SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1995
Commission File No. 1-11465
IDEON GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
(Former Name of Registrant: SafeCard Services, Incorporated)
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)
3001 E. PERSHING BLVD., CHEYENNE, WYOMING 82001
(Former Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (904) 218-1800
--------------
Registrant's former fiscal year end: OCTOBER 31
----------
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
---- ----
Common Stock, $.01 Par Value
Outstanding at May 12, 1995 28,942,265 Shares
Total Number of Pages 34
<PAGE>
IDEON GROUP, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31,
1995 and October 31, 1994 3
Consolidated Statement of Income for the
Three Months Ended March 31, 1995 and
January 31, 1994 4
Consolidated Statement of Cash Flows for
the Three Months Ended March 31, 1995
and January 31, 1994 5
Notes to Consolidated Financial Statements 6-13
Report of Independent Accountants 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, OCTOBER 31,
1995 1994
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................... $ 44,050 $ 17,921
Securities available for sale, maturing
within one year ........................... 65,998 39,249
Receivables, net ............................ 52,485 42,449
Income taxes receivable ..................... 621 2,114
Deferred subscriber acquisition costs and
related commissions, amortizing within
one year .................................. 96,642 83,449
Deferred income tax asset ................... 10,315 8,540
---------- ----------
Total current assets ...................... 270,111 193,722
Securities available for sale, maturing after
one year ..................................... 33,336 127,363
Deferred subscriber acquisition costs and
related commissions, amortizing after one year 36,342 111,948
Property and equipment, net .................... 34,909 16,410
Excess of cost over fair value of net assets
acquired ..................................... 45,988 28,739
Other assets ................................... 5,359 2,191
---------- ----------
Total assets .............................. $ 426,045 $ 480,373
========== ==========
LIABILITIES
Current liabilities:
Notes payable to bank ....................... $ 14,329 $ 11,793
Accounts payable ............................ 25,667 30,833
Accrued expenses ............................ 38,440 24,654
Subscribers' advance payments, amortizing
within one year ........................... 122,717 106,563
Allowance for cancellations ................. 4,321 7,656
---------- ----------
Total current liabilities ................. 205,474 181,499
Subscriber advance payments, amortizing after
one year ..................................... 49,468 51,991
Deferred income tax liability .................. 5,119 29,291
---------- ----------
Total liabilities ......................... 260,061 262,781
---------- ----------
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); 28,942,265
shares outstanding (28,933,599 at October
31, 1994) .................................... 349 349
Additional paid-in capital ..................... 41,120 41,058
Retained earnings .............................. 172,920 225,459
Unrealized gain (loss) on securities available
for sale ..................................... 217 (607)
---------- ----------
214,606 266,259
Less cost of 6,003,735 common shares in treasury
(6,012,401 shares at October 31, 1994) ....... (48,622) (48,667)
---------- ----------
Total stockholders' equity ................ 165,984 217,592
---------- ----------
Total liabilities and stockholders'
equity .................................. $ 426,045 $ 480,373
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
---------------------------
MARCH 31, JANUARY 31,
1995 1994
------------ -----------
(UNAUDITED)
REVENUES
Membership and subscription revenue, net .... $ 43,597 $ 38,828
Card acquisition and services revenue ....... 4,910
Consumer marketing revenue .................. 8,173 2,563
Interest income ............................. 1,885 2,001
Other income ................................ 1,163 302
---------- ----------
59,728 43,694
---------- ----------
COSTS AND EXPENSES
Subscriber acquisition costs and
related commissions ....................... 26,926 23,552
Other costs of revenue ...................... 6,017 1,885
Research and product development costs ...... 9,086
Service costs and other operating expenses .. 8,409 4,713
General and administrative expenses ......... 8,861 4,391
---------- ----------
59,299 34,541
---------- ----------
Income before provision for income taxes ....... 429 9,153
Provision for income taxes ..................... 128 2,709
---------- ----------
Income before cumulative effect of change
in accounting for income taxes ............... 301 6,444
Cumulative effect of change in accounting
for income taxes ............................. 2,000
---------- ----------
NET INCOME ..................................... $ 301 $ 8,444
========== ==========
EARNINGS PER SHARE:
Income before cumulative effect of
accounting change ............................ $ .01 $ .24
Cumulative effect of accounting change ......... .07
---------- ----------
Net income per common share .................... $ .01 $ .31
========== ==========
Weighted average common and
common equivalent shares .....................29,870,000 27,608,000
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
------------------------
MARCH 31, JANUARY 31,
1995 1994
---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from subscribers/customers .... $ 65,407 $ 51,392
Cash paid to suppliers and employees ........ (74,069) (41,021)
Interest received ........................... 4,288 4,735
Income tax refunds (payments), net .......... 1,500 (188)
---------- ----------
Net cash (used in) provided by operating
activities ................................ (2,874) 14,918
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments .................... (31,633) (20,020)
Proceeds from sales of investments .......... 84,980 16,006
Proceeds from maturing investments .......... 7,274 945
Cost of acquisitions, net of cash acquired .. (12,977)
Acquisitions of property and equipment, net . (10,891) (525)
---------- ----------
Net cash provided by (used in) investing
activities ................................ 36,753 (3,594)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on notes payable to bank ..... 2,246
Proceeds from exercise of stock options ..... 57 581
Dividends paid .............................. (1,447) (1,207)
Payments for purchase of treasury shares ... (483)
---------- ----------
Net cash provided by (used in) financing
activities ................................ 856 (1,109)
---------- ----------
Net increase in cash and cash equivalents ...... 34,735 10,215
Cash and cash equivalents at beginning of
period ....................................... 9,315 3,335
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 44,050 $ 13,550
========== ==========
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. As part of the reorganization,
the number of authorized common shares of the Company was increased from 35
million to 90 million. Stockholders also authorized the issuance of up to
10 million shares of Ideon preferred stock.
