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 December 31, 1997 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)
211 King Street, Charleston, SC 29401
(Address of principal executive offices) (Zip Code)
(803) 958-3800
(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
5,893,007 Common shares were outstanding as of February 6, 1998
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,
December 31, 1997 (Unaudited) and
June 30, 1997 3
Condensed Consolidated Statements of
Operations (Unaudited), for the Six
Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of
Operations (Unaudited), for the Three
Months Ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of
Cash Flows (Unaudited), for the Six
Months Ended December 31, 1997 and 1996 6
Condensed Consolidated Statement of
Shareholders' Equity (Unaudited), for
the Six Months Ended December 31, 1997 7
Notes to Condensed Consolidated
Financial Statements (Unaudited) 8 - 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations (Unaudited) 11 - 17
Part II. Other Information (Unaudited):
Item 1. Legal Proceedings 18 - 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1997 (Unaudited) and June 30, 1997
(In thousands)
December 31, June 30,
1997 1997
--------- ---------
ASSETS
Current assets:
Cash $ 11,688 $ 11,574
Short-term investments, at cost, which approximates market 43,507 37,804
Accounts receivable, trade, less allowance for doubtful
accounts of $825 and $681 11,304 10,214
Refundable income taxes 622 -
Prepaid expenses and other current assets 5,450 3,842
--------- ---------
Total current assets 72,571 63,434
Property, buildings and equipment, net 7,785 8,323
Cost of intangible assets from businesses acquired,
less accumulated amortization of $11,261 and $10,532 47,294 48,023
Other assets and deferred charges 4,262 3,490
Deferred income taxes 5,819 2,749
--------- ---------
Total assets $ 137,731 $ 126,019
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,960 $ 3,406
Accrued expenses 27,497 18,015
Income taxes payable - 866
Current portion of long-term debt 20,213 259
--------- ---------
Total current liabilities 50,670 22,546
Long-term debt 283 20,379
Other liabilities 17,103 11,482
--------- ---------
Total liabilities 68,056 54,407
--------- ---------
Shareholders' equity:
Common stock, $.50 par value; authorized shares,
15,000; issued shares 8,837 and 8,696 4,418 4,348
Additional paid-in capital 47,964 45,272
Retained earnings 54,188 58,887
Less treasury stock, at cost, 2,945 and 2,945 shares (36,895) (36,895)
--------- ---------
Total shareholders' equity 69,675 71,612
--------- ---------
Total liabilities and shareholders' equity $ 137,731 $ 126,019
========= =========
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Six Months Ended December 31, 1997 and 1996
(Dollars in thousands, except per share amounts)
1997 1996
--------- ---------
Operating revenues $64,740 $57,718
--------- ---------
Expenses:
Operating expenses 42,522 38,690
Selling, general and administrative expenses 13,604 11,399
Depreciation and amortization 2,208 2,326
--------- ---------
Total expenses 58,334 52,415
--------- ---------
Operating income 6,406 5,303
Interest expense (731) (696)
Interest income 1,256 746
--------- ---------
Income from continuing operations
before income taxes 6,931 5,353
Provision for income taxes 3,050 2,355
--------- ---------
Income from continuing operations 3,881 2,998
Discontinued operations loss provision
(net of tax benefit of $4,420) (8,580) -
--------- ---------
Net income (loss) $ (4,699) $ 2,998
========= =========
Basic earnings per common share:
Income from continuing operations $ .67 $ .53
Discontinued operations loss provision (1.48) -
--------- ---------
Net income (loss) $ (.81) $ .53
========= =========
Diluted earnings per common share:
Income from continuing operations $ .65 $ .51
Discontinued operations loss provision (1.43) -
--------- ---------
Net income (loss) $ (.78) $ .51
========= =========
Number of weighted average shares outstanding
for basic earnings per common share 5,787,675 5,705,841
Dilutive effect of stock options 201,167 198,988
--------- ---------
Number of adjusted weighted average shares outstanding
for dilutive earnings per common share 5,988,842 5,904,829
========= =========
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 1997 and 1996
(Dollars in thousands, except per share amounts
1997 1996
--------- ---------
Operating revenues $ 33,311 $ 28,977
--------- ---------
Expenses:
Operating expenses 21,863 19,525
Selling, general and administrative expenses 7,192 5,729
Depreciation and amortization 1,079 1,162
--------- ---------
Total expenses 30,134 26,416
--------- ---------
Operating income 3,177 2,561
Interest expense (365) (346)
Interest income 650 357
--------- ---------
Income from continuing operations
before income taxes 3,462 2,572
Provision for income taxes 1,524 1,131
--------- ---------
Income from continuing operations 1,938 1,441
Discontinued operations loss provision
(net of tax benefit of $4,420) (8,580) -
--------- ---------
Net income (loss) $ (6,642) $ 1,441
========= =========
Basic earnings per common share:
Income from continuing operations $ .33 $ .25
Discontinued operations loss provision (1.48) -
