-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J1RVuOJejhouIk08Gs5QJsOW/rZtpG+j5pEuhtA+No0saInqHUxecvqZOsrewKPe yvPdaLK9OGxnLT+br+39wQ== 0000950130-97-004290.txt : 19970930 0000950130-97-004290.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950130-97-004290 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION CORP CENTRAL INDEX KEY: 0000100817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 250848970 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05371 FILM NUMBER: 97687111 BUSINESS ADDRESS: STREET 1: 145 MASON STREET CITY: GREEENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036290505 MAIL ADDRESS: STREET 1: 145 MASON STREET CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: SUPER ELECTRIC PRODUCTS INC DATE OF NAME CHANGE: 19661121 FORMER COMPANY: FORMER CONFORMED NAME: UNION SPRING & MANUFACTURING CO DATE OF NAME CHANGE: 19660921 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL 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 fiscal year ended June 30, 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 No.) 211 King Street, Charleston, South Carolina 29401 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (Area Code 803) 958-3800 145 Mason Street, Greenwich, CT 06830 ------------------------------------------------------------ (former name, former address and former fiscal year, if changed since last report) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on Title of each class which Registered ------------------- ------------------------ Common Stock, 50 cents par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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 ----- ----- As of September 12, 1997 the Company had outstanding 5,793,944 shares of common stock. The aggregate market value (based upon the closing price of these shares on The New York Stock Exchange) of these shares held by nonaffiliates was approximately $130,316,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report for the year ended June 30, 1997 are incorporated by reference into Parts I and II. Portions of the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, are incorporated by reference into Part III. The Company's Proxy Statement will be filed within 120 days after June 30, 1997. 1 THE UNION CORPORATION Form 10-K Annual Report For the Fiscal Year Ended June 30, 1997 Table of Contents Page ---- PART I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management 10 Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 11 2 PART I - ------ Item 1. Business - ----------------- (A) General Development of Business ------------------------------- The Union Corporation, which was reincorporated in Delaware in 1986, was formed in 1938. Its principal executive offices are located at 211 King Street, Charleston, South Carolina. When used herein, the "Company" means The Union Corporation and its subsidiaries. The Company conducts its business through subsidiaries which are operationally decentralized. Matters pertaining to corporate strategy, policy and finance are managed at Company headquarters. The Company's operations are currently comprised of five financial services companies, Transworld Systems Inc. ("Transworld"), Allied Bond & Collection Agency, Inc. ("Allied Bond"), Capital Credit Corporation ("Capital Credit"), Interactive Performance, Inc. ("Interactive Performance") and High Performance Services, Inc. ("High Performance Services"), which furnish a broad range of credit and receivables management outsourcing services, such as credit authorization, customer service, credit usage management, management and collection of accounts receivable, and a variety of related inbound and outbound call-center services, to both large and small businesses. (C) Narrative Description Of Business --------------------------------- During the year ended June 30, 1997, the Company, through its Capital Credit, Allied Bond and Interactive Performance subsidiaries, recorded aggregate revenues of approximately $12,816,000 from a single customer, AT&T Corp. No other customer comprises more than 10% of the Company's consolidated revenues. However, both Allied Bond and Capital Credit have several large customers and the loss of any one of these customers could have a material adverse effect on their respective results of operations; Interactive Performance currently serves two customers and the loss of either would have a material adverse effect on its results of operations; and High Performance Services currently serves one customer and the loss of that customer would have a material adverse effect on its results of operations. Revenues derived from the Company's accounts receivable management operations have historically been higher in the third and fourth fiscal quarters than those in the first and second fiscal quarters. The debt collection industry is closely regulated by federal laws such as the Fair Debt Collection Practices Act and similar state laws. The industry is highly competitive and is comprised of companies serving large national accounts and those that concentrate on local accounts in a particular market. The Company, through its Transworld, Allied Bond and Capital Credit subsidiaries, serves both national and local accounts. Accounts are placed for collection based on collection performance, price and service provided. The past-due consumer and commercial debt currently outstanding in the United States includes among other obligations bad checks, delinquent credit card and medical bills and uncollected loans and taxes owed to federal, state and local governments. The key to collecting some of this bad debt is "third-party" intervention. As a third party, the collection agency has an advantage because 3 debtors are far more concerned about their credit record when they are contacted by an outside collection agency and, therefore, are more likely to respond positively. The importance of national credit grantors and the increased mobility of delinquent debtors have created a demand for national collection firms like Transworld, Allied Bond and Capital Credit. These companies have the financial and managerial resources to maintain and upgrade sophisticated automated collection systems that operate nationally. The Company has identified, as sales targets, companies in four large markets, which represent the greatest opportunity to utilize one or more of our services. These markets are large telecommunications, financial services, power generation and distribution firms, and small and medium size companies. The Company currently provides credit and/or accounts receivable management services to 16 of the top 25 U.S. bankcard issuers, to six of the ten largest telecommunications companies and to over 40,000 small and medium size companies. This market focus permits the Company to capitalize on strong client relationships, relevant economic trends, and its core competencies. The Union Corporation expanded its business base beyond that of its traditional role of collecting past-due debt through "third-party intervention" into "call-center outsourcing" services. The Company has significant strengths in third-party collections such as: dedicated and well-trained people, experienced operating management, a proven track record of strong performance and service to our clients, and sophisticated nationwide collections systems. It has become increasingly apparent that many of those same resources can be of value to companies well before the need for third-party collections. The Company's objective to become an outsourcing "arm" of increasingly competitive and cost-conscious companies in a deregulated environment is supported by a solid infrastructure. With 133 sales offices, 27 "call- centers," modern electric communications, and experienced operating management, the Company is prepared to provide current and new customers with a variety of credit and receivables management services to suit their business needs. Transworld Systems Inc. ----------------------- Transworld, headquartered in Rohnert Park, California, offers the combination of both fixed-fee and contingency fee collection services. Transworld has a successful history which is attributable to the strength of its marketing organization, a high recovery rate, cost-effectiveness and quality of service. Transworld's system reduces customers' in-house collection costs while providing detailed monthly status reports for accounting and control purposes. Its fixed-fee system, Phase I, is based on contacting the debtor with a series of computer generated collection demands sent by mail. Unlike companies whose revenues are derived from contingency collection, Transworld's Phase I system charges a fixed fee currently ranging from $4.75 to $9.95 per account depending on the number of accounts placed. Many customers with small-balance delinquent accounts, ranging between $50 and $100, have found Transworld's Phase I system to be the only economical method of obtaining professional, third-party collection results. Transworld's ability to get clients to make an early assignment of delinquent accounts, usually forty-five to ninety days past-due, is possible because of the low fixed-fee structure and its sophisticated computerized management reporting system. Transworld also offers clients who purchase systems for 300 or more accounts the option to electronically 4 communicate the debtor information that is necessary to initiate collection demands directly to Transworld's computer system. Many clients experience collection costs as low as five to seven percent of the amount collected, while at the same time eliminating a good deal of their normal billing expenses. The combination of low cost and high recovery rates results in a high customer renewal rate. Transworld currently has well over 40,000 customers using its services, from small companies that purchase a system for 45 accounts to major corporations that purchase systems for 100,000 accounts. Transworld's marketing organization, consisting of more than 700 independent contractors, provides the sales effort and ongoing service essential to the system. This group is highly trained and motivated, and is paid on a commission basis. Transworld had 133 sales offices throughout the country and Puerto Rico at year end and plans to open six new sales offices in fiscal 1998. Credit Management Services (CMS) -------------------------------- Approximately 75% of the clients using Transworld's Phase I system assign those accounts that were not collected during the fixed-fee program to CMS, a division of Transworld, on a contingency fee basis (Phase II). Because a CMS office is opened in a new location only after business has been developed in that area by Transworld's Phase I division, historically it has become profitable within the first month of operation. CMS collectors are paid on a commission basis and perform collection services at 19 branch offices, with one new branch office expected to be opened in fiscal 1998. Branch managers, trained and promoted from within, are compensated through a combination of commissions and profit incentives. CMS has developed software packages and computer systems to handle fiduciary reporting and interface with a client base of over 35,000. The average debt assigned CMS is approximately $600 with an average payment collected in excess of $200. CMS had record collections, revenues and profits in 1997. Transworld employed approximately 390 persons at September 12, 1997, in addition to the independent contractors. None of the employees are covered under a collective bargaining agreement. Interactive Performance, Inc. ----------------------------- Interactive Performance, headquartered in North Charleston, South Carolina, was formed in fiscal 1996 to provide a range of credit and receivables management outsourcing services to telecommunications companies. Services including credit authorization, customer service, usage management and receivables management, are performed through call-centers in South Carolina and Florida. Interactive Performance began providing services to AT&T Corp. late in the third quarter of fiscal 1996 at its newly created 50,000 square foot facility in North Charleston, South Carolina. During fiscal 1997, Interactive Performance opened a new 8,000 square foot facility, also in North Charleston, South Carolina. Interactive Performance also began providing services to Lucent Technologies late in the fourth quarter of fiscal 1996 at a new 7,000 square foot facility in Jacksonville, Florida. 5 Interactive Performance employed approximately 570 people at September 12, 1997, none of whom is covered under a collective bargaining agreement. High Performance Services, Inc. ------------------------------- High Performance Services, headquartered in Jacksonville, Florida, was formed in fiscal 1996 to provide a full range of credit and receivables management services to the financial services industry. High Performance Services began providing customer services on an outsourcing basis for Advanta Corp.'s credit card business late in the fourth quarter of fiscal 1996 at its new 15,000 square foot facility in Jacksonville, Florida, and employed approximately 170 people at September 12, 1997, none of whom is covered under a collective bargaining agreement. Allied Bond & Collection Agency, Inc. ------------------------------------- Allied Bond, headquartered in Trevose, Pennsylvania, is a third-party contingency and fixed-fee basis collection and teleservicing company. Allied Bond includes among its clients many of the larger consumer credit grantors across a broad spectrum of industries such as banking, oil refining and distribution companies, student loan servicing, retail, travel and entertainment, utilities and telecommunications, and enjoys a significant share in many of these markets. Collections are accomplished through a combination of letters, telephone calls and litigation. Allied Bond earns commissions that are generally in the range of 15 to 40 percent of the amount collected. Post charge-off collection work has long been outsourced by credit grantors. More recently, however, the concept of outsourcing has been expanded to include many aspects of the receivables management process that were traditionally performed by credit grantors as an in-house operation. Allied Bond has responded to these opportunities by developing innovative programs for both its existing customer base and for new customers and markets. These new programs, some on a fee-per-account basis, include early-out and pre-charge-off intervention, as well as customer relations and service calling missions. Allied Bond's philosophy consists of maintaining a highly trained, well supervised collector staff committed to achieving positive results in an efficient and professional manner for all of Allied Bond's clients. Allied Bond employed approximately 650 people at September 12, 1997, none of whom is covered under a collective bargaining agreement. Capital Credit Corporation -------------------------- Capital Credit, headquartered in Jacksonville, Florida, provides contingency and fixed-fee collection services to large national clients primarily in four major market segments: bankcard, telecommunications, travel and entertainment and government. Capital Credit earns commissions that are generally in the range of 15 to 40 percent of the amount collected. Capital Credit's computerized on-line collection system links its Regional Collection Centers in Florida and Massachusetts and permits clients to communicate electronically with the system for an instant exchange of information. This system substantially decreases clerical effort and increases collector productivity. Capital Credit employed approximately 210 people at September 12, 1997, none of whom is covered under a collective bargaining agreement. 6 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 that 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 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 that 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 have been submitted to the EPA to challenge the perceived need for and the extent of the proposed additional remediation. The $8,000,000 loss provision recorded during the third quarter of fiscal 1995 for costs related to certain of its discontinued operations, all of which were terminated or otherwise disposed of prior to fiscal 1990, included a provision of approximately $4,000,000 for environmental matters. Notwithstanding the foregoing and the Company's denial of liability because of the prior settlement with the government, the provision for environmental matters included 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 regarding this site, and the estimated remediation costs that the Company will incur, based on current information, if its prior settlement with the government is not upheld in court. However, the Company may be exposed to additional substantial liability for this site as additional information becomes available over the long-term. A better estimate of costs associated with any further remediation to be taken at the site cannot be made until a Record of Decision is issued by the EPA, which is expected to be issued in fiscal 1998. Actual remediation costs cannot be computed until such remedial action is completed. 7 Some of the other sites involving the Company or an inactive subsidiary are at a stage where an assessment of liability, if any, cannot reasonably be made. It is the Company's policy to comply fully with all laws regulating activities affecting the environment and to meet its obligations in this area. In many "generator" liability cases, reasonable cost estimates are available on which to base reserves on the Company's likely allocated share among viable parties. Where insufficient information is available regarding projected remedial actions for these "generator" liability cases, the Company has recorded what it believes to be reasonable estimates of its potential liabilities. Reserves for liability for sites on which former operations were conducted are based on cost estimates of remedial actions projected for these sites. All known environmental claims are periodically reviewed by the Company, where information is available, to provide reasonable assurance that adequate reserves are maintained. Reserves recorded for environmental liabilities are not net of insurance or other expected recoveries. Other than the aforementioned loss provision that was recorded by the Company during fiscal 1995, no significant expenses related to environmental matters were recorded by the Company during the three years ended June 30, 1997 due to the adequacy of previously recorded reserve balances based on information available at that time. Management believes that reserves established to meet known and potential environmental liabilities are adequate based on current information. The Company does not anticipate, based on current information, that the resolution of these matters will have a material adverse impact on the Company's overall financial condition given its available cash and short-term investments. However, there is no way to be certain that future developments relating to environmental matters will not involve additional substantial costs that may require future charges to the Discontinued operations loss provision. (See Note 2 of Notes to Consolidated Financial Statements included in the Company's 1997 Annual Report for additional information regarding Discontinued Operations). Employees --------- The Company and its subsidiaries employed approximately 2,000 persons at September 12, 1997. Employees of the Company who meet certain requirements as to age and length of service are entitled to participate in a number of employee benefit programs, including medical insurance and retirement plans. The Company considers its relations with its employees to be good. (D) Financial Information About Foreign and Domestic Operations and Export Sales ---------------------------------------------------------------------------- The Company has no foreign operations. Item 2. Properties - ------------------- The Company's operations are comprised of its Transworld, Allied Bond, Capital Credit, Interactive Performance and High Performance Services subsidiaries. The Company believes that the facilities of its operations are suitable and adequate for its business. Transworld owns its headquarters located in Rohnert Park, California. The CMS division of Transworld operates out of 19 branch offices, all of which are leased except for the office located at Transworld's headquarters in Rohnert Park. Allied Bond leases its main facility from a partnership, of which the general partners are the co-chairmen of Allied Bond, pursuant to a lease agreement that expires in July 2002. The terms of 8 the lease are comparable to those that would have been obtained under arrangements with unrelated third parties. All offices for Capital Credit, Interactive Performance and High Performance Services are leased. See Item 1. Environmental Matters on pages 7 and 8 of this Form 10-K for information regarding pending environmental proceedings involving properties currently or formerly owned or operated by a subsidiary or division of the Company. Item 3. Legal Proceedings - -------------------------- See Notes 2 and 7 of Notes to Consolidated Financial Statements included in the Company's 1997 Annual Report, which notes are incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of the year ended June 30, 1997. PART II - ------- Item 5. Market for the Registrant's Common Stock and Related Security Holder - ----------------------------------------------------------------------------- Matters ------- See "Market for the Registrant's Common Stock and Related Security Holder Matters" included on page 33 of the Company's 1997 Annual Report, which is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- See table entitled "Selected Financial Data" included on page 34 of the Company's 1997 Annual Report, which table is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included on pages 28 through 33 of the Company's 1997 Annual Report, which pages are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements and supplementary data contained in the Company's 1997 Annual Report, as listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page 12 of this Form 10-K, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- There have been no disagreements on accounting and financial disclosures with the independent auditors. 9 PART III - -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ See the section captioned "Election of Directors" included in the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, which section is incorporated herein by reference. Information regarding the executive officers of the Company who are also directors and the executive officers of the Company who are not directors is contained in the material incorporated above. The term of office of each of the Company's executive officers extends until either the expiration of their employment contract, their resignation or removal or until a successor is chosen by the Board of Directors. Mr. Herbert Silver, a director of the Company who is also the co- chairman of Allied Bond, is the brother of Mr. Bernard Silver, who is also the co-chairman of Allied Bond. There are no family relationships among any of the other directors or executive officers. Item 11. Executive Compensation - -------------------------------- See the section captioned "Executive Compensation" included in the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, which section is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners ----------------------------------------------- See the section captioned "Voting Securities" included in the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, which section is incorporated herein by reference. (b) Security Ownership of Directors and Officers -------------------------------------------- See the section captioned "Voting Securities" included in the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, which section is incorporated herein by reference. (c) Changes in Control ------------------ The Company knows of no contractual arrangements which may, at a subsequent date, result in a change in control of the Company. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- See Item 2. Properties on pages 8 and 9 of this Form 10-K and the section captioned "Certain Transactions" included in the Company's Proxy Statement, in connection with its Annual Meeting to be held on November 19, 1997, which sections are incorporated herein by reference. 10 PART IV - ------- Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K - ------------------------------------------------------------------------ (a) 1. Financial Statements -------------------- See Index to Consolidated Financial Statements and Financial Statement Schedule on page 12 of this Form 10-K. 2. Reports and Financial Statement Schedule ---------------------------------------- See Index to Consolidated Financial Statements and Financial Statement Schedule on page 12 of this Form 10-K. 3. Exhibits -------- See Index to Exhibits on pages 13 and 14 of this Form 10-K. (b) Reports on Form 8-K ------------------- There were no reports on Form 8-K filed for the three months ended June 30, 1997. 11 Index to Consolidated Financial Statements and Financial Statement Schedule
Annual Report Page(s) Item 14(a) (1) ------- - -------------- Data incorporated by reference from 1997 Annual Report: Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995 12 Consolidated Balance Sheets at June 30, 1997 and 1996 13 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 14 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 15 Notes to Consolidated Financial Statements 16 - 25 Supplementary Information Quarterly Data (Unaudited) 26 Report of Independent Auditors 27 Form 10-K Page(s) Item 14(a) (2) ------ - -------------- Schedule for the years ended June 30, 1997, 1996 and 1995: Schedule II Valuation and Qualifying Accounts and Reserves 15
