SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
Commission File No. 1-11465
IDEON GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
(Former Name of Registrant: SafeCard Services, Incorporated)
Delaware 59-3293212
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
7596 Centurion Parkway, Jacksonville, Florida 32256
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (904) 218-1800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Common Stock, $.01 Par Value
Outstanding at May 10, 1996 27,983,164 Shares
Total Number of Pages 33
<PAGE>
IDEON GROUP, INC.
Index to Form 10-Q
For the Quarter Ended March 31, 1996
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1996 and
December 31, 1995 3
Consolidated Statement of Operations for the Three Months
Ended March 31, 1996 and 1995 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-15
Report of Independent Certified Public Accountants 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1996 1995
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 19,449 $ 25,071
Securities available for sale, maturing within one year 12,916 33,741
Receivables, net 84,290 71,953
Income taxes receivable 18,862 16,153
Deferred subscriber acquisition costs and
related commissions, amortizing within one year 87,268 91,150
Deferred income tax asset 3,370
Other current assets 3,591 3,228
-------------- --------------
Total current assets 226,376 244,666
Securities available for sale, maturing after one year 15,380 13,328
Deferred subscriber acquisition costs and
related commissions, amortizing after one year 42,382 40,403
Property and equipment, net 31,361 32,389
Intangible assets, net 63,465 45,002
Deferred income tax asset, noncurrent 5,244 5,223
Other assets 7,073 4,899
-------------- --------------
Total assets $ 391,281 $ 385,910
============== ==============
Liabilities
Current liabilities:
Notes payable to bank $ 19,855 $ 15,414
Accounts payable 46,087 32,523
Accrued expenses 22,034 35,165
Product abandonment and related liabilities 14,270 20,796
Subscribers' advance payments, amortizing
within one year 118,586 119,805
Allowance for cancellations 6,524 9,548
Deferred income tax liability 2,707
-------------- --------------
Total current liabilities 230,063 233,251
Subscriber advance payments, amortizing after one year 54,098 49,799
-------------- --------------
Total liabilities 284,161 283,050
-------------- --------------
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, 27,981,831 shares
outstanding 349 349
Additional paid-in capital 41,230 41,230
Retained earnings 123,469 118,999
Unrealized gain on securities available for sale 135 345
-------------- --------------
165,183 160,923
Less cost of 6,964,169 common shares in treasury (58,063) (58,063)
-------------- --------------
Total stockholders' equity 107,120 102,860
-------------- --------------
Total liabilities and stockholders' equity $ 391,281 $ 385,910
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Consolidated Statement of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1996 1995
----------------- ----------
(unaudited)
Revenues
Membership and subscription revenue, net $ 46,339 $ 43,597
Card acquisition and services revenue 7,173 4,910
Consumer marketing revenue 9,452 8,173
Interest income 677 1,885
Other income 7,059 1,163
-------------- --------------
70,700 59,728
-------------- --------------
Costs and expenses
Subscriber acquisition costs and
related commissions 30,273 26,926
Other costs of revenue 8,023 6,017
Research and product development costs 421 2,016
Service costs and other operating expenses 11,504 8,409
General and administrative expenses 11,450 7,870
Cost relating to products abandoned
and restructuring 8,061
-------------- --------------
61,671 59,299
-------------- --------------
Income before provision for income taxes 9,029 429
Provision for income taxes 3,160 128
-------------- --------------
Net income $ 5,869 $ 301
============== ==============
Earnings per share $ .21 $ .01
============= =============
Weighted average common and
common equivalent shares 28,097,000 29,870,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S>
<C> <C>
1996 1995
--------------- ----------
(unaudited)
Cash Flows From Operating Activities
Cash received from subscribers/customers $ 63,155 $ 65,407
Cash paid to suppliers and employees (69,980) (74,069)
Interest received 1,499 4,288
Income tax (payments) refunds , net (275) 1,500
-------------- --------------
Net cash used in operating activities (5,601) (2,874)
-------------- --------------
Cash Flows From Investing Activities
Purchases of investments (9,757) (31,633)
Proceeds from sales of investments 23,830 84,980
Proceeds from maturing investments 4,649 7,274
Cost of acquisitions, net of cash acquired (18,471) (12,977)
Acquisitions of property and equipment, net (2,611) (10,891)
-------------- --------------
Net cash (used in) provided by investing activities (2,360) 36,753
-------------- --------------
Cash Flows From Financing Activities
Net borrowings on notes payable to bank 4,441 2,246
Repayment of debt acquired in UBS
acquisition (703)
Proceeds from exercise of stock options 57
Dividends paid (1,399) (1,447)
-------------- --------------
Net cash provided by financing activities 2,339 856
-------------- --------------
Net (decrease) increase in cash and cash equivalents (5,622) 34,735
Cash and cash equivalents at beginning of period 25,071 9,315
-------------- --------------
Cash and cash equivalents at end of period $ 19,449 $ 44,050
=============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes To Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
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 ("WEX") and National
Leisure Group, Inc. ("NLG"). The Company's Ideon Marketing and Services
business unit which manages the PGA TOUR Partners and the Collections of
the Vatican Museums programs has been consolidated with SafeCard. The
operations of United Bank Services ("UBS"), acquired February 16, 1996 (see
Note 2 - Acquisition), have also been consolidated into SafeCard. The
operations of an additional business unit, Family Protection Network, Inc.,
were discontinued in 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Ideon's Annual Report on Form 10-K for the
year ended December 31, 1995.
Prior year financial statements have been reclassified to conform to
1996 presentations.
Price Waterhouse LLP has performed a review, and not an audit, of the
unaudited consolidated financial information of the Company for the three
months ended March 31, 1996 (based on procedures adopted by the American
Institute of Certified Public Accountants) as set forth in their separate
report dated April 29, 1996, which is included in this Form 10-Q. This
report is not a "report" within the meaning of Sections 7 and 11 of the
Securities Act of 1933, and the independent accountant's liability under
Section 11 does not extend to it.
