ample, the program is designed to read only numerical entries
For some terminals the BREAK key will not terminate the pro-
gram. In this case the analyst should ask User Services for
the "appropriate means of terminating the program.
-------
-34-
for financial data. Thus, if a firm has a tax rate of forty-
six percent, the appropriate entry is 46.^ The program will
respond to entries such as 46% or FORTY-SIX with an error
message. The user should therefore be careful to adhere to
the program format whenever entering data.
INITIAL DATA
. At the outset the program requests information which
identifies the case under analysis. Each question the com-
puter asks must be answered, because pressing RETURN without
making an entry will result in an error. If the user does
not know the answer to a question in this section, he should
continue the program by typing UNKNOWN. The only exception
to this rule is in entering the number of the EPA region in
which a case is located. If that number is unknown, the
user should enter 0^ (zero) . An example of the initial data
entry is provided in Exhibit 4-1.
• Today's Date. This date should be entered
in numerical form, XX/XX/XX, as illustrated
in the exhibit. The program will read only
the first eight characters (including num-
bers, slashes and spaces), ignoring any
characters beyond that length.
• Case Name. The program will read only the
first twenty characters (letters and spaces)
of the case name, ignoring any characters
beyond that length.
• Location. Identification of case location
by city and state is recommended, but the
program will accept other locational data.
The entry is again limited to twenty char-
acters .
•"•The program will also accept a tax rate entered in the form
.46, and will interpret the entry correctly as 46 percent.
-------
-35-
Region Number. The number of the EPA region
in which the case is located should be en-
tered in numerical form. If unknown, enter
£ (zero).
Filing Date. The format for the date a case
was filed with EPA is a numerical entry,
XX/XX/XX, identical to that for entry of to-
day's date.
Par±y jSFame. The entry for the name of the
party whose financial capabilities are to be
analyzed is limited to twenty characters.
RULES FOR ENTERING FINANCIAL DATA
The last entry requested in the program's initial sec-
tion is an estimate of the cost of remedial action. The
format for this entry illustrates some general rules to fol-
low whenever entering financial data into the program.
• Dollar or Percentage Signs. The program will
not accept entries containing dollars, per-
centage signs or other non-numeric characters.
The user should omit all such characters from
input data.
• Commas. The program will misread any numbers
containing commas, ignoring all numbers to the
right of the first comma. For example, the
program will interpret the entry .9,985,168.98
as 2/ and will employ the latter value in all
calculations. The user should therefore omit
all commas from input data.
• Decimal Points. Decimal points must be entered
for all financial data. Printed output is
rounded to two or three decimal points, but re-
maining digits of the entry are retained in-
ternally and employed in all calculations. The
decimal point should be omitted when entering
the "number of years of data" and the "first
year of data" as discussed below.
-------
-36-
• Unknown Values. If data on any financial
variables are unavailable, the user should
enter 999.9. The program recognizes tiiis
entry as indication that the value for a
variable is unknown, and will modify its
calculations accordingly.
\
• Default Values. In some instances lack of
adequate data will prevent calculation of
the desired financial ratios. In other cases
the program makes reasonable assumptions
about unknown values and employs these default
values in estimating a firm's financial cap-
abilities. The default values assigned to
various variables are indicated in Exhibit
3-2. Note that default values will only be
activated if the user enters 999.9. Simply
pressing RETURN without making an entry will
result in an error.
• Reaj^ Values ^etween^ 999 V0^ and _99_9' ..99J?. If
any real financial data have values between
999.0 and 999.999, the program will misinter-
pret the data and treat the value as unknown.
To avoid this problem the user should round
the data to 1000.0.
* Consistent - Units. The user should place ex-
treme importance on ensuring that all finan-
cial data are entered in consistent units.
For example, if data taken from Dun & Brad-
street, Value Line, or annual reports are
expressed in millions of dollars, the esti-
mated cost of remedial action should be
similarly expressed. To avoid conversion
^ . errors the user is advised to express all
financial data, whenever possible, in the
units employed by the primary data source.
• Nominal Dollars. It is not necessary to con-
vert dollar figures from previous years to
current dollar terms. The nominal dollar
figures, as they are expressed in the origin-
al source document, should be entered.
The entry for the estimated costs of remedial action and for
all financial data should follow the rules above.
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-37-
THE FINANCIAL DATA
After receiving an estimate of the cost of remedial
action the program requests input of specific data on a firm's
financial situation. The protocol for entering these data
is outlined below and an example is provided in Exhibit 4-2.