--------- ---------
Net income (loss) $ (1.15) $ .25
========= =========
Diluted earnings per common share:
Income from continuing operations $ .32 $ .24
Discontinued operations loss provision (1.43) -
--------- ---------
Net income (loss) $ (1.11) $ .24
========= =========
Number of weighted average shares outstanding
for basic earnings per common share 5,803,510 5,728,183
Dilutive effect of stock options 209,668 172,003
--------- ---------
Number of adjusted weighted average shares outstanding
for dilutive earnings per common share 6,013,178 5,900,186
========= =========
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended December 31, 1997 and 1996
(In thousands)
1997 1996
--------- ---------
Cash Flows From Operating Activities:
Net income (loss) $ (4,699) $ 2,998
Adjustments to reconcile net income to net cash
provided by operations:
Discontinued operations loss provision, net of tax benefit 8,580 -
Depreciation and amortization 2,208 2,326
Deferred compensation expense 205 194
Non-cash compensation expense 239 -
Provision for doubtful accounts 188 129
Provision for deferred income taxes 500 900
Changes in assets and liabilities:
Accounts receivable - (increase) decrease (1,278) 238
Prepaid expenses and other current assets - (increase) decrease (1,608) 378
Other assets and deferred charges - (increase) decrease (772) 71
Accounts payable and accrued expenses - increase (decrease) 6,331 (7,489)
Income taxes payable - increase (decrease) 3 (581)
Other liabilities - (decrease) increase (4,879) 477
--------- ---------
Net cash provided by (used by) operating activities 5,018 (359)
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures (947) (1,523)
Additional purchase price related to the
purchase of Allied Bond & Collection Agency - (134)
Other 6 7
--------- ---------
Net cash (used by) investing activities (941) (1,650)
--------- ---------
Cash Flows From Financing Activities:
Principal payments on long-term debt (63) (59)
Principal payments on capital lease obligations (79) (75)
Fair market value of shares of common stock received
from an optionee to satisfy withholding tax obligation (252) (868)
Proceeds from the exercise of stock options 2,134 361
--------- ---------
Net cash provided by (used by) financing activities 1,740 (641)
--------- ---------
Net increase (decrease) in cash and short-term investments 5,817 (2,650)
Cash and short-term investments at June 30 49,378 43,163
--------- ---------
Cash and short-term investments at December 31 $ 55,195 $ 40,513
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 949 $ 685
Income taxes paid 2,547 2,036
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
For the Six Months Ended December 31, 1997
(Dollars in thousands)
Additional
Common paid-in Retained Treasury
stock capital earnings stock
------ ---------- -------- --------
Balance at June 30, 1997 $ 4,348 $ 45,272 $ 58,887 $ (36,895)
Net income - - 1,943 -
Proceeds from common stock issued
upon exercise of stock options
(45,834 shares) 23 693 - -
-------- --------- --------- ----------
Balance at September 30, 1997 4,371 45,965 60,830 (36,895)
Net (loss) - - (6,642) -
Proceeds from common stock issued
upon exercise of stock options
(95,063 shares, net) 47 1,999 - -
-------- --------- --------- ----------
Balance at December 31, 1997 $ 4,418 $ 47,964 $ 54,188 $ (36,895)
======== ========= ========= ==========
During the quarter ended December 31, 1997, options were exercised to purchase
75,014 shares of common stock of the Company and the optionee elected to pay the
aggregate exercise price for 42,917 shares in cash and pay the aggregate
exercise price for the remaining 32,097 shares by surrendering to the Company
23,582 shares of common stock of the Company, acquired in conjunction with the
exercise of the options, that had a fair market value on the date of exercise
equal to the aggregate exercise price. In addition, the optionee elected to
satisfy the withholding tax obligations resulting from such exercise by
surrendering to the Company 8,066 shares of common stock of the Company acquired
by the optionee in conjunction with the exercise of the options. The shares
surrendered to satisfy the withholding tax obligations were valued at the fair
market value on the date of the exercise of the options.
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, 1997.
1. Share Purchase Agreement and Plan of Merger
On December 22, 1997, the Company entered into a Share Purchase Agreement
and Plan of Merger (the "Merger Agreement") with Outsourcing Solutions Inc.
("OSI"), and Sherman Acquisition Corporation ("Sherman"), a wholly-owned
subsidiary of OSI, pursuant to which Sherman commenced a tender offer (the
"Offer") on December 24, 1997 to purchase all issued and outstanding shares of
common stock, par value $.50 per share, of the Company (the "Shares") at a cash
price of $31.50 per Share. Sherman successfully completed its tender offer for
the Company's common stock on January 23, 1998 and, after giving effect to the
purchase of the Shares tendered and an additional 306,100 Shares purchased in an
open-market transaction after the consummation of the Offer, Sherman currently
owns approximately 83% of the outstanding shares of common stock of the Company.
