UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 3 to Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 1994 Commission File No. 1-10411
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SAFECARD SERVICES, INCORPORATED
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(Exact name of Registrant as specified in its charter)
Delaware 13-2650534
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3001 E. Pershing Blvd., Cheyenne, Wyoming 82001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (307) 771-2700
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
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Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 (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
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant (based on the closing market price on March 22, 1995):
$553,520,818.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock (as of March 22, 1995): Common Stock, $.01 Par Value -
28,942,265 shares.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1995 Annual Meeting of Stockholders
are incorporated by reference into Part III.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
Selected Statement of Earnings Data (In thousands, except per share data)
<CAPTION>
Year ended October 31, 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Subscription revenue, net $ 173,434 $ 156,600 $ 146,265 $ 140,557 $ 124,133
Interest and other income(2) $ 15,652 $ 10,526 $ 11,916 $ 11,327 $ 10,119
Earnings before cumulative
effect of accounting change(1)(4)(6) $ 18,021 $ 31,477 $ 22,498 $ 29,713 $ 26,863
Net earnings(1)(4)(6) $ 20,021 $ 31,477 $ 22,498 $ 29,713 $ 26,863
Earnings per share(1)(4)(6) $.70 $1.10 $.75 $1.02 $.93
Weighted average number of
common and common
equivalent shares(3) 28,411 28,572 30,158 29,325 29,240
Cash dividends per share $.20 $.20 $.15 $.15 $.125
</TABLE>
<TABLE>
Selected Balance Sheet Data(5) (In thousands)
<CAPTION>
October 31, 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Total cash and cash
equivalents and investments(3) $ 184,533 $170,039 $187,301 $178,670 $155,860
Total assets $ 480,373 $378,287 $377,418 $351,566 $324,726
Stockholders' equity(3) $ 217,592 $157,695 $165,498 $144,903 $199,496
<FN>
(1) During 1994, the Company recorded a $2,000,000 benefit ($.07 per share)
resulting from a change in its method of accounting for income taxes.
(2) During 1994, the Company recognized $4,257,000 of income from the
settlement of two lawsuits. In addition, Wright Express contributed
$2,107,000 in other operating revenues in 1994. During 1992, the Company
recognized $550,000 of income from the settlement of a lawsuit.
(3) During 1993, the Company repurchased approximately 3,470,000 shares of
its common stock at a cost of approximately $41,699,000 (see Liquidity and
Capital Resources under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations).
(4) During 1992, the Company recorded a pre-tax charge of $17,500,000
against earnings in connection with its estimated costs of relocation from
Ft. Lauderdale, Florida to Cheyenne, Wyoming.
(5) The Company has no long-term debt, but did record, in periods ended
prior to October 31, 1992, an obligation arising from the Ft. Lauderdale
Lease (see Notes 12 and 14 of Notes to Consolidated Financial Statements
under Item 8. Financial Statements and Supplementary Data).
(6) In April 1994, the Company recorded a restructuring charge of $7,900,000
in connection with a reorganization of its operations and the naming of a new
senior management team.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
References herein to the years 1994, 1993 and 1992 refer to the
Company's fiscal years ended October 31. On December 14, 1994 the Company
announced that it would change its fiscal year-end from October 31 to
December 31. The change in year-end was approved by the Board of Directors
on December 8, 1994.
Results of Operations
Subscription Revenue, Net
Year ended October 31, 1994 1993 1992
$173,434,000 $156,600,000 $146,265,000
The Company's subscription revenue is derived from payments by
subscribers for its credit card enhancement continuity services and is
reported net of an allowance for cancellations. Billings for subscriptions,
as well as expenditures for subscriber acquisition costs and commissions, are
deferred and amortized to revenue or expense, as applicable. Billings and
commissions are amortized over the related subscription periods while
subscriber acquisition costs are amortized over the estimated future periods
benefited (estimated life of the subscriber). For a description of the
Company's accounting policies see Note 1 of Notes to Consolidated Financial
Statements under Item 8. Financial Statements and Supplementary Data.
Subscription revenue, net increased 11% to $173,434,000 in 1994,
compared to $156,600,000 in 1993. This increase was due to a combination of
a price increase for certain Hot-Line subscriptions beginning in 1993 and an
increase in the number of subscribers to the Company's Hot-Line, Fee Card
and CreditLine products. Subscription revenues, net increased by 7% in 1994
over 1993 as a result of an increase in the average number of subscribers to
the Company's principal enhancement services. The price change, which began
to take effect in 1993, accounted for a 4% increase in subscription
revenues, net in 1994 compared to 1993. This price change was or will be
effective for subscribers at varying dates depending on the timing of
adoption by credit card issuers and the timing of renewals.
Subscription revenue, net increased 7% in 1993 compared to 1992. This
increase was primarily due to an increase in the number of Hot-Line
subscribers as well as growth in Fee Card and CreditLine programs.
In 1994, 1993 and 1992 Hot-Line accounted for 70%, 73% and 73%,
respectively, of subscription revenue, net. In 1994, 1993 and 1992, Fee
Card represented 15%, 13% and 12%, respectively, of the Company's net
subscription revenue. CreditLine and other services individually accounted
for less than 10% of subscription revenue, net.
In June 1993, the Company was notified by CreditLine Corporation, a
company owned by Peter Halmos and Steven J. Halmos, the Company's co-
founders, and their families, that the license agreement under which the
Company markets certain credit information products and services known as
CreditLine would not be renewed effective November 1, 1993. Notwithstanding
its termination, the Company believes that it has certain continuing
marketing rights under the CreditLine Agreement. The CreditLine Agreement,
including the continuing marketing rights, is the subject of litigation
between the Company and Peter Halmos (see Note 14 of Notes to Consolidated
Financial Statements).
In July 1993, the Company discontinued providing certain continuity
services on a wholesale basis (i.e. flat fee per customer with the Company
incurring no marketing costs or commissions) to a group of cardholders of
one of its card issuer clients. The decrease in earnings before income taxes
in 1994 as compared to 1993 due to the elimination of the wholesale program
was approximately $1,600,000. Management expects that the elimination of
the wholesale program will not affect the comparability of earnings in
future periods.
Renewal rates for single-year Hot-Line subscriptions were 76%, 75% and
77% for 1994, 1993 and 1992, respectively. Multi-year renewal rates for
Hot-Line subscriptions (primarily three year subscriptions) were 48%, 50%
and 45% for the same periods. Renewal rates for Fee Card subscriptions
(primarily marketed as single-year subscriptions) were 81%, 75% and 79% for
1994, 1993 and 1992, respectively.
Renewal rates are computed by comparing the number of paid subscribers
at the end of the period for each subscriber campaign pool in existence at
the beginning of the period to the number of paid subscribers at the
beginning of the period. The Company monitors renewal rates by product by
client on a monthly basis. Renewal rates of subscribers are affected by a
variety of factors including the mix of subscribers renewing, economic
factors, changes in the credit card industry and certain other factors,
which may be beyond the Company's control. Hot-Line single-year renewal
rates have remained relatively consistent over the last three years, although
a slight decline in 1993 may have been a result of the price increase
discussed above. The Company believes that the decrease in Hot-Line
multi-year renewal rates in 1994 was the result of 20% fewer subscribers
coming up for renewal in 1994 compared to 1993. The computation of renewal
rates was therefore more sensitive to changes in the number of renewing
subscribers. In addition, certain of the Company's large credit card issuers
had multi-year renewal rates slightly lower than in previous periods
partially as the result of subscribers renewing into single-year
subscriptions. Renewal rates may also have been impacted by the price
changes previously discussed. The increase in the Hot-Line multi-year
renewal rate in 1993 was primarily due to the timing of renewals of a large
card issuer whose overall renewal rate is above the overall average for all
card issuer clients. In addition, a billing policy change by a large card
issuer resulted in an increase in the multi-year Hot-Line renewal rate in
1993.
Fee Card renewal rates returned to historical levels in 1994 after the
temporary decline experienced in 1993. The decrease in Fee Card renewal
rates in 1993 compared to 1992 was primarily caused by a large number of
potential renewals of certain retail card issuers which generally renew at
lower rates than petroleum card issuers.
The following table details subscriber activity for 1994, 1993 and 1992:
Beginning New Ending
Period Subscribers Subscribers Cancellations Subscribers
1994 12,043,000 4,877,000 (3,815,000) 13,105,000
1993 11,472,000 4,374,000 (3,803,000) 12,043,000
1992 10,782,000 3,723,000 (3,033,000) 11,472,000
The number of subscribers presented above has been restated from amounts
presented in prior years to exclude free trial subscriptions offered
periodically as a marketing technique. New subscribers represent fee-paying
subscribers obtained through various marketing channels. Cancellations
consist of both voluntary and involuntary membership losses. Voluntary
cancellations result from members electing to discontinue their
subscription. Involuntary cancellations result from the closure of card
accounts or other events beyond the Company's control.
Credit card issuers from time to time may adopt a change in business
strategy which may affect the Company. For example, certain card issuer
clients have changed the marketing emphasis from multi-year to single-year
subscriptions. While this change in marketing emphasis has changed the
product mix, to date, the Company has not noted any material impact on
earnings as a result of these changes or other changes in business strategy.
However, future adverse changes in business strategy by credit card issuers
could have a material impact on the earnings of the Company.
In 1993 and 1994, the Company began placing greater emphasis on the
development of additional products and services to enhance the Company's
existing range of services. The viability of products and services under
development is not assured. New products and services developed and test
marketed are frequently not successful. While the Company believes that
modest growth in Hot-Line subscription revenues through credit card issuers
may be achievable in the future, the Company anticipates that the successful
development of new products and services, new channels of distribution and
the development of new areas of business will become increasingly important
to the future revenue and earnings growth of the Company.