• Years of Data to be Analyzed. The total
number of years of data the user plans to
employ in the analysis should be entered
in numerical form without a decimal point.
(.see exhibit) . The program will respond
to spelled-out entries such as THREE with
an error message.
Between three and five years of data are
necessary; the program will terminate if
a number less than three is entered, and
lacks the capacity to analyze more than
five years of data. To ensure accuracy
• in assessing financial capability, the
user is advised to submit five years of
the most recent data available. Note too
that the program assumes that data will
be provided for consecutive years.
• First Year. The first (earliest) year of
data to be analyzed should be entered in
numerical form without a decimal point.
For example, if data from 1976 to 1980 are
being used, enter 1976. The program will
reject entries in other forms.
• Financial Data. The program then asks for
year-by-year data on the firm's net income,
depreciation, and fixed assets. In addition,
it requests the most recent year's data on
the firm's current liabilities, long-term
liabilities, net worth, interest expense,
and income tax rate. Entries for these var-
iables should follow the rules for entering
financial data previously discussed. Briefly,
the guidelines are:
a) Omit dollar signs, percentage signs, or
other non-numeric characters.
-------
-38-
b) Omit commas.
c) Include decimal points.
d) Enter 999.9 for unknown values.
e) Revise data if any actual values
are between 999.0 and 999.999.
f) Use consistent units.
f) Do not convert figures to constant
dollars.
CORRECTING INPUT ERRORS
In some cases, as indicated above, format errors result
in an error message being printed. The program will not
recognize incorrect numbers for financial data, however. In-
correct entries of this type may be corrected through the
procedure described below.
Once the user has entered all necessary financial data,
the program summarizes the data in tabular form (see Exhibit
4-3) . The user should check this table against his work-
sheet. If there are no errors, the user should type N or
NO when asked if there are any errors in the data. If there
are errors, the user should type Y or YES. Entering YES
moves the program into an error correction mode. In this
mode the program first prints a numbered list of all finan-
cial variables. (See Exhibit 4-4.) It then asks the user
to enter (in order) the number of the incorrect variable, a
comma,' and the year for which the value is incorrect. Cor-
rections should be entered one variable and one year at a
time. The program continues to correct values and to ask
whether other variables need to be corrected until the user
responds to that question by entering N or NO.
Once the user has indicated that all errors have been
corrected, the program again summarizes the data in tabular
form and asks the user if there are any errors in the data.
If the user responds Y or YES, the program will return to
the error correction routine. If the user responds N or NO,
the program will proceed. (See Exhibit 4-5.)
-------
-39-
A list of variables with unknown values is then pro-
vided. The program will indicate whether the missing data
will preclude the calculation of any financial ratios or
the firm's ability to pay. It asks whether the user would
like to continue. If the data gaps are such that the user
believes the program cannot provide a realistic assessment
of a firm's financial capabilities he should enter NO or N,
thus terminating the program. If he has entered adequate
data, however, he should type Y or YES. This entry shifts
the program to its output mode. The results provided by
the system are discussed in the next chapter.
-------
-40-
Exhibit 4-1
INITIAL DATA ENTRY
SUPERFUND FINANCIAL ASSESSMENT SYSTEM
THIS PROGRAM IS DESIGNED TO ASSIST SUPERFUND PERSONNEL
IN DETERMINING THE AMOUNT OF REMEDIAL ACTION COSTS A
FIRM CAN AFFORD TO PAY. THE PROGRAM IS INTERACTIVE AND
WILL ASK YOU TO PROVIDE CERTAIN DATA. THE PROGRAM WILL
ANALYZE THESE DATA AND ESTIMATE THE AMOUNT A FIRM CAN
AFFORD TO PAY. IF YOU HAVE ANY QUESTIONSr PLEASE CONSULT
THE INSTRUCTION MANUAL.
ENTER TODAYS DATE(XX/XX/XX)
4/25/82
ENTER CASE NAME(UP TO 20 LETTERS)
TEST CASE #2
ENTER LOCATION QF CASE
-------
-41-
Exhibit 4-2
FINANCIAL DATA ENTRY
THE PROGRAM WILL NOW ASK YOU FOR SPECIFIC DATA. THESE DATA
ARE NORMALLY AVAILABLE IN A COMPANYS ANNUAL REPORT, A VALUE LINE
REPORT OR A DUN & BRADSTREET REPORT ON THE COMPANY. EXAMPLES OF THE
REQUIRED DATA ARE PROVIDED IN THE INSTRUCTION MANUAL. PLEASE OMIT
ANY COMMAS AND ALWAYS INCLUDE THE DECIMAL POINT. IF THE DATA ARE NOT
AVAILABLE, PLEASE TYPE IN 999.9
HOW MANY YEARS OF DATA WILL BE USED IN THE ANALYSIS?
