SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996 Commission File Number 1-5371
-------------- ------
The Union Corporation
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 25-0848970
- --------------------------- ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
145 Mason Street, Greenwich, CT 06830
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 629-0505
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
5,650,833 Common shares were outstanding as of May 7, 1996
--------- -----------
THE UNION CORPORATION AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements and Exhibits
Part I. Financial Information: Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1996 (Unaudited) and
June 30, 1995 3
Condensed Consolidated Statements of
Operations (Unaudited), for the Nine
Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of
Operations (Unaudited), for the Three
Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of
Cash Flows (Unaudited), for the Nine
Months Ended March 31, 1996 and 1995 6
Condensed Consolidated Statement of
Shareholders' Equity (Unaudited), for
the Nine Months Ended March 31, 1996 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations (Unaudited) 10-16
Part II. Other Information:
Item 1. Legal Proceedings 17-20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1996 (Unaudited) and June 30, 1995
(In thousands)
March 31, June 30,
1996 1995
--------- ---------
ASSETS
Current assets:
Cash $ 17,725 $ 14,805
Short-term investments, at cost,
which approximates market 24,869 21,930
Accounts receivable, trade, less allowance
for doubtful accounts of $630 and $542 7,257 6,339
Prepaid expenses and other current assets 4,974 5,254
--------- --------
Total current assets 54,825 48,328
Property, buildings and equipment, net 8,270 9,283
Cost of intangible assets from businesses acquired,
less accumulated amortization of $8,718 and $7,636 49,543 50,426
Other assets and deferred charges 3,436 2,300
Deferred income taxes 2,526 2,826
--------- --------
Total assets $118,600 $113,163
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,503 $ 3,044
Accrued expenses 21,433 18,747
Income taxes payable 664 992
Current portion of long-term debt 1,220 213
--------- --------
Total current liabilities 26,820 22,996
Long-term debt 19,597 20,763
Other liabilities 11,679 12,200
--------- --------
Total liabilities 58,096 55,959
--------- --------
Shareholders' equity:
Common stock, $.50 par value; authorized shares,
15,000; issued shares 8,583 and 8,521 4,291 4,261
Additional paid-in capital 44,479 43,412
Retained earnings 48,540 46,337
Less treasury stock, at cost, 2,941 and 2,941 shares (36,806) (36,806)
--------- --------
Total shareholders' equity 60,504 57,204
--------- --------
Total liabilities and shareholders' equity $118,600 $113,163
--------- --------
--------- --------
3
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended March 31, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
--------- --------
Operating revenues $ 75,293 $ 71,526
--------- --------
Expenses:
Operating expenses 49,421 46,706
Selling, general and administrative expenses 15,219 15,205
Depreciation and amortization 3,033 3,097
--------- --------
Total expenses 67,673 65,008
--------- --------
Operating income 7,620 6,518
Interest expense (1,120) (1,038)
Interest income 1,121 870
--------- --------
Income from continuing operations
before income taxes 7,621 6,350
Provision for income taxes 3,353 2,731
--------- --------
Income from continuing operations 4,268 3,619
Discontinued operations loss provision
(net of tax benefit of $935 and $2,800, respectively) (2,065) (5,200)
--------- --------
Net income (loss) $ 2,203 $ (1,581)
--------- --------
--------- --------
Primary and fully diluted income per common share:
Income from continuing operations $ .74 $ .64
Discontinued operations loss provision (.36) (.92)
--------- --------
Net income (loss) $ .38 $ (.28)
--------- --------
--------- --------
Average number of common and common equivalent
shares outstanding:
Primary 5,766,198 5,649,016
Fully diluted 5,789,978 5,659,339
4
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 1996 and 1995
(Dollars in thousands, except per share amounts)
1996 1995
--------- --------
Operating revenues $27,237 $24,240
--------- --------
Expenses:
Operating expenses 16,963 16,035
Selling, general and administrative expenses 5,563 4,718
Depreciation and amortization 1,015 1,009
--------- --------
Total expenses 23,541 21,762
--------- --------
Operating income 3,696 2,478
Interest expense (332) (366)
Interest income 373 341
--------- --------
Income from continuing operations
before income taxes 3,737 2,453
Provision for income taxes 1,644 1,055
--------- --------
Income from continuing operations 2,093 1,398
Discontinued operations loss provision
(net of tax benefit of $2,800) -- (5,200)
--------- --------
Net income (loss) $ 2,093 $ (3,802)
--------- --------
--------- --------
Primary and fully diluted income per common share:
Income from continuing operations $ .36 $ .25
Discontinued operations loss provision -- (.92)
--------- --------
Net income (loss) $ .36 $ (.67)
--------- --------
--------- --------
Average number of common and common equivalent
shares outstanding:
Primary 5,824,765 5,668,867