Other Operating Revenue
Year ended October 31, 1994 1993 1992
$2,107,000 ---- ----
Other operating revenue represents revenues derived from the operations
of Wright Express, which was acquired by the Company on September 14, 1994
(see Note 2 of Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data).
Wright Express provides transaction and information processing services
to commercial fleet owners primarily through a national credit card network
program. These services are generally provided through fueling stations
which are owned and operated by retail petroleum merchants. Substantially
all receivables from transportation fleet services represent the cost of
products purchased by the fleet owners. Other operating revenue represents
transaction fees deducted from amounts remitted to the retail merchants and
annual fees charged to fleet customers.
Wright Express is developing a new product, the WexIndex, which will
make use of the fuel and transaction data gathered on a daily basis. Wright
Express will analyze, interpret and format this data into reports made
available to economists, fleet managers, oil companies and government
agencies for the purpose of projecting fuel consumption and retail pricing.
Interest Income
Year ended October 31, 1994 1993 1992
$8,421,000 $8,736,000 $10,022,000
Interest income decreased $315,000 or 4% in 1994 compared to 1993. The
decline reflects a strategy to shorten the overall maturity of the portfolio
which resulted in lower yields. This strategy is consistent with the
Company's plans to redeploy its assets into new products and businesses. The
decline was partially offset by rising interest rates during the latter half
of the year.
In 1993 interest income decreased $1,286,000 or 13% when compared to
1992. This decrease is primarily due to lower cash and investment balances
in 1993 as a result of the Company's repurchase of its common stock held in
treasury (see "Liquidity and Capital Resources").
Other Income
Year ended October 31, 1994 1993 1992
$5,124,000 $1,790,000 $1,894,000
Other income increased $3,334,000 or 186% in 1994 compared to 1993. The
Company recognized $4,257,000 as income from the settlement of two lawsuits
during 1994. This litigation settlement income was offset by a $684,000
decrease in gains recognized on the sale of investments.
Other income decreased $104,000 or 5% in 1993 compared to 1992. The
decrease is due to a $550,000 gain from a litigation settlement in 1992
offset by a $267,000 increase in gains from sales of investments in 1993
over 1992.
Subscriber Acquisition Costs
Year ended October 31, 1994 1993 1992
$105,981,000 $95,248,000 $86,828,000
As a percentage of
subscription revenue... 61% 61% 59%
The cost of subscriber acquisition, which represents the amortization of
deferred subscriber acquisition costs and commissions, increased
$10,733,000, or 11%, in 1994 and $8,420,000, or 10%, in 1993 primarily
because of continuing increases in expenditures in recent years made to
acquire new subscribers. These expenditures increased 6% and 18% in 1994
and 1993, respectively (see "Expenditures of Subscriber Acquisition Costs
and Commissions"). The relationship of these costs to subscription revenues
is dependent on a variety of factors including subscription fees, net
response rates (gross enrollments less cancellations), marketing costs and
renewal rates. These factors are effected by economic conditions, interest
rates, the number of credit cards in use, demographic trends, consumers'
propensity to buy, the degree of market penetration and the effectiveness of
subscriber acquisition concepts, copy and marketing strategies.
In addition, certain cardholder files respond more favorably than others
to similar promotions. In 1993, the Company noted a decline in certain net
response rates, primarily in telemarketing, which have leveled out in 1994
(see "Expenditures for Subscriber Acquisition Costs and Commissions"). This
decline, as well as the discontinuance of the wholesale services discussed
under "Subscription Revenue, Net," has increased subscriber acquisition
costs as a percentage of subscription revenue and may also cause increases
in future years.
A United States postal rate increase of 10% becomes effective in 1995.
Since postage represents the largest component of direct mail costs, this
will have a direct impact on the Company by increasing subscriber
acquisition costs. The Company is working with its card issuer clients to
better target its direct mailings and thereby reduce the impact of the
postal rate increase.
General, Administrative and Service Costs
Year ended October 31, 1994 1993 1992
$43,324,000 $29,433,000 $24,949,000
General, administrative and service costs increased $13,891,000, or 47%,
in 1994 compared to 1993. Of this increase $1,238,000 is attributable to an
increase in legal fees and $1,676,000 is attributable to the operations of
Wright Express since acquisition. The remaining increase was due to expenses
attributable to an investment in Company infrastructure (i.e. personnel and
operations) necessary to support the planned growth of the Company and the
reorganization of the Company's operations into strategic business units. Of
such amount, $3.2 million related to increases in salaries and benefits, $3.8
million related to increases in operating costs and $1.4 million related to
increases in travel-related expenses.
General, administrative and service costs increased $4,484,000, or 18%,
in 1993 compared to 1992. The increase was primarily the result of a
$5,400,000 increase in legal fees in 1993 over 1992 which were partially
offset by a decrease in management fees.
Legal fees in 1994 and 1993 related primarily to the Company's
litigation with Peter Halmos (see "Pending Litigation" and Note 14 of Notes
to Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data).
Research and Product Development Costs
Year ended October 31, 1994 1993 1992
$7,682,000 ---- ----
As described under "Subscription Revenue, Net," the Company is placing
greater emphasis on the development of new products and services and the
development of new areas of business. The Company's strategy is to
diversify and broaden its scope to become an innovative marketing and
servicing organization operating through multiple strategic business units.
While the development of new products and services and the development of
areas of new business has not contributed significantly to revenues in 1994,
the Company has incurred certain direct expenses in developing these new
products and areas of business.
The Company is focusing on three strategic objectives: improvement of
the core business, internal development of new businesses and growth by
acquisitions of businesses within the Company's strategic vision. In
connection with improvement of the core business, the Company is redesigning
its marketing materials, focusing its targeting of customer groups,
emphasizing improved subscriber retention, and obtaining new card issuer
clients. In 1994, the Company entered into an agreement with Household
Credit Services to market selected Company programs to cardholders of the
popular General Motors MasterCard. In addition, the Company recently entered
into an agreement with Capital One Financial Corporation (formerly a part of
Signet Banking Corporation) to market Company programs to Capital One
cardholders. Discussions are continuing with other large card issuers.
In 1994 the Company announced a partnership with the PGA Tour and
entered into an exclusive multi-year licensing, marketing and servicing
agreement that provides for the Company to assume management of the PGA Tour
Partners program. This program allows golfers and PGA Tour fans to become
directly involved in the PGA Tour. Under the Company's direction, the PGA
Tour Partners program, which currently has approximately 85,000 members, is
expected to be significantly expanded and include special access to PGA Tour
events and tournaments and a unique co-branded PGA Tour credit card. In
December 1994, the Company entered into an agreement with SunTrust BankCard,
N.A., to issue the co-branded credit card. The Company will be responsible
for card marketing, acquisition and servicing while SunTrust will fund the
credit card receivables. The Company will begin realizing revenues from
this program in 1995.
The Company's new product and business development, as well as future
acquisitions, will be concentrated in four areas: security and convenience,
travel and leisure, consumer direct marketing and financial planning and
management. The first acquisition under this focus was Wright Express. The
Company is seeking additional acquisition candidates which operate within
these areas and complement the Company's long-term strategy. The Company
also expects to expand its credit card marketing and servicing business by
partnering with other national brands. However, there is no assurance as to
the success of such ventures.
Restructuring Costs
Year ended October 31, 1994 1993 1992
$7,900,000 ---- ----
In April 1994, the Company announced a reorganization of its operations
and named a new senior management team. As part of the reorganization, nine
senior executives left the Company and management decided to close the Fort
Lauderdale sales office. As a result of this reorganization, the Company
recorded a restructuring charge of $3,500,000 to cover severance agreements
and the termination of the lease. The Company also recorded a charge of
$4,400,000 paid to Steven J. Halmos, the Company's co-founder, to terminate
an advisory and consulting contract (see Note 12 of Notes to Consolidated
Financial Statements under Item 8. Financial Statements and Supplementary
Data).
Estimated Relocation Expenses
Year ended October 31, 1994 1993 1992
---- ---- $17,500,000
As discussed in Note 6 of Notes to Consolidated Financial Statements
under Item 8. Financial Statements and Supplementary Data, the Company
physically relocated, over a period of several months during the second half
of 1992, its headquarters and operations center from Ft. Lauderdale, Florida
to Cheyenne, Wyoming, and recorded a $17,500,000 pre-tax charge to earnings
in 1992 in connection with the move.
In December 1994, the Company announced its intention to officially
relocate its corporate headquarters from Cheyenne, Wyoming to Jacksonville,
Florida in May 1995. The move will not impact the operations center in
Cheyenne.
Provision for Income Taxes
Year ended October 31, 1994 1993 1992
$6,178,000 $10,968,000 $6,406,000
Effective November 1, 1993, the Company prospectively adopted Statement
of Financial Accounting Standards No. 109, "Accounting For Income Taxes"
("FAS 109"). The adoption of FAS 109 required a change from the deferred
method to the liability method of accounting for income taxes. The impact
of the adoption of FAS 109 had a cumulative positive effect on the Company's
reported earnings in 1994 of $2,000,000. This positive impact was primarily
the result of deferred income taxes being provided in prior periods at tax
rates higher than those currently in effect.
For information regarding the Company's effective income tax rate and
deferred income tax assets and liabilities see Notes 1 and 10 of Notes to
Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data.
Liquidity and Capital Resources
Historically, the Company has generated the cash needed to finance its
operations and growth from its earnings. The Company's primary capital
requirements are to fund subscriber acquisition marketing programs, support
the development of new products and services and fund acquisitions. In
addition, Wright Express requires capital resources to fund receivable
balances on its fleet credit cards.