The Merger Agreement provides that, subject to fulfillment of certain
conditions, following completion of the Offer, Sherman will merge into the
Company (the "Merger"), and the Company, as the surviving corporation in the
Merger, will become a wholly-owned subsidiary of OSI. Pursuant to the Merger
Agreement and subject to certain conditions therein, any Shares that were not
acquired through the Offer will be converted into the right to receive the same
$31.50 cash per share price paid in the Offer. As a result, the Company will no
longer be a public company and there will be no public market for shares of its
stock. For additional information, reference is made to the Schedule 14D-9
Solicitation/Recommendation Statement that was filed by the Company on December
24, 1997 and Amendments No. 1 and 2 to Schedule 14D-9 that were filed by the
Company on January 14, 1998 and January 21, 1998, respectively.
2. Discontinued Operations - Subsequent Events
The Company recorded a $13,000,000 loss provision ($8,580,000 net of tax
benefit), or $1.43 loss per share on a dilutive basis, during the current fiscal
quarter for costs related to 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 recent developments regarding (i)
previously reported environmental matters involving a site where an inactive
subsidiary of the Company fully performed a settlement with the federal
government which has reopened the matter and (ii) the settlement, on February 9,
1998, of the previously reported suit brought against the Company by Gichner
Systems Group, Inc. The net loss provision of $8,580,000 is included in the
Condensed Consolidated Statements of Operations under the caption "Discontinued
operations loss provision" for the three and six months ended December 31, 1997.
The Condensed Consolidated Balance Sheet at December 31, 1997 includes "Accrued
expenses" of $2,500,000 and "Other liabilities" of $10,500,000 comprising the
$13,000,000 loss provision.
As noted above, although an inactive subsidiary of the Company fully
performed a settlement with the federal government, covering environmental
matters at a site at which the affected subsidiary previously conducted
operations, the government has subsequently reopened the matter. As previously
reported, a group of financially solvent responsible parties has completed an
extensive investigation of this Superfund site under a consent order with the
federal Environmental Protection Agency ("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 issued a
proposed plan which was subject to public comment. The Company's environmental
counsel retained several reputable environmental consulting firms to review and
evaluate the Reports and proposed plan. The findings of these experts indicated
that many of the assumptions, purported facts and conclusions contained in the
Reports and proposed plan are significantly flawed. These findings were
submitted to the EPA to challenge the perceived need for and the extent of the
proposed additional remediation. As previously reported, a better estimate of
costs associated with any further remediation to be taken at the site could not
be made until a Record of Decision was issued by the EPA. The EPA issued such
Record of Decision for this site on February 6, 1998 and, notwithstanding the
information contained in the findings submitted by the Company, the cost to
perform the remediation selected by the EPA for the site is estimated by the EPA
to be approximately $17,300,000. Notwithstanding the foregoing and the Company's
denial of liability because of the prior settlement with the government,
included in the $13,000,000 loss provision recorded during the current fiscal
quarter is an additional loss provision of $10,500,000 for this site. As a
result, the aggregate amounts reserved by the Company for this site is
approximately $13,750,000, which includes reserves previously established for
this site, and represents the Company's best estimate of the ultimate legal and
consulting costs for this site, costs to defend the Company's aforementioned
settlement with the government regarding this site, and the Company's portion of
the estimated remediation costs that will ultimately be incurred by the Company,
based on current information, if the Company's 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. Actual remediation costs cannot be computed until
such remedial action is completed.
In 1989 the Company sold the assets and business of its Gichner Systems
Group division (the "Gichner Division") to Gichner Systems Group, Inc. ("the
Purchaser") and, accordingly, reflected the Gichner Division as a discontinued
operation in the Company's Consolidated Statements of Operations. In 1991 the
Purchaser informed the Company that false pricing information might have been
supplied by former officers of the Gichner Division, who were also members of
the group that purchased the Gichner Division from the Company and who were
officers of the Purchaser, 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 by the
Purchaser, and the Company and Purchaser tendered to the Department of Defense a
report of the results of their investigation.
The Company reached agreements with the federal government in January 1996,
subject to certain agency approvals and final approval by the Court, which
approvals were given in August 1996, to settle the above previously reported
matters involving false pricing information and claims made by certain senior
officers of the Company's former Gichner Division. In accordance with the
agreements, which recognize the Company's co-operation in and substantial
contribution to the investigation of these matters, the Company fulfilled its
commitment to make compensation for the government's civil claims by paying
$5,550,000 in September 1996. The Company also accepted responsibility for the
actions of the officers of the former Gichner Division by entering a plea of
guilty under the federal False Claims Act, although those actions were concealed
from the management of the Company, and paid a fine of $250,000 in August 1996.