Fully diluted 5,825,615 5,668,867
5
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 1996 and 1995
(In thousands)
1996 1995
------- --------
Cash Flows From Operating Activities:
Net income (loss) $ 2,203 $ (1,581)
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Discontinued operations loss provision, net of tax benefit 2,065 5,200
Depreciation and amortization 3,033 3,097
Deferred compensation expense 290 626
Non-cash compensation expense 391 --
Provision for doubtful accounts 136 88
Provision for deferred income taxes 2,190 1,171
Changes in assets and liabilities:
Accounts receivable - (increase) (1,054) (957)
Prepaid expenses and other current assets - (increase) decrease (610) 95
Other assets and deferred charges - (increase) (1,136) (171)
Accounts payable and accrued expenses - increase 945 323
Income taxes payable - (decrease) (312) (1,276)
Other liabilities - (decrease) (1,676) (2,601)
------- -------
Net cash provided by operating activities 6,465 4,014
------- -------
Cash Flows From Investing Activities:
Capital expenditures (976) (833)
Additional purchase price related to the
purchase of Allied Bond & Collection Agency (199) (194)
Other 38 3
------- -------
Net cash (used by) investing activities (1,137) (1,024)
------- -------
Cash Flows From Financing Activities:
Principal payments on long-term debt (82) (74)
Principal payments on capital lease obligations (77) (75)
Proceeds from the exercise of stock options 690 3
Purchase of treasury stock, at cost -- (3,344)
------- -------
Net cash provided by (used by) financing activities 531 (3,490)
------- -------
Net increase (decrease) in cash and short-term
investments 5,859 (500)
Cash and short-term investments at June 30 36,735 34,179
------- -------
Cash and short-term investments at March 31 $ 42,594 $ 33,679
------- -------
------- -------
Supplemental disclosures of cash flow information:
Interest paid $ 1,143 $ 924
Income taxes paid 1,475 2,836
6
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
For the Nine Months Ended March 31, 1996
(Dollars in thousands)
Additional
Common paid-in Retained Treasury
stock capital earnings stock
------- ------- -------- --------
Balance at June 30, 1995 $ 4,261 $ 43,412 $ 46,337 $ (36,806)
Net income -- -- 1,077 --
------- ------- -------- --------
Balance at September 30, 1995 4,261 43,412 47,414 (36,806)
Net (loss) -- -- (967) --
------- ------- -------- --------
Balance at December 31, 1995 4,261 43,412 46,447 (36,806)
Net income -- -- 2,093 --
Proceeds from common stock issued
upon exercise of stock options, net
(61,308 shares) 30 1,067 -- --
------- ------- -------- --------
Balance at March 31, 1996 $ 4,291 $44,479 $48,540 $(36,806)
------- ------- ------- --------
------- ------- ------- --------
7
THE UNION CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The amounts set forth in this Form 10-Q have not been audited by
independent auditors; however, in the opinion of the management of The Union
Corporation (the "Company"), all adjustments (including normal recurring
accruals) necessary for a fair statement of the results of such periods have
been made.
The financial statements included in this Form 10-Q are presented in
accordance with the requirements of the form and may not include all disclosures
required by generally accepted accounting principles. For additional
information, reference is made to the Company's Annual Report for the year ended
June 30, 1995.
1. DISCONTINUED OPERATIONS
The Company reached agreements with the federal government in January
1996, subject to certain agency approvals and final approval by the Court, to
settle the previously reported matters involving false pricing information
and claims made by certain senior officers of the Company's former Gichner
Systems Group division (the "Division"). Under the agreements, which
recognize the Company's co-operation in and substantial contribution to the
investigation of these matters, the Company will fulfill its commitment to
make compensation for the government's civil claims by paying $5,550,000.
The Company also accepted responsibility for the actions of the officers of
the former Division by entering a plea of guilty under the False Claims Act,
18 U.S.C. Section 287, although those actions were concealed from the
management of the Company, and will pay a fine of $250,000. As a result, the
Company recorded a $3,000,000 loss provision ($2,065,000 net of tax benefit)
or $.36 loss per share during the second quarter of fiscal 1996 for its
Discontinued Operations, which provision, combined with amounts previously
reserved in connection with these matters, is expected to cover all costs of
the above settlements, and includes an accrual for the estimated legal and
accounting fees related to the government claims and other costs related to
certain discontinued operations of the Company, all of which were terminated
or otherwise disposed of prior to fiscal 1990. The net loss provision of
$2,065,000 is included in the Condensed Consolidated Statements of Operations
under the caption "Discontinued operations loss provision" for the nine
months ended March 31, 1996. The Condensed Consolidated Balance Sheet at
March 31, 1996 includes "Accrued expenses" of $2,200,000 and "Other
liabilities" of $800,000 comprising the $3,000,000 loss provision.
