Item 1. BUSINESS - ------- --------
Background
SafeCard Services, Incorporated ("SafeCard" or the "Company") is an information based services company that delivers added value offerings to identifiable high growth markets and serves over 150 credit card issuers and more than 13 million subscribers. The Company has embarked on a diversification program designed to transform itself from a single unit credit card enhancement provider into an innovative marketing and servicing organization operating through multiple strategic business units.
SafeCard is a Delaware corporation organized in 1969. During 1992, the Company relocated its headquarters and operational facility from Ft. Lauderdale, Florida to Cheyenne, Wyoming. The Company's executive offices are currently located at 3001 E. Pershing Blvd., Cheyenne, Wyoming, 82001, and its telephone number is (307) 771-2700. The Company has announced its intention to officially relocate its corporate headquarters from Cheyenne, Wyoming to Jacksonville, Florida in May 1995 following its Annual Meeting of Stockholders. This move will not impact the operational facility in Cheyenne. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.
SafeCard has historically been in the business of selling subscriptions by mail and telephone for continuity services that it provides to subscribers. Continuity services are services provided pursuant to subscriptions which typically continue annually or periodically unless canceled by the subscriber. Subscriptions are primarily sold to credit cardholders through arrangements with credit card issuers, including banks and financial services companies, major oil companies, retail department stores and others. Subscriber acquisition material printed for the Company that describes its services and how to subscribe is inserted in the credit card issuer's monthly billing statements or mailed by the Company directly to credit cardholders. Credit cardholders are also asked to subscribe by means of telemarketing calls. Subscription fees of $15 to $45 are generally billed to subscribers' credit card accounts and remitted to the Company by the credit card issuer.
The Company's principal service is credit card registration and loss notification ("Hot-Line"), whereby the Company gives prompt notice to credit card issuers upon being informed that a subscriber's credit cards have been lost or stolen. Other continuity services offered by the Company include
those related to fee-based credit cards, reminder services, a personal credit information service and a discount travel service. Certain of the Company's services include incidental insurance coverage underwritten by its insurance subsidiary.
In 1993 and 1994, the Company also began placing greater emphasis on the development of new products and services and additional lines of business. The Company's strategy is to diversify and broaden its scope to become an innovative marketing and servicing organization operating through multiple strategic business units. To accomplish this strategy, the Company named a new senior management team, expanded and enhanced the infrastructure of the Company and accelerated the development of new products and services and new areas of business. In 1994, the Company incurred significant research and product development expenses in developing these new products and new areas of business. While expansion of the business and the development of new areas of business has not contributed significantly to revenues in 1994, the Company expects to begin recognizing revenues from certain of these new products and businesses in 1995.
In September 1994, SafeCard acquired Wright Express Corporation ("Wright Express"), a leading provider of information processing, management and financial services to petroleum companies and transportation fleets in the United States. The Wright Express Universal Fleet Card is the nation's most widely accepted electronic fleet fueling credit card and is accepted at approximately 90,000 fueling locations.
SafeCard is also developing a credit card marketing and servicing business. In November 1994 the Company entered into an exclusive multi-year marketing and servicing agreement with the PGA Tour. The Company will manage the PGA Tour Partners program which will include a co-branded credit card funded by SunTrust BankCard, N.A. The Company will also provide card acquisition and customer servicing to SunTrust. The Company hopes to expand this business by partnering with other national brands.
For information regarding the Company's results of operations and financial condition, see Item 6. Selected Financial Data, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
References herein to the years 1994, 1993 and 1992 refer to the Company's fiscal years ended October 31.
Credit Card Enhancement Services
Hot-Line Credit Card Loss Notification Service
Hot-Line is the Company's original service and has been its major source of revenue and earnings. Through the Hot-Line program, a subscriber registers his/her credit cards with the Company. If a subscriber notifies the Company of the loss or theft of his/her credit cards, the Company retrieves (or, if cards have not previously been registered, obtains) the necessary card registration information, and then promptly notifies the credit card issuers of the loss, simultaneously requesting replacement. The Company generally charges an annual membership fee of $15 for a single year subscription. The Company also sells multi-year subscriptions, generally for three year periods at a price of $39 to $45, which provide for payment in advance of the full subscription price. The Company sometimes offers to subscribers an initial trial period at either no fee or a nominal fee.