As a result of the reorganization, Ideon is a holding company with
current business units as follows: SafeCard Services, Inc.; Wright
Express Corporation; National Leisure Group, Inc.; Ideon Marketing and
Services Company; and Family Protection Network, Inc.
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- month period ended March 31, 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. The March 31, 1995 Form 10-Q is
the first quarterly report to be filed on the new calendar year basis.
Financial statements for the three months ended January 31, 1994 (the end
of the first 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 months ended March 31, 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 January 31,
1994 is comparable to the present quarter as there are no significant
seasonal differences among the periods presented which would materially
affect comparability. As discussed in Note 3, the Company changed the
amortization periods of deferred subscriber acquisition costs on December
31, 1994.
Prior year financial statements have been reclassified to conform to
1995 presentations.
Price Waterhouse LLP has performed a review, and not an audit, of the
unaudited consolidated financial information of the Company for the three
months ended March 31, 1995 (based on procedures adopted by the American
Institute of Certified Public Accountants) as set forth in their separate
report dated May 5, 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. 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 guaranteed the issuance of $1,400,000 worth of common
stock on the third anniversary of the acquisition. Also, up to $2,800,000
worth 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 for the first quarter
1995 include the results of operations of National Leisure Group for the
entire quarter.
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 has recorded $17,954,000 of excess of cost over fair value of
net assets acquired (goodwill). This excess is being amortized on a
straight-line basis over 25 years. Amortization expense through March 31,
1995 related to this acquisition was approximately $180,000.
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.
4. 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 will allow the Company to take advantage of its current tax
net operating loss position and provide for greater liquidity. The Company
continues to classify the securities portfolio as available for sale.
During the quarter, the Company recognized $991,000 of gains and $39,000 of
losses.
5. SUBSCRIBER ACQUISITION COSTS
Subscriber acquisition expenditures directly relate to the acquisition
of new subscribers through "direct-response" type marketing campaigns and
primarily include payments for telemarketing, printing, postage, mailing
services, certain direct salaries and other direct costs incurred to
acquire new subscribers. These expenditures have historically been 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. 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. In prior periods,
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, pre-tax 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.
Deferred subscriber acquisition costs and related commissions were as
follows:
MARCH 31, OCTOBER 31,
1995 1994
------------ ------------
Hot-Line $ 65,120,000 $123,775,000
Fee Card 8,260,000 9,185,000
Other services 14,082,000 18,796,000
------------ ------------
Total deferred subscriber acquisition
costs 87,462,000 151,756,000
Commissions 45,522,000 43,641,000
------------ ------------
Total deferred subscriber acquisition
costs and commissions $132,984,000 $195,397,000
============ ============
6. INCOME TAXES
The Company's effective income tax rate for the three months ended
March 31, 1995 and January 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 months ended March 31, 1995 was based on the
estimated effective income tax rate for the tax year ending October 31,
1995.
At March 31, 1995, the Company had a net current deferred tax asset of
$10,315,000 and a net noncurrent deferred tax liability of $5,119,000. The
deferred tax asset primarily relates to the Company's net operating loss
carryforward which is expected to be fully utilized during the year.
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
$2,000,000 for the three months ended January 31, 1994.
<PAGE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net income to net cash (used in) provided by
operating activities, as presented in the consolidated statement of cash
flows, is as follows:
THREE MONTHS ENDED
---------------------------
MARCH 31, JANUARY 31,
1995 1994
------------ ------------
Net income ................................$ 301,000 $ 8,444,000
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Depreciation and amortization ......... 1,366,000 214,000
Income tax expense .................... 128,000 2,709,000
Income tax refunds (payments), net .... 1,500,000 (188,000)
Restricted stock expense .............. 50,000
Cumulative effect of change in
accounting for income taxes ......... (2,000,000)
Amortization of investment
premiums/discounts, net ............. 880,000 1,311,000
Realized gain on sales of securities
available for sale .................. (952,000) (209,000)
Billings to subscribers, net .......... 46,550,000 57,368,000
Amortization of subscribers' advance
payments to revenue .................(46,430,000) (41,391,000)
Expenditures for subscriber acquisition
costs ...............................(18,486,000) (14,136,000)
Payment of commissions, net ...........(11,488,000) (15,884,000)
Amortization of subscriber acquisition
costs ............................... 16,070,000 13,409,000
Amortization of commissions ........... 12,837,000 12,028,000
(Decrease) increase in allowance
for cancellations .................. (4,876,000) 1,730,000
Changes in assets and liabilities, net
of effects of business acquisitions:
Receivables, net ................. 7,573,000 (6,377,000)
Other assets ..................... 61,000 (384,000)
Accounts payable and accrued
expenses ....................... (7,958,000) (1,726,000)
----------- ------------
Net cash (used in) provided by
operating activities ....................$(2,874,000) $ 14,918,000
=========== ============
8. COMMITMENTS AND CONTINGENCIES
The Company is defending or prosecuting six complex lawsuits involving
Peter Halmos, former Chairman of the Board and Executive Management
Consultant to SafeCard, and various parties related to him. Peter Halmos is
also a plaintiff in two other lawsuits, one against an officer and one
against a director of the Company. The six cases in which SafeCard 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 stated that he will
appeal this ruling. SafeCard expects to file an answer to the remaining
indemnification claims and the claims of Myron Cherry.