As previously reported, the Company recorded an $8,000,000 loss
provision ($5,200,000 net of tax benefit) or $.92 loss per share during the
third quarter of fiscal 1995 for costs related to
8
certain of its discontinued operations, all of which were terminated or
otherwise disposed of prior to fiscal 1990. This provision was recorded as a
result of developments regarding previously reported matters involving the
Company's former Gichner Systems Group division and environmental matters
principally involving a site where an inactive subsidiary of the Company fully
performed a settlement with the federal government which has reopened the
matter. The net loss provision of $5,200,000 was included in the Condensed
Consolidated Statements of Operations under the caption "Discontinued operations
loss provision" beginning in the third quarter of fiscal 1995.
The $8,000,000 loss provision included an accrual of $3,500,000 for
estimated legal and accounting fees and settlement costs which were expected to
be incurred as a result of government claims for the matter involving the former
Gichner Systems Group division and the estimated legal costs to defend the
Company against the claims asserted by Gichner Systems Group, Inc.. The
$8,000,000 loss provision also included $4,000,000 for environmental matters and
approximately $500,000 of costs incurred by the Company during the quarter ended
March 31, 1995 for the aforementioned Gichner Systems Group division and
environmental matters.
See Part II, Item 1 of this Form 10-Q for additional information
regarding these matters.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained very strong and liquid at
March 31, 1996 with cash and short-term investments totaling $42,594,000,
working capital of $28,005,000 and net worth of $60,504,000. During the nine
months ended March 31, 1996, the net cash provided by operating activities
was $6,465,000 compared to $4,014,000 a year ago. The increase in net cash
provided by operating activities included an increase of approximately
$600,000 in Income from Continuing Operations, a decrease of approximately
$600,000 in cash outflows for accounts payable and accrued expenses, a
decrease of $1,361,000 in income taxes paid and a decrease of approximately
$300,000 in cash outflows charged against Capital Credit Corporation's
("Capital Credit") restructuring provision related to the relocation of its
headquarters in the first quarter of fiscal 1995, partially offset by an
increase of $1,250,000 in other current assets and other assets for cash
deposited into a trust established to fund deferred bonuses for the chairman
of a subsidiary of the Company. The Company's capital spending during the
nine months ended March 31, 1996 principally represents costs related to the
purchase of computer, telecommunications and office equipment and leasehold
improvements, and was slightly higher than that of a year ago.
The Company reached agreements with the federal government in January
1996, subject to certain agency approvals and final approval by the Court, to
settle the previously reported matters involving false pricing information
and claims made by certain senior officers of the Company's former Gichner
Systems Group division. Under the agreements, if approved, the Company will
pay $5,800,000 to settle all civil and criminal claims involving the Company.
The Company anticipates that it will make such payments to the government
during early fiscal 1997. (See "Gichner Systems Group Division" section of
Part II, Item 1 of this Form 10-Q for additional information).
Interactive Performance, Inc. ("Interactive Performance"), a newly-
formed, wholly-owned subsidiary of the Company, began to provide accounts
receivable management services to AT&T Corp. during the current quarter. As
previously announced, revenues under this three-year contract may reach
$20,000,000 a year. The Company anticipates that Interactive Performance will
make capital expenditures of approximately $2,500,000 during the next six
months.
During the nine months ended March 31, 1995 the Company purchased, with
available funds, 55,200 shares of its common stock for approximately $514,000.
The Company also paid $2,830,000 in July 1994 for 290,600 shares of its common
stock that were purchased in June 1994. As of May 7, 1996, the Company holds
approximately 2,941,000 shares of its common stock at an aggregate cost of
approximately $36,806,000. Future purchases, if any, by the Company of its
common stock will be funded with available funds.
10
In December 1992, the Company completed the acquisition of Allied Bond &
Collection Agency ("Allied Bond"), a business engaged in providing collection
services on a contingency fee basis throughout the United States, for an initial
purchase price of approximately $40,300,000, which includes acquisition related
costs. In addition, contingent payments not to exceed approximately $8,300,000
may be payable by the Company based upon Allied Bond attaining certain earnings
levels over the five and one-half year period ending June 30, 1998. As of March
31, 1996, approximately $837,000 of such contingent payments have been made.
