SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 30, 1998
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THE UNITED ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 1-6788 06-0571640
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(State, or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
157 Church Street, New Haven, Connecticut 06506
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
Including Area Code (203) 499-2000
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None
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
The Registrant (Company) reports losses from subsidiary operations at
American Payment Systems, Inc. (APS).
As reported in its most recent quarterly filing with the Securities and
Exchange Commission, the Company has been investigating potential errors in the
accounting records of APS. As a result of the investigation, the Company, and
its independent auditors, PricewaterhouseCoopers, LLP, have determined that APS
should create additional reserves for shortfalls in agent collections and other
potentially uncollectible receivables of $4.9 million. This will result in a
one-time charge to second quarter 1998 earnings of $2.9 million after-tax, or
$.21 per share of the Company's common stock.
The Company intends to report its total earnings for the second quarter,
including this charge on a consolidated basis, on July 27, 1998. Absent the
one-time charge, earnings of the Company from utility operations for the second
quarter are expected to be in line with analysts' estimates. Total earnings for
the twelve month period ended March 31, 1998 were $3.36 per share.
BACKGROUND
The principal business of APS is to operate a network of field agents for
the purpose of accepting cash and check payments of a utility's bills and
forwarding those payments, through APS accounts, to the utility. APS experienced
rapid growth in 1996 and 1997. The number of agents in the APS network increased
from 2537 in 1995 to 4904 in 1997; and the dollar volume of payment transactions
increased from $2.3 billion on 17.2 million transactions in 1995 to $7.5 billion
on 73.2 million transactions in 1997.
At year-end 1996, APS created a reserve to provide for losses associated
with agent collections and uncollectible check deposits totaling $4.4 million
before-tax. These losses stemmed from inadequate "back-office" banking systems
and controls that failed to detect a significant amount of deposit shortfalls
from agents and failed to identify a substantial number of uncollectible check
deposits that were reimbursable from the utilities serviced.
In 1997, under new management with added banking expertise, APS began
implementing new systems and controls to manage the agent collection/deposit
process. These changes included the increased use of daily cash reporting and
account reconciliation on high volume agents, extensive reconciliation
procedures, and agent monitors that interact daily with agents to investigate
discrepancies in deposits. These new procedures were fully implemented by the
4th quarter of 1997.
During 1997, APS was successful in recovering about $900,000 of the
pre-1997 losses, either by restitution or insurance. This entire amount and an
additional $900,000 was used to reserve for 1997 losses, incurred while the new
systems and controls were being implemented.
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Based on the perceived status of the reconciliation of agent depository bank
accounts at year-end 1997, the total provision for collection shortfalls of $
1.8 million was felt to be adequate.
In March 1998, APS contracted for an insurance policy with an A+ rated
carrier to protect against future losses from robberies, missing deposits, and
agent fraud. The effect of the policy is to "cap" the cost of such losses at
$200,000 per event per agent. The current level of detected agent fraud in 1998
is well below that level, averaging $23,000 per month in total, or .004% of the
monthly transaction dollar volume.
Also in 1998, APS implemented new procedures to correct difficulties in
tracking agent deposits in bank mergers or acquisitions situations. During this
process, it was discovered that certain large agent depository bank accounts
were not reconciled appropriately and that the amount of APS working capital
invested in the agent depository accounts to cover timing delays for cash
transfers was over-estimated and the amount due to utilities underestimated.
These cash flow discrepancies were masked by the rapid growth of cash deposits
from expansion in the agent network and the failure to take properly into
account the cash effects of uncleared bank transfers from agent depository
accounts to utilities. APS accounting procedures, which failed to detect the
cash flow discrepancies, have been rectified.
The Company has engaged PricewaterhouseCoopers, LLP, its independent
auditors, to assist in correcting the APS accounting procedures. The proper
reporting of the APS financial statements for the period ended June 30, 1998
indicates that an additional loss reserve of $4.9 million needs to be
established. The Company will continue to seek restitution from any identifiable
sources. It does not appear that any of this loss is attributable to 1998
operations.
In summary, APS has taken the following corrective actions: enhanced
control systems have been implemented to prevent agent fraud and recover
uncollectible checks; accounting methods have been corrected to provide proper
financial reporting of APS results to the Company; and insurance to protect
against losses from agent fraud has been purchased. Exclusive of the one-time
charge, earnings from APS operations are expected to be positive for 1998 and,
thereafter, the Company expects sustained growth.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE UNITED ILLUMINATING COMPANY
Registrant
July 15, 1998 By /s/ Kurt Mohlman
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Kurt Mohlman
Treasurer and Secretary
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