A suit by Peter Halmos, purportedly in the name of Halmos Trading &
Investment Company, 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. The court has denied motions to dismiss filed by
both Peter Halmos and SafeCard. 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. SafeCard's motion to dismiss the second
amended counterclaim was denied, and it has filed an answer to the
second amended counterclaim. 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. Discovery is proceeding.
A trial date is expected in early 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 its 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 notified
the Court of its intent to file an appeal and the Court has entered an
order staying all action on both the counterclaims and the Company's
claims pending appeal.
A suit 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.
A suit by Peter Halmos, as trustee for the Peter A. Halmos revocable
trust dated January 24, 1990 and the Halmos Foundation, Inc.,
individually and James L. Binder as custodian for Elizabeth Binder;
Edward Dubois; Sheila Ann Dubois, as personal representative of the
Estate of Winifred Dubois; G. Neal Goolsby, John E. Masters,
individually and as custodian for Gregory Halmos and Nicholas Halmos;
and J.B. McKinney on behalf of themselves and all others similarly
situated against SafeCard, one of its officers, one of its former
officers and three of 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. SafeCard and the individual defendants filed a
motion to dismiss. On April 27, 1995, the plaintiffs filed a purported
first amendment to class action complaint. The first amendment added
two additional putative classes of plaintiff allegedly represented by
James B. Chambers, individually and on behalf of all persons buying
shares of SafeCard's stock from December 14, 1994 through the present
and all shareholders holding stock in the Company as of April 27, 1995.
The putative class claims are for alleged violations of the federal
securities law, for alleged breach of fiduciary duty and alleged
negligence in connection with certain matters voted on at the Annual
Meeting held on April 27, 1995. The first amendment includes individual
claims by Peter Halmos for the same alleged violations. SafeCard and
the individual defendants have filed a motion to strike.
A suit by LifeFax, Inc. and Continuity Marketing Corporation, companies
affiliated with Peter Halmos, in the State Circuit Court in West Palm
Beach, 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. On April 21, 1995, the
Company and individual defendants filed a motion to dismiss.
The Company believes that it has proper and meritorious defenses in
these lawsuits which it intends to vigorously pursue. Resolution of any or
all of the Peter Halmos-related litigation could have a material impact
(either favorable or unfavorable depending on the outcome) upon the
Company's operations, liquidity and financial condition.
9. SUBSEQUENT EVENTS
On April 10, 1995, the Company launched the Family Protection Network,
a child registration and missing child search service. The Company
announced that it expects to spend approximately $18,000,000 in the second
quarter of 1995 to launch this new business venture.
On May 5, 1995, the Company announced the signing of a definitive
purchase agreement to acquire a 350,000 square foot building and related
property in Jacksonville, Florida for approximately $39,000,000. The
purchase is expected to be completed in early 1996.
<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 March 31, 1995, and the
related consolidated statements of income and of cash flows for the three month
period then ended, appearing in the Company's Form 10-Q for the quarter ended
March 31, 1995. We also have reviewed the consolidated statements of income and
of cash flows for the three months ended January 31, 1994 appearing in the
Company's Form 10-Q for the quarter ended March 31, 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
May 5, 1995
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
References herein to the first quarter 1995 refer to the three months ended
March 31, 1995. References herein to the first quarter 1994 refer to the three
months ended January 31, 1994. Management does not believe that preparation of
financial statements for the three months ended March 31, 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.
On April 27, 1995, SafeCard's stockholders approved a plan of
reorganization whereby SafeCard became a wholly-owned subsidiary of Ideon Group,
Inc., a newly formed Delaware corporation. All shares of SafeCard common stock
were converted into shares of Ideon common stock. As a result of the
reorganization, Ideon is a holding company with current business units as
follows: SafeCard Services, Inc.; Wright Express Corporation; National Leisure
Group, Inc.; Ideon Marketing and Services Company; and Family Protection
Network, Inc.
RESULTS OF OPERATIONS
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Membership and subscription revenue, net $43,597,000 $38,828,000
Membership and subscription revenue represents the amortization of advance
payments received from subscribers to SafeCard credit card enhancement
continuity services such as its Hot-Line credit card loss notification service.
Membership and subscription revenue, net increased $4,769,000 (12.3%) in the
first quarter 1995 compared to the first quarter 1994. The increase was
primarily due to an increase in the number of subscribers to SafeCard's
Hot-Line, Fee Card and CreditLine services. In addition, a price increase
for certain Hot-Line subscriptions which began in 1993 contributed
slightly to the increase in revenues. Membership and subscription revenue are
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.
Renewal rates for single year Hot-Line subscriptions were 76% and 75% for
1995 and 1994, respectively. Renewal rates for multi-year Hot-Line subscriptions
(primarily three year subscriptions) were 47% for 1995 and 50% for 1994. Renewal
rates for Fee Card subscriptions (primarily marketed as single year
subscriptions) were 82% and 81% for 1995 and 1994, respectively. The decline in
renewal rates for multi-year Hot-Line subscriptions is primarily due to
increasing involuntary cancellations by card issuer clients (see description of
involuntary cancellations below) and the price change previously discussed.
Renewal rates are computed by comparing the number of paid subscribers at
the end of the period for each subscriber campaign pool in existence at the
beginning of the period to the number of paid subscribers at the beginning of
the period. 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 which may be beyond SafeCard's
control.
The following table details subscriber activity for the three months ended
March 31, 1995 and January 31, 1994 for the credit card enhancement continuity
services:
Beginning New Ending
Subscribers Subscribers Cancellations Subscribers
----------- ----------- ------------- -----------
1995 13,046,000 1,053,000 (1,075,000) 13,024,000
1994 12,043,000 1,130,000 (944,000) 12,229,000
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 subscriber activity. 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 card accounts or other events beyond
SafeCard's control.