The Purchaser, which has pled guilty to obstruction of justice as a result
of its hindrance of the government's investigation and its destruction of
documents related to this matter, commenced suit in fiscal 1995 against the
Company in which it alleges misrepresentation and breach by the Company of
provisions of the Purchase Agreement and asserts claims for damages and
indemnification. The Company has denied each of the claims. However, in order to
end the substantial expense and distraction of continued litigation, the Company
settled this matter with the Purchaser on February 9, 1998, whereby the Company
will pay $2,750,000 to the Purchaser to settle any and all liabilities and
obligations which were asserted or could have been asserted by the Purchaser in
the above lawsuit. Accordingly, the $13,000,000 loss provision recorded during
the current fiscal quarter includes a provision of $2,500,000 for settlement
costs related to this matter.
See Part II, Item 1 of this Form 10-Q for additional information regarding
discontinued operations and claims in connection with the sale of the former
Gichner Division.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 replaced the previously reported primary and fully diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and where necessary, restated to conform to the requirements of SFAS
128.
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
December 31, 1997 with cash and short-term investments totaling $55,195,000,
working capital of $21,901,000 and net worth of $69,675,000. During the six
months ended December 31, 1997, the net cash provided by operating activities
was $5,018,000 compared to net cash used by operating activities of $359,000 a
year ago. This increase was principally the result of the $5,800,000 aggregate
payment made to the federal government in the prior year regarding the matters
involving the former Gichner Division of the Company (See Note 2 of Notes to
Condensed Consolidated Financial Statements for additional information).
Excluding the aggregate payment to the federal government in the prior year, the
net cash provided by operating activities decreased by $423,000 compared to a
year ago. This decrease was principally the result of increases of approximately
$500,000 in income taxes paid and approximately $260,000 in interest paid, both
primarily due to the timing of the payments, partially offset by improved
operating results.
The Company's capital spending during the six months ended December 31,
1997 was $947,000 compared with $1,523,000 a year ago. This decrease was
principally attributable to the purchase of computer and office equipment and
leasehold improvements in the first fiscal quarter last year by Interactive
Performance, Inc. ("Interactive Performance") and High Performance Services,
Inc. ("High Performance Services"), primarily in connection with the start-up of
the Company's new outsourcing businesses.
On December 22, 1997, the Company entered into a Share Purchase Agreement
and Plan of Merger (the "Merger Agreement") with Outsourcing Solutions Inc.
("OSI"), and Sherman Acquisition Corporation ("Sherman"), a wholly-owned
subsidiary of OSI, pursuant to which Sherman commenced a tender offer (the
"Offer") on December 24, 1997 to purchase all issued and outstanding shares of
common stock, par value $.50 per share, of the Company (the "Shares") at a cash
price of $31.50 per Share. Sherman successfully completed its tender offer for
the Company's common stock on January 23, 1998 and, after giving effect to the
purchase of the Shares tendered and an additional 306,100 Shares purchased in an
open-market transaction after the consummation of the Offer, Sherman currently
owns approximately 83% of the outstanding shares of common stock of the Company.
The Merger Agreement provides that, subject to fulfillment of certain
conditions, following completion of the Offer, Sherman will merge into the
Company, and the Company, as the surviving corporation in the merger, will
become a wholly-owned subsidiary of OSI. Pursuant to the Merger Agreement and
subject to certain conditions therein, any Shares that were not acquired through
the Offer will be converted into the right to receive the same $31.50 cash per
share price paid in the Offer. As a result, the Company will no longer be a
public company and there will be no public market for shares of its stock. For
additional information, reference is made to the Schedule 14D-9
Solicitation/Recommendation Statement that was filed by the Company on December
24, 1997 and Amendments No. 1 and 2 to Schedule 14D-9 that were filed by the
Company on January 14, 1998 and January 21, 1998, respectively. As a result of
the change-in-control of the Company, certain executives, in accordance with
their respective employment agreements, resigned from their respective positions
as officers of the Company, terminating their respective employment agreements,
and received a lump sum payment in satisfaction of all payments due under their
respective employment agreements. The aggregate amount paid by the Company in
January 1998 to such executives, and to certain non-employee directors and
employees as a result of the change-in-control of the Company, was approximately
$14,100,000, of which approximately $9,000,000 represents the net present value
of the aggregate amount that would have been payable to such persons at the time
of their termination of employment, or thereafter, if a change-in-control of the
Company had not occurred. In addition, the Merger Agreement provided that
outstanding stock options to purchase an aggregate of 603,534 shares of Common
Stock of the Company be cancelled and, in exchange, each holder thereof was
entitled to a payment in cash equal to the difference between the exercise price
of such options and $31.50 per share. As a result, the Company paid an aggregate
of approximately $7,859,000 to the holders of such options in January 1998.
Under the current terms of the unsecured $25,000,000 revolving line of
credit facility furnished by a bank (the "Credit Agreement"), the $20,000,000
aggregate principal amount outstanding under the revolving line of credit must
be repaid by the Company at the time of the Merger. The Company anticipates that
such repayment will be made with funds then currently available to the Company
and/or debt facilities available to OSI. Loans under the Credit Agreement 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 approximately 6.7% at
December 31, 1997 and 8.5% at February 6, 1998.
