SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission File No. 1-11465
IDEON GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-3293212
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
7596 Centurion Parkway, Jacksonville, Florida 32256
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (904) 218-1800
--------------
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 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock, $.01 Par Value
Outstanding at November 9, 1995 27,981,832 Shares
Total Number of Pages 44
<PAGE>
IDEON GROUP, INC.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 1995
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1995 and
October 31, 1994 3
Consolidated Statement of Operations for the Three and Nine
Months Ended September 30, 1995 and July 31, 1994 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1995 and July 31, 1994 5
Notes to Consolidated Financial Statements 6-17
Report of Independent Accountants 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 39
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Balance Sheet
(in thousands, except share data)
September 30, October 31,
1995
1994
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,110 $ 17,921
Securities available for sale maturing within one year 47,720 39,249
Receivables, net 68,440 42,449
Income taxes receivable 621 2,114
Deferred subscriber acquisition costs and
related commissions amortizing within one year 104,020 83,449
Deferred income tax asset 32,021 8,540
Other current assets 2,406 799
----- ---
Total current assets 271,338 194,521
Securities available for sale maturing after one year 13,413 127,363
Deferred subscriber acquisition costs and
related commissions amortizing after one year 22,131 111,948
Property and equipment, net 35,672 16,410
Excess of cost over fair value of net assets acquired 45,102 28,739
Other assets 1,634 1,392
----- -----
Total assets $ 389,290 $ 480,373
= ======= = =======
Liabilities
Current liabilities:
Notes payable to bank $ 18,589 $ 11,793
Accounts payable 34,314 30,833
Accrued expenses 31,887 24,654
Product abandonment and related liabilities 27,557
Subscribers' advance payments amortizing
within one year 116,722 106,563
Allowance for cancellations 7,719 7,656
----- -----
Total current liabilities 236,788 181,499
Subscriber advance payments amortizing after one year 47,744 51,991
Deferred income tax liability 5,119 29,291
----- ------
Total liabilities 289,651 262,781
------- -------
Stockholders' Equity
Preferred stock--authorized 10,000,000 shares ($.01 par
value); no shares issued or outstanding
Common stock--authorized 90,000,000 shares ($.01 par value); 34,946,000 shares
issued (34,946,000 at October 31, 1994); 27,992,665 shares outstanding
(28,933,599 at
October 31, 1994) 349 349
Additional paid-in capital 41,222 41,058
Retained earnings 115,645 225,459
Unrealized gain (loss) on securities available for sale 396 (607)
--- ----
157,612 266,259
Less cost of 6,953,335 common shares in treasury
(6,012,401 shares at October 31, 1994) (57,973) (48,667)
------- -------
Total stockholders' equity 99,639 217,592
------ -------
Total liabilities and stockholders' equity $ 389,290 $ 480,373
= ======= = =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, July 31, September 30, July 31,
1995 1994 1995 1994
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Membership and subscription revenue, net $ 44,724 $ 41,423 $ 132,427 $ 120,042
Card acquisition and services revenue 6,025 16,726
Consumer marketing revenue 5,613 2,746 19,835 8,073
Gain from litigation settlements 4,257
Interest income 1,001 2,166 4,589 6,218
Other income 180 80 1,426 832
--- -- ----- ---
57,543 46,415 175,003 139,422
------ ------ ------- -------
Costs and expenses
Subscriber acquisition costs and
related commissions 29,203 24,902 83,730 72,481
Other costs of revenue 5,444 1,999 16,877 5,839
Research and product development costs 1,592 1,326 6,696 1,811
Service costs and other operating expenses 9,531 5,818 27,374 15,719
General and administrative expenses 7,486 4,092 27,339 12,981
Costs related to products abandoned
and restructuring 16,439 97,591 7,900
------ ------ -----
69,695 38,137 259,607 116,731
------ ------ ------- -------
Income (loss) before provision for income taxes (12,152) 8,278 (84,604) 22,691
Provision for (benefit from) income taxes (4,374) 1,643 (30,457) 5,808
------ ----- ------- -----
Income (loss) before cumulative effect of change
in accounting for income taxes (7,778) 6,635 (54,147) 16,883
Cumulative effect of change in accounting
for income taxes 2,000
Net income (loss) $ (7,778) $ 6,635 $ (54,147) $ 18,883
= ======= = ===== = ======= ============
Earnings per share:
Income (loss) before cumulative effect of
accounting change $ (.28) $ .23 $ (1.89) $ .60
Cumulative effect of accounting change .07
---
Net income (loss) per common share $ (.28) $ .23 $ (1.89) $ .67
= ==== = === = ===== = ===
Weighted average common and
common equivalent shares 28,222 28,768 28,675 28,306
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
(in thousands)
Nine Months Ended
September 30, July 31,
1995 1994
----------------- ----------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Cash received from subscribers/customers $ 168,256 $ 141,112
Cash paid to suppliers and employees (239,254) (123,233)
Gain from litigation settlements 4,257
Interest received 6,895 11,508
Income tax refunds (payments), net 10,799 (1,699)
------ ------
Net cash (used in) provided by operating activities (53,304) 31,945
------- ------
Cash Flows From Investing Activities
Purchases of investments (41,333) (62,431)
Proceeds from sales of investments 123,297 48,759
Proceeds from maturing investments 16,616 8,925
Cost of acquisitions, net of cash acquired (12,977)
Acquisitions of property and equipment, net (18,473) (3,177)
------- ------
Net cash provided by (used in) investing activities 67,130 (7,924)
------ ------
Cash Flows From Financing Activities
Net borrowings on notes payable to bank 6,506
Proceeds from exercise of stock options 448 24,627
Dividends paid (4,274) (3,872)
Payments for purchase of treasury shares (9,711) (483)
------ ----
Net cash (used in) provided by financing activities (7,031) 20,272
------ ------
Net increase in cash and cash equivalents 6,795 44,293
Cash and cash equivalents at beginning of period 9,315 3,335
----- -----
Cash and cash equivalents at end of period $ 16,110 $ 47,628
= ====== = ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Notes To Consolidated Financial Statements
(Unaudited)
1. Reorganization
On April 27, 1995, the stockholders of SafeCard Services, Incorporated
("SafeCard") approved a plan of reorganization whereby SafeCard became a
wholly-owned subsidiary of Ideon Group, Inc. ("Ideon" or the "Company"), a
newly formed Delaware corporation. All shares of SafeCard common stock were
converted into shares of Ideon common stock. Ideon is a holding company
with current business units as follows: SafeCard Services, Incorporated,
Wright Express Corporation, National Leisure Group, Inc. and Ideon
Marketing and Services Company. The operations of an additional business
unit, Family Protection Network, Inc., have been discontinued as described
below.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in SafeCard's Annual
Report on Form 10-K for the year ended October 31, 1994.
On February 14, 1995, SafeCard filed a Transition Period Form 10-Q for
the two months ended December 31, 1994 in order to effect a change in its
year end from October 31 to December 31. Financial statements for the three
and nine months ended July 31, 1994 (the end of the third quarter under the
prior October 31 fiscal year) are presented for comparative purposes.
Management does not believe that preparation of financial statements for
the three and nine months ended September 30, 1994 would result in any more
comparable information and, therefore, the additional costs which would
have been incurred to prepare such financial statements would not be
justified. The previously reported interim period ended July 31, 1994 is
comparable to the present interim period as there are no significant
seasonal differences among the periods presented which would materially
affect comparability. As discussed in Note 6, the Company changed the
amortization periods of deferred subscriber acquisition costs on December
31, 1994.
Prior period financial statements have been reclassified to conform to
current presentations.
Price Waterhouse LLP has performed a review, and not an audit, of the
unaudited consolidated financial information of the Company for the three
and nine month periods ended September 30, 1995 (based on procedures
adopted by the American Institute of Certified Public Accountants) as set
forth in their separate report dated October 23, 1995, which is included in
this Form 10-Q. This report is not a "report" within the meaning of
Sections 7 and 11 of the Securities Act of 1933, and the independent
accountant's liability under Section 11 does not extend to it.
3. Product Abandonment and Related Liabilities
Included in costs related to products abandoned and restructuring in
the Statement of Operations for the three and nine months ended September
30, 1995 are special charges of $10,861,000 and $45,017,000, respectively,
related to the abandonment of certain new product developmental efforts and
the related impairment of certain assets and the restructuring of SafeCard
and the corporate headquarters as discussed below. The charges represent
accrued liabilities of $10,661,000 and asset impairments of $200,000 for
the three months ended September 30, 1995, and accrued liabilities of
$36,248,000 and asset impairments of $8,769,000 for the nine months ended
September 30, 1995.