Credit card issuers from time to time may adopt changes in business
strategy which may affect SafeCard. For example, certain card issuer clients
have changed the marketing emphasis from multi-year to single year
subscriptions. In addition, 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. On May 5, 1995, SafeCard announced that it
had been notified by Texaco Refining & Marketing, Inc. that on or after August
1, 1995, Texaco would contract with another supplier to provide marketing
and credit card registration services in connection with new offerings of the
Texaco Star Card. SafeCard will continue to service some existing Texaco
card registration customers after August 1 and will continue to provide several
other credit card enhancement services to Texaco. This change is not expected
to have material impact on the Company's revenues or earnings in 1995.
While changes in marketing emphasis and the extent of new marketing by
credit card issuers affects the number of potential subscribers, to date the
Company has not noted any material impact on earnings as a result of such
changes in business strategy. However, future adverse changes in business
strategy by credit card issuers could have a material impact on the Company's
revenues and earnings.
Membership and subscription revenues are dependent on a variety
of factors including subscription fees, net response rates (gross enrollments
less cancellations), marketing costs and renewal rates. These factors are
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, copy and
marketing strategies.
Since late 1994, SafeCard has transitioned its marketing efforts
to more targeted marketing using redesigned marketing materials which focus on
enhanced value for subscribers. In addition, SafeCard is increasing and
enhancing its communications with its subscribers in an effort to increase
renewal rates. Expenditures for new marketing programs were reduced
during this transition while new marketing concepts, product offerings and
marketing materials were developed and tested. By the end of the first quarter
1995, expenditures for marketing programs have been increasing as this
transition is being completed.
During the past year, the Company began placing greater emphasis on the
development of additional products and services. The viability of products
and services under development is not assured. While the Company believes
that modest growth in Hot-Line subscription revenues through credit card
issuers may be achievable in the future, the Company anticipates that the
successful development of new products and services, new channels of
distribution and the development of new areas of business will become
increasingly important to the future growth in revenue and operating income.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Card acquisition and services revenue $4,910,000 $ -
Card acquisition and services revenue represents revenues derived from the
operations of Wright Express, which was acquired in September 1994. These
revenues are principally in the form of transaction fees deducted from amounts
remitted to retail fueling merchants and annual fees charged to fleet customers.
Wright Express 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 is accepted
at approximately 90,000 fueling locations in the United States and is used by
fleets covering half a million vehicles.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Consumer marketing revenue $8,173,000 $2,563,000
Consumer marketing revenue represents revenues derived from SafeCard's
discount travel service and date reminder service (including the sale of
calendars and appointment books) and from the operations of National Leisure
Group, which was acquired during the quarter. Consumer marketing revenue
increased $5,610,000 (219%) in the first quarter 1995 compared to the first
quarter 1994. National Leisure Group contributed revenues during the quarter of
$5,625,000.
The net assets of National Leisure Group were purchased effective January
1, 1995 for $15,048,000 in cash and $1,400,000 in Company common stock issuable
on the third anniversary of the acquisition. Additional common shares worth
$2,800,000 are payable on the first and second anniversary of the acquisition if
certain earnings hurdles are achieved. The acquisition was accounted for under
the purchase method and $17,954,000 of excess of cost over fair value of net
assets acquired (goodwill) is being amortized over 25 years (see Note 3 of Notes
to Consolidated Financial Statements).
National Leisure Group provides vacation travel packages through credit
card issuers, retailers and wholesale clubs in the United States. Revenues
represent commissions earned as the booking agent for vacation travel providers
such as cruise lines. 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
quarter).
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Interest income $1,885,000 $2,001,000
Interest income decreased $116,000 (5.8%) in the first quarter 1995 as
compared to the first quarter 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. The
decrease in interest income is due to lower levels of investment holdings during
the period as the Company redeployed its investment resources into operating
assets. 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.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Other income $1,163,000 $302,000
Other income increased by $861,000 (285%) from first quarter 1994 to first
quarter 1995 principally due to realized gains on sales of securities available
for sale of $952,000 during the first quarter 1995 compared to securities gains
of $209,000 in the first quarter 1994. The sales were part of the Company's
previously announced plans to shorten the portfolio's overall maturity and
increase its investments in taxable securities. The Company evaluates its
investment strategy on a regular basis.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Subscriber acquisition costs and
related commissions $26,926,000 $23,552,000
Subscriber acquisition costs and related commissions increased $3,374,000
(14.3%) in first quarter 1995 compared to the first quarter 1994. This increase
was primarily the result of the change in the amortization periods for
subscriber acquisition costs during the transition period ended December 31,
1994 (see Note 5 of Notes to Consolidated Financial Statements) and was
partially offset by reduced marketing expenditures during late 1994. As
previously discussed, expenditures on new marketing programs were reduced
during this period as SafeCard transitioned to more targeted marketing using
redesigned marketing materials. The relationship of these costs to
membership and subscription revenues is dependent on a variety of
factors including subscription fees, net response rates (gross enrollments
less cancellations), marketing costs and renewal rates. These factors are
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, copy and
marketing strategies.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Other costs of revenue $6,017,000 $1,885,000
Other costs of revenue represent the direct costs incurred to generate card
acquisition and services revenue and consumer marketing revenue. Other costs of
revenue increased $4,132,000 (219%) from the first quarter 1994 to the first
quarter 1995. Of the increase, $3,977,000 related to the operations of Wright
Express and National Leisure Group. The remaining increase was the result of
slightly higher costs to provide date reminder and discount travel services.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Research and product development costs $9,086,000 $ -
As described under "Membership and subscription revenue, net" and in the
SafeCard's 1994 Form 10-K, the Company is placing greater emphasis on the
development of new products and services and the development of new areas of
business. While the development of new products and services and the development
of new areas of business have not contributed significantly to revenues in the
first three months of 1995, the Company has incurred certain direct expenses in
developing these new products and areas of business.
