<PAGE>
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, 1995 Commission File Number 1-5371
---------------- -------
The Union Corporation
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(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
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(Address of principal executive offices) (Zip Code)
(203) 629-0505
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(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
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5,580,617 Common shares were outstanding as of May 8, 1995
--------- -----------
<PAGE>
THE UNION CORPORATION AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements and Exhibits
PAGE
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1995 (Unaudited) and
June 30, 1994 3
Condensed Consolidated Statements of
Operations (Unaudited), for the Nine Months
Ended March 31, 1995 and 1994 4
Condensed Consolidated Statements of
Operations (Unaudited), for the Three Months
Ended March 31, 1995 and 1994 5
Condensed Consolidated Statements of
Cash Flows (Unaudited), for the Nine Months
Ended March 31, 1995 and 1994 6
Condensed Consolidated Statement of
Shareholders' Equity (Unaudited), for the
Nine Months Ended March 31, 1995 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11 - 16
Part II. Other Information:
Item 1. Legal Proceedings 17 - 19
Item 6. Exhibits and Reports on Form 8-K 20 - 22
Signatures 23
<PAGE>
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1995 (Unaudited) and June 30, 1994
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
--------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ 13,090 $ 11,579
Short-term investments, at cost,
which approximates market 20,589 22,600
Accounts receivable, trade, less allowance
for doubtful accounts of $610 and $552 5,529 4,660
Prepaid expenses and other current assets 5,420 3,846
--------- --------
Total current assets 44,628 42,685
Property, plant and equipment, net 9,622 10,812
Cost of intangible assets from businesses acquired,
less accumulated amortization of $7,276 and $6,199 50,720 51,603
Other assets and deferred charges 2,306 2,135
Deferred income taxes 2,920 2,960
--------- --------
Total assets $110,196 $110,195
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,029 $ 5,307
Accrued expenses 18,865 13,894
Income taxes payable 249 1,525
Current portion of long-term debt 211 204
--------- --------
Total current liabilities 22,354 20,930
Long-term debt 20,817 20,973
Other liabilities 12,116 11,291
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Total liabilities 55,287 53,194
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Shareholders' equity:
Common stock, $.50 par value; authorized shares,
15,000; issued shares 8,521 and 8,476 4,261 4,238
Additional paid-in capital 43,205 43,225
Retained earnings 44,249 45,830
Less treasury stock, at cost, 2,941 and 2,886 shares (36,806) (36,292)
--------- --------
Total shareholders' equity 54,909 57,001
--------- --------
Total liabilities and shareholders' equity $110,196 $110,195
--------- --------
--------- --------
</TABLE>
3
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THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended March 31, 1995 and 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
------- ---------
<S> <C> <C>
Operating revenues $71,526 $67,744
------- -------
Expenses:
Operating expenses 46,706 44,380
Selling, general and administrative expenses 15,205 14,816
Depreciation and amortization 3,097 3,331
------- -------
Total expenses 65,008 62,527
------- -------
Operating income 6,518 5,217
Interest expense (1,038) (756)
Interest income 870 513
------- -------
Income from continuing operations
before income taxes 6,350 4,974
Provision for income taxes 2,731 2,049
------- -------
Income from continuing operations 3,619 2,925
Discontinued operations loss provision
(net of tax benefit of $2,800) (5,200) --
------- -------
Income (loss) before cumulative effect of
change in accounting for income taxes (1,581) 2,925
Cumulative effect of change in accounting
for income taxes -- 1,068
------- -------
Net income (loss) $(1,581) $ 3,993
------- -------
------- -------
Primary and fully diluted income per common
share:
Income from continuing operations $ .64 $ .47
Discontinued operations loss provision (.92) --
Cumulative effect of change in accounting
for income taxes -- .17
------- -------
Net income (loss) $ (.28) $ .64
------- -------
------- -------
Average number of common and common
equivalent shares outstanding:
Primary 5,649,016 6,288,499
Fully diluted 5,659,339 6,288,499
</TABLE>
4
<PAGE>
THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 1995 and 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Operating revenues $24,240 $23,028
------- -------
Expenses:
Operating expenses 16,035 14,609
Selling, general and administrative expenses 4,718 5,053
Depreciation and amortization 1,009 1,114