The maximum amount of letters of credit that the bank will issue under the
Credit Agreement is currently limited to $8,000,000. As of February 6, 1998, the
Company was contingently liable for outstanding letters of credit aggregating
approximately $3,725,000 which reduced the amount currently available for
letters of credit under the Credit Agreement to approximately $1,275,000, based
on amounts currently outstanding under the Company's revolving credit facility.
The Company currently anticipates that its bank will continue to provide a
letter of credit facility to the Company and that the letters of credit that
have been issued by the bank on behalf of the Company will remain outstanding
following the Merger.
In December 1992, the Company completed the acquisition of Allied Bond &
Collection Agency ("Allied Bond") for an initial purchase price of approximately
$40,300,000. 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 December 31, 1997, approximately $1,131,000 of such contingent
payments have been made.
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
estimated future costs, if any, as well as the past costs incurred with respect
to each. Estimates of future costs are based upon currently available data.
The Company recorded a $13,000,000 loss provision ($8,580,000 net of tax
benefit), or $1.43 loss per share on a dilutive basis, during the current fiscal
quarter for costs related to 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 recent developments regarding (i)
previously reported environmental matters involving a site where an inactive
subsidiary of the Company fully performed a settlement with the federal
government which has reopened the matter and (ii) the settlement, on February 9,
1998, of the previously reported suit brought against the Company by Gichner
Systems Group, Inc. The net loss provision of $8,580,000 is included in the
Condensed Consolidated Statements of Operations under the caption "Discontinued
operations loss provision" for the three and six months ended December 31, 1997.
The Condensed Consolidated Balance Sheet at December 31, 1997 includes "Accrued
expenses" of $2,500,000 and "Other liabilities" of $10,500,000 comprising the
$13,000,000 loss provision.
The Company does not anticipate, based on current information and amounts
previously recorded, that the ultimate resolution of the Legal Proceedings and
the Environmental Matters and the matter relating to the Gichner Systems Group
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 18 will have a material adverse impact on the Company's future
results of operations. However, there is no way to be certain that future
developments relating to the environmental matters described in Part II, Item 1
of this Form 10-Q, will not involve additional substantial costs that may
require future charges to the Discontinued operations loss provision.
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.
Six Months Ended December 31, 1997 vs. Six Months Ended December 31, 1996
Operating Revenues
Operating revenues increased by 12% to $64,740,000 for the six months ended
December 31, 1997 compared with $57,718,000 for the six months ended December
31, 1996 representing the highest revenues achieved by the Company for the first
six months of a fiscal year since it became a pure financial services company in
fiscal 1989. This increase was attributable to increases at Transworld Systems
Inc. ("Transworld Systems"), Allied Bond, Interactive Performance and High
Performance Services. Revenues at Transworld Systems were $31,090,000 for the
six months ended December 31, 1997 compared with $29,456,000 a year ago. Allied
Bond reported a 21% increase in revenues for the six months ended December 31,
1997, compared with a year ago, which represents the highest level of revenues
achieved in the first six months of a fiscal year by Allied Bond since it was
acquired in December 1992. Revenues at Capital Credit Corporation ("Capital
Credit") for the six months ended December 31, 1997 were essentially unchanged
compared with a year ago.
Operating Expenses
Operating expenses increased by $3,832,000 for the six months ended
December 31, 1997 compared with the six months ended December 31, 1996. The
increase was attributable to increases in operating expenses at Transworld
Systems and Allied Bond, which expenses increased at rates proportionately less
than the rates of increases in revenues at the respective subsidiaries, and
increases in operating expenses at Interactive Performance and High Performance
Services, which expenses increased at rates that were approximately
proportionate to the rates of increases in revenues at the respective
subsidiaries. Operating expenses at Capital Credit decreased slightly compared
with a year ago.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2,205,000 for
the six months ended December 31, 1997 compared with the six months ended
December 31, 1996. The increase was attributable to increases in expenses at
Transworld Systems, Allied Bond, Interactive Performance and the Corporate
office, partially offset by slight decreases in expenses at Capital Credit and
High Performance Services. The increase in Corporate office expenses primarily
resulted from increases in professional fees resulting from the Share Purchase
Agreement and Plan of Merger with Outsourcing Solutions Inc. and Sherman
Acquisition Corporation and expenses related to the closing of the former
Corporate office in Connecticut.
Depreciation and Amortization
Depreciation and amortization expenses decreased by $118,000 for the six
months ended December 31, 1997 compared with the six months ended December 31,
1996 due to decreases in depreciation expense at Transworld Systems, Capital
Credit and Allied Bond, partially offset by increases in depreciation expense at
Interactive Performance and High Performance Services.