The components of the product abandonment and related liabilities as of
September 30, 1995 are as follows (in thousands):
<TABLE>
1995 Balance at
Provisions Activity 9/30/95
<S> <C> <C> <C>
Severance and other employee costs $14,960 $4,266 $10,694
Costs to terminate equipment and facilities leases 9,593 1,565 8,028
Liability for contract impairments 8,400 1,000 7,400
Other costs 3,295 1,860 1,435
--------- ------- -----------
$36,248 $8,691 $ 27,557
======= ====== ========
</TABLE>
PGA TOUR Partners
In late March and early April 1995, the Company launched an expanded
PGA TOUR Partners program through its Ideon Marketing and Services
subsidiary. The program provided various benefits to members including
access to PGA TOUR events and a co-branded credit card. Consumer response
rates since the launch were significantly less than management's
expectations and it was determined that the product as configured was not
economically viable. The Company discontinued marketing the product and
recorded a special charge of $17,993,000 at June 30, 1995 for costs
associated with the abandonment of the product including employee severance
payments (approximately 130 employees), costs to terminate equipment and
facilities leases, costs for contract impairments and write-downs taken for
asset impairments.
On September 14, 1995, after a period of product redesign and test
marketing, the Company announced that it would discontinue its credit card
servicing role in connection with the PGA TOUR Partners credit card
program. In connection with this decision, the Company has recorded a
special charge of $3,612,000 for costs associated with the abandonment of
this role, including employee severance payments (approximately 60
employees), costs to terminate equipment and facilities leases and the
recognition of certain commitments.
Family Protection Network
In April 1995, Family Protection Network, Inc. launched a nationwide
child registration and missing child search program. Consumer response
rates from the initial product launch were lower than anticipated and the
Company discontinued the operation. As a result, the Company recorded an
$8,987,000 charge in the second quarter to cover severance payments
(approximately 100 employees), costs to terminate equipment and facilities
leases and write-downs taken for asset impairments.
Corporate and SafeCard Restructurings
As a result of the discontinuance of these products, the Company is
undertaking an overall restructuring of its operations, including a
significant reduction of its workforce at its corporate headquarters and at
SafeCard. The decision to abandon these products and restructure the
Company resulted in the recording of a charge of $7,176,000 in the second
quarter of 1995 to cover costs to terminate certain operating leases and
write-down certain assets to their estimated net realizable value. The
Company recorded additional charges of $3,010,000 in the third quarter of
1995 for costs associated with the restructuring of SafeCard and $4,239,000
for a corporate headquarters restructuring. Restructuring costs include
severance payments and costs to terminate equipment and facilities leases.
Management believes that the accruals described above are sufficient to
cover the estimated costs associated with the product abandonments. The
Company anticipates completion of the majority of the transactions related
to the product abandonments and restructurings during 1996.
4. Acquisition
On February 10, 1995, the Company completed its acquisition of
substantially all of the assets and liabilities of National Leisure Group,
Inc., a provider of vacation travel packages to credit card companies,
retailers and wholesale clubs in the United States. The Company paid cash
of $15,048,000 and agreed to issue $1,400,000 of common stock on the third
anniversary of the acquisition. Also, up to $2,800,000 of additional common
stock is issuable based on the attainment of certain earnings hurdles. The
acquisition was effective as of January 1, 1995 and was accounted for under
the purchase method. Accordingly, the consolidated results of operations of
the Company include the results of operations of National Leisure Group for
the three and nine month periods ended September 30, 1995.
As part of the transaction, the Company acquired $5,944,000 of assets,
which included $2,395,000 of cash, and assumed liabilities of $7,093,000.
The Company recorded $17,954,000 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 September 30, 1995 related to
this acquisition was approximately $540,000.
Revenue from the sale of vacation packages, which is included in the
"Consumer marketing revenue" caption in the consolidated statement of
income, is recognized at the date when substantially all obligations to the
customer have been performed and at least 90 percent of the total booking
price has been received.
5. Investments
On October 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS 115"), "Accounting for Investments in
Certain Debt and Equity Securities." Upon adoption of FAS 115, the Company
classified its securities portfolio, consisting of municipal bonds, as
available for sale and disclosed an unrealized loss as a separate component
of stockholders' equity. During the two months ended December 31, 1994, the
Company experienced further market value declines in its investment
portfolio as a result of the increasing interest rate environment. Given
the Company's strategy to redeploy its investment resources into operating
assets and in view of the interest rate environment, management elected to
shorten the overall maturity of the portfolio. In connection with this
decision, the Company determined that the investment portfolio had suffered
an other than temporary market value impairment and the net unrealized
losses, previously recognized as an offset to stockholders' equity, were
charged against earnings for the two months ended December 31, 1994.
During the first quarter of 1995, the Company effected the
repositioning of the investment portfolio. Municipal bond securities with
maturities later than 1996 were sold and the proceeds were reinvested in
short term United States Treasury securities or used to fund the launch of
new businesses and the acquisition of National Leisure Group. This
repositioning allows the Company to take advantage of its current tax net
operating loss position and provides for greater liquidity. The Company
continues to classify the securities portfolio as available for sale.
6. 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. Prior to 1995, these expenditures were deferred
and amortized to expense in proportion to expected revenues over the
expected subscription periods, including renewal periods (life of
subscriber).
After a general review of the Company's business plans and related
accounting practices, the Company's board of directors approved a change in
the amortization periods for deferred subscriber acquisition costs as of
December 31, 1994. The change was made in response to the Company's plans
to incur additional marketing expenditures to enhance renewal rates. Under
generally accepted accounting principles, if additional expenditures are
incurred to maintain or enhance the renewal stream, the Company would not
be allowed to amortize such subscriber acquisition costs over periods
greater than the initial subscription period. Accordingly, based on efforts
to enhance renewal rates, the Company changed its amortization periods.
Prior to December 31, 1994, subscriber acquisition costs were generally
amortized up to ten years for single year subscriptions and up to twelve
years for multi-year subscriptions. These amortization periods represented
the estimated life of the subscriber. During the Transition Period ended
December 31, 1994, the amortization periods were shortened to one year and
three years for single year and multi-year subscriptions, respectively
(initial subscription period without regard for anticipated renewals). The
effect of reducing the amortization periods resulted in a one-time,
non-cash, charge to earnings during the two months ended December 31, 1994
as reported in the Company's Transition Period report on Form 10-Q.
The change in the amortization periods for deferred subscriber
acquisition costs does not affect the amortization of commissions which
continue to be amortized over the one to three year subscription period, as
appropriate.
<TABLE>
<CAPTION>
Deferred subscriber acquisition costs and related commissions were as
follows:
September 30, October 31,
1995 1994
------------------- -----------
<S> <C> <C>
Hot-Line $ 64,279,000 $ 123,775,000
Fee Card 6,935,000 9,185,000
Other services 10,369,000 18,796,000
---------- ----------
Total deferred subscriber acquisition costs 81,583,000 151,756,000
Commissions 44,568,000 43,641,000
---------- ----------
Total deferred subscriber acquisition
costs and commissions $ 126,151,000 $ 195,397,000
= =========== = ===========
</TABLE>
7. Income Taxes
The Company's effective income tax rate for the three and nine months
ended September 30, 1995 and July 31, 1994 differs from the applicable
statutory rate due to tax-exempt interest received on investments in
municipal debt securities and the federal tax benefit of state income
taxes. The effective income tax rate for the three and nine months ended
September 30, 1995 was based on the estimated effective income tax rate for
the tax year ending October 31, 1995.
At September 30, 1995, the Company had a net current deferred tax asset
of $32,021,000 and a net noncurrent deferred tax liability of $5,119,000.
The deferred tax asset relates primarily to the Company's net operating
losses and to timing differences in the recognition of subscriber advance
payments. The net operating losses are expected to be fully utilized
through a carryback claim to recover taxes paid in prior years. Management
believes that based on available information, it is more likely than not
that the net deferred tax asset will be realized, and accordingly, a
valuation allowance has not been recorded.
On November 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes."
The adoption of FAS 109 resulted in a cumulative credit to earnings of
$2,000,000 for the nine months ended July 31, 1994.
8. Stock Repurchase Plan
On May 30, 1995, the Company's board of directors reinstated a
previously adopted stock repurchase program authorizing the Company to
purchase up to an additional 2,500,000 shares of outstanding common stock
in the open market. The program, which had ended October 31, 1994,
authorized the Company to purchase a total of 6,000,000 shares, of which
approximately 3,500,000 shares had been previously purchased. As of
September 30, 1995, the Company had purchased 995,100 shares for $9,711,000
under the reinstated program.