2. Acquisition
On February 16, 1996, SafeCard acquired 100% of the outstanding stock
of UBS for $18,328,000. UBS is a provider of value-added products and
services through a diverse group of financial institutions. Products and
services offered by UBS include CardMiles (an airline frequent flyer
rewards program), rebate travel, insurance enhancements, customer loyalty
programs (designed to aid in card acquisition or increase credit card
usage) and credit card merchant reward programs (designed as packages of
enhancements offered by credit card merchant processors). Terms of the
<PAGE>
acquisition include additional payments of up to $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
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 acquisition was accounted for under the purchase method and
accordingly the results of operations of UBS are included in the Company's
consolidated financial statements from the date of acquisition. In
connection with the acquisition, SafeCard recorded $14,699,000 of goodwill
(excess cost over fair value of net assets acquired) and $4,400,000 of
other intangible assets. The goodwill is being amortized over 25 years and
the other intangible assets are being amortized over 5 years. In connection
with the acquisition, SafeCard assumed $703,000 of debt which was repaid
shortly after the close of the transaction.
Pro forma results of operations of the Company and UBS as if combined
throughout the first quarter of 1996 and 1995 are not materially different
from actual results presented in the consolidated financial statements and
therefore, are not presented herein.
3. Subscriber Acquisition Costs
Subscriber acquisition expenditures directly relate to the acquisition
of new subscribers through "direct-response" type marketing campaigns and
primarily include payments for telemarketing, printing, postage, mailing
services, certain direct salaries and other direct costs incurred to
acquire new subscribers. These expenditures are deferred and amortized to
expense in proportion to expected revenues over the initial subscription
period (generally one or three years).
Deferred subscriber acquisition costs and related commissions were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1996 1995
----------- -----------
Hot-Line $ 59,797,000 $ 65,232,000
CreditLine and related products 7,185,000 7,130,000
Fee Card 3,856,000 5,597,000
Other services 11,062,000 8,775,000
----------------- -----------------
Total deferred subscriber acquisition costs 81,900,000 86,734,000
Commissions 47,750,000 44,819,000
----------------- -----------------
Total deferred subscriber acquisition
costs and commissions $ 129,650,000 $ 131,553,000
================= =================
</TABLE>
<PAGE>
4. Other Income
Included within "Accrued expenses" at December 31, 1995 was a disputed
liability recorded in 1992 of $10,534,000 relating to the Company's estimated
net obligation under a contested lease of its former Ft. Lauderdale, Florida
headquarters. In March 1996, the Company reached a settlement with Peter Halmos,
the lessor (see Note 7 - Commitments and Contingencies), which resulted in the
payment of $3,800,000 to Halmos. Other income for the first quarter of 1996
includes a reversal of the remaining accrual of $6,734,000.
5. Income Taxes
The Company's effective income tax rate for the three months ended
March 31, 1996 and 1995 differs from the applicable statutory rate due to
tax-exempt interest received on investments in municipal debt securities,
non-deductible goodwill amortization and the federal tax benefit of state
income taxes.
At March 31, 1996, the Company had a net noncurrent deferred tax asset
of $5,244,000 and a net current deferred tax liability of $2,707,000. The
deferred tax asset primarily relates to the timing of recognition of
multi-year revenues. Management believes that based on available
information, it is more likely than not that the net deferred tax asset
will be realized and accordingly a valuation allowance has not been
recorded.
<PAGE>
6. Supplemental Cash Flow Information
The reconciliation of net income to net cash used in operating activities,
as presented in the consolidated statement of cash flows, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C>
March 31, March 31,
1996 1995
----------- ----------
Net income $ 5,869,000 $ 301,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,053,000 1,366,000
Amortization of investment
premiums/discounts, net 42,000 880,000
Realized gain on sales of securities
available for sale (201,000) (952,000)
Loss on impairment of assets 2,912,000
Income tax expense 3,160,000 128,000
Income tax refunds (payments), net (275,000) 1,500,000
Restricted stock expense 50,000
Billings to subscribers, net 50,683,000 46,550,000
Amortization of subscribers' advance
payments to revenue (47,603,000) (46,430,000)
Expenditures for subscriber acquisition costs (13,927,000) (18,486,000)
Payment of commissions, net (16,320,000) (11,488,000)
Amortization of subscriber acquisition costs 18,761,000 16,070,000
Amortization of commissions 13,389,000 12,837,000
Decrease in allowance for cancellations (3,024,000) (4,876,000)
Changes in assets and liabilities, net of
effects of business acquisitions:
Receivables, net (10,910,000) 7,573,000
Other current assets (227,000) (57,000)
Other assets (1,883,000) 118,000
Accounts payable and
accrued expenses (1,574,000) (7,958,000)
Product abandonment and
related liabilities (6,526,000)
------------- -------------
Net cash used in operating activities $ (5,601,000) $ (2,874,000)
================ ================
</TABLE>
<PAGE>
7. Commitments and Contingencies
The Company is defending or prosecuting claims in eleven complex
lawsuits involving 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 eleven 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. On December 28, 1995, the court stayed Halmos'
indemnification claims pending resolution of a declaratory judgment
action filed by the Company in Delaware Chancery Court.
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
$48,000,000 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. Trial has
been scheduled to begin on October 7, 1996.
<PAGE>
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 this 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.
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. Plaintiff's reply
was filed on 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 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 former 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
<PAGE>
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 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 20, 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 violation of the federal securities laws, 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.
Plaintiff's reply was filed on March 19, 1996.
A purported shareholder derivative action initiated by Michael P.