------- -------
Total expenses 21,762 20,776
------- -------
Operating income 2,478 2,252
Interest expense (366) (256)
Interest income 341 168
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Income from continuing operations
before income taxes 2,453 2,164
Provision for income taxes 1,055 891
------- -------
Income from continuing operations 1,398 1,273
Discontinued operations loss provision
(net of tax benefit of $2,800) (5,200) --
------- -------
Income (loss) before cumulative effect of
change in accounting for income taxes (3,802) 1,273
Cumulative effect of change in accounting
for income taxes -- --
------- -------
Net income (loss) $(3,802) $ 1,273
------- -------
------- -------
Primary and fully diluted income per common
share:
Income from continuing operations $ .25 $ .20
Discontinued operations loss provision (.92) --
Cumulative effect of change in accounting
for income taxes -- --
------- -------
Net income (loss) $ (.67) $ .20
------- -------
------- -------
Average number of common and common
equivalent shares outstanding:
Primary 5,668,867 6,233,866
Fully diluted 5,668,867 6,233,866
</TABLE>
5
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THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (1,581) $ 3,993
Adjustments to reconcile income (loss)
to net cash provided by operations:
Discontinued operations loss provision,
net of tax benefit 5,200 --
Cumulative effect of change in accounting
for income taxes -- (1,068)
Depreciation and amortization 3,097 3,331
Deferred compensation expense 626 436
Provision for doubtful accounts 88 15
Deferred income tax provision 1,171 1,113
Changes in assets and liabilities:
Accounts receivable -- (increase) decrease (957) 570
Prepaid expenses and other current assets
-- decrease 95 425
Other assets and deferred charges --
(increase) (171) (3)
Accounts payable and accrued expenses --
increase (decrease) 323 (396)
Income taxes payable -- (decrease) (1,276) (375)
Other liabilities -- (decrease) (2,601) (1,296)
-------- --------
Net cash provided by operating activities 4,014 6,745
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (833) (800)
Additional purchase price related to the
purchase of Allied Bond & Collection Agency (194) (189)
Other 3 14
-------- --------
Net cash (used by) investing activities (1,024) (975)
-------- --------
Cash Flows From Financing Activities:
Principal payments on long-term debt (74) (70)
Principal payments on capital lease
obligations (75) (83)
Other 3 --
Purchase of treasury stock, at cost (3,344) (1,325)
-------- --------
Net cash (used by) financing activities (3,490) (1,478)
-------- --------
Net (decrease) increase in cash and short-term
investments (500) 4,292
Cash and short-term investments at June 30 34,179 30,829
-------- --------
Cash and short-term investments at March 31 $ 33,679 $ 35,121
-------- --------
-------- --------
Supplemental disclosures of cash flow
information:
Interest paid $ 924 $ 688
Income taxes paid 2,836 1,097
Supplemental disclosure of noncash investing
and financing activities:
Capitalized equipment lease obligations $ -- $ 184
Accrued liability for treasury stock
purchases -- 1,106
</TABLE>
6
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THE UNION CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
For the Nine Months Ended March 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Retained Treasury
stock capital earnings stock
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 $ 4,238 $ 43,225 $ 45,830 $(36,292)
Net income -- -- 950 --
Purchase of treasury stock,
at cost (55,200 shares) -- -- -- (514)
------- ---------- -------- ---------
Balance at September 30, 1994 4,238 43,225 46,780 (36,806)
Net income -- -- 1,271 --
------- ---------- -------- ---------
Balance at December 31, 1994 4,238 43,225 48,051 (36,806)
Exercise of stock options
(45,277 shares, net) 23 (20) -- --
Net (loss) -- -- (3,802) --
------- ---------- -------- ---------
Balance at March 31, 1995 $ 4,261 $ 43,205 $ 44,249 $(36,806)
------- ---------- -------- ---------
------- ---------- -------- ---------
</TABLE>
During the quarter ended March 31, 1995, an option was exercised to purchase
69,000 shares of common stock of the Company and the optionee elected to pay
for these shares by surrendering 23,723 shares of common stock of the Company,
previously owned by the optionee, that had a fair market value on the date of
exercise equal to the exercise price.
7
<PAGE>
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, 1994.
1. ACCOUNTING CHANGE - ACCOUNTING FOR INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", effective July 1, 1993. Although the change in
accounting for income taxes did not have a material effect on "Income before
cumulative effect of change in accounting for income taxes" for the nine months
ended March 31, 1994, the cumulative effect of the change increased net income
by $1,068,000, or $.17 per share.