The acquisition was financed in part from $20,000,000 borrowed under an existing
unsecured $25,000,000 two year revolving line of credit furnished by a bank
which was scheduled to convert to a three year term loan on December 31, 1994
(the "Credit Agreement"). During fiscal 1995 the bank extended the revolving
line of credit until December 31, 1996, at which time the revolving line of
credit will convert to a three year term loan.
Under the terms of the Credit Agreement, the aggregate principal amount
outstanding, which is limited to a maximum of $20,000,000, under the revolving
line of credit on December 31, 1996 must be repaid by the Company in twelve
quarterly installments commencing March 31, 1997 and ending December 31, 1999.
Each of the first eleven installments must be in an amount equal to one-
twentieth of the outstanding loan balance on December 31, 1996, with the twelfth
installment equal to the amount necessary to repay the then unpaid principal
amount of the loan. The loans bear interest, at the Company's option, at either
the bank's base rate, which is announced by the bank from time to time; or at
3/4% above the bank's Eurodollar rate during both the revolving and term loan
periods. The interest rate, which is reset periodically, on the revolving term
loan was 6.375% at March 31, 1996. The Company intends to extend the revolving
line of credit until December 31, 1998 at which time the revolving line of
credit will convert to a three year term loan.
The maximum amount of letters of credit that the bank will issue under
the Credit Agreement is $5,000,000. As of May 7, 1996, the Company was
contingently liable for outstanding letters of credit aggregating approximately
$3,725,000 which reduced the amount available for letters of credit under the
Credit Agreement to approximately $ 1,275,000.
Pursuant to a March 1995 amendment (the "Amendment") to the Company's
employment agreement with the Chairman of the Company (the "Employment
Agreement"), an amount equal to the discounted net present value of the deferred
compensation payable to the Chairman under the Employment Agreement will be paid
to the Chairman at the time of his retirement. The discounted net present value
of the deferred compensation at March 31, 1996 was approximately $3,000,000,
which amount is included in "Other liabilities" in the Condensed Consolidated
Balance Sheet. The Amendment also extends the term of the Chairman's employment
to December 31, 1997 and provides for the Company to deposit into a trust, at
the time of the Chairman's retirement, an amount equal to the discounted net
present value of the aggregate consulting fees to be paid by the Company to the
Chairman for consulting services to be rendered by the Chairman for a period of
up to ten years following his retirement. Previously such consulting services
were to be rendered for the life of the Chairman. The discounted net present
value of the aggregate consulting fees was approximately $2,250,000 at March 31,
1996, which will be expensed as the services are rendered.
11
The employment agreement dated July 1, 1995 with the chairman of a
subsidiary of the Company provides for the subsidiary to deposit approximately
$1,500,000 into a trust, which represents the deferred bonuses, and related
interest, previously earned by the chairman. The agreement also provides that
the chairman is entitled to withdraw $250,000 in January 1996 and each January
thereafter until the entire amount deposited in the trust, including all
earnings and accretions thereto, has been paid. As of March 31, 1996, the
subsidiary of the Company had deposited the $1,500,000 into a trust of which
$250,000 was withdrawn by the chairman in January 1996 and of the balance
remaining in the trust $250,000 is included in the Condensed Consolidated
Balance Sheet in "Prepaid and other current assets" and $1,000,000 is included
in "Other assets and deferred charges".
The Company and its subsidiaries are involved in litigation and
administrative proceedings described in Part II, Item 1 of this Form 10-Q. The
Company periodically reviews and updates the status of these matters and the
past costs incurred with respect to each. Estimates of future costs are based
upon currently available data. The Company recorded a $3,000,000 loss provision
($2,065,000 net of tax benefit) during the second quarter of fiscal 1996 and an
$8,000,000 loss provision ($5,200,000 net of tax benefit) during the third
quarter of fiscal 1995. The net loss provisions of $2,065,000 and $5,200,000
were included in the Condensed Consolidated Statements of Operations under the
caption "Discontinued operations loss provision" in the second quarter of fiscal
1996 and in the third quarter of fiscal 1995, respectively.
Management believes that reserves established to meet known and
potential environmental liabilities for the pending environmental proceedings
referred to above and the matters involving the Company's former Gichner Systems
Group division also referred to above are adequate based on current information.
However, there is no way to be certain that future developments relating to any
of these matters will not involve additional substantial costs that may require
future charges to the Discontinued operations loss provision. The Company does
not anticipate, based on current information, that the resolution of the Legal
Proceedings and the matters relating to Discontinued Operations described in
Part II, Item 1 of this Form 10-Q will have a material adverse impact on the
Company's overall financial condition given its available cash and short-term
investments, nor that the resolution of the Legal Proceedings described on page
17 will have a material adverse impact on the Company's future results of
operations.