(FIVE IS RECOMMENDED. AT A MINIMUM, THREE IS REQUIRED.
5
WHAT IS THE FIRST YEAR OF DATA TO BE ENTERED?
197S
ENTER NET INCOME FOR 1976
159.9
ENTER DEPRECIATION FOR 1976
FIXED ASSETS IN 1976
NET INCOME FOR 1977
ENTER DEPRECIATION FOR 1977
67. S
ENTER
?
999.9
ENTER
206.3
FIXED ASSETS IN 1977
NET INCOME FOR 1979
DEPRECIATION FOR 1978
-------
-42-
Exhibit 4-2 (cont'd)
FINANCIAL DATA ENTRY
ENTER
7
999.9
ENTER
7
237.9
ENTER
7
as. 6
ENTER
?
999.9
ENTER
?
254.8
ENTER
7
86.8
ENTER
7
999.9
FIXED ASSETS IN 1978
NET INCOME FOR 1979
DEPRECIATION FOR 1979
FIXED ASSETS IN 1979
NET INCOME FOR 1990
DEPRECIATION FOR 1980
FIXED ASSETS IN 1980
ENTER CURRENT LIABILITIES IN 1980
1080.2
ENTER LONG-TERM LIABILITIES IN 1980
583.1
ENTER NET WORTH IN 1980
7
1572.9
ENTER
?
119.3
ENTER
7
3.64
INTEREST EXPENSE IN 1980
INCOME TAX RATE IN 1980
-------
-43-
Exhibit 4-3
SUMMARY OF DATA
YOU HAVE PROVIDED THE FOLLOWING DATA.
THE DATA FOR COMPLETENESS AND ACCURACY.
PLEASE CHECK
YEAR
1876
1377
1978
137S
1980
NET INCOME
159.80
175.40
20S.30
237.80
254.80
DEPRECIATION
53.00
67.60
73.60
86.60
86.60
FIXED ASSETS
993.30
999.30
999.30
333.30
339.90
FINANCIAL VALUES FOR THE YEAR 1980:
CURRENT LIABILITIES
LONG-TERM LIABILITIES
NET WORTH
INTEREST EXPENSE
INCOME TAX RATE
1080.20
583.10
1572.90
119.30
3.64
-------
_44-
Exhibit 4-4
CORRECTING ERRORS
ARE THERE ANY ERRORS IN THE ABOVE DATA(YES/NO)?
YES.
INDICATE WHICH DATA CONTAIN ERRORS BY TYPING IN THE NUMBER
OF THAT VARIABLE, AS FOLLOWS!
1. NET INCOME
2. DEPRECIATION
3. FIXED ASSETS
4. CURRENT LIABILITIES
5. LONG-TERM LIABILITIES
S, NET WORTH
7. INTEREST EXPENSE
8. INCOME TAXES
ENTER NUMBER OF INCORRECT VARIABLE AND YEAR OF INCORRECT DATA
(SEPARATED BY COMMAS)
7
2,1979
ENTER DEPRECIATION FOR 1979
7
80.0
ARE THERE ANY OTHER VARIABLES TO BE CORRECTED?
YES
ENTER NUMBER OF INCORRECT VARIABLE AND YEAR OF INCORRECT DATA
{SEPARATED BY COMMAS)
7
B,198Q
ENTER INCOME TAX RATE IN i960
7
36.4
ARE THERE ANY OTHER VARIABLES TO BE CORRECTED?
NO
-------
-45-
Exhibit 4-5
SUMMARY OF DATA
YOU HAVE PROVIDED THE FOLLOWING DATA.
THE DATA FOR COMPLETENESS AND ACCURACY.
PLEASE CHECK
YEAR
1976
1977
1978
1979
1980
NET INCOME
159.90
175.40
20B.30
237.90
254.80
DEPRECIATION
59.00
67.60
73.60
80.00
86.60
FIXED ASSETS
999.90
999.90
999.90
999.90
999.90
FINANCIAL VALUES FOR THE YEAR 1980!
CURRENT LIABILITIES
LONG-TERM LIABILITIES
NET WORTH
INTEREST EXPENSE
INCOME TAX RATE
1080.20
583.10
1572.90
119.30
36.40
ARE THERE ANY ERRORS IN THE ABOVE DATA(YES/NO)?