The Company's new product and business development, as well as future
acquisitions, is concentrated in the following market segments: security and
convenience; travel, leisure and the arts; and financial planning and
management. The Company continues to seek additional acquisition candidates
which operate within these market segments to complement the Company's long-term
strategy. The Company also hopes to expand its credit card marketing and
services business by partnering with other national brands. However, there is no
assurance as to the success of such ventures.
The Company launched two new business ventures in March 1995. The expanded
PGA TOUR Partners program was launched with the Company assuming management of
the program. The Company expects to incur expenses of approximately $20-25
million in the second and third quarters of 1995 in connection with the launch.
The Company also began test marketing its Collections of the Vatican Museums
in late March 1995. In addition, in April 1995 the Company announced the
launch of a child registration and missing child search service by its
subsidiary, Family Protection Network, Inc. Family Protection Network is
expected to incur expenses of approximately $18 million during the second
quarter of 1995 in connection with the launch. The above mentioned product
launches did not contribute to revenues during the first quarter 1995. The
Company expects to begin generating revenues from these ventures in subsequent
quarters of 1995. The costs incurred in the first quarter 1995 related to these
new business ventures has been included in the "Research and product
development costs" caption of the consolidated statement of income.
The success of these new business ventures or any future marketing and
services opportunities is not assured. While the Company performs extensive
market research, consumer response to new products and services cannot be
predicted with complete accuracy. In addition, competition is significant in the
co-branded industry and while no significant competition currently exists for
the "Registration and Search" service offered by Family Protection Network,
competition could develop. Results of operations or operating cash flows of the
Company, in particular in future quarterly or annual periods, could be
materially impacted by the consumer response to these new products.
Management is currently unable to derive a meaningful estiamte of the amount or
range of any potential loss in any particular period should consumer acceptance
be materially lower than projected through market research.
PGA TOUR Partners Program
The PGA TOUR Partners program mentioned above represents the first of what the
Company hopes will be multiple partnerships with national brands. The Company
has a multi-year licensing, marketing and servicing agreement with the PGA TOUR
whereby it will manage and expand the existing PGA TOUR Partners program. As
part of the program, the Company, in conjunction with the PGA TOUR, offers
access to PGA TOUR events, special members only tournament play, golf clinics
instructed by PGA TOUR players and other services. In addition, the Company
offers a co-branded PGA TOUR Partners credit card issued through SunTrust
BankCard, N.A. The Company is responsible for card acquisition and customer
servicing while SunTrust will fund the card receivables.
Collections of the Vatican Museums
This program offers to consumers products that are recreated from and
inspired by historic works from the thirteen Vatican Museums. The Company
recently test marketed products through direct response advertisements in print
media. The Company expects to test market a Collections of the Vatican
Museums catalogue later this year. While the print media marketing program
did not achieve significant results, the Company believes a catalogue marketing
program will be more successful. The future development of this program into
a new business or product line will be evaluated based on the results
of catalogue test marketing.
Family Protection Network
Family Protection Network was developed to provide a child registration and
missing child search service using more than 1,000 independent professionals
nationwide and applying modern computer information storage and retrieval with
investigative and crisis management resources. Family Protection Network intends
to supplement and complement law enforcement, volunteer and non-profit
organization efforts for child registration and searches.
Revenues will initially come from two sources. The "Registration" service
maintains pertinent information about the child in Family Protection Network's
nationwide database for an annual membership fee. This information is
immediately available to police and volunteer agencies if the child is missing
or abducted.
The "Registration and Search" service augments the registration service
with a search component. Family Protection Network can assign private
investigators to investigate immediately if a member family's child becomes
missing and keep working until the child is found. This service is also provided
for an annual membership fee.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Service costs and other operating expenses $8,409,000 $4,713,000
Service costs and other operating expenses increased $3,696,000 (78.4%) in
the first quarter 1995 compared to the first quarter 1994. Of the increase,
$3,354,000 related to the operations of Wright Express and National Leisure
Group. The remaining increase was principally the result of the expansion of the
Cheyenne, Wyoming operations center, which resulted in higher occupancy costs,
and the expansion of SafeCard's sales and marketing departments.
Three Months Ended
March 31, January 31,
1995 1994
---- ----
General and administrative expenses $8,861,000 $4,391,000
General and administrative expenses increased $4,470,000 (102%) from the
first quarter 1994 to the first quarter 1995. The operations of Wright Express
and National Leisure Group accounted for $875,000 of the increase, including
$373,000 of goodwill amortization relating to these acquisitions. The remaining
increase is attributable to a $2,679,000 increase in salaries and benefits, a
$1,398,000 increase in corporate operating expenses and a $656,000 increase in
outside services. These increases were primarily the result of the Company's
investment in the infrastructure necessary to support planned future growth.
These increases were partially offset by a $1,138,000 decrease in litigation and
other legal expenses.
The Company incurred approximately $1,460,000 of litigation and other legal
expenses during the first quarter 1995, compared to $2,598,000 in the first
quarter 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 8 of Notes to Consolidated
Financial Statements and Item 1. "Legal Proceedings" under Part II "Other
Information").
Three Months Ended
March 31, January 31,
1995 1994
---- ----
Provision for income taxes $128,000 $2,709,000
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 6 of
Notes to Consolidated Financial Statements.