In most states Hot-Line includes liability insurance against fraudulent use of credit cards, issuance of fraud-deterrent stickers to be affixed to credit cards, notification to card issuers of a subscriber's address change, and in some instances, issuance of an emergency medical card containing a microfilm history of certain medical data provided by the subscriber. The Company will also wire a $100 to $1,500 cash advance or send an airplane ticket to subscribers under certain conditions. Such advances and the cost of such tickets are typically repayable in thirty days. Other services available to subscribers include a nationwide toll-free message service (similar to an answering service) and a lost key return service.
During 1994, 1993 and 1992, Hot-Line provided 70%, 73% and 73%, respectively, of the Company's subscription revenue. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Fee-Based Credit Card Services
The Company, through arrangements with certain credit card issuers, markets fee-based credit cards ("Fee Card") on behalf of the issuer, generally to the issuer's existing no fee cardholders. For an annual fee of $15 to $25, cardholders who elect to subscribe to the fee-based credit cards typically receive a new credit card (to replace the no fee card) and various services such as credit card registration, discounts on travel, insurance and other services provided or obtained by the Company. The card issuer is responsible for the collection of all charges made to the credit card and may also provide additional services to the cardholder. During 1994, 1993 and 1992, Fee Card programs provided 15%, 13% and 12%, respectively, of the Company's subscription revenue. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Reminder Services
The Company also offers date reminder services ("Reminder Services") which provide subscribers, by mail, a monthly computer-generated reminder listing personal dates and events registered by the subscriber in addition to standard holidays. Subscribers add dates and events as desired, either by mail or by calling the Company's operations center. The Reminder Services include either a large plastic-laminated wall calendar, and/or a personal Desk Appointment Book and/or a Pocket Appointment Book. During 1994, 1993 and 1992, Reminder Services provided less than 10% of the Company's subscription revenue.
CreditLine Services
CreditLine is a personal credit information service. Subscribers receive a comprehensive personal credit report biography either annually or upon request. The subscriber's credit information is obtained from national credit bureaus and reorganized into a user-friendly format. The annual fee is typically $29. The Company also sometimes markets CreditLine in conjunction with other services at higher prices. The credit reporting business is subject to existing regulation, as well as possible future regulation. During 1994, 1993 and 1992, CreditLine Services provided less than 10% of the Company's subscription revenue.
The Company began marketing CreditLine in 1989. The Company marketed CreditLine pursuant to an agreement (the "CreditLine Agreement") with CreditLine Corporation, a corporation owned by Peter and Steven J. Halmos, the Company's co-founders, and their families. Profits or losses are shared 50% by the Company and 50% by CreditLine Corporation. In June 1993, the Company was notified by CreditLine Corporation that the license agreement under which the Company markets certain credit information products and services known as CreditLine would not be renewed effective November 1, 1993.
However, the Company believes it has certain continuing marketing rights under the license agreement. The CreditLine Agreement is the subject of litigation between Peter Halmos and related entities and the Company. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 12 and 14 of Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.
Discount Travel Service
The Company offers a discount travel service, either separately or in conjunction with other programs. During 1994, 1993 and 1992, this service provided less than 10% of the Company's subscription revenue.
Subscriber Acquisition
The Company sells subscriptions for its products and services primarily through arrangements with credit card issuers to consumers who use credit cards. The Company's subscriber acquisition strategy includes direct mail (generally "Solo Mailings" and "Billing Inserts") and telephone sales. The Company's subscriber acquisition campaigns are typically based on internally-developed strategies, research, formats, copy and graphics and often include multiple solicitations within an overall strategy.
The Company's Solo Mailings are generally those created and mailed directly by the Company to holders of credit cards from listings supplied to the Company by the issuers of such credit cards. The printing is typically done by others under contract with SafeCard. While Solo Mailings vary in type and content, they generally include a descriptive brochure, a letter and other subscriber acquisition materials, as well as a postage-paid return
subscription form. Each Solo Mailing typically must be approved by the credit card issuer and generally contains materials (i.e., letter, envelope, etc.) bearing the credit card issuer's name and logo.
Billing Inserts are generally created by the Company and printed by others under contract and are inserted in the monthly billing statements of credit card issuers. Billing Inserts have the advantage of low cost (because postage is generally paid by credit card issuers). Each Billing Insert mailing typically must be approved by the credit card issuer. Due to the comparatively low cost of Billing Inserts and the limitation on the number of inserts which may be placed in any single billing statement, there is intense competition for insert space among providers of credit card enhancements.