All other financial statements and schedules not listed have been omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. 12 Index to Exhibits Item 14(a) (3) - -------------- 3. Articles of Incorporation and By-laws. (a) Certificate of Incorporation of The Union Corporation (13). Certificate of Correction of Certificate of Incorporation of The Union Corporation, dated March 12, 1990 (6). (b) Certificate of Merger of The Union Corporation (a New Jersey corporation) into The Union Corporation (a Delaware corporation), as filed in New Jersey (8). (c) Certificate of Ownership and Merger merging The Union Corporation (a New Jersey corporation) into The Union Corporation (a Delaware corporation), as filed in Delaware (13). (d) By-laws of The Union Corporation, amended effective July 1, 1997 (filed herewith). 10. Material Contracts (a) Employment Agreement between The Union Corporation and Melvin L. Cooper, dated as of January 1, 1986 (9). Amendment dated September 30, 1986 (8). Amendment dated November 10, 1988 (7). Amendment dated September 13, 1990 (6). Amendment dated September 1, 1992 (4). Amendment dated March 15, 1995 (2). (b) Rights Agreement dated March 14, 1988 between The Union Corporation and Registrar and Transfer Company as Rights Agent (13). Amendment dated May 23, 1990 (12). Amendment dated September 16, 1992 (13). Amendment dated August 22, 1994 which established the First National Bank of Boston as Rights Agent (14). (c) Asset Purchase Agreement dated as of February 8, 1989 by and between the Registrant and GSG Acquisition Corporation (11). (d) Indemnification Agreement by and between The Union Corporation and each member of the Board of Directors and each Executive Officer of the Registrant (5). (e) Employment Agreement by and between Transworld Systems Inc., The Union Corporation and Gordon S. Dunn dated as of July 1, 1995 (2). Extension of Employment Agreement by and between Transworld Systems Inc., The Union Corporation and Gordon S. Dunn entered into as of November 14, 1996 (filed herewith). (f) Employment Agreement by and between Transworld Systems Inc. and George M. Macaulay dated as of July 1, 1995 (2). Extension of Employment Agreement by and between Transworld Systems Inc. and George Macaulay entered into as of November 14, 1996 (filed herewith). (g) Employment Agreement by and between Capital Credit Corporation, The Union Corporation and William B. Hewitt dated as of July 1, 1995 (1). (h) Employment Agreement by and between The Union Corporation and Nicholas P. Gill dated as of March 22, 1995 (2). Extension dated August 27, 1996 (filed herewith). (i) Asset Purchase Agreement dated December 1, 1992 by and between the Registrant and Allied Bond & Collection Agency (10). Amendment dated November 14, 1996 to the Asset Purchase Agreement by and between the Registrant and Allied Bond & Collection Agency and to the Employment Agreements by and between Allied Bond & Collection Agency, Inc., The Union Corporation and Herbert R. Silver and Bernard Silver (filed herewith). 13 Index to Exhibits (Continued) Item 14(a) (3) - -------------- 10. Material Contracts (Continued) (j) Employment Agreement by and between Allied Bond & Collection Agency, Inc., The Union Corporation and Herbert R. Silver dated as of December 1, 1992 (10) and amendment thereto (16). (k) Employment Agreement by and between Allied Bond & Collection Agency, Inc., The Union Corporation and Bernard Silver dated December 1, 1992 (10) and amendment thereto (16). (l) Employment Agreement between Allied Bond & Collection Agency, Inc. and Sheldon Zucker dated as of December 1, 1992 (4). (m) Contract between AT&T Corp. and Interactive Performance, Inc. dated January 19, 1996 (15). (Confidential treatment has been granted for certain portions of this exhibit.) (n) Contract between Advanta Corp. and High Performance Services, Inc. dated August 16, 1996 (1). (Confidential treatment has been granted for certain portions of this exhibit.) 11. Determination of primary and fully diluted income per common and common equivalent share. 13. Annual Report to Shareholders for 1997. (With the exception of the pages listed in the above index (on page 12) and the items incorporated by reference in Items 3, 5, 6, 7 and 8 of this Form 10-K, the Company's 1997 Annual Report is not deemed to be filed as part of this Form 10-K.) 21. Subsidiaries of the registrant. 23. Consent of Independent Auditors. 27. Financial Data Schedule. ______________________________ Footnotes to Item 14 (a) (3); 3. and 10. (1) Incorporated by reference to the Company's 1996 Form 10-K Report. (2) Incorporated by reference to the Company's 1995 Form 10-K Report. (3) Incorporated by reference to the Company's 1994 Form 10-K Report. (4) Incorporated by reference to the Company's 1993 Form 10-K Report. (5) Incorporated by reference to the Company's 1992 Form 10-K Report. (6) Incorporated by reference to the Company's 1990 Form 10-K Report, Exhibit No. 3(a) and 10(a), respectively (File No. 1-5371). (7) Incorporated by reference to the Company's 1989 Form 10-K Report, Exhibit No. 10(c) (File No. 1-5371). (8) Incorporated by reference to the Company's 1987 Form 10-K Report, Exhibit No. 3(b) and 10(c), respectively (File No. 1-5371). (9) Incorporated by reference to the Company's 1986 Form 10-K Report, Exhibit No. 10(d) (File No. 1-5371). (10) Incorporated by reference to the Company's December 23, 1992 Form 8-K Current Report. (11) Incorporated by reference to the Company's February 15, 1989 Form 8-K Current Report, Exhibit No. 1 (File No. 1-5371). (12) Incorporated by reference to the Company's June 4, 1990 Form 8-K Current Report, Exhibit No. 1 (File No. 1-5371). (13) Incorporated by reference to the Company's Form 8-B/A Amendment to Registration of Securities of Certain Successor Issuers filed on July 5, 1994. (14) Incorporated by reference to the Company's Form S-8 filed on September 2, 1994. (15) Incorporated by reference to the Company's March 31, 1996 Form 10-Q Report. (16) Amendment dated November 14, 1996 to the Asset Purchase Agreement by and between the Registrant and Allied Bond & Collection Agency and to the Employment Agreements by and between Allied Bond & Collection Agency, Inc., The Union Corporation and Herbert R. Silver and Bernard Silver (filed herewith as part of Exhibit 10 (i)). 14 THE UNION CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the years ended June 30, 1997, 1996 and 1995 (Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ----------------------- -------- -------- Additions ----------------------- Balance at Charged to Balance at beginning cost and Other (A) close of Description of period expenses Additions Deductions period ----------- ---------- ---------- --------- ----------- ---------- Allowance for doubtful accounts: 1997 $700 $124 $ - $143 $681 ==== ==== ==== ==== ==== 1996 $542 $266 $ - $108 $700 ==== ==== ==== ==== ==== 1995 $552 $143 $ - $153 $542 ==== ==== ==== ==== ====
(A) Accounts receivable write-offs, net of recoveries. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Union Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE UNION CORPORATION Melvin L. Cooper ---------------- Melvin L. Cooper Chairman of the Board Nicholas P. Gill ---------------- Nicholas P. Gill Executive Vice President, Treasurer and Secretary (Chief Financial Officer) DATE: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Melvin L. Cooper William B. Hewitt James C. Miller III - ------------------------ ----------------------------- ----------------------- Melvin L. Cooper William B. Hewitt James C. Miller III Chairman of the Board; President and Chief Executive Director Director Officer; Director September 26, 1997 September 26, 1997 September 26, 1997 Robert A. Kerr - ------------------------ ----------------------------- ----------------------- John E. Angle Robert A. Kerr Stuart J. Northrop Director Director Director September , 1997 September 26, 1997 September , 1997 Herbert A. Denton Robert A. Marshall Herbert R. Silver - ------------------------ ----------------------------- ----------------------- Herbert A. Denton Robert A. Marshall Herbert R. Silver Director Director Director September 26, 1997 September 26, 1997 September 26, 1997 Gordon S. Dunn James M. McCormick - ------------------------ ----------------------------- Gordon S. Dunn James M. McCormick Director Director September 26, 1997 September 26, 1997 16 EX-3.(D) 2 BYLAWS OF THE UNION CORPORATION EXHIBIT 3(d) THE UNION CORPORATION --------------------- BY-LAWS (Effective July 1, 1997) ARTICLE I OFFICES ------- SECTION 1. OFFICES. The registered office of the Corporation in the ------- State of Delaware shall be in the city of Dover, county of Kent, and the name of the resident agent in charge thereof is United States Corporation Company. The Corporation may also have offices at such other places as the Board of Directors may from time to time appoint, or the business of the Corporation may require. Said offices may be within or without the State of Delaware. ARTICLE II STOCKHOLDERS ------------ SECTION 1. PLACE OF MEETING. All meetings of the stockholders shall ---------------- be held at such place within or without the State of Delaware as may be fixed from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver of notice thereof. SECTION 2. ANNUAL MEETING. A meeting of the stockholders shall be -------------- held annually on such date after the close of the Corporation's fiscal year (June 30), and at such time as may be designated from time to time by the Board of Directors for the purpose of electing directors, and for the transaction of such other business as may properly come before the meeting. SECTION 3. NOTICE OF THE ANNUAL MEETING. Written notice of the time, ---------------------------- place and purpose of the annual meeting of stockholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail to each stockholder of record entitled to vote at the meeting. SECTION 4. SPECIAL MEETINGS. Special meetings of the stockholders ---------------- shall be held whenever called by the Chairman of the Board of Directors, or whenever called by the Board of Directors pursuant to the majority vote of the directors, voting at a duly convened meeting of the Board or pursuant to a written instrument signed by a majority of the full Board, and a special meeting of the stockholders shall likewise be called whenever persons holding 50% of the total shares of stock issued and outstanding and entitled to vote, shall in writing, make application therefor to the Chairman of the Board of Directors, President or the Board of Directors, stating the object of such special meeting. 2 SECTION 5. NOTICE OF SPECIAL MEETING. Written notice of the time, ------------------------- place and purpose of special meetings of the stockholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail to each stockholder of record entitled to vote at the meeting. SECTION 6. QUORUM. At any meeting of stockholders, the holders of a ------ majority of the issued and outstanding shares of the stock of the Corporation present in person or represented by proxy, shall constitute a quorum for the transaction of business, including the election of directors; the presence or absence of a quorum shall be determined at the opening of a meeting, and if a quorum is then present, and unless the law or certificate of incorporation specifically provides to the contrary, all business properly before the meeting may be thereafter transacted by a majority vote of the shares present or by proxy, though less than a quorum as a result of abstentions or absences, after the opening of the meeting. SECTION 7. ADJOURNMENTS. At any annual or special meeting, including ------------ a meeting at which a fixed quorum may be required but fails to attend, a majority in interest of the stockholders present, in person or by proxy, and entitled to vote, may adjourn the meeting from time to time without further notice, and at any such adjourned meeting, provided a quorum is 3 present at the opening thereof, any business may be transacted at the meeting as originally called had the same not been adjourned. SECTION 8. ORGANIZATION. The Chairman of the Board of Directors, or ------------ in his absence, the President, the Executive Vice President or any Vice President (in order of seniority) shall call the meeting of stockholders to order and shall act as Chairman thereof. The Secretary of the Corporation shall act as the secretary at all meetings of stockholders, and in his or her absence the Chairman of the meeting may appoint any person to act as Secretary. SECTION 9. VOTING. Directors shall be chosen by plurality of the ------ votes cast. On demand of any stockholder entitled to vote, or whenever required by statute, the vote upon any question, at any meeting, shall be by ballot. At each meeting of the stockholders, each stockholder entitled to vote may vote in person or by proxy appointed by an instrument in writing, subscribed by such stockholder, or by his duly authorized attorney, and delivered to the Secretary of the meeting. Unless the transfer of books shall have been closed or a date shall have been fixed as a record date for the determination of the stockholders entitled to vote, no share of stock shall be voted on at any election for the directors which shall have been transferred on the books of the Corporation within twenty (20) days next preceding such election. Each holder of stock entitled 4 to vote shall be entitled to one (1) vote for each share of said stock registered in such holder's name on the books of the Corporation. At any duly constituted meeting of the stockholders, the vote of the holders of a majority of the shares having voting powers and present in person or by proxy, shall decide any question brought before such meeting, unless applicable statutes, the certificates of incorporation or these by-laws specifically require otherwise. SECTION 10. BUSINESS. Business transacted at all meetings of -------- stockholders shall be as required by statute, these by-laws or the certificate of incorporation or as specified in the notice of meeting. SECTION 11. INSPECTORS. At all meetings of stockholders, whether the ---------- same be annual meetings or special meetings, the polls shall be opened and closed by the Chairman of the meeting, and the said polls shall remain open for a period not exceeding one (1) hour. The proxies shall be reviewed and all questions touching the qualifications of votes and the validity of proxies and the acceptance or rejection of votes shall be decided by one or more inspectors of election. All ballots shall be received and counted by the inspector(s) of elections and the inspector(s) shall certify the results in writing. Such inspector(s) shall be appointed by the Chairman of 5 the meeting. No candidate for election as director shall be appointed or shall act as inspector. ARTICLE III BOARD OF DIRECTORS ------------------ SECTION 1. NUMBER. The business, affairs and property of this ------ Corporation shall be managed and controlled by the Board of Directors. The number of directors shall not be less than three nor more than twelve. Such number may at any time and from time to time be increased or decreased by the Board of Directors by resolution. SECTION 2. CLASSIFICATION OF DIRECTORS. The Board of Directors shall --------------------------- be divided into three classes, the members of each class to serve for three years. The number of directors in each class shall be as nearly equal as possible. At the first meeting of stockholders held for the election of members of the Board so classified, the directors of a class shall be elected for a term which shall expire at the first succeeding annual meeting thereafter; the directors of a second class shall be elected for a term which shall expire at the second succeeding annual meeting thereafter; and the directors of a third class shall be elected for a term which shall expire at the third succeeding annual meeting thereafter. At each successive annual meeting, directors of the class whose term expires shall be 6 elected for a term of three years and until their successors shall have been duly elected and qualified, so that the term of office of one class of directors shall expire in each year. SECTION 3. VACANCIES. Vacancies shall be filled by a majority of the --------- remaining directors, through less than a quorum, and newly created directorships resulting from an increase in the number of directors shall be filled by a majority of the Board as constituted prior to such increase, or by election by the stockholders at any meeting thereof, and the directors so chosen shall hold office until the annual election and until their successors shall be duly elected and qualified, unless sooner displaced. SECTION 4. PLACE OF MEETING. Directors may hold their meeting at ---------------- such place or places within or without the State of Delaware as they may from time to time designate. SECTION 5. FIRST MEETING OF THE BOARD OF DIRECTORS. After each --------------------------------------- annual election of directors, the newly elected directors shall meet for the purpose of organization, election of officers and the transaction of other business at such place and time as shall be fixed by the directors. 7 SECTION 6. SPECIAL MEETING. A special meeting of the Board of --------------- Directors may be called by the Chairman of the Board of Directors, by the President or by written notice from two or more members of the Board. SECTION 7. NOTICE OF SPECIAL MEETING. The Secretary or Assistant ------------------------- Secretary shall give notice to each director of each special meeting by mailing the same at least two days before such meeting or on 24 hours' telegraphic (or equivalent) notice. Notice of a meeting need not be given to any director who submits a signed waiver of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 8. QUORUM. At any meeting of the Board of Directors, a ------ majority of the number of Directors then in office shall constitute a quorum for the transaction of business, except where otherwise expressly provided for by statute, by the certificate of incorporation or by these by-laws. A majority of those present at the time and place of any special or regular meeting, although less than a quorum, may adjourn the meeting from time to time without further notice until a quorum shall attend, and thereupon any business may be transacted which would 8 be transacted at the meeting as ordinarily called. The presence or absence of a quorum shall be determined at the opening of the meeting, and if a quorum is then present, and unless the law or the certificate of incorporation specifically provides to the contrary, all business properly before the meeting may thereafter be transacted by majority vote of the directors present. SECTION 9. ORGANIZATION. At the first meeting of the Board of ------------ Directors a Chairman shall be elected by the Board who shall serve at the will and pleasure of the Board. The Secretary of the Corporation, or in the event of his absence, a temporary Secretary appointed by the Chairman, shall act as a Secretary of the meeting. SECTION 10. COMPENSATION. Directors who are not otherwise ------------ compensated as officers or employees of the Corporation or any of its subsidiaries shall receive, by appropriate resolution of the Board of Directors, compensation for services provided to the Corporation, provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving additional compensation therefor. Members of committees may also be granted such compensation as the Board of Directors may determine. Directors fees may be payable currently or be deferred. Compensation for services may be in such form as the Board of Directors may determine. 9 SECTION 11. INDEMNIFICATION. Every person who is an officer or --------------- director of the Corporation, or of any corporation which he or she serves as such at the request of the Corporation, shall be indemnified by the Corporation to the fullest extent permitted by law against all expenses and liabilities reasonably incurred by or imposed upon him or her in connection with any proceeding to which he or she may be made, or threatened to be made, a party, or in which he or she may become involved by reason of his or her being or having been an officer or director of the Corporation, or of such other corporation, whether or not he or she is an officer or director of the Corporation, or such other corporation, at the time the expenses or liabilities are incurred. Such right of indemnification shall not be deemed exclusive of any other rights to which such person may be entitled apart from this provision. The Board of Directors is authorized to provide for the discharge of the Corporation's responsibilities under this Section by way of insurance or any other feasible and proper means. SECTION 12. ACTION BY WRITTEN CONSENT. Unless otherwise provided by ------------------------- the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or any Committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in 10 writing, the writing or writings to be filed with the minutes of proceedings of the Board of Directors or committee. ARTICLE IV COMMITTEES ---------- SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors, by ------------------- resolution adopted by a majority of the entire Board, may appoint from among its members an executive committee which shall have at least three members, including the Chairman of the Board of Directors and the President. The executive committee shall have and may exercise all of the authority of the Board of Directors in the management of the Corporation, provided such committee shall not have the authority of the Board of Directors to amend the certificate of incorporation, adopt a plan of merger or adopt a plan of consolidation with another corporation; recommend to the stockholders the sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the property and assets of the Corporation if not made in the usual and regular course of its business; recommend to the stockholders a voluntary dissolution of the Corporation or a revocation thereof; amend, alter, or repeal the by-laws of the Corporation; elect or remove officers of the Corporation or members of the executive committee; fix the compensation of any member of the executive committee; declare dividends or amend, alter, or repeal any resolution of the Board 11 of Directors which by its terms provides that it shall not be amended, altered, or repealed by the executive committee. The designation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. SECTION 2. STANDING COMMITTEES. The Standing Committees shall be an ------------------- Audit Committee, an Employee Compensation and Benefit Committee, and a Stock Option Committee. (a) The Audit Committee shall consist of not less than two directors. No member of the Audit Committee shall also be an officer or employee of the Corporation or any subsidiary thereof. The Audit Committee shall review, with the public accountants and auditors who audit the books of the Corporation, the scope of the audit for each fiscal year, the compensation payable to such auditors, the results of all annual and any special audits, the management letter prepared by the auditors, and such other matters as the members of the Committee or the Board of Directors may determine are necessary or desirable for the maintenance of proper books of account and records of the Corporation and its subsidiaries. (b) The Employee Compensation and Benefit Committee shall supervise and make recommendations with respect to employee compensation levels and all benefit plans involving employees of 12 the Corporation and its subsidiaries. It shall, on the recommendation of the President, or other appropriate officer, approve the terms of employment of all officers of the Corporation except the Chairman of the Board and the President, and shall recommend the terms of employment of the Chairman of the Board and the President to the Board of Directors for approval. The Committee may include such persons, not directors of the Corporation, as the Board of Directors may determine from time to time. (c) The Stock Option Committee shall consist of not less than three persons, none of whom is or has been for at least one year prior to any action taken by such member, eligible to receive an option under any of the Corporation's employee stock option plans. It shall have the power to grant stock options to all officers and employees of the Corporation and its subsidiaries provided that, in the case of an officer who is also a director of the Corporation, the grant of such option also must be approved by the Board of Directors. The Chairman of the Committee shall have the authority to execute stock option agreements on behalf of the Corporation, and such officers of the Corporation as may be designated from time to time by the Stock Option Committee or the Board of Directors shall also have such authority. The Committee shall have the power to interpret all stock option plans and to make recommendations with respect to all such plans. The Committee may also make recommendations to 13 the Board of Directors for stock options not covered by any stock option plan. (d) The members of all Committees shall be appointed by the Board of Directors and shall serve on such Committee at the will and pleasure of the Board. The members of Standing Committees shall be appointed at the first meeting of the Board of Directors after the annual meeting of stockholders. One person shall be designated as Chairman of each such Committee by the Board of Directors, except that the Chairman of the Board shall be the Chairman of any committee on which he serves. In the absence of the Chairman of the Committee, the other members of the Committee may designate a Chairman pro tem. Minutes of all meetings shall be prepared and signed by the Chairman of the meeting or the Secretary. Such minutes shall be circulated to the Board of Directors or delivered to the directors at the next meeting of the Board unless the Committee meeting occurred within two days before the meeting of the Board of Directors, in which event the Chairman of the Committee shall report verbally to the Board of Directors at the next meeting of the Board, and minutes of the meeting shall be delivered to the Board at its next subsequent meeting. Action by any committee at a meeting may be taken by a majority of its members or without a meeting by unanimous written consent. 