Management believes that current cash and short-term investments
and the Company's future cash flows from operations are sufficient to provide
for anticipated working capital, debt service and capital expenditure
requirements.
12
NINE MONTHS ENDED MARCH 31, 1996 VS. NINE MONTHS ENDED MARCH 31, 1995
OPERATING REVENUES
Operating revenues increased to $75,293,000 for the nine months ended
March 31, 1996 compared with $71,526,000 for the nine months ended March 31,
1995 primarily reflecting increases at Transworld Systems, Inc. ("Transworld
Systems") and Capital Credit and the inclusion of revenues from Interactive
Performance, which began operations in the current quarter. Revenues at
Transworld Systems were $43,267,000 compared with $42,028,000 a year ago.
Revenues at Capital Credit increased by 20% in the first nine months of fiscal
1996 compared with a year ago, which was the result of the increase in the level
of placements received from its clients during fiscal 1996. Revenues at Allied
Bond were essentially unchanged during the nine months ended March 31, 1996
compared to a year ago in spite of changing market conditions such as reduced
collectibility of accounts placed for collection and lower commission rates in
certain key markets. Allied also reported an increase in the dollar value of
accounts placed for collection from its clients and an increase in the amount
collected on behalf of its clients during the nine months ended March 31, 1996
compared to a year ago.
OPERATING EXPENSES
Operating expenses increased by $2,715,000 for the nine months ended
March 31, 1996 compared with fiscal 1995. The increase was attributable to
increases in operating expenses at Transworld Systems, Capital Credit and Allied
Bond and the inclusion of the operating expenses of Interactive Performance.
The increase in operating expenses at Transworld Systems was primarily the
result of the increases in revenues and postal rates. The increase in
operating expenses at Capital Credit and Allied Bond resulted from increased
collection costs and compensation expenses, which resulted in part from Capital
Credit's increase in revenues and also reflected the changing market conditions
affecting both companies, such as reduced collectibility of accounts placed for
collection.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $14,000 for
the nine months ended March 31, 1996 compared with 1995. The increase was
attributable to the inclusion of the selling, general and administrative
expenses of Interactive Performance and increases in expenses at Transworld
Systems, Allied Bond and to a lesser extent Capital Credit, partially offset by
a decrease in expenses at the Corporate office. The decrease in Corporate
office expenses primarily resulted from a decrease of approximately $600,000 of
legal fees related to discontinued operations of the Company and a decrease of
approximately $300,000 in deferred compensation expense. During the nine months
ended March 31, 1996 such legal fees were charged against the reserves that were
previously established for the discontinued operations of the Company (See Note
1). During the
13
six months ended December 31, 1994 such legal fees were included in selling,
general and administrative expenses and thereafter such fees were charged
against the reserves for the discontinued operations of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased by $64,000 for the nine
months ended March 31, 1996 compared with the nine months ended March 31, 1995
principally due to decreases at Allied Bond and Capital Credit, partially offset
by the inclusion of depreciation and amortization expense from Interactive
Performance.
OPERATING INCOME
Operating income was $7,620,000 for the nine months ended March 31, 1996
compared with $6,518,000 for the nine months ended March 31, 1995. This
increase was due to increases at Transworld Systems and Capital Credit, the
inclusion of the operating results of Interactive Performance, which began
operations in the current quarter, and a decrease in Corporate office expenses,
partially offset by a decrease in operating income at Allied Bond. Transworld
Systems reported operating income of $9,797,000, before amortization of
goodwill, compared with $9,453,000 a year ago, principally reflecting the
increase in its revenues, partially offset by the increase in postal rates, and
an operating margin of 22%, after amortization of goodwill, for the first nine
months of fiscal 1996. Capital Credit's operating income during the nine months
ended March 31, 1996 was well ahead of last year. Allied Bond continued to
operate profitably, after amortization of goodwill and depreciation expense
related to its acquisition, in spite of changing market conditions such as
reduced collectibility of accounts placed for collection and lower commission
rates in certain key markets.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased by $82,000 for the nine months ended March
31, 1996 compared with March 31, 1995 principally due to an increase in the
interest rate charged for the borrowings under the Credit Agreement. Interest
income increased by $251,000 for the nine months ended March 31, 1996 compared
with a year ago, due to higher average short-term investment balances and
interest rates.
During the nine months ended March 31, 1996 and the three months ended
March 31, 1995, the Company primarily invested in commercial paper with short-
term maturities and overnight time deposits. During the six months ended
December 31, 1994, the Company primarily invested in commercial paper and U.S.
government securities, both with short-term maturities, and overnight time
deposits.