Cash flow provided by operating activities was $47,046,000 in 1994
compared to $28,845,000 in 1993. The increase in cash flow from operations
is the result of (i) a reduction in taxes paid, net of refunds, of
$24,527,000, principally as a result of recognition of increased compensation
expense for tax purposes from the exercise of non-qualified stock options
during 1994, (ii) a $12,131,000 increase in net cash received from
subscribers, (iii) a net cash contribution from the operations of Wright
Express since the date of acquisition of $4,341,000, and (iv) litigation
settlements received during 1994 of $4,257,000. The net cash contributed
from the operations of Wright Express results primarily from the timing of
the collections of receivables during the interim period since the date of
the acquisition. These increases in cash flow from operations were
partially offset by increases in cash expenditures for subscriber
acquisition, commissions and operations. The increase in net cash received
from subscribers is primarily due to an increase in net billings over the
prior year.
Cash flow provided by operating activities for 1993 was $28,845,000
compared to $19,172,000, in 1992. The increase in 1993 over 1992 is
primarily a result of increases in net cash received from subscribers and
interest received, partially offset by increases in cash expenditures for
subscriber acquisition, commissions and operations.
Cash flow used in investing activities was $48,523,000 in 1994 compared
to $7,714,000 provided by investing activities in 1993. In September 1994,
the Company expended $35,276,000 (net of cash acquired) to purchase Wright
Express. Net acquisitions of property and equipment increased by $7,325,000
in 1994 over 1993, principally to enhance the Company's information
technology platform and improve customer service capabilities. In addition,
the Company is currently expanding and renovating its operations center in
Cheyenne, Wyoming to allow for expected growth and to provide for improved
customer service capabilities. Through October 31, 1994, approximately
$750,000 has been expended by the Company on this project. Expenditures
through February 1995, the anticipated date of completion, are expected to
be approximately $10,000,000.
Cash flow provided by investing activities was $7,714,000 in 1993
compared to cash flows used in investing activities of $20,410,000 in 1992.
In connection with the Company's relocation to Cheyenne, Wyoming in 1992,
the Company made capital expenditures of approximately $6,400,000 to
renovate and upgrade the Cheyenne facility and to purchase equipment for that
facility. Proceeds from sales and maturities of investment securities, net
of purchases, decreased by $22,463,000 from 1993 to 1992. In 1992
additional funds were required to support operations and to finance the
relocation of the Company.
Cash flow provided by financing activities amounted to $16,063,000 in
1994 compared to $41,432,000 used in financing activities in 1993. In 1993
the Board of Directors authorized the Company to repurchase up to 6,000,000
shares of its outstanding common stock through October 31, 1994. During
1994, the Company repurchased approximately 37,000 shares for $483,000. In
1993, the Company repurchased approximately 3,470,000 shares for
$41,699,000.
In 1994 stock options were exercised to acquire approximately 4,934,000
shares of the Company's common stock. Cash received from the exercise of
these options amounted to $24,658,000. In 1993 options were exercised for
the purchase of approximately 960,000 shares contributing $5,380,000 of cash
to the Company. In connection with the increase in the number of options
exercised in 1994, primarily from the exercise of Steven J. Halmos (see Note
12 of Notes to Consolidated Financial Statements under Item 8. Financial
Statements and Supplementary Data), the Company incurred a net operating
loss for tax purposes. As a result of the net operating loss generated in
1994, the Company has applied for a refund of income taxes paid during the
year. Any excess net operating loss not utilized in 1994 may be carried
forward to offset future years' tax liabilities subject to certain
limitations. As a result, the Company has additional net operating loss
carryforwards of $23,117,000 at October 31, 1994 available to offset income
taxes payable in future periods.
On September 14, 1994, the Company acquired 100% of the outstanding
common stock of Wright Express for $35,500,000 in cash. The acquisition was
accounted for under the purchase method and accordingly the results of
operations of Wright Express are included in the Company's consolidated
financial statements from the date of acquisition. In connection with the
acquisition, the Company recorded $28,891,000 of excess cost over fair value
of net assets acquired which is being amortized over 25 years (see Notes 2
and 12 of Notes to Consolidated Financial Statements under Item 8. Financial
Statements and Supplementary Data). At October 31, 1994, the Company had
$11,793,000 of revolving debt outstanding. This debt was assumed in the
acquisition of Wright Express (see Note 7 of Notes to Consolidated Financial
Statements under Item 8. Financial Statements and Supplementary Data) and is
used to finance the operations of that subsidiary. Prior to the acquisition
of Wright Express, the Company did not have any debt outstanding.
Cash flow used in financing activities amounted to $41,432,000 in 1993
compared to $2,733,000 used in financing activities in 1992. This increase
is explained in the preceding paragraphs.
The Company incurred approximately $8.3 million of litigation and other
legal expenses in 1994. Litigation expenses anticipated in future periods
cannot be quantified. See "Pending Litigation".
The amount of the expected costs or commitments to develop new
businesses, products and services in future periods is not quantifiable;
however, such amounts could be material to liquidity or results of
operations. The Company believes that its cash flow from operations and the
Company's cash and investment balances (which totaled $184,533,000, of which
$11,900,000 is restricted, as of October 31, 1994) are adequate to meet the
Company's current liquidity needs.
Billings to Subscribers, Net
Net billings were $189,925,000 in 1994 compared to $173,769,000 in 1993
and $150,495,000 in 1992. The 9% increase in 1994 over 1993 and 15%
increase in 1993 as compared to 1992 was primarily due to the combination of
increases in subscribers and subscription fees as discussed in "Subscription
Revenue, Net."
Expenditures for Subscriber Acquisition Costs and Commissions
Subscriber acquisition expenditures directly relate to the acquisition
of new subscribers through "direct response" type marketing campaigns and
include payments for telemarketing, printing, postage, mailing services,
certain direct salaries and other direct costs incurred to acquire new
subscribers.
Expenditures for subscriber acquisition costs increased $4,312,000, or
7%, in 1994 as compared to 1993. This increase is primarily due to an
increase in the level of direct-mail and telemarketing programs initiated
during the year. However, the rate of increase in expenditures was less
than that in the previous year due to a decline in telemarketing volume which
began in the fourth quarter of 1993 and leveled off in 1994. The decrease
in telemarketing volume is due primarily to reduced volume with certain non-
bank credit card issuer clients. The decrease in volume relates to the
decline in certain net response rates discussed under "Results of Operations
- Subscriber Acquisition Costs."
Expenditures for subscriber acquisition costs increased $8,652,000, or
16%, in 1993 over 1992. Total subscriber acquisition campaign volume (mail
and telephone contacts) increased in 1993 as compared to 1992. Contributing
to the higher volumes were increases in telemarketing hours of approximately
9% and a 22% increase in direct mail volume in 1993 as compared to 1992. The
increase in telemarketing hours occurred during the first three quarters of
1993, while in the fourth quarter of 1993, telemarketing hours declined 23%
compared to the prior year.
The volume and type of subscriber acquisition expenditures, as well as
enrollments, fluctuate periodically and such fluctuations are not unusual.
Due to timing differences between periods, there may not always be a direct
correlation between subscriber acquisition expenditures and new enrollments
in a particular period. In addition, historical response rates may not be an
indication of future response rates.
Commissions paid to credit card issuers were $52,412,000 in 1994 as
compared to $49,511,000 in 1993 and $41,024,000 in 1992. The 6% increase in
1994 as compared to 1993 and the 21% increase in commissions in 1993 over
1992 were primarily the result of increases in billings (see "Billings to
Subscribers, Net").
Pending Litigation
The Company is defending or prosecuting five complex lawsuits against
Peter Halmos, former Chairman of the Board and Executive Management
Consultant to the Company, and parties related to him (see Note 14 of Notes
to Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data). The Company believes that it has proper and meritorious
defenses in these lawsuits which it intends vigorously to pursue. Peter
Halmos is also a plaintiff in two other lawsuits, one against an officer and
one against a director of the Company, in which the Company is not named as
a defendant.
As a result of the Peter Halmos-related litigation, the Company has
incurred substantial legal fees and, to some extent, had a diversion of its
executives' attention. The litigation has also had an impact on the
Company's business. Management is seeking to reduce, to the extent it deems
reasonable and feasible, the adverse effects of these lawsuits, but there
can be no assurance that such efforts will be successful. The Company does
not expect the litigation to affect its ability to service its customers.
Resolution of any or all of the Peter Halmos-related litigation could
have a material impact (either favorable or unfavorable depending on the
outcome) upon the results of operations and financial condition of the
Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
Financial Statements:
Report of Independent Accountants 25
Consolidated Balance Sheet as of October 31, 1994 and 1993 26
Consolidated Statement of Earnings for the
three years ended October 31, 1994 27
Consolidated Statement of Changes in Stockholders' Equity for
the three years ended October 31, 1994 28
Consolidated Statement of Cash Flows for the
three years ended October 31, 1994 29
Notes to Consolidated Financial Statements 30-46
Financial Statement Schedules:
For the three years ended October 31, 1994
VIII - Valuation and Qualifying Accounts 53
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SafeCard Services, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of SafeCard Services, Inc. and its subsidiaries at October 31, 1994
and 1993, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1994, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 14 to the consolidated financial statements, the
Company's former Executive Management Consultant has asserted certain claims
against the Company. The ultimate outcome of these claims cannot presently
be determined.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in November 1993.
PRICE WATERHOUSE LLP
Denver, Colorado
December 5, 1994, except for Note 1, as to
which the date is March 24, 1995
SafeCard Services, Inc.
