SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1995, or
/ / Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-5589
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PAYCO AMERICAN CORPORATION
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(Exact name of registrant as specified in its charter)
WISCONSIN
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(State or other jurisdiction of incorporation
or organization)
180 North Executive Drive, Brookfield, Wisconsin
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(Address of principal executive offices)
39-1133219
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(IRS Employer Identification Number)
53005
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(Zip Code)
(414) 784-9035
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(former name,former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the 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, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ----
The number of shares outstanding of each of the issuer's classes of
common stock was 10,133,478 shares of common stock, par value $0.10,
outstanding as at June 30, 1995.
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PAYCO AMERICAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except share & per share data)
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JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1995 1994 1995 1994
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ASSETS LIABILITIES & SHAREHOLDERS'
INVESTMENT
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and Cash Equivalents $9,463 $10,867 Collections Due to Clients $21,753 $17,794
Cash and Cash Equivalents Accounts Payable 5,553 5,459
Held for Clients 21,753 17,794
Short-Term Borrowings 9,712 6,200
Obligations under Capital
Accounts Receivable-Trade Leases 57 77
Net of Allowances 17,003 15,541 Accrued Liabilities-
Salaries and Benefits 5,211 5,597
Accounts Receivable- Taxes, Other Than Income 1,209 1,101
Purchased 13,403 13,826 Other 1,111 1,698
Prepaid Expenses 1,470 1,054 Deferred Revenue 351 192
Accrued Income Taxes - 23
Deferred Income Taxes 707 743 Accrued Income Taxes 352 -
------------ --------- ------------ ---------
Total Current Assets 63,799 59,848 Total Current Liabilities 45,309 38,118
PROPERTY AND EQUIPMENT: OTHER LONG-TERM LIABILITIES 857 942
Data Processing Equipment 38,530 33,105
Furniture and Equipment 12,113 11,334
Leasehold Improvements 3,380 2,998 LONG-TERM DEBT 334 334
Property Held under
Capital Leases 634 634 OBLIGATIONS UNDER CAPITAL
------------ --------- LEASES 31 61
54,657 48,071
Less-Accumulated COMMITMENTS AND
Amortization 36,951 34,463 CONTINGENCIES
------------ --------- SHAREHOLDERS' INVESTMENT:
Net Property and Equipment 17,706 13,608 Preferred Stock,
No Par Value-
ACCOUNTS RECEIVABLE- Authorized 500,000 Shares,
PURCHASED 944 4,164 None Issued - -
Common Stock,
OTHER LONG-TERM $.10 Par Value-Authorized
RECEIVABLES 789 839 50,000,000 Shares, Issued &
Outstanding, 10,133,478 &
NON-COMPETE COVENANTS, NET 1,917 2,691 10,128,503 Shares, Respectively 1,013 1,013
GOODWILL, NET 11,725 5,939 Additional Paid-In Capital 1,622 1,586
DEFERRED INCOME TAXES 496 287 Stock Options Issuable 704 704
OTHER ASSETS 493 122 Retained Earnings 47,999 44,740
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Total Shareholders' Investment 51,338 48,043
------------ --------- ------------ ---------
$97,869 $87,498 $97,869 $87,498
============ ========= ============ =========
<FN>
==============================================================================================================
The accompanying notes are an integral part of these consolidated balance sheets.
2
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except share & per share data)
---------------------------------------------------------------------
For the three month period
ended June 30, 1995 1994
---------------------------------------------------------------------
OPERATING REVENUE $ 42,873 $ 37,159
OPERATING EXPENSES:
Salaries and Benefits 24,364 20,614
Telephone 2,662 2,738
Postage and Supplies 2,687 2,282
Occupancy Costs 2,265 2,171
Data Processing Equipment 1,953 1,788
Amortization of Acquisition Costs 3,109 2,280
Other Operating Costs 2,820 2,767
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Total Operating Expenses 39,860 34,640
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Income from Operations 3,013 2,519
OTHER INCOME, Primarily from
Short-Term Investments 82 13
INTEREST EXPENSE 184 10
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Income before Income Taxes 2,911 2,522
PROVISION FOR INCOME TAXES 1,290 1,122
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NET INCOME $ 1,621 $ 1,400
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,133,478 10,077,945
NET INCOME PER SHARE $0.16 $0.14
<FN>
======================================================================
The accompanying notes are an integral part of these consolidated
statements.