The current average cost of Solo Mailings is approximately $230 per thousand pieces of mail, as compared with about $30 per thousand pieces for Billing Inserts. While Solo Mailings are more costly, primarily due to the fact that the Company pays the postage, Solo Mailings typically generate a higher response rate. In addition, Solo Mailings may be sent to all cardholders of a card issuer, whereas Billing Inserts are mailed only to cardholders who are receiving a statement in the month of insertion. A U.S. postal rate increase takes effect in 1995. Since postage represents the largest component of direct mail cost, this will have a direct impact on the Company by increasing subscriber acquisition costs.
The Company also sells subscriptions (primarily Hot-Line) by telephone. Although the cost of telephone sales is typically higher, as compared to Solo Mailing and Billing Inserts, the response rates are generally higher and the initial subscription period for telephone sales is often for more than one year, with payment to the Company in advance. Mailings result in both single year and multi-year subscribers, with a larger percentage being single year.
During 1994, 1993 and 1992, approximately 50%, 54% and 58%, respectively, of all subscriptions for Hot-Line were acquired through telephone sales. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Subscriber acquisition costs are the Company's largest expense. Subscriber fees are the primary source of revenue. The relationship of these costs to subscription revenues is dependent on a variety of factors including prices, net response rates (gross enrollments less cancellations), marketing costs and renewal rates. These factors are affected by economic conditions, interest rates, the number of credit cards in use, demographic trends, consumers' propensity to buy, the degree of market penetration and the effectiveness of subscriber acquisition concepts, copy and marketing strategies. In addition, cardholders of certain credit card issuer clients respond more favorably than others to similar promotions. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Relationships with Credit Card Issuers
The Company acquires its subscribers primarily through contractual arrangements with credit card issuers (including banks and financial services companies, major oil companies, retail department stores and others) for the mail and telephone sales of its products and services to the issuers' credit card customers. The Company also provides, to a limited extent, on a wholesale basis, its services to large membership groups which are affiliated with credit card issuers, such as oil company travel clubs. New marketing with particular credit card issuers varies from year to year based on both the Company's and the credit card issuer's strategies as well as contractual requirements.
The Company has written agreements with a few 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 Citicorp (South Dakota), N.A. and related entities contributed 30%, 34% and 37% of the Company's consolidated subscription revenue in 1994, 1993 and 1992, respectively. The Company has had contracts with Citicorp since 1981. The principal Citicorp contract, as amended, expires December 31, 1999. Citicorp has a right to terminate the contract in the event of the sale of a majority of the shares of the Company to specified credit card issuers, to banks and their corporate affiliates and to entities that do not have equity of at least $25 million.
Contracts with Sears, Roebuck and Co. contributed approximately 12% and 11% of the Company's subscription revenue during 1994 and 1993, respectively (and less than 10% in 1992). The agreement, which contains a provision for cancellation without cause upon 90 days notice, is subject to renewal annually.
The Company's contracts with credit card issuers generally (though not always) have a one-year or two-year initial term, provide for automatic annual renewal thereafter unless canceled by either party, and are subject to the fulfillment of certain contractual obligations. These contracts generally provide for the mail and/or telephone sales of subscriptions to the issuer's credit card customers, for the billing (to the subscriber's credit card account) and collection of subscription fees by the card issuers and for payment to the card issuers of commissions or fees. In certain cases, the Company enters into profit-sharing arrangements with credit card issuers, in which the Company pays compensation to credit card issuers based on profitability (as defined in the agreement with the credit card issuer) in lieu of commissions.
Authorization for each mailing and/or telephone sales campaign typically must be obtained by the Company from the card issuer, although some contracts contain minimum marketing volume requirements. The Company's ability to obtain such authorization is critical and is dependent on many factors, including the business strategies of the credit card issuer clients; the volume, profitability and efficiency of subscriber acquisitions; quality and efficiency of the Company's subscriber servicing; and competition for the limited subscriber acquisition volume which may be allowed by any one issuer. Additional important factors in the maintenance of these contracts are the Company's knowledge of the differing operational requirements of each credit card issuer, including compatible data processing software, innovative subscriber acquisition strategies, operational efficiency and financial stability.
Credit card issuers from time to time may adopt a change in business strategy which may affect the Company. For example, in October 1993, Shell Oil Company and a major bank announced the joint marketing of a co-branded credit card. In addition, certain consolidations of credit card issuers and market share shifts have occurred and may continue to occur. To date, the Company has not noted any material impact as a result of these changes in business strategy.