Consolidated Balance Sheet
(in thousands, except share data)
October 31, 1994 1993
Assets
Current Assets
Cash and cash equivalents $ 17,921 $ 3,335
Securities available for sale,
maturing within one year 39,249
Receivables, net 42,449 12,846
Income taxes receivable 2,114 5,252
Deferred subscriber acquisition
costs and related commissions,
current portion 83,449 76,136
Deferred income taxes, current 8,540
------- -------
Total current assets 193,722 97,569
Investment securities, maturing
after one year 166,704
Securities available for sale,
maturing after one year 127,363
Deferred subscriber acquisition
costs and related commissions,
non-current portion 111,948 104,801
Property and equipment, net 16,410 8,420
Excess of cost over fair value
of net assets acquired 28,739
Other assets 2,191 793
------- -------
Total assets $480,373 $378,287
======= =======
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities
Accounts payable $ 30,833 $ 14,961
Accrued expenses 24,654 16,573
Subscribers' advance payments,
current portion 106,563 94,460
Allowance for cancellations 7,656 8,893
Deferred income taxes,current portion 10,554
Notes payable to bank 11,793
------- -------
Total current liabilities 181,499 145,441
Subscriber advance payments,
non-current portion 51,991 47,603
Deferred income taxes, non-
current portion 29,291 27,548
------- -------
Total liabilities 262,781 220,592
------- -------
Stockholders' Equity
Common stock--authorized 35,000,000
shares ($.01 par value); 34,946,000
shares issued (34,196,000 in 1993);
28,933,599 shares outstanding
(24,118,184 in 1993) 349 342
Additional paid-in capital 41,058 15,990
Retained earnings 225,459 220,898
Unrealized loss on securities
available for sale (607)
------- -------
266,259 237,230
Less cost of common shares in treasury
(6,012,401 in 1994 and 10,077,816 in 1993) (48,667) (79,535)
------- -------
Total stockholders' equity 217,592 157,695
------- -------
Commitments and contingencies (Note 14) ------- -------
Total liabilities and
stockholders' equity $480,373 $378,287
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
SafeCard Services, Inc.
Consolidated Statement of Earnings
(in thousands, except share data)
Year ended October 31, 1994 1993 1992
Revenues
Subscription revenue, net $173,434 $156,600 $146,265
Other operating revenue 2,107
Interest income 8,421 8,736 10,022
Other income 5,124 1,790 1,894
------- ------- -------
189,086 167,126 158,181
------- ------- -------
Costs and expenses
Subscriber acquisition costs 105,981 95,248 86,828
General, administrative
and service costs 43,324 29,433 24,949
Research and product
development costs 7,682
Restructuring costs 7,900
Estimated relocation expenses 17,500
------- ------- -------
164,887 124,681 129,277
------- ------- -------
Earnings before income taxes 24,199 42,445 28,904
Provision for income taxes 6,178 10,968 6,406
------- ------- -------
Earnings before cumulative
effect of change in accounting
for income taxes 18,021 31,477 22,498
Cumulative effect of change in
accounting for income taxes 2,000
------- ------- -------
Net earnings $ 20,021 $ 31,477 $ 22,498
------- ------- -------
Earnings per share:
Earnings before cumulative
effect of accounting change $.63 $1.10 $.75
Cumulative effect of accounting
change .07
--- ---- ---
Net earnings $.70 $1.10 $.75
=== ==== ===
Weighted average number of common
and common equivalent shares 28,411,000 28,572,000 30,158,000
The accompanying notes are an integral part of these consolidated financial
statements
SafeCard Services, Inc.
Consolidated Statement of Changes In Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on Common Stock
Common Stock Additional Securities in Treasury Total
-------------------- Paid-in Retained Available ------------------------- Stockholders'
Shares Amount Capital Earnings for sale Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1991 33,130,148 $ 331 $ 7,326 $ 176,009 (6,772,427) $( 38,763) $ 144,903
Net earnings 22,498 22,498
Cash dividends paid,
$.15 per share (3,973) (3,973)
Exercise of employee
stock options 295,900 3 1,624 54,662 313 1,940
Tax benefit from exercise
of employee stock options 675 675
Purchase of treasury stock (62,250) (545) (545)
---------- ---- ------ ------ ----- ---------- -------- --------
Balance at October 31, 1992 33,426,048 334 9,625 194,534 (6,780,015) ( 38,995) 165,498
Net earnings 31,477 31,477
Cash dividends paid,
$.20 per share (5,113) (5,113)
Exercise of employee
stock options 769,952 8 4,213 172,059 1,159 5,380
Tax benefit from exercise
of employee stock options 2,152 2,152
Purchase of treasury stock (3,469,860) (41,699) (41,699)
---------- ---- ------ ------- ----- ---------- -------- -------
Balance at October 31, 1993 34,196,000 342 15,990 220,898 (10,077,816) ( 79,535) 157,695
Net earnings 20,021 20,021
Cash dividends paid,
$.20 per share (5,320) (5,320)
Exercise of employee
stock options 750,000 7 3,440 (10,140) 4,090,165 31,351 24,658
Tax benefit from exercise
of employee stock options 21,628 21,628
Issuance of restricted
common stock 11,950
Change in unrealized gain
(loss) on securities
available for sale $ (607) (607)
Purchase of treasury stock (36,700) (483) (483)
--------- ----- ------- --------- ----- --------- -------- ---------
Balance at October 31, 1994 34,946,000 $ 349 $ 41,058 $ 225,459 $ (607) (6,012,401) $( 48,667) $217,592
========== ==== ======= ======== ===== ========== ======== =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
SafeCard Services, Inc.
Consolidated Statement of Cash Flows
(in thousands)
Year ended October 31, 1994 1993 1992
Cash Flows From Operating Activities
Net cash received from subscribers $ 187,727 $ 175,596 $ 153,303
Net cash received from other
operating revenue sources 4,341
Cash expenditures for subscriber
acquisition costs, commissions
and operations (166,315) (137,537) (120,306)
Relocation expenditures (1,753) (6,104)
Interest received 13,922 13,952 10,675
Interest paid (428)
Income taxes paid, net of
refunds received 3,114 (21,413) (18,518)
Gain from litigation settlements 4,257 550
------- ------- -------
Net cash provided by operating activities 47,046 28,845 19,172
------- ------- -------
Cash Flows From Investing Activities
Purchases of investment securities (96,986) (63,174) (167,760)
Proceeds from sales of investment
securities 73,748 64,539 119,284
Proceeds from maturing investment
securities 18,035 7,068 34,446
Cost of acquisitions, net of
cash acquired (35,276)
Acquisition of property
and equipment, net (8,044) (719) (6,380)
------- ------ -------
Net cash (used in) provided by
investing activities (48,523) 7,714 (20,410)
------- ------ -------
Cash Flows From Financing Activities
Net repayments on notes payable to bank (2,792)
Proceeds from exercise of stock options 24,658 5,380 1,940
Dividends paid (5,320) (5,113) (3,973)
Payments for purchase of treasury shares (483) (41,699) (545)
Other (155)
------- ------- -------
Net cash provided by (used in)
financing activities 16,063 (41,432) (2,733)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 14,586 (4,873) (3,971)
Cash and cash equivalents at
beginning of period 3,335 8,208 12,179
------- ------- -------
Cash and cash equivalents at
end of period $ 17,921 $ 3,335 $ 8,208
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
SafeCard Services, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
SafeCard Services, Inc. ("SafeCard" or the "Company") is an information-based
marketing and servicing company. Subscriptions for continuity services are
principally marketed through credit card issuers by mail or telephone.
SafeCard's principal service is credit card registration and loss
notification ("Hot-Line"), whereby SafeCard gives prompt notice to credit
card issuers upon being informed that a subscriber's credit cards have been
lost or stolen. Subscriptions for continuity services typically continue
annually or periodically unless canceled by the subscriber. SafeCard also
markets other continuity services including those related to fee-based
credit cards ("Fee Card"), reminder services, a personal credit information
service ("CreditLine") and others. SafeCard is also developing new lines of
business including credit card marketing and servicing and direct mail
marketing services which are expected to become a significant component of
SafeCard's overall operations in future years.
The Company believes that a classified balance sheet does not accurately
reflect the Company's operating cycle and results in financial ratios that
are not meaningful due to the mix of its assets including marketable
investment securities, deferred subscriber acquisition costs and related
commissions, and deferred subscribers' advance payments. As a result, the
1994 presentation of the Company's balance sheet had previously been
presented in an unclassified format. During a review of the Company's Form
10-K, the Securities and Exchange Commission disagreed with the unclassified
presentation. As a result, the balance sheet is presented in a classified
format for 1994 and 1993. Certain other changes have been made in the
presentation of 1993 and 1992 financial information to conform with 1994
presentation.
References herein to the years 1994, 1993 and 1992 refer to the Company's
fiscal years ended October 31.
Principles of Consolidation
The consolidated financial statements include the accounts of SafeCard and
its subsidiaries, after elimination of intercompany accounts and
transactions. On September 14, 1994, the Company acquired 100% of the
outstanding common stock of Wright Express Corporation ("Wright Express").
The transaction was accounted for under the purchase method and accordingly
the consolidated financial statements include the results of operations of
Wright Express from the date of purchase (see Note 2 - Acquisition).
Cash and Cash Equivalents
Cash and cash equivalents include cash-on-hand, demand deposits and short-
term investments with original maturities of three months or less.