14
INCOME TAXES
The Company's effective income tax rate for continuing operations was
44% for the nine months ended March 31, 1996 and 43% for the nine months ended
March 31, 1995.
THREE MONTHS ENDED MARCH 31, 1996 VS. THREE MONTHS ENDED MARCH 31, 1995
OPERATING REVENUES
Operating revenues increased to $27,237,000 for the three months ended
March 31, 1996 compared with $24,240,000 for the three months ended March 31,
1995 primarily reflecting increases at Transworld Systems and Capital Credit and
the inclusion of revenues from Interactive Performance, which began operations
in the current quarter. Revenues at Transworld Systems were $15,277,000
compared with $13,497,000 a year ago. Revenues at Capital Credit increased by
22% in the third quarter of fiscal 1996 compared with a year ago, which was the
result of the increase in the level of placements received from its clients
during fiscal 1996. Allied Bond reported a decrease in revenues primarily due
to changing market conditions such as reduced collectibility of accounts placed
for collection and lower commission rates in certain key markets. Allied also
reported an increase in the dollar value of accounts placed for collection from
its clients during the three months ended March 31, 1996 compared to a year ago.
OPERATING EXPENSES
Operating expenses increased by $928,000 for the three months ended
March 31, 1996 compared with fiscal 1995. The increase was attributable to
increases in operating expenses at Transworld Systems and Capital Credit and
the inclusion of the operating expenses of Interactive Performance, partially
offset by a decrease in operating expenses at Allied Bond. The increase in
operating expenses at Transworld Systems was primarily the result of the
increases in revenues. The increase in operating expenses at Capital Credit
resulted from increased collection costs and compensation expenses, which
primarily resulted from the increase in revenues. The decrease in operating
expenses at Allied Bond primarily resulted from the decrease in revenues,
however operating expenses were also affected by changing market conditions
such as reduced collectibility of accounts placed for collection.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $845,000 for
the three months ended March 31, 1996 compared with 1995. The increase was
attributable to the inclusion of the selling, general and administrative
expenses of Interactive Performance and increases at Transworld Systems, Capital
Credit and to a lesser extent Allied Bond.
15
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased by $6,000 for the three
months ended March 31, 1996 compared with the three months ended March 31, 1995.
OPERATING INCOME
Operating income was $3,696,000 for the three months ended March 31,
1996 compared with $2,478,000 for the three months ended March 31, 1995. This
increase was due to increases at Transworld Systems and Capital Credit and the
inclusion of the operating results of Interactive Performance, which began
operations in the current quarter, partially offset by a decrease in operating
income at Allied Bond. Transworld Systems reported operating income of
$3,918,000, before amortization of goodwill, compared with $2,773,000 a year
ago, principally reflecting the increase in its revenues and an operating margin
of 25%, after amortization of goodwill, for the third quarter of fiscal 1996.
Capital Credit's operating income during the three months ended March 31, 1996
was well ahead of last year. Allied Bond continued to operate profitably, after
amortization of goodwill and depreciation expense related to its acquisition,
and reported an increase in operating income and an improvement in its operating
margin for the third quarter of fiscal 1996 compared to the second quarter of
fiscal 1996.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense decreased by $34,000 for the three months ended March
31, 1996 compared with March 31, 1995. Interest income increased by $32,000 for
the three months ended March 31, 1996 compared with a year ago, due to higher
average short-term investment balances and interest rates.
During the three months ended March 31, 1996 and 1995, the Company
primarily invested in commercial paper with short-term maturities and overnight
time deposits.
INCOME TAXES
The Company's effective income tax rate for continuing operations was
44% for the three months ended March 31, 1996 and 43% for the three months ended
March 31, 1995.
16
PART II - OTHER INFORMATION (UNAUDITED)
ITEM 1. LEGAL PROCEEDINGS:
In addition to the continuing environmental clean-up efforts and other
matters described below, the Company and its subsidiaries are parties to a
number of lawsuits arising in the ordinary course of business.
In June 1991, two stockholder class actions were brought, and then
consolidated, against the Company, Capital Credit, certain directors and current
and former executive officers of the Company, and certain former directors and
officers of Capital Credit, seeking damages under the securities laws in
connection with the misstatement by the Company of certain quarterly financial
statements in fiscal 1990 and 1991. The Company and the individual defendants
denied any and all wrongdoing or liability and vigorously defended the action.
In order to end the substantial expense and distraction of continued litigation,
the Company settled the action, which settlement has been approved by the court.