3
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except share & per share data)
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For the six month period ended June 30, 1995 1994
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OPERATING REVENUE $ 85,741 $ 74,436
OPERATING EXPENSES:
Salaries and Benefits 48,159 40,992
Telephone 5,217 5,275
Postage and Supplies 5,269 4,531
Occupancy Costs 4,591 4,299
Data Processing Equipment 3,752 3,534
Amortization of Acquisition Costs 7,246 5,467
Other Operating Costs 5,458 5,267
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Total Operating Expenses 79,692 69,365
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Income from Operations 6,049 5,071
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OTHER INCOME, Primarily from
Short-Term Investments 117 25
INTEREST EXPENSE 315 34
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Income before Income Taxes 5,851 5,062
PROVISION FOR INCOME TAXES 2,592 2,252
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NET INCOME $ 3,259 $ 2,810
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,133,478 10,077,945
NET INCOME PER SHARE $0.32 $0.28
<FN>
======================================================================
The accompanying notes are an integral part of these consolidated
statements.
4
PAYCO AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
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For the six month period
ended June 30, 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,259 $ 2,810
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Amortization of Acquisition Costs 7,247 5,467
Depreciation and Amortization 2,499 2,187
Benefit of Deferred Income Taxes (173) (226)
Changes in Assets and Liabilities:
Accounts Receivable (1,462) (405)
Prepaid Expenses (304) (513)
Accounts Payable 94 632
Accrued Liabilities (950) (624)
Deferred Revenue 159 141
Accrued Income Taxes 375 (412)
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Net Cash Provided by Operations 10,744 9,057
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital Expenditures, Net of Retirements (5,422) (2,232)
Purchase of Accounts Receivable (2,299) (4,904)
Purchase of Other Businesses (7,975) (4,267)
Long-Term Notes Receivable 50 (179)
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Net Cash Used In Investing Activities (15,646) (11,582)
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net Proceeds Under Line of Credit 3,512 (1,000)
Payments Under Capital Lease Obligations (50) (61)
Other Long-Term Debt - 25
Proceeds from Exercise of Stock Options 36 15
----------- -----------
Net Cash Provided by Financing Activities 3,498 (1,021)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (1,404) (3,546)
Cash and Cash Equivalents at
Beginning of Period 10,867 14,014
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Cash and Cash Equivalents at End of Period $ 9,463 $ 10,468
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid For:
Income Taxes, Net of Refunds $ 2,391 $ 2,891
Interest 276 53
<FN>
======================================================================
The accompanying notes are an integral part of these consolidated
statements.
5
PAYCO AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED June 30, 1995
I. ACCOUNTING POLICIES
The information furnished in this report reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to form a fair
statement of the results of the interim periods. This report should be read
in conjunction with the 1994 Annual Report and Form 10-K.
A. STATEMENT OF CASH FLOWS
The following paragraph provides additional disclosure regarding cash
flow as required under the indirect method of reporting.
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments with a maturity of less than 90 days to be cash
equivalents.
B. TRADE ACCOUNTS RECEIVABLE
Accounts Receivable-Trade is presented net of an allowance for doubtful
accounts. The allowance was $367,000 and $555,000 for the period ended June
30, 1995 and December 31, 1994, respectively.
C. SHORT-TERM BORROWING
The Company maintains a short-term borrowing agreement with the Bank
which provides the Company with an option to borrow under a line of
credit or issue commercial paper up to $25.0 million. During the first
half of 1995, interest rates on borrowed funds ranged from 6.05% to
7.40%.