Effective November 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting For Income
Taxes." 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 in the first quarter 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.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities was $2,874,000 in 1995 compared to
$14,918,000 provided by operating activities in 1994. The decrease in cash flow
from operations is principally the result of a $33,048,000 increase in cash paid
to suppliers and employees, which includes cash expenditures for research and
product development. The increase in cash paid to suppliers and employees was
offset by a $14,015,000 increase in cash received from subscribers and customers
and a $1,688,000 increase in income tax refunds received, net of payments.
Of the $33,048,000 million increase in cash paid to suppliers and
employees, approximately $13,500,000 was expended for research and product
development and approximately $5,500,000 was expended for card acquisition and
services costs which are reimbursable by SunTrust BankCard, N.A. if certain
conditions are met. In addition, approximately $9,200,000 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 the
first quarter 1994. The remaining increase in cash paid to suppliers and
employees is primarily the result of the continued emphasis by the Company on
the development and launching of new businesses, products and services which
requires a larger infrastructure necessary to support the planned growth of the
Company.
In addition to the increase in cash paid for the development and launching
of new businesses, products and services, expenditures for subscriber
acquisition costs increased $4,350,000 in the first quarter 1995 as compared to
the first quarter 1994. The increase in expenditures includes the costs of a
program which was recently initiated to enhance renewal rates. The volume and
type of subscriber acquisition expenditures, as well as enrollments, fluctuate
periodically and such fluctuations are not unusual. Due to timing differences
between periods, there may not always be a direct correlation between subscriber
acquisition expenditures and new enrollments in a particular period. In
addition, historical response rates may not be an indication of future response
rates.
A postal rate increase became effective in January 1995. Since postage
represents the largest component of direct mail costs, this rate increase has a
direct impact on the Company by increasing subscriber acquisition costs. During
the first quarter 1995, deferred subscriber acquisition costs increased by
approximately $500,000 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.
Offsetting the increase in expenditures for subscriber acquisition costs
was a $4,396,000 decrease in commissions paid to credit card issuers. The
decrease in commissions paid was related to the decrease in net billings for
credit card enhancement continuity services as discussed below.
Of the $14,015,000 increase in cash received from subscribers and
customers, the operations of Wright Express and National Leisure Group generated
approximately $9,100,000. 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 $46,550,000 in the
first quarter 1995 compared to $57,368,000 in the first quarter 1994. This
decrease in net billings in the first quarter 1995 compared to the first quarter
1994 was primarily due to the timing of merchandise billings.
Investing Activities
Cash provided by investing activities was $36,753,000 in the first quarter
1995 compared to $3,594,000 used in investing activities in the first quarter
1994. Proceeds from sales and maturities of investment securities, net of
securities purchased increased $63,690,000 in the first quarter 1995 as compared
to the first quarter 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 into operating assets. The Company paid $12,977,000 (net of cash
acquired) to acquire the net assets of National Leisure Group (see Note 3 of
Notes to Consolidated Financial Statements).
The Company also expended $10,366,000 more for capital assets in the first
quarter 1995 than in the first quarter 1994, principally due to information
technology enhancements and the Company's expansion and renovation of its
operations center in Cheyenne, Wyoming. The renovations were essentially
complete as of March 31, 1995.
Financing Activities
Cash flow provided by financing activities was $856,000 in the first
quarter 1995 compared to $1,109,000 used in financing activities in first
quarter 1994. The increase in cash flow provided by financing activities was
largely due to $2,246,000 of net borrowings on Wright Express' revolving credit
facility. The borrowings are a part of Wright Express' working capital
management structure and are required periodically to fund its accounts
receivable. The increase in cash flow provided by financing activities was
offset by a $240,000 increase in dividends paid, which was solely due to an
increase in the number of common shares outstanding during 1995 as compared to
1994, and a $524,000 decrease in proceeds from the exercise of stock options.
Cash used in financing activities in the first quarter 1994 also included
$483,000 used to repurchase approximately 37,000 shares of the Company's common
stock. The Company has discontinued its stock repurchase program and,
accordingly, there were no stock repurchases during the first quarter 1995.
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 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.
In March 1995 the Company launched its expanded PGA TOUR Partners program.
The Company expects to incur expenses of approximately $20-25 million in the
second and third quarters of 1995 to fund the launch. Management expects to
fund these costs from its cash and investment balances.
On April 10, 1995, Family Protection Network launched its child
registration and search service and announced that it expects to spend
approximately $18 million in the second quarter of 1995 to fund the launch.
Management expects to fund these costs from its cash and investment balances.
On May 5, 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 million. As part of the agreement, the Company paid $3.9
million into an escrow account pending the completion of the purchase in early
1996. Management has not determined whether the purchase will be funded through
internal cash and investments or through borrowings.
The amount of the expected costs or commitments to develop 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 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 (which totaled
$143,384,000, of which $11,068,000 was restricted, as of March 31, 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 six complex lawsuits against
Peter Halmos, former Chairman of the Board and Executive Management Consultant
to SafeCard, and parties related to him. These lawsuits are described in Note 8
of Notes to Consolidated Financial Statements under Part I. "Financial
Information." The Company believes that it has proper and meritorious defenses
in these lawsuits which it intends to pursue vigorously. Peter Halmos is also a
plaintiff in two other lawsuits, one against an officer and one against a
director of the Company, in which the Company is not named as a defendant.
The Company is involved in certain other claims and litigation which
are not considered material to the operations of the Company.