2. DISCONTINUED OPERATIONS
The Company recorded an $8,000,000 loss provision ($5,200,000 net of tax
benefit) or $.92 loss per share 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 previously reported matters involving
the Company's former Gichner Systems Group division (the "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 is included in
the Condensed Consolidated Statements of Operations under the caption
"Discontinued operations loss provision" for the three and nine months ended
March 31, 1995. The Condensed Consolidated Balance Sheet at March 31, 1995
includes "Accrued expenses" of $5,200,000 and "Other liabilities" of $2,800,000
comprising the $8,000,000 loss provision.
The Company sold the assets and business of 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
government contracts negotiated prior to the sale. After investigation, those
of the former officers who where 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. In addition to civil
proceedings, it is possible the government could institute criminal proceedings
against the Company
8
<PAGE>
as a result of the prior actions of the former officers of
the Division. The Purchaser has also made claims, allegedly based on provisions
in the purchase agreement, that the Company is required to indemnify Purchaser
for all damages, costs and expenses related to this matter which are incurred by
Purchaser as a result of actions taken by former Division employees of the
Company prior to the sale of the Division to the Purchaser. The Company has
denied liability to the Purchaser.
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 $8,000,000 loss provision includes an accrual of $3,500,000 for
estimated legal and accounting fees and settlement costs which are expected to
be incurred as a result of government claims for this matter and the estimated
legal costs to defend the Company against the claims asserted by the Purchaser.
Although the Company does not anticipate 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, there are a number of
variables which could reduce or increase the Company's current estimate of its
liability to the government.
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 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 legally 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
9
<PAGE>
financially solvent responsible parties has completed an extensive investigation
of the site under a consent order with the Environmental Protection Agency and
submitted Remedial Investigation and Feasibility Study Reports (the "Reports")
to the Environmental Protection Agency, which outline a range of various
remedial alternatives for the site. The Company's environmental counsel
recently retained two environmental consulting firms to review and evaluate the
Reports. The preliminary findings of these consulting firms, which were
received during the quarter, indicate that many of the assumptions, purported
facts and conclusions contained in the Reports are flawed. Notwithstanding the
foregoing and the Company's denial of liability because of the prior settlement
with the government, the $8,000,000 loss provision includes 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. 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
Environmental Protection Agency. Actual remediation costs cannot be computed
until such remedial action is completed. Some of the other sites involving the
Company or a 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. No significant expenses related to
environmental matters were recorded by the Company during the three years ended
June 30, 1994 due to the adequacy of previously 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. 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 earnings.
The $8,000,000 loss provision also includes approximately $500,000 of costs
incurred by the Company during the quarter ended March 31, 1995 for the
aforementioned Gichner Systems Group and environmental matters.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained very strong and liquid at March
31, 1995 with cash and short-term investments totaling $33,679,000, working
capital of $22,274,000 and net worth of $54,909,000. During the nine months
ended March 31, 1995, the net cash provided by operating activities was
$4,014,000 compared to $6,745,000 a year ago. The decline in net cash provided
by operating activities in the first nine months of fiscal 1995 was principally
attributable to an increase of $1,739,000 in income taxes paid, an increase of
$272,000 in cash outflows charged against Capital Credit Corporation's ("Capital
Credit") restructuring provision, principally related to the relocation of its
headquarters, and an increase of approximately $675,000 in disbursements
principally related to legal matters involving the Company's discontinued
operations. The Company's capital spending during the nine months ended March
31, 1995 principally represents costs related to the purchase of computer,
telecommunications and office equipment and was comparable to that of a year
ago.
During the nine month periods ended March 31, 1995 and 1994 the Company
purchased, with available funds, 55,200 shares and 211,800 shares, respectively,
of its common stock for approximately $514,000 and $2,431,000, respectively.
The Company also paid $2,830,000 in July 1994 for 290,600 shares of its common
stock that was purchased in June 1994. As of May 8, 1995, 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.
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, 1995, approximately $572,000 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 new 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. At March 31, 1995 the interest rate, which is reset periodically, on
11
<PAGE>
the revolving term loan was approximately 7%. As of May 8, 1995, the Company
was contingently liable for outstanding letters of credit aggregating
approximately $1,621,000 which reduced the amount available for letters of
credit under the Credit Agreement to approximately $3,379,000.
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, 1995 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. The discounted net present value of
the aggregate consulting fees was approximately $2,000,000 at March 31, 1995,
which will be expensed as the services are rendered.