The Company generally does not have proprietary or other rights to the issuers' credit card customer lists should a credit card issuer terminate its contract with the Company. In that event, with the majority of issuers, the Company would continue to provide services to, and receive its revenue from, existing subscribers after termination. The Company's right to continue to bill existing subscribers after termination of the client contract generally continues as long as there is an active credit card or until such subscribers cancel their subscriptions or for certain contractually specified periods of time.
Competition
Competition in securing contracts with credit card issuers for sales of subscriptions to the issuers' cardholders -- i.e., the third party endorsed segment of the credit card industry -- is intense. Among the factors affecting the outcome of such competition are the quality and reliability of the services to be offered, subscriber acquisition strategy and expertise (which is highly dependent upon creative talents), operational capability, reputation, financial stability of the company supplying the services, the confidence of credit card issuers in management of the Company and the compensation or fee paid to the credit card issuer. Additionally, the Company must maintain security over credit card and credit data of which it has custody.
The Company believes it has greater than 50% of the market share (within the United States) for credit card registration. Competitors in the credit card registration business include Signature, CUC International, American Express and others. Fee-based credit cards are sometimes directly marketed and/or serviced by certain credit card issuers. Certain national credit bureaus, as well as CUC International, offer or have offered personal credit information services in competition with CreditLine. CreditLine is dependent upon the purchase of consumer credit data from such credit bureaus and there is no other comparable source for such data. In addition, some of the new products and services which the Company may be exploring, developing or testing, are currently marketed by competitors. The Company's competition is not limited to companies offering similar products and services. Since the Company competes for "advertising space" of various credit card issuers, it competes with companies who market other products and services through credit card issuers. Certain of the Company's competitors may have greater resources and/or other competitive advantages.
The Company's competition is not confined to any particular region of the country.
Wright Express Corporation
On September 14, 1994 the Company acquired 100% of the outstanding common stock of Wright Express, a leading provider of enhanced information services to oil companies and commercial transportation fleets. The acquisition of Wright Express was accounted for under the purchase method and, accordingly, the results of operations of Wright Express are included in the consolidated results of operations of the Company from the date of acquisition. See Note 2 to Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.
Wright Express Universal Fleet Card
Wright Express provides transaction and information processing services to commercial fleet owners through a national credit card network program, the Wright Express Universal Fleet Card (the "WexCard"). These services are generally provided through fueling stations which are owned and operated by retail petroleum merchants. The WexCard is accepted at approximately 90,000 fueling locations in the United States including those operated by Mobil, Texaco, Exxon, Shell and Getty. Wright Express also manages private label fleet charge cards and co-branded WexCard fleet fueling cards for large fleet
operators such as BellSouth (its largest fleet customer with over 26,000 vehicles), DHL, Airborne Express, Federal Express and Sears.
In providing services through the WexCard, Wright Express generates receivables from its fleet customers. These receivables relate to payments due from fleet customers for purchases at fueling stations that accept the WexCard. These receivables are funded through a revolving credit agreement and payables to retail petroleum merchants and are the cause of the significant increase in consolidated receivables over the prior year. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Vehicle Analysis Report
In addition to the convenience of electronically charging fuel purchases, the WexCard includes a proprietary "Vehicle Analysis Report" designed to assist fleet managers who monitor and control expenses. The report can be generated on a vehicle and/or driver specific basis providing information to managers regarding both driver and vehicle performance.
WexIndex
WexIndex is a new product being developed by Wright Express. This product will make use of the vast amount of fuel and transaction data accumulated by Wright Express on a daily basis. Wright Express will analyze, interpret and format this data into a series of ongoing reports so that economists, fleet managers, oil companies and government agencies can make accurate projections of fuel consumption and retail prices.
Competition
Wright Express operates in a market niche with little direct competition. Competition primarily exists in the form of oil company credit cards. The key factor in distinguishing Wright Express from other credit card issuers that are accepted by retail petroleum merchants is the array of ancillary information processing services that are offered in addition to the basic credit card service
New Products and Businesses Under Development
In 1993 and 1994, the Company began placing greater emphasis on the development of new products and services and areas of business. The Company is focusing on four areas which management believes will be high growth sectors of the economy--security and convenience, travel and leisure, consumer direct merchandising, and financial management and planning.