6
PAYCO AMERICAN CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS
Effective May 1, 1995, The Company purchased certain assets of Grable,
Greiner and Wolff (GGW). GGW is a leading provider of collection services
to commercial credit grantors and is located in Beachwood, Ohio.
Effective January 1, 1995, the Company purchased certain assets of Furst and
Furst (F&F). F&F provides accounts receivable management services primarily
to commercial clients through offices in Illinois, New Jersey and California.
Effective February 1, 1995 the Company purchased the collection business of
Continental Credit Adjustors (CCA). CCA is located in Houston, Texas and
provides primarily medical and retail collection services to Texas clients.
Accounts received for collection were $1.94 billion and $1.55 billion for the
six months ended June 30, 1995 and 1994, respectively, or a 25.0 % increase.
Excluding placements from the 1995 acquisition of CCA, F&F and GGW accounts
received for collection increased $286 million or 18.4 %.
Operating revenue for the period ended June 30, 1995 and 1994 is summarized
below.
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Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(in thousands)
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Revenue:
Collection $34,270 $29,260 $67,105 $57,691
Accounts Receivable-Purchased 3,178 2,266 7,253 5,506
Student Loan Billing 1,804 1,728 3,578 3,415
Medicaid Billing 1,652 1,258 3,195 2,730
Telemarketing 1,294 1,670 3,014 3,213
Other 675 977 1,596 1,881
-------------------------- -------- ------ ------ -------
Total Operating Revenue $42,873 $37,159 $85,741 $74,436
========================== ======== ======= ======= ========
Total operating revenue for the three and six month period ended
June 30, 1995 increased 15.4% and 15.2% respectively. Collection
revenue for the three and six month period ended June 30, 1995 increased
17.1% and 16.3% Excluding the 1995 acquisitions, collection revenue
increased 7.2% and 8.0% for the three and six month period ended June 30, 1995
compared to the same periods in 1994. These increases were accomplished
as a result of new client business and growth in business volume from existing
clients, despite an operating environment with continued competitive pressure
on prices.
Revenue from purchased accounts receivable portfolios increased
31.7% to $7.3 million in the first half of 1995. This increase was
primarily the result of purchases of receivables during the second
half of 1994. During the first half of 1995 portfolios were purchased
at a cost of $2.3 million compared to $4.9 million in the first half
of 1994.
7
Billing revenue, including Student Loan billing, Medicaid billing
and Other billing increased 4.3% to $8.4 million during the first half of
1995 compared to $8.0 million during the first half of 1994. However
Billing revenue during the quarter ended June 30, 1995 compared to
the quarter ended June 30, 1994 decreased primarily as a result of a decline
in Other billing revenue from a single client in this category. Telemarketing
revenue declined 22.5 % and 6.2% for the three and six month periods ended
June 30, 1995 compared to the same periods in 1994. A decline in business
volume negatively impacted revenue.
Operating expenses increased 14.9% to $79.7 million for the first
half of 1995 compared to the first half of 1994. Operating expenses
exclusive of the acquisition of CCA, F&F & GGW increased 8.3%.
Salaries and benefits, the Company's most significant expense was $48.2
million for the six month period ended June 30, 1995 compared to $41.0 million
in 1994 or a 17.5% increase. Salary and benefits exclusive of 1995
acquisitions increased 10.3% primarily as a result of an increase in number
of collectors required to handle larger business volume. The Company does
not provide post-retirement health or life insurance benefits or significant
post-employment benefits to employees.
Telephone expense decreased 1.0% to $5.2 million for the six months ended
June 30, 1995 compared to the same period in 1994. Included in telephone
expense are costs associated with dedicated communication datalines, local
and long distance service, and depreciation and maintenance on telephone
equipment. Telephone expense, exclusive of acquisitions, decreased by 4.8%.
Although telephone usage increased during the first half of 1995 compared
to the same period in 1994, the cost of increased usage was partially offset
by lower long-distance rates negotiated at the end of 1994. Depreciation
expense increased between quarters primarily as a result of the Company's
upgrade to its telephone systems in certain locations during the second
quarter of 1994.