14 A meeting of any committee may be called by any member of the committee. Notice of meeting shall be given by, or at the instance of, any member of the committee or each member of the committee by mailing the same at least two (2) days before such meeting or on 24 hours telegraphic (or equivalent) notice. On unanimous written consent or waiver by all members of the committee or if every member of the committee shall be present at the meeting, a meeting may be held at any time or place without any previous notice. SECTION 3. OTHER COMMITTEES. The Board of Directors may, by ---------------- resolution or resolutions, passed by a majority of the whole Board, designate one or more other committees, each of said committees to consist of two (2) or more of the directors of the Corporation with such powers as may be provided in the respective resolutions establishing such committees. ARTICLE V OFFICERS -------- SECTION 1. EXECUTIVE OFFICERS. The executive officers of the ------------------ Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a President, an Executive Vice President, one or more Vice Presidents, a Secretary, and a Treasurer. Any two or more of the aforesaid offices may be held by the same person, except that the same person shall not be 15 Chairman of the Board or President and Secretary. Subject to contract, the executive officers of the Corporation shall hold office at the will and pleasure of the Board of Directors. SECTION 2. SUBORDINATE OFFICERS. The Board of Directors may elect -------------------- such other officers subordinate to the above executive officers as it shall deem necessary, who shall have such authority and shall perform such duties as from time to time may be prescribed by the Board of Directors. SECTION 3. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the ---------------------------------- Board of Directors shall preside at all meetings of the Board of Directors and stockholders, and he shall have such other powers and duties as from time to time may be assigned to him by the Board of Directors. SECTION 4. PRESIDENT. The President shall be chosen from among the --------- directors. He shall have such powers and duties as from time to time may be assigned to him by the Board of Directors. Subject to the control and direction of the Board of Directors, the President shall be the Chief Executive Officer of the Corporation, and in such capacity, he shall have general authority over all affairs of the Corporation and over all officers, employees and agents of the Corporation, other than the Chairman of the Board, and shall have all of those powers usually pertaining to the office of Chief Executive Officer. 16 SECTION 5. VICE PRESIDENT. Each Vice President shall perform such -------------- duties as may be assigned to him by the Board of Directors. The Board of Directors may appoint an Executive Vice President who shall be senior to all other officers of the Corporation and its subsidiaries except the Chairman of the Board and the President. Vice Presidents other than the Executive Vice President shall rank in order of seniority in position, except as the Board of Directors may otherwise determine. SECTION 6. TREASURER. The Treasurer shall have custody of all the --------- funds and securities of the Corporation. He shall endorse, on behalf of the Corporation, for collection, checks, notes and other obligations and shall deposit the same and all moneys and other valuable effects belonging to the Corporation to the credit of the Corporation in such bank or banks or depositories as the Board of Directors may designate. Whenever required by the Board, he shall render a statement of the Corporation's cash accounts. He shall perform all duties normally incident to the position of Treasurer. SECTION 7. SECRETARY. The Secretary shall be sworn to the faithful --------- discharge of his duty. He shall record all the proceedings of the meetings of the Corporation and the Board of Directors, and also (unless otherwise directed by such committee) the minutes of each committee in books to be kept for that purpose. He shall attend to the giving and serving of all 17 notices for the Corporation. He shall affix the seal of the Corporation to all contracts or other documents as required and shall attest the same. He shall have charge of the stock certificate books and other papers and books of the Corporation in such manner as the Board may direct; and he shall in general perform all the duties incident to the office of Secretary. SECTION 8. ASSISTANTS. There may be one or more Assistant ---------- Secretaries or Assistant Treasurers who shall act in the absence or inability to act of the Secretary or Treasurer, as the case may be, in order of seniority in position, and perform such other duties as may be determined by the Board of Directors. SECTION 9. OTHER OFFICERS. The Board of Directors may appoint a -------------- Controller, an Assistant Controller or other officers from time to time to perform such duties as the Board may determine. SECTION 10. REMOVAL. The Board of Directors may remove any officer ------- or member of a committee by a majority vote of those directors attending a duly constituted meeting of the Board, at any time with or without cause. 18 SECTION 11. BONDING. The Board of Directors may require that the ------- Treasurer or any Assistant Treasurer be bonded in such form and amount and with such surety or sureties as the Board may require for the faithful discharge of his duties. ARTICLE VI CAPITAL STOCK ------------- SECTION 1. FORM AND EXECUTION OF CERTIFICATES. The certificates of ---------------------------------- shares of the capital stock of the Corporation shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board or the President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. SECTION 2. CERTIFICATES TO BE ENTERED. All certificates shall be -------------------------- consecutively numbered and names of the owners and numbers of shares and the date of issue shall be entered in the Corporation's books. SECTION 3. TRANSFER OF SHARES. Shares shall be transferable upon the ------------------ books of the Corporation in person or by attorney, upon surrender of certificates for a like number of shares. Surrendered certificates shall be cancelled. 19 SECTION 4. FIXING RECORD DATE. For the purpose of determining the ------------------ stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or allotment of any right, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall be not more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. SECTION 5. LOST CERTIFICATES. No new certificates shall be issued ----------------- upon a transfer of stock until the former certificates for a like number of shares shall have been surrendered and cancelled; and in case the former certificates shall have been lost or destroyed, no new certificates shall be issued except upon the receipt of a satisfactory bond, the giving of which bond, however, may be waived by the Board of Directors in its discretion. SECTION 6. TRANSFER AGENT AND REGISTRAR. The Board may make such ---------------------------- rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Corporation. 20 ARTICLE VII SECTION 1. BOARD OF DIRECTORS. The Board of Directors in its ------------------ discretion, from time to time, may declare and pay dividends upon the shares of the capital stock of the Corporation, as and to the extent permitted by applicable law and by any agreements to which the Corporation is a party or by which it may be bound; and may fix and change the dates for the declaration and payment thereof. SECTION 2. VOTING OF STOCK. Unless otherwise ordered by the Board of --------------- Directors, the Chairman of the Board or such officers as he may designate shall have full power and authority to attend, act and vote or give proxies to vote at any meeting of stockholders of any corporation in which the Corporation may hold stock and may exercise any and all rights and powers incident to such ownership for and on behalf of the Corporation. ARTICLE VIII SEAL ---- SECTION 1. SEAL. The seal of the Corporation shall be a printed, ---- engraved, stamped or embossed impression, either in form, containing the name of the Corporation, year of its creation, and the words "Corporate Seal, Delaware", or other 21 appropriate words. The Secretary shall cause to be prepared a suitable seal press bearing such design. ARTICLE IX FISCAL YEAR ----------- SECTION 1. FISCAL YEAR. The fiscal year of the Corporation, unless ----------- otherwise determined by the Board of Directors, shall begin on the first day of July of each year. ARTICLE X NEGOTIABLE INSTRUMENTS ---------------------- SECTION 1. NEGOTIABLE INSTRUMENTS. All promissory notes issued in ---------------------- the name of the Corporation shall be signed, and all promissory notes made to the order of the Corporation, if negotiated, shall be endorsed and all checks, drafts and orders for the payment of money issued in the name of the Corporation shall be signed by such officer, officers, employee, employees, agent or agents of the Corporation as the Board of Directors may from time to time direct. 22 ARTICLE XI NOTICE AND WAIVER OF NOTICE --------------------------- SECTION 1. NOTICE. Any notice required to be given by these by-laws, ------ except such published notice as may be required by statute, may be given by mailing the same addressed to the person entitled thereto, at his or her address as shown on the Corporation's books, unless he or she shall have filed with the Secretary of the Corporation a written request that notices intended for him or her be mailed to some other address, in which case it shall be mailed to the address designated in such request. Any such notice shall be deemed to be given at the time of such mailing. SECTION 2. WAIVER OF NOTICE. Any stockholder, director or officer ---------------- may waive, in writing, any notice required to be given by these by-laws. ARTICLE XII AMENDMENTS ---------- SECTION 1. AMENDMENTS. By-laws may be made, altered, amended, ---------- suspended or rescinded at any duly convened meeting of the stockholders upon the affirmative vote of the holders of a majority of the stock present and voting at such meeting. At a special meeting of the stockholders, such action can only be 23 taken if the substance of the proposed change is set forth in the notice of the meeting. By-laws may also be made, altered, amended, suspended or rescinded by the Board of Directors, at any duly convened meeting thereof upon the affirmative vote of a majority of the directors present at such meeting, subject to the right of the stockholders, by proper action to alter, amend or repeal the by-laws. ARTICLE XIII SECTION 1. The Corporation hereby elects not to be governed by the provisions of Section 203 of the General Corporation Law of Delaware. SECTION 2. Notwithstanding the provisions of Article XII of these by- laws, Section 1 of this Article XIII may not be further amended by the Board of Directors. 24 EX-10.(E) 3 EXTENSION OF EMPLOYMENT AGREEMENT WITH G. DUNN EXHIBIT 10(e) EXTENSION OF EMPLOYMENT AGREEMENT This extension agreement is made and entered into as of November 14, 1996, by and between Transworld Systems Inc., a California Corporation (the "Company") and Gordon Dunn ("Dunn"). WHEREAS, on July 1, 1995 Dunn entered into an Employment Agreement with the Company, (the "Employment Agreement") to which Employment Agreement The Union Corporation, a Delaware corporation is also a party; and WHEREAS, Dunn and the Company both wish to extend the Employment Agreement for an additional one year from July 1, 1997 through June 30, 1998, NOW THEREFORE, the parties agree as follows: FIRST: The Employment Agreement is extended for an additional period of one year so that the termination date as set forth in paragraph (A)(1) of Article SECOND of the Employment Agreement shall be June 30, 1998 instead of June 30, 1997. SECOND: The first sentence of paragraph (B)(1) of Article THIRD is amended to read as follows: "The Company shall also pay production/incentive bonuses to Dunn for each full twelve (12) month period commencing July 1, 1995, July 1, 1996, and July 1, 1997 as set forth in Schedule 1 annexed hereto." THIRD: The references in paragraphs (B)(2), (B)(3), (E) and (F) of Article THIRD to "June 30, 1997" are amended to read "June 30, 1998" and the references in paragraphs (E) and (F) of Article THIRD to "June 30, 2000" are amended to read "June 30, 2001." FOURTH: Paragraph (A) of Article FOURTH of the Employment Agreement is amended in full to read as follows: "FOURTH: A. The Company has paid the premiums on a split dollar policy of life insurance in the face amount of $2 million, with Transamerica Occidental Life Insurance Company, Policy Number 92520289 (the "Policy"). The insureds under this Policy are Gordon Dunn and his wife Joanne Dunn. The Policy is currently owned as follows: "TRANSWORLD SYSTEMS, INC. except the owner of the right to designate the ------------------------ beneficiary for any proceeds in excess of the greater of the accumulation value or its total premiums paid on this policy from the date of issue to the date of death of the insured, shall be JOANNE C. DUNN." -------------- The cost of all premiums payable on the Policy shall be borne by the Company until the termination of Dunn's employment with the Company under the circumstances set forth below. Upon termination of this Agreement on or after June 30, 1998, or upon termination by reason of his mental or physical incapacity as provided in paragraph (B)(2) of Article SECOND or pursuant to the provisions of paragraph (C) of Article SECOND or paragraph (D) of Article THIRD, the Company shall thereupon have no further obligation to pay any premiums on the policy and cause ownership of the Policy, or any replacement policy, to be transferred to the individual owner(s), subject only to the Company's right to return of the premiums that the Company has paid from the proceeds of the Policy when such proceeds are paid, or from the cash value of the Policy if it should be cashed in before the death of the insured. The Company shall have the right to receive reasonable assurances (including an irrevocable endorsement if appropriate/available) from the 2 individual owner(s) that the Company will be paid such amounts. It is acknowledged and agreed that the obligations of the Company under this paragraph only relate to the payment of the premiums in respect of the policy and the transfer of the ownership of the policy as provided herein. The Company shall have no further obligations with respect to the policy and it shall be Dunn's responsibility to take whatever actions may be necessary to keep the policy in effect. FIFTH: Paragraph (A) of Article FIFTH is clarified and amended as follows: Dunn hereby acknowledges that (i) all bonuses referred to in paragraph (A) of Article FIFTH of the Employment Agreement have, as of the date of this extension agreement, been contributed to a Rabbi Trust, and all of the amounts of assumed interest thereon prior to the date or dates of contribution (based upon United States Treasury obligations) have also been contributed to the Rabbi Trust, (ii) the amount of deferred compensation hereafter due to Dunn under paragraph (A) of Article FIFTH of the Employment Agreement shall be based upon the actual income, earnings and losses of the amounts held by the Rabbi Trust and (iii) subject to the provisions of paragraphs (B), (C) and (D) of Article FIFTH and Dunn's rights in the event of the Company's Insolvency (as defined in the Rabbi Trust Agreement), the Company and Union have no further obligation whatsoever to Dunn related to the bonuses described in paragraph (A) of Article FIFTH. The last sentence in paragraph (A) of Article FIFTH is hereby deleted. SIXTH: The references in paragraphs (A)(1), (B) and (C) of 3 Article SIXTH to "fifth (5th)" are amended to read "sixth (6th)." SEVENTH: Paragraph (C)(7) of Article THIRD and paragraph (B) of Article FIFTH of the Employment Agreement are clarified and modified as set forth in this Section SEVENTH. The Company shall contribute all amounts previously accrued under paragraph (C)(7) of Article THIRD (the non-qualified retirement plan) including accrued interest, to the Rabbi Trust established pursuant to paragraph (A) of Article FIFTH and as described in Section FIFTH above. With respect to amounts payable under paragraph (C)(7) of Article THIRD, the parties agree that the Employee must be employed by the Company on June 30 of each fiscal year to earn the non-qualified retirement plan contribution for the applicable fiscal year. Subject to the foregoing, the Company agrees to contribute, for the fiscal years ending June 30, 1997 and 1998, amounts earned under paragraph (C) (7) of Article THIRD to the Rabbi Trust no later than July 15 following the end of the fiscal year for which it is earned. The Trustee shall be instructed to retain separate records with respect to such contributions and any income, gains, losses and expenses with respect thereto. A. The administrative costs and expenses with respect to establishing and maintaining such Rabbi Trust shall be paid by the Company and shall not be deducted from the Rabbi Trust. However, the Company shall not be obligated to pay for any costs, expenses or losses relating to the purchases, sales or holding of assets and investments by the Rabbi Trust, which costs, expenses and losses shall be borne solely by the Rabbi Trust. B. Subject to the Employee satisfying the employment 4 requirements hereunder, the Company's only obligations to the Employee and his beneficiaries, heirs and estate regarding paragraph (C)(7) of Article THIRD is to (i) establish and maintain the Rabbi Trust, (ii) contribute to the Rabbi Trust all amounts previously earned, including all accrued interest due thereon, (iii) contribute $30,000 to the Rabbi Trust no later than each July 15th during the remaining term of the Employment Agreement and (iv) pay the administration costs and expenses in accordance with paragraph A. of this Section SEVENTH. The Employee and Company hereby acknowledge and agree that all gains, losses, earnings and expenses relating to the purchases, sales or holding of assets and investments of the Rabbi Trust shall enure to the benefit or detriment of the Employee and that, subject to the Employee's rights in the event of the Company's Insolvency (as defined in the Rabbi Trust Agreement), the payment by the Company of the administrative expenses described in paragraph A. above and the payment of the applicable annual contribution(s) to the Rabbi Trust in accordance with this paragraph B. shall relieve the Company of any and all of its obligations under paragraph (C)(7) of Article THIRD and this Section SEVENTH. The amounts that the Company contributes to the Rabbi Trust shall be an asset of the Company and shall be subject to the claims of the Company's general creditors. C. The words "sum retained by the Company" set forth in paragraph (B)(1) of Article FIFTH shall hereinafter mean "amounts contributed into the Rabbi Trust pursuant to this Agreement." EIGHTH: Except as amended above, all of the terms and conditions of the Employment Agreement shall remain in full force 5 and effect. Dated ____________________ TRANSWORLD SYSTEMS, INC. /s/ GORDON S. DUNN By:/s/ GEORGE MACAULAY - ------------------------------ ----------------------- Gordon S. Dunn George Macaulay President THE UNION CORPORATION By:/s/ MELVIN L. COOPER ----------------------- Melvin L. Cooper Chairman of the Board and Chief Executive Officer 6 EX-10.(F) 4 EXTENSION OF EMPLOYMENT AGRMT WITH G. MACAULAY EXHIBIT 10(f) EXTENSION OF EMPLOYMENT AGREEMENT This extension agreement is made and entered into as of November 14, 1996, by and between Transworld Systems Inc., a California Corporation (the "Company") and George Macaulay (the "Employee"). WHEREAS, the Employee is currently employed by the Company under a contract dated July 1, 1995 (the "Employment Agreement"); and WHEREAS, the Company and the Employee have agreed (a) to extend the Employment Agreement for an additional two (2) years and (b) to amend the Employment Agreement as extended in the manner hereafter set forth, NOW THEREFORE, in consideration of the premises and mutual promises and agreements hereinafter set forth, the parties hereby agree that the Employment Agreement is extended and amended as follows: 1. The first line of paragraph (B) of Article FIRST is amended to read as follows: "(B) The Employee shall serve as the President and Chief Executive Officer". 2. The date "June 30, 1997" in paragraphs (A) and (C) of Article SECOND and paragraphs (F) and (G) of Article THIRD is amended to read "June 30, 1999." 3. The following sentence is added to paragraph (B)(i) of Article THIRD: "Subject to the terms of this Employment Agreement, for each of the Fiscal Years of the Company ending June 30, 1998 and June 30, 1999, the Employee also shall be entitled to receive bonuses as set forth in Schedule 2, annexed hereto." 4. Paragraph (B)(ii) of Article THIRD is amended to read in full as follows: "(ii) For purposes hereof, "Adjusted Pretax Income" shall mean the net income of the Company and its subsidiaries, if any, as reported to Union for the twelve (12) months ended June 30, before Federal and state income taxes, and before (a) goodwill amortization expense, (b) bonus expense for Gordon Dunn, (c) Employee's bonus expense in respect of periods after July 1, 1995, (d) mortgage interest expense, if any, related to the land and buildings that are currently owned by the Company in Rohnert Park, California, and (e) any payment made by the Company to Gordon Dunn pursuant to Article FOURTH (C) of Gordon Dunn's Employment Agreement with the Company." 5. The following is added to paragraph (B)(iii) of Article THIRD: ",except that the Company shall contribute for each full fiscal year after June 30, 1997 during which Employee is employed hereunder Thirty Thousand Dollars ($30,000) to such non-qualified retirement plan established for him." 6. Paragraph (D) of Article THIRD is amended to read in full as follows: "(D) The Company shall procure and keep in force during the term of this Agreement for the benefit of the Employee a policy of term, "split dollar" or other life insurance, to be determined at the sole discretion of the chief executive officer of The Union Corporation, in the face amount of $1,000,000, provided that such insurance can be obtained by the Company at a commercially reasonable cost. The Company shall pay all of the premiums payable on such insurance, provided that the Company shall only be required to pay the normal rate for "non-rated" males of the Employee's age, and all or portion of the cost of such premiums shall be additional compensation to the Employee. Any such compensation shall not be deemed to be "Base Salary" for the purposes of this Agreement. The beneficiary of such insurance shall be designated by the Employee, and the owner of the insurance policy shall be the Employee or his assigns. The Employee agrees to submit to any physical examination required by any prospective insurer, and will otherwise cooperate with the Company in connection with any insurance on the Employee which the Company may wish to obtain. If a "split dollar" policy has been obtained, the Company shall have the right to return of the premiums that the Company has paid from the proceeds of the policy when such proceeds are paid or from the cash value of the policy, if any, if the policy shall be cashed in before the death of the insured, and the Company 2 shall have the right to receive reasonable assurances (including an irrevocable endorsement if appropriate/available) from the owner of the policy that the Company will be paid such amounts. It is acknowledged and agreed that the obligations of the Company under this paragraph only relate to the payment of the premiums in respect of the policy as provided herein. The Company shall have no further obligations with respect to the policy and it shall be Employee's responsibility to take whatever actions may be necessary to keep the policy in effect." 7. In each place where the date "June 30, 1999" appears in paragraphs (F) and (G) of Article THIRD, it shall be replaced with the date "June 30, 2001." 8. The following paragraphs (H) and (I) shall be added to Article THIRD: "(H) Upon the Employee's retirement from regular employment with the Company, he will receive at the Company's expense medical insurance coverage comparable to the present plan of the Company for the remainder of his life; provided that if the cost of such coverage exceeds the normal rate for non-rated males of the Employee's age, the Employee will be required to reimburse the Company for the amount of such excess." "(I) The Union Corporation will recommend to its Stock Option Committee that Employee be granted an option to purchase Twenty-Five Thousand (25,000) shares of The Union Corporation common stock. If such option is granted by the Stock Option Committee, the exercise price and other terms and conditions of such option shall be determined by the Committee at the time of grant." 9. The attached Schedule 2 is added to the Employment Agreement. 