NO
YOU HAVE PROVIDED THE REQUESTED INFORMATION WITH THE EXCEPTION
OF:
FIXED ASSETS FOR THE YEAR 1976
FIXED ASSETS FOR THE YEAR 1977
FIXED ASSETS FOR THE YEAR 1978
FIXED ASSETS FOR THE YEAR 1979
FIXED ASSETS FOR THE YEAR 1980
THE MISSING FIXED ASSET DATA WILL NOT PRECLUDE THE
CALCULATION OF ANY OF THE FINANCIAL RATIOS.
DO YOU WISH TO CONTINUE?
YES
-------
OUTPUT OF FINANCIAL ASSESSMENT SYSTEM
CHAPTER 5
INTRODUCTION
As noted previously, the financial assessment system is
a two-part system designed to:
1) Calculate the amount of remedial action costs a
firm can afford to pay, and
2) Provide a concise financial evaluation of the firm.
The system's output reflects this structure. First, the
system presents the results of its "ability to pay" calcu-
lations. Next, it calculates three standard financial ratios
to assess the firm's ability to borrow additional funds.
Finally, on request, the program will display the intermediate
calculations employed in determining the affordable remedial
action costs. A detailed description of each output is pre-
sented below.1
The accompanying Technical Support Document contains a
detailed review of the concept of ability to pay. It also
explains the basis for selection of the three financial
ratios, discusses the interpretation of program results,
and describes the steps employed in all calculations.
-------
-47-
CALCULATION OF ABILITY TO PAY
The first output of the financial assessment system is
a table which indicates the probability that a firm will be
able to pay a given amount of remedial action costs. The
system defines cash available to fund remedial action as the
cash flow generated by the firm's operations less the cash
which must be reinvested in the business to maintain its
plant and equipment. The amount is likely to vary from year
to year. Consequently, variability in annual cash flows
must be taken into account in estimating the firm's ability
to pay. The system does so by determining the probability
that given amounts of cash will be available given the var-
iability of the cash .flow which existed in the past.
An example of the results is provided in Exhibit 5-1.
This example indicates that there is a 50 percent probabil-
ity that the firm will be able to pay annual remedial action
cost of $171 million or a one-time charge of $615 million.
There is an 80 percent chance that the firm can afford a
smaller annual payment of $41 million or a one-time charge
of $148 million.
The figures provided in Exhibit 5-1 are the before-tax
amounts the firm is likely to be able to afford. The program
assumes that the costs of remedial action are tax-deductible.
In the event that the costs of remedial action are not tax-
deductible/ this assumption will lead the program to over-
estimate the firm's ability to pay. In such cases the user
can translate the figures to after-tax affordable costs by
multiplying the before-tax amounts by one minus the marginal
tax rate.1
An additional feature of the output shown in Exhibit
5-1 is the calculation of"the probability that the firm will
be able to pay the estimated cost of remedial action. If
the user has not provided an estimated cost during data input
the program will omit this calculation. If an estimate has
been entered, however, the output will take two basic forms:
.1
A marginal tax rate of 40 percent should be used since this
rate is used in the program to convert after-tax cash flows
to before-tax dollars.
-------
-48-
• A statement that the firm is unlikely to
be able to afford the remedial action cost,
or
• An estimate of the probability that the
firm will be able to pay the cost of re-
medial action.
An example is presented in Exhibit 5-1. Note that $615.4
million is the smallest one-time charge greater than the
estimated cost of remedial action of $500 million and that
there is a 50 percent probability that the firm can afford
this charge.
The one-time charge a firm can afford to pay assumes
that the firm will be able to borrow against its future ex-
pected earnings. The ability of a firm to raise additional
debt, however, depends on its financial health. Failure of
two or three of the financial ratios discussed below indi-
cates potential difficulty in obtaining additional debt.
FINANCIAL RATIOS
After estimating the affordable remedial action costs,
the financial assessment system calculates three ratios:
• The ratio -of cash flow to total liabilities,
• The ratio of total liabilities to equity,
and
• The ratio of earnings before interest and
taxes to interest payments (the interest
coverage ratio).
The system prints the value of these three ratios in decimal
form and states whether or not the values fall above or below
established critical levels. A message indicates whether the
outcome suggests potential financial difficulties for the
firm. An example of program output is presented in Exhibit
5-2.
The three ratios indicate whether a firm may have dif-
ficulty financing remedial'action costs requiring large in-
itial expenditures. The intent of this assessment is not
necessarily to exempt firms from paying remedial action
-------
-49-
costs, but instead to indicate when an extended payment
schedule may be necessary. A brief explanation of each
of the ratios is provided below.
