UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Sections 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1995 Commission File No. 1-11465
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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
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing market price on March 15, 1996):
$332,284,243.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock (as of March 15, 1996): Common Stock, $.01 Par Value - 27,981,831
shares.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders
are incorporated by reference into Part III.
Total Number of Pages - 95
<PAGE>
PART I
Item 1. BUSINESS
Background
Ideon Group, Inc. ("Ideon" or the "Company") is a holding company with
current operating business units as follows: SafeCard Services, Incorporated
("SafeCard"), Wright Express Corporation ("Wright Express"), National Leisure
Group, Inc. ("National Leisure Group") and Ideon Marketing and Services Company
("IMS"). The operations of an additional business unit, Family Protection
Network, Inc. ("Family Protection Network"), were both initiated and terminated
during 1995. On April 27, 1995, the stockholders of SafeCard, a Delaware
corporation organized in 1969, approved a plan of reorganization whereby
SafeCard became a wholly-owned subsidiary of Ideon, a Delaware corporation
formed in December 1994. All shares of SafeCard common stock were converted into
shares of Ideon common stock. Upon the completion of the reorganization, the
Company's headquarters were relocated from Cheyenne, Wyoming to Jacksonville,
Florida.
SafeCard, the Company's principal subsidiary, is a credit card enhancement
marketing company that serves over 160 credit card issuers and more than 13
million subscribers. SafeCard's executive offices were also relocated to
Jacksonville, Florida from Cheyenne, Wyoming, in April 1995. This move did not
impact SafeCard's operational facility in Cheyenne. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 7 of Notes to Consolidated Financial Statements under Item 8. Financial
Statements and Supplementary Data.
In 1993 and 1994, the Company began placing greater emphasis on the
development of new products and services and additional lines of business. The
Company's strategy was to diversify and broaden its scope to become an
innovative marketing and servicing organization operating through multiple
strategic business units. To accomplish this strategy, the Company named a new
senior management team, expanded and enhanced its infrastructure and accelerated
the development of new products and services and new areas of business. In 1994
and 1995, the Company incurred significant expenses in developing these new
products and new areas of business. During this time, the Company made two
acquisitions and launched two internally developed businesses as a result of
these developmental efforts.
In September 1994, the Company acquired Wright Express, a provider of
information processing, management and financial services to petroleum companies
and transportation fleets in the United States. The Wright Express Universal
Fleet Card is the nation's most widely accepted electronic fleet fueling credit
card and is accepted at over 90,000 fueling locations. Wright Express is based
in South Portland, Maine.
In January 1995, the Company acquired National Leisure Group, a provider of
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 membership clubs nationwide. National Leisure Group is based in
Boston, Massachusetts.
<PAGE>
In 1995, the Company formed IMS principally to fulfill its obligation under
an exclusive multi-year marketing and servicing agreement with the PGA TOUR that
was entered into in November 1994. Under the agreement, IMS began managing the
PGA TOUR Partners program which included a co-branded credit card issued and
funded by SunTrust BankCard, N.A. IMS was also responsible for card acquisition
and customer servicing. In May 1995, the Company announced that, due to lower
than expected response rates to the PGA TOUR Partners program, the activities of
IMS would be significantly curtailed. In September 1995, the Company announced
that card servicing for the PGA TOUR Partners credit card would be transferred
to SunTrust. IMS continues to service existing PGA TOUR Partners non-credit card
accounts (see Developmental Operations below). IMS is based in Jacksonville,
Florida.
IMS is also engaged in test marketing a direct response consumer business,
Collections of the Vatican Museums, that offers to consumers, primarily through
catalog distribution, products that are recreated from and inspired by historic
works from the thirteen Vatican Museums.
In 1995, the Company formed Family Protection Network, a nationwide child
registration and missing child search program. Consumer response rates from the
initial product launch were significantly lower than anticipated, and the
Company discontinued the operation effective June 30, 1995 (see Developmental
Operations below).
In February 1996, SafeCard completed its acquisition of United Bank Services
("UBS"), a provider of value added enhancement products and services through a
diverse group of financial institutions. Products and services offered by UBS,
based in Norman, Oklahoma, include an airline frequent flyer miles program,
rebate travel, insurance enhancements, customer loyalty and credit card merchant
reward programs.
On February 14, 1995, the Company 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. References herein to the year 1995 refer to
the Company's calendar year ended December 31. References herein to the
Transition Period refer to the two months ended December 31, 1994. References
herein to the years 1994 and 1993 refer to the Company's previous fiscal years
ended October 31.
The following discussion of the Company's business activities is segmented
according to its current operating business units, which is the same segregation
used by management in its internal evaluation of financial results. Additional
information regarding the Company's results of operations and financial
condition, including segmented financial information, can be found in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.
<PAGE>
SafeCard Services, Inc.
SafeCard has historically been in the business of selling subscriptions by
mail and telephone for continuity services that it provides to subscribers.
Continuity services are services provided pursuant to subscriptions which
typically continue annually or periodically unless canceled by the subscriber.
Subscriptions are primarily sold to credit cardholders through arrangements with
credit card issuers, including banks and financial services companies, major oil
companies, retail department stores and others. Subscriber acquisition material
printed for SafeCard that describes its services and how to subscribe is
inserted in the credit card issuer's monthly billing statements or mailed by
SafeCard directly to credit cardholders. Credit cardholders are also asked to
subscribe by means of direct telemarketing solicitation. SafeCard has recently
begun marketing through alternative channels, such as solicitation efforts
during credit card activation. Subscription fees are generally billed to
subscribers' credit card accounts and remitted to SafeCard by the credit card
issuer. A discussion of SafeCard's services and subscriber acquisition methods
follows.
Hot-Line Credit Card Loss Notification Service
Hot-Line is a credit card registration service. If a subscriber notifies
SafeCard of the loss or theft of his/her credit cards, SafeCard retrieves (or,
if cards have not previously been registered, obtains) the necessary card
registration information, and then promptly notifies the credit card issuers of
the loss, simultaneously requesting replacement. In most states, Hot-Line
protects members with liability insurance for fraudulent use of credit, debit,
ATM and calling cards. Membership includes issuance of fraud-deterrent stickers
to be affixed to credit cards, a change of address service to notify card
issuers and magazines when a subscriber moves, car rental discounts and a
"DateReminder" service. SafeCard will also wire stranded subscribers a cash
advance or send an airplane ticket, subject to available credit on a bank card.
Other services available to subscribers include a 24-hour message center and
nationwide toll-free message relay service.
Hot-Line is SafeCard's original service and has been its major source of
revenue and earnings. During 1995, the Transition Period, 1994 and 1993,
Hot-Line provided 55%, 61%, 65% and 68% of the Company's total consolidated
revenue, respectively. In addition, Hot-Line provided 73%, 75%, 76% and 78% of
the Company's consolidated membership and subscription revenue during the same
periods. SafeCard generally charges an annual membership fee of $15 for a single
year subscription. SafeCard also sells multi-year subscriptions, generally for
three year periods at a price of $39 to $45, which provide for payment in
advance of the full subscription price. SafeCard sometimes offers to subscribers
an initial trial period at either no fee or a nominal fee.
Fee-Based Credit Card Services
SafeCard, through arrangements with certain credit card issuers, markets
fee-based credit cards ("Fee Card") on behalf of the issuer, generally to the
issuer's existing no fee cardholders. For an annual fee of $15 to $25,
cardholders who elect to subscribe to the fee-based credit cards typically
receive a new credit card (to replace the no fee card) and various services such
as credit card registration, discounts on travel, insurance and other services
provided or obtained by SafeCard. The card issuer is responsible for the
collection of all charges made to the credit card and may also provide
additional services to the cardholder. During 1995, the Transition Period, 1994,
and 1993, Fee Card programs provided 13%, 14%, 14% and 12% of the Company's
consolidated revenue, respectively. In addition, Fee Card programs provided 17%,
17%, 16% and 14% of the Company's consolidated membership and subscription
revenue during the same periods.
<PAGE>
Reminder Services
SafeCard also offers date reminder services ("Reminder Services") which
provide subscribers, by mail, a monthly computer-generated reminder listing
personal dates and events registered by the subscriber in addition to standard
holidays. Subscribers add dates and events as desired, either by mail or by
calling SafeCard's operations center. The Reminder Services include either a
large plastic-laminated wall calendar, and/or a personal Desk Appointment Book
and/or a Pocket Appointment Book. During 1995, the Transition Period, 1994 and
1993, Reminder Services provided less than 10% of the Company's consolidated
revenue.
CreditLine Services
CreditLine is a personal credit information service. Subscribers receive a
comprehensive personal credit report biography either annually or upon request.
The subscriber's credit information is obtained from national credit bureaus and
reorganized into a user-friendly format. The annual fee is typically $29.
SafeCard also markets "CreditLine Early Warning" which provides customer
notification upon entry of adverse information to a customers credit bureau
file. The annual fee for this service is typically $39. SafeCard also sometimes
markets CreditLine in conjunction with other services at higher prices. The
credit reporting business is subject to existing regulation, as well as possible
future regulation. During 1995, the Transition Period, 1994 and 1993, CreditLine
provided less than 10% of the Company's consolidated revenue.
SafeCard began marketing CreditLine in 1989. SafeCard marketed CreditLine
pursuant to an agreement (the "CreditLine Agreement") with CreditLine
Corporation, a corporation owned by Peter and Steven J. Halmos, SafeCard's
co-founders, and their families. Profits or losses, if any, are shared equally
between SafeCard and CreditLine Corporation. In June 1993, SafeCard was notified
by CreditLine Corporation that the license agreement under which SafeCard
markets certain credit information products and services known as CreditLine
would not be renewed effective November 1, 1993. However, SafeCard believes it
has certain continuing marketing rights under the license agreement. The
CreditLine Agreement is the subject of litigation between Peter Halmos and
related entities and SafeCard. See Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and Notes 14 and 16 of Notes to
Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data.
Discount Travel Service
SafeCard offers a discount travel service, either separately or in
conjunction with other continuity programs. During 1995, the Transition Period,
1994 and 1993, this service provided less than 10% of the Company's consolidated
revenue. SafeCard's travel service is separate from the travel services provided
by the Company's National Leisure Group business unit. See National Leisure
Group below.
Subscriber Acquisition
SafeCard sells subscriptions for its products and services on a retail basis
primarily through arrangements with credit card issuers to consumers who use
credit cards. SafeCard's subscriber acquisition strategy includes direct mail
(generally "Solo Mailings" and "Billing Inserts") and telephone sales.
SafeCard's subscriber acquisition campaigns are typically based on
internally-developed strategies, research, formats, copy and graphics and often
include multiple solicitations within an overall strategy.
<PAGE>
Solo Mailings are generally those created and mailed directly by SafeCard to
holders of credit cards from listings supplied to SafeCard by the issuers of
such credit cards. The printing is typically done by others under contract with
SafeCard. While Solo Mailings vary in type and content, they generally include a
descriptive brochure, a letter and other subscriber acquisition materials, as
well as a postage-paid return subscription form. Each Solo Mailing typically
must be approved by the credit card issuer and generally contains materials
(i.e., letter, envelope, etc.) bearing the credit card issuer's name and logo.
Billing Inserts are generally created by SafeCard and printed by others
under contract and are inserted in the monthly billing statements of credit card
issuers. Billing Inserts have the advantage of lower cost (because postage is
generally paid by credit card issuers). Each Billing Insert mailing typically
must be approved by the credit card issuer. Due to the comparatively low cost of
Billing Inserts and the limitation on the number of inserts which may be placed
in any single billing statement, there is intense competition for insert space
among providers of credit card enhancements.
The current average cost of Solo Mailings is approximately $300 per thousand
pieces of mail, as compared with about $25 per thousand pieces for Billing
Inserts. While Solo Mailings are more costly, primarily due to the fact that the
Company pays the postage, Solo Mailings typically generate a higher response
rate. In addition, Solo Mailings may be sent to all cardholders of a card
issuer, whereas Billing Inserts are mailed only to cardholders who are receiving
a statement in the month of insertion. A U.S. postal rate increase took effect
in January 1995. The postal rate increase had the effect of increasing
subscriber acquisition costs by approximately $2,000,000 during 1995. In
addition, paper costs have increased approximately 20-50% over the past year.
Postage and paper costs generally represent the majority of the cost of Solo
Mailings.
SafeCard also sells subscriptions (primarily Hot-Line) by telephone.
Although the cost of telemarketing campaigns is typically higher, as compared to
Solo Mailing and Billing Inserts, the response rates are generally higher and
the initial subscription period for telephone sales is primarily for more than
one year, with payment to SafeCard in advance. Mailings result in both single
year and multi-year subscribers, with a larger percentage being single year.
During 1995, the Transition Period, 1994 and 1993, approximately 47%, 51%, 50%
and 54%, respectively, of all subscriptions for Hot-Line were acquired through
telephone solicitation.
Subscriber fees are SafeCard's primary source of revenue. Subscriber
acquisition costs are the largest expense. The relationship of these costs to
subscription revenues is dependent on a variety of factors including prices, 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. In addition,
cardholders of certain credit card issuer clients respond more favorably than
others to similar promotions.
Relationships with Credit Card Issuers
SafeCard acquires its subscribers primarily through contractual arrangements
with credit card issuers (including banks and financial services companies,
major oil companies, retail department stores and others) for the mail and
telephone sales of its products and services to the issuers' credit card
holders. SafeCard also provides, to a limited extent, on a wholesale basis, its
services to large membership groups which are affiliated with credit card
issuers, such as oil company travel clubs. New marketing with particular credit
card issuers varies from year to year based on both SafeCard's and the credit
card issuer's strategies as well as contractual requirements.
<PAGE>
SafeCard has written agreements with certain large credit card issuers which
account for a large percentage of its subscription revenue. Termination of any
of these contracts would adversely affect the Company.
Contracts with Citibank (South Dakota), N.A. and related entities
contributed 22%, 24%, 26% and 30% of the Company's consolidated revenue in 1995,
the Transition Period, 1994 and 1993, respectively. Citibank contributed 30%,
30%, 32% and 36% of the Company's consolidated membership and subscription
revenue during the same periods. SafeCard has had contracts with Citibank since
1981. The principal Citibank contract, as amended, expires December 31, 2000.
Citibank has a right to terminate the contract in the event of the sale of a
majority of the shares of the Company to specified credit card issuers, to banks
and their corporate affiliates and to entities that do not have equity of at
least $25 million.
Contracts with Sears, Roebuck and Co. contributed approximately 10% of the
Company's consolidated revenue in 1995, the Transition Period, 1994 and 1993.
Sears contributed 13%, 12%, 13% and 12% of the Company's consolidated membership
and subscription revenue during the same periods. SafeCard has signed a letter
of intent for a new five-year cooperative business relationship with Sears. The
new contract will be effective January 1, 1996, and is expected to executed
shortly. See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
SafeCard's contracts with credit card issuers generally (though not always)
have a one-year or two-year initial term, provide for automatic annual renewal
thereafter unless canceled by either party, and are subject to the fulfillment
of certain contractual obligations. These contracts generally provide for the
mail and/or telephone sales of subscriptions to the issuer's credit card
customers, for the billing (to the subscriber's credit card account) and
collection of subscription fees by the card issuers and for payment to the card
issuers of commissions or fees. In certain cases, SafeCard enters into
profit-sharing arrangements with credit card issuers, in which SafeCard pays
compensation to credit card issuers, after recovery of its marketing costs,
based on profitability (as defined in the agreement with the credit card issuer)
in lieu of commissions.
Authorization for each mailing and/or telephone sales campaign typically
must be obtained by SafeCard from the card issuer, although some contracts
contain minimum marketing volume requirements. SafeCard's ability to obtain such
authorization is critical and is dependent on many factors, including the
business strategies of the credit card issuer clients; the volume, profitability
and efficiency of subscriber acquisitions; quality and efficiency of SafeCard's
client and subscriber servicing; and competition for the limited subscriber
acquisition volume which may be allowed by any one issuer. An additional
important factor in the maintenance of these contracts is SafeCard's knowledge
of the differing operational requirements of each credit card issuer, including
compatible data processing software, innovative subscriber acquisition
strategies, operational efficiency and financial stability.
Credit card issuers from time to time may adopt changes in business strategy
which may affect SafeCard. In addition, there has been significant industry
consolidation by both financial institutions and retailers in recent periods.
Such changes and market shifts can both positively and negatively impact the
member acquisition strategy and market position of SafeCard and the Company.
SafeCard works with its credit card issuer clients, where possible, to minimize
any adverse affects of such changes.
<PAGE>
SafeCard generally does not have proprietary or other rights to the issuers'
credit card customer lists should a credit card issuer terminate its contract
with SafeCard. In that event, with the majority of issuers, SafeCard would
continue to provide services to, and receive its revenue from, existing
subscribers after termination. SafeCard's right to continue to bill existing
subscribers after termination of the client contract generally continues as long
as there is an active credit card, until such subscribers cancel their
subscriptions or for certain contractually specified periods of time.
Seasonality
The operations of SafeCard are not generally seasonal in nature, except that
SafeCard avoids subscriber acquisition campaigns prior to and during certain
holiday periods (i.e. Thanksgiving and Christmas). SafeCard's cash receipts and
disbursements are also related to the timing of solicitation campaigns.
Competition
Competition in securing contracts with credit card issuers for sales of
subscriptions to the issuers' cardholders -- i.e., the third party endorsed
segment of the credit card industry -- is intense. Among the factors affecting
the outcome of such competition are price, the quality and reliability of the
services to be offered, subscriber acquisition strategy and expertise (which is
highly dependent upon creative talents), operational capability, reputation,
financial stability of the company supplying the services, the confidence of
credit card issuers in the management and the sales and marketing personnel of
the enhancement provider and the compensation or fee paid to the credit card
issuer. Additionally, the enhancement provider must maintain security over
credit card and credit data of which it has custody.
SafeCard believes it has greater than 50% of the market share (within the
United States) for credit card registration. Competitors in the credit card
registration business include Signature, CUC International, American Express and
others. Fee-based credit cards are sometimes directly marketed and/or serviced
by certain credit card issuers. Certain national credit bureaus, as well as CUC
International, offer or have offered personal credit information services in
competition with CreditLine. CreditLine is dependent upon the purchase of
consumer credit data from such credit bureaus and there is no other comparable
source for such data. Since SafeCard competes for "advertising space" of various
credit card issuers, it competes with companies who market other products and
services through credit card issuers. Certain of SafeCard's competitors may have
greater resources and/or other competitive advantages.
SafeCard's competition is not confined to any particular region of the
country.
United Bank Services, Inc.
On February 16, 1996, SafeCard completed its acquisition of UBS, a provider
of value added products and services through a diverse group of financial
institutions including banks, credit unions and other financial services
companies. Products and services offered by UBS are expected to expand the base
of product offerings available for offer to SafeCard's extensive client list. In
addition, SafeCard's products will be offered through UBS' more diverse base of
financial institutions. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<PAGE>
Wright Express Corporation
On September 14, 1994 the Company acquired 100% of the outstanding common
stock of Wright Express, a leading provider of enhanced information services to
oil companies and commercial transportation fleets. Revenues from Wright Express
accounted for approximately 10% of consolidated revenue for 1995 and less than
10% of consolidated revenue during the Transition Period and 1994.
Wright Express Universal Fleet Card
Wright Express provides transaction and information processing services to
commercial fleet owners through a national credit card network program, the
Wright Express Universal Fleet Card (the "WexCard"). These services are
generally provided through fueling stations which are owned and operated by
retail petroleum merchants. The WexCard is accepted at more than 90,000 fueling
locations in the United States including those operated by Mobil, Texaco, Exxon,
Shell and Getty. Wright Express also manages private label fleet charge cards
and co-branded WexCard fleet fueling cards for large fleet operators including
regional telephone utilities and national courier and package delivery services.
In providing services through the WexCard and certain private label cards,
Wright Express generates receivables from fleet customers. These receivables
relate to payments due from fleet customers for purchases at fueling stations
that accept such cards. These receivables are funded through a revolving credit
agreement and payables to retail petroleum merchants. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Vehicle Analysis Report
In addition to the convenience of electronically charging fuel purchases,
the WexCard includes a "Vehicle Analysis Report" designed to assist fleet
managers who monitor and control expenses. The report can be generated on a
vehicle and/or driver specific basis providing information to managers regarding
both driver and vehicle performance.
WexIndex
WexIndex is a new product being marketed by Wright Express. This product
makes use of the vast amount of fuel and transaction data accumulated by Wright
Express on a daily basis. Wright Express provides data through a license
agreement with a third party database provider who makes it available to
economists, fleet managers, oil companies and government agencies for their use
and analysis.