Operating Income
Operating income increased by 21% to $6,406,000 for the six months ended
December 31, 1997 compared with $5,303,000 for the six months ended December 31,
1996 representing the highest operating income achieved by the Company for the
first six months of a fiscal year since it became a pure financial services
company in fiscal 1989. This increase was attributable to increases at Allied
Bond, Transworld Systems, Capital Credit, Interactive Performance and High
Performance Services, partially offset by an increase in Corporate office
expenses. Transworld Systems reported operating income, before amortization of
goodwill, of $7,054,000 for the six months ended December 31, 1997 compared with
$6,600,000 a year ago and continued to maintain a strong operating margin, which
was approximately 22%, after amortization of goodwill, for the six months ended
December 31, 1997. Operating income at Allied Bond increased significantly for
the six months ended December 31, 1997 and was more than 50% higher than any
level previously achieved by Allied Bond for the first six months of a fiscal
year since it was acquired in December 1992. Operating income at Capital Credit
also increased significantly for the six months ended December 31, 1997 compared
with a year ago.
Interest Expense and Interest Income
Interest expense increased by $35,000 for the six months ended December 31,
1997 compared with a year ago. Interest income increased by $510,000 for the six
months ended December 31, 1997 compared with a year ago, principally due to
higher short-term investment balances. During the six months ended December 31,
1997 and 1996, 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 six months ended December 31, 1997 and 1996.
Discontinued Operations Loss Provision
The Company recorded a $13,000,000 loss provision ($8,580,000 net of tax
benefit), or $1.43 loss per share on a dilutive basis, during the current fiscal
quarter for costs related to 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 recent developments regarding (i)
previously reported environmental matters involving a site where an inactive
subsidiary of the Company fully performed a settlement with the federal
government which has reopened the matter and (ii) the settlement, on February 9,
1998, of the previously reported suit brought against the Company by Gichner
Systems Group, Inc. The net loss provision of $8,580,000 is included in the
Condensed Consolidated Statements of Operations under the caption "Discontinued
operations loss provision" for the six months ended December 31, 1997. (See Note
2 of Notes to Condensed Consolidated Financial Statements for additional
information).
Three Months Ended December 31, 1997 vs. Three Months Ended December 31, 1996
Operating Revenues
Operating revenues increased by 15% to $33,311,000 for the three months
ended December 31, 1997 compared with $28,977,000 for the three months ended
December 31, 1996 representing the highest second fiscal quarter revenues
achieved by the Company since it became a pure financial services company in
fiscal 1989. This increase was attributable to increases at Transworld Systems,
Allied Bond and Interactive Performance. Revenues at Transworld Systems were
$16,290,000 for the three months ended December 31, 1997 compared with
$14,571,000 a year ago. Allied Bond reported a 26% increase in revenues for the
three months ended December 31, 1997, compared with a year ago, which represents
the highest level of revenues achieved in any quarter by Allied Bond since it
was acquired in December 1992. Revenues at Capital Credit decreased by 2% for
the three months ended December 31, 1997, compared with a year ago. Revenues at
High Performance Services for the three months ended December 31, 1997 were
essentially unchanged compared to a year ago.
Operating Expenses
Operating expenses increased by $2,338,000 for the three months ended
December 31, 1997 compared with the three months ended December 31, 1996. The
increase was attributable to increases in operating expenses at Transworld
Systems and Allied Bond, which expenses increased at rates proportionately less
than the rates of increases in revenues at the respective subsidiaries, and an
increase in operating expenses at Interactive Performance, which expenses
increased at a rate that was approximately proportionate to the rate of increase
in revenues at Interactive Performance. Operating expenses at Capital Credit for
the three months ended December 31, 1997 decreased slightly compared with a year
ago. Operating expenses at High Performance Services for the three months ended
December 31, 1997 were essentially unchanged compared to a year ago.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1,463,000 for
the three months ended December 31, 1997 compared with the three months ended
December 31, 1996. The increase was attributable to increases in expenses at
Transworld Systems, Allied Bond, Interactive Performance and the Corporate
office, partially offset by slight decreases in expenses at Capital Credit and
High Performance Services. The increase in Corporate office expenses primarily
resulted from increases in professional fees resulting from the Share Purchase
Agreement and Plan of Merger with Outsourcing Solutions Inc. and Sherman
Acquisition Corporation and expenses related to the closing of the former
Corporate office in Connecticut.
Depreciation and Amortization
Depreciation and amortization expenses decreased by $83,000 for the three
months ended December 31, 1997 compared with the three months ended December 31,
1996 due to decreases in depreciation expense at Transworld Systems, Capital
Credit and Allied Bond, partially offset by an increase in depreciation expense
at Interactive Performance.
Operating Income
Operating income increased by 24% to $3,177,000 for the three months ended
December 31, 1997 compared with $2,561,000 for the three months ended December
31, 1996 representing the highest second fiscal quarter operating income
achieved by the Company since it became a pure financial services company in
fiscal 1989. This increase was attributable to increases at Allied Bond,
Transworld Systems, Capital Credit and Interactive Performance, partially offset
by an increase in Corporate office expenses. Transworld Systems reported
operating income, before amortization of goodwill, of $3,841,000 for the three
months ended December 31, 1997 compared with $3,286,000 a year ago and continued
to maintain a strong operating margin, which was approximately 23%, after
amortization of goodwill, for the three months ended December 31, 1997.