Pisano, on behalf of himself and other stockholders of SafeCard and the
Company against SafeCard, the Company, two of their officers, and the
Company's Board of Directors in the United States District Court for
the Southern District of Florida. This litigation involves claims that
the officers and directors of SafeCard and the Company have improperly
refused to accede to 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
<PAGE>
arising out of the resolution of a shareholder class action lawsuit in
1991 and SafeCard's subsequent filing of an action against Halmos and
his related companies in Wyoming in 1993. SafeCard has filed a motion
to dismiss and on March 28, 1996 the court entered an agreed order
denying SafeCard's motion to dismiss as moot in light of an agreement
that plaintiff would file an amended complaint. The amended complaint
is due by June 26, 1996.
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. On April 22, 1996, Halmos filed
an answer and amended counterclaims in which High Plains Capital
Corporation and Halmos Trading & Investment Company were added as
additional parties. The amended counterclaims seek advancement and/or
indemnification for Halmos, High Plains Capital Corporation and Halmos
Trading & Investment Company for certain litigations and an IRS
investigation. The amended counterclaims also seek recovery against
individual defendant directors based on allegations they willfully and
unjustly denied Halmos indemnification and/or advancement.
A suit by High Plains Capital Corporation against SafeCard, the
Company, 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, a motion to dismiss and a motion to transfer. On March 29,
1996, the court denied the Company's motion to dismiss or to stay. On
April 5, 1996, the court entered an agreed order withdrawing without
prejudice the defendant's motion to strike. The Company subsequently
filed a motion for final summary judgment and a hearing is scheduled on
this motion for June 7, 1996. Discovery has been stayed pending a
ruling on this motion.
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.
<PAGE>
In addition to the above Halmos related lawsuits, the Company has
resolved a suit filed 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 had vacated
the building and ceased making payments related to the Ft. Lauderdale
lease. After a number of claims and counterclaims were filed, trial of
the lawsuit began February 26, 1996. On March 25, 1996, the parties
entered into a Settlement Agreement under which the Company made a
payment of $3,800,000 to settle all claims currently pending or
previously brought in this lawsuit.
The Company is involved in certain other claims and litigation as follows:
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 common 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 suit filed by SafeCard on April 17, 1996, against Museum Art
Properties, Inc. in state court in Duval County, Florida. This action
involves a complaint for declaratory judgment for a determination of
SafeCard's rights under the termination provisions of a Marketing and
Distribution Agreement between SafeCard and Museum Art Properties dated
November 25, 1994 and subsequently amended on February 27, 1995 and
December 18, 1995.
A suit filed by Museum Art Properties, Inc. on April 18, 1996, seeking
monetary damages against SafeCard in State Court for New York County,
New York in which Museum Art Properties, Inc. seeks damages purportedly
in the amount of $50,000,000 for SafeCard's alleged breaches of its
contractual obligations to Museum Art Properties, Inc. in connection
with a mail order catalog for "Collections of the Vatican Museums."
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>
8. Subsequent Event
On April 22, 1996, the Company announced the signing of a definitive
merger agreement with CUC International Inc. ("CUC"), an international
membership services company, whereby CUC will acquire Ideon in a
stock-for-stock transaction valued at approximately $375 million. The
transaction is expected to close mid-summer and is subject to customary
closing requirements and approval by Ideon stockholders.
Under the terms of the agreement, each share of Ideon common stock
outstanding on the effective date of the proposed merger will be converted
into the right to receive CUC common stock with an aggregate value of
$13.50 per share if the average closing price per share of CUC common stock
over a specified fifteen day period prior to the date of the Ideon
stockholder meeting called to vote upon the proposed merger (the "Average
Stock Price") is within the collar described below. The exact ratio of
shares of CUC common stock to be issued per outstanding share of Ideon
stock will be determined by dividing $13.50 by the Average Stock Price.
However, the number of shares of CUC common stock to be issued in exchange
for each share of Ideon common stock will in no event be greater than .6136
(if the Average Stock Price is at or below $22.00 per share) nor less than
.3750 (if the Average Stock Price is at or above $36.00 per share).
CUC intends to account for the acquisition as a pooling-of-interests
and it is intended that the merger be tax-free to Ideon stockholders.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Ideon Group, Inc.
We have reviewed the accompanying consolidated balance sheet of Ideon Group,
Inc. as of March 31, 1996, and the related consolidated statements of operations
and of cash flows for the three months ended March 31, 1996 and 1995, appearing
in the Company's Form 10-Q for the quarter ended March 31, 1996. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended (not presented herein), and in our report dated
February 2, 1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the accompanying consolidated balance
sheet information as of December 31, 1995, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
PRICE WATERHOUSE LLP
Tampa, Florida
April 29, 1996
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Ideon Group, Inc. ("Ideon" or the "Company") is a holding company with
three current operating business units including SafeCard Services, Incorporated
("SafeCard"), Wright Express Corporation ("WEX") and National Leisure Group,
Inc. ("NLG"). The Company's Ideon Marketing and Services business unit which
manages the PGA TOUR Partners and the Collections of the Vatican Museums
programs has been consolidated with SafeCard. The operations of United Bank
Services ("UBS"), acquired February 16, 1996 (see Note 2 of Notes to
Consolidated Financial Statements), have also been consolidated into SafeCard.
The operations of an additional business unit, Family Protection Network, Inc.,
were discontinued in 1995.
On January 22, 1996, the Company announced that its Board of Directors had
decided to explore strategic alternatives available to the Company for the
purpose of enhancing shareholder value. The Company retained financial and legal
advisors to assist the Board in this process.
On April 22, 1996, the Company announced the signing of a definitive merger
agreement with CUC International Inc. ("CUC"), an international membership
services company, whereby CUC will acquire Ideon in a stock-for-stock
transaction valued at approximately $375 million. The transaction is expected to
close mid-summer and is subject to customary closing requirements and approval
by Ideon stockholders.