ITEM 2. CHANGES IN SECURITIES
On April 27, 1995, the stockholders of SafeCard approved a plan of
reorganization pursuant to which (i) SafeCard became a wholly-owned subsidiary
of Ideon; (ii) the shares of common stock, $.01 par value, of SafeCard were
automatically converted into an equal number of shares of common stock, $.01 par
value, of Ideon; and (iii) outstanding options and other rights to purchase
shares of SafeCard common stock were converted into options or other rights to
purchase the same number of shares of the Ideon common stock at the same
exercise price and subject to the same conditions. In addition, the stockholders
approved the proposed capital structure of Ideon to include 90 million shares of
Ideon common stock and 10 million shares of Ideon preferred stock with such
designations, rights, preferences and limitations as determined by the Board of
Directors at the time of issuance.
Stockholders of SafeCard, whose rights had been governed by SafeCard's
Certificate of Incorporation and By-laws, upon consummation of the
reorganization, became stockholders of Ideon whose rights are now governed by
the Amended and Restated Certificate of Incorporation and By-laws of Ideon. The
only material differences between the rights of a SafeCard stockholder under the
SafeCard Certificate of Incorporation and By-laws, on the one hand, and the
rights of an Ideon stockholder under the Ideon Certificate of Incorporation and
By-laws on the other hand are as follows: (i) the Ideon Certificate of
Incorporation authorizes the issuance of a total of 90 million shares of common
stock compared to a total of 35 million shares authorized under the SafeCard
Certificate of Incorporation; (ii) the Ideon Certificate of Incorporation
authorizes the issuance of a total of 10 million shares of preferred stock
whereas preferred stock was not authorized under the SafeCard Certificate of
Incorporation; (iii) a quorum at a meeting of stockholders was changed from
fifty-one percent or more to a simple majority of the stock issued and
outstanding entitled to vote thereat, present in person or represented, by
proxy; and (iv) the notice provisions regarding meetings of stockholders under
the Ideon Certificate of Incorporation were revised to conform to Delaware law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(a) Director's Deferral Plan
11(a) Computation of Primary Earnings Per Share
11(b) Computation of Fully Diluted Earnings Per Share
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<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: May 12, 1995 /s/ Paul G. Kahn
-------------------------
Paul G. Kahn
Chairman of the Board and
Chief Executive Officer
Date: May 12, 1995 /s/ G. Thomas Frankland
-------------------------
G. Thomas Frankland
Vice Chairman and
Chief Financial Officer
EXHIBIT 10(A)
SAFECARD SERVICES, INCORPORATED
DIRECTORS DEFERRAL PLAN
1. PURPOSE OF THE PLAN.
The purpose of this Directors Deferral Plan (the "Plan") is to attract
and retain the services of well-qualified directors who are not employees of
SafeCard Services, Incorporated (the "Company") by providing directors with
flexibility in the form of payment of annual retainers and meeting fees. The
Plan provides for non-employee directors to elect to defer receipt of all or a
portion of their cash retainer or meeting fees.
2. DEFINITIONS.
For purposes of the Plan, the following capitalized terms shall have
the meanings set forth below:
2.0 "BOARD" means the Board of Directors of the Company.
2.1 "CHANGE IN CONTROL" means the occurrence during the term of the
Plan of any one of the following events: (i) when the Company acquires actual
knowledge that any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act), other than an employee benefit plan established or
maintained by the Company or any of its affiliates, is or becomes the beneficial
owner (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of
securities of the Company representing 25% or more of the total combined voting
power of the Company's then-outstanding securities, (ii) upon the first purchase
of the Company's common stock pursuant to a tender or exchange offer (other than
a tender or exchange offer made by the Company or an employee benefit plan
established or maintained by the Company or any of its affiliates), (iii) upon
the approval by the Company's stockholders of (A) a merger or consolidation of
the Company with or into another corporation (other than a merger or
consolidation in which the Company is the surviving corporation and which does
not result in any capital reorganization or reclassification or other change in
the Company's then-outstanding shares of common stock), (B) a sale or
disposition of all or substantially all of the Company's assets or (C) a plan of
liquidation or dissolution of the Company, or (iv) if during any period of two
(2) consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least two-thirds
thereof, unless the election or nomination for the election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period; provided however, that notwithstanding the above, a "Change in Control"
shall not be deemed to occur if the foregoing events are approved by a vote of
at least a majority of the directors then still in office who were directors on
the date immediately after the date the Plan was adopted.
2.2 "CODE" means the Internal Revenue Code of 1986, as amended.
2.3 "COMMITTEE" means the Compensation Committee of the Board or such
other committee as may be designated from time to time by the Board.
2.4 "ELIGIBLE DIRECTOR" means any person who is a member of the Board
and who is not an employee, full time or part time, of the Company.
2.5 "EXCHANGE ACT" means the Securities Exchange Act 1934, as amended.
2.6 "PLAN" means this Directors Deferral Plan.
3. ADMINISTRATION OF THE PLAN.
The Committee shall administer the Plan and shall have authority to
adopt such rules and regulations, and to make such determinations as are not
inconsistent with the Plan and are necessary or desirable for its implementation
and administration.
4. TERMINATION AND AMENDMENT OF THE PLAN.
The Plan shall become effective upon its adoption by the Board unless
sooner terminated in accordance with the terms hereof. The Board may terminate,
amend, modify or suspend the Plan at any time and from time to time in such
respects as the Board may deem advisable, subject to any stockholder or
regulatory approval required by law or regulation.
5. DEFERRAL OF FEES AND RETAINER.
5.0 ELECTION TO DEFER. Any Eligible Director may elect to defer receipt
of a fixed percentage or fixed amount of the annual retainer and/or meeting fees
payable to such director. Such election to defer receipt of the retainer and/or
meeting fees must be received in writing by the administrator of the Plan prior
to the payment of the scheduled quarterly retainer or prior to any meeting at
which such meeting fees will be earned, and may specify whether the total amount
deferred at the election of such director (the "Deferred Amount") shall be paid
(a) in a lump sum or (b) over a period of five, ten, fifteen or twenty years,
from the date the Deferred Amount and any interest thereon would otherwise
become payable. The election pursuant to (a) or (b) above shall apply to all
Deferred Amounts. Any election to defer receipt of the retainer and/or fees
shall continue in effect until revoked in writing by the director. The Deferred
Amount and any interest thereon become payable upon the later of the director's
termination of service to the Company or upon reaching 65 years of age.