<PAGE>
9. Supplemental Cash Flow Information
The reconciliation of net (loss) income to net cash (used in) provided
by operating activities, as presented in the consolidated statement of cash
flows, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, July 31,
1995 1994
----------------- ----------
<S> <C> <C>
Net (loss) income $ (54,147,000) $ 18,883,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,754,000 704,000
Cumulative effect of change in accounting
for income taxes (2,000,000)
Amortization of investment
premiums/discounts, net 1,363,000 3,986,000
Realized gain on sales of securities
available for sale (1,014,000) (603,000)
Loss on impairment of property
and equipment 4,317,000
Change in deferred income taxes (21,457,000) 4,109,000
Billings to subscribers, net 133,065,000 143,338,000
Amortization of subscribers' advance
payments to revenue (140,664,000) (128,115,000)
Expenditures for subscriber acquisition costs (46,683,000) (48,082,000)
Payment of commissions, net (37,467,000) (39,818,000)
Amortization of subscriber acquisition costs 50,163,000 41,311,000
Amortization of commissions 39,753,000 37,009,000
Decrease in allowance for cancellations (1,478,000) (1,874,000)
Changes in assets and liabilities, net of
effects of business acquisitions:
Receivables, net (8,382,000) 723,000
Income taxes receivable 1,500,000
Other current assets 1,766,000 (78,000)
Other assets (386,000) (896,000)
Accounts payable and accrued expenses (5,864,000) 3,348,000
Product abandonment and related
liabilities 27,557,000
Net cash (used in) provided by
operating activities $ (53,304,000) $ 31,945,000
= =========== = ==========
</TABLE>
<PAGE>
10. Commitments and Contingencies
Legal Matters
The Company is defending or prosecuting claims in thirteen complex
lawsuits, twelve of which involve Peter Halmos, former Chairman of the
Board and Executive Management Consultant to SafeCard, and various parties
related to him as adversaries. Peter Halmos is also a plaintiff in three
other lawsuits, one against a former officer, one against a director of the
Company and one against SafeCard's outside counsel, in which neither
SafeCard nor the Company have been named as defendent. The thirteen cases
in which the Company or its subsidiaries is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court
in Illinois against SafeCard and one of the Company's 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. SafeCard 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. On February 7, 1995, the court
dismissed with prejudice Peter Halmos' claims regarding alleged rights
to "incentive compensation," stock options or their equivalent,
wrongful termination and defamation. Mr. Halmos has appealed this
ruling; briefing has not been completed and no date for oral argument
has been set. SafeCard has filed an answer to the remaining
indemnification claims. Its obligation to file an answer to the claims
of Myron Cherry have been stayed pending settlement discussions.
A suit by Peter Halmos, purportedly in the name of Halmos Trading &
Investment Company, seeking monetary damages and specific performance
against SafeCard, one of its officers and one of the Company's
directors in Circuit Court in Broward County, Florida, making a variety
of claims related to the contested lease of SafeCard's former Ft.
Lauderdale headquarters. SafeCard has vacated the building, ceased
making payments related to the Ft. Lauderdale lease and has filed
counterclaims. 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.
In January 1995, Peter Halmos filed a third amended counterclaim which
was identical in all material respects to the second amended
counterclaim. On January 17, 1995, SafeCard filed its answer to the
third amended counterclaim. On October 30, 1995, the court dismissed
Peter Halmos' claims against the Company for fraudulent
misrepresentation and specific performance and dismissed all claims
against the Company's director. Discovery is proceeding. Trial is
expected to occur in the first quarter of 1996.
A suit which seeks monetary damages and certain equitable relief filed
by SafeCard in August 1993 in Laramie County Circuit Court in Wyoming
against Peter Halmos and related entities alleging that Peter Halmos
dominated and controlled SafeCard, breached his fiduciary duties to
SafeCard, and misappropriated material non-public information to make
$48 million in profits on sales of SafeCard stock. In March 1994, Mr.
Halmos and related entities filed a counterclaim in which claims were
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. SafeCard'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. On April 12, 1995, the
trial court granted the motion of Mr. Halmos and certain related
entities to amend their counterclaims. The amended counterclaims
include claims for indemnification for legal expenses incurred in the
action and a claim that SafeCard's contract with CreditLine should be
rescinded. On April 19, 1995, the trial court granted Mr. Halmos'
motion for summary judgment that certain of SafeCard's claims against
him were barred by the statute of limitations. SafeCard has filed an
appeal, and the Court has entered an order staying all action on both
the counterclaims and the Company's claims pending appeal. Oral
argument on the appeal has been scheduled for November 15, 1995.
A suit seeking monetary damages by Peter Halmos, purportedly in his
name and in the name of CreditLine Corporation and Continuity Marketing
Corporation against SafeCard, one of its officers and three of the
Company's directors in United States District Court in the Southern
District of Florida, in September 1994 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, SafeCard, its
officer and the Company's directors moved to dismiss the lawsuit. On
March 8, 1995, the court granted Mr. Halmos' motion to file a second
amended complaint. On March 28, 1995, SafeCard, its officer and the
Company's directors again moved to dismiss the lawsuit. All discovery
in the case has been stayed pending a ruling on the motion to dismiss.
On August 16, 1995, the United States Magistrate Judge filed a Report
and Recommendation that the case be dismissed.
A suit seeking monetary damages 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 the Company's directors in the United
States District Court for the Southern District of Florida in December
1994. This litigation 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. The complaint also includes individual claims made by Peter
Halmos in connection with the sale of stock by the two trusts
controlled by him. The Complaint was amended on September 13, 1995 to
join James L. Binder individually and as custodian for the James L.
Binder, D.D.S., P.C. Profit Sharing Trust II. SafeCard and the
individual defendants have filed a motion to dismiss. There has been
limited discovery on class certification and identification of "John
Doe" defendant issues.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc.
and Continuity Marketing Corporation, companies affiliated with Peter
Halmos, in the State Circuit Court in Palm Beach County, Florida in
April 1995 against the Company, Family Protection Network, Inc.,
SafeCard, one of the Company's directors and the Company's Chief
Executive Officer purporting to state various statutory and tort
claims. The claims principally relate to the allegation by these
companies that SafeCard's Early Warning Service and Family Protection
Network were conceived and commercialized by, among others, Peter
Halmos and have been improperly copied. An amended complaint filed on
June 14, 1995 seeking monetary damages adds to the prior claims certain
claims by Nicholas Rubino that principally relate to the allegation
that SafeCard's Pet Registration Product was conceived by Mr. Rubino
and has been improperly copied. The Company and the individual
defendants have filed a motion to dismiss the amended complaint. A
hearing was held on the motion to dismiss on October 13, 1995, and the
court is considering this motion.
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos Revocable Trust
dated January 24, 1990 and by James B. Chambers, individually and on
behalf of himself and all others similarly situated against the
Company, SafeCard, each of the members of the Company's Board of
Directors, three non-board member officers of the Company, the
Company's outside auditor and one of the Company's outside counsel in
the United States District Court for the Southern District of Florida
in June 1995. The litigation involves claims by a putative class of
purchasers of the Company stock between December 14, 1994 and May 25,
1995 and on behalf of a separate class of all record holders of
SafeCard stock as of April 27, 1995. The putative class claims are for
alleged violations of the federal securities laws, for alleged breach
of fiduciary duty and alleged negligence in connection with certain
matters voted on at the Annual Meeting of SafeCard stockholders held on
April 27, 1995. The Company and the individual defendants have filed a
motion to dismiss these claims. There has been limited discovery on
class certification issues.
A purported shareholder derivative action initiated by Michael P.
Pisano, on behalf of himself and other stockholders of SafeCard and
Ideon Group, Inc. against SafeCard, Ideon Group Inc., two of their
officers, and the Company's directors in United States District Court,
Southern District of Florida. This litigation involves claims that the
officers and directors of SafeCard have improperly refused to accede
Peter Halmos' litigation and indemnification demands against the
Company. The Company and the individual defendants have filed motions
to dismiss the first amended complaint. On September 29, 1995, Pisano
filed a second amended complaint which made additional allegations of
waste and mismanagement against the Company's officers and directors in
connection with the Family Protection Network and PGA Tour Partners
products.
A suit seeking monetary damages filed by Peter Halmos against SafeCard,
one of its directors, its former general counsel, and its legal counsel
in the Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach
County, Florida on August 10, 1995. This litigation involves claims by
Peter Halmos for breach of fiduciary duty and constructive fraud,
fraud, and negligent misrepresentation and is based on allegations
arising out of the resolution of a shareholder class action lawsuit in
1991 and SafeCard's subsequent filing of an action against Halmos and
his related companies in Wyoming in 1993. SafeCard has filed a motion
to dismiss which has been set for hearing on January 11, 1996.
A suit by Lois Hekker on behalf of herself and all others similarly
situated seeking monetary damages against the Company and its Chief
Executive Officer in the United States District Court for the Middle
District of Florida on July 28, 1995. The litigation involves claims by
a putative class of purchasers of the Company's stock for the period
April 25, 1995 through May 25, 1995 for alleged violation of the
federal securities laws in connection with statements made about the
Company's business and financial performance. Defendants filed a motion
to dismiss on October 2, 1995.
A declaratory judgment action by the Company and its directors against
Peter Halmos in Delaware Chancery Court, New Castle County. This action
seeks a declaration regarding the Company's advance indemnification
obligations, if any, to Peter Halmos who has made numerous advance
indemnification demands on the Company in connection with his many
litigations.
A suit by High Plains Capital Corporation against Ideon Group, Inc.,
SafeCard, two of its directors and The Dilenschneider Group, Inc. in
Circuit Court in Palm Beach County, Florida. This litigation involved
claims by High Plains Capital Corporation, a corporation with which
Peter Halmos is affiliated, for certain incentive compensation arising
out of Halmos' affiliation with SafeCard. The Complaint includes claims
for breach of written agreements regarding additional services and
expenses, an alternative claim for quantum meruit based on written
agreement and a count for tortious interference with advantageous
business relationship. The complaint has not yet been served on the
Company.