Under the terms of the agreement, each share of Ideon common stock
outstanding on the effective date of the proposed merger will be converted into
the right to receive CUC common stock with an aggregate value of $13.50 per
share if the average closing price per share of CUC common stock over a
specified fifteen day period prior to the date of the Ideon stockholder meeting
called to vote upon the proposed merger (the "Average Stock Price") is within
the collar described below. The exact ratio of shares of CUC common stock to be
issued per outstanding share of Ideon stock will be determined by dividing
$13.50 by the Average Stock Price. However, the number of shares of CUC common
stock to be issued in exchange for each share of Ideon common stock will in no
event be greater than .6136 (if the Average Stock Price is at or below $22.00
per share) nor less than .3750 (if the Average Stock Price is at or above $36.00
per share).
CUC intends to account for the acquisition as a pooling-of-interests and it
is intended that the merger be tax-free to Ideon stockholders.
RESULTS OF OPERATIONS
CONSOLIDATED
Revenues
Revenues increased $10,972,000, or 18%, in the first quarter of 1996
compared to the same period in 1995. The Company reported revenue growth at all
three operating units. This revenue growth was partially offset by declines in
interest income and gains from investment security transactions due to
significantly lower investment balances in 1996 compared to 1995.
Included in 1996 revenues is the $6,734,000 reversal of an accrual
previously established in connection with a contested lease of the Company's
former Ft. Lauderdale headquarters. The contested lease was the subject of
litigation which was settled in March 1996. See Notes 4 and 7 of Notes to
Consolidated Financial Statements.
Income
The Company generated pre-tax income of $9,029,000 in the first quarter of
1996 compared to $429,000 in the first quarter of 1995. The Company has
significantly reduced or discontinued the activities of its development stage
businesses and reduced expenditures for research and new product development. As
noted above, revenues and income include a nonrecurring reversal of an accrual
for a contested lease. Costs and expenses for the first quarter of 1996 include
certain nonrecurring items discussed below.
On February 5, 1996, the Board of Directors terminated the employment of
the Company's former chairman and chief executive officer, Paul G. Kahn. In
connection with the termination, the Company accrued $2,500,000 during the first
quarter of 1996 for severance and other payments due under Mr. Kahn's employment
agreement.
During the first quarter of 1996, the Company incurred expenses of
approximately $800,000 related to the evaluation of strategic alternatives
process initiated by the Board of Directors in January 1996. If the merger with
CUC discussed above is completed, additional expenses are expected to be
incurred by the Company.
In the first quarter of 1996, the Company recorded a special charge of
$2,912,000 for estimated costs related to the decision to eliminate its
Jacksonville, Florida operations center and consolidated all Jacksonville
employees into the Company's corporate headquarters building.
The following tables summarize operating results by business unit. The
"Developmental Operations" column for 1995 includes the operating results for
Ideon Marketing and Services Company and Family Protection Network. The
activities of Ideon Marketing and Services Company in 1996 are not material and
have been consolidated with SafeCard. The activities of Family Protection
Network were discontinued in 1995.
For the three months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
Membership and
subscription revenue $ 46,339 $ 46,339
Card acquisition and
services revenue $ 7,173 7,173
Consumer marketing
revenue 3,320 $ 6,132 9,452
Interest and other
income 304 22 $ 7,410 7,736
--------- --------- ------- -------- --------
Total revenue 49,963 7,173 6,154 7,410 70,700
Total costs and
expenses 40,692 6,415 4,886 9,678 61,671
--------- --------- --------- -------- --------
Income (loss) before
provision for income
taxes $ 9,271 $ 758 $ 1,268 $ (2,268) $ 9,029
========= ========= ========= ========= ========
</TABLE>
<PAGE>
For the three months ended March 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
National Develop- Corporate
Wright Leisure mental and
SafeCard Express Group Operations Other Total
Membership and
subscription revenue $ 43,597 $ 43,597
Card acquisition and
services revenue $ 4,910 4,910
Consumer marketing
revenue 2,546 $ 5,627 8,173
Interest and other
income 211 20 $ 2,817 3,048
--------- --------- --------- ------- --------
Total revenue 46,354 4,910 5,647 2,817 59,728
Total costs and
expenses 35,980 4,240 3,967 $ 8,061 7,051 59,299
--------- --------- --------- -------- -------- --------
Income (loss) before
provision for income
taxes $ 10,374 $ 670 $ 1,680 $ (8,061) $ (4,234) $ 429
========= ========= ========= ========= ======== ========
</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 telephone solicitations. New distribution channels,
including solicitation during credit card activation, are being tested by
SafeCard. SafeCard markets its products and services through approximately 160
credit card issuers including banks and other financial institutions, oil
companies and retailers.
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. SafeCard also markets other continuity services including fee-based
credit cards ("Fee Card"), date reminder services and a personal credit
information service ("CreditLine"). Subscriptions for continuity services
typically continue annually or periodically unless canceled by the subscriber.
On February 16, 1996, SafeCard acquired 100% of the outstanding stock of
United Bank Services ("UBS") for $18,328,000. UBS is a provider of value-added
products and services through a diverse group of financial institutions.
Products and services offered by UBS include CardMiles, an airline frequent
flyer rewards program, rebate travel, insurance enhancements, customer loyalty
programs (designed to aid in card acquisition or increase credit card usage) and
credit card merchant reward programs (designed as packages of enhancements to be
offered by credit card merchant processors). Terms of the acquisition include
additional payments of up to $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 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 acquisition was accounted for under the purchase method and accordingly
the results of operations of UBS are included in the Company's consolidated
financial statements from the date of acquisition. In connection with the
acquisition, SafeCard recorded $14,699,000 of goodwill (excess cost over fair
value of net assets acquired) and $4,400,000 of other intangible assets. The
goodwill is being amortized over 25 years and the other intangible assets are
being amortized over 5 years. In connection with the acquisition, SafeCard
assumed $703,000 of debt which was repaid shortly after the close of the
transaction.