The Company and certain subsidiaries are involved in litigation and
administrative proceedings described in Part II, Item 1 of this report. 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 available data. The Company recorded an $8,000,000 loss provision
($5,200,000 net of tax benefit) 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 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 is included in the Condensed
Consolidated Statements of Operations under the caption "Discontinued operations
loss provision" for the three and nine months ended March 31, 1995. The
Condensed Consolidated Balance Sheet at March 31, 1995 includes "Accrued
expenses" of $5,200,000 and "Other liabilities" of $2,800,000 comprising the
$8,000,000 loss provision.
Management believes that reserves established to meet known and potential
environmental liabilities for the pending environmental proceedings referred to
above are adequate, based on current information. 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
earnings. The Company does not currently anticipate that the resolution of the
Legal Proceedings and the Other matters described in Part II, Item 1 of this
report 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
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NINE MONTHS ENDED MARCH 31, 1995 VS. NINE MONTHS ENDED MARCH 31, 1994
OPERATING REVENUES
Operating revenues increased to $71,526,000 for the nine months ended March
31, 1995 compared with $67,744,000 for the nine months ended March 31, 1994.
Revenues at Transworld Systems, Inc. ("Transworld Systems") were $42,028,000
compared with $39,233,000 a year ago. Transworld Systems increase in revenues
is partially due to an acceleration of customer orders prior to a scheduled
price increase for its fixed-fee letter service in the second quarter of fiscal
1995. The Transworld Systems price increase was in response to the United
States postal rate increase that took effect on January 1, 1995. Revenues at
Allied Bond increased by 7% during the first nine months of fiscal 1995, while
revenues at Capital Credit decreased by approximately $400,000 compared with
results a year ago, primarily due to lower placements from a major client.
OPERATING EXPENSES
Operating expenses increased by $2,326,000 for the nine months ended March
31, 1995 compared with 1994. The increase was attributable to increases in
operating expenses at Transworld Systems and Allied Bond that were generally in
line with their respective increases in operating revenues, partially offset by
a decrease in operating expenses at Capital Credit. The decrease in operating
expenses at Capital Credit reflects lower compensation and collection costs,
both of which decreased at a rate proportionally greater than the decrease in
operating revenues at Capital Credit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $389,000 for the
nine months ended March 31, 1995 compared with 1994. The increase was
attributable to an increase in Corporate office expenses, partially offset by
decreases at Transworld Systems, Capital Credit and Allied Bond. The increase
in Corporate office expenses primarily resulted from an increase of
approximately $400,000 of legal fees related to discontinued operations of the
Company and increased deferred compensation expense. During the three months
ended March 31, 1995 such legal fees were included in the $8,000,000 pretax loss
provision recorded during the current fiscal quarter for discontinued operations
of the Company (See Note 2). In the first six months of fiscal 1994 such legal
fees were charged against reserves previously established for discontinued
operations of the Company, while during the three months ended March 31, 1994
such legal fees were included in selling, general and administrative expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased by $234,000 for the nine
months ended March 31, 1995 compared with the nine months ended March 31, 1994.
The decrease was due to decreases at Allied Bond and Transworld Systems,
partially offset by an increase in depreciation expense at Capital Credit.
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<PAGE>
OPERATING INCOME
Operating income increased to $6,518,000 for the nine months ended March
31, 1995 from $5,217,000 for the nine months ended March 31, 1994 due to
increases at Transworld Systems, Allied Bond and Capital Credit, partially
offset by higher legal fees related to discontinued operations of the Company
and increased deferred compensation expenses at the Corporate office.
Transworld Systems reported a 14% increase in operating income to $9,453,000,
before amortization of goodwill, compared with $8,280,000 a year ago and an
operating margin of 22%, after amortization of goodwill, for the first nine
months of fiscal 1995. Allied Bond reported an increase in operating income,
compared with a year ago, after absorbing the amortization of goodwill and
depreciation expense related to its acquisition and Capital Credit operated
profitably during the first nine months of fiscal 1995 compared to an operating
loss of approximately $500,000 a year ago.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased by $282,000 for the nine months ended March 31,
1995 compared with March 31, 1994 principally due to an increase in the interest
rate charged for the borrowings under the Credit Agreement. Interest income
increased by $357,000 for the nine months ended March 31, 1995 compared with a
year ago, due to higher average short-term interest rates.