A suit filed by High Plains Capital Corporation against Ideon Group,
Inc. and SafeCard in Circuit Court in Broward County, Florida. This
litigation involves claims by High Plains Capital Corporation, a
corporation with which Peter Halmos is affiliated, for alleged breach
of oral contract, alleged violation of Florida's Uniform Trade Secrets
Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are the property of High Plains Capital
Corporation. The complaint has not yet been served on the Company.
The Company believes that it has proper and meritorious claims and
defenses in these lawsuits which it intends to vigorously pursue.
Resolution of any or all of these litigation matters could have a material
impact (either favorable or unfavorable depending on the outcome) upon the
Company's operations, liquidity and financial condition.
Other Matters
In May 1995, the Company announced the signing of a definitive purchase
agreement to acquire a 350,000 square foot building and related property
for approximately $39,000,000. As part of the agreement, the Company paid
$3,900,000 into an escrow account as a nonrefundable deposit pending the
completion of the purchase in early 1996. In light of the product
abandonments and restructurings discussed in Note 3, management included an
amount related to the impairment of this deposit in the corporate charge of
$7,176,000 recorded in the second quarter. Management is currently working
with the building owner to facilitate a sale of the building to a third
party from which the Company expects to recover a portion of the deposit.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Ideon Group, Inc.
We have reviewed the accompanying consolidated balance sheet of Ideon Group,
Inc. (formerly SafeCard Services, Incorporated) as of September 30, 1995, the
related consolidated statement of operations for the three-month and nine-month
periods then ended and the consolidated statement of cash flows for the
nine-month period ended September 30, 1995, appearing in the Company's Form 10-Q
for the quarter ended September 30, 1995. We also have reviewed the consolidated
statements of income for the three-month and nine-month periods ended July 31,
1994 and the consolidated statement of cash flows for the nine-month period
ended July 31, 1994 appearing in the Company's Form 10-Q for the quarter ended
September 30, 1995. This financial information is the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet of SafeCard Services, Incorporated as of October
31, 1994, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated December 5, 1994, except for Note 1, as to
which the date is March 24, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the accompanying consolidated
balance sheet information as of October 31, 1994, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
PRICE WATERHOUSE LLP
Tampa, Florida
October 23, 1995
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
References herein to the third quarter 1995 and to the third quarter 1994
refer to the three months ended September 30, 1995 and July 31, 1994,
respectively. References to 1995 and 1994 refer to the nine months ended
September 30, 1995 and July 31, 1994, respectively. Management does not believe
that preparation of financial statements for the three or nine months ended
September 30, 1994 would result in any more comparable information, and
therefore, the additional costs which would have been incurred to prepare such
financial statements would not be justified.
Ideon Group, Inc. resulted from the reorganization of SafeCard Services,
Inc. approved by shareholders on April 27, 1995. As a result of the
reorganization, Ideon is a holding company with current business units including
SafeCard Services, Inc., Wright Express Corporation, National Leisure Group,
Inc. and Ideon Marketing and Services Company. The operations of an additional
business unit, Family Protection Network, Inc., have been discontinued as
described below.
RESULTS OF OPERATIONS
CONSOLIDATED
Overview
The Company reported a pre-tax loss of $12,152,000, resulting in a net loss
of $7,778,000, or $.28 per share, for the third quarter 1995. The pre-tax loss
includes a special charge of $10,861,000 for costs associated with the further
abandonment of Ideon Marketing and Services product developmental efforts and
the reduction of SafeCard and corporate staff and expenses. As discussed in the
second quarter Form 10-Q, the Company attempted to launch two new businesses
late in the first quarter and early in the second quarter of 1995. Consumer
response rates to the products offered by these businesses were significantly
lower than management's expectations and these products proved not to be
economically viable. The Company closed its Family Protection Network business
unit and significantly reduced the size of its Ideon Marketing and Services
business unit, returning it to a developmental mode, in the second quarter. The
third quarter special charge includes costs to discontinue the credit card
servicing operation of Ideon Marketing and Services and to reduce SafeCard and
corporate staff and overhead expenses.
The Company expects to record a loss for the year ended December 31, 1995
as a result of the actions described above.
Revenues
Revenues increased $11,128,000, or 24.0%, for the third quarter 1995 and
$35,581,000, or 25.5%, for the nine months ended September 30, 1995 over the
comparable periods in 1994. The increases are primarily due the acquisitions of
Wright Express in September 1994 and National Leisure Group in January 1995 and
revenue growth at SafeCard.
<PAGE>
Operating Income
The Company incurred pre-tax operating losses of $12,152,000 and
$84,604,000 during the three and nine months ended September 30, 1995, compared
to pre-tax operating income of $8,278,000 and $22,691,000 during the three and
nine months ended July 31, 1994. The decline in operating income was the result
of the expenses incurred in connection with the launch and subsequent
abandonment of the two new product development initiatives and related
restructuring discussed above. The operating losses include special charges of
$10,861,000 and $45,017,000 for the three and nine months ended September 30,
1995 for costs associated with the abandonment of these product development
efforts and the reduction of SafeCard and corporate staff and overhead expenses.
The charges include severance payments to terminated employees, costs to
terminate equipment and facilities leases, the recording of certain commitments
and write-downs taken for asset impairments as a result of these actions.
<PAGE>
The following tables summarize operating results by business unit. The
"Developmental Operations" column includes the operating results of Ideon
Marketing and Services and Family Protection Network, the Company's
developmental stage business units. Prior year financial information includes
the operating results of SafeCard and general corporate activities.
<TABLE>
<CAPTION>
For the three months ended September 30, 1995 (in thousands):
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription revenue $ 44,724 $ 44,724
Card acquisition and
services revenue $ 6,025 6,025
Consumer marketing
revenue 2,601 $ 3,012 5,613
Interest and other
income 155 $ 1,026 1,181
--------- --------- ------ ------- ----- -----
Total revenue 47,480 6,025 3,012 1,026 57,543
------ ----- ------- ----- ------
Total costs and
expenses 42,022 5,056 3,313 $ 9,190 10,114 69,695
------ ------- ----- -------- ------ ------
Income (loss) before
provision for income
taxes $ 5,458 $ 969 $ (301) $ (9,190) $ (9,088) $(12,152)
= ===== == ===== = ===== = ====== = ====== ========
</TABLE>
<TABLE>
<CAPTION>
For the three months ended July 31, 1994 (in thousands):
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription revenue $ 41,423 $ 41,423
Card acquisition and
services revenue
Consumer marketing
revenue 2,746 2,746
Interest and other
income 79 $ 2,167 2,246
---------- ------- -----
Total revenue 44,248 2,167 46,415
------ ----- ------
Total costs and
expenses 33,040 745 4,352 38,137
------ --- ----- ------
Income (loss) before
provision for income
taxes $ 11,208 $ (745) $(2,185) $ 8,278
= ====== ========= ======= = =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995 (in thousands):
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription revenue $ 132,427 $132,427
Card acquisition and
services revenue $ 16,726 16,726
Consumer marketing
revenue 7,772 $ 12,063 19,835
Interest and other
income 448 24 $ 5,543 6,015
------- ------ -------- ----- -------
Total revenue 140,647 16,726 12,087 5,543 175,003
------- ------ -------- ----- -------
Total costs and
expenses 116,549 14,386 10,348 $ 83,166 35,158 259,607
------- -------- ------ -------- ------ -------
Income (loss) before
provision for income
taxes $ 24,098 $ 2,340 $ 1,739 $ (83,166) $(29,615) $(84,604)
= ====== == ====== = ===== = ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended July 31, 1994 (in thousands):
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription revenue $120,042 $ 120,042
Card acquisition and
services revenue
Consumer marketing
revenue 8,073 8,073
Interest and other
income 229 $ 11,078 11,307
----- --------- ------
Total revenue 128,344 11,078 139,422
------- ------ -------
Total costs and
expenses 94,786 1,014 20,931 116,731
------ ----- ------ -------
Income (loss) before
provision for income
taxes $ 33,558 $ (1,014) $ (9,853) $ 22,691
= ====== ========= = ====== ========
</TABLE>
<PAGE>
SAFECARD SERVICES
Business Overview
SafeCard is a provider of credit card enhancement and continuity products.
Subscriptions for continuity services are primarily marketed through credit card
issuers by using mail and telemarketing solicitations. 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 fee-based
credit cards ("Fee Card"), reminder services and a personal credit information
service ("CreditLine").
SafeCard markets its products and services through approximately 160 credit
card issuers including banks, oil companies and retailers. New contracts have
been signed with six existing clients during 1995, including an extension of the
Company's contract with Citibank through the year 2000. SafeCard has also signed
a letter of intent for a new five-year cooperative business relationship with
Sears Roebuck & Company which is expected to become effective on January 1,
1996. As previously reported, SafeCard has ceased new marketing with Texaco.
While modest growth in Hot-Line subscription revenues through credit card
issuers may be achievable in the future, the Company believes that successful
development of new products and services will become increasingly important to
the future growth of SafeCard revenues and operating income. However, the
viability of new products and services under development is not assured and the
timing of bringing such new products and services to market cannot be estimated.