Seasonality
The operations of Wright Express are not generally seasonal in nature.
<PAGE>
Competition
Wright Express' competition 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. These oil companies and certain
other competitors are larger and have greater financial and other resources than
Wright Express or the Company. The key factor in distinguishing Wright Express
from its competition is the array of ancillary information processing services
that are offered in addition to the basic credit card service. Recent entrants
into this competitive market, including Texaco's Voyager card, are also
providing such information processing services. There can be no assurance that
Wright Express will not face increased competition in the future.
National Leisure Group
National Leisure Group, acquired by the Company effective January 1, 1995,
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 membership clubs nationwide. The
majority of bookings have historically been generated in New England area retail
stores and, as a result, are dependent upon the level of customer traffic in
these stores. Sales through credit card issuers and membership clubs are
becoming significant new sources of growth. Revenue from National Leisure Group
was less than 10% of consolidated revenue for 1995.
National Leisure Group revenues were negatively affected by adverse weather
conditions at several popular vacation destinations during the summer and fall
of 1995. A number of hurricanes hit several popular Caribbean cruise
destinations and destroyed many of the hotels and attractions. As a result, many
would-be travelers canceled plans or postponed travel to these destinations. The
majority of National Leisure Group's cruise bookings are to Caribbean
destinations. The Company is unable to estimate the lost revenues resulting from
the canceled or postponed bookings.
During 1995, many airlines imposed commission caps on air travel booked
through travel agencies which had a negative impact on margins across the travel
industry. This commission cap did not have a significant impact on National
Leisure Group as the majority of its bookings are cruises and/or air inclusive
tour packages which were not affected by the commission caps.
Seasonality
National Leisure Group's business is highly seasonal in nature. The majority
of the Company's revenues are generated in the winter months (first and fourth
quarters). Although marketing efforts through credit card issuers and membership
clubs are spreading sales into historically slower periods, National Leisure
Group is expected to continue to be highly seasonal.
Competition
Competition within the travel agency industry is intense. National Leisure
Group's primary competitors are independent travel agencies and national travel
providers such as The American Automobile Association, American Express Travel
Related Services and Carlson Wagenlit Travel. National Leisure Group competes
primarily on the basis of price and service.
<PAGE>
Developmental Operations
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 development effort was an initiative between the Company and the PGA TOUR
under an exclusive multi-year licensing, marketing and servicing agreement with
the PGA TOUR. As part of the agreement, the Company committed to manage and
expand the existing PGA TOUR Partners program. The program, developed by the PGA
TOUR, offers access to program members to PGA TOUR events, special members only
tournament play, golf clinics instructed by PGA TOUR players and other services.
In addition, IMS offered a co-branded PGA TOUR Partners credit card issued
through SunTrust BankCard, N.A. Originally, the Company had responsibility for
card acquisition and customer servicing while SunTrust funded the card
receivables. The expanded PGA TOUR Partners program was launched in March 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 and distribution
channels. In September 1995, after a period of product redesign and test
marketing, the Company announced that it was significantly scaling back the
activities of IMS and would discontinue its credit card servicing role. Credit
card servicing responsibilities for the PGA TOUR Partners credit card were
transferred to SunTrust. IMS continues its PGA TOUR Partners membership
(non-credit card) servicing role. The Company recorded a pre-tax charge of
$21,605,000 to 1995 earnings for activities associated with the abandonment of
IMS' credit card servicing role and the related restructuring of IMS operations.
Revenue from the PGA TOUR Partners program is not material to the Company's
consolidated revenue. See Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition and Note 10 of Notes to
Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data.
IMS is also engaged in test marketing "Collections of the Vatican Museums,"
a direct response consumer business that offers to consumers, primarily through
catalog distribution, products that are recreated from and inspired by historic
works from the thirteen Vatican Museums. The revenue and results of operations
of the Collections of the Vatican Museums test marketing effort are not material
to the consolidated revenue and results of operations of the Company.
Family Protection Network
Family Protection Network was launched as a nationwide child registration
and search product in April 1995. The Company developed the concept during 1994
and through March 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, Family Protection Network 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. The Company recorded a pre-tax charge of $8,987,000 to 1995
earnings for activities associated with the termination of Family Protection
Network operations. Revenue from Family Protection Network is not material to
the Company's consolidated revenue. See Item 7 Management's Discussion and
Analysis of Results of Operations and Financial Condition and Note 10 of Notes
to Consolidated Financial Statements under Item 8.Financial Statements and
Supplementary Data.
<PAGE>
New Products and Businesses Under Development
As previously noted, in 1993 and 1994, the Company began placing greater
emphasis on the development of new products and services and areas of business.
The Company focused on four areas which management believed would be high growth
sectors of the economy--security and convenience, travel and leisure, consumer
direct merchandising, and financial management and planning. While the Company's
business acquisition strategy has been successful to date, as a result of the
product failures discussed above, the Company has redirected its efforts to the
streamlining of operations and related cost reductions.
The Company is still committed, however, to growing the existing profitable
business units through new product development, distribution channel expansion
and selective acquisitions which will complement and enhance the individual
business units. It should be noted that a risk exists that new products and
services being developed and test marketed may not be successful or may never be
brought to market. Two new products being developed by SafeCard are "TraveLine"
and "ShopLine." TraveLine is a discount travel membership program offering
airline, hotel, rental car, vacation and cruise package savings. It includes
services designed to increase travel convenience and enjoyment such as trip
routing, destination information and a single 800 number to access all program
services. ShopLine is a discount shopping membership program offering up to 50%
off manufacturer's suggested retail price on over 250,000 name brand products.
ShopLine is designed to be differentiated from competitive services by a series
of customer features including a "double the manufacturer's" warranty, "no
questions" return policy and lower prices. The ShopLine program is the product
of a joint venture between SafeCard and a third party provider.
Employees
As of December 31, 1995, the Company employed 1,038 persons (including 48
part-time employees), as compared to 779 employees (including 31 part-time
employees) as of December 31, 1994.
Other Information
Printing of subscriber acquisition materials is generally contracted to
commercial printers. The Company copyrights most of this material and registers
its trademarks. Telephone sales are made using the services of independent
contractors with SafeCard developing and dictating sales strategies, methods and
quality controls. These strategies, methods and controls are subject to approval
by the credit card issuers. Currently, SafeCard has contracted with several
independent telemarketing contractors, with one such contractor accounting for
the majority of the volume, to execute its telephone sales using scripts and
procedures provided by SafeCard. There are other independent telephone sales
contractors who could provide similar services for SafeCard.
National Leisure Group is dependent on a limited number of wholesale charter
vacation providers in the New England market. National Leisure Group could
create its own charter vacation packages or utilize scheduled airline package
providers as alternative sources.
All raw materials utilized by the Company (primarily paper, plastic and
printer's ink) are readily available.
<PAGE>
Certain copyrights and trademarks of the Company, such as the names
"Hot-Line" and "Wright Express Universal Fleet" may be material to its business.
Various trademarks of the Company are registered under applicable federal law.
These trademarks, which expire periodically, are subject to renewal, and the
Company presently intends to renew all such trademarks. The agreement pursuant
to which SafeCard marketed CreditLine provided that logos, trademarks,
tradenames, service marks and copyrights do not belong to SafeCard. In June
1993, SafeCard was notified by CreditLine Corporation, that the license
agreement under which SafeCard markets certain credit information products and
services would not be renewed on November 1, 1993. This agreement is subject to
litigation. See Note 14 of Notes to Consolidated Financial Statements under Item
8. Financial Statements and Supplementary Data and Item 13. Certain
Relationships and Related Transactions.
Due to the nature of the Company's business, specifically its SafeCard
business unit, many aspects of the Company's operations involve some degree of
security risk. The Company views security as a significant function, a breach of
which could have a material adverse impact on the Company. As such, the Company
places a great deal of emphasis on the security of confidential customer
information. However, it should be noted that no security systems/procedures are
foolproof.
Subscribers to the Company's services are entitled to receive the benefits
of their subscriptions immediately; consequently, the Company has no backlog. In
addition, there is no backlog associated with the Company's travel reservation
business or its fleet fueling operations.
Compliance with federal, state and local laws and regulations which have
been enacted or adopted with respect to protecting the environment is not
expected to have a material impact on capital expenditures or operations of the
Company.
The Company's operations for mail and telephone sales are conducted on a
nationwide basis and the Company does not derive its revenue from any particular
geographic area of the United States, except for National Leisure Group whose
revenue was less than 10% of consolidated revenue for 1995. During the period
1993 through 1995, the Company did not conduct any significant operations, nor
derive any material portion of its sales or revenue, from subscribers or
customers in foreign countries.
On January 22, 1996, the Company announced that its Board of Directors has
decided to explore strategic alternatives available to the Company for the
purpose of enhancing shareholder value. In connection with this decision, the
Company has retained financial and legal advisors to assist the Board in this
process. The Board has established a Strategic Direction Committee to have
oversight of the process. The eventual outcome of this evaluation cannot be
predicted and there can be no assurance that any restructuring or transaction
will result from this process. Because of the uncertainty surrounding the
evaluation process, the Company's business units are experiencing market and
operational issues including increased competitive pressure, customer and client
concerns resulting in contract delays and various employee related matters.
On February 6, 1996, the Company announced that Eugene Miller, one of its
outside directors, has been appointed as Chairman of the Board and Chief
Executive Officer replacing Paul G. Kahn. Mr. Miller serves as the head of the
Company's Strategic Direction Committee as described above.
<PAGE>
Item 2. PROPERTIES
During 1995, the Company relocated its headquarters from Cheyenne, Wyoming
to Jacksonville, Florida. During 1995, the Company leased approximately 110,000
square feet of office space and operational facilities in Jacksonville, Florida
for certain executive and administrative offices of the Company and SafeCard and
personnel associated with the development of new businesses. Due to closure of
Family Protection Network, scaling back of IMS operations and corporate
restructurings, the amount of leased space in Jacksonville has been reduced to
approximately 73,000 square feet.
SafeCard owns and occupies an approximately 143,000 square foot building on
approximately 17 acres in Cheyenne, Wyoming, which serves as its operational
facility. SafeCard expanded its Cheyenne facility during 1995, adding
approximately 28,000 square feet. In connection with the acquisition of UBS,
SafeCard also assumed a lease covering approximately 18,000 square feet of a
32,000 square foot facility in Norman, Oklahoma. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Wright Express currently leases a 33,000 square foot building in Portland,
Maine which serves as its headquarters and operational facility.
National Leisure Group currently leases 20,000 square feet of office space
in Boston, Massachusetts which serves as its headquarters and operational
facility.
The Company also leases a 9,300 square foot facility in Portland, Oregon
which houses its information technology staff.
Item 3. LEGAL PROCEEDINGS
The Company is defending or prosecuting thirteen complex lawsuits, twelve of
which involve Peter Halmos, former Chairman of the Board and Executive
Management Consultant to the Company, and parties related to him as adversaries.
See Note 16 of Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data.
The Company is involved in certain other claims and litigation, including
various employment related claims, arising in the ordinary course of business
and which are not considered material to the operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officer information is as follows. Prior to the reorganization of
SafeCard Services into a wholly subsidiary of Ideon in April 1995, officers who
are, unless otherwise noted, officers of Ideon were officers of SafeCard
Services.
NAME/POSITION/AGE
Kevin L. Bouchillon 33
Vice President - Treasury, Ideon Group, Inc., from May 1995 to present;
Vice President - Assistant Controller, Ideon Group, Inc., from October 1994 to
May 1995; Senior Litigation Manager from July 1993 to October 1994 - Price
Waterhouse, independent public accountants; Litigation Manager from June 1992 to
July 1993, Audit staff/supervisor/manager from August 1985 to June 1992 - Price
Waterhouse.
Joel E. Cutler 38
President and Chief Executive Officer, National Leisure Group, Inc., from
1986 to present.
G. Thomas Frankland 49
Vice Chairman and Chief Financial Officer, Ideon Group, Inc., from May 1994
to present; Partner of Price Waterhouse, independent public accountants, from
1980 to 1994.
Robert M. Frechette 56
President and Chief Executive Officer, SafeCard Services, Inc., from
February 1995 to present; Executive Vice President - Sales, SafeCard Services,
Inc., from April 1994 to February 1995; Senior Vice President - U. S. Acceptance
Group of MasterCard International, from 1991 to 1994; Vice President - General
Merchandise Manager of Montgomery Ward from 1987 to 1991.
Bryan L. Hanson 42
Executive Vice President and Chief Operating Officer, National Leisure
Group, Inc., from February 1996 to present; Vice President - Finance, National
Leisure Group, Inc., from August 1993 to February 1996; Director of Strategic
Planning- Retail Travel of Carlson Wagenlit Travel, from July 1990 to August
1993.
Richard M. Interdonato 47
Executive Vice President - Operations, SafeCard Services, Inc., from April
1994 to present; President of Intec International, Inc., manufacturer of
specialty lubricants from January 1993 to March 1994; Senior Vice President of
American Express managing the Optima Card Operations Center, from 1987 to 1992.
<PAGE>
NAME/POSITION/AGE
David D. Lunghino 42
Executive Vice President - Marketing, SafeCard Services, Inc., from
September 1995 to present; Executive Vice President of Citibank Diners Club from
September 1993 to September 1995; Vice President - Marketing of Conagra Frozen
Foods from September 1990 to September 1993; General Manager of the Vlasic
Pickle Division of Campbell Soup from June 1988 to July 1990.
Francis J. Marino 53
Vice Chairman and General Counsel, Ideon Group, Inc. from April 1995 to
present; Vice Chairman, Ideon Group, Inc., from February 1994 to April 1995;
Senior member of the law firm of Mahoney Adams & Criser, P. A., from January
1990 to January 1994.
Donelyn N. Merritt, Jr. 40
Executive Vice President - Corporate Development & Strategy, Ideon Group,
Inc., from June 1995 to present; Senior Vice President - Corporate Development
and Strategy, Ideon Group, Inc.; from May 1994 to June 1995; Principal of a
private consulting firm primarily concentrating on strategy development and
implementation, from 1986 to May 1994; Consultant with Boston Consulting Group,
a strategic consulting firm, from 1983 to 1986.
Harry Strauss 55
Executive Vice President - Information Technology, SafeCard Services, Inc.,
from January 1996 to present; Executive Vice President - Information Technology,
Ideon Group, Inc. from July 1994 to January 1996; Principle of Microtec
Planning, a technical and management consulting firm, from 1980 to June 1994.
David C. Thompson 40
Senior Vice President & Chief Financial Officer, SafeCard Services, Inc.,
Senior Vice President and Controller, Ideon Group, Inc., from July 1995 to
present; Senior Vice President and Controller, Ideon Group, Inc. from June 1994
to July 1995; Vice President and Chief Financial Officer of the bank card
division of Fidelity Investments, from February 1992 to June 1994; Vice
President and Controller for a regional operating center of American Express,
from October 1988 to February 1992.
<PAGE>
NAME/POSITION/AGE
Paul F. Walsh 46
President and Chief Executive Officer, Wright Express Corporation, from
February 1995 to present; Chairman and Chief Executive Officer of BancOne
Investor Services Corporation and BancOne Diversified Services Corp. from
January 1990 to January 1995.
PART II
Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the
symbol "IQ". The following table sets forth the quarterly high and low sales
prices of Ideon's common stock as reported on the New York Stock Exchange as
well as cash dividends paid during the Transition Period and 1994.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dividend
High Low Paid
Quarter Ended
March 31, 1995 $ 21.38 $ 17.50 $ .05
June 30, 1995 19.75 8.38 .05
September 30, 1995 11.63 9.00 .05
December 31, 1995 10.88 7.38 .05
Two Months Ended
December 31, 1994 18.88 14.25 .05
Quarter Ended
January 31, 1994 20.75 11.50 .05
April 30, 1994 20.00 16.00 .05
July 31, 1994 19.00 14.13 .05
October 31, 1994 17.00 13.75 .05
</TABLE>
The closing price of the Company's stock on March 15, 1996, was $11.875.
The Company had 899 stockholders of record on February 29, 1996.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Selected Statement of Earnings Data(8) (In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Two Months
Year Ended Ended
December 31, December 31, Year Ended October 31,
1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Subscription,
card service
and consumer
marketing
revenue, net $226,620 $ 33,290 $175,541 $156,600 $146,265 $140,557
Interest and
other income(1) 7,348 1,408 13,545 10,526 11,916 11,327
Income (loss)
before cumulative
effect of
accounting
change(2)(3)
(5)(6) (49,441) (49,944) 18,021 31,477 22,498 29,713
Net income
(loss)(2)(3)
(4)(5)(6) (49,441) (49,944) 20,021 31,477 22,498 29,713
Income (loss)
per share(2)
(3)(4)(5)(6) $ (1.73) $ (1.70) $ .70 $ 1.10 $ .75 $ 1.02
Weighted average
number of
common and
common
equivalent
shares(7) 28,500 29,297 28,411 28,572 30,158 29,325
Cash dividends
per share $ .20 $ .05 $ .20 $ .20 $ .15 $ .15
</TABLE>
Selected Balance Sheet Data(8) (In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, October 31,
1995 1994 1994 1993 1992 1991
Total cash
and cash
equivalents and
investments(7) $72,140 $168,981 $184,533 $170,039 $187,301 $178,670
Total assets 385,910 428,714 480,373 378,287 377,418 351,566
Stockholders'
equity(7) 102,860 166,806 217,592 157,695 165,498 144,903
</TABLE>
(1) During 1994, the Company recognized $4,257,000 of income from the
settlement of two lawsuits. During 1992, the Company recognized $550,000 of
income from the settlement of a lawsuit.
(2) During 1995, the Company recorded pre-tax charges of $43,817,000 (net of
recoveries of $1,200,000) related to the abandonment of certain new product
development efforts and the restructuring of SafeCard and the corporate
infrastructure.
(3) During the two months ended December 31, 1994, the Company recorded a
pre-tax charge of $65,500,000 for a change in the amortization periods for
deferred subscriber acquisition costs. The Company also recorded a charge
to earnings of $1,943,000 for permanent impairment of the value of its
securities portfolio.
(4) During 1994, the Company recorded a $2,000,000 benefit ($.07 per share)
resulting from a change in its method of accounting for income taxes.
(5) During 1992, the Company recorded a pre-tax charge of $17,500,000 against
earnings in connection with its relocation from Ft. Lauderdale, Florida to
Cheyenne, Wyoming.
(6) In April 1994, the Company recorded a pre-tax charge of $7,900,000 in
connection with a reorganization of its operations, the naming of a new
senior management team and a payment made to Steven J. Halmos, the
Company's co-founder, in connection with the termination of his contract to
provide services to the Company.
(7) During 1995 and 1993, the Company repurchased approximately 1,005,000 and
3,470,000 shares of its common stock at a cost of approximately $9,801,000
and $41,699,000, respectively (see Liquidity and Capital Resources under
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations).
(8) In September 1994, the Company acquired the outstanding common stock of
Wright Express. In January 1995, the Company acquired the net assets of
National Leisure Group. The results of operations of Wright Express and
National Leisure Group have been included in the consolidated results of
operations since their respective dates of acquisition.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
References herein to the year 1995 refer to the Company's calendar year
ended December 31. References herein to the Transition Period refer to the two
months ended December 31, 1994. References herein to the years 1994 and 1993
refer to the Company's previous fiscal years ended October 31.
Ideon resulted from the reorganization of SafeCard approved by shareholders
on April 27, 1995. As a result of the reorganization, Ideon is a holding company
with current operating business units including SafeCard, Wright Express,
National Leisure Group, and IMS. The operations of an additional business unit,
Family Protection Network, have been discontinued as described below.
RESULTS OF OPERATIONS
CONSOLIDATED
Overview
The Company reported a pre-tax loss of $77,242,000, resulting in a net loss
of $49,441,000, or $1.73 per share, for 1995. The pre-tax loss includes a
special charge of $43,817,000 (net of recoveries of $1,200,000) for costs
associated with the abandonment of certain new product development efforts and
the related impairment of certain assets and the restructuring of SafeCard and
the corporate infrastructure. During the first two quarters of 1995, the Company
attempted to launch two new businesses. Consumer response rates to the products
offered by these businesses were significantly below management's expectations
and the products proved not to be economically viable. The Company closed its
Family Protection Network business unit and significantly reduced the size of
its IMS business unit, returning it to a developmental mode in the second
quarter. In the third quarter, the Company took an additional charge to
discontinue the credit card servicing operation of IMS and to reduce SafeCard
and corporate staff and overhead expenses. See Note 10 of Notes to Consolidated
Financial Statements.