Postage and supplies increased 16.3% to $5.3 million for the six month
period ended June 30, 1995 as compared to the same period in 1994.
Postage expense alone increased 20.3% compared to the first half of 1994.
The new U.S. postal rate, which became effective January 1, 1995 along with
increased business volume accounted for the increase in postage costs.
Exclusive of acquisitions, postage and supplies increased 11.4%. Postage and
supplies expense historically fluctuates with the number of accounts received
for collection.
Occupancy costs which includes leased office space, depreciation of furniture
and fixtures, amortization of leasehold improvements and rental and repair of
office equipment increased 6.8% to $4.6 million. Occupancy costs exclusive
of acquisitions decreased 2.6% for the first half of 1995 compared to the
first half of 1994 as a result of a decline in depreciation and space rent.
Data processing equipment costs increased by 6.2% to $3.8 million for
the period ended June 30, 1995 when compared to the same period in
1994. Work continues to proceed according to plan on the World-class
Integrated Network (WIN). WIN is the Company's new receivable
management system which will replace PACS [registered trade mark] (Payco
Automated Collection System). The Company will invest approximately
$15 million for the purchase and customization of WIN hardware and software
in all offices. WIN installation is expected to be completed by year-end
1996. Depreciation charges associated with the WIN hardware and software will
increase during the third quarter of 1995. The Company also plans to invest
8
approximately $4.0 million over 1995 and 1996 in order to upgrade its student
loan billing system. Work proceeds on schedule on the development of the
new student loan billing system which is expected to be completed in mid-1996.
Amortization of acquisition costs was $7.2 million for the first half
of 1995 compared to $5.5 million for the same period in 1994. This expense
category includes the amortization of non-compete agreements, debtor account
inventory, goodwill and purchase accounts receivable portfolios. Amortization
expense associated with purchased accounts receivable portfolios increased by
$1.6 million between years to $5.9 million. This increase is due to the
increase in the volume of collections on purchased receivables.
Other operating costs increased by $192,000 or 3.6% to $5.5 million in the
first half of 1995 compared to the first half of 1994 primarily as a
result of 1995 acquisitions. Other operating costs includes, among other
costs, business insurance, legal expense, skip tracing costs and travel and
entertainment costs.
Other income increased $92,000 while interest expense increased $281,000
in the first half of 1995 compared to the first half of 1994. Other
income consists primarily of interest income. The increase in interest
expense is due primarily to the increase in short-term borrowings.
The effective tax rate decreased to 44.3% for the first six months of 1995
from 44.5% for the same period in 1994. The Company's provision for income
taxes changes with the levels of pre-tax income, levels of nondeductible
expenses, changes in tax law and the mix of state income tax rates.
Net income per share for the first six months of 1995 was $0.32
compared to $0.28 for the same period in 1994. The increase is a
result of a 15.2% increase in revenue coupled with a 14.9% increase in
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $25.0 million short-term borrowing agreement with the Bank.
The agreement allows the Company to borrow funds under a line of credit
agreement or through the issuance of commercial paper. All loans made to the
Company by the bank under the line of credit are payable upon demand and are
evidenced by a single promissory note. The Company is not required to
maintain compensating balances, and there are no restrictive covenants under
the agreement. As of June 30, 1995, the Company had $15.3 million available
to borrow. Funds borrowed were used primarily to fund the Company's
acquisition program. The interest rate on outstanding borrowings at June 30,
1995 ranged from 6.05% to 7.40%. The total capital expenditure associated with
the WIN project is estimated to be approximately $15.0 million. Plans are to
complete the installation by the end of 1996. The Company also expects to
invest approximately $4.0 million over 1995 and 1996 in order to upgrade its
automated student loan billing system. The Company considers the short-term
borrowing agreement to be its primary liquidity resource.