Investment Securities
Investments in securities, which consist primarily of tax-exempt municipal
securities, were carried at cost in 1993, adjusted for the amortization of
any premium or accretion of any discount. In May 1993, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 115, ("FAS 115") "Accounting for Certain Investments in Debt and Equity
Securities." FAS 115 requires that all investments in debt and equity
securities that fall within its scope be classified as either held to
maturity, trading or available for sale. Management elected early adoption
of FAS 115 as of October 31, 1994 and has classified its entire securities
portfolio as "available for sale." Securities classified as available for
sale are stated at market value with any unrealized gains or losses included
as a separate component of stockholders' equity.
Approximately $11,900,000 of securities available for sale at October 31,
1994 were held in escrow for advance payments of multi-year subscriptions
(see "Revenue Recognition/Cost Amortization") or pursuant to the CreditLine
Agreement (see Note 12 - Transactions with Related Parties).
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense while betterments are
capitalized. Depreciation is computed using the straight-line method over
the assets' estimated useful lives. Estimated useful lives range from 3 to
7 years for equipment, furniture and fixtures to 30 years for buildings.
Capitalized leasehold improvements are amortized over the estimated useful
life of the asset, or the lease term, whichever is shorter.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired represents the
difference between the purchase price of Wright Express and the value of
the net assets acquired in the acquisition. Such excess of cost over fair
value of net assets acquired is being amortized on a straight-line basis over
25 years.
Revenue Recognition/Cost Amortization
Subscription Revenue and Commission Expense
The Company generally receives advance payments from subscribers for its
products and services. The subscription period and advance payments are
generally for periods of 12 or 36 months. These advance payments, less an
appropriate allowance for cancellations, are deferred and amortized to
revenue ratably over the subscription period. Credit card issuers earn
commissions based on percentages of subscription billings or other profit
sharing arrangements. Such commissions, less an appropriate allowance for
cancellations, are also deferred and amortized to expense ratably over the
subscription period.
The allowance for cancellations, net of related commissions, relates to
amounts which may be refunded at a future time to subscribers who may cancel
their subscriptions prior to the completion of the subscription period.
Previously paid commissions related to canceled subscriptions are reimbursed
to the Company by the credit card issuer.
The Company previously followed an internal policy of restricting use of all
advance payments for multi-year subscriptions by placing them in escrow. In
March 1994, the Company changed its policy such that it now places funds in
escrow when required contractually by credit card issuer clients. The
contractual requirement as of October 31, 1994 was approximately
$10,300,000. Restricted funds are released ratably over the subscription
period (which coincides with the period of revenue recognition) and are
invested primarily in tax-exempt municipal securities.
Subscriber Acquisition Costs
Subscriber acquisition expenditures directly relate to the acquisition of new
subscribers through "direct response" type marketing campaigns and primarily
include payments for telemarketing, printing, postage, mailing services,
certain direct salaries and other direct costs incurred to acquire new
subscribers. These expenditures are deferred and amortized to expense in
proportion to expected revenue over the expected subscription periods,
including renewal periods (life of subscriber). Historically, a significant
percentage of the Company's subscribers renew for additional years beyond
the initial subscription period. Renewal rates for single-year Hot-Line
subscriptions were between 75% and 77% during the period 1992 through 1994.
Multi-year Hot-Line renewal rates (primarily three year subscriptions) were
between 45% and 50% during the same period. Renewal rates for Fee Card,
which to date has primarily been marketed as a single-year program, were
between 75% and 81% during the same period. Based on the Company's renewal
rate experience, subscriber acquisition expenditures are amortized to expense
using an accelerated rate of amortization to reflect subscriber attrition
over renewal periods. Expenditures relating to the acquisition of Hot-Line
and Fee Card subscribers are generally amortized over a 10-12 year period;
other program expenditures are generally amortized over a 3 year period
(see Note 8 - Subscriber Acquisition Costs).
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 93-7, "Reporting on Advertising
Costs" which is effective for the Company on November 1, 1994. The
Company's historical method of amortizing such advertising costs is similar
to the method prescribed by this SOP. The SOP, which, among other things,
deals with the reporting of advertising costs for companies in the direct
response industry, is not expected to have a material effect on the
Company's reported earnings or financial position.
Income Taxes
Effective November 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Adoption of FAS 109 required a change from the deferred method to
the liability method of accounting for income taxes. One of the principal
differences of the liability method from the deferred method used in previous
financial statements is that changes in tax laws and rates are reflected in
income from continuing operations in the period such changes are enacted.
The impact of the adoption of FAS 109 had a cumulative positive effect on the
Company's reported earnings in 1994 of $2,000,000.
Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
(common stock issuable upon exercise of stock options) outstanding.
2. Acquisition
On September 14, 1994, the Company acquired 100% of the outstanding common
stock of Wright Express, a leading provider of information processing,
management and financial services to petroleum companies and transportation
fleets in the United States, for $35,500,000 in cash. The acquisition was
accounted for under the purchase method and accordingly the results of
operations of Wright Express are included in the Company's consolidated
financial statements from the date of acquisition.
In connection with the acquisition, the Company recorded $28, 891,000 of
excess of cost over fair value of net assets acquired. This excess is
being amortized on a straight-line basis over 25 years. Amortization expense
through October 31, 1994 was $152,000.
The following presents the pro forma results of operations of the Company and
Wright Express as if combined throughout the years ended October 31, 1994
and 1993 (pro forma amounts are unaudited):
Year ended October 31,
1994 1993
Revenues, net $ 200,955,000 $ 178,386,000
Costs and expenses 176,060,000 135,904,000
Earnings before provision for income
taxes and cumulative effect
of accounting change $ 24,895,000 $ 42,482,000
------------ ------------
Net earnings 20,149,000 31,496,000
---------- ----------
Earnings per share $ .71 $ 1.10
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented, nor are they intended to be a projection of future results.
3. Investments
The Company's investment portfolio is invested primarily in tax-exempt
municipal bonds. Because there is not a regularly published source of
accurate current market values for tax-exempt municipal bonds, the Company's
investment adviser estimates market values for the Company's securities
available for sale and investment securities using a pricing matrix commonly
used in the municipal bond industry, or in certain cases, by soliciting
quotations from municipal bond dealers.
The financial statement carrying amount, gross unrealized gains, gross
unrealized losses and estimated market value of the Company's securities
available for sale and investment securities were as follows:
Securities available
for sale October 31, 1994
---------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
Tax-exempt
municipal bonds $ 167,219,000 $ 500,000 $ 1,107,000 $ 166,612,000
Investment securities October 31, 1993
--------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
Tax-exempt
municipal bonds $ 166,524,000 $ 3,389,000 $ 78,000 $ 169,835,000
Other 180,000 180,000
----------- --------- ------- -----------
$ 166,704,000 $ 3,389,000 $ 78,000 $ 170,015,000
=========== ========= ======= ===========
Maturities of the Company's investment portfolio at October 31, 1994 were as
follows:
Carrying Market
Value Value
Within one year $ 39,098,000 $ 39,249,000
One to five years 119,416,000 118,401,000
More than five years 8,705,000 8,962,000
----------- ------------
$ 167,219,000 $ 166,612,000
=========== ===========
Gross realized gains on investment securities totaled $620,000, $1,290,000
and $1,013,000 for the years 1994, 1993 and 1992, respectively. Gross
realized losses on sales of investment securities totaled $27,000, $12,000
and $2,000 for the years 1994, 1993 and 1992, respectively. Gains and losses
on sales of securities are computed on the specific identification basis and
are included as a component of other income.
4. Receivables, net
Receivables and the related allowance for doubtful accounts were as follows:
October 31, 1994 1993
Receivables for transportation
fleet services $ 30,027,000
Receivables for continuity services 9,831,000 $ 8,593,000
Accrued interest receivable 4,186,000 4,403,000
----------- -----------
44,044,000 12,996,000
Allowance for doubtful accounts (1,595,000) (150,000)
----------- -----------
$ 42,449,000 $ 12,846,000
=========== ===========
The receivables for transportation fleet services primarily relate to amounts
due from customers of Wright Express for fleet fueling and other
transportation services.
5. Property and Equipment
Property and equipment consisted of the following:
October 31, 1994 1993
Equipment, furniture and fixtures $ 11,367,000 $ 4,390,000
Building 5,268,000 5,215,000
Construction in progress 2,045,000
Land 447,000 447,000
----------- -----------
19,127,000 10,052,000
Less: accumulated
depreciation (2,717,000) (1,632,000)
----------- -----------
$ 16,410,000 $ 8,420,000
=========== ===========
Construction in progress relates to improvements and additions being added to
the Company's operations center in Cheyenne, Wyoming and enhancements to the
Company's technology platform. All costs associated with these projects are
being capitalized as construction in progress and will begin to be
depreciated when the improvements and additions are placed in service.
6. Estimated Relocation Expenses
During 1992, the Company relocated its headquarters and operational facility
from Ft. Lauderdale, Florida to Cheyenne, Wyoming. In connection with the
relocation, the Company recorded pre-tax charges against earnings of
$17,500,000 in 1992. These charges included the Company's estimated cost of
moving the Company's operations and certain employees from Ft. Lauderdale to
Cheyenne, certain other one-time costs associated with the relocation and
the Company's then estimated net obligation under a contested lease ("the
Ft. Lauderdale Lease") of its former Ft. Lauderdale headquarters. The
Company no longer occupies these premises and is no longer making payments
on the Ft. Lauderdale Lease, which is now the subject of litigation (see
Note 14 - Commitments and Contingencies). Included within "Accrued expenses"
as of October 31, 1994 and 1993 is approximately $10,500,000 relating
primarily to the Ft. Lauderdale Lease.