Revenues
Membership and subscription revenue, net increased 8.0% from $41,423,000 in
the second quarter 1994 to $44,724,000 in the second quarter 1995. Membership
and subscription revenue increased 10.3% to $132,427,000 for the nine months
ended September 30, 1995 from $120,042,000 for the nine months ended July 31,
1994. Membership and subscription revenue represents the amortization of advance
payments received from subscribers to SafeCard's credit card enhancement
continuity services such as Hot-Line and Fee Card. The increases are due to a
combination of factors, including an increase in the number of subscribers to
SafeCard's Hot-Line, Fee Card and CreditLine services, a shift in sales mix to
higher priced products, such as CreditLine, and a price increase for certain
Hot-Line subscriptions which began in 1993. Membership and subscription revenue
is reported net of an allowance for cancellations. Billings for subscriptions
are deferred and amortized to revenue over the related subscription periods,
generally one or three years.
<PAGE>
The following table details renewal rates at September 30, 1995 and July 31,
1994:
Subscription Product 1995 1994
-------------------- ---- ----
Single year Hot-Line 76% 75%
Multi-year Hot-Line 47% 48%
Fee Card (primarily single year) 80% 81%
Renewal rates are computed by comparing the number of paid subscribers at
the end of the period for each subscriber campaign pool to the number of paid
subscribers at the beginning of the period. SafeCard monitors renewal rates by
product by client on a monthly basis. Renewal rates of subscribers are affected
by a variety of factors, including the number and mix of subscribers renewing,
economic factors, changes in the credit card industry and other factors, some of
which may be beyond SafeCard's control, as well as the effectiveness of
retention programs.
The following table details subscriber activity for the nine months ended
September 30, 1995 and July 31, 1994 for SafeCard's credit card enhancement and
continuity services.
<TABLE>
<CAPTION>
Beginning New Ending
Subscribers Subscribers Cancellations Subscribers
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
1995 13,046,000 2,847,000 (2,719,000) 13,174,000
1994 12,043,000 3,630,000 (2,797,000) 12,876,000
</TABLE>
New subscribers represent fee-paying subscribers obtained through various
marketing channels. Free trial subscriptions which are offered periodically as a
marketing technique are excluded from the subscriber activity above.
Cancellations consist of both voluntary and involuntary membership losses.
Voluntary cancellations result from members electing to discontinue their
subscriptions. Involuntary cancellations result from the closure of credit card
accounts or other events beyond SafeCard's control.
Membership and subscription revenues are dependent on a variety of factors
including subscription fees, net response rates (gross enrollments less
cancellations), the extent of new marketing activities and renewal rates. These
factors are further affected 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, solicitation materials and marketing strategies.
Changes in marketing emphasis and the extent of new marketing with credit
card issuers affects the number of potential subscribers. In addition, certain
card issuers, including Citibank, have begun to limit telemarketing performed by
SafeCard and other enhancement providers to their customer lists. As a result,
SafeCard has developed alternative marketing channels, such as solicitation
efforts during credit card activation. In addition, SafeCard is expanding its
use of customer modeling in order to more effectively solicit likely purchasers.
SafeCard expects that these efforts will partially offset the negative effects
of reduced telemarketing contacts.
At any given point in time, SafeCard is in contractual discussions with
various current and potential card issuer clients regarding the state of its
relationship, the extent of new marketing, new product offerings and other
matters. SafeCard has signed a letter of intent for a new five-year cooperative
business relationship with Sears Roebuck & Company. In connection with this new
agreement, which is expected to be effective January 1, 1996, Sears will assume
additional marketing costs and SafeCard's overall margins will be reduced. As a
result, SafeCard expects pretax income from existing products to be lower by
approximately $2,000,000 in 1996. In addition, SafeCard will be working with
Sears to develop and test new card enhancement products which could provide
growth potential. Future changes in business strategy by credit card issuers or
relationships with such issuers could have an adverse impact on the revenues and
earnings of SafeCard.
SafeCard also generated consumer marketing revenue from its discount travel
service and date reminder service, including the sale of calendars and
appointment books. Consumer marketing revenue decreased 5.3% to $2,601,000 in
the third quarter 1995 as compared to $2,746,000 in the third quarter 1994 and
decreased 3.7% to $7,772,000 for the nine months ended September 30, 1995 as
compared to $8,073,000 for the nine months ended July 31, 1994.
Operating Income
Operating income decreased 51.3% to $5,458,000 in the third quarter 1995
compared to $11,208,000 in the third quarter 1994 and 28.2% to $24,098,000 for
the nine months ended September 30, 1995 compared to $33,558,000 for the nine
months ended July 31, 1994. The decrease in operating income was primarily the
result of a third quarter restructuring charge, the change in amortization of
subscriber acquisition costs adopted in December 1994, increased marketing and
new product development costs and increased facilities and equipment costs.
As previously discussed, the Company has reviewed and evaluated SafeCard's
organization and structure. A restructuring charge of $3,010,000 was recorded in
the third quarter to cover the associated costs of streamlining SafeCard's
operating structure. Approximately 70 positions have been eliminated and several
functions will be restructured to take advantage of operational efficiencies
obtained from automation programs recently implemented.
Prior to 1995, deferred subscriber acquisition costs were amortized over
the expected life of the subscriber including renewal periods (10 to 12 years
for single year and multi-year subscriptions, respectively). As of December 31,
1994, the amortization periods were shortened to match the initial subscription
period (1 to 3 years). As a result of the change, deferred subscriber
acquisition costs in 1995 are recognized on a more accelerated method as
compared to the prior year.
Beginning in late 1994 and continuing through the third quarter 1995,
SafeCard increased its marketing and new product development efforts in order to
expand its product lines and better target new customers. These efforts
translated into higher marketing and product development expenses of $2,200,000
and $5,400,000 for the three and nine month periods ended September 30, 1995,
respectively, which were partially offset by higher revenues.
SafeCard also experienced higher facilities and equipment expenses during
1995 compared to 1994 due to increased depreciation associated with capital
expenditures in 1994 and 1995. Since October 31, 1994, capital expenditures have
totaled $13,000,000, including approximately $8,000,000 for the expansion of the
Cheyenne operating center. The remainder represents upgraded computer equipment
and systems.
WRIGHT EXPRESS
Business Overview
Wright Express, acquired in September 1994, provides transaction and
information processing services to oil companies and commercial transportation
fleets primarily through a national credit card network program, the Wright
Express Universal Fleet card ("the WEX card") and through private label
processing arrangements for retail fuel marketers.
The WEX card is accepted at approximately 90,000 fueling locations in the
United States and is used by fleets covering over one-half million vehicles.
Wright Express programs include co-branded fleet fueling programs for many of
the nation's vehicle leasing companies.
Wright Express is continuing the development of products which will take
advantage of the vast amount of fuel and transaction data it gathers on a daily
basis. Wright Express expects to analyze, interpret and format this data into a
series of ongoing reports which can be made available to economists, fleet
managers, oil companies and government agencies for the purpose of projecting
fuel consumption and retail pricing.
Competition for Wright Express primarily exists in the form of oil company
credit cards and other competing fleet cards, including those offered by large
card associations and financial institutions. Generally, what differentiates
Wright Express from its competition is the array of ancillary information
processing services that are offered in addition to the basic credit card
service. These oil companies and certain other competitors are larger and have
greater financial and other resources than Wright Express or the Company. There
can be no assurance that Wright Express will not face increased competition in
the future.
Revenues
Card acquisition and services revenue was $16,726,000 for the nine months
ended September 30, 1995, including revenue of $6,025,000 in the third quarter
1995 compared to $5,791,000 in the second quarter of 1995. Card acquisition and
services revenue is principally in the form of transaction fees deducted from
amounts remitted to retail fueling merchants and monthly fees charged to fleet
customers.
Card acquisition and services revenue varies as a result of changes in fuel
prices and the volume of fuel purchased. Amounts owed to retail fueling
merchants decreased approximately 5% from the second quarter 1995 to the third
quarter 1995 as a result of a corresponding decline in fuel prices. This
reduction in card acquisition and services revenue was more than offset by an
increase in the volume of fuel purchased on both the WEX and private label
program cards from 123 million gallons in the second quarter 1995 to 139 million
gallons in the third quarter 1995. This volume represents less than 2% of the
30-35 billion gallon annual automobile and light truck fleet fueling market,
which is part of a larger 50-55 billion gallon commercial fleet fueling market.
Operating Income
Operating income was $969,000 in the third quarter 1995 compared to
$701,000 in the second quarter 1995. The increase in operating income is due to
the increase in card acquisition and services revenue, as described above,
offset by a slight increase in operating expenses and product development costs.