The Company reported a net loss of $49,944,000 ($1.70 per share) and net
income of $20,021,000 ($.70 per share) and $31,477,000 ($1.10 per share) for the
Transition Period, 1994 and 1993, respectively. The net loss of $49,944,000
during the Transition Period was largely the result of a $65,500,000 pre-tax
charge recorded as a result of a change in the Company's amortization periods
for subscriber acquisition costs (see Note 1 of Notes to Consolidated Financial
Statements). The decrease in net income from 1993 to 1994 was principally due to
the expansion of the Company's infrastructure in anticipation of future growth
and a $7,900,000 restructuring charge taken in connection with a change in
senior management in 1994. Net income for 1994 included a $2,000,000 benefit
from the cumulative effect of a change in the Company's method of accounting for
income taxes.
Revenues
Revenues for 1995 were $233,968,000, compared to revenues of $34,698,000,
$189,086,000 and $167,126,000 for the Transition Period, 1994 and 1993,
respectively. The increases in revenues 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 a pre-tax operating loss of $77,242,000 in 1995,
compared to a pre-tax operating loss of $76,019,000 in the Transition Period and
pre-tax operating income of $24,199,000 and $42,445,000 for 1994 and 1993,
respectively. The decline in operating income was the result of expenses
incurred in connection with the launch and subsequent abandonment of two new
product development initiatives and related restructuring as discussed above.
The 1995 operating loss includes a special charge of $43,817,000 (net of
recoveries of $1,200,000) 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.
The following tables summarize operating results by business unit. The
"Developmental Operations" column includes the operating results of IMS and
Family Protection Network, the Company's developmental stage business units.
For the year ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription
revenue, net $176,951 $176,951
Card acquisition
and services
revenue $23,332 23,332
Consumer marketing
revenue 10,343 $15,994 26,337
Interest and other
income 581 24 $6,743 7,348
--------- ------- ------ -------- -------- -------
Total revenue 187,875 23,332 16,018 6,743 233,968
--------- ------- ------ -------- -------- --------
Total costs and
expenses 155,429 19,898 14,045 $ 83,803 38,035 311,210
-------- ------- ------ -------- -------- ---------
Income (loss)
before provision
for income
taxes $ 32,446 $ 3,434 $ 1,973 $(83,803) $(31,292) $ (77,242)
========== ======== ======== ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the two months ended December 31, 1994 (in thousands):
<S> <C> <C> <C> <C> <C> <C>
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
Membership and
subscription
revenue, net $ 28,579 $28,579
Card acquisition
and services
revenue $ 2,915 2,915
Consumer marketing
revenue 1,796 1,796
Interest and other
income $ 1,408 1,408
-------- -------- ------- -------
Total revenue 30,375 2,915 1,408 34,698
--------- -------- ------ -------
Total costs and
expenses 89,825 2,691 $ 6,565 11,636 10,717
-------- ------- -------- ------ -------
Income (loss)
before provision
for income taxes $ (59,450) $ 224 $ (6,565) $(10,228) $(76,019)
======= ====== ========= ======== ========
</TABLE>
For the year ended October 31, 1994 (in thousands):
<TABLE>
<CAPTION>
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
<S> <C> <C> <C> <C> <C> <C>
Membership and
subscription
revenue, net $ 162,591 $ 162,591
Card acquisition
and services
revenue $ 2,107 2,107
Consumer marketing
revenue 10,843 10,843
Interest and
other income 229 $ 13,316 13,545
-------- ------ --------- -------
Total revenue 173,663 2,107 13,316 189,086
--------- ------- -------- ------
Total costs and
expenses 131,702 1,857 $ 5,006 26,322 164,887
------- ------- ------- -------- -------
Income (loss)
before provision
for income taxes $ 41,961 $ 250 $ (5,006) $(13,006) $24,199
====== ======= ====== ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the year ended October 31, 1993 (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, net $ 146,173 $ 146,173
Card acquisition
and services
revenue
Consumer marketing
revenue 10,427 10,427
Interest and
other income 512 $ 10,014 10,526
---------- -------- -------
Total revenue 157,112 10,014 167,126
-------- ------- -------
Total costs and
expenses 112,430 12,251 124,681
--------- -------- -------
Income (loss)
before provision
for income taxes $ 44,682 $ (2,237) $ 42,445
========= ========= ========
</TABLE>
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"), a personal credit information service ("CreditLine"),
date reminder services and discount travel services.
SafeCard markets its products and services through approximately 160 credit
card issuers including banks, oil companies and retailers. Contracts were signed
with four new clients in 1995 including Mellon Bank (DE) National Association.
New contracts were signed with five existing clients during 1995, including an
extension of the Company's contract with Citibank through the year 2000.
SafeCard also signed a letter of intent for a new five-year agreement with Sears
Roebuck & Co. The new agreement will become on January 1, 1996 and is expected
to be executed shortly. In connection with the new agreement, Sears will assume
additional marketing costs and SafeCard's overall margins will be reduced. As a
result, SafeCard expects pre-tax income from existing products to be lower by
approximately $2,000,000 in 1996. In May 1995, the Company announced that
SafeCard's contract to provide Fee Card services to Texaco Refining & Marketing,
Inc. would be terminated effective August 1, 1995. SafeCard will continue to
service some Texaco customers and will continue to provide other credit card
enhancement services to Texaco. This change in SafeCard's relationship with
Texaco did not have a material impact on the Company's results of operations in
1995. In February 1996, the Company announced that SafeCard's contract to
provide credit card registration to J.C. Penney credit card holders will be
terminated. Renewals of existing subscribers will continue to be billed through
J.C. Penney for five years. Termination of the J.C. Penney contract is not
expected to have a material impact on the Company's results of operations in
1996.
<PAGE>
The Company believes that successful development of new products and
services and new channels of distribution will become increasingly important to
the future growth of SafeCard revenues and operating income. New products being
test marketed in 1996 include "TraveLine," a discount travel membership program,
and "ShopLine," a discount shopping membership program. New channels of
distribution include using voice response technology to conduct solicitations
during credit card activation. The viability of new products and services and
new channels of distribution under development is not assured and the timing of
bringing such new products and services to market or penetrating new channels of
distribution cannot be estimated.
Revenue
Membership and Subscription Revenue, Net
Membership and subscription revenue, net represents the amortization of
advance payments received from subscribers to SafeCard's credit card enhancement
continuity services such as Hot-Line, Fee Card and CreditLine. 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.
Membership and subscription revenue, net increased 9% from $162,591,000 in
1994 to $176,951,000 in 1995. The increase is 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. Subscription revenue increased 5% in 1995 over 1994 as a
result of the increase in the average number of subscribers to SafeCard's
principal enhancement services. A shift in sales mix to higher priced products,
the price increase which began to take effect in 1993 and other factors
accounted for a 4% increase in subscription revenue in 1995 over 1994.
Membership and subscription revenue, net increased 11% from $146,173,000 in
1993 to $162,591,000 in 1994. Subscription revenue increased 7% in 1994 over
1993 as a result in the increase in the average number of SafeCard subscribers.
The price change noted above accounted for a 4% increase in subscription revenue
in 1994 over 1993.
Membership and subscription revenue is 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, credit card issuer's
strategies, interest rates, the number of credit cards in use, demographic
trends, consumers' propensity to buy, the number of competing offers received by
potential subscribers, the degree of market penetration and the effectiveness of
subscriber acquisition concepts, solicitation materials and marketing
strategies. Many direct-to-consumer marketers have experienced an overall
decline in the percentage of consumers responding to offers during the past
year. Such declines in response rates may result from a number of factors
including the foregoing. There can be no assurance that response rates will not
decline further in the future.
The following table details renewal rates at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Subscription Product 1995 1994
-------------------- ---- ----
<S> <C> <C>
Single year Hot-Line 76% 76%
Multi-year Hot-Line 48% 47%
Fee Card (primarily single year) 78% 82%
</TABLE>
<PAGE>
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 and 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 decrease in renewal rates for Fee Card
is primarily due to the loss of certain Texaco customers during 1995 as
previously discussed. Fee Card renewal rates in 1996 are expected to be
negatively impacted by the loss of the Texaco contract.
In 1995, SafeCard initiated a new retention initiative designed to enhance
renewal rates. During the year, additional marketing expenditures were made in
connection with this effort. The Company estimates that in 1995 approximately
155,000 subscribers were retained who would otherwise have cancelled their
subscriptions.
The following table details subscriber activity for 1995, the Transition
Period, 1994 and 1993 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 3,856,000 (3,730,000) 13,172,000
Transition 13,105,000 592,000 (651,000) 13,046,000
1994 12,043,000 4,877,000 (3,815,000) 13,105,000
1993 11,472,000 4,374,000 (3,803,000) 12,043,000
</TABLE>
New subscribers represent fee-paying subscribers obtained through various
marketing channels. Free initial 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 inability to bill
credit card accounts, the closure of credit card accounts or other events beyond
SafeCard's control.
The decline in new subscribers in 1995 reflects the impact of reduced
marketing efforts at the end of 1994 and during the first half of 1995 while
SafeCard renegotiated contracts with certain large credit card issuers. Changes
in marketing emphasis and the extent of new marketing with credit card issuers
affects the number of potential subscribers. Certain card issuers, including
Citibank, have begun to limit telemarketing and other customer contacts
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. SafeCard is also 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 customer contacts.
<PAGE>
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. As previously discussed, in 1995 SafeCard signed contracts with four
new clients and signed new contracts with five existing clients (including an
extension of its contract with Citibank). SafeCard also signed a letter of
intent for a new five-year agreement with Sears. The new agreement will be
effective January 1, 1996 and is expected to executed shortly. In connection
with the new agreement, Sears will assume additional marketing costs and
SafeCard's overall margins will be reduced. As a result, SafeCard expects
pre-tax income from existing products to be lower by approximately $2,000,000 in
1996. Certain contracts with Texaco and J.C. Penney have been terminated as
previously noted. 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.
In June 1993, SafeCard was notified by CreditLine Corporation, a company
owned by Peter and Steven J. Halmos, SafeCard's co-founders, and their families,
that the license agreement under which SafeCard markets the CreditLine product
would not be renewed effective November 1, 1993. Notwithstanding its
termination, SafeCard believes it has certain continuing marketing rights under
the CreditLine Agreement. The CreditLine Agreement, including the continuing
marketing rights, is the subject of litigation between SafeCard, the Company and
Peter Halmos (see Notes 14 and 16 of Notes to Consolidated Financial
Statements).
Consumer Marketing Revenue
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% to $10,343,000 in
1995 as compared to $10,843,000 in 1994. Consumer marketing revenue increased 4%
from $10,427,000 in 1993 to $10,843,000 in 1994.
Operating Income
Operating income decreased 23% to $32,446,000 in 1995 compared to
$41,961,000 in 1994. The decrease in operating income was the result of higher
subscriber acquisition costs, increased marketing and new product development
costs, increased equipment and facilities costs and a restructuring charge of
$3,010,000 taken in the third quarter of 1995. SafeCard incurred an operating
loss of $59,450,000 during the Transition Period as a result of a $65,500,000
pre-tax charge resulting from the change in amortization periods for deferred
subscriber acquisition costs.
After a review of the Company's accounting practices during the Transition
Period, SafeCard changed the amortization periods for deferred subscriber
acquisition costs (see Note 1 of Notes to Consolidated Financial Statements).
The change was made in response to the Company's plans to incur additional
marketing expenditures to enhance renewal rates as noted above. 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 the change, 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. At
December 31, 1994, the amortization periods were shortened to one year and three
years for single 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 of $65,500,000 in the Transition Period. As a result of the change,
deferred subscriber acquisition costs in 1995 are recognized on a more
accelerated basis as compared to prior periods.
<PAGE>
Beginning in late 1994 and continuing through 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 $2,218,000 for 1995, which were
partially offset by higher revenues.
As previously discussed, in 1995 the Company reviewed and evaluated
SafeCard's operating structure. A restructuring charge of $3,010,000 was
recorded during the year to provide for the associated costs of streamlining
SafeCard's operating structure. Approximately 70 positions were eliminated and
several functions will be, or have been, restructured to streamline certain
operations and take advantage of operational efficiencies obtained from
automation programs implemented during the year.
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. In 1995, capital expenditures totaled $9,881,000,
including approximately $5,000,000 for the expansion and renovation of the
Cheyenne operating center. The remainder represents upgraded computer equipment
and systems.
Operating income decreased 6% from $44,682,000 in 1993 to $41,961,000 in
1994. The decrease resulted from increased marketing expenditures, new product
development expenses and facilities costs in 1994, partially offset by increased
membership and subscription revenues.
Acquisition
On February 16, 1996, SafeCard completed its acquisition of UBS, a provider
of value added products and services through a diverse group of financial
institutions. Products and services offered by UBS, headquartered in Norman,
Oklahoma, include an airline frequent flyer miles program called CardMiles,
rebate travel, insurance enhancements, customer loyalty programs (designed to
aid in card acquisition or increase card usage) and credit card merchant reward
programs (designed as packages of enhancements to be offered by credit card
merchant processors). SafeCard expects to be able to increase revenues through
the sale of its products through UBS' distribution channels and to expose UBS'
current and planned enhancement products to SafeCard's client base.
SafeCard's acquisition of UBS closed in 1996, and, accordingly, the 1995
results of operations of SafeCard and the Company do not include UBS financial
results. Terms of the acquisition included an $18,328,000 cash payment at
closing and up to an additional $4,000,000 in each of the years 1996, 1997 and
1998 based on the attainment of certain earnings hurdles and fulfillment of
certain conditions. In addition, the sellers are also entitled to 50% of UBS's
share of the profits from a foreign joint venture over the next three years, up
to a maximum of $10,000,000. The acquisition of UBS is not expected to
materially impact the Company's earnings in 1996.
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. See Note 3 of Consolidated
Notes to Financial Statements.
<PAGE>
The WEX card is accepted at over 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 provides this data through a license agreement with a
third party database provider who makes it available to economists, fleet
managers, oil companies and government agencies for their use and analysis.
Wright Express' competition 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. The key factor in distinguishing
Wright Express from its competition is the array of ancillary information
processing services that are offered in addition to the basic credit card
service. Recent entrants into this competitive market, including Texaco's
Voyager card, are also providing such information processing services. 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
Card acquisition and services revenue principally results from transaction
fees deducted from amounts remitted to retail fueling merchants and periodic
fees charged to fleet customers. Card acquisition and services revenue was
$23,332,000 for 1995 compared to $2,107,000 in 1994. Card acquisition and
services revenue for 1994 includes the results of operations of Wright Express
from September 14, 1994 (date of acquisition) to October 31, 1994. Card
acquisition and services revenue was $2,915,000 for the Transition Period.
Card acquisition and services revenue varies as a result of changes in fuel
prices and the volume of fuel purchased. Changes in fuel prices primarily impact
revenue through the dollar volume of fuel purchases subject to discount rates
charged to retail fueling merchants. Fuel gallons purchased increased from 108
million gallons in the first quarter of 1995 to 153 million gallons in the
fourth quarter. This volume represents less than 2% of the annual 35 billion
gallon 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 $3,434,000 for 1995, $224,000 for the Transition
Period and $250,000 for the period from September 14, 1994 to October 31, 1994.
Operating income has been positively impacted by an increase in card acquisition
and services revenue, as described above, offset by a slight increase in
operating expenses and product development costs.
<PAGE>
NATIONAL LEISURE GROUP
Business Overview
National Leisure Group was acquired effective January 1, 1995 (see Note 3
of Notes to Consolidated Financial Statements). 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 and, as a result,
are dependent upon the level of customer traffic in these stores. In addition,
sales are highly seasonal in nature with the majority of sales in the winter
months (first and fourth quarters). Sales through credit card issuers and
membership clubs are becoming significant new sources of growth.
Revenues
Consumer Marketing Revenue
Consumer marketing revenue for National Leisure Group is primarily
generated from commissions paid by cruise lines and vacation package
wholesalers. Consumer marketing revenue for National Leisure Group was
$15,994,000 for 1995. As National Leisure Group was acquired in 1995, the
Company's results of operations for previous periods do not include the results
of operations of National Leisure Group. As noted above, National Leisure
Group's revenue has historically come primarily from retail outlets in the New
England area. Revenue during 1995 was adversely impacted by reduced levels of
customer traffic in Filene's Basement stores in the New England area and by
adverse publicity received by Filene's. Revenue was also negatively impacted by
adverse weather conditions at several popular vacation destinations which
reduced new bookings and increased cancellations.
Operating Income
National Leisure Group had operating income of $1,973,000 for 1995.
Virtually all of National Leisure Group's operating income for the year was
generated in the first and fourth quarters due to the highly seasonal nature of
the New England travel market. Operating income was adversely impacted by the
negative impact of weather conditions at certain travel destinations as noted
above. Operating income was positively impacted by sales growth through endorsed
channels such as credit card issuers and membership clubs.
DEVELOPMENTAL OPERATIONS
The "Developmental Operations" column of the business units table includes
the operating results of Family Protection Network and IMS (including
Collections of the Vatican Museums). Revenue generated from these developmental
efforts is not material and has 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.
<PAGE>
Business Overview
Family Protection Network
Family Protection Network, launched in April 1995, was initiated as a
nationwide child registration and search product. The Company expended
approximately $7,000,000 to develop the concept during 1994 through March 1995.
These costs were expensed as incurred.
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, Family Protection Network 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 closed Family Protection
Network.
Ideon Marketing and Services Company
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 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 were incurred in both developmental
efforts (multiple co-branding opportunities and the Partners program). These
costs were expensed as incurred.
An expanded PGA TOUR Partners program, designed around a co-branded credit
card, 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 and 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.
In September, 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 will continue its PGA
TOUR Partners membership (non-credit card) servicing role while credit card
servicing responsibilities have been transferred to SunTrust.
<PAGE>
IMS is also engaged in test marketing "Collections of the Vatican Museums,"
a direct response consumer business that offers to consumers products that are
recreated from and inspired by historic works from the thirteen Vatican Museums.
A fall catalog was tested in 1995 with mailings during the third and fourth
quarters. A spring catalog is being tested in the first half of 1996. The
Company expended approximately $2,500,000 in 1995 to develop and test market
this program. The future development of this program will be evaluated based on
the results of the catalog test marketing. The Company does not expect the
completion of testing of this program to have a material impact on 1996 results
of operations.
Operating Loss
Family Protection Network and IMS incurred a combined operating loss of
$83,803,000 in 1995, including pre-tax charges of $30,592,000 to cover costs
associated with the product abandonments. Operating losses for developmental
operations in the Transition Period and 1994 were $6,565,000 and $5,006,000,
respectively.
For 1995, IMS had an operating loss of $54,115,000, including $32,510,000
related to marketing and operational costs incurred (including product launch
costs) and $21,605,000 for product abandonment costs including costs of employee
severance, costs to terminate equipment and facilities leases and the
recognition of certain commitments. Marketing and operational costs incurred
include $2,511,000 for the Collections of the Vatican Museums test marketing.
The operations of Family Protection Network were discontinued effective
June 30, 1995. Family Protection Network incurred an operating loss of
$29,688,000 for 1995, including $20,701,000 of marketing and operational costs
(including product launch costs) and $8,987,000 for product abandonment
including costs 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 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. The corporate and other operating results in the business unit table
includes the following:
<TABLE>
<CAPTION>
Year Year Two Months
Ended Ended Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
General corporate
overhead expenses $18,971,000 $ 6,531,000 $9,316,000 $ 5,257,000
Litigation and
other legal expenses 5,570,000 762,000 8,162,000 6,924,000
Corporate research
and development 3,279,000 2,400,000 944,000 70,000
Asset impairment and
restructuring charges 10,215,000 7,900,000
Unrealized loss on
securities available
for sale 1,943,000
Interest income (5,497,000) (1,394,000) (8,421,000) (8,736,000)
Other income (1,246,000) (14,000) (4,895,000) (1,278,000)
------------ ------------ ---------- -------------
$ 31,292,000 $10,228,000 $13,006,000 $ 2,237,000
============ =========== =========== ============
</TABLE>
<PAGE>
General Corporate Overhead Expenses
General corporate overhead expenses increased $9,655,000 (104%) in 1995 as
compared to 1994. This increase was 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 general
corporate overhead expenses for 1995 as compared to 1994 include increases in
payroll and employee related expenses of $6,025,000, increases in outside
services of $1,762,000 and increases in corporate operating expenses of
$1,868,000.