Revenues
Membership and subscription revenue increased 6% from $43,597,000 in the
first quarter of 1995 to $46,339,000 in the first quarter of 1996. Membership
and subscription revenue represents the amortization of advance payments
received from subscribers to SafeCard credit card enhancement continuity
services such as Hot-Line and wholesale fees received from UBS clients.
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. The
increase was primarily due to an increase in the number of subscribers to
SafeCard's CreditLine services and a resulting shift in the sales mix to higher
priced products such as CreditLine. This increase in CreditLine revenue
accounted for more than 80% of the total increase in membership and subscription
revenue. UBS revenue since the date of acquisition accounted for the remaining
increase partially offset by a small decline in Hot-Line and Fee Card revenues.
Renewal rates are computed by comparing the number of paid subscribers at
the end of the period for each subscriber campaign pool to the number of paid
subscribers at the beginning of the period. SafeCard monitors renewal rates by
product by client on a monthly basis. Renewal rates of subscribers are affected
by a variety of factors, including the number and mix of subscribers renewing,
economic factors, changes in the credit card industry and other factors, some of
which may be beyond SafeCard's control, as well as the effectiveness of
retention programs.
The following table details renewal rates at March 31, 1996 and 1995:
Subscription Product 1996 1995
-------------------- ---- ----
Single year Hot-Line 76% 76%
Multi-year Hot-Line 48% 47%
Fee Card (primarily single year) 79% 82%
CreditLine 66% 68%
The decline in Fee Card renewal rates is primarily due to the loss of
certain Texaco Star Card customers beginning in August 1995. Fee Card renewal
rates in 1996 are expected to be negatively impacted by the loss of the Texaco
contract. CreditLine renewal rates have declined as a result of a decline in
active members at certain credit card issuers. However, total CreditLine members
have increased by 10% over this same time period due to increased new marketing
of CreditLine and related products.
<PAGE>
The following table details subscriber activity for the three months ended
March 31, 1996 and 1995 for SafeCard's credit card enhancement and continuity
services.
Beginning New Ending
Subscribers Subscribers Cancellations Subscribers
--------- ----------- ------------- -----------
1996 13,172,000 868,000 (1,177,000) 12,863,000
1995 13,046,000 1,053,000 (1,075,000) 13,024,000
New subscribers represent fee-paying subscribers obtained through various
marketing channels. Free trial subscriptions which are offered periodically as a
marketing technique are excluded from the subscriber activity above.
Cancellations consist of both voluntary and involuntary membership losses.
Voluntary cancellations result from members electing to discontinue their
subscriptions. Involuntary cancellations result from the closure of credit card
accounts or other events beyond SafeCard's control. The decline in subscribers
since the beginning of the year is primarily due to the loss of the Texaco
contract as discussed above.
Membership and subscription revenues are dependent on a variety of factors
including subscription fees, net response rates (gross enrollments less
cancellations), the extent of new marketing 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.
SafeCard also generated consumer marketing revenue from its discount travel
service (including revenues contributed by UBS since the date of acquisition)
and date reminder service, including the sale of calendars and appointment
books. Consumer marketing revenue increased 30% to $3,320,000 in the first
quarter of 1996 as compared to $2,546,000 in the first quarter of 1995. The
increase in consumer marketing revenue was principally the result of the
acquisition of UBS.
Operating Income
Operating income decreased 11% to $9,271,000 in the first quarter of 1996
compared to $10,374,000 in the first quarter of 1995. The decrease in operating
income was primarily the result of margin erosion at certain large card issuer
clients, increased facilities and equipment costs and increased operating costs
at SafeCard's Jacksonville, Florida facility.
As previously reported, SafeCard signed a new five-year agreement with
Sears Roebuck & Company. In connection with this new agreement, which became
effective on January 1, 1996, Sears assumed additional marketing costs and
SafeCard's overall margin was reduced. As a result, operating margins from the
Sears relationship are expected to be lower by approximately $2,000,000 in 1996.
In addition, the loss of the Texaco contract in the second quarter of 1995 has
reduced operating margins slightly.
<PAGE>
SafeCard also experienced higher facilities and equipment expenses during
the first quarter of 1996 compared to the first quarter of 1995 due to increased
depreciation associated with capital expenditures in 1994 and 1995. During this
period, SafeCard expended approximately $11,000,000 for the expansion and
renovation of the Cheyenne, Wyoming operating center. An additional $14,000,000
was expended primarily to upgrade computer equipment and systems.
In addition, in early 1995, SafeCard began moving certain executive and
administrative functions from Cheyenne to Jacksonville. As a result of this
move, SafeCard has experienced higher facilities and employee costs as compared
to the prior year. In the first quarter of 1996, the Company decided to close
its Jacksonville, Florida operations center. As a result of this decision,
SafeCard's sales, marketing and administrative offices are being consolidated
with the Company's corporate headquarters (see CORPORATE AND OTHER - Building
Consolidation Charge below).
WRIGHT EXPRESS
Business Overview
WEX provides transaction and information processing services to oil
companies and commercial car, van and truck fleets throughout the United States.
In addition to the Wright Express Universal Fleet Card, now accepted at over
90,000 fueling locations, WEX also provides private label credit card programs
to 15 of the nation's oil companies and co-branded fleet fueling cards with 15
of the largest vehicle leasing companies.
During 1996, WEX expects to introduce a number of new and enhanced products
and services. Developed in response to customer requests, the new products and
services include secure on-line access to account data via the Internet,
multiple levels of reporting, improved exception reporting allowing for more
proactive fleet management, maintenance alerts and private site fueling using
the WEX Card.