All claims against the Company and the other defendants have been dismissed with
prejudice. The Company and its insurer each paid one-half of the $1,500,000
settlement amount in March 1995. That portion of the settlement amount which
was not covered by insurance was charged against existing reserves, all of which
had been recorded in prior fiscal years.
In a lawsuit brought in 1993 by three individuals engaged by Transworld
Systems as independent contractors, in which it was alleged that Transworld
Systems has improperly treated the plaintiffs as independent contractors rather
than employees, all of the asserted claims have been dismissed by the Court with
prejudice.
Some of the same persons and others have also brought suit against
Transworld Systems and certain of its directors and officers, alleging breach of
contract and mental distress as a result of Transworld Systems' failure to
supply plaintiffs with copies of a monthly publication distributed by Transworld
Systems. Several persons have also brought suit alleging wrongful termination.
The claims in these actions against Transworld Systems have been reviewed by
counsel and, based upon their assessment, management has concluded that the
claims are without merit.
Based on current estimates and information, the Company does not believe
that the ultimate resolution of the above lawsuits will have a material adverse
impact on the Company's overall financial condition or future results of
operations.
17
Gichner Systems Group Division:
The Company sold the assets and business of the Company's Gichner
Systems Group division (the "Division") to Gichner Systems Group, Inc. (the
"Purchaser") in 1989 and, accordingly, reflected the Division as a
discontinued operation in the Company's Statements of Operations. In 1991
the Purchaser informed the Company that false pricing information might have
been supplied by former officers of the Division, who were also members of
the group that purchased the Division from the Company, in connection with
certain government contracts negotiated prior to the sale. After
investigation, those of the former officers who were then working for the
Purchaser were terminated for cause, and the Company and Purchaser have
tendered to the Department of Defense a report of the results of their
investigation. The Company recorded an $8,000,000 loss provision ($5,200,000
net of tax benefit) during the third quarter of fiscal 1995, which included
an accrual of $3,500,000 for estimated legal and accounting fees and
settlement costs which were expected to be incurred as a result of government
claims for this matter and the estimated legal costs to defend the Company
against claims asserted by the Purchaser. The Company reached agreements
with the federal government in January 1996, subject to certain agency
approvals and final approval by the Court, to settle the government's claims.
Under the agreements, which recognize the Company's co-operation in and
substantial contribution to the investigation of these matters, the Company
will fulfill its commitment to make compensation for the government's civil
claims by paying $5,550,000. The Company also accepted responsibility for
the actions of the officers of the former Division by entering a plea of
guilty under the False Claims Act, 18 U.S.C. Section 287, although those
actions were concealed from the management of the Company, and will pay a
fine of $250,000. As a result, the Company recorded a $3,000,000 loss
provision ($2,065,000 net of tax benefit) or $.36 loss per share during the
second quarter of fiscal 1996 for its Discontinued Operations, which
provision, combined with amounts previously reserved in connection with these
matters, is expected to cover all costs of the above settlements, and
includes an accrual for the estimated legal and accounting fees related to
the government claims and other costs related to certain discontinued
operations of the Company, all of which were terminated or otherwise disposed
of prior to fiscal 1990.
The Purchaser commenced suit against the Company in which it alleges
misrepresentation and breach by the Company of the provisions of the Purchase
Agreement and asserts claims for damages and indemnification. The Company
denies each of the claims of the Purchaser and intends to vigorously defend
against this action.
Although management believes that reserves established for these matters are
adequate based on current information, there is no way to be certain that future
developments will not involve additional substantial costs that may require
future charges to the Discontinued operations loss provision. The Company does
not anticipate, based on current information, that the resolution of these
matters will have a material adverse impact on the Company's overall financial
condition given its available cash and short-term investments.
18
Two former officers of the Division filed suit against the Company for
retirement benefits which the Company terminated when their alleged misconduct
was reported to the Company. All of their claims, and their refiled claims,
have been dismissed by the Court. The Company has counterclaimed for damages
resulting from the misconduct of the two former officers of the Division. The
estate of a third former officer of the Division has filed suit against the
Company for similar claims, which the Company denies and intends to vigorously
defend against.
Environmental Matters:
Current commercial operations of the Company and its subsidiaries do not
involve activities affecting the environment. However, the Company is a party
in several pending environmental proceedings involving the federal Environmental
Protection Agency ("EPA") and comparable state agencies in Indiana, Maryland,
Massachusetts, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia. All
of these matters relate to discontinued operations of former divisions or
subsidiaries for which the Company has potential continuing responsibility.