General corporate overhead expenses increased $4,059,000 (77%) from 1993 to
1994 as the Company built a larger corporate infrastructure designed to support
multiple, diversified, high-growth business units. Additional corporate
functions were added (i.e. marketing, information technology and corporate
development) to support the anticipated rapid growth of the Company. Increases
in general corporate overhead expenses for 1994 as compared to 1993 include
increases in payroll and employee related expenses of $2,221,000, increases in
outside services of $1,308,000 and increases in corporate operating expenses of
$530,000.
As previously discussed, subsequent to the product launch failures, the
Company reviewed and evaluated its organization and structure. The Company has
instituted expense reduction efforts including restrictions on travel and a
decrease in the use of outside consultants. The Company has reduced its
corporate staff by more than 80% 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 (54%) from the second
quarter to the third quarter 1995 and $1,254,000 (32%) from the third quarter to
the fourth quarter 1995. As discussed below, a restructuring charge of
$10,215,000, net of recoveries, was recorded in 1995 to cover the associated
costs of downsizing the Company's corporate infrastructure.
Litigation and Other Legal Expenses
Litigation and other legal expenses decreased $2,592,000 (32%) in 1995
compared to 1994. Litigation and other legal expenses increased $1,238,000 (18%)
in 1994 compared to 1993. The Company is involved in a number of complex
lawsuits involving Peter Halmos, former Chairman of the Board and Executive
Management Consultant to SafeCard (see Note 16 of Notes to Consolidated
Financial Statements). Litigation expenses anticipated in future periods cannot
be quantified as such expenses are dependent on a number of factors beyond the
Company's control.
Corporate Research and Development
Corporate research and development expenses include 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 expenses also include the costs incurred by the Company's corporate
development and acquisition function. Corporate research and development efforts
increased in 1994 and 1995 primarily due to acquisition activity and the
development and launch of new products in the first half 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. In the fourth
quarter, the Company recorded a $1,200,000 recovery of a $3,900,000 building
deposit included in the write-down taken in the second quarter (see Note 10 of
Notes to Consolidated Financial Statements).
<PAGE>
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.
Unrealized Loss on Securities Available for Sale
During the Transition Period, the Company experienced market value declines
in its investment portfolio as a result of an increasing interest rate
environment. Given the Company's strategy to redeploy its investment resources
into operating assets and in view of the then current interest rate environment,
management elected to reposition its investment portfolio. This repositioning
helped to minimize additional market risk and complete the Company's effort to
shorten the overall maturity of the portfolio. Due to the decision to sell a
significant portion of the Company's investment portfolio, management determined
that there was an other than temporary decline in the market value of its
available for sale portfolio, and consequently net unrealized losses of
$1,943,000 were charged against earnings for the two months ended December 31,
1994.
Interest and Other Income
Interest income decreased $2,924,000 (35%) during 1995 as compared to 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 excess
operating 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. In addition, the
Company repurchased approximately 1,005,000 shares of its own common stock in
1995 for $9,801,000. 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
first quarter of 1995 (see Note 4 of Notes to Consolidated Financial
Statements).
Interest income decreased $315,000 (4%) in 1994 as compared to 1993. This
decrease in interest income was due to lower levels of cash and investments in
1994 compared to 1993, partially offset by increasing interest rates. Cash and
investments were used to fund increased marketing and operating expenses in 1994
and to fund the acquisition of Wright Express.
Other income decreased to $3,649,000 (75%) in 1995 as compared to 1994.
Other income in 1994 includes $4,257,000 of gains from litigation settlements.
This decrease was offset by realized gains on sales of securities available for
sale of $1,094,000 during 1995 compared to securities gains of $593,000 during
1994. The 1995 sales were part of the Company's plans, as discussed above, to
shorten the portfolio's overall maturity and increase its investments in taxable
securities.
Other income increased $3,617,000 (283%) in 1994 as compared to 1993,
primarily due to the gains from litigation settlements in 1994 noted above. This
litigation settlement income was offset by a $684,000 decrease in securities
gains.
<PAGE>
Provision for Income Taxes
For information regarding the Company's effective income tax rate and
deferred income tax assets and liabilities, see Note 12 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
resulted in a cumulative benefit of $2,000,000 on the Company's reported
earnings during 1994. This benefit 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
1995 Compared to 1994
Cash used in operating activities was $55,519,000 in 1995 compared to cash
provided by operating activities of $47,046,000 in 1994. The decrease in cash
flow from operations is principally the result of a $143,140,000 increase in
cash paid to suppliers and employees, which includes cash expenditures for
research and product development and payments relating to product abandonment
and restructuring charges. The increase in cash paid to suppliers and employees
was offset by a $44,251,000 increase in cash received from subscribers and
customers. Operating cash flow was also impacted by a $4,257,000 decrease in
gain from litigation settlements, a $7,352,000 decrease in interest received,
net of interest paid and a $7,933,000 increase in income tax refunds, net of
payments.
Of the $143,140,000 increase in cash paid to suppliers and employees during
1995, approximately $33,763,000 was expended for the development and launching
of the PGA TOUR Partners program, $22,721,000 for Family Protection Network and
$3,197,000 for Collections of the Vatican Museums. The Company made payments
totalling $14,252,000 for product abandonment and restructuring related charges
in 1995. In addition, approximately $43,501,000 more was expended for the
operations of Wright Express and National Leisure Group in 1995 than in 1994.
NLG was not included in the consolidated results of operations for 1994, while
Wright Express was only included from September 14, 1994 to October 31, 1994.
The remaining increase in cash paid to suppliers and employees in 1995 is the
result of a larger corporate infrastructure and increased spending on SafeCard
marketing, operations and product development activities.
Expenditures for subscriber acquisition costs at SafeCard increased by
$919,000 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. Offsetting the increase in expenditures for subscriber acquisition costs
was a decrease in commissions paid to credit card issuers of $846,000 in 1995
compared to 1994. Changes in commissions paid are related to the change in net
billings for credit card enhancement continuity services as discussed below.
<PAGE>
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
$2,000,000 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 making changes in its mix of direct mailings and is
taking other steps to reduce the impact of the postal rate increase. Provisions
in some card issuer client contracts allow for the recovery of postal rate
increases from the card issuer. In addition, paper costs have increased
approximately 20-50% over the past year.
Of the $44,251,000 increase in cash received from subscribers and customers
in 1995, the operations of Wright Express and National Leisure Group contributed
$43,125,000 more in 1995 than in 1994. The remaining increase is due to a
decrease in receivables from continuity services offset by a decrease in net
billings to subscribers discussed below.
Net billings for credit card enhancement continuity services decreased
$4,628,000 in 1995 compared to 1994. The decline in billings in 1995 as compared
to 1994 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 a tax net operating loss for the tax year ended October 31,
1994, the Company filed a carryback claim in 1995 for a refund of tax payments
made in 1991 and 1992. The Company received refunds of previously paid taxes of
approximately $9,300,000 in connection with the carryback claim and $1,500,000
for estimated tax payments made prior to the filing of the return. The net
operating loss for 1994 was principally the result of increased compensation
expense from the exercise of non-qualified stock options in 1994. In addition,
as a result of the completion of an audit of the Company's 1992 and 1993 federal
income tax returns, the Company received a refund of approximately $600,000 in
1995. During 1994, the Company received a $4,000,000 federal tax refund for
estimated tax payments made in the prior year and made an estimated tax payment
of $1,500,000 in connection with its 1994 federal income tax return.
1994 Compared to 1993
Cash provided by operating activities was $47,046,000 in 1994 compared to
$28,845,000 in 1993. The increase in cash flow from operations from 1993 to 1994
was the result of (i) a reduction in taxes paid, net of refunds of $24,527,000,
principally as a result of recognition of increased compensation expense for tax
purposes from the exercise of stock options, (b) a $12,131,000 increase in net
cash received from SafeCard subscribers, (c) a net cash contribution from the
operations of Wright Express since the date of acquisition of $4,341,000 and (d)
litigation settlements received during 1994 of $4,257,000. Offsetting these
changes was a $27,025,000 increase in cash paid to suppliers and employees.
Expenditures for subscriber acquisition costs increased by $4,312,000 in
1994 compared to 1993. The increase from 1993 to 1994 was primarily due to an
increase in the level of direct-mail and telemarketing programs initiated during
1994. Commissions paid to credit card issuers increased $2,901,000 in 1994
compared to 1993. The increase in commissions paid in 1994 was due primarily to
increased subscriber billings over this period. Billings to subscribers
increased $16,156,000 in 1994 compared to 1993 due to a combination of increases
in subscription fees and the number of subscribers.
<PAGE>
Investing Activities
1995 Compared to 1994
Cash provided by investing activities was $82,915,000 in 1995 compared to
$48,523,000 used in investing activities in 1994. Proceeds from sales and
maturities of investment securities, net of securities purchased increased
$117,538,000 in 1995 as compared to 1994. As previously discussed, the Company
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 to fund acquisitions. The
Company paid $12,977,000 (net of cash acquired) to acquire the net assets of
National Leisure Group in the first quarter of 1995 and $35,276,000, net of cash
acquired, to acquire the outstanding stock of Wright Express in September 1994
(see Note 3 of Notes to Consolidated Financial Statements).
The Company also expended $16,443,000 for capital assets in 1995
compared to $8,044,000 in 1994. Capital additions at Wright Express and National
Leisure Group contributed $3,632,000 of the increase, primarily related to
technology platform enhancements. The remaining increase was principally due to
the completion of the expansion and renovation of SafeCard's operations center
in Cheyenne, Wyoming, company-wide information technology enhancements and
capital additions related to the Company's internally developed businesses.
1994 Compared to 1993
Cash used in investing activities was $48,523,000 in 1994 compared to cash
provided by investing activities of $7,714,000. Investment securities purchased,
net of proceeds from sales and maturities of securities increased $13,636,000 in
1994 as compared to 1993 primarily due to the increase in operating cash flow.
As noted above, the Company paid $35,276,000 (net of cash acquired) to acquire
Wright Express in September 1994. Net acquisitions of property and equipment
increased $7,325,000 in 1994 compared to 1993 principally for enhancements to
the Company's information technology platform designed to improve customer
service capabilities.
Financing Activities
1995 Compared to 1994
Cash used in financing activities was $11,640,000 in 1995 compared to cash
provided by financing activities of $16,063,000 in 1994. Cash flow used in
financing activities included a $9,318,000 increase in treasury share purchases
in 1995 over 1994 as the Company reinstated its stock repurchase program. 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 December 31,
1995, the Company had purchased 1,005,100 shares for $9,801,000 under the
reinstated plan.
Dividends paid increased by $306,000 in 1995 compared to 1994. The increase
in dividends paid was solely due to an increase in the number of common shares
outstanding during each period presented. The Company's annual dividend rate was
$.20 per share ($.05 per quarter) for each period presented. Cash generated from
the exercise of stock options decreased $24,202,000 in 1995 compared to 1994.
<PAGE>
Cash provided by net borrowings on Wright Express' revolving credit
facility increased $6,123,000 due to growth and related funding requirements for
this business unit. Wright Express' borrowings are a part of its working capital
management structure and are required periodically to fund its accounts
receivable.
1994 Compared to 1993
Cash provided by financing activities was $16,063,000 in 1994 compared to
cash used in financing activities of $41,432,000 in 1993. The increase in cash
provided by operating activities in 1994 as compared to 1993 was due to an
increase in proceeds from exercise of stock options of $19,278,000 coupled with
a decrease in payments for treasury shares of $41,216,000. These increases in
financing cash flows were offset by a increase in dividends paid of $207,000 and
net repayments on Wright Express' revolving credit facility of $2,792,000.
Liquidity
Historically, the Company has generated the cash needed to finance its
operations and growth from its operating cash flow. 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 SafeCard and the Company in 1995,
the Company committed approximately $30-35 million for employee severance, lease
terminations and other costs associated with these decisions. 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. During 1995, the Company paid $14,252,000
(net of recoveries of $1,200,000) related to its product abandonment and
restructuring efforts. As of December 31, 1995, the remaining product
abandonment and restructuring liability was $20,796,000, the majority of which
is expected to be utilized during 1996.
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 remaining authorized shares are repurchased at
the current market price, the Company would spend approximately $18,000,000 to
acquire its stock.
In February 1996, SafeCard completed its acquisition of UBS. Terms of the
acquisition included an $18,328,000 cash payment at closing and up to an
additional $4,000,000 in each of the years 1996, 1997 and 1998 based on the
attainment of certain earnings hurdles and fulfillment of certain conditions. In
addition, the sellers are also entitled to 50% of UBS' share of the profits from
a foreign joint venture over the next three years, up to a maximum of
$10,000,000. The initial payment of $18,328,000 was funded from the Company's
cash and securities available for sale portfolio. Cash needed to make any of the
contingent payments is expected to be provided from UBS operations, cash
currently on hand and/or the Company's investment securities available for sale.
<PAGE>
As a result of the Company's tax net operating loss for the tax year ended
October 31, 1995, the Company expects to file a carryback claim in 1996 for a
refund of federal tax payments made in previous years. The Company expects such
a carryback claim to result in a refund of approximately $17,000,000 in 1996.
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 operating cash flow and the Company's
cash and investment balances ($72,140,000 as of December 31, 1995) are adequate
to meet the Company's current and long term liquidity needs. In addition, the
Company believes that Wright Express' revolving credit facility is adequate to
meet its current working capital needs.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which the
Company will adopt in the first quarter of 1996. In management's opinion, the
adoption of this standard will not have a significant impact on the financial
condition or results of operations of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." FAS 123 does not require companies to change their
existing accounting for employee stock options, however, the new rules encourage
companies to recognize expense for stock-based awards based on their estimated
fair value on the date of grant. Companies electing to continue following
present accounting rules will be required to provide pro forma disclosures of
what net income and earnings per share would have been had the new fair value
method been used. FAS 123 is effective for fiscal years beginning after December
15, 1995. Management has elected to continue following present accounting rules
for the recording of stock option expenses and will prepare the required pro
forma disclosures as required.
OTHER MATTERS
On January 22, 1996, the Company announced that its Board of Directors has
decided to explore strategic alternatives available to the Company for the
purpose of enhancing shareholder value. In connection with this decision, the
Company has retained financial and legal advisors to assist the Board in this
process. The Board has established a Strategic Direction Committee to have
oversight of the process. The eventual outcome of this evaluation cannot be
predicted and there can be no assurance that any restructuring or transaction
will result from this process. Because of the uncertainty surrounding the
evaluation process, the Company's business units are experiencing market and
operational issues including increased competitive pressure, customer and client
concerns resulting in contract delays and various employee related matters.
On February 6, 1996, the Company announced that Eugene Miller, one of its
outside directors, has been appointed as Chairman of the Board and Chief
Executive Officer replacing Paul G. Kahn. Mr. Miller serves as the head of the
Company's Strategic Direction Committee as described above.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
Financial Statements(1):
Report of Independent Certified Public Accountants 37
Consolidated Balance Sheet as of December 31, 1995 and 1994 38
Consolidated Statement of Operations for the year ended
December 31, 1995, the two months ended December 31, 1994
and the two years ended October 31, 1994 39
Consolidated Statement of Changes in Stockholders' Equity for
the year ended December 31, 1995, the two months ended
December 31, 1994 and the two years ended October 31, 1994 40
Consolidated Statement of Cash Flows for the year ended
December 31, 1995, the two months ended December 31, 199
and the two years ended October 31, 1994 41
Notes to Consolidated Financial Statements 42 - 68
Financial Statement Schedules:
For the year ended December 31, 1995, the two months ended
December 31, 1994 and the two years ended October 31, 1994:
VIII - Valuation and Qualifying Accounts 77
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
(1) In December 1994, the Company effected a change in its year end from
October 31 to December 31. As a result, the consolidated financial
statements contain information as of and for the two months ended December
31, 1994.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Ideon
Group, Inc. (formerly known as SafeCard Services, Incorporated), and its
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, the two months ended
December 31, 1994, and each of the two years in the period ended October 31,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, the Company changed the amortization periods for
deferred subscriber acquisition costs effective December 31, 1994.
PRICE WATERHOUSE LLP
Tampa, Florida
February 2, 1996
<PAGE>
<TABLE>
<CAPTION>
Ideon Group, Inc.
Consolidated Balance Sheet
(in thousands, except share data)
December 31,
1995 1994
--------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 25,071 $ 9,315
Securities available for sale maturing within one year 33,741 43,532
Receivables, net 71,953 58,337
Income taxes receivable 16,153 11,441
Deferred subscriber acquisition costs and
related commissions amortizing within one year 91,150 85,435
Deferred income tax asset 3,370 995
Other current assets 3,228 3,262
------- -------
Total current assets 244,666 212,317
Securities available for sale maturing after one year 13,328 116,134
Deferred subscriber acquisition costs and
related commissions amortizing after one year 40,403 46,482
Property and equipment, net 32,389 23,381
Excess of cost over fair value of net assets acquired 45,002 28,451
Deferred income tax asset, noncurrent 5,223
Other assets 4,899 1,949
-------- ---------
Total assets $ 385,910 $428,714
========= ========
Liabilities
Current liabilities:
Notes payable to bank $ 15,414 $ 12,083
Accounts payable 32,523 33,037
Accrued expenses 35,165 30,535
Product abandonment and related liabilities 20,796
Subscribers' advance payments amortizing
within one year 119,805 117,203
Allowance for cancellations 9,548 9,197
--------- ---------
Total current liabilities 233,251 202,055
Subscriber advance payments amortizing after one year 49,799 54,862
Deferred income tax liability 4,991
--------- -------
Total liabilities 283,050 261,908
--------- --------
Commitments and Contingencies (Note 16)
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
December 31, 1994); 27,981,831 shares outstanding
(28,933,599 at December 31, 1994) 349 349
Additional paid-in capital 41,230 41,058
Retained earnings 118,999 174,066
Unrealized gain on securities available for sale 345
---------- --------
160,923 215,473
Less cost of 6,964,169 common shares in treasury
(6,012,401 shares at December 31, 1994) (58,063) (48,667)
---------- ---------
Total stockholders' equity 102,860 166,806
---------- ----------
Total liabilities and stockholders' equity $ 385,910 $ 428,714
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ideon Group, Inc.
Consolidated Statement of Operations
(in thousands, except per share data)
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Membership and subscription
revenue, net $176,951 $ 28,579 $ 162,591 $ 146,173
Card acquisition and services
revenue 23,332 2,915 2,107
Consumer marketing revenue 26,337 1,796 10,843 10,427
Interest income 5,690 1,394 8,421 8,736
Other income 1,658 14 5,124 1,790
---------- -------- -------- ------
233,968 34,698 189,086 167,126
----------- --------- -------- --------
Costs and expenses
Subscriber acquisition costs
and related commissions 112,632 14,967 98,150 87,852
Other costs of revenue 22,837 4,475 8,353 7,396
Research and produc
development costs 7,043 8,163 7,682
Service costs and other
operating expenses 38,351 10,063 26,351 16,891
General and administrative
expenses 33,318 5,606 16,451 12,542
Costs related to products
abandoned and restructuring 97,029 7,900
Unrealized loss on securities
available for sale 1,943
Effect of change in
amortization periods for
deferred subscriber acquisition
costs 65,500
--------- ------- ------- --------
311,210 110,717 164,887 124,681
--------- ------- ------- --------
Income (loss) before income taxes (77,242) (76,019) 24,199 42,445
Provision for (benefit from)
income taxes (27,801) (26,075) 6,178 10,968
--------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
for income taxes (49,441) (49,944) 18,021 31,477
Cumulative effect of change in
accounting for income taxes 2,000
Net income (loss) $ (49,441) $ (49,944) $ 20,021 $ 31,477
=========== ========= ========== ========
Earnings per share:
Income (loss) before cumulative
effect of accounting change $ (1.73) $ (1.70) $ .63 $ 1.10
Cumulative effect of accounting
change .07
------------ ---------- ----------- ---------
Net income (loss) $ (1.73) $ (1.70) $ .70 $ 1.10
============ ========== ========= =======
Weighted average number of common
and common equivalent shares 28,500 29,297 28,411 28,572
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ideon Group, Inc.