10. Paragraph (B)(iii) of Article THIRD is clarified and modified as set forth in this Section 10. The Company shall contribute all amounts previously earned, including all accrued interest, under paragraph (B)(iii) of Article THIRD to a Rabbi Trust. With respect to amounts hereafter payable under paragraph 3 (B)(iii) of Article THIRD the parties agree that the Employee must be employed by the Company on June 30 of each fiscal year to earn the non-qualified retirement plan contribution for the applicable fiscal year. Subject to the foregoing, the Company agrees to contribute beginning with the fiscal year ending June 30, 1997, amounts earned under paragraph (B)(iii) of Article THIRD to the Rabbi Trust no later than July 15 following the end of the fiscal year for which it is earned. The Trustee shall be instructed to retain separate records with respect to such contributions and any income, gains, losses and expenses with respect thereto. A. The administrative costs and expenses with respect to establishing and maintaining such Rabbi Trust shall be paid by the Company and shall not be deducted from the Rabbi Trust. However, the Company shall not be obligated to pay for any costs, expenses or losses relating to the purchases, sales or holding of assets and investments by the Rabbi Trust, which costs, expenses and losses shall be borne solely by the Rabbi Trust. B. Subject to the Employee satisfying the employment requirements hereunder, the Company's only obligations to the Employee and his beneficiaries, heirs and estate regarding paragraph (B)(iii) of Article THIRD is to (i) establish and maintain the Rabbi Trust, (ii) contribute to the Rabbi Trust all amounts previously earned, including all accrued interest due thereon, (iii) contribute $15,000 to the Rabbi Trust no later than July 15, 1997 and to contribute $30,000 to the Rabbi Trust by each July 15th thereafter during the term of this Employment Agreement 4 and (iv) pay the administration costs and expenses in accordance with paragraph A. above. The Employee and Company hereby acknowledge and agree that all gains, losses, earnings and expenses relating to the purchases, sales or holding of assets and investments of the Rabbi Trust shall enure to the benefit or detriment of the Employee and that, subject to the Employee's rights in the event of the Company's Insolvency (as defined in the Rabbi Trust Agreement), the payment by the Company of the administrative expenses described in paragraph A. of this Section 10 and the payment of the applicable annual contribution(s) to the Rabbi Trust in accordance with this paragraph B. shall relieve the Company of any and all of its obligations under paragraph (B)(iii) of Article THIRD and this Section 10. The amounts that the Company contributes to the Rabbi Trust shall be an asset of the Company and shall be subject to the claims of the Company's general creditors. C. The Employee shall have the right to designate a beneficiary of all of the amounts payable pursuant to paragraph (B)(iii) of Article THIRD and this Section 10 in the event of his death and to change any beneficiary previously designated by him. Such designation shall be made by delivering to the Chief Financial Officer of the Company a writing dated and signed by the Employee setting forth the name and address of the person or persons so designated. Upon the death of the Employee, any amounts payable from the Rabbi Trust shall be paid in accordance with such Trust Agreement and this paragraph C. to the beneficiary or beneficiaries designated by the Employee, or, failing such designation, to his 5 estate. Upon the termination of the Employee's regular employment with the Company, the entire amount then allocated to his account in the Rabbi Trust, including all earnings and accretions thereto, net of all losses and expenses required to be borne by the Rabbi Trust pursuant to paragraph A. of this Section 10, shall be paid to the Employee (or his beneficiary or beneficiaries if such termination occurs as a result of the death of the Employee) under one of the following options that the Employee or such beneficiary or beneficiaries, or failing a designated beneficiary or beneficiaries, the Employee's legal representatives, shall select within thirty (30) days after said termination of employment: 1. Such amount shall be paid in monthly installments as nearly equal as practicable over a designated number of months as specified by the person entitled to select the option, not exceeding thirty-six (36) months, commencing thirty (30) days after the termination of the Employee's regular employment with the Company, provided that no monthly installment except the last shall be less than $1,000; or 2. Such amount may be applied to the purchase of an immediate or deferred life annuity contract on the sole life of the Employee, or jointly on the lives of the Employee and the beneficiary designated by the Employee pursuant to this paragraph C; or 3. Such amount may be paid forthwith in a lump sum. If more than one beneficiary is designated and the Employee's 6 spouse is a beneficiary, the option shall be selected by her if she survives him, and otherwise by a majority of the beneficiaries. IN WITNESS WHEREOF, each of the parties hereto has executed this Extension of Employment Agreement as of the day and year first above written. TRANSWORLD SYSTEMS INC. /s/ GEORGE MACAULAY By:/s/ GORDON S. DUNN - ------------------------------ ----------------------- George Macaulay Gordon S. Dunn Chairman 7 SCHEDULE 2 GEORGE MACAULAY EMPLOYMENT AGREEMENT BONUS SCHEDULE FOR FISCAL YEARS ENDED JUNE 30, 1998 AND 1999 I. The maximum bonus for the Employee for any fiscal year is Six Hundred Thousand Dollars ($600,000). II. For fiscal years ending in 1998 and 1999, there are four components to the Employee's bonus, two Adjusted Pretax Income ("API") components and two other components, as follows: A. First API Component: ------------------- If Transworld's The minimum bonus API equals or exceeds based on the API Fiscal Years the following amount: component is: - ------------ -------------------- ------------- 1998 & 1999 $14,000,000 $300,000 B. Second API Component: -------------------- If API increases by the following % amounts over the API The additional bonus for the preceding based on the Fiscal Years fiscal year: API component is: - -------------- -------------------- -------------------- 1998 & 1999 10.0% $105,000 15.0% $157,500 20.0% $210,000 C. Pretax Margin Component (Maximum $45,000) ----------------------------------------- If Transworld's consolidated Pretax Margin is 20.0% or more, then the Employee will be paid an additional bonus of $45,000. "Pretax Margin" for purposes hereof shall mean, for any fiscal year, the percentage derived by dividing the annual pretax income reported by Transworld to Union (which will differ from Transworld's API for such year) by the revenues of Transworld for such year. "Annual pretax income" shall mean the net income of Transworld and its subsidiaries, if any, as reported to Union before Federal and state income taxes and before (a) goodwill amortization expense, (b) mortgage interest expense, if any, related to the land and buildings that are currently owned by the Company in Rohnert Park, California, and (c) any expense related to the 8 payment, if any, made by the Company to Gordon Dunn pursuant to Article FOURTH (C) of Gordon Dunn's Employment Agreement with the Company. D. Discretionary Component (Maximum $45,000) ----------------------------------------- Each year George Macaulay and the CEO of Union Corporation will agree on the factors that will constitute the discretionary component. 9 EX-10.(H) 5 EXTENSION OF EMPLOYMENT AGRMT WITH N. GILL EXHIBIT 10(h) August 27, 1996 Reference is made to the Employment Agreement dated as of March 22, 1995 ("Agreement") between you and The Union Corporation (the "Company"). It is hereby agreed that the Agreement is hereby amended to extend the term of the Agreement, as provided in Article SECOND (A), from June 30, 1997 to June 30, 2000. In all other respects, the Agreement, as amended, shall continue in full force and effect. Please signify your agreement with the foregoing by countersigning this letter in the space provided below. Very truly yours, THE UNION CORPORATION By /s/ Melvin L. Cooper --------------------------------- Melvin L. Cooper Chairman ACCEPTED AND AGREED: /s/ Nicholas P. Gill - ----------------------------- Nicholas P. Gill EX-10.(I) 6 AMENDMENT TO ALLIED BOND ASSET PURCHASE AGRMT EXHIBIT 10(i) November 14, 1996 Reference is made to: (i) the Asset Purchase Agreement dated as of December 1, 1992 and Amendment to Asset Purchase Agreement dated July 30, 1993 (collectively, the "Purchase Agreement") by and among Allied Bond & Collection Agency, a Pennsylvania general partnership, Bernard Silver and Herbert R. Silver (collectively referred to in this letter as the "Partners"), The Union Corporation, a Delaware corporation ("Union"), and Allied Bond & Collection Agency, Inc., a Delaware corporation (the "Company"), and (ii) the employment agreements dated as of December 1, 1992 (the "Employment Agreements") by and among the Company, Union and each of the Partners. Unless otherwise defined herein, the capitalized terms used herein shall have the meaning ascribed thereto in the Purchase Agreement and/or Employment Agreements. -2- This will confirm that, effective as of the date hereof, the Purchase Agreement and the Employment Agreements shall be deemed amended in the following respects: (1) The parties hereto agree that, for purposes of determining Tier- One Additional Consideration and Tier-Two Additional Consideration payable to the Partners pursuant to Section 1.5 of the Purchase Agreement, as well as calculation of the bonus payable to each of the Partners pursuant to Section (B) of Article THIRD of the respective Employment Agreements, Adjusted Pretax Income of the Company for any fiscal period commencing on and after July 1, 1995 shall include the pretax income of Interactive Performance, Inc. ("IPI"), a wholly- owned subsidiary of Union incorporated in connection with the performance of certain services on behalf of AT&T Corp. ("AT&T"), adjusted to exclude (A) revenues and profits generated by IPI in connection with all non-accounts receivable collection activities performed on behalf of AT&T ("Non-ARC Services") and (B) the results of IPI's wholly-owned subsidiary, Interactive Performance of Florida, Inc. ("IP of Florida"), and any other subsidiary of IPI unless otherwise agreed to in writing by Union (as adjusted, such pretax income shall hereinafter be referred to as "IPI Pretax Income"). IPI Pretax Income for any period shall include, in addition to all income and expenses which are included in the general ledger or other books and records of IPI (excluding those -3- of IP of Florida and revenues and expenses associated with Non-ARC Services), (i) all reasonable and proportional costs incurred by Union and/or any affiliates of Union on behalf of IPI during such period in connection with the performance of services by IPI on behalf of AT&T, including but not limited to insurance, tax preparation, travel and auditing services , (ii) an interest charge with respect to any funds of Union and/or any affiliates of Union advanced to or on behalf of, or otherwise utilized by, IPI, which charge will be calculated utilizing the interest rate charged to Union (as may be adjusted from time to time) on amounts which Union has borrowed under that certain Amended and Restated Revolving Credit Agreement dated as of December 31, 1994 (the "Credit Agreement") between Union and The First National Bank of Boston, as amended, or amounts borrowed under whatever may be Union's principal working capital lending facility if First National Bank of Boston is no longer the principal lender to Union (or, in the event Union has no borrowings outstanding under the Credit Agreement or successor working capital facility during any period for which an interest calculation is required under this Agreement, the parties shall utilize the interest rate that would have been applied under the Credit Agreement or successor facility had borrowings been outstanding during such period), (iii) 12.5% of the cost of all compensation and benefits payable by Union and any of its affiliated companies to William B. Hewitt during such period, excluding the non-discretionary -4- bonus which may be earned by Mr. Hewitt during such period pursuant to Paragraph (B)(i) of Article THIRD of the employment agreement dated as of July 1, 1995 by and among Union, Capital Credit Corporation and Mr. Hewitt (and any similar bonus which may be earned by Mr. Hewitt in any subsequent employment agreement entered into by him with Union and/or any of its affiliated companies), but in no event shall the charge required by this clause (iii) exceed $50,000 in any year, and (iv) 5% of the cost of all compensation and benefits payable by Union and any of its affiliated companies to Nicholas P. Gill, but in no event shall the charge required by this clause (iv) exceed $10,000 in any year. (2) Paragraph (B)(i) of Article THIRD of each of the respective Employment Agreements shall be amended to read in its entirety as follows: "(B) (i) Employee shall receive a bonus for each fiscal year ended June 30 ("Fiscal Year") commencing with the Fiscal Year ending in 1993, calculated as a percent of Base Salary in accordance with the table attached hereto as Exhibit A. Such percent shall be determined by comparing the Company's current Fiscal Year Adjusted Pretax Income with the greater of (a) the highest Adjusted Pretax Income in any Fiscal Year during the period of employment hereunder and (b) $4,621,452, which is the annual income of Allied Bond & Collection Agency ("AB&CA") for the calendar year 1992 on which the purchase price for the acquisition of the business and assets of AB&CA (the "Acquisition") is based ("1992 AB&CA Adjusted Pretax Income"). For purposes of the first Fiscal Year hereunder, the basis of comparison will be such portion of the 1992 AB&CA Adjusted Pretax Income as is -5- determined by multiplying the 1992 AB&CA Adjusted Pretax Income by a fraction, the numerator of which shall be the number of days from and after the date of closing of the Acquisition through and including June 30, 1993 and the denominator of which is 365. "Adjusted Pretax Income" for purposes of this Agreement (other than 1992 AB&CA Adjusted Pretax Income) shall be determined in accordance with the provisions applicable to the determination of Adjusted Pretax Income of Purchaser set forth in the Asset Purchase Agreement dated as of December 1, 1992 by and among Union, Purchaser, Employee, the Co-Chairman and AB&CA (the "Asset Purchase Agreement") relating to the Acquisition as amended for Fiscal Years beginning on and after July 1, 1992 by the provisions of that certain letter agreement dated November 14, 1996 by and among Union, Purchaser, Employee and the Co-Chairman, except that any bonus expense payable to Employee and the Co-Chairman hereunder shall not be deducted for purposes of determining Adjusted Pretax Income under this Agreement." Each of the Partners acknowledges that no bonus has been earned by him under Section (B) of Article THIRD of his respective employment agreement for any fiscal year beginning with the fiscal year ended June 30, 1993. (3) Exhibit A shall be amended to read in its entirety as follows: "EXHIBIT A Each principal will receive an annual bonus which is calculated as a percent of his base salary. The bonus percent will be based on the percent increase in the Company's current year Adjusted Pretax Income versus the greater of (a) the highest Adjusted Pretax Income for each fiscal year during the period ending June 30, 1998, and (b) $4,621,452, which is the 1992 AB&CA Adjusted Pretax Income. (See table below.) -6- ===================================================== INCREASE IN % OF BASE SALARY TO BE PAID ADJUSTED PRETAX INCOME AS BONUS - ----------------------------------------------------- less than 10% 0% - ----------------------------------------------------- 10% to 20% 2 x Increase % - ----------------------------------------------------- 21% to 25% 4 X Increase % - ----------------------------------------------------- 26% to 30% 6 X Increase % - ----------------------------------------------------- greater than 30% 7 X Increase %" ===================================================== (4) Herbert R. Silver acknowledges that the Company and Union have satisfied their obligation to him to provide the life and disability insurance required to be furnished to him pursuant to Section (F) of Article THIRD of his Employment Agreement by offering to make such insurance available to him, he has elected to forego such insurance through the remainder of the term of the Employment Agreement and is waiving any and all rights he had or has, now or in the future, under the Employment Agreement to such insurance. Bernard Silver acknowledges that the Company and Union have satisfied their obligation to him to provide the disability insurance required to be furnished to him pursuant to Section (F) of Article THIRD of his Employment Agreement by offering to make such insurance available to him, he has elected to forego such insurance through the remainder of the term of the Employment Agreement and is waiving any and all rights he had or has, now or in the future, under the Employment Agreement to such insurance. Concerning the life insurance -7- benefit to which he is still entitled under the Employment Agreement, Bernard Silver acknowledges that the obligations of Union and the Company with respect to such insurance only relate to the payment of the premiums in respect of such insurance, and it shall be Bernard Silver's responsibility to take whatever actions may be necessary to keep such insurance in effect. (5) The parties hereto agree that, for a period of five years following termination of their respective employment with the Company (except if such termination is by the Company for Cause), each Partner and his spouse will continue to be covered, at the Company's expense, under the Company's group medical insurance coverage in which they are participants at the time of termination (which coverage will be an indemnity-based, fee-for-service medical plan and will not utilize a "gatekeeper" primary care physician component common in health maintenance organizations), provided they are eligible for inclusion in such group coverage. In addition, each of the Partners (or if such Partner dies during the five year period referred to above, his respective spouse), shall have the right to elect to discontinue participation in the Company's group medical plan and arrange for medical insurance of his or her own choosing. In the event (i) a Partner or spouse either (a) is not eligible or becomes ineligible for participation in the Company medical insurance plan or (b) elects to discontinue participation in the plan, or -8- (ii) the Company terminates such group medical insurance plan, the only obligation of the Company under this Section 5 will be to pay the applicable Partner or spouse (as the case may be) an amount equal to the monthly insurance premium paid by the Company in respect of the Partner (and/or spouse) under the Company plan at the time of the occurrence of either (i) or (ii), as the case may be, which amount shall be fixed at the time of such occurrence and shall be paid each month thereafter to the Partner or spouse, as the case may be, for the remainder of the five year period referred to above. In all other respects, the Purchase Agreement and Employment Agreements shall remain in full force and effect. -9- Please acknowledge your agreement with the foregoing by countersigning this letter in the space provided below. THE UNION CORPORATION By:/s/ MELVIN L. COOPER ------------------------- Name: Melvin L. Cooper Title: Chairman ALLIED BOND & COLLECTION AGENCY, INC. By:/s/ SHELDON ZUCKER ------------------------- Name: Sheldon Zucker Title: Executive Vice President AGREED: /s/ BERNARD SILVER - ----------------------- Bernard Silver /s/ HERBERT R. SILVER - ----------------------- Herbert R. Silver EX-11 7 DETERMINATION OF INCOME PER COMMON SHARE EXHIBIT 11 THE UNION CORPORATION AND SUBSIDIARIES Determination of Primary and Fully Diluted Income Per Common and Common Equivalent Share (In thousands, except per share amounts) For the Year Ended June 30, ---------------------------
1997 1996 ---------------------------------- ----------------------------------- Number of Income Per Share Number of Income Per Share Shares Net of Taxes Amount Shares Net of Taxes Amount --------- ------------ --------- --------- ------------ --------- Primary: - -------- Average common shares (based on weighted average number of shares outstanding) 5,720 5,611 Common stock equivalents (stock options) 186 180 ----- ----- Income from continuing operations 5,906 $8,096 $1.37 5,791 $ 6,519 $1.13 ===== ===== Discontinued operations loss provision (net of $935 and $2,800 tax benefit) - - - 5,791 (2,065) (.36) ===== ------ ----- ===== ------- ----- Net income 5,906 $8,096 $1.37 5,791 $ 4,454 $ .77 ===== ====== ===== ===== ======= ===== Fully Diluted: - -------------- Average common shares (based on weighted average number of shares outstanding) 5,720 5,611 Common stock equivalents (stock options) 236 225 ----- ----- Income from continuing operations 5,956 $8,096 $1.36 5,836 $ 6,519 $1.12 ===== ===== Discontinued operations loss provision (net of $935 and $2,800 tax benefit) - - - 5,836 (2,065) (.35) ===== ------ ----- ===== ------- ----- Net income 5,956 $8,096 $1.36 5,836 $ 4,454 $ .77 ===== ====== ===== ===== ======= ===== 1995 ---------------------------------- Number of Income Per Share Shares Net of Taxes Amount --------- ------------ --------- Primary: - -------- Average common shares (based on weighted average number of shares outstanding) 5,558 Common stock equivalents (stock options) 99 ----- Income from continuing operations 5,657 $5,707 $1.01 ===== Discontinued operations loss provision (net of $935 and $2,800 tax benefit) 5,657 (5,200) (.92) ===== ------ ----- Net income 5,657 $ 507 $ .09 ===== ====== ===== Fully Diluted: - -------------- Average common shares (based on weighted average number of shares outstanding) 5,558 Common stock equivalents (stock options) 168 ----- Income from continuing operations 5,726 $5,707 $1.00 ===== Discontinued operations loss provision (net of $935 and $2,800 tax benefit) 5,726 (5,200) (.91) ===== ------ ----- Net income 5,726 $ 507 $ .09 ===== ====== =====
