1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2 to 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
----------------- -------
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 - 37
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
Financial Statements(1):
Report of Independent Certified Public Accountants 3
Consolidated Balance Sheet as of December 31, 1995 and 1994 4
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 5
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 6
Consolidated Statement of Cash Flows for the
year ended December 31, 1995, the two months
ended December 31, 1994 and the two years
ended October 31, 1994 7
Notes to Consolidated Financial Statements 8-34
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 35
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<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 product 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
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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 unrealized 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
onsolidated 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 suppliers 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 purchase 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
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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.
Consolidated Statement of Operations
Two Months Ended
December 31, 1993
(unaudited)
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
<PAGE>
Consolidated Statement of Cash Flows
Two Months Ended
December 31, 1993
(unaudited)
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
================
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
================= ============ ============ ===============
December 31,
1994
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
Tax-exempt municipal bonds $ 159,473,000 $ 159,473,000
Other 193,000 193,000
----------------- ------------ ------------ ---------------
$ 159,666,000 $ 159,666,000
================= ============ ============ ===============
Maturities of the Company's investment portfolio at December 31, 1995 were as
follows:
Carrying Market
Value Value
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>
<PAGE>
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)
----------------- ---------------- ---------------- -----------------
Total $ (27,801,000) $ (26,075,000) $ 6,178,000 $ 10,968,000
</TABLE>
<PAGE>
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,
1995 1994 1994 1993
<S> <C> <C> <C> <C>
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:
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)
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:
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
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
<PAGE>
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. 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. The Company is unable to estimate the potential loss or
range of loss, if any, with respect to these litigation matters.
<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 Year Ended
December 31, December 31, 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 chang
in accounting for income taxes (2,000,000)
Amortization of investmen
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>
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>
<TABLE>
<CAPTION>
SAFECARD SERVICES, INC. AND SUBSIDIARIES
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:
Year ended December 31, 1995
<S> <C> <C> <C> <C> <C>
Accounts receivable $ 1,744,000 $1,151,000 $ 90,000 a $ (990,000) f $ 1,995,000
Defered 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) 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/ G. Thomas Frankland
G. Thomas Frank
Vice Chairman and
Chief Financial Officer
June 20, 1996