The ratio of cash flow to total liabilities is calcu-
lated by dividing internally-generated cash flow (net in-
come plus depreciation) by total debt (current liabilities
plus long-term debt). This test measures a firm's solvency
and is the single best predictor of bankruptcy up to* five
years prior to failure. A ratio less than the critical
level of 0.10 indicates that the firm may be unable to meet
its fixed obligations (interest repayments, debt repayments,
etc.), and is in danger of bankruptcy.
The ratio of total liabilities to stockholders' equity
is calculated by dividing the firm's total debt (current
liabilities plus long-term debt) by the stockholders'
equity.1. It indicates the firm's ability to obtain addition-
al debt financing and is also useful in 'predicting bankruptcy,
A ratio greater than the critical level of 1.5 indicates that
a firm may be unable to borrow a large amount of money to
immediately fund remedial action.
The final ratio is the ratio of earnings before interest
and taxes to interest payments, commonly referred to as the
interest coverage ratio. This ratio indicates whether it is
likely to be able to obtain additional debt financing. A
ratio less than the critical level of 2.0 suggests that the
firm may have difficulty financing remedial action if re-
medial action costs are greater than the available cash flow
in any given year.
It is possible that a firm may pass one or two of the
financial ratios while failing the remaining ratios. As
Exhibit 5-3 shows, the program will print a warning if the
^•Stockholders' equity includes common equity plus paid-in
surplus and retained earnings less the value of any treasury
stock.
-------
-50-
firm fails two or more of the three financial ratios. This
warning is meant to (1) indicate that it may be necessary to
allow an extended payment schedule so that the firm can
spread the remedial action costs over several years, and (2)
alert EPA that the firm may use these ratios or a similar
analysis to contend that it cannot pay any remedial action
costs.
INTERMEDIATE CALCULATIONS
After calculation of the three financial ratios, the
program will ask the user if he wishes to see the inter-
mediate calculations of affordable annual costs. If the user
does not want an illustration of these calculations he should
enter N or NO and either sign off or proceed to the next case.
If the user does wish to see these calculations, however, he
should enter Y or YES. The program will respond by printing
the intermediate calculations in the format described below.
An example is shown in Exhibit 5-4.
The program illustrates each of the steps required to
determine annual affordable remedial costs. First, it shows
the calculation of residual cash flow for each year analyzed
(net income plus depreciation less required expenditures.)
Next, the weights used in determining the weighted average
the absence of available data, the program may be unable
to calculate one or more of the financial ratios. The pro-
gram will indicate which ratios cannot be calculated. If
one ratio cannot be calculated, the firm must fail both of
the remaining ratios in order for the warning to be printed.
If two or three of the ratios cannot be calculated, no warn-
ing will be printed but the value of any ratio which can be
calculated will be provided.
The signoff procedure and the procedure for restarting the
program are both explained in Chapter 2.
-------
-51-
residual cash flow are provided.1 The program then prints
the weighted average and the standard deviation of the
residual cash flows. Finally the program provides the
.equation used to determine the annual affordable costs and
explains how one-time charges are calculated.
The more recent the year the greater the weight assigned
its annual cash flow. Calculating a weighted rather than
simple average provides a better estimate of future per-
formance, since greatest weight is given to performance
attained under conditions most likely to be similar to
those currently encountered by the firm. The user should
consult the Technical Support Document for a thorough ex-
planation of the rationale employed and the calculations
used in determining these weights.
-------
-52-
Exhibit 5-1
AFFORDABLE REMEDIAL ACTION COSTS
THIS PROGRAM WILL NOW DISPLAY A RANGE OF ANNUAL COSTS AND ONE-TIME
CHARGES THAT XYZ CORPORATION MAY BE ABLE TO AFFORD. THIS IS BASED
ON THE AVERAGE CASH AVAILABLE AND THE VARIATION IN THAT CASH FLOW OVER
THE PAST 5 YEARS.
4/25/82
CASE: TEST CASE #2
PARTY: XYZ CORPORATION
LOCATION: COSTON, MA.
REGION: i
DATE FILED: 4/2/82
PROBABILITY OF
ADEQUATE CASH FLOW
507.
607.
707.