Revenues
Card acquisition and services revenue increased 46% to $7,173,000 for the
first quarter of 1996 compared to $4,910,000 in the first quarter of 1995. Card
acquisition and services revenue is principally in the form of transaction fees
deducted from amounts remitted to retail fueling merchants and monthly fees
charged to fleet customers.
Card acquisition and services revenue varies as a result of changes in fuel
prices and the volume of fuel purchased. Average fuel prices have increased by
approximately 3% during the first quarter of 1996 compared to the same period in
1995. The volume of fuel purchased has increased from 108,000,000 gallons in the
first quarter of 1995 to 171,000,000 gallons in the first quarter of 1996, a 58%
increase. This increase in fuel purchased is the result of the continuing
expansion of WEX's customer base. Total active WEX, co-branded and private label
cards increased 60% during this period.
<PAGE>
Operating Income
Operating income increased 13% from $670,000 in the first quarter of 1995
to $758,000 in the first quarter of 1996. The increase in operating income is
due to the increase in card acquisition and services revenue, as described
above, offset by product development costs associated with the new products and
services discussed above. In addition, during the quarter WEX invested in
upgrades to its technology platform required to maintain and enhance its
competitive position. WEX has also invested in changes to its operational
structure and process flows in order to achieve significant productivity gains.
NATIONAL LEISURE GROUP
Business Overview
NLG, acquired in January 1995, provides vacation travel packages and
cruises directly to the consumer in association with established retailers and
warehouse clubs in 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. However, sales through credit card issuers and
travel clubs have become significant sources of revenue growth.
NLG operates in a very competitive marketplace and the historical growth
rate of its traditional New England market may not be sustainable. Also,
discounting by vendors and other retail travel companies has increased pressure
on NLG's operating margins. NLG is working to secure solid relationships with
and to establish distribution via the endorsed credit card channel to offset the
slower growth rate in the New England market.
Revenues
Consumer marketing revenue for NLG increased 9% from $5,627,000 for the
first quarter of 1995 to $6,132,000 in the first quarter of 1996. Revenues are
primarily generated from commissions paid by cruise lines and vacation package
wholesalers. The revenue increase was the result of strong growth in sales at
existing and new retail locations in New England. NLG also continues to explore
growth opportunities through endorsed marketing relationships. In addition, the
cold weather in the New England area during the winter months had a positive
impact on travel bookings. NLG's revenues have historically been highly seasonal
in nature with the majority of sales in the winter months (first and fourth
quarters).
Operating Income
NLG's operating income decreased 25% from $1,680,000 in the first quarter
of 1995 to $1,268,000 in the first quarter of 1996. The decrease in operating
income was principally due to significant margin pressure resulting from heavy
discounting in the travel industry as noted above. In addition, NLG has made
significant investments in technology, including the development of a
state-of-the-art reservation system, necessary to maintain an advantage in its
very competitive marketplace and to realize operational efficiencies in the
future.
<PAGE>
DEVELOPMENTAL OPERATIONS
The "Developmental Operations" column of the business units tables includes
the 1995 operating results for Ideon Marketing and Services Company and Family
Protection Network. The activities of Ideon Marketing and Services Company in
1996 are not material and have been consolidated with SafeCard. The activities
of Family Protection Network were discontinued in 1995. Revenues generated from
these developmental efforts are not material and have been netted against
operating expenses for financial statement presentation.
Loss from Developmental Operations
The Company incurred losses from developmental operations of $8,061,000 in
the first quarter of 1995. These expenses were incurred in connection with the
development and launch of the expanded PGA TOUR Partners Program and Family
Protection Network in March and April of 1995. For more information, see Ideon's
Annual Report on Form 10-K for the year ended December 31, 1995.
CORPORATE AND OTHER
Overview
Corporate and other activities resulted in a pre-tax loss of $2,268,000 in
the first quarter of 1996 compared to $4,234,000 in the first quarter of 1995.
Corporate expenditures increased during 1994 and the first half of 1995 as the
Company developed an infrastructure necessary to support previously anticipated
growth. In the third quarter of 1995, the Company restructured and significantly
reduced its corporate staff and functions to provide support services that can
only be effectively and economically performed centrally.
The corporate and other loss in the business unit table includes the following:
For the three months ended March 31, 1996 and 1995 (in thousands):
1996 1995
General corporate overhead expenses $ 2,321 $ 3,912
Building consolidation charge 2,912
Executive termination charge 2,500
Litigation and other legal expenses 1,768 1,318
Corporate research and development 177 1,821
Reversal of lease accrual (6,734)
Interest income (475) 1,864)
Other income (201) (953)
---------- -------
$ 2,268 $ 4,234
========== ========
General Corporate Overhead Expenses
General corporate overhead expenses decreased $1,591,000 (41%) for the
first quarter of 1996 compared to the first quarter of 1995. This decrease was
the result of cost reduction initiatives and the downsizing of the corporate
infrastructure in connection with the restructuring of the Company in the third
quarter of 1995. The decreases in general corporate overhead expenses for the
first quarter of 1996 include a decrease in payroll and employee related
<PAGE>
expenses of $1,722,000, a decrease in outside services of $587,000 and a
decrease in corporate operating expenses of $82,000. Offsetting these decreases
were nonrecurring expenses of $800,000 incurred in connection with the strategic
alternative evaluation process initiated by the board of directors in January
1996.
Building Consolidation Charge
In the first quarter of 1996, the Company recorded a special charge of
$2,912,000 for estimated costs related to the decision to eliminate its
Jacksonville, Florida operations center. SafeCard's sales, marketing and
administrative offices are being consolidated with the Company's corporate
headquarters staff. The charge includes a provision for the impairment of the
value of certain furniture and equipment as a result of the decision as well as
certain future minimum lease payments for the operations center.