Notwithstanding the foregoing, the Deferred Amount and any interest thereon
shall immediately become payable in accordance with the director's election upon
a Change in Control.
5.1 INTEREST ON DEFERRED AMOUNTS. The Company shall pay to a director
participating in the Plan a further sum of money equal to the interest accrued
on the Deferred Amount. The Deferred Amount shall accrue simple interest,
commencing at the end of the calendar quarter for which the Deferred Amount
would have been payable, at a rate equal to the quarterly long term "applicable
federal rate" (as defined in Section 1274(d) of the Code) in effect at the end
of each calendar quarter to the date of actual payment. Such interest shall be
computed on the basis of a 360 day year consisting of twelve thirty day months.
5.2 RIGHTS IN DEFERRED AMOUNTS. Any rights to the Deferred Amount and
any interest thereon created under the Plan shall be unsecured contractual
rights of participants in the Plan and their beneficiaries against the Company
and will be subject to the claims of the Company's general creditors under
federal and state law.
5.3 TIMING OF DISTRIBUTIONS. Any distributions of the Deferred Amount
and any interest thereon shall be paid on the first January 15 after such
Deferred Amount and interest become payable in accordance with Section 5.0. If
an election is made pursuant to Section 5.0(b) to receive the Deferred Amount
and interest in equal annual installments, the initial annual installment shall
be paid on the first January 15 after the Deferred Amount and interest become
payable and all succeeding annual installments shall be paid on January 15 of
each succeeding year. If January 15 is not a business day for any given year,
distributions shall be paid on the next succeeding business day.
6. LIMITATION OF LIABILITY.
As illustrative of the limitations of liability of the Company, but not
intended to be exhaustive thereof, nothing in the Plan shall be construed to
confer any right on any person at any time to continued service to the Company.
7. EFFECTIVE DATE AND TERM.
The Plan shall be effective as of the date of its adoption by the
Board, and shall remain in effect until amended or terminated by action of the
Board.
8. WITHHOLDING.
Whenever the Company proposes or is required to distribute any Deferred
Amount an interest pursuant to Sections 5.0 or 5.1 of the Plan, the Company
shall have the right to require the director to remit to the Company an amount
sufficient to satisfy any federal, state or local withholding tax liability
prior to the delivery of any such distribution. The Company, at its option, may
make any distributions net of an amount of cash sufficient to satisfy any such
federal, state or local withholding tax liability.
9. GOVERNING LAW.
The Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of Florida.
EXHIBIT 11(A)
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Three Months Ended
----------------------------
March 31, January 31,
1995 1994
------------ ------------
(Unaudited)
Net income ............................. $ 301,000 $ 8,444,000
Adjustment(1) .......................... (23,000)
------------ ------------
Adjusted net income .................... $ 278,000 $ 8,444,000
============ ============
Average common shares
outstanding ......................... 29,166,000 24,130,000
Assumed equivalent shares from
stock options converted to
common shares (2) ................... 704,000 3,478,000
------------ ------------
Total weighted average number
of common and common
equivalent shares ...................... 29,870,000 27,608,000
============ ============
Earnings per share
Income before cumulative effect of
accounting change ....................... $.01 $.24
Cumulative effect of accounting change .. .07
----- -----
Net income per common share ............. $.01 $.31
===== =====
(1) The adjustment to net income represents goodwill amortization, net of
taxes, related to the additional purchase price for National Leisure Group
assuming the contingent issuance of common shares of the Company's common
stock. The shares are issuable upon the performance of certain earnings
hurdles by National Leisure Group.
(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>
EXHIBIT 11(B)
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Three Months Ended
----------------------------
March 31, January 31,
1995 1994
------------ ------------
(Unaudited)
Net income .............................. $ 301,000 $ 8,444,000
Adjustment(1) ........................... (23,000)
------------ ------------
Adjusted net income ..................... $ 278,000 $ 8,444,000
============ ============
Average common shares
outstanding .......................... 29,166,000 24,130,000
Assumed equivalent shares from
stock options converted to
common shares (2) .................... 734,000 3,913,000
------------ ------------
Total weighted average number
of common and common
equivalent shares ....................... 29,900,000 28,043,000
============ ============
Earnings per share
Income before cumulative effect of
accounting change ....................... $.01 $.23
Cumulative effect of accounting change .. .07
----- -----
Net income per common share(3) .......... $.01 $.30
===== =====
(1) The adjustment to net income represents goodwill amortization, net of
taxes, related to the additional purchase price for National Leisure Group
assuming the contingent issuance of common shares of the Company's common
stock. The shares are issuable upon the performance of certain earnings
hurdles by National Leisure Group.
(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
May 12, 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 May 5, 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
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<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-1-1995
<PERIOD-END> Mar-31-1995
<CASH> 44,050,000
<SECURITIES> 99,334,000
<RECEIVABLES> 54,999,000
<ALLOWANCES> 1,893,000
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<CURRENT-ASSETS> 270,111,000
<PP&E> 41,178,000
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0
0
<OTHER-SE> 165,635,000
<TOTAL-LIABILITY-AND-EQUITY> 426,045,000
<SALES> 56,680,000
<TOTAL-REVENUES> 59,728,000
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