One group of the Company's known environmental proceedings relates to Superfund
or other sites where the Company's liability arises from arranging for the
disposal of allegedly hazardous substances in the ordinary course of prior
business operations. In most of these "generator" liability cases, the
Company's involvement is considered to be DE MINIMUS (i.e. a volumetric share of
approximately 1% or less) and in each of these cases the Company is only one of
many potentially responsible parties. From the information currently available,
there are a sufficient number of other economically viable participating parties
so that the Company's projected liability, although potentially joint and
several, is consistent with its allocable share of liability. At one
"generator" liability site, the Company's involvement is potentially more
significant because of the volume of waste contributed in past years by an
inactive subsidiary. Insufficient information is available regarding the need
for or extent and scope of any remedial actions which may be required. The
Company has recorded what it believes to be a reasonable estimate of its
potential liability, based on current information, for this site.
The second group of matters relates to environmental issues on
properties currently or formerly owned or operated by a subsidiary or division
of the Company. These cases generally involve matters for which the Company or
an inactive subsidiary is the sole or primary responsible party. In one such
case, however, although the affected subsidiary fully performed a settlement
with the federal government, the government has reopened the matter. A group of
financially solvent responsible parties has completed an extensive investigation
of the Superfund site under a consent order with the EPA and submitted Remedial
Investigation and Feasibility Study Reports (the "Reports") to the EPA, which
outline a range of various remedial alternatives for the site. The EPA has
issued a proposed plan which is subject to public comment. The Company's
environmental counsel retained two environmental consulting firms to review and
evaluate the Reports and proposed plan. The findings of these consulting firms
indicate that many of the
19
assumptions, purported facts and conclusions contained in the Reports and
proposed plan are significantly flawed and such findings have been recently
submitted to the EPA. Notwithstanding the foregoing and the Company's denial of
liability because of the prior settlement with the government, the $8,000,000
loss provision recorded during the third quarter of fiscal 1995 included a
provision of approximately $4,000,000 for environmental matters. The provision
for environmental matters includes the estimated legal and consulting costs for
this and other sites involving the Company or an inactive subsidiary, the
estimated costs to defend the Company's aforementioned settlement with the
government, and the estimated remediation costs that the Company will incur,
based on current information, if its prior settlement with the government is not
upheld in court. However, the Company may be exposed to additional substantial
liability for this site as additional information becomes available over the
long-term. A better estimate of costs associated with any further remediation
to be taken at the site cannot be made until a Record of Decision is issued by
the EPA, which is expected to be issued in fiscal 1997. Actual remediation
costs cannot be computed until such remedial action is completed. Some of the
other sites involving the Company or an inactive subsidiary are at a stage where
an assessment of liability, if any, cannot reasonably be made.
It is the Company's policy to comply fully with all laws regulating
activities affecting the environment and to meet its obligations in this area.
In many "generator" liability cases, reasonable cost estimates are available on
which to base reserves on the Company's likely allocated share among viable
parties. Where insufficient information is available regarding projected
remedial actions for these "generator" liability cases, the Company has recorded
what it believes to be reasonable estimates of its potential liabilities.
Reserves for liability for sites on which former operations were conducted are
based on cost estimates of remedial actions projected for these sites. All
known environmental claims are periodically reviewed by the Company, where
information is available, to provide reasonable assurance that adequate reserves
are maintained. Reserves recorded for environmental liabilities are not net of
insurance or other expected recoveries. Other than the aforementioned loss
provision that was recorded by the Company during the third quarter of fiscal
1995, no significant expenses related to environmental matters were recorded by
the Company during the nine months ended March 31, 1996 or the three years ended
June 30, 1995 due to the adequacy of recorded reserve balances based on prior
available information. Management believes that reserves established to meet
known and potential environmental liabilities are adequate based on current
information. The Company does not anticipate, based on current information,
that the resolution of these matters will have a material adverse impact on the
Company's overall financial condition given its available cash and short-term
investments. However, there is no way to be certain that future developments
relating to environmental matters will not involve additional substantial costs
that may require future charges to the Discontinued operations loss provision.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS:
Exhibit No. 11 Computation of Primary and Fully Diluted Earnings
Per Share (Unaudited)
Exhibit No. 27 Financial Data Schedule (Unaudited)
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed for the three months ended March
31, 1996.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNION CORPORATION
(Registrant)
Date: May 13, 1996 By: Melvin L. Cooper
--------------------------
Melvin L. Cooper
Chairman of the Board
(Chief Executive Officer)
Date: May 13, 1996 By: Nicholas P. Gill
--------------------------
Nicholas P. Gill
Vice President,
Treasurer and Secretary
(Chief Financial Officer)
22