EX-13 8 1997 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 1997 ANNUAL REPORT THE UNION CORPORATION [Photo omitted of a teleservice representative.] The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- COMPANY PROFILE: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A leader in its field, The Union Corporation furnishes a broad range of credit and receivables management outsourcing services to large and small businesses, and is positioned for greater growth as companies increasingly seek benefits that "outsourcing" provides. Through its subsidiaries -- Transworld Systems, Interactive Performance, High Performance Services, Allied Bond & Collection Agency, and Capital Credit -- The Union Corporation fills demanding clients' needs. Among them are: credit authorization, customer service, credit usage management, management and collection of accounts receivable, and a variety of related inbound and outbound call-center services. - -------------------------------------------------------------------------------- [Map omitted of the continental United States that shows the location of Transworld Systems' 133 Sales Offices and the Company's 27 Call-Centers.] - -------------------------------------------------------------------------------- TABLE OF CONTENTS 1....................................Financial Highlights 2....................................Report to Shareholders 5....................................Business Overview 11...................................Financials - -------------------------------------------------------------------------------- The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Company's financial performance was impressive in fiscal 1997. Operating profits rose 22%, revenues grew 17%, and earnings per share increased 21%. Equally important, the Company achieved a firm foothold during the year in a burgeoning new business known as "call-center outsourcing." [Graph omitted that shows the Revenues of the Company based on the following data: - ----------------------------------------- REVENUES Fiscal Years 1993-1997 ($ in millions) 93* 80.5 94 92.1 95 97.6 96** 103.7 97 121.7 - ----------------------------------------- * Fiscal year 1993 includes results of Allied Bond following its acquisition in December 1992. ** Fiscal year 1996 includes the results of Interactive Performance and High Performance Services since the commencement of their operations during the third and fourth fiscal quarters, respectively.] [Graph omitted that shows the Operating Income* of the Company's Subsidiaries based on the following data: - ---------------------------------------- OPERATING INCOME* FROM SUBSIDIARIES Fiscal Years 1993-1997 ($ in millions) 93** 12.0 94 14.2 95 16.9 96 17.3 97 21.3 - ---------------------------------------- * Represents operating income of Union's subsidiaries before goodwill and depreciation expenses related to purchase accounting adjustments. Also excludes Union's corporate office expenses. ** Fiscal year 1993 includes the results of Allied Bond following its acquisition in December 1992.] [Graph omitted that shows the Cash Generated* by the Company's Subsidiaries based on the following data: - ---------------------------------------- CASH GENERATED* BY SUBSIDIARIES Fiscal Years 1993-1997 ($ in millions) 93** 13.9 94 16.4 95 18.9 96 19.4 97 24.0 - ---------------------------------------- * Represents cash generated by Transworld Systems, Allied Bond, Capital Credit, Interactive Performance and High Performance Services, as measured by profit before taxes, amortization of goodwill and depreciation expense, and Union's corporate office expenses. ** Fiscal year 1993 includes the results of Allied Bond following its acquisition in December 1992.] - -------------------------------------------------------------------------------- 1 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- REPORT TO SHAREHOLDERS - -------------------------------------------------------------------------------- Fiscal 1997 was a pivotal year in the evolution of The Union Corporation; a year of change. - -------------------------------------------------------------------------------- The Company's financial performance was impressive. Operating profits rose 22%, earnings before interest, taxes, depreciation and amortization expense increased 20%, revenues grew 17%, and earnings per share increased 21%. Equally important, the Company achieved a firm foothold in a burgeoning new business known as "call-center outsourcing." It is a development for which we began to lay the foundation two years ago. Our 1995 annual report mentioned that the Company was "exploring" opportunities to provide outsourcing services to major corporations. Last year, we noted that contractual agreements had been signed with "three major outsourcing clients." Today, after more than a year of successful operation under those contracts, we are pleased to report that the Company has exceeded the expectations of our clients, in terms of both cost and performance, as evidenced by the comments of our two largest call-center clients, AT&T Corp. and Advanta Corp. (pages 7 and 10). With its well-established and respected position as a leader in the business of credit and accounts receivable management outsourcing, The Union Corporation is ideally positioned to benefit as the industry flourishes. To provide shareholders with a full appreciation of the Company's strategic objectives, it is worthwhile to look briefly at where outsourcing has been and where it is today. AN EXPANDED OBJECTIVE. The concept of outsourcing has been in place for years. The emphasis has recently changed, however, from reducing a company's in-house costs by hiring an outside provider to perform non-core business functions, rather than handling those functions within its own organization. Today it is recognized that in addition to helping to lower costs, a provider of specialized outsourced services can often do a better and more effective job than the company might do itself. For example, The Union Corporation's expertise in credit and accounts receivable management results in improved receivables recoveries and portfolio performance for companies that turn to us. These clients benefit from reduced write-offs and other savings that are in the aggregate a multiple of the operational cost savings. We refer to this as "portfolio leverage," and it has been a key to our success with a number of clients. [Graphic text box omitted that contains the following statement: The Company's financial performance was impressive. Operating profits rose 22%, earnings before interest, taxes, depreciation and amortization expense increased 20%, revenues grew 17%, and earnings per share increased 21%. Equally important, the Company achieved a firm foothold during the year in a burgeoning new business known as "call-center outsourcing."] - -------------------------------------------------------------------------------- 2 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Such rewards for existing and new clients were envisioned when your Company's management devised the new strategy to broaden our business base beyond traditional third-party accounts receivable management. It was seen that as deregulation affects telecommunications companies and firms in such fields as financial services and utilities, they would have to compete in a new, unfettered marketplace. Consequently, there will be a growing demand for the "portfolio leverage," improved customer care and lower costs that a specialized outsourcing firm can deliver. In addition, a new relationship develops between a company that turns to outsourcing to meet its objectives and the company that provides the needed services. The traditional relationship most likely would have been merely one of buyer and seller. Now it is more of a partnership, as each company works closely with the other toward the achievement of mutual goals. Currently serving as a provider of outsourced call-center services to such major clients as AT&T Corp., Lucent Technologies and Advanta Corp., Union is well on its way toward a principal goal: achieving a strong position in the growing outsourcing industry -- one that some forecasters believe will be a $100 billion market before the end of the 1990s. A STRONG FOUNDATION. Much of the foregoing emphasizes The Union Corporation's success in broadening its value as an outsourcing provider of services related to our traditional business. There should be no doubt, however, that a fundamental strength of the Company lies in the marketplace's acknowledgment of our leadership role in third-party accounts receivable management. Our expertise and proven skills in accounts receivable management -- furnished to long-term clients and an increasing number of new ones by our Transworld Systems, Allied Bond & Collection and Capital Credit subsidiaries -- contributed significantly to the improved financial results in fiscal 1997. IMPRESSIVE FINANCIAL PERFORMANCE. . The operating results for fiscal 1997 represent the highest revenue, operating income and earnings per share ever reported by the Company for any fiscal year since Union became a pure financial services company in 1989. . Consolidated revenue increased 17% to $121.7 million in fiscal 1997, compared with the prior year, reflecting record revenues at Transworld Systems, a 10% increase in revenues at Capital Credit and the inclusion of revenues from Union's call-center outsourcing services subsidiaries. . Operating income was $14.2 million in fiscal 1997, an increase of 22%, compared with the prior year. Fiscal 1997 primary earnings per share for Income from continuing operations increased to $1.37 per share, compared with $1.13 per share in fiscal 1996. . Cash generated* by the Company's operating subsidiaries, as measured by profit before taxes, amortization of goodwill and depreciation expense, and Union's corporate office expenses, was a record $24 million. . Union's financial condition remained strong and liquid at June 30, 1997, with cash and short-term investments of approximately $49 million, working capital of approximately $41 million and net worth of approximately $72 million. [Graphic text box omitted that contains the following statement: Cash generated* by the Company's operating subsidiaries was a record $24 million.] - -------------------------------------------------------------------------------- 3 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- STRENGTHENED MANAGEMENT. In other developments, your Company announced the appointment of Bill Hewitt as Chief Executive Officer in July 1997 and welcomed three new members to the Board of Directors. Mr. Hewitt, who joined The Union Corporation in 1991 as Chairman of Capital Credit, has served as President and Chief Operating Officer of Union since 1995. With skills and strengths that complement those of your Chairman, he is the architect of the Company's new expansion strategy and played a major role in establishing the High Performance and Interactive Performance subsidiaries. The Board of Directors elected Nicholas Gill Executive Vice President in recognition of his many contributions to the success of Union. Mr. Gill continues to serve as the Company's Chief Financial Officer. Joining the board are Herbert A. Denton, Robert A. Marshall, and James M. McCormick. Mr. Denton is the president and co-founder of Providence Capital, Inc. Mr. Marshall, a consultant to the financial services industry, formerly headed Advanta National Bank and was an executive vice president at its parent, Advanta Corp. Mr. McCormick is president and a founder of First Manhattan Consulting Group. Each new director has a well-earned reputation for his diligent efforts to increase shareholder value, and we are proud that they have chosen to work with us. In welcoming them, we take this opportunity to acknowledge the inestimable contributions made over years of long service by retiring board members John E. Angle and Stuart J. Northrop. The Union Corporation's management, shareholders, and employees have benefitted from their guidance and untiring efforts on behalf of the Company. We shall miss them both. ADDING IT UP. In view of what you have read to this point, it seems natural to have settled on the theme for this report that The Union Corporation is well- positioned for sustained growth ... . Well-positioned to continue to provide demanding clients with the superior results, high-quality performance, and variety of services they rely on in these increasingly competitive times ... . Well-positioned by its leadership status, top-flight operating management, and sound financial condition to expand successfully into new related areas of opportunity ... . Well-positioned to further maximize value for shareholders. We are confident of the Company's future, and we will continue to pursue strategies that will strengthen your Company and increase shareholder value in the years ahead. Respectfully, MELVIN L. COOPER WILLIAM B. HEWITT Melvin L. Cooper William B. Hewitt Chairman of the Board President and Chief Executive Officer September 16, 1997 - -------------------------------------------------------------------------------- 4 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Business Overview - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Beginning in fiscal 1995, The Union Corporation undertook to expand its business base beyond that of its traditional role of collecting past-due debt through "third-party intervention" into "call-center outsourcing" services. The Company has significant strengths in third-party collections such as: dedicated and well-trained people, experienced operating management, a proven track record of strong performance and service to our clients, and sophisticated nationwide collection systems. It has become increasingly apparent that many of those same resources can be of value to companies well before the need for third-party collections. . For example, our expertise in telephonic "call-center" communications can serve credit grantors early on to ascertain customers' creditworthiness, to gather data to maintain their account records, and to provide customer service. . Also, our accounts receivable management skills can be applied to perform "usage management." These skills come into play in advance of delinquency to determine whether select customers' credit usage and credit worthiness are cause for concern. Thus, a "warning flag" can be raised at any sign of trouble. . At the same time, our recognized proficiency in our core business continues to give credit grantor clients assurance of full control over the important element of accounts receivable management and collection. The Union Corporation has identified, as sales targets, companies in four large markets, which represent the greatest opportunity to utilize one or more of our services. These markets are large telecommunications, financial services, power generation and distribution firms, and small and medium size companies. Indicative of our successful efforts is the fact that the Company at present provides credit and/or accounts receivable management services to 16 of the top 25 U.S. bankcard issuers, to six of the ten largest telecommunications companies and to over 40,000 small and medium size companies. This market focus permits The Union Corporation to capitalize on strong client relationships, relevant economic trends, and its core competencies. Our aim to become an outsourcing "arm" of increasingly competitive and cost-conscious companies in a deregulated environment is supported by a solid infrastructure. With 133 sales offices, 27 "call-centers," modern electronic communications, and experienced operating management, the Company is prepared to provide current and new customers with a variety of credit and receivables management services to suit their business needs. Combined with management's attention toward increasing productivity and controlling costs, a successful marketing effort of our credit and receivables management outsourcing services can be expected to result in earnings growth. [Graphic text box omitted that contains the following statement: Beginning in fiscal 1995, The Union Corporation undertook to expand its business base beyond that of its traditional role of collecting past-due debt through "third-party intervention" into "call-center outsourcing" services.]
TARGET MARKETS - -------------- + STRONG CORRELATIONS # WEAK CORRELATION LARGE CORPORATE ---------------------------------------------------------------------- ATTRACTIVENESS ATTRIBUTE TELECOMMUNICATIONS FINANCIAL SERVICES POWER UTILITIES SMALL CORPORATE - ------------------------------------------------------------------------------------------------------------------------ SIZE $4 BILLION $12 BILLION $2 BILLION $4 BILLION - ------------------------------------------------------------------------------------------------------------------------ DEREGULATION + + + # - ------------------------------------------------------------------------------------------------------------------------ INDEPENDENT SALES FORCE # # # + - ------------------------------------------------------------------------------------------------------------------------ CALL-CENTER USAGE + + + # - ------------------------------------------------------------------------------------------------------------------------ UNION CORPORATION RELATIONSHIPS + + # + - ------------------------------------------------------------------------------------------------------------------------ - ---------------------------------------------------------------------------------------------------
5 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- The market-focused subsidiaries, described below, bring to bear all the resources of The Union Corporation, with the knowledge and experience needed to serve each client well. TRANSWORLD SYSTEMS INC. Transworld, headquartered in Rohnert Park, California, offers the combination of both fixed-fee and contingency fee collection services. As the leading company of its type in the industry, Transworld has a successful history of growth that is attributable to the strength of its nationwide marketing organization, a high recovery rate, cost-effectiveness and quality of service. Transworld's system reduces customers' in-house collection costs while providing detailed monthly status reports for accounting and control purposes. Its fixed- fee system, Phase I, is based on contacting the debtor with a series of computer generated collection demands sent by mail. Unlike companies whose revenues are derived from contingency collection, Transworld's Phase I system charges a fixed fee currently ranging from $4.75 to $9.95 per account, depending on the number of accounts placed. Many customers with small-balance delinquent accounts, ranging between $50 and $100, have found Transworld's Phase I system to be the only economical method of obtaining professional, third-party collection results. Transworld's ability to get clients to make an early assignment of delinquent accounts, usually 45 to 90 days past due, is possible because of the low fixed- fee structure and its sophisticated computerized management reporting system. Transworld also offers clients who purchase systems for 300 or more accounts the option to electronically communicate the debtor information that is necessary to initiate collection demands directly to Transworld's computer system. Many clients experience collection costs as low as 5 to 7 percent of the amount collected, while at the same time eliminating a good deal of their normal billing expenses. The combination of low cost and high recovery rates results in a high customer renewal rate. Transworld currently has well over 40,000 customers using its services, from small companies that purchase a system for 45 accounts to major corporations that purchase systems for 100,000 accounts. The potential market in the United States includes more than 5 million companies and businesses with revenues greater than $50,000. Transworld's outstanding marketing organization, consisting of more than 700 independent contractors, provides the sales effort and ongoing service essential to the system. This group is highly trained and motivated, and is paid on a commission basis. The building of such a sales force is a formidable barrier to entry for potential competitors. Transworld had 133 sales offices throughout the country and Puerto Rico at year end and plans to open six new sales offices in fiscal 1998. CREDIT MANAGEMENT SERVICES (CMS) Approximately 75% of the clients using Transworld's Phase I system assign those accounts that were not collected during the fixed-fee program to CMS, a division of Transworld, on a contingency fee basis (Phase II). Because a CMS office is opened in a new location only after business has been developed in that area by Transworld's Phase I division, historically it has become profitable within the first month of operation. CMS collectors are paid on a commission basis and perform collection services at 19 branch offices, with one new branch office expected to be opened in fiscal 1998. Branch managers, trained and promoted from within, are compensated through a combination of commissions and profit incentives. CMS has developed software packages and computer systems to handle fiduciary reporting and interface with a client base of over 35,000. The average debt assigned to CMS is approximately $600 with an average payment collected in excess of $200. CMS completed another very strong year and had record collections, revenues and profits. Transworld's fiscal 1997 consolidated revenues and operating income represent the highest levels ever achieved in any fiscal year. Transworld also continued to maintain its strong operating margin, which was 24% in fiscal 1997, and is well positioned for future growth. INTERACTIVE PERFORMANCE, INC. Interactive Performance, Inc. (IPI) is headquartered in North Charleston, South Carolina. IPI provides a range of credit and receivables management outsourcing services to telecommunications companies. Services including credit authorization, customer service, usage management and receivables management are provided through call centers in South Carolina and Florida. All IPI services- [Graphic text box omitted that contains the following statement: Transworld's fiscal 1997 consolidated revenues and operating income represent the highest levels ever achieved in any fiscal year.] - -------------------------------------------------------------------------------- 6 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- i.e., receiving or making phone calls and related functions, are performed in the client's name. IPI's three call-centers total nearly 65,000 square feet of space and contain in excess of 650 work stations. The IPI management team is focused on building long-term relationships with large telecommunications clients. Accordingly, it is anticipated that IPI contracts will include most, if not all, of the following characteristics: . Performance targets . Multi-year term . Cost plus markup and incentive . Dedicated facilities and/or staff . Enhancement/integration of client systems. IPI is a performance-driven company and during fiscal 1997 its strong performance was recognized by: . Being asked by a client to build a 97-seat call-center . Receiving a substantial bonus for work performed for a client IPI strives to establish an excellent working environment for its employees by: . Offering attractive wages and benefits . State-of-the-art technology . Three weeks or more of paid training . Attractive facilities . Promotion opportunities and ongoing employee motivation, training and support. Management believes IPI is well positioned for continued growth. [Graphic text box omitted that contains the following statement: "The Union Corporation has fully met--or exceeded--our expectations in providing receivables management outsourcing services." Brent Bostick, Vice President, AT&T, Credit and Receivables Mgt.] [Photo omitted of an AT&T customer statement.] [Photo omitted of the interior of Interactive Performance, Inc.'s North Charleston, SC Call-Center facility.] [Graphic text box omitted that contains the following statement: For well over a year, Union's Interactive Performance, Inc. subsidiary has successfully handled receivables management services for AT&T's Consumer Markets Division at a new North Charleston, SC facility. Working closely with the client, Union built-out and staffed the entire operation, getting the center up and running on schedule and within budget.] - -------------------------------------------------------------------------------- 7 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- HIGH PERFORMANCE SERVICES, INC. High Performance Services, Inc. (HPSI) serves the financial services industry. HPSI, headquartered in Jacksonville, Florida, provides a full range of credit and receivables management services in the name of its clients. Currently providing customer service for a leading credit card issuer, HPSI is negotiating with another major financial services firm to provide a usage management capability. HPSI is in most respects (e.g., long-term client relationship focus, performance emphasis, management style) analogous to IPI, but with financial services industry knowledge and expertise. Management believes that this industry focus, coupled with strong performance, positions HPSI for continued growth. ALLIED BOND & COLLECTION AGENCY, INC. Allied Bond & Collection Agency, headquartered in Trevose, Pennsylvania, is a well-managed third-party contingency and fixed-fee basis collection and teleservicing company with a nationally recognized reputation for superior performance and service. Allied includes among its clients many of the larger consumer credit grantors across a broad spectrum of industries such as banking, oil refining and distribution companies, student loan servicing, retail, travel and entertainment, utilities and telecommunications, and enjoys a significant share in many of these markets. Through superior performance and service, Allied has been able to increase its market share in several of these areas. Additionally, the Company reported record placements in both dollars and the number of accounts processed; and by focusing on col- [Graphic text box omitted that contains the following statement: Allied achieved a 38% increase in operating income over fiscal 1996.] - -------------------------------------------------------------------------------- The Ingredients for Delivering Excellence... [Graphic image omitted that contains the following photos: - the exterior of Interactive Performance, Inc.'s North Charleston, SC Call-Center facility; and - a training class room.] An attractive facility... ...with thorough training... - -------------------------------------------------------------------------------- 8 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- lector productivity and cost control, Allied achieved a 38% improvement in operating income over the prior year. Post charge-off collection work has long been outsourced by credit grantors. More recently, however, the concept of outsourcing has been expanded to include many aspects of the receivables management process that were traditionally performed by credit grantors as an in-house operation. Allied Bond has responded to these opportunities by developing innovative programs for both its existing customer base and for new customers and markets. These new programs, some on a fee-per-account basis, include early-out and pre-charge-off intervention, as well as customer relations and service calling missions. Through its strong, in-depth management, Allied has employed a consistent philosophy that has served both it and its clients well throughout Allied's 39- year history. The foundation of that philosophy consists of maintaining a highly trained, well-supervised collector staff committed to achieving positive results in an efficient and professional manner for all of Allied's clients. By being flexible and innovative in its collection services, techniques, and technology employed, Allied has kept its leadership position and retains a solid basis upon which it will continue to improve its financial and operational performance. CAPITAL CREDIT CORPORATION Capital Credit provides third-party contingency and fixed-fee collection services to large national clients primarily in four major market segments: . Bankcard . Travel and Entertainment . Telecommunications . Government [Graphic text box omitted that contains the following statement: Capital Credit increased operating income by 28% in fiscal 1997 compared with the prior year.] - -------------------------------------------------------------------------------- .. The Union Corporation Way. [Graphic image omitted that contains the following photos: - a teleservice representative; - telecommunications equipment; and - a group of teleservice representatives at work.] ...state-of-the-art technology... ...and ongoing motivation, training and support. Knowledgeable, skilled, Union Corporation Teleservice Representatives - -------------------------------------------------------------------------------- 9 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Capital Credit, headquartered in Jacksonville, Florida, had a strong year in fiscal 1997 with some notable accomplishments: . Revenues increased 10% . Operating income increased 28% . A major credit card issuer selected Capital Credit as its Agency of the Year, for the second year in a row . Capital Credit won and has performed well on several pre-charge-off outsourcing projects. Capital Credit's strategy for growth is premised upon the following principles: . Being a top quartile performer for clients in recovery rate, compliance and customer service will yield increases in market share from existing clients and will facilitate the acquisition of new clients within the four market segments listed above. . The client base should be expanded and new services offered to existing clients. . Maintaining state-of-the-art technology is essential in maximizing staff productivity. Based upon strong client performance, management believes Capital Credit is well positioned for continued growth. - -------------------------------------------------------------------------------- [Graphic text box omitted that contains the following statement: "We set our time, cost, and quality targets -- and HPSI responded quickly and effectively to meet them!" Jim Allhusen, President, Advanta Personal Payment Services] [Photo omitted of two Advanta Corp. credit cards.] [Graphic text box omitted that contains the following statement: When Advanta Corp. management determined that the company's strong growth called for an external partner, it turned to Union's High Performance Services, Inc. Currently handling approximately 10% of Advanta's credit card customer service calls the HPSI subsidiary once again is proving the value of outsourcing.] [Photo omitted of a teleservice representative.] - -------------------------------------------------------------------------------- 10 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- FINANCIAL REVIEW - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 12........................ Consolidated Statements of Operations 13........................ Consolidated Balance Sheets 14........................ Consolidated Statements of Cash Flows 15........................ Consolidated Statements of Shareholders' Equity 16........................ Notes to Consolidated Financial Statements 27........................ Management's Report 27........................ Report of Independent Auditors 28........................ Management's Discussion and Analysis of Financial Condition and Results of Operations 34........................ Selected Financial Data 35........................ Corporate Information - ------------------------------------------------------------------------------- 11 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Consolidated Statements of Operations - ------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------- (In thousands, except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------- Operating revenues $121,709 $103,732 $97,649 - -------------------------------------------------------------------------------------- Expenses: Operating expenses 79,311 67,877 63,482 Selling, general and administrative expenses 23,635 20,190 19,759 Depreciation and amortization 4,562 4,058 4,101 - -------------------------------------------------------------------------------------- Operating costs and expenses 107,508 92,125 87,342 - -------------------------------------------------------------------------------------- Operating income 14,201 11,607 10,307 Interest expense (1,417) (1,475) (1,450) Interest income 1,673 1,509 1,242 - -------------------------------------------------------------------------------------- Income from continuing operations before income taxes 14,457 11,641 10,099 Provision for income taxes 6,361 5,122 4,392 - -------------------------------------------------------------------------------------- Income from continuing operations 8,096 6,519 5,707 Discontinued operations loss provision (net of tax benefits of $935 and $2,800) - (2,065) (5,200) - -------------------------------------------------------------------------------------- Net income $ 8,096 $ 4,454 $ 507 ====================================================================================== Primary income per common share: Income from continuing operations $ 1.37 $ 1.13 $ 1.01 Discontinued operations loss provision - (.36) (.92) - -------------------------------------------------------------------------------------- Net income $ 1.37 $ .77 $ .09 ====================================================================================== Fully diluted income per common share: Income from continuing operations $ 1.36 $ 1.12 $ 1.00 Discontinued operations loss provision - (.35) (.91) - -------------------------------------------------------------------------------------- Net income $ 1.36 $ .77 $ .09 ====================================================================================== Average number of common shares outstanding: Primary 5,906 5,791 5,657 Fully diluted 5,956 5,836 5,726
The accompanying notes are an integral part of the financial statements. - ------------------------------------------------------------------------------- 12 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Consolidated Balance Sheets - ------------------------------------------------------------------------------- June 30, 1997 and 1996
- ------------------------------------------------------------------------------------------- (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 11,574 $ 18,634 Short-term investments, at cost, which approximates market 37,804 24,529 Accounts receivable, trade, less allowance for doubtful accounts of $681 and $700 10,214 9,135 Prepaid expenses and other current assets 3,842 5,860 - ------------------------------------------------------------------------------------------- Total current assets 63,434 58,158 Property, buildings and equipment, net 8,323 9,168 Cost of intangible assets from businesses acquired, less accumulated amortization of $10,532 and $9,080 48,023 49,248 Other assets and deferred charges 3,490 3,526 Deferred income taxes 2,749 2,886 - ------------------------------------------------------------------------------------------- Total assets $126,019 $122,986 =========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,406 $ 3,531 Accrued expenses 18,015 22,065 Income taxes payable 866 1,448 Current portion of long-term debt 259 277 - ------------------------------------------------------------------------------------------- Total current liabilities 22,546 27,321 Long-term debt 20,379 20,634 Other liabilities 11,482 12,038 - ------------------------------------------------------------------------------------------- Total liabilities 54,407 59,993 - ------------------------------------------------------------------------------------------- Commitments and contingent liabilities Shareholders' equity: Common stock, $.50 par value; authorized shares, 15,000; issued shares, 8,696 and 8,601 4,348 4,300 Additional paid-in capital 45,272 44,708 Retained earnings 58,887 50,791 Less treasury stock, at cost, 2,945 shares and 2,941 shares (36,895) (36,806) - ------------------------------------------------------------------------------------------- Total shareholders' equity 71,612 62,993 - ------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $126,019 $122,986 ===========================================================================================
The accompanying notes are an integral part of the financial statements. - ------------------------------------------------------------------------------- 13 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------ (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 8,096 $ 4,454 $ 507 Adjustments to reconcile income to net cash provided by operations: Discontinued operations loss provision, net of tax benefit - 2,065 5,200 Depreciation and amortization 4,562 4,058 4,101 Deferred compensation expense 432 432 723 Non-cash compensation expense 31 434 - Provision for doubtful accounts 124 266 143 Provision for deferred income taxes 2,043 1,161 1,334 Changes in assets and liabilities: Accounts receivable - (increase) (1,203) (3,062) (1,822) Prepaid expenses and other current assets - decrease (increase) 218 (696) 282 Other assets and deferred charges - decrease (increase) 36 (1,226) (165) Accounts payable and accrued expenses - (decrease) increase (4,876) 805 220 Income taxes payable - increase (decrease) 215 506 (183) Other liabilities - (decrease) (393) (790) (2,847) - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 9,285 8,407 7,493 - ------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities: Capital expenditures (2,286) (2,383) (1,177) Additional purchase price related to the purchase of Allied Bond & Collection Agency (227) (266) (260) Other 21 46 42 - ------------------------------------------------------------------------------------------------------ Net cash (used by) investing activities (2,492) (2,603) (1,395) - ------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities: Purchase of treasury stock, at cost (89) - (3,344) Principal payments on long-term debt (120) (110) (102) Principal payments on capital lease obligations (153) (117) (99) Fair market value of shares of common stock received from an optionee to satisfy withholding tax obligations (868) - - Proceeds from exercise of stock options 652 851 3 - ------------------------------------------------------------------------------------------------------ Net cash (used by) provided by financing activities (578) 624 (3,542) - ------------------------------------------------------------------------------------------------------ Net increase in cash and short-term investments 6,215 6,428 2,556 Cash and short-term investments at beginning of year 43,163 36,735 34,179 - ------------------------------------------------------------------------------------------------------ Cash and short-term investments at end of year $49,378 $43,163 $36,735 ====================================================================================================== Supplemental disclosures of cash flow information: Interest paid $ 1,275 $ 1,751 $ 1,308 Income taxes paid 4,103 3,455 3,241 Supplemental disclosures of noncash investing and financing activities: Capitalized equipment lease obligations $ - $ 162 $ -
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 14 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity - ------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------ Additional Common paid-in Retained Treasury (Dollars in thousands) stock capital earnings stock - ------------------------------------------------------------------------------------------ Balance at June 30, 1994 $4,238 $43,225 $45,830 $(36,292) Net income - - 507 - Proceeds from common stock issued upon exercise of stock option (45,277 shares, net) 23 187 - - Purchase of treasury stock, at cost (55,200 shares) - - - (514) - ------------------------------------------------------------------------------------------ Balance at June 30, 1995 4,261 43,412 46,337 (36,806) Net income - - 4,454 - Proceeds from common stock issued upon exercise of stock options (79,116 shares, net) 39 1,296 - - - ------------------------------------------------------------------------------------------ Balance at June 30, 1996 4,300 44,708 50,791 (36,806) Net income - - 8,096 - Proceeds from common stock issued upon exercise of stock options (95,377 shares, net) 48 564 - - Purchase of treasury stock, at cost (4,000 shares) - - - (89) - ------------------------------------------------------------------------------------------ Balance at June 30, 1997 $4,348 $45,272 $58,887 $(36,895) ==========================================================================================
The accompanying notes are an integral part of the financial statements. - ------------------------------------------------------------------------------- 15 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Union Corporation and its subsidiaries (the "Company"). All intercompany transactions and accounts have been eliminated. REVENUE RECOGNITION: Revenue is generally recorded upon the performance of services. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND SHORT-TERM INVESTMENTS: The Company primarily invests excess cash balances in commercial paper with short-term maturities and overnight time deposits. The Company considers its cash and short-term investments with an original maturity or redemption date of three months or less to be cash equivalents. PROPERTY, BUILDINGS AND EQUIPMENT: Property, buildings and equipment are stated at cost. The Company uses the straight-line method to provide for depreciation and amortization over the following estimated useful lives of the assets or terms of leases: buildings and leasehold improvements, three to 30 years; equipment and furniture and fixtures, three to 10 years; computer software, three to five years. ACCOUNTING FOR INTANGIBLES: The net cost of intangible assets of businesses acquired amounting to $47,103,000 and $48,328,000 at June 30, 1997 and 1996, respectively, is being amortized on a straight-line basis over a 40 year period. Such amortization amounted to $1,452,000, $1,444,000 and $1,437,000 during the years ended June 30, 1997, 1996 and 1995, respectively. Certain intangible assets from acquisitions made prior to October 31, 1970, amounting to $920,000, are not being amortized since, in the opinion of management, there has been no diminution in value. INCOME TAXES: The Company accounts for income taxes in accordance with the liability method (See Note 10) whereby deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. PER SHARE DATA: Income per common share is computed on the basis of the weighted average number of common shares and dilutive common share equivalents outstanding during the year. LONG-LIVED ASSETS: In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", impairment of long-lived assets is reviewed annually by the Company by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying value to determine if an impairment exists. The adoption of SFAS No. 121 in fiscal 1997 did not require an adjustment to the results of operations or the financial position of the Company. STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") became effective in fiscal 1997 and allows companies to elect to account for stock- based compensation plans using a fair-value based method or continue measuring compensation expense for those plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. The Company has elected to continue using the intrinsic value method to account for its stock-based compensation plans. SFAS 123 requires companies electing to continue using the intrinsic value method to make certain pro forma disclosures (See Note 8). - ------------------------------------------------------------------------------- 16 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- 2. DISCONTINUED OPERATIONS: 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 previously reported matters involving false pricing information and claims made by certain senior officers of the Company's former Gichner Systems Group division (the "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. As previously reported, the Company recorded a $3,000,000 loss provision ($2,065,000 net of tax benefit), or $.36 loss per share, during the second quarter of fiscal 1996 for its Discontinued Operations, which provision, combined with amounts previously reserved in connection with these matters, covered all costs of the above settlements with the government, and included an accrual for the estimated legal and accounting fees related to the government claims and other costs related to certain discontinued operations of the Company, all of which were terminated or otherwise disposed of prior to fiscal 1990. The net loss provision of $2,065,000 was included in the Consolidated Statements of Operations under the caption "Discontinued operations loss provision" for the year ended June 30, 1996. As previously reported, the Company also recorded an $8,000,000 loss provision ($5,200,000 net of tax benefit), or $.92 loss per share, during the third quarter of fiscal 1995 for costs related to certain of its discontinued operations, all of which were terminated or otherwise disposed of prior to fiscal 1990. This provision was recorded as a result of developments regarding the former Gichner Division (discussed in the preceding paragraph) and environmental matters, principally involving a site where an inactive subsidiary of the Company fully performed a settlement with the federal government, which has reopened the matter. The net loss provision of $5,200,000 was included in the Consolidated Statements of Operations under the caption "Discontinued operations loss provision" for the year ended June 30, 1995. The $8,000,000 loss provision included an accrual of $3,500,000 for estimated legal and accounting fees and settlement costs that were expected to be incurred as a result of government claims for the matter involving the former Gichner Division and the estimated legal costs to defend the Company against the claims asserted by the purchaser of the Gichner Division. The $8,000,000 loss provision also included $4,000,000 for environmental matters and approximately $500,000 of costs incurred by the Company during the quarter ended March 31, 1995 for the Gichner Division and environmental matters. GICHNER SYSTEMS GROUP DIVISION: In 1989 the Company sold the assets and business of 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 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 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 denies each of the claims and intends to vigorously defend this action. Although management believes the reserve established for this matter is adequate based on current information, there is no way to be certain that future developments will not involve additional substantial costs that may require future charges to the Discontinued operations loss provision. - ------------------------------------------------------------------------------- 17 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Company does not anticipate, based on current information, that the resolution of this matter will have a material adverse impact on the Company's overall financial condition given its available cash and short-term investments. 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 that 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 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 that 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 have been submitted to the EPA to challenge the perceived need for and the extent of the proposed additional remediation. The $8,000,000 loss provision recorded during the third quarter of fiscal 1995 for costs related to certain of its discontinued operations, all of which were terminated or otherwise disposed of prior to fiscal 1990, included a provision of approximately $4,000,000 for environmental matters. Notwithstanding the foregoing and the Company's denial of liability because of the prior settlement with the government, the provision for environmental matters included 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 regarding this site, and the estimated remediation costs that the Company will incur, based on current information, if its prior settlement with the government is not upheld in court. However, the Company may be exposed to additional substantial liability for this site as additional information becomes available over the long-term. A better estimate of costs associated with any further remediation to be taken at the site cannot - ------------------------------------------------------------------------------- 18 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- be made until a Record of Decision is issued by the EPA, which is expected to be issued in fiscal 1998. Actual remediation costs cannot be computed until such remedial action is completed. Some of the other sites involving the Company or an inactive subsidiary are at a stage where an assessment of liability, if any, cannot reasonably be made. It is the Company's policy to comply fully with all laws regulating activities affecting the environment and to meet its obligations in this area. In many "generator" liability cases, reasonable cost estimates are available on which to base reserves on the Company's likely allocated share among viable parties. Where insufficient information is available regarding projected remedial actions for these "generator" liability cases, the Company has recorded what it believes to be reasonable estimates of its potential liabilities. Reserves for liability for sites on which former operations were conducted are based on cost estimates of remedial actions projected for these sites. All known environmental claims are periodically reviewed by the Company, where information is available, to provide reasonable assurance that adequate reserves are maintained. Reserves recorded for environmental liabilities are not net of insurance or other expected recoveries. Other than the aforementioned loss provision that was recorded by the Company during fiscal 1995, no significant expenses related to environmental matters were recorded by the Company during the three years ended June 30, 1997 due to the adequacy of previously recorded reserve balances based on information available at that time. Management believes that reserves established to meet known and potential environmental liabilities are adequate based on current information. The Company does not anticipate, based on current information, that the resolution of these matters will have a material adverse impact on the Company's overall financial condition given its available cash and short-term investments. However, there is no way to be certain that future developments relating to environmental matters will not involve additional substantial costs that may require future charges to the Discontinued operations loss provision. 3. PROPERTY, BUILDINGS AND EQUIPMENT: Property, buildings and equipment, at cost, are summarized below: June 30, - ------------------------------------------- (In thousands) 1997 1996 - ------------------------------------------- Land $ 1,488 $ 1,488 Buildings and leasehold improvements 4,838 4,486 Equipment and furniture and fixtures 14,217 13,634 Computer software 3,200 3,200 - ------------------------------------------- Subtotal 23,743 22,808 Less accumulated depreciation 15,420 13,640 - ------------------------------------------- Net property, buildings and equipment $ 8,323 $ 9,168 =========================================== 4. ACCRUED EXPENSES: Accrued expenses are summarized below: June 30, - ------------------------------------------------ (In thousands) 1997 1996 - ------------------------------------------------ Compensation and benefits $ 6,721 $ 4,976 Accrued collection costs 3,262 3,271 Accrued commissions 1,668 1,788 Accrued liabilities retained from discontinued operations 1,593 8,169 Current portion of restructuring provision - 250 Other 4,771 3,611 - ------------------------------------------------ Total $18,015 $22,065 ================================================ 5. LONG-TERM DEBT: Long-term debt obligations are summarized below: June 30, - ------------------------------------------ (In thousands) 1997 1996 - ------------------------------------------ Senior debt: Collateralized notes at 8.25% $ 465 $ 585 Capitalized lease obligations 173 326 Unsecured revolving line of credit 20,000 20,000 - ------------------------------------------ Total debt 20,638 20,911 Less current portion 259 277 - ------------------------------------------ Total long-term debt $20,379 $20,634 ========================================== - ------------------------------------------------------------------------------- 19 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In December 1992, the Company borrowed $20,000,000 under an existing $25,000,000 unsecured Revolving Credit Agreement, as amended (the "Credit Agreement"), furnished by a bank. Pursuant to the terms of the Credit Agreement, the Company borrowed the $20,000,000 under a revolving line of credit that currently converts to a three year term loan on December 31, 1998. Under the terms of the Credit Agreement, the aggregate principal amount outstanding, which is limited to a maximum of $20,000,000, under the revolving line of credit on December 31, 1998 must be repaid by the Company in twelve quarterly installments commencing March 31, 1999 and ending December 31, 2001. Each of the first eleven installments must be in an amount equal to one- twentieth of the outstanding loan balance on December 31, 1998, with the twelfth installment equal to the amount necessary to repay the then unpaid principal amount of the loan. The loans bear interest, at the Company's option, at either the bank's base rate, which is announced by the bank from time to time; or at 3/4% above the bank's Eurodollar rate during both the revolving and term loan periods. The interest rate, which is reset periodically, on the revolving term loan was approximately 6.8% at June 30, 1997. The maximum amount of letters of credit that the bank will issue under the Credit Agreement is $8,000,000. At June 30, 1997, the Company was contingently liable for outstanding letters of credit aggregating approximately $3,725,000, which reduced the amount available for letters of credit under the Credit Agreement to approximately $1,275,000. Under the terms of the Credit Agreement, the Company is precluded from paying cash dividends on common stock, is limited to capital expenditures of $8,500,000 per year and is required to meet certain financial tests, all of which were met at June 30, 1997. The aggregate amount of long-term debt, excluding capitalized leases (See Note 7), which becomes due during each of the next five years ending June 30, is as follows: 1998, $130,000; 1999, $2,141,000; 2000, $4,154,000; 2001, $4,040,000; 2002, $10,000,000. 