7. Notes Payable to Bank
Notes payable to bank represents a revolving loan agreement assumed in
connection with the acquisition of Wright Express (see Note 2 -
Acquisition). The agreement, as originally structured, provided for maximum
borrowings equal to the lesser of $17,500,000 or an amount based on a
percentage of eligible accounts receivable as defined therein.
Interest on the outstanding borrowings is, at Wright Express' option, either
the bank's prime rate minus 0.5% or the London Interbank Offering Rate
("LIBOR"), plus 1.0%. Wright Express pays a fee of 0.25% per annum on the
average daily unused portion of the line of credit. Borrowings are secured
by substantially all assets of Wright Express. The revolving line of credit
expires in June 1996.
At October 31, 1994, the Company had the following amounts outstanding with
related interest rates under the revolving line of credit:
Amount Rate
LIBOR based loan $ 8,600,000 5.875%
LIBOR based loan 3,000,000 6.063%
Prime rate based loan 193,000 7.250%
----------
$ 11,793,000
==========
In November 1994, the revolving credit agreement was amended increasing the
available line to $27,500,000 and decreasing the LIBOR rate to LIBOR plus
0.625%. The Company was also added as a guarantor under the amended
agreement.
8. Subscriber Acquisition Costs and Commissions
Deferred subscriber acquisition costs and related commissions were as
follows:
October 31, 1994 1993
Hot-Line $ 123,775,000 $ 121,061,000
Fee Card 9,185,000 5,470,000
Other services 18,796,000 13,432,000
----------- -----------
Total deferred subscriber
acquisition costs 151,756,000 139,963,000
Commissions 43,641,000 40,974,000
----------- -----------
Total deferred subscriber
acquisition costs
and commissions $ 195,397,000 $ 180,937,000
=========== ===========
9. Restructuring Costs
In April 1994, the Company announced a reorganization of its operations and
named a new senior management team. As a part of the reorganization, nine
senior executives left the Company and management closed the Ft. Lauderdale
sales office. As a result of this reorganization, the Company recorded a
restructuring charge of $3,500,000 to cover severance agreements and a lease
termination. In addition, the Company recorded an additional charge of
$4,400,000 paid to Steven J. Halmos, the Company's co-founder (see Note 12 -
Transactions with Related Parties). At October 31, 1994 the remaining
balance of these reserves of $2,378,000 was included in "Accrued expenses."
10. Income Taxes
As discussed in Note 1, the Company changed its method of accounting for
income taxes as of November 1, 1993. The components of the provision for
income taxes for the years ended October 31, 1994, 1993 and 1992 were as
follows:
Year ended October 31, 1994 1993 1992
Current
Federal $13,032,000 $15,608,000 $15,255,000
State 272,000 101,000 2,547,000
---------- ---------- ----------
Total current 13,304,000 15,709,000 17,802,000
---------- ---------- ----------
Deferred
Federal (7,640,000) (3,588,000) (9,894,000)
State 514,000 (1,153,000) (1,502,000)
---------- ---------- ----------
Total deferred (7,126,000) (4,741,000) (11,396,000)
---------- ---------- -----------
Total $ 6,178,000 $10,968,000 $ 6,406,000
========== ========== ===========
The following is a reconciliation of the statutory U.S. federal income tax
rate and the Company's effective income tax rate:
Year ended October 31, 1994 1993 1992
Statutory federal income tax rate 35.0% 34.8% 34.0%
Increase (reduction) in tax
rates resulting from:
State income tax, net of federal benefit 2.1 1.2 2.4
Tax-exempt interest income (10.8) (6.8) (13.8)
Reversal of prior years' deferred taxes
at the rates in effect at that time (2.9) (1.1)
Other (.8) (.5) .7
----- ---- -----
Effective tax rate 25.5% 25.8% 22.2%
==== ==== ====
As a result of legislation enacted in August 1993, the federal corporate
income tax rate increased from 34% to 35% effective January 1, 1993. This
resulted in a blended federal tax rate for 1993 of 34.8%.
The components of the Company's deferred income tax assets and liabilities
under FAS 109 were as follows:
October 31, November 1,
1994 1993
Deferred tax liabilities
Subscriber acquisition costs $71,585,000 $68,391,000
Depreciation 549,000 382,000
---------- ----------
72,134,000 68,773,000
---------- ----------
Deferred tax assets
Multi-year subscription revenues 36,226,000 29,051,000
Relocation expenses 3,749,000 3,736,000
Net operating loss carryforwards 8,217,000
Reminder/reference subscription revenue 1,195,000 (1,945,000)
Other 1,996,000 1,829,000
---------- ----------
51,383,000 32,671,000
---------- ----------
Net deferred tax liability $20,751,000 $36,102,000
========== ==========
The deferred income tax benefit for 1993 and 1992 (under prior accounting
method) resulted from the following items:
Year ended October 31, 1993 1992
Subscriber costs, net $ 450,000 $( 15,000)
Multi-year subscription revenues (7,310,000) (7,993,000)
Reminder/reference subscription
revenue 1,952,000 1,194,000
Relocation expenses 698,000 (4,389,000)
Other (531,000) (193,000)
---------- ----------
$(4,741,000) $(11,396,000)
========== ===========
At October 31, 1994, the Company had $23,117,000 of net operating loss
carryforwards for tax purposes which, if unused, will expire in 2009.
11. Common Stock And Stock Options
The following table represents information for the previous three years with
respect to options granted and outstanding as follows:
<TABLE>
<CAPTION>
Shares Under Option
--------------------------------------------------------------------
Outstanding Outstanding
Option at beginning at end of
Price Range of period Granted Canceled Exercised Period
<S> <C> <C> <C> <C> <C> <C>
Year ended October 31, 1992
1979 Plan $ 5.875 141,040 141,040
Outside Directors' Options $ 5.513-9.00 300,000 (100,000) 200,000
1987 Plan $ 5.875 424,000 (75,900) 348,100
1989 Executive Options $ 5.125 1,100,000 (120,000) 980,000
1989 Employee Stock Option Plan $ 6.00 429,669 (14,003) (54,662) 361,004
Peter & Steven J. Halmos $ 5.125-5.50 5,850,000 5,850,000
1991 Employee Stock Option Plan $ 9.00 162,000 (24,000) 138,000
--------- ------- -------- ---------
8,406,709 (38,003) (350,562) 8,018,144
--------- ------- -------- ---------
Year ended October 31, 1993
1979 Plan $ 5.875 141,040 (141,040)
Outside Directors' Options $ 6.375-13.00 200,000 200,000 (100,000) 300,000
1987 Plan $ 5.875 348,100 (348,100)
1989 Executive Options $ 5.125 980,000 (230,000) 750,000
1989 Employee Stock Option Plan $ 6.00 361,004 (5,333) (102,671) 253,000
Peter & Steven J. Halmos $ 5.125-5.50 5,850,000 (1,950,000) 3,900,000
1991 Employee Stock Option Plan $ 9.00 138,000 (24,333) (38,334) 75,333
1992 Employee Stock Option Plan $ 8.875 75,000 (12,500) 62,500
--------- ------- ---------- -------- ---------
8,018,144 275,000 (1,992,166) (960,145) 5,340,833
--------- ------- ---------- -------- ---------
Year ended October 31, 1994
Outside Directors' Options $ 9.00-13.00 300,000 300,000
1989 Executive Options $ 5.125 750,000 (750,000)
1989 Employee Stock Option Plan $ 6.00 253,000 (234,000) 19,000
Steven J. Halmos $ 5.125-5.50 3,900,000 (3,900,000)
1991 Employee Stock Option Plan $ 9.00 75,333 (15,001) (36,333) 23,999
1992 Employee Stock Option Plan $ 8.875 62,500 (13,335) (14,164) 35,001
1994 Long-Term Stock-Based
Incentive Plan $ 12.625-18.375 2,315,000 (3,000) 2,312,000
Employee Stock Option Plan $ 16.50 42,700 (2,700) 40,000
--------- --------- --------- ---------- ---------
5,340,833 2,357,700 (34,036) (4,934,497) 2,730,000
========= ========= ========= ========== =========
<FN>
All shares outstanding are exercisable and no additional shares are available
for granting options under each plan except as noted below.
Of the options to purchase 23,999 shares outstanding under the 1991 Employee
Stock Option Plan, options to purchase 7,831 shares were exercisable at
October 31, 1994, and the remaining options to purchase 16,168 shares vest
in 1995. Of the options to purchase 35,001 shares outstanding under the 1992
Employee Stock Option Plan, options to purchase 6,666 shares were
exercisable at October 31, 1994, and the remaining options to purchase
28,335 shares vest in 1995. Of the options to purchase 2,312,000 shares
outstanding under the 1994 Long-Term Stock-Based Incentive Plan (as amended,
the "1994 Plan"), options to purchase 133,333 shares were exercisable at
October 31, 1994. A portion of the stock options outstanding under the 1994
Plan vest over time (becoming fully vested in two or four years) beginning
in 1995 and a portion vests based on certain stock price hurdles. In
addition, options to purchase 525,400 shares have been granted as of October
31, 1994 that were subject to stockholder approval of an increase in the
number of shares issuable under the 1994 Plan. Of the options to purchase
40,000 shares outstanding under the Employee Stock Option Plan, none were
exercisable at October 31, 1994. All outstanding options under this plan in
1994 vest in July 1995.
In addition to the options granted under the 1994 Plan as discussed above,
11,950 shares of restricted stock have been awarded under the 1994 Plan
through October 31, 1994. An additional 2,000 shares of restricted stock
have been awarded subject to stockholder approval of the amendment to
increase the number of shares authorized for issuance under the 1994 Plan.