Consolidated Statement of Changes In Stockholders' Equity
(in thousands, except share data)
Unrealized
Gain(Loss)on
Additional Securities Common Stock Total
Common Stock Paid-in Retained Available in Treasury Stockholders'
Shares Amount Capital Earnings for Sale Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 31, 1992 ... 33,426,048 $334 $ 9,625 $194,534 (6,780,015) $(38,995) $165,498
Net earnings ............. 31,477 31,477
Cash dividends paid,
$.20 per share ........ (5,113) (5,113)
Exercise of employee
stock options ......... 769,952 8 4,213 172,059 1,159 5,380
Tax benefit from
exercise of employee
stock options 2,152 2,152
Purchase of treasury
stock (3,469,860) (41,699) (41,699)
-------- ----- ------ ------- ----------- --------- --------
Balance at
October 31, 1993 .... 34,196,000 342 15,990 220,898 (10,077,816) (79,535) 157,695
Net earnings .............. 20,021 20,021
Cash dividends paid,
$.20 per share .......... (5,320) (5,320)
Exercise of employee
stock options ........... 750,000 7 3,440 (10,140) 4,090,165 31,351 24,658
Tax benefit from
exercise of employee
stock options 21,628 21,628
Issuance of restricted
common stock ............ 11,950
Change in unrealized
gain (loss) on
securities available
for sale ...... $(607) (607)
Purchase of treasury
stock (36,700) (483) (483)
-------- ---- ------- -------- ------ ---------- ----- --------
Balance at
October 31, 1994 .....34,946,000 349 41,058 225,459 (607) (6,012,401) (48,667) 217,592
Net loss .................. (49,944) (49,944)
Cash dividends paid,
$.05 per share .......... (1,449) (1,449)
Change in unrealize
gain(loss)on securities
available for sale ...... 607 607
--------- ----- ------- ------- ------ -------- --- ---------
Balance at
December 31, 1994 .... 34,946,000 349 41,058 174,066 (6,012,401) (48,667) 166,806
Net loss .................. (49,441) (49,441)
Cash dividends paid,
$.20 per share .......... (5,626) (5,626)
Exercise of employee
stock options ........... 51 49,832 405 456
Tax benefit from
exercise of employee
stock options 121 121
Issuance of restricted
common stock ............ 3,500
Change in unrealized
gain(loss) on securities
available for sale ...... 345 345
Purchase of treasury
stock (1,005,100) (9,801) (9,801)
--------- ----- --------- -------- ----- --------- ----- ---------
Balance at
December 31, 1995 ....34,946,000 $349 $41,230 $118,999 $345 (6,964,169) $(58,063) $102,860
========== ==== ======= ======== ==== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Ideon Group, Inc.
Consolidated Statement of Cash Flows
(in thousands)
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net cash received from
subscribers/customers $ 238,835 $ 31,070 $ 194,584 $ 175,596
Cash paid to supplier
and employees (311,971) (38,763) (168,831) (139,290)
Interest received 7,857 3,094 13,922 13,952
Interest paid (1,287) (146)
Income tax refunds
(payments), net 11,047 (7) 3,114 (21,413)
Gain from litigation
settlements 4,257
---------- --------- --------- -------
Net cash (used in) provided
by operating activities (55,519) (4,752) 47,046 28,845
--------- --------- ---------- --------
Cash Flows From Investing
Activities
Purchases of investment
securities (52,961) (12,752) (96,986) (63,174)
Proceeds from sales of
investment securities 135,111 17,463 73,748 64,539
Proceeds from maturing
investment securities 30,185 18,035 7,068
Cost of acquisitions, net
of cash acquired (12,977) (35,276)
Acquisition of property
and equipment, net (16,443) (7,406) (8,044) (719)
---------- -------- --------- ---------
Net cash provided by(used in)
investing activities 82,915 (2,695) (48,523) 7,714
-------- -------- -------- ---------
Cash Flows From Financing
Activities
Net borrowings (repayments)
on notes
payable to bank 3,331 290 (2,792)
Proceeds from exercise
of stock options 456 24,658 5,380
Dividends paid (5,626) (1,449) (5,320) (5,113)
Payments for purchas
of treasury shares (9,801) (483) (41,699)
--------- -------- -------- --------
Net cash (used in) provided
by financing activities (11,640) (1,159) 16,063 (41,432)
---------- -------- -------- ---------
Net increase (decrease) in
cash and cash equivalents 15,756 (8,606) 14,586 (4,873)
Cash and cash equivalents at
beginning of period 9,315 17,921 3,335 8,208
--------- -------- ------- ---------
Cash and cash equivalents at
end of period $ 25,071 $ 9,315 $17,921 $ 3,335
========== ========= ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
Ideon Group, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
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, 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 in Note 10 - Costs Related to Products Abandoned and
Restructuring.
SafeCard, the Company's principal operating subsidiary, is a credit card
enhancement marketing company. Subscriptions for continuity services are
primarily marketed through credit card issuers by mail or telephone. SafeCard's
principal service is credit card registration and loss notification
("Hot-Line"), whereby SafeCard gives prompt notice to credit card issuers upon
being informed that a subscriber's credit cards have been lost or stolen.
Subscriptions for continuity services typically continue annually or
periodically unless canceled by the subscriber. SafeCard also markets other
continuity services including those related to fee-based credit cards ("Fee
Card"), date reminder services, a personal credit information service
("CreditLine"). SafeCard is also developing new lines of business including
travel and shopping related products.
Wright Express Corporation ("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.
National Leisure Group, Inc. ("National Leisure Group"), acquired in January
1995, 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 membership clubs nationwide.
Ideon Marketing and Services Company ("IMS") manages 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. The
activities of IMS have been significantly curtailed due to lower than expected
response rates to the expanded PGA TOUR Partners program and related credit card
offering during 1995 (see Note 10 - Costs Related to Products Abandoned and
Restructuring).
On February 14, 1995, the Company 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. References herein to the year 1995 refer to the
Company's calendar year ended December 31, 1995. References herein to the
Transition Period refer to the two months ended December 31, 1994. References
herein to the years 1994 and 1993 refer to the Company's previous fiscal years
ended October 31.
<PAGE>
Principles of Consolidation
The consolidated financial statements include the accounts of Ideon and its
subsidiaries, after elimination of intercompany accounts and transactions. On
September 14, 1994, the Company acquired 100% of the outstanding common stock of
Wright Express. Effective January 1, 1995, the Company acquired substantially
all of the assets and assumed substantially all of the liabilities of National
Leisure Group. These transactions were accounted for under the purchase method
and accordingly the consolidated financial statements include the results of
operations of Wright Express and National Leisure Group from the respective
dates of purchase (see Note 3 - Acquisitions).
Cash and Cash Equivalents
Cash and cash equivalents include cash-on-hand, demand deposits and short-term
investments with original maturities of three months or less.
Securities Available for Sale
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, ("FAS 115") "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires that all
investments in debt and equity securities that fall within its scope be
classified as either held to maturity, trading or available for sale. Management
elected early adoption of FAS 115 as of October 31, 1994 and classified its
entire securities portfolio as "available for sale" at that time. Securities
classified as available for sale are stated at market value with any unrealized
gains or losses included as a separate component of stockholders' equity.
Approximately $11,600,000 of securities available for sale at December 31, 1995
were held in escrow as required contractually by certain credit card issuers
(see "Revenue Recognition/Cost Amortization").
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense while betterments are
capitalized. Depreciation is computed using the straight-line method over the
assets' estimated useful lives. Estimated useful lives range from 3 to 7 years
for equipment, furniture and fixtures to 30 years for buildings. Capitalized
leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the lease term.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired ("goodwill") represents
the difference between the purchase price of Wright Express and National Leisure
Group and the value of the net assets acquired in each of the acquisitions (see
Note 3 - Acquisitions). Such goodwill is being amortized on a straight-line
basis over 25 years. Accumulated amortization was $2,216,000 and $440,000 as of
December 31, 1995 and 1994, respectively. Periodically, the Company reviews its
intangible assets for events or changes in circumstances that may indicate that
the carrying amounts of the assets are not recoverable. Based upon this review,
the Company believes that the unamortized balance of goodwill at December 31,
1995 is fully recoverable.
<PAGE>
Revenue Recognition/Cost Amortization
Subscription Revenue and Commission Expense
The Company generally receives advance payments from subscribers for its
products and services. The subscription period and advance payments are
generally for periods of 12 or 36 months. These advance payments, less an
appropriate allowance for cancellations, are deferred and amortized to revenue
ratably over the subscription period. Credit card issuers earn commissions based
on percentages of subscription billings or other profit sharing arrangements.
Such commissions, less an appropriate allowance for cancellations, are also
deferred and amortized to expense ratably over the subscription period.
The allowance for cancellations, net of related commissions, relates to amounts
which may be refunded at a future time to subscribers who may cancel their
subscriptions prior to the completion of the subscription period. Previously
paid commissions related to canceled subscriptions are reimbursed to the Company
by the credit card issuer.
The Company places funds in escrow as required contractually by certain credit
card issuer clients. The contractual requirement as of December 31, 1995 was
approximately $11,600,000. Restricted funds are released ratably over the
subscription period (which coincides with the period of revenue recognition) and
are invested primarily in tax-exempt municipal securities and United States
Treasury securities.
Card Acquisition and Services Revenue
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 of Wright Express.
Consumer Marketing Revenue
Revenue from the sale of vacation packages by National Leisure Group, which is
included in the "Consumer marketing revenue" caption in the consolidated
statement of operations, 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 (see Note 3 Acquisitions). Consumer
marketing revenue also includes revenues from SafeCard's date reminder service
which is amortized over each calendar year.
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 December 31, 1994, these expenditures were deferred and amortized to
expense in proportion to expected revenues over the expected subscription
periods, including renewal periods (life of subscriber). These amortization
periods ranged from 10 to 12 years for single year and multi-year subscriptions,
respectively.
<PAGE>
After a general review of the Company's business plans and related accounting
practices during the Transition Period, 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 is required 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. Effective 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 of
$65,500,000 during the two months ended December 31, 1994.
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.
Income Taxes
Effective November 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Adoption of FAS 109 required a change from the deferred method to the
liability method of accounting for income taxes. One of the principal
differences of the liability method from the deferred method used in previous
financial statements is that changes in tax laws and rates are reflected in
income from continuing operations in the period such changes are enacted. The
impact of the adoption of FAS 109 had a cumulative positive effect on the
Company's reported earnings in 1994 of $2,000,000.
Income (Loss) Per Share
Income per share is calculated by dividing net income by the weighted average
number of shares of common stock and common stock equivalents (common stock
issuable upon exercise of stock options) outstanding. Loss per share is
calculated by dividing net loss by the weighted average number of shares of
common stock outstanding.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior period financial statements to
conform to the 1995 presentation.
<PAGE>
2. Change in Fiscal Year End
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. As a result, the consolidated audited financial
statements contain information as of and for the two months ended December 31,
1994. The following supplemental unaudited consolidated statement of operations
and unaudited consolidated statement of cash flows for the two months ended
December 31, 1993 is presented for comparative purposes only and was presented
in the Transition Period Form 10-Q filed in February 1995.
<TABLE>
<CAPTION>
Consolidated Statement of Operations
Two Months Ended
December 31, 1993
(unaudited)
<S> <C>
Revenues
Membership and subscription revenue, net $ 25,775,000
Card acquisition and services revenue
Consumer marketing revenue 1,743,000
Interest income 1,334,000
Other income 280,000
----------------
29,132,000
Costs and expenses
Subscriber acquisition costs and related commissions 15,652,000
Other costs of revenue 1,239,000
Service costs and other operating expenses 3,282,000
General and administrative expenses 2,480,000
----------------
22,653,000
Income before income taxes 6,479,000
Provision for income taxes 1,652,000
Income before cumulative effect of change in accounting
for income taxes 4,827,000
Cumulative effect of change in accounting for income taxes 2,000,000
----------------
Net Income $ 6,827,000
================
Earnings per share
Income before cumulative effect of accounting change $ .18
Cumulative effect of accounting change .07
Net income $ .25
=====
Weighted average number of common
and common equivalent shares 27,325,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
Two Months Ended
December 31, 1993
(unaudited)
<S> <C>
Cash Flows From Operating Activities
Net cash received from subscribers/customers $ 33,523,000
Net cash paid to suppliers and employees (31,601,000)
Interest received 3,627,000
Income tax refunds (payments), net 515,000
----------------
Net cash provided by operating activities 6,064,000
----------------
Cash Flows From Investing Activities
Purchases of investment securities (18,350,000)
Proceeds from sale of investment securities 15,438,000
Proceeds from maturing investment securities 710,000
Acquisition of property and equipment, net (410,000)
-----------------
Net cash used in investing activities (2,612,000)
-----------------
Cash Flows From Financing Activities
Proceeds from exercise of stock options 36,000
Dividends paid (1,207,000)
Payments for purchase of treasury shares (483,000)
-----------------
Net cash used in financing activities (1,654,000)
-----------------
Net increase in cash and cash equivalents 1,798,000
Cash and cash equivalents at beginning of period 3,335,000
----------------
Cash and cash equivalents at end of period $ 5,133,000
================
</TABLE>
3. Acquisitions
National Leisure Group
On February 10, 1995, the Company completed its acquisition of substantially all
of the assets and liabilities of National Leisure Group, 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 year ended December 31, 1995.
As part of the transaction, the Company acquired $5,631,000 of assets, which
included $2,395,000 of cash, and assumed liabilities of $7,153,000. The Company
recorded $18,327,000 of goodwill which is being amortized on a straight-line
basis over 25 years. Amortization expense through December 31, 1995 related to
this acquisition was approximately $725,000.
<PAGE>
The following presents the unaudited pro forma results of operations of the
Company and National Leisure Group as if combined throughout the two months
ended December 31, 1994 and the year ended October 31, 1994:
<TABLE>
<CAPTION>
Two Months Ended Year Ended
December 31, October 31,
1994 1994
(unaudited) (unaudited)
<S> <C> <C>
Revenues, net ................................................................ $ 36,933,000 $201,940,000
Costs and expenses ........................................................... 112,708,000 176,570,000
------------- ------------
Income (loss) before provision for income taxes
and cumulative effect of accounting change ................................ $ (75,775,000) $ 25,370,000
============= ============
Net (loss) income ............................................................ $ (49,769,000) $ 20,980,000
============= ============
(Loss) earnings per share $ (1.70) $ .74
========= =====
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented,
nor are they intended to be a projection of future results.
Wright Express Corporation
On September 14, 1994, the Company acquired 100% of the outstanding common stock
of Wright Express, a provider of transaction and information processing services
to oil companies and commercial transportation fleets in the United States, for
$35,500,000 in cash. The acquisition was accounted for under the purchase method
and, accordingly, the results of operations of Wright Express are included in
the Company's consolidated financial statements from the date of acquisition. In
connection with the acquisition, the Company recorded $28,891,000 of goodwill
which is being amortized on a straight-line basis over 25 years.
The following presents the unaudited pro forma results of operations of the
Company and Wright Express as if combined throughout the year ended October 31,
1994:
<TABLE>
<CAPTION>
Year Ended
October 31,
1994
(unaudited)
<S> <C>
Revenues, net $ 200,955,000
Costs and expenses 176,060,000
------------------
Income before provision for income taxes
and cumulative effect of accounting change $ 24,895,000
==================
Net income $ 20,149,000
==================
Earnings per share $ .71
=====
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented,
nor are they intended to be a projection of future results.
<PAGE>
4. Investments
The Company's investment portfolio is invested primarily in tax-exempt municipal
bonds. Because there is not a regularly published source of accurate current
market values for tax-exempt municipal bonds, the Company's investment adviser
estimates market values for the Company's securities available for sale using a
pricing matrix commonly used in the municipal bond industry, or in certain
cases, by soliciting quotations from municipal bond dealers.
The financial statement carrying amount, gross unrealized gains, gross
unrealized losses and estimated market value of the Company's securities
available for sale were as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
Tax-exempt municipal bonds $ 39,054,000 $ 366,000 $ (21,000) $ 39,399,000
U.S. Treasury bills 7,415,000 7,415,000
Other 255,000 255,000
----------------- ------------ ------------ -----------------
$ 46,724,000 $ 366,000 $ (21,000) $ 47,069,000
================= ============ ============ =================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
Tax-exempt municipal bonds $ 159,473,000 $ 159,473,000
Other 193,000 193,000
----------------- ------------ ------------ -----------------
$ 159,666,000 $ 159,666,000
================= ============ ============ =================
</TABLE>
Maturities of the Company's investment portfolio at December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Carrying Market
Value Value
<S> <C> <C>
Within one year $ 33,499,000 $ 33,741,000
One to five years 9,187,000 9,282,000
More than five years 4,038,000 4,046,000
---------------- -----------------
$ 46,724,000 $ 47,069,000
================ =================
</TABLE>
Gross realized gains on sales of securities available for sale totaled
$1,237,000, $620,000 and $1,290,000 for the years ended December 31, 1995 and
October 31, 1994 and 1993, respectively. Gross realized losses on sales of
securities available for sale totaled $143,000, $97,000, $27,000 and $12,000 for
the years ended December 31, 1995, the two months ended December 31, 1994 and
the years ended October 31, 1994 and 1993, respectively. Gains and losses on
sales of securities are computed on the specific identification basis and are
included as a component of other income.
<PAGE>
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, principally consisting of municipal bonds, as available
for sale and disclosed the unrealized loss of $607,000 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 then current interest rate environment, management elected to reposition
the portfolio. This repositioning helped to minimize additional market risk and
complete the Company's effort to shorten the overall maturity of the portfolio.
Due to the decision to sell a significant portion of the Company's investment
portfolio, management determined that there was an other than temporary decline
in the market value of its available for sale portfolio, and consequently the
net unrealized losses of $1,943,000 were charged against earnings for the two
months ended December 31, 1994.
5. Receivables, net
Receivables and the related allowance for doubtful accounts were as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Receivables for transportation fleet services $ 47,041,000 $ 31,402,000
Receivables for continuity services 24,086,000 25,391,000
Other receivables 1,700,000
Accrued interest receivable 1,121,000 3,288,000
--------------- ----------------
73,948,000 60,081,000
Allowance for doubtful accounts (1,995,000) (1,744,000)
--------------- --------------
$ 71,953,000 $ 58,337,000
=============== ================
</TABLE>
The receivables for transportation fleet services primarily relate to amounts
due from customers of Wright Express for fleet fueling and other transportation
services.
6. Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Equipment ............................................................ $ 19,747,000 $ 13,457,000
Building ............................................................. 16,204,000 5,582,000
Furniture and fixtures ............................................... 7,053,000 1,481,000
Construction in progress ............................................. 6,877,000
Land ................................................................. 447,000 447,000
------------ ------------
43,451,000 27,844,000
Less: accumulated depreciation ....................................... (11,062,000) (4,463,000)
------------ ------------
$ 32,389,000 $ 23,381,000
============ ============
</TABLE>
<PAGE>
Construction in progress related to improvements and additions made to
SafeCard's operations center in Cheyenne, Wyoming. All costs associated with
this project were capitalized as construction in progress and began to be
depreciated when the improvements and additions were placed in service during
1995.
7. Accrued Expenses
Included within "Accrued expenses" as of December 31, 1995 and 1994 is a
disputed liability recorded in 1992 of approximately $10,500,000 relating to the
Company's estimated net obligation under a contested lease (the "Ft. Lauderdale
Lease") of its former Ft. Lauderdale headquarters. The Company no longer
occupies these premises and is no longer making payments on the Ft. Lauderdale
Lease, which is now the subject of litigation (see Note 16 - Commitments and
Contingencies).
8. Notes Payable to Bank
Notes payable to bank represents a revolving loan agreement assumed in
connection with the acquisition of Wright Express in 1994. The agreement, as
originally structured, provided for maximum borrowings equal to the lesser of
$17,500,000 or an amount based on a percentage of eligible accounts receivable
as defined therein. In November 1994, the revolving credit agreement was amended
increasing the available line to $27,500,000 and the Company was added as a
guarantor under the amended agreement.
Interest on the outstanding borrowings was, at Wright Express' option, either
the bank's prime rate minus 0.5% or the London Interbank Offering Rate ("LIBOR")
plus 0.625%. Wright Express paid a fee of 0.25% per annum on the average daily
unused portion of the line of credit. Borrowings are secured by substantially
all assets of Wright Express.
At December 31, 1995, the Company had $15,414,000 outstanding under the
revolving line of credit with interest rates ranging from 6.31% to 7.25%.
In February 1996, Wright Express entered into a new revolving credit facility
agreement replacing the previous revolving line of credit. The new credit
facility has an available line of $75,000,000 of which $50,000,000 may be used
to finance working capital requirements and for general corporate purposes and
$25,000,000 may be used for acquisition financing. The new credit facility
expires December 1, 1998. Interest on the outstanding borrowings is computed, at
the option of Wright Express, under various methods including the bank's prime
rate or LIBOR plus 0.75%. Wright Express pays a quarterly fee of 0.25% on the
average daily unused portion of the line of credit and an annual agent's fee of
$25,000. Borrowings are secured by substantially all assets of Wright Express.