Operating income at Allied Bond increased significantly for the three months
ended December 31, 1997 and was more than 50% higher than any level previously
achieved by Allied Bond in the second fiscal quarter since it was acquired in
December 1992. Operating income at Capital Credit also increased significantly
for the three months ended December 31, 1997 compared with a year ago. Operating
income at High Performance Services for the three months ended December 31, 1997
was essentially unchanged compared to a year ago.
Interest Expense and Interest Income
Interest expense increased by $19,000 for the three months ended December
31, 1997 compared with a year ago. Interest income increased by $293,000 for the
three months ended December 31, 1997 compared with a year ago, principally due
to higher short-term investment balances. During the three months ended December
31, 1997 and 1996, 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 December 31, 1997 and 1996.
Discontinued Operations Loss Provision
The Company recorded a $13,000,000 loss provision ($8,580,000 net of tax
benefit), or $1.43 loss per share on a dilutive basis, during the current fiscal
quarter for costs related to 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 recent developments regarding (i)
previously reported environmental matters involving a site where an inactive
subsidiary of the Company fully performed a settlement with the federal
government which has reopened the matter and (ii) the settlement, on February 9,
1998, of the previously reported suit brought against the Company by Gichner
Systems Group, Inc. The net loss provision of $8,580,000 is included in the
Condensed Consolidated Statements of Operations under the caption "Discontinued
operations loss provision" for the three months ended December 31, 1997. (See
Note 2 of Notes to Condensed Consolidated Financial Statements for additional
information).
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 certain subsidiaries are parties to a
number of lawsuits arising in the ordinary course of business.
A lawsuit was brought in 1993 by three individuals engaged by Transworld
Systems as independent contractors, in which it was alleged that Transworld
Systems had improperly treated the plaintiffs as independent contractors rather
than employees. All of the asserted claims were dismissed by the court in 1996
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 certain business information, including copies of a
monthly publication distributed by Transworld Systems. Several persons have also
brought suit alleging wrongful termination. Transworld Systems prevailed in a
jury trial in 1997, and all of these claims have been dismissed.
Nine purported class actions are currently pending against Transworld
Systems, two of which also name the Company as a defendant, and one alleged
class action is currently pending against Allied Bond, which actions have been
brought by debtors who received written collection notices from either
Transworld Systems or its Credit Management Services division, or Allied Bond,
respectively. Plaintiffs in these actions allege that such letters violated
various provisions of the federal Fair Debt Collection Practices Act or
comparable state regulations. In a suit brought against Allied Bond, the United
States District Court denied class certification, denied approval of the class
settlement, and denied plaintiff's motion for partial summary judgment,
effectively ending the case. The plaintiff's individual claim remains, which is
expected to be settled for an immaterial amount. A United States District Court
in one of the alleged class actions against Transworld Systems has, upon motion
of Transworld Systems, granted summary judgment in favor of Transworld Systems.
The claims in the eight other purported class actions against Transworld Systems
have been reviewed by counsel to Transworld Systems and, based on their
assessment, management has concluded that the claims are of questionable merit.
Transworld Systems intends to vigorously defend each of these actions.
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 given its available cash and
short-term investments, or future results of operations.
Gichner Systems Group Division:
In 1989 the Company sold the assets and business of the Company's former
Gichner Systems Group division (the "Gichner Division") to Gichner Systems
Group, Inc. (the "Purchaser") and, accordingly, reflected the Gichner Division
as a discontinued operation in the Company's Consolidated Statements of
Operations. In 1991 the Purchaser informed the Company that false pricing
information might have been supplied by former officers of the Gichner Division,
who were also members of the group that purchased the Gichner Division from the
Company and who were officers of the Purchaser, 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 by the Purchaser, and the Company and Purchaser tendered to the Department
of Defense a report of the results of their investigation.
The Purchaser, which has plead guilty to obstruction of justice as a result
of its hindrance of the government's investigation and its destruction of
documents related to this matter, commenced suit in fiscal 1995 against the
Company in which it alleges misrepresentation and breach by the Company of
provisions of the Purchase Agreement and asserts claims for damages and
indemnification. The Company has denied each of the claims. However, in order to
end the substantial expense and distraction of continued litigation, the Company
settled this matter with the Purchaser on February 9, 1998, whereby the Company
will pay $2,750,000 to the Purchaser to settle any and all liabilities and
obligations which were asserted or could have been asserted by the Purchaser in
the above lawsuit. Accordingly, the $13,000,000 loss provision recorded during
the current fiscal quarter includes a provision of $2,500,000 for settlement
costs related to this matter.
Two former officers of the Gichner Division filed suit against the Company
for retirement benefits that 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 Gichner
Division. Appeals are pending in these matters. The estate of a third former
officer of the Gichner Division filed suit against the Company for similar
claims, all of which have been dismissed by the Court.