Executive Termination Charge
On February 5, 1996, the Board of Directors terminated the employment of
the Company's former chairman and chief executive officer, Paul G. Kahn. In
connection with the termination, the Company accrued $2,500,000 for severance
and other payments due under Mr. Kahn's employment agreement. On April 18, 1996,
the Company paid Mr. Kahn in settlement of his employment agreement and Mr. Kahn
resigned from the Company's board of directors.
Litigation and Other Legal Expenses
Litigation and other legal expenses increased $450,000 (34%) during the
first quarter of 1996 compared to the same period in 1995. The increase in
litigation costs during the quarter is principally due to the trial of one of
the Peter Halmos-related matters during the first quarter. Litigation expenses
anticipated in future periods cannot be quantified as such expenses are
dependent on a number of factors beyond the Company's control (see Notes 4 and 7
of Notes to Consolidated Financial Statements and Item 1. "Legal Proceedings"
under Part II "Other Information").
Corporate Research and Development
Corporate research and development expenses decreased $1,644,000 (90%) in
the first quarter of 1996 compared to the first quarter of 1995. Corporate
research and development expenses include costs associated with developing new
products and services and new areas of business which were not directly related
to the Company's existing business units. Corporate research and development
costs in 1996 include only the costs incurred by the Company's corporate
development and acquisition function. No other indirect corporate research and
development costs (such as marketing research) are being incurred at the
corporate level.
Reversal of Lease Accrual
Included within "Accrued expenses" at December 31, 1995 was a disputed
liability recorded in 1992 of $10,534,000 relating to the Company's estimated
net obligation under a contested lease of its former Ft. Lauderdale, Florida
headquarters. In March 1996, the Company reached a settlement with Peter Halmos,
the lessor (see Note 7 of Notes to Consolidated Financial Statements), which
resulted in the payment of $3,800,000 to Halmos. The net remaining accrual of
$6,734,000 was reversed in the first quarter of 1996 as a result of the
settlement of the lawsuit arising from the contested lease.
<PAGE>
Interest and Other Income
Interest income decreased $1,389,000 (75%) in the first quarter of 1996
compared to the first quarter of 1995. Interest income is primarily derived from
earnings on the Company's municipal bonds and U.S. Treasury securities
portfolio, as well as earnings on cash invested in money market funds. The
decrease in interest income is due to lower levels of investment holdings during
the period as the Company redeployed its investment resources to fund the launch
of new businesses and the acquisitions of NLG in the first quarter of 1995 and
the acquisition of UBS in the first quarter of 1996.
Other income decreased by $752,000 (79%) from first quarter of 1995 to
first quarter of 1996 principally due to a decline in realized gains on sales of
securities as the volume of securities transactions has decreased significantly.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash used in operating activities was $5,601,000 in the first quarter of
1996 compared to $2,874,000 in the first quarter of 1995. The decrease in cash
flow from operations is principally the result of a $2,789,000 decrease in
interest received due to significantly lower investment balances in 1996
compared to 1995. In addition, cash received from subscribers/customers
decreased $2,252,000 and income tax refunds received, net of payments decreased
$1,775,000. Offsetting these changes was a decrease in cash paid to suppliers
and employees of $4,089,000.
The decrease in cash received from subscribers/customers is principally due
to an increase in accounts receivable for credit card enhancement continuity
services. Net billings for credit card enhancement continuity services were
$50,683,000 in the first quarter of 1996 compared to $46,550,000 in the first
quarter of 1995. This increase in net billings in the first quarter of 1996
compared to the first quarter of 1995 was primarily due to increased marketing
activities in the latter half of 1995 and the timing of merchandise billings.
The decrease in cash paid to suppliers and employees was primarily due to
reductions in expenditures for research and product development, the operations
of Ideon Marketing and Services and Family Protection Network and general
corporate overhead. These decreases were partially offset by payments made
related to the product abandonment and restructuring liabilities incurred in
1995 and a $3,800,000 payment made in settlement of a contested lease in March
1996 (see Notes 4 and 7 of Notes to Consolidated Financial Statements).
Expenditures for subscriber acquisition costs decreased $4,559,000 in the first
quarter of 1996 as compared to the first quarter of 1995. The volume and type of
subscriber acquisition expenditures, as well as enrollments, fluctuate
periodically and such fluctuations are not unusual. Due to timing differences
between periods, there may not always be a direct correlation between subscriber
acquisition expenditures and new enrollments in a particular period. In
addition, historical response rates may not be an indication of future response
rates. Offsetting the decrease in expenditures for subscriber acquisition costs
was a $4,832,000 increase in commissions paid to credit card issuers. The
increase in commissions paid was related to the increase in net billings for
credit card enhancement continuity services as discussed below.
<PAGE>
INVESTING ACTIVITIES
Cash used in investing activities was $2,360,000 in the first quarter of
1996 compared to $36,753,000 provided by investing activities in the first
quarter of 1995. Proceeds from sales and maturities of investment securities,
net of securities purchased decreased $41,899,000 in the first quarter of 1996
as compared to the first quarter of 1995. As previously discussed, the Company
redeployed a significant portion of its investment resources into the launch of
new businesses and the acquisitions of NLG and UBS. The Company paid $12,977,000
(net of cash acquired) to acquire the net assets of NLG in the first quarter of
1995 and $18,471,000 (net of cash acquired) to acquire the outstanding stock of
UBS in the first quarter of 1996 (see Note 2 of Notes to Consolidated Financial
Statements).
The Company also expended $8,280,000 less for capital assets in the first
quarter of 1996 than in the first quarter of 1995, principally due to SafeCard's
expansion and renovation of its operations center in Cheyenne, Wyoming, which
was completed in 1995.
FINANCING ACTIVITIES
Cash flow provided by financing activities was $2,339,000 in the first
quarter of 1996 compared to $856,000 in the first quarter of 1995. The increase
in cash flow provided by financing activities was largely due to an increase of
$2,195,000 of net borrowings on WEX's revolving credit facility. The borrowings
are a part of WEX's working capital management structure and are required
periodically to fund its accounts receivable. The increase in cash flow provided
by financing activities was offset by the repayment of $703,000 of debt acquired
in connection with the acquisition of UBS.