80%
90%
35%
99%
ANNUAL COSTS
AFFORDABLE
(BEFORE-TAX)
171.43
132.32
90.44
41.29
0.0
0.0
0.0
ONE-TIME CHARGE
AFFORDABLE
{BEFORE-TAX)
615.43
475.04
324.66
148.20
0.0
0.0
0.0
THIS MEANS THAT THERE IS A 60 PERCENT CHANCE THAT
XYZ CORPORATION WILL BE ABLE TO AFFORD 41.28 DOLLARS
ANNUALLY OR A ONE-TIME CHARGE OF 148.20 DOLLARS
(ASSUMING THE FIRM WILL BE ABLE TO BORROW AGAINST FUTURE EXPECTED
EARNINGS). REMEMBER THIS CALCULATION ALLOWS FOR SUFFICIENT FUNDS TO
MAINTAIN THEIR CURRENT PLANT AND EQUIPMENT BUT WILL NOT ALLOW
THE FIRM TO MAKE ANY SIZABLE NEW INVESTMENTS.
THERE IS A 50 PERCENT PROBABILITY THAT XYZ CORPORATION
WILL BE ABLE TO PAY THE COST OF REMEDIAL ACTION OF
500.00 DOLLARS
-------
cn
-53-
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-------
-54-
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FINANCIAL WARNING
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-------
-55-
Exhibit 5-4
INTERMEDIATE CALCULATIONS
WOULD YOU LIKE TO BEE THE INTERMEDIATE CALCULATIONS OF AFFORDABLE ANNUAL
COSTS?
YES
INTERMEDIATE CALCULATIONS OF AFFORDABLE ANNUAL COSTS
YEAR
NET INCOME
PLUS DEPRECIATION
LESS REQ. EXPENDITURES
EQUALS CASH FLOW
MULTIPLIED BY
WEIGHT
CONTRIBUTION TO
AVG CASH FLOW
1976
159.90
59.00
88.50
130.40
0.09
11.29
YEAR
NET INCOME
PLUS DEPRECIATION
LESS REQ. EXPENDITURES
EQUALS CASH FLOW
MULTIPLIED BY '
WEIGHT
CONTRIBUTION TO
AVG CASH FLOW
1977
175.40
E7.SO
101.40
141.BO
0.12
17.51
YEAR
NET INCOME
PLUS DEPRECIATION
LESS REQ. EXPENDITURES
EQUALS CASH FLOW
MULTIPLIED BY
WEIGHT
CONTRIBUTION TO
AVG CASH FLOW
1978
206.30
73. SO
110.40
169.50
0.19
29.95
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-56-
Exhibit 5-4 (cont'd)
INTERMEDIATE CALCULATIONS
YEAR
NET INCOME
PLUS DEPRECIATION
LESS REG. EXPENDITURES
EQUALS CASH FLOW
MULTIPLIED BY
WEIGHT
CONTRIBUTION TO
AVG CASH FLOW
1979
237.90
80.00
120.00
197.SO
0.25
49.95
YEAR
NET INCOME
PLUS DEPRECIATION
LESS REG. EXPENDITURES
EQUALS CASH FLOW
MULTIPLIED BY
WEIGHT
CONTRIBUTION TO
AVG CASH FLOW
1980
254.80
86.60
129.90
211.50
0.36
76.27
AVERAGE CASH FLOW EQUALS
THE STANDARD DEVIATION OF THE CASH FLOW EQUALS
184.98
28.79
A NORMAL DISTRIBUTION IS ASSUMED ABOUT THE MEAN.
TO ARRIVE AT THE ANNUAL COSTS AFFORDABLE THE FOLLOWING FORMULA
is USED:
(AVG - FACTOR X SD)/(1-TAXRATE)
WHERE:
AVG - THE AVERAGE CASH FLOW
SD = STANDARD DEVIATION OF CASH FLOW
FACTOR = FACTORS FROM A STANDARD NORMAL DISTRIBUTION TABLE
(SEE TECHNICAL SUPPORT DOCUMENT FOR MORE DETAILS.)
TAXRATE = MARGINAL TAX RATE (ASSUMED TO BE 407.)
THE ONE-TIME CHARGE AFFORDABLE IS THE PRESENT VALUE
OF 5 YEARS OF ANNUAL COSTS AT A DISCOUNT RATE OF 207.
-------
ESTIMATING NET INCOME FOR ADDITIONAL YEARS
APPENDIX A
In some cases, data on net income may not be available
for the minimum required three years. If net income data
are available for only one year, but related data are avail-
able for three or more years, net income may be estimated
for the additonal years. The following example illustrates
how such an estimate could be developed.