During the nine months ended March 31, 1995, the Company primarily invested
in commercial paper and U.S. government securities, both with short-term
maturities, and overnight time deposits. During the nine months ended March 31,
1994, the Company primarily invested in U.S. government securities with short-
term maturities and overnight time deposits.
INCOME TAXES
The Company's effective income tax rate for continuing operations was
43% for the nine months ended March 31, 1995 and 41% for the nine months ended
March 31, 1994. The increase is primarily the result of increased state income
taxes. The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", effective July 1, 1993. Although the change in
accounting for income taxes did not have a material effect on "Income before
cumulative effect of change in accounting for income taxes" for the nine months
ended March 31, 1994, the cumulative effect of the change increased net income
by $1,068,000, or $.17 per share.
DISCONTINUED OPERATIONS LOSS PROVISION
The Company recorded an $8,000,000 loss provision ($5,200,000 net of tax
benefit) or $.92 loss per share 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 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 is included in the Condensed
Consolidated Statements of Operations under the caption "Discontinued operations
loss provision" for the nine months ended March 31, 1995.
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 VS. THREE MONTHS ENDED MARCH 31, 1994
OPERATING REVENUES
Operating revenues increased to $24,240,000 for the three months ended
March 31, 1995 compared with $23,028,000 for the three months ended March 31,
1994 as a result of increased revenues at Transworld Systems, Allied Bond and
Capital Credit. Revenues at Transworld Systems, Inc. were $13,497,000 compared
with $13,072,000 a year ago. Revenues at Allied Bond and Capital Credit
increased 7% and 10%, respectively, during the current fiscal quarter compared
to a year ago.
OPERATING EXPENSES
Operating expenses increased by $1,426,000 for the three months ended March
31, 1995 compared with 1994. The increase was attributable to increases in
operating expenses at Transworld Systems, Allied Bond and Capital Credit and
principally reflects increased volume and mailing costs for Transworld Systems'
letter service and higher compensation costs at Allied Bond. All other
operating expenses at Transworld Systems and Allied Bond increased generally in
line with their respective increases in operating revenues. The increased
operating expenses at Capital Credit were generally in line with their increase
in operating revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $335,000 for the
three months ended March 31, 1995 compared with 1994. The decrease was
attributable to decreases at Transworld Systems, Capital Credit and the
Corporate office. Selling, general and administrative expenses at Allied Bond
were essentially unchanged in the third fiscal quarter of 1995 compared with a
year ago. The decrease in Corporate office expenses primarily resulted from a
reduction in legal fees related to discontinued operations of the Company,
partially offset by increased compensation expense. Approximately $200,000 of
such legal fees were included in selling, general and administrative expenses
for the three months ended March 31, 1994 while in the third quarter of fiscal
1995 such legal fees were included in the $8,000,000 pretax loss provision
recorded during the current fiscal quarter for discontinued operations of the
Company (See Note 2).
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased by $105,000 for the three
months ended March 31, 1995 compared with the three months ended March 31, 1994.
The decrease was due to decreases at Transworld Systems, Allied Bond and Capital
Credit.
15
<PAGE>
OPERATING INCOME
Operating income increased to $2,478,000 for the three months ended March
31, 1995 from $2,252,000 for the three months ended March 31, 1994 principally
due to increases at Capital Credit and, to a lesser extent, at Transworld
Systems and a decrease in Corporate office expenses. Transworld Systems
reported operating income of $2,773,000, before amortization of goodwill,
compared with $2,755,000 a year ago and an operating margin of 20%, after
amortization of goodwill, in the third quarter of fiscal 1995. Operating income
decreased slightly at Allied Bond in the third quarter of fiscal 1995 compared
to a year ago, after absorbing the amortization of goodwill and depreciation
expense related to its acquisition.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased by $110,000 for the three months ended March 31,
1995 compared with March 31, 1994 principally due to an increase in the interest
rate charged for the borrowings under the Credit Agreement. Interest income
increased by $173,000 for the three months ended March 31, 1995 compared with a
year ago, due to higher average short-term interest rates.
During the three months ended March 31, 1995, the Company primarily
invested in commercial paper and U.S. government securities, both with short-
term maturities, and overnight time deposits. During the three months ended
March 31, 1994, the Company primarily invested in U.S. government securities
with short-term maturities and overnight time deposits.
INCOME TAXES
The Company's effective income tax rate for continuing operations was
43% for the three months ended March 31, 1995 and 41% for the three months ended
March 31, 1994. The increase is primarily the result of increased state income
taxes.