In February 1996, Wright Express also entered into a $5,000,000 capital
expenditure line of credit arrangement with a bank.
<PAGE>
9. Subscriber Acquisition Costs and Commissions
Deferred subscriber acquisition costs and related commissions were as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Hot-Line $ 65,232,000 $ 61,006,000
Fee Card 5,597,000 4,540,000
Other services 15,905,000 19,500,000
---------------- -----------------
Total deferred subscriber acquisition costs 86,734,000 85,046,000
Commissions 44,819,000 46,871,000
---------------- -----------------
Total deferred subscriber acquisition
costs and commissions $ 131,553,000 $ 131,917,000
================ =================
</TABLE>
10. Costs Related to Products Abandoned and Restructuring
Included in costs related to products abandoned and restructuring in the
Consolidated Statement of Operations for the year ended December 31, 1995 are
special charges totaling $43,817,000, net of recoveries, 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
infrastructure as discussed below. The original charge of $45,017,000 was
composed of accrued liabilities of $36,248,000 and asset impairments of
$8,769,000. As discussed below, in December 1995 the Company recovered
$1,200,000 of a $3,900,000 deposit included in the above charges.
The components of the product abandonment and related liabilities as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
1995 Balance at
Provisions Activity 12/31/95
<S> <C> <C> <C>
Severance and other employee costs $ 14,960,000 $ 8,950,000 $ 6,010,000
Costs to terminate equipment and facilities leases 9,593,000 2,656,000 6,937,000
Liability for contract impairments 8,400,000 1,000,000 7,400,000
Other costs 3,295,000 2,846,000 449,000
--------------- --------------- ----------------
$ 36,248,000 $ 15,452,000 $ 20,796,000
=============== =============== ================
</TABLE>
The $20,796,000 balance of the product abandonment and related liabilities at
December 31, 1995 represents the Company's best estimate of the amounts expected
to be incurred with respect to its product abandonment and restructuring
efforts. The amounts that will ultimately be paid could differ from the amounts
included in the product abandonment and related liabilities estimate. The
Company anticipates completion of the majority of the actions related to the
product abandonment and restructuring during 1996.
<PAGE>
PGA TOUR Partners
In late March and early April 1995, the Company launched an expanded PGA TOUR
Partners program through its IMS subsidiary. The program provided various
benefits to members including access to PGA TOUR events and a co-branded credit
card. Consumer response rates after 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 marketing 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 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. The Company
continues to provide membership (non-credit card) servicing for the PGA TOUR
Partners program.
Family Protection Network
In April 1995, Family Protection Network launched a nationwide child
registration and missing child search program. Consumer response rates from the
initial product launch were significantly lower than anticipated and the Company
closed this business unit. As a result, the Company recorded an $8,987,000
charge in the second quarter 1995 to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and write-downs
taken for asset impairments. As of December 31, 1995, all employees of Family
Protection Network have been terminated.
Corporate and SafeCard Restructurings
As a result of the discontinuance of these products, the Company undertook 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 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 1995 for costs associated with the restructuring of SafeCard and
$4,239,000 for a restructuring of the corporate infrastructure. Restructuring
costs include severance payments and costs to terminate equipment and facilities
leases.
In May 1995, the Company signed 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.
Included in the $7,176,000 corporate charge recorded in the second quarter was a
provision for the full impairment of this deposit. Management worked with the
building owner to facilitate a sale of the building to a third party. As a
result, the building owner and a third party entered into a purchase agreement
and the Company recovered $1,200,000 of its deposit in the fourth quarter of
1995.
<PAGE>
In April 1994, the Company announced a reorganization of its operations and
named a new senior management team. As a part of the reorganization, nine senior
executives left the Company and the Ft. Lauderdale sales office was closed. As a
result of this reorganization, the Company recorded a restructuring charge of
$3,500,000 to cover severance agreements and a lease termination. In addition,
the Company recorded an additional charge of $4,400,000 paid to Steven J.
Halmos, the Company's co-founder (see Note 14 - Transactions with Related
Parties). At December 31, 1995 the remaining balance of these reserves of
$285,000 was included in "Accrued expenses."
11. Segment Information
The operations of the Company are managed along business unit lines and,
accordingly, the Company considers each operating subsidiary a separate business
segment for financial reporting purposes. Due to their nature and stage of
development, the operations of IMS and Family Protection Network have been
combined and presented as Developmental Operations in the segment information
table below.
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
<S> <C> <C> <C> <C>
---- ---- ---- ----
SafeCard
Operating revenue $ 187,875,000 $ 30,375,000 $ 173,663,000 $ 157,112,000
Operating income (loss) 32,446,000 (59,450,000) 41,961,000 44,682,000
Identifiable assets 195,769,000 217,679,000 270,636,000 206,331,000
Depreciation and amortization 2,549,000 236,000 1,094,000 864,000
Capital expenditures, net 9,881,000 7,241,000 7,913,000 719,000
Wright Express
Operating revenue 23,332,000 2,915,000 2,107,000
Operating income 3,434,000 512,000 250,000
Identifiable assets 77,309,000 32,737,000 32,471,000
Depreciation and amortization 1,721,000 421,000 255,000
Capital expenditures, net 1,663,000 165,000 131,000
National Leisure Group
Operating revenue 16,018,000
Operating income 1,973,000
Identifiable assets 27,237,000
Depreciation and amortization 1,066,000
Capital expenditures, net 1,969,000
Developmental Operations
Operating revenue
Operating loss (83,803,000) (6,565,000) (5,006,000)
Identifiable assets 521,000 4,218,000
Depreciation and amortization 384,000
Capital expenditures, net 664,000
<PAGE>
Corporate and Other
Operating revenue 6,743,000 1,408,000 13,316,000 10,014,000
Operating income (loss) (31,292,000) (10,516,000) (13,006,000) (2,237,000)
Identifiable assets 85,074,000 174,080,000 177,266,000 171,956,000
Depreciation and amortization 437,000 66,000
Capital expenditures, net 2,266,000
Consolidated Totals
Operating revenue 233,968,000 34,698,000 189,086,000 167,126,000
Operating income (loss) (77,242,000) (76,019,000) 24,199,000 42,445,000
Identifiable assets 385,910,000 428,714,000 480,373,000 378,287,000
Depreciation and amortization 6,157,000 723,000 1,349,000 864,000
Capital expenditures, net 16,443,000 7,406,000 8,044,000 719,000
</TABLE>
Identifiable assets are those assets of the Company that are identified with the
operations of each of the individual business units. Corporate assets are
principally cash, securities available for sale and property and equipment.
National Leisure Group's identifiable assets include $17,607,000 of unamortized
goodwill as of December 31, 1995. Wright Express' identifiable assets included
unamortized goodwill of $27,395,000, $28,451,000 and $28,739,000 as of December
31, 1995 and 1994 and October 31, 1994, respectively. Operating income for
SafeCard for the two months ended December 31, 1994 includes a pre-tax charge of
$65,500,000 for a change in amortization periods for deferred subscriber
acquisition costs. Operating revenue for the year ended October 31, 1994 for
Corporate and Other includes a gain on litigation settlements of $4,257,000.
The Company does not earn material amounts of revenue from sources outside the
United States.
12. Income Taxes
As discussed in Note 1, the Company changed its method of accounting for income
taxes as of November 1, 1993. The components of the provision for (benefit from)
income taxes for the year ended December 31, 1995, the two months ended December
31, 1994 and the years ended October 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
<S> <C> <C> <C> <C>
---- ---- ---- ----
Current
Federal $ (15,636,000) $ (1,887,000) $ 13,032,000 $ 15,608,000
State (93,000) (54,000) 272,000 101,000
----------------- ---------------- ---------------- -----------------
Total current (15,729,000) (1,941,000) 13,304,000 15,709,000
----------------- ---------------- ---------------- -----------------
Deferred
Federal (11,530,000) (23,815,000) (7,640,000) (3,588,000)
State (542,000) (319,000) 514,000 (1,153,000)
----------------- ---------------- ---------------- -----------------
Total deferred (12,072,000) (24,134,000) (7,126,000) (4,741,000)
----------------- ---------------- ---------------- -----------------
</TABLE>
Total $ (27,801,000) $ (26,075,000) $ 6,178,000 $ 10,968,000 The following is a
reconciliation of the statutory U.S. federal income tax rate and the Company's
effective income tax rate for the year ended December 31, 1995, the two months
ended December 31, 1994 and the years ended October 31, 1994 and 1993:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0% 34.8%
Increase (reduction) in tax rates
resulting from:
State income tax, net of federal benefit 2.1 1.2
Tax-exempt interest income (1.7) (.6) (10.8) (6.8)
Amortization of non-deductible goodwill .5 .1
Reversal of prior years' deferred taxes
at the rates in effect at that time (2.9)
Other 2.2 (.2) (.8) (.5)
----- ------ ----- -----
Effective tax rate 36.0% 34.3% 25.5% 25.8%
==== ==== ==== ====
</TABLE>
The components of the Company's deferred income tax assets and liabilities under
FAS 109 were as follows:
<TABLE>
<CAPTION>
December 31, December 31, October 31, November 1,
<S> <C> <C> <C> <C>
1995 1994 1994 1993
Deferred tax liabilities:
Subscriber acquisition costs $ 47,255,000 $ 45,915,000 $ 71,585,000 $ 68,391,000
Depreciation 1,312,000 432,000 549,000 382,000
----------------- ---------------- ---------------- -----------------
48,567,000 46,347,000 72,134,000 68,773,000
----------------- ---------------- ---------------- -----------------
Deferred tax assets:
Multi-year subscription revenues 41,928,000 36,968,000 36,226,000 29,051,000
Relocation expenses 3,439,000 3,606,000 3,749,000 3,736,000
Product abandonment and
related liabilities 8,005,000
Net operating loss carryforwards 1,347,000 1,474,000 8,217,000
Reminder/reference subscription revenue (2,709,000) (3,643,000) 1,195,000 (1,945,000)
Other 5,150,000 3,946,000 1,996,000 1,829,000
----------------- ---------------- ---------------- -----------------
57,160,000 42,351,000 51,383,000 32,671,000
----------------- ---------------- ---------------- -----------------
Net deferred tax (asset) liability $ (8,593,000) $ 3,996,000 $ 20,751,000 $ 36,102,000
================= ================ ================ =================
</TABLE>
<PAGE>
The deferred income tax benefit for the year ended October 31, 1993 (under prior
accounting method) resulted from the following items:
<TABLE>
<CAPTION>
<S> <C>
Subscriber costs, net $ 450,000
Multi-year subscription revenues (7,310,000)
Reminder/reference subscription revenue 1,952,000
Relocation expenses 698,000
Other (531,000)
----------------
$ (4,741,000)
</TABLE>
At December 31, 1995, the Company had $4,298,000 of net operating loss
carryforwards for tax purposes which, if unused, will expire in 2001.
13. Common Stock And Stock Options
The following table presents information for the year ended December 31, 1995,
the two months ended December 31, 1994 and the years ended October 31, 1994 and
1993 with respect to options granted and outstanding as follows:
<TABLE>
<CAPTION>
Shares Under Option
Outstanding Outstanding
Option at beginning at end of
Price Range of period Granted Canceled Exercised period
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Year ended October 31, 1993
1979 Plan $ 5.875 141,040 (141,040)
Outside Directors' Options $ 6.375-13.00 200,000 200,000 (100,000) 300,000
1987 Plan $ 5.875 348,100 (348,100)
1989 Executive Options $ 5.125 980,000 (230,000) 750,000
1989 Employee Stock Option Plan $ 6.00 361,004 (5,333) (102,671) 253,000
Peter & Steven J. Halmos $ 5.125-5.50 5,850,000 (1,950,000) 3,900,000
1991 Employee Stock Option Plan $ 9.00 138,000 (24,333) (38,334) 75,333
1992 Employee Stock Option Plan $ 8.875 75,000 (12,500) 62,500
----------------- ---------- ------------ ----------------- -----------
8,018,144 275,000 (1,992,166) (960,145) 5,340,833
========= ========= ========== ========== =========
- ----------------------------------------------------------------------------------------------------------------------------
Year ended October 31, 1994
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Executive Options $ 5.125 750,000 (750,000)
1989 Employee Stock Option Plan $ 6.00 253,000 (234,000) 19,000
Steven J. Halmos $ 5.125-5.50 3,900,000 (3,900,000)
1991 Employee Stock Option Plan $ 9.00 75,333 (11,667) (36,333) 27,333
1992 Employee Stock Option Plan $ 8.875 62,500 (13,335) (14,164) 35,001
1994 Long-Term Stock-Based
Incentive Plan $ 12.625-18.375 2,315,000 (3,000) 2,312,000
Employee Stock Option Plan $ 16.50 42,700 (2,700) 40,000
----------------- ----------- ----------- ------------------ -----------
5,340,833 2,357,700 (30,702) (4,934,497) 2,733,334
========= ========= ========== ========== =========
- ----------------------------------------------------------------------------------------------------------------------------
<PAGE>
Two months ended December 31, 1994
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Employee Stock Option Plan $ 6.00 19,000 19,000
1991 Employee Stock Option Plan $ 9.00 27,333 27,333
1992 Employee Stock Option Plan $ 8.875 35,001 35,001
1994 Long-Term Stock-Based
Incentive Plan $ 12.625-18.938 2,312,000 193,500 2,505,500
Employee Stock Option Plan $16.50-17.50 40,000 21,500 61,500
----------- ----------- -----------
2,733,334 215,000 2,948,334
========= ========== =========
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Employee Stock Option Plan $ 6.00 19,000 (19,000)
1991 Employee Stock Option Plan $ 9.00 27,333 (1,667) (17,333) 8,333
1992 Employee Stock Option Plan $ 8.875 35,001 (12,501) (12,500) 10,000
1994 Long-Term Stock-Based
Incentive Plan $ 7.625 - 20.75 2,505,500 1,049,200 (936,000) (1,000) 2,617,700
Employee Stock Option Plan $ 9.875 - 19.125 61,500 74,300 (27,500) 108,300
Directors Stock Plan $15.875 30,000 30,000
---------------- --------------------------------------------- -----------
2,948,334 1,153,500 (977,668) (49,833) 3,074,333
========= ========= =========== =========== =========
</TABLE>
All options to purchase common shares are exercisable and no additional shares
are available for granting options under each plan except as noted below.
Of the options to purchase 2,617,700 shares outstanding under the 1994 Long-Term
Stock-Based Incentive Plan (as amended, the "1994 Plan"), options to purchase
655,583 shares were exercisable at December 31, 1995. A portion of the stock
options outstanding under the 1994 Plan vest over time (becoming fully vested in
two or four years) beginning one year from the date of grant and a portion vests
based on certain stock price hurdles. Of the options to purchase 108,300 shares
outstanding under the Employee Stock Option Plan, options to purchase 48,600
shares were exercisable at December 31, 1995. The options under the Employee
Stock Option Plan vest one year from the date of grant.
Of the options to purchase 30,000 shares outstanding under the Directors Stock
Plan, none of the options were exercisable at December 31, 1995. Sixty percent
of the options, which are granted automatically upon a director's election to
the Board, vest over four years beginning one year after the date of grant and
forty percent of the options vest in three equal installments based on
achievement of certain stock price hurdles.
In addition to the options granted under the 1994 Plan as discussed above,
15,450 shares of restricted stock have been awarded under the 1994 Plan through
December 31, 1995. Of the 15,450 shares of restricted stock issued through
December 31, 1995, 12,450 shares are vested and 1,000 shares of restricted stock
were forfeited upon the grantee's termination of employment.
In connection with the exercise of options to purchase common stock, certain
employees exchanged 94,332 and 18,134 shares of common stock in lieu of cash in
1994 and 1993, respectively. The exchanged shares are deducted from the number
of shares issued upon the exercise of employee stock options for purposes of
presentation in the consolidated statement of changes in stockholders' equity.
<PAGE>
The 1994 Plan was approved by the stockholders at the 1994 Annual Meeting of
Stockholders held on March 7, 1994 and amended at the 1995 Annual Meeting of
Stockholders held on April 27, 1995. The 1994 Plan, as amended, provides for the
award of stock options, stock appreciation rights and restricted stock covering
a maximum of 3,740,000 shares. The Directors Stock Plan was approved by the
stockholders at the 1995 Annual Meeting of Stockholders and provides for the
automatic grant of an option to purchase 15,000 shares of the Company's common
stock upon a director's initial election or appointment to the Board. Up to
105,000 shares may be issued pursuant to the Directors Stock Plan.
All stock options granted in 1995 and in prior years, except for the grants
under the Employee Stock Option Plan, were administered by the Board of
Directors or a committee thereof and had an exercise price based on the market
price of the Company's common stock on the date of grant. The Employee Stock
Option Plan is administered by a committee of Company officers who are not
eligible to participate in this plan. As of December 31, 1995, 3,074,333 of the
shares held in treasury were reserved for the issuance of shares under the above
described stock options.
14. Transactions with Related Parties
Until his resignation as Chief Executive Officer and a director on December 19,
1992, Steven J. Halmos, SafeCard's co-founder, provided his services to SafeCard
through High Plains Capital Corporation ("HPCC"), a company owned by himself and
his brother, Peter Halmos, SafeCard's other co-founder. After that date, Steven
J. Halmos, acting in the capacity of an Advisor on Marketing and Operational
Strategy, provided services directly to SafeCard pursuant to a written agreement
(as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement").
On May 26, 1994, SafeCard reached a settlement with Steven J. Halmos to
terminate the Steven J. Halmos Agreement and various other agreements between
SafeCard and Mr. Halmos that provided for payments to Mr. Halmos of $2,000,000 a
year through March 31, 1998. The settlement, which arose in connection with the
Company's management restructuring in April 1994 and a resulting decision to
cease using Mr. Halmos' services, resulted in a $4,400,000 cash payment to Mr.
Halmos and charge to 1994 earnings. Subsequent to his termination Mr. Halmos
exercised options to purchase 3,900,000 shares of the Company's common stock.
Stockholders' equity increased $37,800,000 resulting from the exercise of such
options and the related tax benefit (see Note 13 - Common Stock and Stock
Options). In 1993, SafeCard paid Steven J. Halmos (or HPCC for Steven J. Halmos'
services) a total of approximately $2,100,000.
In 1993, SafeCard also entered into an agreement that called for Steven J.
Halmos to sell the 1,645,760 shares of Company stock he owned at that time (this
representing approximately 6.2% of total outstanding shares at April 1, 1993) to
the Company as part of the Company's stock repurchase program. The shares were
acquired by the Company on April 21, 1993 for a price of $11.50 per share, a
price equal to the average trading price of the Company's common stock over a
specific period of days following public disclosure of the repurchase.
<PAGE>
SafeCard markets its CreditLine product pursuant to an agreement (as amended,
the "CreditLine Agreement") with CreditLine Corporation ("CLC"), a corporation
owned by Steven J. Halmos and Peter Halmos, SafeCard's co-founders, and their
families. The CreditLine Agreement grants SafeCard an exclusive license to
market CreditLine through certain credit card issuers (including all issuers
with which SafeCard has contractual relationships) and provides that profits and
losses, if any, are shared equally between CLC and SafeCard. Net CreditLine
billings to subscribers totaled approximately $30,710,000, $7,000,000,
$22,900,000 and $15,800,000 while marketing and other expenditures totaled
$23,488,000, $3,060,000, $17,400,000 and $13,400,000 for the year ended December
31, 1995, the two months ended December 31, 1994 and the years ended October 31,
1994 and 1993, respectively. In June 1993, SafeCard was notified by CLC that the
CreditLine Agreement would not be renewed effective November 1, 1993.
Notwithstanding its termination, the CreditLine Agreement gives SafeCard the
perpetual right to continue to service existing CreditLine subscribers and to
participate in the resulting income. In addition, an amendment to the CreditLine
Agreement provides that SafeCard has the perpetual right to market CreditLine,
and participate in the resulting income, through all of its existing card issuer
clients with which it either had a CreditLine marketing agreement on November 1,
1993 or entered into such a marketing agreement within the following three
years. The CreditLine Agreement is the subject of litigation as described in
Note 16 - Commitments and Contingencies.
In 1995, CreditLine and certain services marketed in conjunction with CreditLine
accounted for approximately $14,506,000 or 7.7% of the Company's subscription
revenue and generated approximately $4,728,000 of pre-tax income. During the
Transition Period, CreditLine and related services accounted for approximately
$1,913,000 or 6.3% of the Company's subscription revenue and generated
approximately $702,000 of pre-tax income. In 1994, such services accounted for
approximately $9,100,000 or 5.3% of the Company's subscription revenue and
approximately $2,800,000 or 11.6% of the Company's pre-tax income. In 1993, such
services accounted for approximately $6,500,000 or 4.2% and $1,900,000 or 4.5%
of the Company's subscription revenue and pre-tax income, respectively.