LIQUIDITY
Historically, the Company has generated the cash needed to finance its
operations and growth from its operations. The Company's primary liquidity
requirements are to fund membership and subscriber acquisition marketing
programs, business acquisitions such as UBS and payments required under the
product abandonment and restructuring liabilities incurred in 1995. In addition,
WEX 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.
<PAGE>
As a result of the abandonment of certain product development efforts
previously discussed and the restructuring of 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 on management's best estimates and is subject to change as the
restructuring plan continues to be implemented. Management believes that this
estimate is adequate to cover the estimated costs associated with the product
abandonments and related restructuring liabilities. During the first quarter of
1996, the Company paid $6,526,000 related to its product abandonment and
restructuring efforts. As of March 31, 1996, the remaining product abandonment
and restructuring liability was $14,270,000, the majority of which is expected
to be utilized in 1996.
As a result of the Company's net operating loss for the tax year ended
October 31, 1995, the Company has filed a carryback claim for a refund of
federal tax payments made in previous years. The Company expects to receive a
refund of approximately $17,400,000 during the second quarter of 1996 as a
result of the carryback claim.
In March 1996, the Company paid $3,800,000 in settlement of a lawsuit
related to a contested lease (see Notes 4 and 7 of Notes to Consolidated
Financial Statements). The amount of litigation and other legal 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 its cash and
investment balances are adequate to meet the Company's current and long-term
liquidity needs. In addition, the Company believes that WEX's revolving credit
facility is adequate to meet its current working capital needs.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending or prosecuting eleven complex lawsuits involving
Peter Halmos, former Chairman of the Board and Executive Management Consultant
to the Company, and parties related to him as adversaries. These lawsuits and
three others involving the Company and its subsidiaries are described in Note 7
of Notes to Consolidated Financial Statements under Part I. "Financial
Information."
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11(a) Computation of Primary Earnings Per Share
11(b) Computation of Fully Diluted Earnings Per Share
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K
On February 6, 1996, the Company announced the appointment of
Eugene Miller, one of its outside directors, as chairman of
the board and chief executive officer replacing Paul G.
Kahn.
On February 20, 1996, the Company announced the completion of
its acquisition of United Bank Services, a leading provider of
value added products and services through a diverse group of
financial institutions. Terms of the acquisition included $18
million in cash and up to $12 million over the next three
years in additional consideration based on performance and the
fulfulliment of certain conditions. Additionally, the sellers
are eligible to receive 50% of the first three years' profit
(not to exceed $10 million) of an international joint venture.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEON GROUP,INC.
(Registrant)
Date: May 13, 1996 /s/ Eugene Miller
-----------------------
Eugene Miller
Chairman of the Board
and Chief Executive Officer
Date: May 13, 1996 /s/ G. Thomas Frankland
-----------------------
G. Thomas Frankland
Vice Chairman and
Chief Financial Officer
Exhibit 11(a)
Computation of Primary Earnings Per Share
Three Months Ended
March 31, March 31,
1996 1995
(Unaudited)
Net income $ 5,869,000 $ 301,000
Adjustment(1) (23,000)
-------------- --------------
Adjusted net income $ 5,869,000 $ 278,000
============== ==============
Average common shares
outstanding 27,982,000 29,166,000
Assumed common stock
equivalent shares (2) 115,000 704,000
-------------- --------------
Total weighted average number
of common and common
equivalent shares 28,097,000 29,870,000
============== ==============
Earnings per share $ .21 $ .01
(1) The adjustment to net income represents goodwill amortization, net of
taxes, related to the additional purchase price for National Leisure Group
assuming the contingent issuance of common shares of the Company's common
stock. The shares are issuable upon the performance of certain earnings
hurdles by National Leisure Group.
(2) Earnings per share are computed using the weighted average number of shares
of common stock and common stock equivalents (common stock issuable upon
exercise of stock options) outstanding. In computing earnings per share,
the Company utilizes the treasury stock method. This method assumes that
stock options, under certain conditions, are exercised and treasury shares
are assumed to be purchased from the proceeds using the average market
price of the Company's common stock for the period.
Exhibit 11(b)
Computation of Fully Diluted Earnings Per Share
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31, March 31,
1996 1995
(Unaudited)
Net income $ 5,869,000 $ 301,000
Adjustment(1) (23,000)
-------------- --------------
Adjusted net income $ 5,869,000 $ 278,000
============== ==============
Average common shares
outstanding 27,982,000 29,166,000
Assumed common stock
equivalent shares(2) 116,000 734,000
-------------- --------------
Total weighted average number
of common and common
equivalent shares 28,098,000 29,900,000
============== ==============
Earnings per share(3) $ .21 $ .01
============== =============
</TABLE>
(1) The adjustment to net income represents goodwill amortization, net of
taxes, related to the additional purchase price for National Leisure Group
assuming the contingent issuance of common shares of the Company's common
stock. The shares are issuable upon the performance of certain earnings
hurdles by National Leisure Group.
(2) Earnings per share are computed consistent with footnote (2) on Exhibit
11(a) - Computation of Primary Earnings Per Share except in computing
fully diluted earnings per share, the treasury stock method uses the
market price of the Company's common stock at the close of the period
rather than the average market price during the period.
(3) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
Exhibit 15
May 13, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that Ideon Group, Inc. has included our report dated April 29,
1996 (issued pursuant to the provisions of Statement on Auditing Standards No.
71) in the Prospectus constituting part of the Registration Statements on Forms
S-3 and S-8 (Nos. 33-51439 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).
We are also aware of our responsibilities under the Securities Act of 1933.
PRICE WATERHOUSE LLP
Tampa, Florida
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