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 a currently 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 ultimate 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 subsequently reopened the matter. A group
of financially solvent responsible parties has completed an extensive
investigation of this 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 issued a proposed plan which was subject to public comment. The
Company's environmental counsel retained several reputable environmental
consulting firms to review and evaluate the Reports and proposed plan. The
findings of these experts indicated that many of the assumptions, purported
facts and conclusions contained in the Reports and proposed plan are
significantly flawed. These findings were submitted to the EPA to challenge the
perceived need for and the extent of the proposed additional remediation. As
previously reported, a better estimate of costs associated with any further
remediation to be taken at the site could not be made until a Record of Decision
was issued by the EPA. The EPA issued such Record of Decision for this site on
February 6, 1998 and, notwithstanding the information contained in the findings
submitted by the Company, the cost to perform the remediation selected by the
EPA for the site is estimated by the EPA to be approximately $17,300,000.
Notwithstanding the foregoing and the Company's denial of liability because of
the prior settlement with the government, included in the $13,000,000 loss
provision recorded during the current fiscal quarter is an additional loss
provision of $10,500,000 for this site. As a result, the aggregate amounts
reserved by the Company for this site is $13,750,000, which includes reserves
previously established for this site, and represents the Company's best estimate
of the ultimate legal and consulting costs for this site, costs to defend the
Company's aforementioned settlement with the government regarding this site, and
the Company's portion of the remediation costs that will ultimately be incurred
by the Company, based on current information, if the Company's 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. 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 ultimate liability, if any, cannot reasonably be made at this
time.
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 current fiscal quarter and
an $8,000,000 loss provision that was recorded during fiscal 1995, which
included a provision of approximately $4,000,000 for environmental matters, no
significant expenses related to environmental matters were recorded by the
Company during the six months ended December 31, 1997 or the three fiscal year
period ended June 30, 1997 due to the adequacy of previously recorded reserve
balances based on information available at that time. 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.
Item 4. Submission of Matters to a Vote of Security Holders
One November 19, 1997, the Company held its Annual Meeting of Stockholders.
The following matters were voted on and approved by the stockholders:
(1) Messrs. William B. Hewitt and Robert A. Kerr were re-elected to the Board
of Directors and Messrs. Herbert A. Denton, Robert A. Marshall and James M.
McCormick were elected to the Board of Directors. Messrs. Melvin L. Cooper,
Gordon S. Dunn, James C. Miller III and Herbert R. Silver continued to
serve as members of the Board of Directors after the meeting.
Votes Votes Votes Broker
For Against Abstaining Non-Votes
----- ------- ---------- ---------
(2) Proposal to approve the adoption of the 1997
Non-Employee Directors' Stock Option Plan 2,960,732 646,392 102,485 1,801,551
(3) Proposal to approve the amendment to the
1994 Incentive Stock Plan to increase by
250,000 the number of shares of Common Stock
available for issuance thereunder 2,862,514 747,840 99,255 1,801,551
Item 5. Other Information:
On December 22, 1997, the Company entered into a Share Purchase Agreement
and Plan of Merger (the "Merger Agreement") with Outsourcing Solutions Inc.
("OSI") and Sherman Acquisition Corporation ("Sherman"), a wholly-owned
subsidiary of OSI, pursuant to which Sherman commenced a tender offer (the
"Offer") on December 24, 1997 to purchase all issued and outstanding shares of
common stock, par value $0.50 per share, of the Company (the "Shares") at a cash
price of $31.50 per Share. The Offer was consummated on January 23, 1998 when
Sherman accepted and purchased the 4,614,568 Shares validly tendered and not
withdrawn prior to such date by stockholders of the Company. On February 10,
1998, Sherman purchased an additional 306,100 Shares in an open market
transaction, making the aggregate number of Shares owned by Sherman 4,920,668,
constituting approximately 83.05% of the issued and outstanding Shares. The
Merger Agreement provides that, subject to fulfillment of certain conditions
following the completion of the Offer, Sherman will merge with and into the
Company (the "Merger"), and the Company, as the surviving corporation in the
Merger, will become a wholly-owned subsidiary of OSI. Pursuant to the Merger
Agreement and subject to certain conditions therein, any Shares that were not
acquired through the Offer will be converted into the right to receive $31.50 in
cash per Share. As a result, the Company will no longer be a public company and
there will be no public market for shares of its stock. For additional
information, reference is made to the Schedule 14D-9 Solicitation/Recommendation
Statement that was filed by the Company on December 24, 1997 and Amendments No.
1 and 2 to Schedule 14D-9 that were filed by the Company on January 14, 1998 and
January 21, 1998, respectively.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
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 December
31, 1997.
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: February 17, 1998 By: Timothy G. Beffa
--------------------
Timothy G. Beffa
President
(Chief Executive Officer)
Date: February 17, 1998 By: Daniel J. Dolan
--------------------
Daniel J. Dolan
Vice President
(Chief Financial Officer)