DISCONTINUED OPERATIONS LOSS PROVISION
The Company recorded an $8,000,000 loss provision ($5,200,000 net of tax
benefit) or $.92 loss per share 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 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 is included in the Condensed
Consolidated Statements of Operations under the caption "Discontinued operations
loss provision" for the three months ended March 31, 1995.
16
<PAGE>
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.
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 had 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. One person has also brought suit alleging wrongful termination. The
claims in this action 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 legal matters will have a material
adverse impact on the Company's overall financial condition or future results of
operations.
17
<PAGE>
ENVIRONMENTAL
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 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 legally 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 site under a consent order with the Environmental Protection Agency and
submitted Remedial Investigation and Feasibility Study Reports (the "Reports")
to the Environmental Protection Agency, which outline a range of various
remedial alternatives for the site. The Company's environmental counsel
recently retained two environmental consulting firms to review and evaluate the
Reports. The preliminary findings of these consulting firms, which were
received during the quarter, indicate that many of the assumptions, purported
facts and conclusions contained in the Reports are flawed. Notwithstanding the
foregoing and the Company's denial of liability because of the prior settlement
with the government, the Company has recorded reserves for environmental matters
which include 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. 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
Environmental Protection Agency. Actual remediation costs cannot be computed
until such remedial action is completed. Some of the other sites involving the
Company or a subsidiary are at a stage where an assessment of liability, if any,
cannot reasonably be made.
18
<PAGE>
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. No significant expenses related to
environmental matters were recorded by the Company during the three years ended
June 30, 1994 due to the adequacy of previously 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. 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 earnings.
OTHER
The Company sold the assets and business of the Division to Gichner Systems
Group, Inc. (the "Purchaser") in 1989. 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 government contracts negotiated
prior to the sale. After investigation, those of the former officers who where
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. In addition to civil proceedings, it is possible the
government could institute criminal proceedings against the Company as a result
of the prior actions of the former officers of the Division. The Purchaser has
also made claims, allegedly based on provisions in the purchase agreement, that
the Company is required to indemnify Purchaser for all damages, costs and
expenses related to this matter which are incurred by Purchaser as a result of
actions taken by former Division employees of the Company prior to the sale of
the Division to the Purchaser. The Company has denied liability to the
Purchaser.
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.
Although the Company does not anticipate 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, there are a
number of variables which could reduce or increase the Company's current
estimate of its liability to the government.
19
<PAGE>
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
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed for the three months ended March
31, 1995.
20
<PAGE>
THE UNION CORPORATION AND SUBSIDIARIES Item 6
EXHIBIT 11
Computation of Primary and Fully Diluted Earnings Per Share (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended March 31
------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
Income Income
Number of Net of Per Share Number of Net of Per Share
Shares Taxes Amount Shares Taxes Amount
--------- ------ --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY EARNINGS:
Average common shares (based
on weighted average number
of shares outstanding) 5,550,376 6,198,933
Common stock equivalents
(stock options) 98,640 89,566
--------- ---------
Income from continuing
operations 5,649,016 $ 3,619 $.64 6,288,499 $ 2,925 $ .47
--------- ---------
--------- ---------
Discontinued operations loss
provision, net of tax 5,649,016 (5,200) (.92) -- -- --
--------- -------- ----- ---------- ------- ------
--------- ----------
Income (loss) before cumulative