9
As of June 30, 1995 the Company had $18.5 million in working capital which
compares to $21.7 million as of December 31, 1994. This represents a decrease
of $3.2 million in working capital during the first six months of 1995. In
addition to the investment in the WIN project and the upgrade to the automated
student loan billing system, the Company will continue to actively pursue the
accounts receivable purchase program and the acquisition of certain collection
and related businesses.
The Company has reviewed its liquidity in relation to planned capital
expenditures, growth in working capital to support increased business, and
its acquisition program. To the extent internal funding may not be sufficient
to meet it future cash requirements, the Company plans to continue to utilize
its line of credit, which it considers to be adequate to meet its needs.
10
ITEM 1.
LEGAL PROCEEDINGS
As previously reported on the Registrant's Form 10-Q for the period
ended March 31, 1995, on March 8, 1995 the Registrant reached a settlement
in its litigation with the Federal Trade Commission which was based on a
complaint filed in August of 1993 alleging that the Company had violated the
Federal Fair Debt Collection Practices Act. The case was resolved with a
consent decree in which the Company did not admit any liability. The consent
decree further provided that the Registrant pay a civil penalty of $500,000
and take additional steps to ensure compliance with the Act. The Company had
previously established a reserve adequate to cover the cost of the consent
decree. The Company further believes that compliance with the provisions of
the consent decree will not materially affect its financial condition or
ongoing operations.
The Company is defendant in various legal proceedings involving claims
for damages which constitute ordinary routine litigation incidental to its
business. The Registrant has provided for the estimated defense costs and
liability associated with pending litigation through charges to operations.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Registrant was held
on May 2, 1995. On March 10, 1995, the record date for the meeting, the
Registrant had 10,133,478 shares of common stock outstanding. A majority of
the outstanding shares present in person or by proxy and entitled to vote
constitutes a quorum. Once a share is present and entitled to vote at the
meeting, for quorum purposes, it is deemed present for quorum purposes
throughout the meeting. 9,771,980 shares of common stock were present and
entitled to vote at the meeting, and a quorum was present. Each outstanding
share entitled to vote was entitled to one vote upon each of the two matters,
as discussed below, submitted to a vote at the meeting.
Brokers who hold outstanding shares in street name for beneficial owners are
not entitled to vote on non-routine matters, unless beneficial owners
specifically instruct them how to vote the shares on such matters. Unvoted
shares under such circumstances are termed "broker non-votes." Brokers who
hold outstanding shares in street name for beneficial owners are entitled to
vote on routine matters, unless beneficial owners specifically instruct them
how to vote shares on such matters.
There were no no non-routine matters voted upon at the annual meeting.
11
MATTERS VOTED UPON
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(1) With regard to the election of one or more of the nominees for
director, votes could be cast in favor or withheld. Votes withheld
in connection with the election of one or more of the nominees for
director were not counted as votes cast for such individuals. The
following directors were elected upon the following votes:
WITHHELD
AUTHORITY BROKER
James R. Bohmann 9,612,050 N/A 159,930 N/A
William A. Inglehart 9,599,667 N/A 172,313 N/A
Dennis G. Punches 9,611,398 N/A 160,582 N/A
Dennis Shea 9,591,218 N/A 180,762 N/A
(2)The proposal to appoint Arthur Andersen LLP as auditors for the
Registrant's books and records for the year ending December 31, 1995 required
for its passage the affirmative vote of a majority of the outstanding shares
present. Abstentions had the same legal effect as a vote against the
proposal. The proposal as approved by the following vote:
FOR AGAINST ABSTAIN BROKER
NON-VOTE
9,666,154 17,940 87,886 N/A
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
12
SIGNATURES
Pursuant to the requirements ofthe Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYCO AMERICAN CORPORATION
(Registrant)
Date: August 10, 1995 By: DAVID S. PATTERSON
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David S. Patterson
Principal Operating Officer
Date: August 10, 1995 By: JOHN P. STETZENBACH
--------------- -------------------
John P. Stetzenbach
Principal Financial &
Accounting Officer
13