The Company recorded $123,000 of restricted stock expense in 1994. Except
for the restricted stock awarded to the Chairman and Chief Executive Officer
which will fully vest by December 1, 1996, all of the outstanding shares of
restricted stock will vest no later than October 31, 1995
In connection with the exercise of options to purchase common stock, certain
employees exchanged 94,332 and 18,134 shares of common stock in lieu of cash
in 1994 and 1993, respectively. The exchanged shares are deducted from the
number of shares issued upon the exercise of employee stock options for
purposes of presentation in the consolidated statement of changes in
stockholders' equity.
The 1994 Plan was approved by the stockholders at the 1994 Annual Meeting of
Stockholders held on March 7, 1994. The 1994 Plan provides for the award of
stock options, stock appreciation rights and restricted stock covering a
maximum of 2,400,000 shares. The Company's Chairman and Chief Executive
Officer has been granted a ten-year option to purchase 1,000,000 of these
shares. The Company is seeking stockholder approval at the 1995 Annual
Meeting of Stockholders of an amendment to increase the number of shares
available for issuance under the 1994 Plan by 1,340,000 shares.
All stock options granted in 1994 and in prior years, except for the grants
under the Employee Stock Option Plan, were administered by the Board of
Directors or a committee thereof and had an exercise price based on the
market price of the Company's common stock on the date of grant. The
Employee Stock Option Plan is administered by a committee of Company
officers who are not eligible to participate in this plan. As of October
31, 1994, options to acquire 466,830 shares were exercisable under the option
plans. As of October 31, 1994, 3,255,400 of the shares held in treasury
were reserved for the issuance of shares under the above described stock
options.
</TABLE>
12. Transactions with Related Parties
Until his resignation as Chief Executive Officer and a Director on December
19, 1992, Steven J. Halmos, the Company's co-founder, provided his services
to the Company through High Plains Capital Corporation ("HPCC"), a company
owned by himself and his brother, Peter Halmos, the Company's other co-
founder. After that date, Steven J. Halmos, acting in the capacity of an
Advisor on Marketing and Operational Strategy, provided services directly to
the Company pursuant to a written agreement with the Company (as amended and
restated as of April 1, 1993, the "Steven J. Halmos Agreement"). On May 26,
1994, the Company reached a settlement with Steven J. Halmos to terminate
the Steven J. Halmos Agreement and various other agreements between the
Company and Mr. Halmos that provided for payments to Mr. Halmos of $2,000,000
a year through March 31, 1998. The settlement, which arose in connection
with the Company's management restructuring in April 1994 and a resulting
decision to cease using Mr. Halmos' services, resulted in a $4,400,000 cash
payment to Mr. Halmos and charge to 1994 earnings. Subsequent to his
termination Mr. Halmos exercised options to purchase 3,900,000 shares of the
Company's common stock. Stockholders' equity increased $37,800,000
resulting from the exercise of such options and the related tax benefit (see
Note 11 - Common Stock and Stock Options). In 1993, the Company paid Steven
J. Halmos (or HPCC for Steven J. Halmos' services) a total of approximately
$2,100,000. In 1992 the aggregate fee paid to HPCC for Steven J. Halmos'
services was approximately $2,700,000, with an additional $1,500,000 being
paid to HPCC for the services of Peter Halmos.
In 1993 the Company also entered into an agreement that called for Steven J.
Halmos to sell the 1,645,760 shares of Company stock he owned at that time
(this representing approximately 6.2% of total outstanding shares at April
1, 1993) to the Company as part of the Company's stock repurchase program.
The shares were acquired by the Company on April 21, 1993 for a price of
$11.50 per share, a price equal to the average trading price of the
Company's common stock over a specific period of days following public
disclosure of the repurchase.
The Company markets its CreditLine product pursuant to an agreement (as
amended, the "CreditLine Agreement") with CreditLine Corporation ("CLC"),
a corporation owned by Steven J. Halmos and Peter Halmos, the Company's co-
founders, and their families. The CreditLine Agreement grants the Company an
exclusive license to market CreditLine through certain credit card issuers
(including all issuers with which the Company has contractual relationships)
and provides that profits and losses, if any, are shared equally between CLC
and the Company. Net CreditLine billings to subscribers totaled
approximately $22,900,000, $15,800,000 and $9,700,000 while marketing and
other expenditures totaled $17,400,000, $13,400,000 and $6,200,000 in 1994,
1993 and 1992, respectively. In June 1993, the Company was notified by CLC
that the CreditLine Agreement would not be renewed effective November 1,
1993.
Notwithstanding its termination, the CreditLine Agreement gives the Company
the perpetual right to continue to service existing CreditLine subscribers
and to participate in the resulting income. In addition, an amendment to
the CreditLine Agreement provides that the Company has the perpetual right to
market CreditLine, and participate in the resulting income, through all of
its existing card issuer clients with which it either had a CreditLine
marketing agreement on November 1, 1993 or entered into such a marketing
agreement within the following three years. The CreditLine Agreement is the
subject of litigation as described in Note 14 - Commitments and
Contingencies.
In 1994 CreditLine and certain services marketed in conjunction with
CreditLine, accounted for approximately $9,100,000 or 5.3% of the Company's
subscription revenues and approximately $2,800,000 or 11.6% of the Company's
pre-tax earnings. In 1993 such services accounted for approximately
$6,500,000 or 4.2% and $1,900,000 or 4.5% of the Company's subscription
revenues and pre-tax earnings, respectively. In 1992 such services
accounted for approximately $4,500,000 or 3.1% and $1,200,000 or 4.2% of the
Company's subscription revenues and pre-tax earnings, respectively.
The CreditLine Agreement provides for the creation of an escrow in the case
of certain disputes between the parties. Effective September 1993, the
Company began depositing its share and CLC's share of CreditLine profits in
escrow accounts. As of October 31, 1994, approximately $1,600,000 of the
Company's securities available for sale have been deposited in the escrow
account (see Note 1 - Summary of Significant Accounting Policies).
The Company made payments under the Ft. Lauderdale Lease to a partnership
consisting of Peter Halmos and Steven J. Halmos (the "Halmos Partnership").
Payments made to the Halmos Partnership for the years 1993 and 1992 for the
land and building, were approximately $700,000 and $1,200,000, respectively.
No payments were made to the Halmos Partnership in 1994. During 1992 the
Company also leased warehouse space from the Halmos Partnership and made
lease payments of approximately $47,000. The warehouse leases were month-to-
month and were terminated in 1992. The Company no longer occupies the
operations center and is no longer making payments on the Ft. Lauderdale
Lease which is now the subject of litigation (see Note 14 - Commitments and
Contingencies).
In October 1993, the Company renewed a consulting agreement with the
Dilenschneider Group, Inc. ("DGI"), to provide public relations counsel and
advice to the Company in 1994 for an annual retainer of $180,000. A director
of the Company is the majority owner and chief executive officer of DGI. In
October 1994, the Company entered into an agreement with DGI for public
affairs and public relations assistance during 1995 for an annual retainer
of $100,000.
During 1994, DGI consulted on and assisted with investor relations for a
monthly fee of $12,500. In addition, another director of the Company
provided investor relations consulting services to the Company during 1994
for a monthly retainer of $4,167. These consulting arrangements were
terminated effective October 31, 1994.
In September 1994, the Company acquired Wright Express (see Note 2 -
Acquisition). The Company's Chairman and Chief Executive Officer was a
director of Wright Express prior to the acquisition. During negotiations
between the Company and Wright Express, the Company's Chairman did not attend
any meetings or participate in any discussions of the Board of Directors of
Wright Express and abstained from voting on the acquisition by the Company's
Board of Directors.
13. Employee Benefit Plan
In June 1993, the Company implemented a 401(k) and Profit-Sharing Plan for
its employees who are at least 20 years of age, have worked at least 1,000
hours in the past year and have completed one year of service. The Company
matches 50% of each employee's contribution, up to a maximum of 4% of each
employee's salary. Continuation of, and contributions to, the 401(k) and
Profit-Sharing Plan are voluntary, at the discretion of the Company and are
paid to each eligible employee's account. The total expense recorded under
the Plan in 1994 and 1993 was approximately $385,000 and $240,000,
respectively.
Prior to 1993, the Company maintained a Simplified Employer Pension Plan
("SEP/IRA") for its employees over 21 years of age, who had worked for the
Company for some period of time in any three of the previous five calendar
years. Amounts recorded for the Company's contributions to the SEP/IRA for
1993 and 1992 were $75,000 and $402,000, respectively.
14. Commitments and Contingencies
Contracts
The Company has written agreements with a few large credit card issuers which
account for a large percentage of its subscription revenue. Termination of
any of these contracts would adversely affect the Company. Contracts with
Citicorp (South Dakota), N.A. and related entities contributed 30%, 34% and
37% of the Company's consolidated subscription revenue in 1994, 1993 and
1992, respectively. The principal Citicorp contract, as amended, expires
December 31, 1999. Citicorp has a right to terminate the contract in the
event of the sale of a majority of the shares of the Company to specified
credit card issuers, to banks and their corporate affiliates and to entities
that do not have equity of at least $25,000,000.
Contracts with Sears, Roebuck and Co. contributed approximately 12% and 11%
of the Company's consolidated subscription revenue in 1994 and 1993,
respectively (and less than 10% in 1992). The contracts, which contain a
provision for cancellation without cause by either party upon 90 days notice,
is subject to renewal annually.
In addition, the Company is currently expanding and renovating its operations
center in Cheyenne, Wyoming to allow for expected growth and to provide for
improved customer service capabilities. Through October 31, 1994,
approximately $750,000 has been expended by the Company on this project.
Expenditures through February 1995, the anticipated date of completion, are
expected to be approximately $10 million.