Exhibit A-l is a sample D&B report for an unnamed "ABC
Inc." Exhibit A-2 is a worksheet from this report.^-
In this example, the income tax rate is calculated as follows:
Tax rate = taxes -=• income before taxes
= 73.5 T (158.8 + 73.5)
= 32%
Also note that there appears to be a typographical error
in the reported data on "Other Assets" for 1979. The accuracy
of this abnormally-low number can be checked by relying on the
following relationship:
Total Assets = Total Liabilities 4- Net Worth
Current Assets + Other Assets = Current Liabilities
+ Other Liabilities + Net Worth
194.9 + X = 95.8 + 129.3 + 263.1 or X = 293.3
This check reveals that the report is, in fact, in error,
and that "Other Assets" for 1979 (expressed in thousands) is
293.3, not 0.293.
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-58-
ABC Inc. did not report net income data for 1978 or 1979,
but did provide sales data for the three years 1978, 1979
and 1980. In addition, net income is provided in the notes
for 1980. Net income for 1978 and 1979 could be estimated
by assuming that the ratio of net income to sales is the
same in all three years. This calculation is done as fol-
lows:
Ratio of income to sales in 1980 = $ 158.8 = .106
$1503.8
Estimated income for 1978 = ratio x sales for 1978
= .106 x 399.8
= 42.4
Estimated income for 1979 = ratio x sales for 1979
= .106 x 987.1
= 104.6
In interpreting the program results based on these estimates,
the user should bear in mind, first, that the data are esti-
mates only and; second, that to the extent that the estimates
understate the variability of income the calculated ability
to pay will be overstated. In most cases, net income varies
more proportionately from year-to-year than do sales and there-
fore this estimating procedure is likely to understate vari-
ability in net income.
For some companies, it may not be possible to estimate
net income because data on sales are not reported for a
sufficient number of years. In these cases, the user can
simply enter the same data two or three times in order to
obtain an estimate of ability to pay based on one or two
years of financial results. This procedure inherently under-
states the variability of income and, again, will result in
an overstatement of the firm's ability to pay.
-------
-59-
Exhibit A-l
DUN & BRADSTREET REPORT
fINANCE
* A FINANCIAL SPREAD SHEET OF COMPARATIVES, RATIOS, AND INDUSTRY AVERAGES
* MAY BE AVAILABLE. ORDER A DUNS FINANCIAL PROFILE VIA YOUR DUHS PRIHT
* TERMINAL OR LOCAL D£B OFFICE
3;
*
J2/18/81
Curr Assets
Curr Liabs
Other Assets
Other Liabs
Worth
Sales
Fiscal statement
Cash $
Accts Rec
Certificate of
Deposits
Nov
Fiscal
30 1S78
120,960
73.398
^123,230.
i> M , 'I 1 6
116, 375
Nov
Fiscal
30 1979
Nov
^
dateTT NOV 30
70,526
206,930
8,000
95
^
129
263
.92?
831
?9J$r
306
1t1
130,
Fiscal
30 19CO
235,507
Curr Assets
Fixed Assets
Real Estate
285,507
'MS, 302
85,000
1980:
Accts Pay
Notes Pay
Prov for Costs
Accruals
Taxes
Curr Liabs
Notes Def
CAPITAL STOCK
RETAINED EARNINGS
* 67
25
25
20
283
82
5
116
,953
,755
, TOG
,95H
,223
, 993
,832
,000
,984
Total Assets 788,810 Total
-------
-60-
Exhibit A-2
WORKSHEET
(dollar figures expressed in thousands)
Name of Party "ABC, INC."
Name and Address of Subject Company
(if different)
Name and Location
of Case
Financial Year
Ends:
November 30
Estimated Remedial
Action Cost
Relationship to Party_
Financial Data for Subject Company:
Year Net^nooipe Depreciation
N/A
19
19
42.4*
104.6*
158.8
N/A
N/A
Fixed
(end of
123. 2
293. S
503.3
Additional Financial Data for Final Year 19 80-.
Current Liabilities
(end of year)
Long-Term Liabilities
(end of year)
Net Worth
(end of year)
Interest Expense
Income Tax Rate
Source of Data: DSB Report, 12/19/81
Notes: **Es timated
284.0
82.8
422.0
N/A
*Not needed if depreciation data are available.
5
•s^^.
6.
32% % (7
-------
UPDATING KEY PARAMETERS
APPENDIX B
INTRODUCTION
The Superfund Financial Assessment System uses some
program-supplied data when:
1) the user fails to provide key data, and
2) calculating the firm's affordable remedial
action costs.
These program-supplied data include:
1) a tax rate of 40 percent,
2) a ratio of depreciation to fixed assets
of 0.05,
3} an interest rate of 20 percent,
4) a ratio of required reinvestment to de-
preciation of 1.50, and
5) an exponential smoothing factor of 0.30.
The use of each of these factors is discussed in more detail
below. This discussion is followed by instructions for up-
dating these factors.