6. OTHER LIABILITIES: Other liabilities are summarized below: June 30, - ------------------------------------------------ (In thousands) 1997 1996 - ------------------------------------------------ Compensation and benefits $ 6,304 $ 6,743 Noncurrent liabilities retained from discontinued operations 4,160 3,720 Net noncurrent deferred state tax liability 535 429 Other 483 1,146 - ------------------------------------------------ Total $11,482 $12,038 ================================================ 7. COMMITMENTS AND CONTINGENT LIABILITIES: LEASES: The Company leases equipment and facilities with terms ranging from one to seven years with renewal options generally being available. Property, buildings and equipment includes $671,000, before accumulated depreciation, of fixed assets held under capitalized leases at June 30, 1997 and 1996. Related accumulated depreciation was $514,000 and $357,000 at June 30, 1997 and 1996, respectively. Future minimum lease payments under long-term leases as of June 30, 1997 are as follows: Capitalized Operating Leases Leases - ----------------------------------------------- 1998 $143,000 $ 5,198,000 1999 44,000 4,469,000 2000 - 3,847,000 2001 - 2,785,000 2002 - 1,516,000 2003 and thereafter - 390,000 - ----------------------------------------------- Total minimum lease payments 187,000 $18,205,000 Amount representing interest 14,000 - ----------------------------------------------- Present value of minimum lease payments $173,000 =============================================== Rental expense included in Operating income amounted to $5,313,000 in 1997, $4,370,000 in 1996 and $4,045,000 in 1995. - ------------------------------------------------------------------------------- 20 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Allied Bond leases its main facility from a partnership, of which the general partners are the co-chairmen of Allied Bond, pursuant to a lease agreement that expires in July 2002. The terms of the lease are comparable to those that would have been obtained under arrangements with unrelated third parties. Allied Bond paid approximately $566,000, $539,000 and $513,000 in 1997, 1996 and 1995, respectively, pursuant to such lease. LITIGATION: 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 was 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 that 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 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 prevailed in a jury trial in 1997 and all of these claims have been dismissed. Seven 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. Allied Bond has agreed to settle the action brought against it for an immaterial amount, subject to court approval. A United States Magistrate Judge appointed in one of the alleged class actions against Transworld Systems has, upon motion of Transworld Systems, recommended that the District Court Judge in the case grant summary judgement in favor of Transworld Systems. The claims in the six 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. In addition, the Company and certain subsidiaries are also parties to a number of lawsuits arising in the ordinary course of business. Based on current estimates and information, the Company does not believe that the ultimate resolution of the above matters will have a material adverse impact on the Company's overall financial condition or future results of operations. OTHER: The Company is a party in a lawsuit involving its former Gichner Systems Group division. The Company is also a party in several pending environmental proceedings involving the federal Environmental Protection Agency and comparable agencies in various states. All of these environmental matters relate to discontinued operations of former divisions or subsidiaries for which the Company has potential continuing responsibility. See Note 2 of Notes to Consolidated Financial Statements for additional information regarding these matters. - -------------------------------------------------------------------------------- 21 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8. STOCK OPTION PLANS: At June 30, 1997, 816,713 shares of the Company's common stock were reserved for issuance to officers, key employees and directors under various stock option plans as summarized below: Number of Shares - ------------------------------------------------------------------------- 1994 1984 1991 Incentive Stock Non-Employee Stock Option Directors' Stock Plan Plan Option Plan - ------------------------------------------------------------------------- Under option (1) 424,462 282,701 42,000 Available for future grants (2) 67,550 - - Exercised to date 7,988 621,362 - Expired - 340,937 7,000 - ------------------------------------------------------------------------- Authorized shares 500,000 1,245,000 49,000 ========================================================================= Total reserved (1) + (2) 492,012 282,701 42,000 ========================================================================= The 1994 Incentive Stock Plan ("1994 Plan"), which was approved by the stockholders at the Annual Meeting in November 1994, provides for the issuance of options, stock appreciation rights and other securities to purchase, in the aggregate, up to 500,000 shares of the Company's common stock to employees of the Company or its subsidiaries. Options granted under the 1994 Plan are granted at an exercise price equal to the fair market value of the stock on the date of such grant and generally expire approximately ten years after the date of grant. Options that are forfeited without exercise are available for future grants through the date the plan expires. On September 10, 1997, the Board of Directors authorized an increase in the number of shares available under the 1994 Plan by 250,000 shares, subject to stockholder approval at the Annual Meeting of Stockholders to be held on November 19, 1997. The 1994 Plan expires on August 24, 2004. On September 10, 1997, the Board of Directors also adopted, subject to stockholder approval at the Annual Meeting of Stockholders to be held on November 19, 1997, the 1997 Non-Employee Directors' Stock Option Plan ("1997 Directors' Plan"), which provides for the issuance of options up to an aggregate of 100,000 shares to Non-Employee Directors. Under the 1997 Directors' Plan, Non-Employee Directors will receive an option on the day of each Annual Meeting of Stockholders to purchase 5,000 shares of common stock at an exercise price $5.00 below the fair market value on the date of the grant, in lieu of receiving an annual cash retainer. Options vest over two years and expire ten years after the date of grant. The 1991 Non-Employee Directors' Stock Option Plan ("1991 Directors' Plan"), which expired on December 31, 1995, provided for the issuance of options to purchase up to an aggregate of 49,000 shares of the Company's common stock to Non-Employee Directors. Options granted under the 1991 Directors' Plan were granted at an exercise price equal to the fair market value of the stock on the date of such grant and generally expire approximately ten years after the date of grant. Options under the 1984 Stock Option Plan ("1984 Plan") were granted through September 17, 1994, the date that the plan expired, at such prices and upon such terms as the Stock Option Committee of the Board of Directors fixed as to each optionee. Options granted under the 1984 Plan generally expire approximately ten years after the date of grant. The Company applies APB 25 in accounting for stock options issued under all of its plans described above and, accordingly, recognizes compensation expense for the difference, if any, between the fair value of the underlying common stock and the grant price of the option on the date of grant. If compensation cost had been determined based upon the fair value method prescribed under SFAS 123, the pro forma net income and primary earnings per share for fiscal 1997 and 1996 would have been $7,860,000, or $1.36 per share, and $4,390,000, or $.76 per share, respectively. The pro forma effect on net income and earnings per share for fiscal 1997 and 1996 may not be representative of the pro forma effect on net income and earnings per share of future years because the SFAS 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to July 1, 1995. Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the "Black-Scholes" option pricing model with the following weighted-average assumptions for grants in fiscal 1997 and 1996, respectively; risk-free interest rates of 6.7% and 6.0%; expected volatility of 23.7% and 22.3%; and expected option life of five years for both years. For each year it was further assumed that no - ------------------------------------------------------------------------------- 22 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- cash dividend would be issued since the Company is precluded from paying cash dividends under the terms of its Credit Agreement (See Note 5). The weighted- average fair value of options granted was $7.91 and $5.11 for the years ended June 30, 1997 and 1996, respectively. The following table summarizes information about shares under option at June 30, 1997: Outstanding Exercisable -------------------------- ------------------- Weighted Weighted No. of No. Of Average No. of Average Exercise Shares Years Exercise Shares Exercise Price Range (000's) (a) Price (000's) Price - ------------------------------------------------------------------------ $ 7.375 - $13.750 209 4.9 $10.776 187 $10.647 14.125 - 17.625 141 8.0 15.232 72 14.936 19.250 - 26.156 399 8.9 22.126 150 21.168 - ------------------------------------------------------------------------ $ 7.375 - $26.156 749 7.6 $17.662 409 $15.271 ======================================================================== (a) Weighted average remaining contractual life in years. A summary of all shares under option for the three years ended June 30, 1997 is as follows: Weighted Average Number Exercise of Price Shares - -------------------------------------------------- Outstanding at June 30, 1994 $13.280 766,003 Granted 12.727 101,583 Exercised 4.620 (69,000) Exchanged 18.371 (124,168) Forfeited 11.875 (11,000) - -------------------------------------------------- Outstanding at June 30, 1995 $13.166 663,418 Granted 15.724 90,023 Exercised 12.643 (100,110) Expired 22.440 (30,000) - -------------------------------------------------- Outstanding at June 30, 1996 $13.173 623,331 Granted 22.664 313,427 Exercised 11.078 (185,928) Forfeited 14.088 (1,667) - -------------------------------------------------- Outstanding at June 30, 1997 $17.662 749,163 ================================================== During fiscal 1997, options were exercised to purchase 131,000 shares of common stock of the Company and the optionee elected to pay the aggregate exercise price of these options by surrendering to the Company 56,050 shares of common stock of the Company, previously acquired by the optionee, 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 12,977 shares of common stock of the Company previously acquired by the optionee and 21,524 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. During fiscal 1996, certain optionees elected to pay for a portion or all of the exercise price of the options they exercised by surrendering a total of 20,994 shares of common stock of the Company that were previously acquired by the optionees or were acquired by the optionees in conjunction with the exercise of the options. During fiscal 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 acquired by the optionee, that had a fair market value on the date of exercise equal to the exercise price. On August 25, 1994, the Board of Directors approved a plan that offered all optionees under the 1984 Stock Option Plan, other than members of the Executive Management Group of the Company, the opportunity to voluntarily exchange all of their unexercised options granted during calendar 1990, 1991 and 1992 for a new option to purchase one-half of the number of shares subject to the above unexercised options at the exercise price of $11.875 per share, the fair market value on August 25, 1994. Under the plan, options covering 124,168 shares that were exercisable at prices ranging from $14.125 to $23.625 per share were exchanged for options to purchase 62,083 shares at the lower price. The tax benefits that the Company realized as a result of the exercise of nonincentive stock options are included in "Additional paid-in capital" in the Consolidated Balance Sheets. - ------------------------------------------------------------------------------- 23 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 9. RETIREMENT PLANS: The Company has defined contribution plans covering substantially all of its employees. The contributions to these plans generally represent a percentage of employee salary. The costs of the plans, which are funded currently, amounted to $540,000, $479,000 and $494,000 in the years ended June 30, 1997, 1996 and 1995, respectively. Certain officers, directors and key employees of the Company have agreements that provide for deferred compensation after termination of active employment. The Company accrues the estimated total deferred compensation under each agreement over the expected period of active employment. Deferred compensation expense during the years ended June 30, 1997, 1996 and 1995 was $432,000, $432,000 and $723,000, respectively. 10. INCOME TAXES: The provision for income taxes on continuing operations is comprised of the following: Year ended June 30, - --------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------- Current: Federal $2,637 $2,725 $1,936 State 1,681 1,236 1,122 - --------------------------------------------- Total current 4,318 3,961 3,058 - --------------------------------------------- Deferred: Federal 1,980 1,040 1,244 State 63 121 90 - --------------------------------------------- Total deferred 2,043 1,161 1,334 - --------------------------------------------- Total income taxes $6,361 $5,122 $4,392 ============================================= As described in Note 2, the Company recorded deferred tax benefits of $935,000 and $2,800,000 in fiscal 1996 and fiscal 1995, respectively, as a result of loss provisions recorded for discontinued operations. The tax effects of temporary differences and tax loss carryforwards that give rise to significant components of the Company's deferred tax assets and liabilities are as follows: June 30, - -------------------------------------------------------- (In thousands) 1997 1996 1995 - -------------------------------------------------------- Deferred Tax Assets: Compensation and benefits $ 3,747 $ 3,562 $ 3,479 Restructuring provision - 105 1,322 Accrued liabilities retained from discontinued operations 2,019 4,059 4,010 Book depreciation in excess of tax depreciation 825 350 - Net state operating loss carryforwards 1,214 1,263 886 Other 642 519 374 - -------------------------------------------------------- Total deferred tax assets 8,447 9,858 10,071 Valuation allowance for deferred tax assets (2,130) (2,191) (2,095) - -------------------------------------------------------- Deferred tax assets, net of valuation allowance 6,317 7,667 7,976 - -------------------------------------------------------- Deferred Tax Liabilities: Tax goodwill amortization in excess of book amortization (3,103) (2,410) (1,726) Tax depreciation in excess of book depreciation - - (767) - -------------------------------------------------------- Total deferred tax liabilities (3,103) (2,410) (2,493) - -------------------------------------------------------- Net deferred tax assets $ 3,214 $ 5,257 $ 5,483 ======================================================== The valuation allowance for deferred tax assets relates to certain deferred state tax assets, including the net state operating loss carryforwards, as management currently believes that the realization of the deferred state tax assets do not meet the "more likely than not" criteria outlined in Statement of Financial Accounting Standards No. 109. Net current deferred federal tax assets of $1,000,000 and $2,800,000 are included in "Prepaid expenses and other current assets" in the Consolidated Balance Sheets at June 30, 1997 and 1996, respectively. Also, net noncurrent deferred state tax liabilities of $535,000 and $429,000 are included in "Other liabilities" in the Consolidated Balance Sheets at June 30, 1997 and 1996, respectively. - ------------------------------------------------------------------------------- 24 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- A reconciliation of the provision for income taxes on continuing operations computed at the U.S. federal statutory income tax rate, 34%, to the tax provision as reported for 1997, 1996 and 1995 is as follows: Year ended June 30, - --------------------------------------------------- (In thousands) 1997 1996 1995 - --------------------------------------------------- Provision computed at U.S. federal statutory income tax rate $4,915 $3,958 $3,434 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit 1,151 896 800 Nondeductible amortization of intangibles 182 182 182 Other 113 86 (24) - ---------------------------------------------------- Total $6,361 $5,122 $4,392 ==================================================== 11. RIGHTS AGREEMENT: During fiscal 1988, the Board of Directors of the Company (the "Board") declared a dividend distribution of one common stock purchase right (a "Right") for each outstanding share of the common stock of the Company. The Rights expire at the close of business on December 31, 1998, unless earlier redeemed by the Company. Each Right entitles the registered holder to purchase one-half of one share of common stock, at the exercise price as declared by the Board, subject to adjustment. The exercise price is currently $30 per whole share. The Rights will not be exercisable until the Distribution Date, which will occur when a person (other than a certain former shareholder or any shareholder who has filed a Schedule 13G pursuant to Regulation 13d-1(b) or 13d-2(b) and remains eligible to do so) becomes and remains the beneficial owner of 15% or more of the Company's outstanding common stock or announces an offer that would result in such person acquiring 30% or more of the Company's common stock. After the Distribution Date, Rights Certificates will be mailed to holders of record of the common stock as of the close of business on the Distribution Date. After the Rights become exercisable, if the Company is a party to certain merger or business combination transactions or transfers 50% or more of its assets or earnings power, or if the acquiring person engages in certain self-dealing transactions, each holder of a Right will receive, upon exercise of each Right, that number of shares of common stock, of either the Company or the acquiring company, having a market value equal to two times the exercise price of the Right. Pursuant to certain provisions of the Rights Agreement, the Company may redeem the Rights in whole and the Board of Directors may amend the Rights Agreement. 12. TREASURY STOCK: During fiscal 1997 the Company purchased, with available funds, 4,000 shares of the Company's common stock for approximately $89,000. During fiscal 1995 the Company purchased, with available funds, 55,200 shares of the Company's common stock for approximately $514,000 and paid $2,830,000 for 290,600 shares of the Company's common stock that were purchased at the end of fiscal 1994. All purchases were under share repurchase authorizations previously announced. 13. MAJOR CUSTOMER: During the year ended June 30, 1997, the Company, through its Capital Credit, Allied Bond and Interactive Performance subsidiaries, recorded aggregate revenues of approximately $12,816,000 from a single customer. - ------------------------------------------------------------------------------- 25 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 14. QUARTERLY DATA (UNAUDITED): (In thousands, except per share amounts) First Second Third Fourth 1997 quarter quarter quarter quarter - ------------------------------------------------------------------------------- Operating revenues $28,741 $28,977 $32,174 $31,817 Operating income 2,742 2,561 4,474 4,424 Income before income taxes 2,781 2,572 4,515 4,589 Provision for income taxes 1,224 1,131 1,989 2,017 Net income 1,557 1,441 2,526 2,572 Primary net income per common share .26 .24 .43 .44 Fully diluted net income per common share .26 .24 .43 .43 First Second Third Fourth 1996 quarter quarter quarter quarter - ------------------------------------------------------------------------------ Operating revenues $23,987 $24,069 $27,237 $28,439 Operating income 1,955 1,969 3,696 3,987 Income from continuing operations before income taxes 1,922 1,962 3,737 4,020 Provision for income taxes 845 864 1,644 1,769 Income from continuing operations 1,077 1,098 2,093 2,251 Discontinued operations loss provision (net of tax benefit of $935) - (2,065) - - Net income (loss) 1,077 (967) 2,093 2,251 Primary and fully diluted income (loss) per common share: Income from continuing operations .19 .19 .36 .38 Discontinued operations loss provision - (.36) - - Net income (loss) .19 (.17) .36 .38 - ------------------------------------------------------------------------------- 26 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Management's Report and Report of Independent Auditors - -------------------------------------------------------------------------------- MANAGEMENT'S REPORT Management is responsible for the integrity and objectivity of the data included in this report. The financial statements have been prepared in accordance with generally accepted accounting principles. Where necessary, they reflect estimates based on management judgment. Established accounting procedures and related systems of internal control are designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorizations and are recorded properly in the books and records. The accounting and control systems are continually reviewed. The Audit Committee, composed of four members of the Board of Directors who are not employees of the Company, meets regularly with representatives of management, the independent auditors and the internal auditor to monitor the functioning of the accounting and control systems, to determine the scope of the annual audit by the independent auditors, and to review the results of the independent and internal auditing activities. The Audit Committee recommends independent auditors for appointment by the Board. The independent auditors and internal auditor have direct access to the Audit Committee. The independent auditors conduct an objective, independent audit of the financial statements. Their report appears at right. NICHOLAS P. GILL Nicholas P. Gill Executive Vice President, Chief Financial Officer REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Board of Directors and Shareholders The Union Corporation We have audited the accompanying consolidated balance sheets of The Union Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Union Corporation and subsidiaries at June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York August 15, 1997 - ------------------------------------------------------------------------------- 27 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- (Years referred to are Fiscal Years) LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong and liquid at June 30, 1997 with cash and short-term investments totaling $49,378,000, working capital of $40,888,000 and net worth of $71,612,000. During the twelve months ended June 30, 1997 the net cash provided by operating activities was $9,285,000, compared to $8,407,000 a year ago. During fiscal 1997, the Company made payments aggregating $5,800,000 to the federal government regarding the matters involving the former Gichner Division of the Company (See Note 2 of Notes to Consolidated Financial Statements for additional information). Excluding the above aggregate payment to the federal government, the net cash provided by operating activities was $15,085,000, an increase of $6,678,000 compared to a year ago. This increase was principally the result of improved year-to-date operating results at the accounts receivable management companies and the inclusion of a full year of operating results from the call-center outsourcing companies. As of September 12, 1997, the Company held approximately 2,945,000 shares of its common stock at an aggregate cost of $36,895,000. Future purchases, if any, by the Company of its common stock will be funded with available funds. Capital expenditures, excluding capital lease obligations, were $2,286,000 in fiscal 1997 compared to $2,383,000 in fiscal 1996. The fiscal 1997 capital expenditures principally represent costs related to the purchase of computer, telecommunications and office equipment by Transworld Systems, Allied Bond and Capital Credit and office equipment and leasehold improvements by High Performance and Interactive Performance. The Company anticipates that capital expenditures of approximately $4,000,000 will be made during fiscal 1998. In December 1992, the Company completed the acquisition of 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 June 30, 1997, $1,131,000 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 is scheduled to convert to a three year term loan on December 31, 1998. Under the terms of the Credit Agreement, the aggregate principal amount outstanding, which is limited to a maximum of $20,000,000, under the revolving line of credit on December 31, 1998 must be repaid by the Company in twelve quarterly installments commencing March 31, 1999 and ending December 31, 2001. Each of the first eleven installments must be in an amount equal to one- twentieth of the outstanding loan balance on December 31, 1998, with the twelfth installment equal to the amount necessary to repay the then unpaid principal amount of the loan. The maximum amount of letters of credit that the bank will issue under the Credit Agreement is $8,000,000. At June 30, 1997, the Company was contingently liable for outstanding letters of credit aggregating approximately $3,725,000, which reduced the amount available for letters of credit under the Credit Agreement to approximately $1,275,000. Pursuant to a March 1995 amendment (the "Amendment") to the Company's employment agreement with the Chairman of the Company (the "Employment Agreement"), an amount equal to the discounted net present value of the deferred compensation payable to the Chairman under the Employment Agreement will, together with certain other amounts, be paid to the Chairman at the time of his retirement. The discounted net present value of the deferred compensation at June 30, 1997 was approximately $3,700,000, which amount is included in "Other liabilities" in the Consolidated Balance Sheets. The Chairman's Employment Agreement expires December 31, 1998 and provides for the Company to deposit into a trust, at the time of the Chairman's retirement, an amount equal to the discounted net present value of the aggregate consulting fees to be paid by the Company to the Chairman for consulting services to be rendered by the Chairman for a period of up to ten years following his retirement; previously such consulting services were to be rendered by the Chairman for the remainder of his life. The discounted net present value of the aggregate consulting fees was approximately $2,900,000 at June 30, 1997, which will be expensed as the services are rendered. - ------------------------------------------------------------------------------- 28 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- In accordance with the employment agreement dated July 1, 1995 with the chairman of a subsidiary of the Company, the subsidiary deposited approximately $1,500,000 into a trust during fiscal 1996, which represented the deferred bonuses, and related interest, previously earned by the chairman. In accordance with the agreement, the chairman withdrew $250,000 in January 1996 and may withdraw $250,000 each January thereafter until the entire amount deposited in the trust, including all earnings and net of any losses, has been paid. The chairman may also withdraw the balance remaining in the trust upon retirement. As of June 30, 1997, $250,000 of the balance remaining in the trust is included in the Consolidated Balance Sheet in "Prepaid expenses and other current assets" and the remainder of the balance in the trust is included in "Other assets and deferred charges". In 1989 the Company sold the assets and business of the Gichner Division to Gichner Systems Group, Inc. (the "Purchaser"). 