NATIONAL LEISURE GROUP
Business Overview
As discussed in Note 4 of Notes to Consolidated Financial Statements,
National Leisure Group was acquired effective January 1995. National Leisure
Group provides vacation travel packages and cruises directly to the public in
partnership with established retailers and warehouse clubs throughout New
England and with credit card issuers and travel club members nationwide. The
majority of bookings have historically been generated in New England area retail
stores such as Filene's Basement and, as a result, are dependent upon the level
of customer traffic in these stores. However, sales through credit card issuers
and travel clubs are becoming significant new sources of growth.
Revenues
Consumer marketing revenue for National Leisure Group was $12,063,000 for
the nine months ended September 30, 1995, reflecting revenue of $3,012,000 in
the third quarter 1995, compared to $3,424,000 in the second quarter 1995 and
$5,627,000 in the first quarter 1995. National Leisure Group's revenues have
historically come primarily from retail outlets in the New England area and are
highly seasonal in nature with the majority of sales in the winter months (first
and fourth quarters). Revenue was also negatively impacted by adverse weather
conditions at several popular vacation destinations which reduced new bookings
and increased cancellations. Revenues are primarily generated from commissions
paid by cruiselines and vacation package wholesalers.
Operating Income
National Leisure Group had an operating loss of $301,000 in the third
quarter 1995 compared to operating income of $1,680,000 and $360,000 in the
first and second quarters of 1995, respectively. The decrease from the preceding
1995 quarters are due to the seasonality of National Leisure Group's business in
which most bookings occur during the first and fourth quarters of each year
(i.e. the fall and winter months) and the negative impact of weather conditions
at destination sites, as noted above.
DEVELOPMENTAL OPERATIONS
The "Developmental Operations" column of the business units table includes
the operating results of Family Protection Network and Ideon Marketing and
Services (including Collections of the Vatican Museums). Revenues generated from
these developmental efforts are not material and have been netted against
operating expenses for financial statement presentation. The losses presented in
the table include the actual losses from operations and the associated product
abandonment costs recorded in 1995.
Business Overview
Family Protection Network
Family Protection Network ("FPN") was initiated as a nationwide child
registration and search product. The Company expended approximately $7,000,000
to develop the concept during 1994 and through March 31, 1995. These costs were
expensed as research and new product development costs as incurred and are
included in costs related to products abandoned and restructuring in the
Statement of Operations. The Company launched the new business in April 1995.
In late May 1995, preliminary launch results indicated lower than
anticipated consumer response rates and the Company announced its plans to
reduce marketing expenditures while analyzing product designs as well as
distribution channels. During June 1995, FPN used in-market mailings to test
different product configurations and price points and to verify the results from
the initial launch that the products were not economically viable. As a result
of the unsuccessful product launch and the subsequent unsuccessful test
mailings, the Company discontinued Family Protection Network.
Ideon Marketing and Services Company
Ideon Marketing and Services ("IMS") activities were initiated in 1994 as a
platform to develop, manage, market and service co-branded credit cards. The
first product to result from this developmental effort was an initiative between
the Company, the PGA TOUR and SunTrust BankCard N.A. to develop and market an
expanded PGA TOUR Partners program, including a co-branded credit card. IMS has
proceeded on two developmental tracks--development and launch of the expanded
Partners program and continued research and development of additional
co-branding opportunities. From inception through March 31, 1995, $9,000,000 of
costs incurred in both research and development efforts (multiple co-branding
opportunities and the Partners program) were expensed as incurred as research
and new product development costs and are included in costs related to products
abandoned and restructuring in the Statement of Operations.
An expanded Partners credit card program was launched in late March and
early April 1995. In late May 1995, preliminary launch results indicated lower
than anticipated consumer response rates and the Company announced its plans to
reduce marketing expenditures while analyzing product designs as well as
distribution channels. During June 1995, the Company began in-market test
mailings to determine product viability and test alternative product
configurations. The results of these test mailings were not satisfactory. As a
result, the Company ceased marketing the PGA TOUR Partners credit card program
and eliminated approximately two-thirds of IMS' marketing and customer service
positions. The remaining employee base was kept to continue the development and
testing of new PGA TOUR offerings.
On September 14, 1995, after a period of product redesign and test
marketing, the Company announced that it would discontinue its credit card
servicing role in connection with the PGA TOUR Partners credit card program.
This resulted in the elimination of approximately 60 additional positions. IMS
plans to continue its PGA TOUR Partners membership servicing role while SunTrust
will assume credit card servicing responsibilities.
IMS also continues testing its Collections of the Vatican Museums program,
with catalog mailings during the third and fourth quarters of 1995. IMS has
spent approximately $1,800,000 on this program in 1995 and expects to incur an
additional $650,000 over the remainder of the year to complete test marketing
efforts. The future development of this program will be evaluated based on the
results of the catalog test marketing.
Operating Loss
FPN and IMS incurred a combined operating loss of $9,190,000 and
$83,166,000 for the three and nine month periods ended September 30, 1995,
including special charges of $3,612,000 and $26,980,000 taken in the third and
second quarters of 1995, respectively, to cover costs associated with the
product abandonments.
For the third quarter 1995, IMS had an operating loss of $9,190,000,
including $5,578,000 related to marketing and operational costs incurred and
$3,612,000 related to the cost of employee severance, costs to terminate
equipment and facilities leases and the recognition of certain commitments.
Marketing and operational costs incurred include $829,000 for the Collections of
the Vatican Museums test marketing. Marketing and operational costs incurred for
the nine months ended September 30, 1995 totaled $31,796,000 while costs related
to product abandonment amounted to $21,606,000.
The operations of FPN were discontinued effective June 30, 1995. FPN
incurred an operating loss of $29,765,000 for the six months ended June 30,
1995, including $20,778,000 of marketing and operational costs and $8,987,000
related to the cost of employee severance, costs to terminate equipment and
facilities leases and the write-down resulting from the impairment of certain
assets.
CORPORATE AND OTHER
Overview
Corporate expenditures have increased during 1994 and the first half of
1995 as the Company developed the infrastructure necessary to support previously
anticipated growth, including corporate marketing and information technology
support. In the future, corporate staff will provide support services that can
only be effectively and economically performed centrally.
<PAGE>
The corporate and other operating loss in the business unit table includes the
following:
<TABLE>
<CAPTION>
For the three months ended September 30, 1995 and July 31, 1994 (in thousands):
Three Months Three Months
Ended Ended
September 30, 1995 July 31, 1994
<S> <C> <C>
General corporate overhead expenses $ 3,905 $ 2,005
Litigation and other legal expenses 1,420 2,212
Corporate research and development 550 135
Asset impairment and restructuring charges 4,239 -
Interest income (954) (2,167)
Other income (72) -
----------- --------
$ 9,088 $ 2,185
= ===== = =====
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995 and July 31, 1994 (in thousands):
Nine Months Nine Months
Ended Ended
September 30, 1995 July 31, 1994
------------------ -------------
<S> <C> <C>
General corporate overhead expenses $ 16,320 $ 5,932
Litigation and other legal expenses 4,308 6,964
Corporate research and development 3,115 135
Asset impairment and restructuring charges 11,415 7,900
Interest income (4,518) (6,218)
Other income (1,025) (4,860)
--------- ------
$ 29,615 $ 9,853
= ====== = =====
</TABLE>
General Corporate Overhead Expenses
General corporate overhead expenses increased $1,900,000 (94.8%) for the
third quarter 1995 compared to the third quarter 1994 and $10,388,000 (175.1%)
for the nine months ended September 30, 1995 as compared to the nine months
ended July 31, 1994. These increases were the result of indirect costs incurred
for new product launches, acquisition efforts and a larger corporate
infrastructure designed to support previously anticipated growth. Increases in
corporate overhead expenses for the three and nine months ended September 30,
1995 included increases in payroll and related expenses of $931,000 and
$3,156,000, respectively; increases in outside services of $753,000 and
$2,395,000, respectively; and increases in corporate operating expenses of
$216,000 and $4,837,000, respectively.
As previously discussed, the Company has reviewed and evaluated its
organization and structure. The Company has instituted expense reduction efforts
including a hiring freeze, restrictions on travel, a decrease in the use of
outside consultants and has reduced its corporate staff by more than 60% since
the end of the first quarter 1995. As a result of these cost cutting measures
and the third quarter restructuring, general corporate overhead expenses
decreased $4,598,000 or 54.1% over the second quarter 1995. As discussed below,
a restructuring charge of $4,239,000 was recorded in the third quarter to cover
the associated costs of downsizing the Company's corporate infrastructure.
Litigation and Other Legal Expenses
The Company incurred approximately $1,402,000 and $4,308,000 of litigation
and other legal expenses during the three and the nine months ended September
30, 1995 compared to $2,212,000 and $6,964,000 during the three and nine months
ended July 31, 1994. Litigation expenses anticipated in future periods cannot be
quantified. By their very nature, such expenses are dependent on a number of
factors beyond the Company's control (see Note 10 of Notes to Consolidated
Financial Statements and Item 1. "Legal Proceedings" under Part II "Other
Information").
Corporate Research and Development
Corporate research and development includes the costs of developing new
products and services and new areas of business that are not directly related to
the Company's existing business units. Corporate research and development
efforts were minimal during the 1994 periods presented. These efforts were
greater during 1995 due to the development and launch of new products in the
first and second quarters of 1995.