During the year, the Company entered into operating leases for facilities in
Jacksonville, Florida in the normal course of business. Rent expense for
1994 was $283,000. There was no rental expense for 1993 or 1992. The
following is a schedule of future minimum rental payments required under
operating leases having initial or remaining non-cancelable lease terms in
excess of one year at October 31, 1994:
1995 $ 1,522,000
1996 1,424,000
1997 1,386,000
1998 482,000
1999 390,000
Thereafter 1,243,000
---------
$ 6,447,000
=========
Pending Litigation
The Company is defending or prosecuting five complex lawsuits involving Peter
Halmos, former Chairman of the Board and Executive Management Consultant to
the Company, and various parties related to him. Peter Halmos is also a
plaintiff in two other lawsuits, one against an officer and one against a
director of the Company. The five cases in which the Company is a party
are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for the Company) in April 1993 in Cook County Circuit
Court in Illinois against the Company and one of its directors,
purporting to state claims aggregating in excess of $100 million,
principally relating to alleged rights to "incentive compensation,"
stock options or their equivalent, indemnification, wrongful termination
and defamation. The Company and the director moved to dismiss this
lawsuit. In November 1993, the court granted the motions to dismiss
all parts of the complaint, but gave the plaintiffs leave to replead,
which they did. Again in March 1994, the court granted the motions to
dismiss all of the complaints but permitted the plaintiffs to replead
which they did in June 1994. The Company and the director have filed
motions seeking dismissal of the second amended complaint.
A suit by Peter Halmos, purportedly in the name of Halmos Trading &
Investment Company, against the Company, one of its officers and one of
its directors in Circuit Court in Broward County, Florida, making a
variety of claims related to the contested lease of the Company's former
Ft. Lauderdale headquarters. The Company has vacated the building,
ceased making payments related to the Ft. Lauderdale lease and has
filed counterclaims. The court has denied motions to dismiss filed by
both Peter Halmos and the Company. In May 1994, the court dismissed
Peter Halmos' amended counterclaim for breach of contract for indemnity
and intentional infliction of emotional distress but gave leave to
amend. In June 1994 Peter Halmos filed a second amended counterclaim
purporting to state claims for intentional infliction of emotional
distress, fraud and negligent misrepresentation and declaratory judgment
based on alleged breach of contract for indemnity or, in the
alternative, promissory estoppel, related to indemnification of legal
expenses in this lawsuit. The Company's motion to dismiss the second
amended counterclaim was denied, and it has filed an answer to the
second amended counterclaim. Discovery is proceeding. No trial date
has yet been set.
A suit which seeks monetary damages and certain equitable relief filed
by the Company in August 1993 in Laramie County Circuit Court in
Wyoming against Peter Halmos and related entities alleging that Peter
Halmos dominated and controlled the Company, breached his fiduciary
duties to the Company, and misappropriated material non-public
information to make $48 million in profits on sales of Company stock.
Discovery is proceeding. In March 1994, Mr. Halmos and related entities
filed a counterclaim in which claims are made of conspiracy in
restraint of trade, monopolization and attempted monopolization, unfair
competition and restraint of trade, breach of contract for indemnity and
intentional infliction of emotional distress. The Company's motion to
sever the conspiracy, monopolization and restraint of trade claims was
granted in May 1994. The claims for the conspiracy, monopolization,
restraint of trade and unfair competition were dismissed without
prejudice in June 1994.
A suit by Peter Halmos, purportedly in his name and in the name of
CreditLine Corporation and Continuity Marketing Corporation against the
Company, one of its officers and three of its directors in United
States District Court in the Southern District of Florida, in September
1994, seeking monetary damages and certain equitable relief purporting
to state various tort claims, state and federal antitrust claims and
claims of copyright infringement. The claims principally relate to the
allegation by Peter Halmos and his companies that SafeCard has taken
action to prevent him from being a successful competitor. On December
9, 1994 the Company and its directors moved to dismiss the lawsuit.
A suit by Peter Halmos, as trustee for the Peter A. Halmos revocable
trust dated January 24, 1990 and the Halmos Foundation, Inc.,
individually and James L. Binder as custodian for Elizabeth Binder;
Edward Dubois; Sheila Ann Dubois, as personal representative of the
Estate of Winifred Dubois; G. Neal Goolsby, John E. Masters,
individually and as custodian for Gregory Halmos and Nicholas Halmos;
and J.B. McKinney on behalf of themselves and all others similarly
situated against SafeCard, one of its officers, one of its former
officers and three of its directors in the United States District Court
for the Southern District of Florida in December 1994. This
litigation seeks monetary damages and certain equitable relief and
involves claims by a putative class of sellers of SafeCard stock for the
period January 11, 1993 through December 8, 1994 for alleged violations
of the federal and states securities laws in connection with alleged
improprieties in SafeCard's investor relations program. Peter Halmos
has filed individual claims in connection with the sale of stock by the
two trusts controlled by him. The Company intends to file an
appropriate response to the complaint.
The Company believes that it has proper and meritorious defenses in these
lawsuits which it intends to vigorously pursue. Resolution of any or all of
the Peter Halmos-related litigation could have a material impact (either
favorable or unfavorable depending on the outcome) upon the Company's
operations, liquidity and financial condition.
During 1994, the Company recognized $4,257,000 in other income from the
settlement of two lawsuits. The Company is involved in certain other claims
and litigation which are not considered material to the operations of the
Company.
15. Statement Of Cash Flows
The following is a reconciliation of net earnings to net cash provided by
operating activities:
Year ended October 31, 1994 1993 1992
Net Earnings $20,021,000 $31,477,000 $22,498,000
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Cumulative effect of change
in accounting for income
taxes (2,000,000)
Depreciation 1,197,000 864,000 769,000
Amortization of excess of cost
over fair value of net
assets acquired 152,000
Restructuring costs, net 1,978,000
Income tax expense 6,178,000 10,968,000 6,406,000
Income taxes paid, net of
refunds received 3,114,000 (16,161,000) (18,518,000)
Restricted stock expense 123,000
Net decrease (increase) in
receivables 3,763,000 (627,000) (4,427,000)
Net amortization of bond
premiums/discounts 5,281,000 5,233,000 2,439,000
Provision for uncollectible
accounts and commissions 307,000 (250,000) 137,000
Billings to subscribers, net 189,925,000 173,769,000 150,495,000
Amortization of subscribers'
advance payments to revenue (173,434,000) (156,600,000) (146,265,000)
Expenditures for subscriber
acquisition costs (68,029,000) (63,717,000) (55,065,000)
Payment of commissions, net (52,412,000) (49,511,000) (41,024,000)
Amortization of subscriber
acquisition costs 56,236,000 51,075,000 46,516,000
Amortization of commissions 49,745,000 44,173,000 40,312,000
Net (decrease) increase in
allowance for cancellations (1,237,000) 1,306,000 597,000
Net increase (decrease) in
accounts payable and
accrued expenses 7,868,000 (2,459,000) 15,680,000
Gains on sales of investment
securities, net (593,000) (1,277,000) (1,011,000)
(Gain) loss on sale/disposition
of equipment (12,000) (117,000) 271,000
Net (increase) decrease in
other assets (1,125,000) 699,000 (638,000)
----------- ----------- -----------
Net cash provided by
operating activities $ 47,046,000 $ 28,845,000 $ 19,172,000
=========== =========== ===========
<TABLE>
16. Unaudited Quarterly Financial Data
<CAPTION>
Quarters Ended
1994 January 31 April 30 July 31 October 31
<S> <C> <C> <C> <C>
Subscription revenue, net $41,391,000 $42,555,000 $44,169,000 $45,319,000
Gross profit $15,954,000 $16,573,000 $17,268,000 $17,658,000
Earnings before cumulative
effect of change in accounting
for income taxes $ 6,444,000 $ 3,804,000 $ 6,635,000 $ 1,138,000
Net earnings (A) $ 8,444,000 $ 3,804,000 $ 6,635,000 $ 1,138,000
Earnings per share before
cumulative effect of change
in accounting for income taxes $.24 $.14 $.23 $.04
Net earnings per share (A) $.31 $.14 $.23 $.04
Weighted average number
of common and common
equivalent shares 27,608,000 27,761,000 28,768,000 29,229,000
Subscribers at period end 12,229,000 12,635,000 12,876,000 13,105,000
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
1993 January 31 April 30 July 31 October 31
<S> <C> <C> <C> <C>
Subscription revenue, net $37,570,000 $39,116,000 $39,717,000 $40,197,000
Gross profit $15,409,000 $15,334,000 $15,392,000 $15,217,000
Net earnings $ 8,896,000 $ 8,528,000 $ 7,492,000 $ 6,561,000
Earnings per share $.30 $.29 $.27 $.24
Weighted average number
of common and common
equivalent shares 29,312,000 29,360,000 27,814,000 27,465,000
Subscribers at period end 11,940,000 11,928,000 11,825,000 12,043,000
<FN>
(A) The first quarter of 1994 includes a $2,000,000 positive effect on net
earnings from a change in the Company's method of accounting for income
taxes.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SAFECARD SERVICES, INCORPORATED
G. THOMAS FRANKLAND
March 24, 1995 -------------------------------
G. Thomas Frankland
Vice Chairman & Chief Financial
Officer
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-3 and S-8 (Nos. 33-39023, 33-48317, 33-51439, 33-55581,
33-55585 and 33-57071) of SafeCard Services, Inc. of our report
dated December 5, 1994, except for Note 1, as to which the date is
March 24, 1995, appearing on page 25 of this Form 10-KA.
PRICE WATERHOUSE LLP
Denver, Colorado
March 24, 1995