-------
-62-
TAX RATE
If the analyst cannot provide an estimate of the firm's
tax rate in the most recent year of the analysis, a default
value of 40 percent is assumed. For some firms, this will
be an over-estimate of the average tax rate, since the max-
imum marginal tax rate is 46 percent. This 40 percent tax
rate is also used as the marginal tax rate for all companies
when translating the after-tax affordable annual cost into
before-tax affordable costs. This rate should be altered
when existing corporate tax rates are changed.
DEPRECIATION TO FIXED ASSETS
In calculating the annual affordable costs, the cash
flow available to pay remedial action costs is estimated
by adding net income and depreciation and subtracting the
funds needed for reinvestment.1 if no depreciation data
are available, the program estimates the depreciation of
the firm.2 Depreciation is assumed to equal 5 percent of
fixed assets (if fixed asset data are available). Five (5)
percent was selected as a conservative (low) estimate of
depreciation based on the assumption that the remaining fixed
assets would be depreciated over a twenty year period on a
straight-line basis. If the estimated depreciation is low,
the amount of affordable annual costs will be over-estimated.
In a negotiation process it was felt that providing an over-
estimate of the firm's affordable remedial action costs may
increase the firm's willingness to provide additional data
on depreciation.
INTEREST RATE
When calculating the one-time charge affordable, it
As explained below and in the Technical Support Document:, the
funds needed for reinvestment are assumed to equal 150 per-
cent of the depreciation amount.
2
This estimate is used only when calculating affordable re-
medial action costs and not in the calculation of any of
the financial ratios.
-------
-62-
TAX RATE
If the analyst cannot provide an estimate of the firm's
tax rate in the most recent year of the analysis, a default
value of 40 percent is assumed. For some firms, this will
be an over-estimate of the average tax rate, since the max-
imum marginal tax rate is 46 percent. This 40 percent tax
rate is also used as the marginal tax rate for all companies
when translating the after-tax affordable annual cost into
before-tax affordable costs. This rate should be altered
when existing corporate tax rates are changed.
DEPRECIATION TO FIXED ASSETS
In calculating the annual affordable costs, the cash
flow available to pay remedial action costs is estimated
by adding net income and depreciation and subtracting the
funds needed for reinvestment.1 if no depreciation data
are available, the program estimates the depreciation of
the firm.2 Depreciation is assumed to equal 5 percent of
fixed assets (if fixed asset data are available). Five (5)
percent was selected as a conservative (low) estimate of
depreciation based on the assumption that the remaining fixed
assets would be depreciated over a twenty year period on a
straight-line basis. If the estimated depreciation is low,
the amount of affordable annual costs will be over-estimated.
In a negotiation process it was felt that providing an over-
estimate of the firm's affordable remedial action costs may
increase the firm's willingness to provide additional data
on depreciation.
INTEREST RATE
When calculating the one-time charge affordable, it
1
As explained below and in the Technical Support Document, the
funds needed for reinvestment are assumed to equal 150 per-
cent of the depreciation amount.
"This estimate is used only when calculating affordable re-
medial action costs and not in the calculation of any of
the financial ratios.
-------
-64-
Factor
a
a (1-a)
a (1-a)2
a (1-a)3
a (1-a)4
t= the most recent year of data
a= the exponential smoothing factor
In the current version of the Superfund Financial Assessment
System, the value of a is 0.30. The effect of this value is
to give the most recent year's data twice the weight of the
data for the year t-2 and three times the weight of the data
for the year t-3.
Year
t
t-1
t-2
t-3
t-4
where:
UPDATING THE ESTIMATES
The above estimates are based on the current state of
the economy (current tax laws, inflation rates, and so forth)
and may become obsolete as a result of changes in the econo-
mic environment. Thus it will be necessary to periodically
review these estimates and update them as required. Exhibit
B-l provides an indication of when circumstances may require
updating these parameters and the name of the variable in
the program which should be changed.
As explained in Exhibit B-l the parameters should be
altered when the economic environment changes or when the
values are found to produce results which are too high or
too low based on some actual experience. Methods for esti-
mating new values are also suggested 'in this exhibit.
.All of the parameters are defined at the start of the
program. To alter these parameters, a programmer familiar
with the EPA IBM system should access the listing of the
-------
-65-
program (SUPERF), change the appropriate parameter value,
and recompile the program.
-------
-66-
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OCT I 6 .1995
U.S. Environmental Protection Agency
Library. Boom 2404 PM-211-A
401 M Street, S.W.
Washington, DC. 20460
------- |