The CreditLine Agreement provides for the creation of an escrow in the case of
certain disputes between the parties. Effective September 1993, SafeCard began
depositing CLC's share of CreditLine profits into escrow. Through December 31,
1995, SafeCard has also deposited approximately $4,265,000 of its share of the
CreditLine profits in an escrow account. The Company's cash and cash equivalents
include only SafeCard's share of the escrowed amounts.
SafeCard made payments under the Ft. Lauderdale Lease to a partnership
consisting of Peter Halmos and Steven J. Halmos (the "Halmos Partnership").
Payments made to the Halmos Partnership for the year ended October 31, 1993 for
the land and building, were approximately $700,000. No payments were made to the
Halmos Partnership in 1994 or 1995. SafeCard no longer occupies the operations
center and is no longer making payments on the Ft. Lauderdale Lease which is now
the subject of litigation (see Note 16 - Commitments and Contingencies).
In October 1993, the Company renewed a consulting agreement with the
Dilenschneider Group, Inc. ("DGI") to provide public relations counsel and
advice to the Company in 1994 for an annual retainer of $180,000. A director of
the Company is the majority owner and chief executive officer of DGI. In October
1994, the Company entered into an agreement with DGI for public affairs and
public relations assistance during 1995 for an annual retainer of $100,000.
These consulting arrangements have not been renewed for 1996.
<PAGE>
During 1994, DGI consulted on and assisted with investor relations for a monthly
fee of $12,500. In addition, another director of the Company provided investor
relations consulting services to the Company during 1994 for a monthly retainer
of $4,167. These consulting arrangements were terminated effective October 31,
1994.
In September 1994, the Company acquired Wright Express. The Company's former
Chairman and Chief Executive Officer, Paul G. Kahn, was a director of Wright
Express prior to the acquisition. During negotiations between the Company and
Wright Express, Mr. Kahn did not attend any meetings or participate in any
discussions of the Board of Directors of Wright Express and abstained from
voting on the acquisition by the Company's Board of Directors.
15. Employee Benefit Plans
In June 1993, the Company implemented a 401(k) and Profit-Sharing Plan for its
employees who are at least 20 years of age, have worked at least 1,000 hours in
the past year and have completed one year of service. The Company matches 50% of
each employee's contribution, up to a maximum of 6% of each employee's salary.
Company contributions vest at a rate of 20% per year after one year of service
while participating in the plan. Continuation of, and contributions to, the
401(k) and Profit-Sharing Plan are voluntary, at the discretion of the Company
and are paid to each eligible employee's account. The total expense recorded
under the plan in 1995, the Transition Period, 1994 and 1993 was approximately
$686,000, $16,000, $385,000 and $240,000, respectively.
Wright Express maintains a separate 401(k) and Profit-Sharing Plan that has been
modified to mirror the benefits and conditions of the Company's plan. The total
expense recorded under the plan in 1995 and the Transition Period was
approximately $5,000 and $1,000, respectively.
National Leisure Group maintains a separate 401(k) and Profit-Sharing Plan for
its employees who are considered full-time and have completed six months of
service. National Leisure Group matches 25% of the each employee's contribution,
up to a maximum of 4% of each employee's salary. Continuation of, and
contributions to, the plan are voluntary, at the discretion of management and
are paid to each eligible employee's account. The total expense recorded under
the plan in 1995 was approximately $30,000.
16. Commitments and Contingencies
Contracts
The Company has written agreements with certain large credit card issuers which
account for a large percentage of its subscription revenue. Termination of any
of these contracts would adversely affect the Company. Contracts with Citibank
(South Dakota), N.A. and related entities contributed 22%, 24%, 26% and 30% of
the Company's consolidated revenue in 1995, the Transition Period, 1994 and
1993, respectively. Citibank contributed 30%, 30%, 32% and 36% of the Company's
consolidated membership and subscription revenue during the same periods. The
principal Citibank contract, as amended, expires December 31, 2000. Citibank has
a right to terminate the contract in the event of the sale of a majority of the
shares of the Company to specified credit card issuers, to banks and their
corporate affiliates and to entities that do not have equity of at least
$25,000,000.
<PAGE>
Contracts with Sears, Roebuck and Co. contributed approximately 10% to the
Company's consolidated revenue in 1995, the Transition Period, 1994 and 1993.
Sears contributed 13%, 12%, 13% and 12% of the Company's consolidated membership
and subscription revenue during the same periods. SafeCard has signed a letter
of intent for a new five-year cooperative business relationship with Sears. The
new contract will be effective on January 1, 1996 and is expected to be executed
shortly.
Leases
The Company has entered into several operating leases for certain computer and
telephone equipment and facilities in the normal course of business. Rent
expense for 1995, the Transition Period and 1994 was $5,535,000, $452,000 and
$283,000, respectively. There was no material rental expense for 1993. The
following is a schedule of future minimum rental payments required under
operating leases having initial or remaining non-cancelable lease terms in
excess of one year at December 31, 1995:
<TABLE>
<S> <C> <C>
1996 $ 4,523,000
1997 4,329,000
1998 2,848,000
1999 1,448,000
2000 784,000
Thereafter 2,241,000
--------------
$ 16,173,000
</TABLE>
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 defendant. 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;
the initial brief, the answer brief and the reply brief have been filed. 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.
<PAGE>
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 former 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. Halmos also dismissed without prejudice his emotional distress
claim, severed his indemnification claims and dismissed with predjudice his
claim against the former officer. Trial of the lawsuit began February 26,
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. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations.
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. The parties have filed various briefs and memoranda in response
to this Report. On January 4, 1996, the Magistrate recommended ruling that
the statute of limitations was tolled during pendency of the case in
federal court and the plaintiffs' state law claims were thus not
time-barred. Defendants have filed an objection to this recommendation.
<PAGE>
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.
The Company filed its opposition to the pending motion for class
certification on December 11, 1995. Plaintiffs' reply is due March 19,
1996.
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 filed
a motion to dismiss the amended complaint. A hearing was held on the motion
to dismiss on October 13, 1995. On November 27, 1995, the Court entered an
Order denying the Company's motion to dismiss. On December 12, 1995 the
defendants filed their Answer and Affirmative Defenses to the Amended
Complaint. Preliminary discovery is proceeding.
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. The Company filed its opposition to the pending
motion for class certification on December 11, 1995. Plaintiffs' reply is
due March 19, 1996.
<PAGE>
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. On December 26, 1995, the Company filed motions
to dismiss the Second Amended Complaint for: (i) failure to join an
indispensable party (Halmos) and failure to allege demand on the Board of
Directors with particularity; and (ii) the failure of Pisano to comply with
the fairness and adequacy requirements of Federal Rule of Civil Procedure
23.1. On January 25, 1996, the plaintiff filed a memorandum in opposition
to motion to dismiss. The Company filed its reply to the memorandum in
opposition on February 23, 1996.
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. Safe-Card has filed a motion to dismiss which has been set for
hearing on March 29, 1996.
A suit by Lois Hekker on behalf of herself and all others similarly
situated seeking monetary damages against the Company and its former 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. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for
class certification.
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
lawsuits. Halmos filed a motion to dismiss on jurisdictional grounds on
November 17, 1995. The Company filed a brief in opposition and an amended
complaint on February 14, 1996. Defendant's response is due March 21, 1996.
A suit by High Plains Capital Corporation against the Company, SafeCard,
two of its directors and The Dilenschneider Group, Inc. in Circuit Court in
Palm Beach County, Florida. This litigation involves 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 appears
to attempt to revive the incentive compensation claims which have been
dismissed with prejudice in Illinois. On November 30, 1995, the Company
filed a motion to strike, motion to dismiss and motion to transfer.
Hearings have been set on the motion to dismiss on March 29, 1996, and on
the motion to strike on April 4, 1996.
<PAGE>
A suit filed by High Plains Capital Corporation against the Company 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
Company filed motions to dismiss and to transfer on December 15, 1995.
The Company is involved in certain other claims and litigation, including
various employment related claims, arising from the ordinary course of business
and which are not considered material to the operations of 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.
<PAGE>
17. Statement Of Cash Flows
The following is a reconciliation of net income (loss) to net cash provided by
(used in) operating activities:
<TABLE>
<CAPTION>
Two Months
Year Ended Ended
December 31, December 31, Year Ended October 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (49,441,000) $ (49,944,000) $ 20,021,000 $ 31,477,000
Adjustments to reconcile net
(loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 6,157,000 723,000 1,349,000 864,000
Cumulative effect of change
in accounting for income taxes (2,000,000)
Amortization of investment
premiums/discounts, net 1,701,000 802,000 5,281,000 5,233,000
Realized (gain) loss on sales of
securities available for sale (1,094,000) 97,000 (593,000) (1,277,000)
Unrealized loss on marketable
securities 1,943,000
Loss on impairment of assets 7,569,000
Income tax (benefit) provision (27,801,000) (26,075,000) 6,178,000 10,968,000
Income tax (refunds) payments, net 11,047,000 (7,000) 3,237,000 (16,161,000)
Billings to subscribers, net 185,297,000 43,886,000 189,925,000 173,769,000
Amortization of subscribers' advance
payments to revenue (187,758,000) (30,375,000) (173,434,000) (156,600,000)
Effect of change in amortization
periods for deferred subscriber
acquisition costs 65,500,000
Expenditures for subscriber
acquisition costs (68,948,000) (8,792,000) (68,029,000) (63,717,000)
Payment of commissions, net (51,566,000) (11,794,000) (52,412,000) (49,511,000)
Amortization of subscriber
acquisition costs 67,799,000 10,001,000 56,236,000 51,075,000
Amortization of commissions 53,079,000 8,565,000 49,745,000 44,173,000
Increase (decrease) in allowance
for cancellations 351,000 1,541,000 (1,237,000) 1,306,000
Changes in assets and liabilities, net
of effects of business acquisitions:
Receivables, net (12,321,000) (15,888,000) 4,070,000 (877,000)
Other current assets 117,000
Other assets (6,076,000) (3,020,000) (1,137,000) 582,000
Accounts payable and
accrued expenses (4,427,000) 8,085,000 9,846,000 (2,459,000)
Product abandonment and related
liabilities 20,796,000
---------------- -------------- --------------- ---------------
Net cash (used in) provided by
operating activities $ (55,519,000) $ (4,752,000) $ 47,046,000 $ 28,845,000
================ ================= ================= ================
</TABLE>
<PAGE>
18. Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
Quarters Ended
1995 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenue $ 59,728,000 $ 57,732,000 $ 57,543,000 $ 58,965,000
Operating income (loss) 429,000 (72,881,000) (12,152,000) 7,362,000
Net income (loss) (A) 301,000 (46,670,000) (7,778,000) 4,706,000
Net income (loss) per share (A) $ .01 $ (1.62) $ (.28) $ .17
Weighted average number of common
and common equivalent shares 29,870,000 28,860,000 28,222,000 27,986,000
Subscribers at period end 13,024,000 13,139,000 13,174,000 13,172,000
Two Months
Ended
Transition Period - 1994 December 31
- ------------------------ -----------
Operating revenue $ 34,698,000
Operating income (loss) (76,019,000)
Net income (loss) (B) (49,944,000)
Net income (loss) per share (B) $ (1.70)
Weighted average number of common
and common equivalent shares 29,297,000
Subscribers at period end 13,046,000
Quarters Ended
1994 January 31 April 30 July 31 October 31
- ---- ---------- -------- ------- ----------
Operating revenue $ 43,694,000 $ 49,313,000 $ 46,415,000 $ 49,664,000
Operating income (loss) 9,153,000 5,260,000 8,278,000 1,508,000
Net income (loss) (C) 8,444,000 3,804,000 6,635,000 1,138,000
Income (loss) per share before
cumulative effect of change
in accounting for income taxes $ .24 $ .14 $ .23 $ .04
Net income (loss) per share (C) $ .31 $ .14 $ .23 $ .04
Weighted average number of common
and common equivalent shares 27,608,000 27,761,000 28,768,000 29,229,000
Subscribers at period end 12,229,000 12,635,000 12,876,000 13,105,000
</TABLE>
(A) During the second and third quarters of 1995, the Company recorded pre-tax
product abandonment and restructuring charges of $34,156,000 and
$10,861,000, 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 infrastructure. During
the fourth quarter of 1995, the Company recovered $1,200,000 relating to a
deposit previously written off in connection with the second quarter
product abandonment.
(B) During the Transition Period, the Company recorded a pre-tax charge of
$65,500,000 related to the change in the amortization periods for
subscriber acquisition costs.
(C) The first quarter of 1994 includes a $2,000,000 ($.07 per share) positive
effect on net earnings from a change in the Company's method of accounting
for income taxes.
<PAGE>
- ---------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------
NONE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item with regard to Directors and
Executive Officers who are also Directors is incorporated by reference to the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 in connection with the Company's
Annual Meeting of Stockholders. See Part I Executive Officers of the Registrant
for information on executive officers of the Company. The information called for
in this item regarding disclosure of delinquent Form 3, 4 or 5 filers is
incorporated by reference to the Company's definitive proxy statement which is
to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the Company's Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 in connection with the Company's
Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 in connection with the Company's
Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement which is to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 in connection with the Company's
Annual Meeting of Stockholders.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Certain of the agreements listed below are the subject of litigation with
Peter Halmos and parties related to him.
(a)1. Financial Statements
The Consolidated Financial Statements and Notes thereto required by
Item 8 are listed in the Index set forth in Item 8. Financial
Statements and Supplementary Data.
(a)2. Financial Statement Schedules
The Financial Statement Schedules required by Item 8 are listed in
the Index set forth in Item 8. Financial Statements and Supplementary
Data.
(a)3. Exhibits
2 Plan of Reorganization and Agreement of Merger dated as of
January 23, 1995 between SafeCard, Ideon and Ideon Merger
Company, incorporated by reference to Appendix A of
SafeCard's 1995 definitive proxy statement which was
included in Ideon Registration Statement for Form S-4 (No.
33-58273) filed as of March 28, 1995 ("Ideon's S-4").
3(a) Ideon's Amended and Restated Certificate of Incorporation,
incorporated by reference to Appendix B of SafeCard's 1995
definitive proxy statement which was included in Ideon's
S-4.
3(b) Certificate of Amendment of Ideon's Amended and Restated
Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) of Ideon's Registration Statement on Form 8-B
filed in May 5, 1995.
3(c) Ideon's By-Laws, incorporated by reference to Appendix B
of SafeCard's 1995 definitive proxy statement which was
included in Ideon's S-4.
Management Contracts and Compensatory Plans
10(a) Form of Non-Qualified Stock Option Agreement dated August
30, 1989 with an outside director, incorporated by
reference to Exhibit 10(a) of SafeCard's Quarterly Report
on Form 10-Q for its fiscal quarter ended July 31, 1989.
10(b) Form of Non-Qualified Stock Option Agreement dated October
16, 1991 with an outside director, incorporated by
reference to Exhibit 10(n) of SafeCard's Annual Report on
Form 10-K for its fiscal year ended October 31, 1991.
10(c) Form of Non-Qualified 1991 Employee Stock Option Plan
dated October 16, 1991 with twenty key employees,
incorporated by reference to Exhibit 10(o) of the
SafeCard's Annual Report on Form 10-K for its fiscal year
ended October 31, 1991.
<PAGE>
10(d) Board of Directors' Resolution dated December 6, 1991
establishing a non-employee director retirement plan,
incorporated by reference to Exhibit 10(s) of SafeCard's
Annual Report on Form 10-K for its fiscal year ended
October 31, 1991.
10(e) Indemnification Agreements for certain of SafeCard's
Directors dated October 2, 1992, incorporated by reference
to Exhibit 10(x) to SafeCard's Annual Report on Form 10-K
for its fiscal year ended October 31, 1992.
10(f) Indemnification Agreements for two of SafeCard's Directors
dated February 11, 1993 and September 1, 1993,
incorporated by reference to Exhibit 10(ai) of SafeCard's
Annual Report on Form 10-K for its fiscal year ended
October 31, 1993.
10(g) Forms of Non-Qualified Stock Option Agreements dated
February 11, 1993 and September 1, 1993 with two outside
directors, incorporated by reference to Exhibit 10(aj) of
SafeCard's Annual Report on Form 10-K for its fiscal year
ended October 31, 1993.
10(h) 1994 Long Term Stock-Based Incentive Plan, incorporated
by reference to SafeCard's 1993 definitive proxy statement.
10(i) Second Amendment to the 1994 Long Term Stock-Based
Incentive Plan, incorporated by reference to Exhibit 10(i)
of SafeCard's Annual Report on Form 10-K for its fiscal
year ended October 31, 1994.
10(j) Employment Agreement, effective as of December 1, 1993,
with Paul G. Kahn, incorporated by reference to Exhibit 1
of SafeCard's Current Report on Form 8-K filed on December
6, 1993.
10(k) Employment Agreement, effective as of February 1, 1994,
with Francis J. Marino, incorporated by reference to
SafeCard's Quarterly Report on Form 10-Q for the fiscal
quarter ended January 31, 1994.
10(l) Amendment to Exhibit 3 of the Employment Agreement,
effective as of February 1, 1994, with Francis J. Marino,
incorporated by reference to Exhibit 10(l) to SafeCard's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1994.
10(m) Employment Agreement as of May 2, 1994, with G. Thomas
Frankland, incorporated by reference to Exhibit 10(a) of
SafeCard's Quarterly Report for its fiscal quarter ended
April 30, 1994.
10(n) Amendment to Exhibit 3 of the Employment Agreement,
effective as of May 2, 1994, with G. Thomas Frankland,
incorporated by reference to Exhibit 10(n) of SafeCard's
Annual Report for the fiscal year ended October 31, 1994.
10(o) Indemnification Agreement as of April 7, 1994, with one
outside director, incorporated by reference to Exhibit
10(b) of SafeCard's Quarterly Report for its fiscal
quarter ended April 30, 1994.
<PAGE>
10(p) Non-Qualified Stock Option Agreement as of April 7, 1994,
with outside director, incorporated by reference to
Exhibit 10(c) of SafeCard's Quarterly Report for its
fiscal quarter ended April 30, 1994.
10(q) Employment Agreement, effective as of September 14, 1994,
with John R. Birk, incorporated by reference to Exhibit
10(q) of SafeCard's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994.
10(r) Amendment, effective as of January 1, 1995, to Employment
Agreement, with John R. Birk, incorporated by reference to
Exhibit 10(r) of SafeCard's Annual Report on Form 10-K for
the fiscal year ended October 31, 1994.
10(s) Form of Assignment and Amendment of Employment Agreement,
incorporated by reference to Exhibit 10(s)of Ideon's
Registration Statement on Form 8-B filed on May 5, 1995.
10(t) Executive Deferred Compensation Plan, incorporated by
reference to Exhibit 10(s) of SafeCard's Annual Report on
Form 10-K for the year ended October 31, 1994.
10(u) Amendment of Executive Deferred Compensation Plan,
incorporated by reference to Exhibit 10(u) of Ideon's
Registration Statement on Form 8-B filed on May 5, 1995.
10(v) Form of Executive Agreement with certain senior officers,
incorporated by reference to Exhibit 10(t) of SafeCard's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1994.
10(w) Form of Amendment and Assignment of Executive Agreement,
incorporated by reference to Exhibit 10(w)of Ideon's
Registration Statement on Form 8-B filed May 5, 1995.
10(x) Form of Non-Qualified Stock Option Agreement under the
1994 Long Term Stock-Based Incentive Plan with certain
officers, incorporated by reference to Exhibit 10(u) of
SafeCard's Annual Report on Form 10-K for the fiscal year
ended October 31, 1994.
10(y) Board of Directors' resolution dated January 24, 1995,
reducing benefit under the non-employee director
retirement plan, incorporated by reference to Exhibit
10(v) of Ideon's Form S-4.
10(z) Form of Indemnification Agreement with certain outside
directors, incorporated by reference to Exhibit 10(w) of
Ideon's Form S-4.
10(aa) Form of Amendment and Assignment of Indemnification
Agreement with certain outside directors, incorporated by
reference to Ideon's Registration Statement on Form 8-B
filed on May 5, 1995.
10(ab) Directors' Deferral Plan, incorporated by reference to
Ideon's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1995.