effect of change in accounting
for income taxes 5,649,016 (1,581) (.28) 6,288,499 2,925 .47
--------- ----------
--------- ----------
Cumulative effect of change in
accounting for income taxes -- -- -- 6,288,499 1,068 .17
--------- -------- ----- ---------- ------- ------
--------- ----------
Net income (loss) 5,649,016 $(1,581) $(.28) 6,288,499 $ 3,993 $ .64
--------- -------- ----- ---------- ------- ------
--------- -------- ----- ---------- ------- ------
FULLY DILUTED EARNINGS:
Average common shares (based
on weighted average number
of shares outstanding) 5,550,376 6,198,933
Common stock equivalents
(stock options) 108,963 89,566
--------- ---------
Income from continuing
operations 5,659,339 $ 3,619 $.64 6,288,499 $ 2,925 $.47
--------- ---------
--------- ---------
Discontinued operations loss
provision, net of tax 5,659,339 (5,200) (.92) -- -- --
--------- -------- ----- ---------- ------- ------
--------- ----------
Income (loss) before cumulative
effect of change in accounting
for income taxes 5,659,339 (1,581) (.28) 6,288,499 2,925 .47
--------- ---------
--------- ---------
Cumulative effect of change in
accounting for income taxes -- -- -- 6,288,499 1,068 .17
--------- -------- ----- ---------- ------- ------
--------- ----------
Net income (loss) 5,659,339 $(1,581) $(.28) 6,288,499 $ 3,993 $.64
--------- -------- ----- ---------- ------- ------
--------- -------- ----- ---------- ------- ------
</TABLE>
21
<PAGE>
THE UNION CORPORATION AND SUBSIDIARIES Item 6
EXHIBIT 11
Computation of Primary and Fully Diluted Earnings Per Share (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
Income Income
Number of Net of Per Share Number of Net of Per Share
Shares Taxes Amount Shares Taxes Amount
--------- ------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY EARNINGS:
Average common shares (based
on weighted average number
of shares outstanding) 5,578,102 6,147,162
Common stock equivalents
(stock options) 90,765 86,704
--------- ---------
Income from continuing
operations 5,668,867 $ 1,398 $ .25 6,233,866 $ 1,273 $ .20
--------- ---------
--------- ---------
Discontinued operations loss
provision, net of tax 5,668,867 (5,200) (.92) -- -- --
--------- -------- ------ --------- ------- -----
--------- ---------
Income (loss) before cumulative
effect of change in accounting
for income taxes 5,668,867 (3,802) (.67) 6,233,866 1,273 .20
--------- ---------
--------- ---------
Cumulative effect of change in
accounting for income taxes -- -- -- -- -- --
--------- -------- ------ --------- ------- -----
--------- ---------
Net income (loss) 5,668,867 $(3,802) $(.67) 6,233,866 $ 1,273 $ .20
--------- -------- ------ --------- ------- -----
--------- -------- ------ --------- ------- -----
FULLY DILUTED EARNINGS:
Average common shares (based
on weighted average number
of shares outstanding) 5,578,102 6,147,162
Common stock equivalents
(stock options) 90,765 86,704
--------- ---------
Income from continuing
operations 5,668,867 $ 1,398 $ .25 6,233,866 $ 1,273 $ .20
--------- ---------
--------- ---------
Discontinued operations loss
provision, net of tax 5,668,867 (5,200) (.92) -- -- --
--------- -------- ------ --------- ------- -----
--------- ---------
Income (loss) before cumulative
effect of change in accounting
for income taxes 5,668,867 (3,802) (.67) 6,233,866 1,273 .20
--------- --------- ------- -----
--------- ---------
Cumulative effect of change in
accounting for income taxes -- -- -- -- -- --
--------- -------- ------ --------- ------- -----
--------- ---------
Net income (loss) 5,668,867 $(3,802) $(.67) 6,233,866 $ 1,273 $ .20
--------- -------- ------ --------- ------- -----
--------- -------- ------ --------- ------- -----
</TABLE>
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNION CORPORATION
(Registrant)
Date: May 12, 1995 By: Melvin L. Cooper
------------------------------------
Melvin L. Cooper
Chairman of the Board and President
(Chief Executive Officer)
Date: May 12, 1995 By: Nicholas P. Gill
------------------------------------
Nicholas P. Gill
Treasurer and Secretary
(Chief Financial Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 13,090
<SECURITIES> 20,589
<RECEIVABLES> 6,139
<ALLOWANCES> 610
<INVENTORY> 0
<CURRENT-ASSETS> 44,628
<PP&E> 20,526
<DEPRECIATION> 10,904
<TOTAL-ASSETS> 110,196
<CURRENT-LIABILITIES> 22,354
<BONDS> 20,817
<COMMON> 4,261
0
0
<OTHER-SE> 50,648
<TOTAL-LIABILITY-AND-EQUITY> 110,196
<SALES> 0
<TOTAL-REVENUES> 71,526
<CGS> 0
<TOTAL-COSTS> 46,706
<OTHER-EXPENSES> 3,097<F1>
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 1,038
<INCOME-PRETAX> 6,350
<INCOME-TAX> 2,731
<INCOME-CONTINUING> 3,619
<DISCONTINUED> (5,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,581)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
<FN>
<F1>Represents the total depreciation and amortization expense, but does not
include S,G&A expenses of $15,205.
</FN>
</TABLE>