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 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 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 denies each of the claims and intends to vigorously defend this action. Although management believes the reserve established for this matter is adequate based on current information, there is no way to be certain that future developments will not involve additional substantial costs that may require future charges to the Discontinued operations loss provision. The Company does not anticipate, based on current information, that the resolution of this matter will have a material adverse impact on the Company's overall financial condition given its available cash and short-term investments. 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 that 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 this Superfund site under a consent order with the EPA and submitted Remedial Investigation and Feasibility Study - ------------------------------------------------------------------------------- 29 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- Reports (the "Reports") to the EPA, which outline a range of various remedial alternatives for the site. The EPA issued a proposed plan that 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 have been submitted to the EPA to challenge the perceived need for and the extent of the proposed additional remediation. The $8,000,000 loss provision recorded during the third quarter of fiscal 1995 for costs related to certain of its discontinued operations, all of which were terminated or otherwise disposed of prior to fiscal 1990, included a provision of approximately $4,000,000 for environmental matters. Notwithstanding the foregoing and the Company's denial of liability because of the prior settlement with the government, the provision for environmental matters included 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 regarding this site, and the estimated remediation costs that the Company will incur, based on current information, if its prior settlement with the government is not upheld in court. However, the Company may be exposed to additional substantial liability for this site as additional information becomes available over the long-term. A better estimate of costs associated with any further remediation to be taken at the site cannot be made until a Record of Decision is issued by the EPA, which is expected to be issued in fiscal 1998. Actual remediation costs cannot be computed until such remedial action is completed. Some of the other sites involving the Company or an inactive subsidiary are at a stage where an assessment of liability, if any, cannot reasonably be made. It is the Company's policy to comply fully with all laws regulating activities affecting the environment and to meet its obligations in this area. In many "generator" liability cases, reasonable cost estimates are available on which to base reserves on the Company's likely allocated share among viable parties. Where insufficient information is available regarding projected remedial actions for these "generator" liability cases, the Company has recorded what it believes to be reasonable estimates of its potential liabilities. Reserves for liability for sites on which former operations were conducted are based on cost estimates of remedial actions projected for these sites. All known environmental claims are periodically reviewed by the Company, where information is available, to provide reasonable assurance that adequate reserves are maintained. Reserves recorded for environmental liabilities are not net of insurance or other expected recoveries. Other than the aforementioned loss provision that was recorded by the Company during fiscal 1995, no significant expenses related to environmental matters were recorded by the Company during the three years ended June 30, 1997 due to the adequacy of previously recorded reserve balances based on information available at that time. Management believes that reserves established to meet known and potential environmental liabilities are adequate based on current information. The Company does not anticipate, based on current information, that the resolution of these matters will have a material adverse impact on the Company's overall financial condition given its available cash and short-term investments. However, there is no way to be certain that future developments relating to environmental matters will not involve additional substantial costs that may require future charges to the Discontinued operations loss provision. In a lawsuit brought in 1993 by three individuals engaged by Transworld Systems as independent contractors, in which it was alleged that Transworld Systems has improperly treated the plaintiffs as independent contractors rather than employees, all of the asserted claims 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 prevailed in a jury trial in 1997 and all of these claims have been dismissed. Seven 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 - ------------------------------------------------------------------------------- 30 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- 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. Allied Bond has agreed to settle the action brought against it for an immaterial amount, subject to court approval. A United States Magistrate Judge appointed in one of the alleged class actions against Transworld Systems has, upon motion of Transworld Systems, recommended that the District Court Judge in the case grant summary judgement in favor of Transworld Systems. The claims in the six 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. Management believes that current cash and short-term investments and its future cash flows from operations are sufficient to provide for anticipated working capital, debt service and capital expenditure requirements. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 OPERATING REVENUES Operating revenues increased by 17% to $121,709,000 in 1997 compared with $103,732,000 in 1996 reflecting record revenues at Transworld Systems, a 10% increase in revenues at Capital Credit and the inclusion of a full year of revenues from the Company's wholly-owned call-center outsourcing services subsidiaries, Interactive Performance and High Performance Services. Revenues at Transworld Systems were $61,413,000 in 1997 compared with $59,553,000 in 1996, and represent the highest level ever achieved in any fiscal year. Revenues at Capital Credit increased by 10% compared with a year ago, which resulted from a continued high level of performance and service that contributed to an increase in the level of placements received from its clients. Revenues at Allied Bond were essentially unchanged in fiscal 1997 compared with a year ago. However, Allied Bond reported an increase in the dollar value and number of accounts placed with Allied Bond for collection by its clients in 1997 compared with a year ago. OPERATING INCOME Operating income increased 22% to $14,201,000 in 1997 compared with $11,607,000 in 1996 due to increases at Transworld Systems, Allied Bond and Capital Credit and the inclusion of a full year of operating results of Interactive Performance and High Performance Services, partially offset by an increase in Corporate office expenses. Transworld Systems reported an 8% increase in operating income to $14,941,000, before amortization of goodwill, compared with $13,866,000 a year ago and an operating margin of 24% after amortization of goodwill. Transworld Systems' fiscal 1997 operating income also represents the highest level ever achieved in any fiscal year. Capital Credit reported a 28% increase in operating income compared to a year ago. Allied Bond reported a 38% increase in operating income compared to a year ago, which reflects the operational changes that were made by Allied's management to meet changing market conditions. INTEREST EXPENSE AND INTEREST INCOME Interest expense decreased $58,000 to $1,417,000 in 1997 from $1,475,000 in 1996 due to decreases in the interest rates charged for borrowings under the Credit Agreement. Interest income increased $164,000 to $1,673,000 in 1997 from $1,509,000 in 1996 due to higher average short-term investment balances. During the years ended June 30, 1997 and 1996, the Company primarily invested its excess cash balances 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% in 1997 and 1996. - ------------------------------------------------------------------------------- 31 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS 1996 COMPARED TO 1995 OPERATING REVENUES Operating revenues increased to $103,732,000 in 1996 compared with $97,649,000 in 1995 due to increases in revenues at Transworld Systems and Capital Credit and the inclusion of revenues from the Company's recently formed Interactive Performance and High Performance Services subsidiaries, which began operations in the third and fourth quarters of fiscal 1996, respectively. Revenues at Transworld Systems were $59,553,000 in 1996 compared with $57,144,000 in 1995. Revenues at Capital Credit increased by 18% compared with a year ago, which resulted from the increase in the level of placements received from its clients during fiscal 1996. Revenues at Allied Bond decreased 2% in fiscal 1996 compared with a year ago due to changing market conditions previously reported such as reduced collectibility of accounts placed for collection and lower commission rates in certain key markets. However, Allied Bond also reported an increase in the dollar value of accounts placed with Allied Bond for collection by its clients in 1996 compared with a year ago, and increases in the average amount collected per collector and in the total amount collected on behalf of its clients during fiscal 1996 compared with a year ago. OPERATING INCOME Operating income increased 13% to $11,607,000 in 1996 compared with $10,307,000 in 1995 due to increases at Transworld Systems and Capital Credit, the inclusion of the operating results of Interactive Performance and High Performance Services and a decrease in Corporate office expenses, partially offset by a decrease in operating income at Allied Bond. Transworld Systems reported a 6% increase in operating income to $13,866,000, before amortization of goodwill, compared with $13,057,000 a year ago and an operating margin of 22% after amortization of goodwill. Capital Credit reported a 57% increase in operating income compared to a year ago. Although Allied Bond reported a decrease in operating income compared with a year ago, it continued to operate profitably, after amortization of goodwill and depreciation expense related to its acquisition, in spite of the changing market conditions described above. In fiscal 1995, Corporate office expenses included legal fees of approximately $700,000 related to discontinued operations of the Company. These legal fees were expensed prior to the third quarter of fiscal 1995, at which time the Company recorded the $8,000,000 pretax loss provision for discontinued operations. INTEREST EXPENSE AND INTEREST INCOME Interest expense increased $25,000 to $1,475,000 in 1996 from $1,450,000 in 1995 due to increases in the interest rates charged for borrowings under the Credit Agreement. Interest income increased $267,000 to $1,509,000 in 1996 from $1,242,000 in 1995 due to higher average short-term interest rates. During the year ended June 30, 1996, the Company primarily invested its excess cash balances in commercial paper with short-term maturities and overnight time deposits. During the year ended June 30, 1995, the Company primarily invested its excess cash balances in commercial paper and U.S. government securities, both with short-term maturities, and overnight time deposits. INCOME TAXES The Company's effective income tax rate for continuing operations was 44% in 1996 compared to 43% in 1995. DISCONTINUED OPERATIONS LOSS PROVISION The Company recorded a $3,000,000 loss provision ($2,065,000 net of tax benefit), or $.36 loss per share, during the second quarter of fiscal 1996 for its Discontinued Operations, which provision, combined with amounts previously reserved in connection with the previously reported matters involving the Company's former Gichner Systems Group division, covered all costs of the settlements with the government, and included an accrual for the estimated legal and accounting fees related to the government claims and other costs related to certain discontinued operations of the Company, all of which were terminated or otherwise disposed of prior to fiscal 1990. The net loss provision of $2,065,000 is included in the Consolidated Statements of Operations under the caption "Discontinued operations loss provision" for the year ended June 30, 1996. - ------------------------------------------------------------------------------- 32 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward-looking statements" as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended. These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of risks and uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. Readers are cautioned not to put undue reliance on such forward-looking statements, each of which speaks only as of the date hereof. Factors and uncertainties that could affect the outcome of such forward-looking statements include, among others, market and industry conditions, increased competition, changes in governmental regulations, general economic conditions, pricing pressures, loss of a large client, and the Company's ability to continue its growth and expand successfully into new markets and services. The Company disclaims any intention or obligation to update publicly or revise any forward- looking statements, whether as a result of new information, future events or otherwise. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is listed and traded on the New York Stock Exchange. The following table shows the quarterly high and low sales prices as reported for the years ended June 30, 1997 and 1996, respectively. Fiscal Year 1997 ------------------- Quarter Ending: High Low - ------------------------------------------ September 30, 1996 25 3/8 19 7/8 December 31, 1996 23 3/4 20 1/2 March 31, 1997 24 3/4 20 7/8 June 30, 1997 26 7/16 18 3/4 Fiscal Year 1996 ------------------ Quarter Ending: High Low - ------------------------------------------ September 30, 1995 16 1/2 14 3/8 December 31, 1995 18 3/4 15 1/4 March 31, 1996 21 1/4 16 1/4 June 30, 1996 22 1/8 17 5/8 The last reported sales price of the Company's common stock on September 12, 1997 as reported on the New York Stock Exchange, was $23.50 per share. The approximate number of holders of record of common stock as of September 12, 1997 was 2,650. Under the terms of the Credit Agreement, the Company is precluded from paying cash dividends on its common stock (See Note 5 of Notes to Consolidated Financial Statements for additional information). - ------------------------------------------------------------------------------- 33 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Selected Financial Data - -------------------------------------------------------------------------------
(In thousands, except per share amounts) - -------------------------------------------------------------------------------------- For the years ended June 30: 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------- Operating revenues $121,709 $103,732 $ 97,649 $ 92,109 $ 80,499 Total operating costs and expenses 107,508 92,125 87,342 84,167 72,871 - -------------------------------------------------------------------------------------- Operating income 14,201 11,607 10,307 7,942 7,628 Interest expense (1,417) (1,475) (1,450) (1,048) (687) Interest income 1,673 1,509 1,242 723 1,074 - -------------------------------------------------------------------------------------- Income from continuing operations before income taxes 14,457 11,641 10,099 7,617 8,015 Provision for income taxes 6,361 5,122 4,392 3,138 3,345 - -------------------------------------------------------------------------------------- Income from continuing operations 8,096 6,519 5,707 4,479 4,670 Discontinued operations loss provision (net of tax benefits of $935 and $2,800) (Note 2) - (2,065) (5,200) - - - -------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting for income taxes 8,096 4,454 507 4,479 4,670 Cumulative effect of change in accounting for income taxes - - - 1,068 - - -------------------------------------------------------------------------------------- Net income $ 8,096 $ 4,454 $ 507 $ 5,547 $ 4,670 ====================================================================================== Primary income per common share: Income from continuing operations $ 1.37 $ 1.13 $ 1.01 $ .72 $ .71 Discontinued operations loss provision - (.36) (.92) - - Cumulative effect of change in accounting for income taxes - - - .17 - - -------------------------------------------------------------------------------------- Net income $ 1.37 $ .77 $ .09 $ .89 $ .71 ====================================================================================== Fully diluted income per common share: Income from continuing operations $ 1.36 $ 1.12 $ 1.00 $ .72 $ .71 Discontinued operations loss provision - (.35) (.91) - - Cumulative effect of change in accounting for income taxes - - - .17 - - -------------------------------------------------------------------------------------- Net income $ 1.36 $ .77 $ .09 $ .89 $ .71 ====================================================================================== At June 30: Current assets $ 63,434 $ 58,158 $ 48,328 $ 42,685 $ 40,169 Current liabilities 22,546 27,321 22,996 20,930 18,201 - -------------------------------------------------------------------------------------- Working capital $ 40,888 $ 30,837 $ 25,332 $ 21,755 $ 21,968 ====================================================================================== Property, buildings and equipment, net $ 8,323 $ 9,168 $ 9,283 $ 10,812 $ 12,737 Total assets 126,019 122,986 113,163 110,195 110,085 Long-term debt (excluding current portion) 20,379 20,634 20,763 20,973 21,036 Treasury stock, at cost 36,895 36,806 36,806 36,292 29,233 - --------------------------------------------------------------------------------------
Note: The fiscal 1993 amounts include the results of Allied Bond following its acquisition in December 1992. Additionally, under the terms of the Credit Agreement, the Company is precluded from paying cash dividends on its common stock (See Note 5 of Notes to Consolidated Financial Statements for additional information). - ------------------------------------------------------------------------------- 34 The Union Corporation and Subsidiaries - ------------------------------------------------------------------------------- Corporate Information - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Union Corporation 211 King Street Charleston, SC 29401 Telephone (803)958-3800 Registrar and Transfer Agent Boston EquiServe 150 Royall Street Canton, MA 02021 Telephone (800)733-5001 Securities Listings New York Stock Exchange, Inc. (Symbol UCO) Common Stock Annual Meeting The annual meeting of shareholders of the Company will be held on Wednesday, November 19, 1997. Form 10-K A copy of The Union Corporation's Annual Report to the Securities and Exchange Commission on Form 10-K is available to shareholders on request. For a copy of Form 10-K, please write to The Union Corporation at the above address. OPERATING COMPANIES Transworld Systems Inc. 5880 Commerce Boulevard Rohnert Park, CA 94928 Capital Credit Corporation 8000 Arlington Expressway Jacksonville, FL 32211 Allied Bond & Collection Agency, Inc. One Allied Drive Neshaminy Interplex Trevose, PA 19047 Interactive Performance, Inc. 4275 Bridgeview Drive North Charleston, SC 29405 High Performance Services, Inc. 8000 Arlington Expressway Jacksonville, FL 32211 EXECUTIVE OFFICERS Melvin L. Cooper Chairman of the Board William B. Hewitt President and Chief Executive Officer Nicholas P. Gill Executive Vice President, Treasurer, Secretary and Chief Financial Officer DIRECTORS Melvin L. Cooper Chairman of the Board Herbert A. Denton President Providence Capital, Inc. Gordon S. Dunn Chairman Transworld Systems Inc. William B. Hewitt President and Chief Executive Officer Robert A. Marshall Consultant: Formerly Corporate Executive Vice President Advanta Corp. James M. McCormick President First Manhattan Consulting Group Robert A. Kerr Retired: Formerly Chairman and Chief Executive Officer Banc One, Dayton, Ohio James C. Miller III Counselor, Citizens for a Sound Economy and formerly Director of the Federal Office of Management and Budget Herbert R. Silver Co-Chairman Allied Bond & Collection Agency, Inc. EXECUTIVE MANAGEMENT GROUP /1/ Melvin L. Cooper George M. Macaulay /2/ Gordon S. Dunn Bernard Silver /3/ Nicholas P. Gill Herbert R. Silver William B. Hewitt Sheldon Zucker /4/ 1. Members of the Executive Management Group are considered "executive officers" for purposes of reporting under Section 16 and Regulation 14A of the Securities Exchange Act of 1934, as amended. 2. George M. Macaulay is President and Chief Executive Officer of Transworld Systems Inc. 3. Bernard Silver is Co-Chairman of Allied Bond & Collection Agency, Inc. and President of Interactive Performance, Inc. 4. Sheldon Zucker is President and Chief Executive Officer of Allied Bond & Collection Agency, Inc. - ------------------------------------------------------------------------------- 35 The Union Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 36 - -------------------------------------------------------------------------------- THE UNION CORPORATION 211 King Street Charleston, SC 29401 Tel: (803) 958-3800 - -------------------------------------------------------------------------------- EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of the principal subsidiaries of the Company. Such subsidiaries are incorporated or organized in the jurisdictions indicated. State or Jurisdiction of Incorporation --------------------- The Union Corporation (Registrant) Delaware Name of Subsidiary (1) - ------------------ Allied Bond & Collection Agency, Inc. (2) Delaware Capital Credit Corporation Delaware High Performance Services, Inc. (3) Delaware Interactive Performance, Inc. (4) Delaware Transworld Systems Inc. California UCO Properties, Inc. Delaware Union Financial Services Group, Inc. Nevada (1) Does not include inactive subsidiaries. (2) Allied Bond & Collection Agency, Inc. has the following wholly-owned subsidiary: American Child Support Service Bureau Inc. (Pennsylvania). (3) High Performance Services, Inc. has the following wholly-owned subsidiary: High Performance Services of Florida, Inc. (Delaware). (4) Interactive Performance, Inc. has the following wholly-owned subsidiary: Interactive Performance of Florida, Inc. (Delaware). EX-23 10 CONSENT OF THE INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Union Corporation of our report dated August 15, 1997 included in the 1997 Annual Report to Shareholders of The Union Corporation. Our audits also included the consolidated financial statement schedule of The Union Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule, referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-88204, 33-33615, 33-83608, 2-98930, 2-52439, 2-89570 and 2- 65720) and Form S-3 (Nos. 33-25818 and 33-13625) of The Union Corporation and in the related prospectuses of our report dated August 15, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of The Union Corporation. ERNST & YOUNG LLP New York, New York September 26, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT TO SHAREHOLDERS INCLUDED AS EXHIBIT 13 TO THE FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 $ 11,574 37,804 10,895 681 0 63,434 23,743 15,420 126,019 22,546 20,379 0 0 4,348 67,264 126,019 0 121,709 0 79,311 4,562 124 1,417 14,457 6,361 8,096 0 0 0 8,096 1.37 1.36 REPRESENTS THE TOTAL DEPRECIATION AND AMORTIZATION EXPENSE, BUT DOES NOT INCLUDE S, G&A EXPENSES OF $23,635.
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