<PAGE>
10(ac) Directors' Stock Plan, incorporated by reference to
Appendix D of SafeCard's 1995 definitive proxy
statement which was included in Ideon's Form S-4.
10(ad) Termination Agreement dated as of May 26, 1994 between
SafeCard and Steven J. Halmos and Recission Agreement made
and entered into as of June 9, 1994 between SafeCard and
Steven J. Halmos, incorporated by reference to Exhibit
10(e) from SafeCard's Quarterly Report on Form 10-Q for
the fiscal quarter ended July 31, 1994.
10(ae) Agreement with Citicorp (South Dakota), N.A., effective
January 1, 1995, incorporated by reference to Exhibit
10(g) of Ideon's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1995.
10(af) Agreement with Peter Halmos, dated November 1, 1988,
regarding a marketing license for credit information
services, incorporated by reference to Exhibit 10(e) of
SafeCard's Annual Report on Form 10-K, for its fiscal year
ended October 31, 1988.
10(ag) First Amendment to Agreement, dated January 25, 1991,
regarding marketing license for credit information
services, incorporated by reference to Exhibit 10(m) of
SafeCard's Annual Report on Form 10-K for its fiscal year
ended October 31, 1990.
10(ah) Letter Agreement dated January 27, 1992, between
CreditLine Corporation and the Company, incorporated by
reference to Exhibit 10(q) of SafeCard's Annual Report on
Form 10-K for its fiscal year ended October 31, 1991.
10(ai) Confirmation Agreement between Peter Halmos, High Plains
Capital Corporation, CreditLine Corporation and SafeCard
dated January 27, 1992, incorporated by reference to
Exhibit 10(r) of SafeCard's Annual Report on Form 10-K for
its fiscal year ended October 31, 1991.
10(aj) Public Relations Consulting Agreement dated October 25,
1994 between the Dilenschneider Group, Inc. and the
Company, incorporated by reference to Exhibit 10(ad) of
SafeCard's Annual Report on Form 10-K for its fiscal year
ended October 31, 1994.
10(ak) Special Projects Public Relations Consulting Agreement
dated December 14, 1994 between the Company and the
Dilenschneider Group, Inc., incorporated by reference to
Exhibit 10(ae) of SafeCard's Annual Report on Form 10-K
for its fiscal year ended December 31, 1994.
.
11(a) Computation of Primary Earnings Per Share.
11(b) Computation of Fully Diluted Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants to incorporation by
reference of their report in Prospectuses constituting
part of Registration Statements on Forms S-3 and S-8.
24 Powers of Attorney.
<PAGE>
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
- --------------------------------------------------------------------------
SAFECARD SERVICES, INC. AND SUBSIDIARIES
- --------------- ----------------------------------------------------------
<TABLE>
<CAPTION>
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged to Charged to Balance
at beginning costs and other at end of
Description of period expenses accounts Deductions period
Reserves deducted from assets to
which they apply:
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Accounts receivable $ 1,744,000 $ 1,151,000 $ 90,000 a $ (990,000)f $ 1,995,000
Deferred commissions 297,000 297,000
Allowance for cancellations 9,197,000 40,821,000 g (40,470,000)h 9,548,000
Product abandonment and 36,248,000 b (15,452,000) 20,796,000
restructuring liabilities
Product abandonment and
restructuring asset impairments 8,769,000 b (8,769,000)
Two months ended December 31, 1994:
Accounts receivable $ 1,595,000 $ 232,000 $ 83,000 f $ 1,744,000
Deferred commissions 297,000 297,000
Allowance for cancellations 7,656,000 9,327,000 g (7,786,000) h 9,197,000
Unrealized loss on securities
available for sale 607,000 (607,000) c
Year ended October 31, 1994:
- ------------------------------
Accounts receivable $ 150,000 $ 307,000 $1,138,000 d $ 1,595,000
Deferred commissions 297,000 297,000
Allowance for cancellations 8,893,000 37,810,000 g $ (39,047,000) h 7,656,000
Unrealized loss on securities
available for sale 607,000 e c 607,000
Year ended October 31, 1993:
- ----------------------------
Accounts receivable $ 350,000 $ (200,000) f $ 150,000
Deferred commissions 347,000 (50,000) f 297,000
Allowance for cancellations 7,587,000 $ 35,529,000 g (34,223,000) h 8,893,000
</TABLE>
(a) Balance recorded in the acquisition of National Leisure Group, Inc.
(b) Charges recorded as part of the Company's failed product development
efforts and the restructuring of certain SafeCard and corporate functions.
(c) Amount included as part of the $1,943,000 permanent impairment of
securities available for sale.
(d) Balance recorded in the acquisition of Wright Express.
(e) Adjustment to record securities available for sale portfolio at market
value in accordance with FAS 115.
(f) Reversal of uncollectible accounts receivable or commissions reserves.
(g) Charged to balance sheet accounts "Deferred subscriber acquisition
commission" and "Subscriber advance payments."
(h) Charges for refunds upon subscriber cancellations.
(i) Uncollectible accounts receivable or commissions written-off.
<PAGE>
- ----------------------------------------------------------------------------
SIGNATURES
- ----------------------------- ----------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
IDEON GROUP, INC.
By: /s/ Eugene Miller
Eugene Miller
Chairman and Chief Executive Officer
March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature Title
March 20, 1996 /s/ Eugene Miller Director, Chairman and Chief
-----------------------------
Eugene Miller Executive Officer
March 20, 1996 * Director
------------------------------
William T. Bacon, Jr.
March 20, 1996 * Director
-------------------------------
Marshall L. Burman
March 20, 1996 * Director
--------------------------------
John Ellis Bush
March 20, 1996 * Director
--------------------------------
Robert L. Dilenschneider
March 20, 1996 * Director
--------------------------------
Adam W. Herbert, Jr., Ph.D.
March 20, 1996 Director
-------------------------------
Paul G. Kahn
March 20, 1996 * Director
-------------------------------
Thomas F. Petway, III
March 20, 1996 /s/ G. Thomas Frankland Vice Chairman and Chief
Financial Officer
G. Thomas Frankland (Principal Financial and
Accounting Officer)
March 20, 1996 /s/ G. Thomas Frankland
-----------------------
G. Thomas Frankland
* Attorney in Fact
By signing his name hereto, G. Thomas Frankland, does sign this document
on behalf of each of the persons indicated by an asterisk above, pursuant to
Powers of Attorney duly executed by such persons and filed with the Securities
and Exchange Commission herewith.
<PAGE>
- ---------------------------------------------------------------------------
Exhibit Index
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Page Numbers
2 Plan of Reorganization and Agreement of Merger Incorporated by reference to Appendix A of SafeCard's 1995
dated as of January 23, 1995, between SafeCard, definitive proxy statement which was included in Ideon
Ideon and Ideon Merger Company. Registration Statement on Form S-4 (No. 33-58273) filed as
of March 28, 1995 (Ideon's S4).
3(a) Ideon's Amended and Restated Certificate Incorporated by reference to Appendix B of SafeCard's
of Incorporation. 1995 definitive proxy statement which was included
in Ideon's S-4.
.
3(b) Certificate of Amendment of Ideon's Incorporated by reference to Exhibit 3(b) of Ideon's
Amended and Restated Incorporation. Registration Statement on Form 8-B filed on May 5, 1995.
3(c) Ideon's By-Laws Incorporated by reference to Appendix B of SafeCard's
1995 definitive proxy statement which was included in
Ideon's S-4.
Management Contracts and Compensatory Plans
10(a) Form of Non-Qualified Stock Option Agreement Incorporated by reference to Exhibit 10(a) with SafeCard's
dated August 30, 1989, with an outside director. Quarterly Report on Form 10-Q for its fiscal quarter ended
July 31, 1989.
10(b) Form of Non-Qualified Stock Option Agreement dated Incorporated by reference to Exhibit 10(n) of SafeCard's
October 16, 1991 with an outside director. Annual Report on Form 10-K for its fiscal year ended
October 31, 1991.
10(c) Form of Non-Qualified 1991 Employee Stock Option Plan Incorporated by reference to Exhibit 10(o) of SafeCard's
dated October 16, 1991 between SafeCard with twenty Annual Report on Form 10-K for its fiscal year ended
key employees. October 31, 1991.
10(d) Board of Directors' Resolution dated December 6, 1991 Incorporated by reference to Exhibit 10(s) of SafeCard's
establishing a non-employee director retirement plan. Annual Report on Form 10-K for its fiscal year ended
October 31, 1991.
10(e) Indemnification Agreements for certain Directors dated Incorporated by reference to Exhibit 10(x) to SafeCard's
October 2, 1992. Annual Report on Form 10-K for its fiscal year ended
October 31, 1992.
10(f) Indemnification Agreements for two of SafeCard's Incorporated by reference to Exhibit 10(ai) of
Directors dated February 11, 1993 and September 1, 1993. SafeCard's Annual Report on Form 10-K for its fiscal
year ended October 31, 1993.
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------
Exhibit Index
- ----------------------------------------------------------------------------------------------------------------------------
Exhibit Page Numbers
10(g) Forms of Non-Qualified Stock Option Incorporated by reference to Exhibit 10(aj) of
Agreements dated February 11, 1993 and SafeCard's Annual Report on Form 10-K for its
September 1, 1993 with two outside fiscal year ended October 31, 1993.
directors.
10(h) 1994 Long Term Stock-Based Incentive Plan. Incorporated by reference to SafeCard's 1993 definitive
proxy statement.
10(i) Second Amendment to the 1994 Long Term Stock-Based Incorporated by reference to Exhibit 10(I) of SafeCard's
Incentive Plan. Annual Report on Form 10-K for its fiscal year ended
October 31, 1994.
10(j) Employment Agreement, effective as of December 1, 1993, Incorporated by reference to Exhibit 1 of Current
with Paul G. Kahn. Report on Form 8-K filed on December 6, 1993.
10(k) Employment Agreement, effective as of February 1, 1994, Incorporated by reference to SafeCard's Quarterly Report
with Francis J. Marino. on Form 10-Q for the fiscal quarter ended January 31,
1994.
10(l) Amendment to Exhibit 3 of the Employment Agreement, Incorporated by reference to Exhibit 10(l) to SafeCard's
effective as of February 1, 1994, with Francis J. Marino. Annual Report on Form 10-K for the fiscal year ended
October 31, 1994.
10(m) Employment Agreement as of May 2, 1994, with G. Thomas Incorporated by reference to Exhibit 10(a) of SafeCard's
Frankland. Quarterly Report for its fiscal quarter ended April 30,
1994.
10(n) Amendment to Exhibit 3 of the Employment Agreement, Included by reference to Exhibit 10(n) of SafeCard's
effective as of May 2, 1994, with G. Thomas Frankland. Annual Report for the fiscal year ended October 31, 1994.
10(o) Indemnification Agreement as of April 7, 1994, with one Incorporated by reference to Exhibit 10(b) of SafeCard's
outside director. Quarterly Report for its fiscal quarter ended April 30,
1994.
10(p) Non-Qualified Stock Option Agreement as of April 7, Incorporated by reference to Exhibit 10(c) of SafeCard's
1994, with one outside director. Quarterly Report for its fiscal quarter ended April 30,
1994.
10(q) Employment Agreement, effective as of September 14, Incorporated by reference to Exhibit 10(q) of SafeCard's
1995, with John R. Birk. Annual Report for the fiscal year ended October 31, 1994.
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------------
Exhibit Index
- ----------------------------------------------------------------------------------------------------------------------------
Exhibit Page Numbers
10(r) Amendment, effective as of January 1, 1995, to Incorporated by reference to Exhibit 10(r) of SafeCard's
Employment Agreement with John R. Birk. Annual Report for the fiscal year ended October 31, 1994.
10(t) Executive Deferred Compensation Plan. Incorporated by reference to Exhibit 10(s) of SafeCard's
Annual Report for the fiscal year ended October 31, 1994.
10(u) Amendment of Executive Deferred Compensation Plan. Incorporated by reference to Exhibit 10(u) of Ideon's
Registration Statement on Form 8-B filed on May 5, 1995.
10(v) Form of Executive Agreement with certain senior officers. Incorporated by reference to Exhibit 10(t) of
SafeCard's Annual Report on Form 10-K for the year
ended October 31, 1994.
10(w) Form of Amendment and Assignment of Executive Agreement. Incorporated by reference to Exhibit 10(w) of Ideon's
Registration Statement on Form 8-B filed on May 5, 1995.
10(x) Form of Non-qualified Stock Option Agreement under Incorporated by reference to Exhibit 10(u) of SafeCard's
the 1994 Long Term Stock-Based Incentive Plan with Annual Report for fiscal year ended October 31, 1994.
certain officers.
10(y) Board of Directors' resolution dated January 24, 1995, Incorporated by reference to Exhibit 10(v) of Ideon's
reducing benefit under the nonemployee director S-4.
retirement plan.
10(z) Form of Indemnification Agreement with certain outside Incorporated by reference to Exhibit 10(w) of Ideon's
directors. S-4.
10(aa) Form of Amendment and Assignment of Indemnification Incorporated by reference to Exhibit 10(aa) of Ideon's
Agreement with certain outside directors. Registration Statement on Form 8-B filed on May 5, 1995.
10(ab) Directors Deferral Plan. Incorporated by reference to Exhibit 10(a) of Ideon's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1995.
10(ac) Directors Stock Plan. Incorporated by reference to Appendix D of SafeCard's
1995 definitive proxy statement which was included in
Ideon's S-4.
<PAGE>
Other Material Contracts
10(ad) Termination Agreement dated as of May 26, 1994 with Incorporated by reference to Exhibit 10(e) from
Steven J. Halmos and Recission Agreement made and SafeCard's Quarterly Report on Form 10-Q for the
entered into as of June 9, 1994 between SafeCard and fiscal quarter ended July 31, 1994.
Steven J. Halmos.
10(ae) Agreement with Citicorp (South Dakota), N.A., Incorporated by reference to Exhibit 10(g) to Ideon's
effective January 1, 1995. Quarterly Report on Form 10-Q for its fiscal quarter
ended June 30, 1995.
10(af) Agreement with Peter Halmos, dated November 1, 1988, Incorporated by reference to Exhibit 10(e) of SafeCard's
regarding a marketing license for credit information Annual Report on Form 10-K for its fiscal year ended
services. October 31, 1988.
10(ag) First Amendment to Agreement, dated January 25, 1991, Incorporated by reference to Exhibit 10(m) of SafeCard's
regarding marketing license for credit information Annual Report on Form 10-K for its fiscal year ended
services. October 31, 1990.
10(ah) Letter Agreement dated January 27, 1992, Incorporated by reference to Exhibit 10(q) of
between CreditLine Corporation and SafeCard. SafeCard's Annual Report on Form 10-K for its fiscal
year ended October 31, 1991.
10(ai) Confirmation Agreement between Peter Halmos, High Incorporated by reference to Exhibit 10(r) of SafeCard's
Plains Capital Corporation, CreditLine Corporation Annual Report on Form 10-K for its fiscal year ended
and SafeCard dated January 27, 1992. October 31, 1991.
10(aj) Public Relations Consulting Agreement dated Incorporated by reference to Exhibit 10(ad) of
October 25, 1994 with the Dilenschneider Group, Inc. SafeCard's Annual Report on Form 10-K for its fiscal
year ended October 31, 1994.
10(ak) Special Projects Public Relations Consulting Agreement Incorporated by reference to Exhibit 10(ae) of
dated December 14, 1994 with the Dilenschneider Group, SafeCard's Annual Report on Form 10-K for its
Inc. fiscal year ended October 31, 1994.
11(a) Computation of Primary Earnings Per Share. 85
11(b) Computation of Fully Diluted Earnings Per Share. 86
21 Subsidiaries of the Registrant 87
<PAGE>
23 Consent of Independent Accountants to incorporation 88
by reference of their report in Prospectuses
constituting part of Registration Statements on Form
S-3 and S-8.
24 Powers of Attorney 89-94
27 Financial Data Schedule 95
</TABLE>
<PAGE>
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
EXHIBITS
PAGE LEFT BLANK
EXHIBIT 11
Exhibit 11(a)
Computation of Primary Earnings Per Share
(amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
Net (loss) in $ (49,441) $(49,944) $20,021 $31,477
========= ========= ======== =======
Average common shares
outstanding 28,500 29,297 26,197 25,499
Assumed equivalent shares from
stock options converted to
common shares (1) 2,214 3,073
--------- ---------- -------- -------
Total weighted average number
of common and common
equivalent shares 28,500 29,297 28,411 28,572
======== ========= ======== =======
Earnings per share $ (1.73) $ (1.70) $ .70 $ 1.10
========= ========= ======== =======
</TABLE>
(1) 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. In the case of a net loss, average shares
outstanding does not assume the exercise of options since an increase in average
shares outstanding would be dilutive to net loss per share.
<PAGE>
Exhibit 11(b)
Computation of Fully Diluted Earnings Per Share
(amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
Net (loss) income $ (49,441) $ (49,944) $ 20,021 $ 31,477
Average common shares
outstanding 28,500 29,297 26,197 25,499
Assumed equivalent shares from
stock options converted to
common shares (1) 2,214 3,378
Total weighted average number
of common and common
equivalent shares 28,500 29,297 28,411(3) 28,877
Earnings per share (2) $ (1.73) $ (1.70) $ .70(3) $ 1.09
</TABLE>
(1) Earnings per share are computed consistent with (1) 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 (if the closing price is higher
than the average market price during the period).
(2) 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%.
(3) The weighted average number of common and common equivalent shares and
earnings per share on this exhibit are equal to the respective amounts on
Exhibit 11(a) - Computation of Primary Earnings Per Share since the
year-end market value of the Company's stock was lower than the average
market value used in applying the treasury stock method in the computation
of primary earnings per share.
Exhibit 21
Subsidiaries of the Registrant
SafeCard Services, Incorporated.
Wright Express Corporation
National Leisure Group, Inc.
Family Protection Network, Inc.
Ideon Marketing and Services Company
SafeCard Services Insurance Company (subsidiary of SafeCard Services,
Incorporated)
SafeCard Travel Services, Incorporated (subsidiary of SafeCard Services,
Incorporated)
SafeCard Technologies, Inc. (subsidiary of SafeCard Services, Incorporated)
MCM Group, Ltd (subsidiary of SafeCard Services, Incorporated)
United Bank Club Association, Inc. (subsidiary of MCM Group, Ltd)
Present Value Services, Ltd (subsidiary of United Bank Club Association, Inc.)
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 and S-8 (Nos.
33-51439 and 33-55581) and Form S-8 (Nos. 33-55585 and 33-57071) of SafeCard
Services, Incorporated, as amended and adopted by Ideon Group, Inc. and Form S-8
(No. 33-59247) and Forms S-3 and S-8 (No. 33-59249) of Ideon Group, Inc. of our
report dated February 2, 1996, appearing on page 37 of this Form 10-K.
PRICE WATERHOUSE LLP
Tampa, Florida
March 15, 1996
Exhibit 24
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/ Robert L.Dilenschneider
Robert L. Dilenschneider
(SEAL)
<PAGE>
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/ Thomas F. Petway, III
Thomas F. Petway, III
(SEAL)
<PAGE>
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/Marshall L. Burman
Marshall L. Burman
(SEAL)
<PAGE>
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/ William T. Bacon,
Jr.
William T. Bacon, Jr.
(SEAL)
<PAGE>
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/ Adam W. Herbert,Jr.
Adam W. Herbert, Jr.
(SEAL)
<PAGE>
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director or
Officer of Ideon Group, Inc. (the "Company") hereby constitutes and appoints, G.
Thomas Frankland, Francis J. Marino and Eugene Miller and each or any of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, to sign that
certain Annual Report and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day
of March, 1996.
/s/ John Ellis
Bush
John Ellis Bush
(SEAL)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,071,000
<SECURITIES> 47,069,000
<RECEIVABLES> 73,948,000
<ALLOWANCES> 1,995,000
<INVENTORY> 0
<CURRENT-ASSETS> 244,666,000
<PP&E> 43,451,000
<DEPRECIATION> 11,062,000
<TOTAL-ASSETS> 385,910,000
<CURRENT-LIABILITIES> 233,251,000
<BONDS> 0
0
0
<COMMON> 349,000
<OTHER-SE> 102,466,000
<TOTAL-LIABILITY-AND-EQUITY> 385,910,000
<SALES> 226,620,000
<TOTAL-REVENUES> 233,968,000
<CGS> 135,469,000
<TOTAL-COSTS> 311,210,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 77,242,000
<INCOME-TAX> 27,801,000
<INCOME-CONTINUING> 49,441,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,441,000
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
</TABLE>