Asset Impairment and Restructuring Charges
The 1995 asset impairment and restructuring charges include a $7,176,000
write-down of certain assets related to the product abandonments recorded in the
second quarter and a $4,239,000 restructuring charge recorded in the third
quarter for the downsizing of the corporate headquarters staff. See Note 3 of
Notes to Consolidated Financial Statements.
The 1994 restructuring charge was for a reorganization of operations, the
appointment of a new senior management team and a related settlement with a
former chief executive officer. These charges included the costs to close the
Ft. Lauderdale, Florida sales office, employee severance and lease termination
costs.
Interest and Other Income
Interest income decreased $1,213,000 (56.0%) during the third quarter 1995
as compared to the third quarter 1994 and $1,700,000 (27.3%) during the nine
months ended September 30, 1995 as compared to the nine months ended July 31,
1994. Interest income is primarily derived from earnings on the Company's
municipal bonds and U.S. Treasury securities portfolio, as well as earnings on
cash invested in money market funds and overnight repurchase agreements. The
decrease in interest income is due to lower interest rates and lower levels of
investment holdings during the period as the Company redeployed its investment
resources to fund the launch of new businesses and the acquisitions of Wright
Express and National Leisure Group. The impact of the decrease in investment
holdings was partially offset by the repositioning of a significant portion of
the municipal bond portfolio into higher yielding short-term taxable securities
during the nine months ended September 30, 1995. See Note 5 to Notes to
Consolidated Financial Statements.
Other income decreased $3,835,000 (78.9%) for the nine months ended
September 30, 1995 as compared to the nine months ended July 31, 1994 due to
$4,257,000 of gains from litigation settlements in the second quarter 1994. This
decrease was offset by realized gains on sales of securities available for sale
of $1,014,000 during the nine months ended September 30, 1995 compared to
securities gains of $603,000 during the nine months ended July 31, 1994. The
1995 sales were part of the Company's previously announced plans to shorten the
portfolio's overall maturity and increase its investments in taxable securities.
Provision for Income Taxes
For interim reporting purposes, the Company provides income taxes based
upon an estimated effective income tax rate for the tax year containing the
interim reporting period. For information regarding the Company's effective
income tax rate and deferred income tax assets and liabilities, see Note 7 of
Notes to Consolidated Financial Statements.
Effective November 1, 1993, the Company prospectively adopted 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 of $2,000,000
during the nine months ended July 31, 1994. 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities was $53,304,000 in 1995 compared to
$31,945,000 provided by operating activities in 1994. The decrease in cash flow
from operations is principally the result of a $116,021,000 increase in cash
paid to suppliers and employees, which includes cash expenditures for research
and product development, product abandonment and restructuring payments and a
$4,257,000 decrease in gain from litigation settlements. The increase in cash
paid to suppliers and employees was offset by a $27,144,000 increase in cash
received from subscribers and customers.
Of the $116,021,000 increase in cash paid to suppliers and employees,
approximately $27,107,000 was expended for the development and launching of the
PGA TOUR Partners program, $22,721,000 for Family Protection Network and
$2,594,000 for Collections of the Vatican Museums. In addition, approximately
$29,046,000 was expended for the operations of Wright Express and National
Leisure Group. Neither of these business units were included in the consolidated
results of operations for 1994.
The remaining increase in cash paid to suppliers and employees is the
result of a larger corporate infrastructure and increased spending on SafeCard
and general corporate research and product development activities.
Partially offsetting the increase in cash paid for the development and
launching of new businesses, products and services, is a decrease in
expenditures for subscriber acquisition costs of $1,399,000 in 1995 as compared
to 1994. 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 and
related billings in a particular period. In addition, historical response rates
may not be an indication of future response rates.
In addition to the decrease in expenditures for subscriber acquisition
costs, commissions paid to credit card issuers decreased $2,351,000 in 1995
compared to 1994. The decrease in commissions paid was related to the decrease
in net billings for credit card enhancement continuity services as discussed
below.
A postal rate increase became effective in January 1995. Since postage
represents the largest component of direct mail costs, this rate of increase has
a direct impact on the Company by increasing subscriber acquisition costs.
During 1995, deferred subscriber acquisition costs increased by approximately
$1,203,000 for additional expenditures for postage as a result of the rate
increase. The Company is working with its card issuer clients to better target
its direct mailings, is considering changes in its mix of direct mailings and is
taking other steps to reduce the impact of the postal rate increase. In
addition, provisions in some card issuer client contracts allow for the recovery
of postal rate increases from the card issuer.
Of the $33,376,000 increase in cash received from subscribers and
customers, the operations of Wright Express and National Leisure Group generated
approximately $26,483,000. The remaining increase is due to a decrease in
accounts receivable for credit card enhancement continuity services.
Net billings for credit card enhancement continuity services were
$133,065,000 in 1995 compared to $143,338,000 in 1994. This decrease in net
billings is primarily due to differences in the timing of merchandise billings
when comparing billings on a different fiscal year basis for 1995 and 1994.
Additionally, the decline in billings reflects the impact of the renegotiation
of contracts with certain large credit card issuers and a reduction in the
number of customer contacts permitted by credit card issuers. In light of the
reduction in permitted customer contacts, SafeCard has engaged in more targeted
marketing in an attempt to improve response rates. New marketing began
increasing at the end of the second quarter.
As a result of its large tax net operating loss for the tax year ended
October 31, 1994, the Company filed a carryback claim for the refund of tax
payments made in 1991 and 1992. In the third quarter 1995, the Company received
tax refunds of approximately $9,300,000 as a result of the carryback claim.
Investing Activities
Cash provided by investing activities was $67,130,000 in 1995 compared to
$7,924,000 used in investing activities in 1994. Proceeds from sales and
maturities of investment securities, net of securities purchased increased
$103,327,000 in 1995 as compared to 1994. As previously discussed, the Company
actively repositioned its investment portfolio in order to shorten the overall
maturity of the portfolio and to take advantage of higher yielding short term
taxable securities. In addition, the Company continued to redeploy its
investment resources to fund the launch of new businesses and the acquisition of
National Leisure Group. The Company also paid $12,977,000 (net of cash acquired)
to acquire the net assets of National Leisure Group in the first quarter of 1995
(see Note 4 of Notes to Consolidated Financial Statements).
The Company also expended $15,296,000 more for capital assets in 1995 than
in 1994, principally due to the Company's expansion and renovation of its
operations center in Cheyenne, Wyoming and company-wide information technology
enhancements. The renovations and expansion of the Cheyenne facility are
substantially complete.
Financing Activities
Cash flow used in financing activities was $7,031,000 in 1995 compared to
cash flow provided by financing activities of $20,272,000 in 1994. Cash flow
used in financing activities included a $9,228,000 increase in treasury share
purchases and a $402,000 increase in dividends paid. These increases were offset
by $6,506,000 of net borrowings on Wright Express' revolving credit facility and
a $24,179,000 decrease in proceeds from the exercise of stock options.
On May 30, 1995, the Company's board of directors reinstated a stock
repurchase program authorizing the Company to purchase up to 2,500,000 shares of
outstanding common stock on the open market. The program, which had ended
October 31, 1994, authorized the Company to purchase a total of 6,000,000
shares, of which approximately 3,500,000 shares had been previously purchased.
As of September 30, 1995, the Company had purchased 995,100 shares for
$9,711,000 under the reinstated plan.
Wright Express' borrowings are a part of its working capital management
structure and are required periodically to fund its accounts receivable. The
increase in dividends paid was solely due to an increase in the number of common
shares outstanding during 1995 as compared to 1994.
Liquidity
Historically, the Company has generated the cash needed to finance its
operations and growth from its operations. The Company's primary liquidity
requirements are to fund membership and subscriber acquisition marketing
programs, support the development and operation of new products and services and
fund acquisitions. In addition, Wright Express requires resources to fund
receivable balances on its fleet credit cards. Management does not foresee any
material changes in funding needs or uses over the long term except as set forth
in the following paragraphs.
As a result of the abandonment of certain product development efforts
previously discussed and the restructuring of the Company in the third quarter
1995, the Company has committed approximately $25-30 million for employee
severance, lease terminations and other costs associated with these decisions
over the next 12 months. This commitment is based upon management's best
estimates and is subject to change as the restructuring plan is implemented.
Management believes that this estimate is adequate to cover the estimated costs
associated with the product abandonments and related restructuring liabilities.
As previously discussed, the Company has reinstated a stock repurchase
program. While the Company is not obligated to purchase any stock under the
program, if the full amount of authorized shares are repurchased at the current
market price, the Company would spend approximately $13 million to acquire its
stock.
The Company expects to invest an additional $650,000 in 1995 to complete
the test marketing of its Collections of the Vatican Museums, nearly all of
which has been committed.
In May 1995, the Company announced the signing of a definitive purchase
agreement to acquire a 350,000 square foot building and related property for
approximately $39,000,000. As part of the agreement, the Company paid $3,900,000
million into an escrow account as a nonrefundable deposit pending the completion
of the purchase in early 1996. In light of the product abandonments and
restructurings discussed above, Management included an amount related to the
impairment of this deposit in the corporate charge of $7,176,000 recorded in the
second quarter. Management is currently working with the building owner to
facilitate a sale of the building to a third party from which the Company
expects to recover a portion of the deposit.
The amount of the expected costs or commitments to develop or acquire new
businesses, products and services in future periods other than those discussed
above are not quantifiable. In addition, legal and litigation expenses to be
incurred in future periods, including amounts paid in resolution thereof, cannot
be quantified. 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 ($77,243,000 as of September 30, 1995)
are adequate to meet the Company's current and long term liquidity needs.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending or prosecuting claims in thirteen complex
lawsuits, twelve of which involve Peter Halmos, former Chairman of the Board and
Executive Management Consultant to SafeCard, and parties related to him as
adversaries. These lawsuits are described in Note 10 of Notes to Consolidated
Financial Statements under Part I. "Financial Information." The Company believes
that it has proper and meritorious claims and defenses in these lawsuits which
it intends to pursue vigorously. Peter Halmos is also a plaintiff in two other
lawsuits, one against a former officer and one against a director of the
Company, in which neither SafeCard nor the Company is named as a defendant.
The Company is involved in certain other claims and litigation which are not
considered material to the operations of the Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11(a) Computation of Primary Earnings Per Share
11(b) Computation of Fully Diluted Earnings Per Share
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 31, 1995, the Company announced that it had
discontinued its child registration and missing child search
service and would be redesigning and test marketing its PGA
TOUR Partners program. In addition, the Company announced that
it was significantly reducing its corporate staff and
streamlining its SafeCard Services business unit. The
announced actions would eliminate approximately 375 jobs and
result in a charge of $34,200,000 in the second quarter 1995.
On September 14, 1995, the Company announced that it was
eliminating approximately 75 jobs and reconfiguring its senior
management team. The Company also announced that its Ideon
Marketing and Services business unit will discontinue its
credit card servicing role in connection with the PGA TOUR
Partners credit card program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEON GROUP, INC.
(Registrant)
Date: November 13, 1995 /s/ Paul G. Kahn
----------------
Paul G. Kahn
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1995 /s/ G. Thomas Frankland
-----------------------
G. Thomas Frankland
Vice Chairman and
Chief Financial Officer
<TABLE>
<CAPTION>
Exhibit 11(a)
Computation of Primary Earnings Per Share
Three Months Ended
September 30, July 31,
1995 1994
-------------- ---------
(Unaudited)
<S> <C> <C>
Net (loss) income $ (7,778,000) $ 6,635,000
Adjustment
Adjusted net (loss) income $ (7,778,000) $ 6,635,000
= ========== = =========
Average common shares
outstanding (1) 28,222,000 27,225,000
Assumed equivalent shares from
stock options converted to
common shares (2) 1,543,000
---------
Total weighted average number
of common and common
equivalent shares 28,222,000 28,768,000
========== ==========
Earnings per share
(Loss) income before cumulative effect of
accounting change $ (.28) $ .23
Cumulative effect of accounting change
Net (loss) income per common share $ (.28) $ .23
= ==== = ====
</TABLE>
(1) Average shares outstanding for the three months ended September 30, 1995
does not assume the exercise of options since an increase in average
shares outstanding would be dilutive to net loss per share.
(2) Earnings per share are computed using the weighted average number of
shares of common stock and common stock equivalents (common stock issuable
upon exercise of stock options) outstanding. In computing earnings per
share, the Company utilizes the treasury stock method. This method assumes
that stock options, under certain conditions, are exercised and treasury
shares are assumed to be purchased from the proceeds using the average
market price of the Company's common stock for the period.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11(a)
Computation of Primary Earnings Per Share
Nine Months Ended
September 30, July 31,
1995 1994
-------------- ---------
(Unaudited)
<S> <C> <C>
Net (loss) income $ (54,147,000) $ 18,883,000
Adjustment
Adjusted net (loss) income $ (54,147,000) $ 18,883,000
= =========== = ==========
Average common shares
outstanding (1) 28,675,000 25,461,000
Assumed equivalent shares from
stock options converted to
common shares (2) 2,845,000
---------
Total weighted average number
of common and common
equivalent shares 28,675,000 28,306,000
========== ==========
Earnings per share
Income (loss) before cumulative effect of
accounting change $ (1.89) $ .60
Cumulative effect of accounting change .07
---
Net (loss) income per common share $ (1.89) $ .67
= ===== = ====
</TABLE>
(1) Average shares outstanding for the nine months ended September 30, 1995
does not assume the exercise of options since an increase in average
shares outstanding would be dilutive to net loss per share.
(2) Earnings per share are computed using the weighted average number of
shares of common stock and common stock equivalents (common stock issuable
upon exercise of stock options) outstanding. In computing earnings per
share, the Company utilizes the treasury stock method. This method assumes
that stock options, under certain conditions, are exercised and treasury
shares are assumed to be purchased from the proceeds using the average
market price of the Company's common stock for the period.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11(b)
Computation of Fully Diluted Earnings Per Share
Three Months Ended
September 30, July 31,
1995 1994
-------------- ---------
(Unaudited)
<S> <C> <C>
Net (loss) income $ (7,778,000) $ 6,635,000
Adjustment
Adjusted net (loss) income $ (7,778,000) $ 6,635,000
= ========== = =========
Average common shares
outstanding (1) 28,222,000 27,225,000
Assumed equivalent shares from
stock options converted to
common shares (2) 1,406,000
--------- ---------
Total weighted average number
of common and common
equivalent shares 28,222,000 28,631,000
========== ==========
Earnings per share
(Loss) income before cumulative effect of
accounting change $ (.28) $ .23
Cumulative effect of accounting change
Net (loss) income per common share(3) $ (.28) $ .23
= ==== = ====
</TABLE>
(1) Average shares outstanding for the three months ended September 30, 1995
does not assume the exercise of options since an increase in average
shares outstanding would be dilutive to net loss per share.
(2) Earnings per share are computed consistent with footnote (2) on Exhibit
11(a) - Computation of Primary Earnings Per Share except in computing
fully diluted earnings per share, the treasury stock method uses the
market price of the Company's common stock at the close of the period
rather than the average market price during the period.
(3) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11(b)
Computation of Fully Diluted Earnings Per Share
Nine Months Ended
September 30, July 31,
1995 1994
------------ ---------
(Unaudited)
<S> <C> <C>
Net (loss) income $ (54,147,000) $ 18,883,000
Adjustment
Adjusted net (loss) income $ (54,147,000) $ 18,883,000
= =========== = ==========
Average common shares
outstanding (1) 28,675,000 25,461,000
Assumed equivalent shares from
stock options converted to
common shares (2) 2,636,000
--------- ---------
Total weighted average number
of common and common
equivalent shares 28,675,000 28,097,000
========== ==========
Earnings per share
(Loss) income before cumulative effect of
accounting change $ (1.89) $ .60
Cumulative effect of accounting change .07
---
Net (loss) income per common share(3) $ (1.89) $ .67
= ===== = ====
</TABLE>
(1) Average shares outstanding for the nine months ended September 30, 1995
does not assume the exercise of options since an increase in average
shares outstanding would be dilutive to net loss per share.
(2) Earnings per share are computed consistent with footnote (2) on Exhibit
11(a) - Computation of Primary Earnings Per Share except in computing
fully diluted earnings per share, the treasury stock method uses the
market price of the Company's common stock at the close of the period
rather than the average market price during the period.
(3) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
Exhibit 15
November 10, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that Ideon Group, Inc. has included our report dated October 23,
1995 (issued pursuant to the provisions of Statement on Auditing Standards No.
71) in the Prospectus constituting part of the Registration Statements on Forms
S-3 and S-8 (Nos. 33-39023, 33-48317, 33-51439, 33-55581, 33-55585, 33-57071,
33-59247 and 33-59249) filed on or about February 14, 1991, June 2, 1992,
December 15, 1993, September 22, 1994, December 23, 1994 and May 11, 1995.
We are also aware of our responsibilities under the Securities Act of 1933.
PRICE WATERHOUSE LLP
Tampa, Florida
<TABLE> <S> <C>
<ARTICLE> 5
<CIK>0000943097
<NAME>IDEON GROUP, INC.
<MULTIPLIER> 1000
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 16,110
<SECURITIES> 61,133
<RECEIVABLES> 70,353
<ALLOWANCES> 1,913
<INVENTORY> 0
<CURRENT-ASSETS> 271,338
<PP&E> 49,143
<DEPRECIATION> 13,471
<TOTAL-ASSETS> 389,290
<CURRENT-LIABILITIES> 236,788
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 99,290
<TOTAL-LIABILITY-AND-EQUITY> 389,290
<SALES> 56,362
<TOTAL-REVENUES> 57,543
<CGS> 34,647
<TOTAL-COSTS> 69,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,152
<INCOME-TAX> 4,374
<INCOME-CONTINUING> 7,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,778
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