Consumer Marketing and Servicing
Consistent with this focus, the Company entered into an exclusive multi- year licensing, marketing and servicing agreement in 1994 with the PGA Tour.
Under the agreement, the Company will manage and expand the existing PGA Tour Partners program. Under the program, the Company, in conjunction with the PGA Tour, will offer access to PGA Tour events, special members only tournament play, golf clinics instructed by PGA Tour players and other services.
In addition, the Company will offer a co-branded PGA Tour Partners credit card issued through SunTrust BankCard, N.A. The Company will be responsible for card acquisition and customer servicing while SunTrust will fund the card receivables.
Although it is the Company's desire to add additional brands, competition is significant in the rapidly growing credit card marketing and servicing industry. There can be no assurance as to the success of these ventures.
Other New Products and Services
Other new products and services are in various stages of development. It should be noted that a risk exists that new products and services being developed and test marketed may not be successful or may never be brought to market. During 1994, the Company recorded research and development costs of $7,682,000 in connection with the development of new products and areas of business.
In addition to the new services being developed above, the Company is continuously seeking and evaluating acquisition candidates that will complement and enhance the Company's strategic focus.
Employees
As of December 31, 1994, the Company employed 779 persons (including 31 part-time employees), as compared to 435 employees (including 12 part-time employees) as of December 31, 1993.
Other Information
Printing of subscriber acquisition materials is generally contracted to commercial printers. The Company copyrights most of this material and registers its trademarks. Telephone sales are made using the services of independent contractors with the Company developing and dictating sales strategies, methods and controls. These strategies, methods and controls are subject to approval by the credit card issuers. Currently, the Company has contracted with several independent telemarketing contractors, with one such contractor accounting for the majority of the volume, to execute its telephone sales using scripts and procedures provided by the Company. There are other independent telephone sales contractors who could provide similar services for the Company.
Certain copyrights and trademarks of the Company, such as the names "Hot-Line" and "Wright Express Universal Fleet," may be material to its business. The earliest expiration date of any such copyright is 2002. Various trademarks of the Company are registered under applicable federal law. These trademarks, which expire periodically, are subject to renewal, and the Company presently intends to renew all such trademarks. The agreement pursuant to which the Company marketed CreditLine provided that logos, trademarks, tradenames, service marks and copyrights do not belong to the Company. This agreement is subject to litigation. In June 1993, the Company was notified by CreditLine Corporation, that the license agreement under which the Company markets certain credit information products and services would not be renewed on November 1, 1993. See Note 14 of Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data and Item 13. Certain Relationships and Related Transactions.
No security systems/procedures are foolproof. Due to the nature of the Company's business, many aspects of the Company's operations involve some degree of security risk. The Company views security as a significant function, a breach of which could have a material adverse impact on the Company. As such, the Company places a great deal of emphasis on the security of its assets and information.
The Company's business is not generally seasonal in nature, except that the Company avoids subscriber acquisition campaigns prior to and during certain holiday periods, i.e., Thanksgiving, Christmas and Independence Day.
The Company's cash receipts and disbursements are also related to the timing of advertising campaigns.
All raw materials, primarily paper, plastic and printer's ink, are readily available.
Subscribers to the Company's services are entitled to receive the benefits of their subscriptions immediately; consequently, the Company has no backlog.
Compliance with Federal, State and local laws and regulations which have been enacted or adopted with respect to protecting the environment is not expected to have a material impact on capital expenditures or operations of the Company.
The Company's operations for mail and telephone sales are conducted on a nationwide basis and the Company does not derive its revenue from any particular geographic area of the United States. During the period 1992 through 1994, the Company did not conduct any significant operations, nor derive any material portion of its sales or revenue, from subscribers in foreign countries.
Item 2.
Item 2. PROPERTIES
During 1992, the Company relocated its headquarters and operational facility from Ft. Lauderdale, Florida to Cheyenne, Wyoming where it owns and occupies an approximately 115,000 square foot building on approximately 17 acres. The Company is currently expanding its Cheyenne facility, adding approximately 28,000 square feet. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
During 1994, the Company leased approximately 60,000 square feet of office space and operational facilities in Jacksonville, Florida for certain executive officers and personnel associated with the development of new businesses. Two leases totaling an additional 50,000 square feet in Jacksonville, Florida, were entered into in November and December 1994. In December 1994, the Company announced its intention to move its corporate headquarters to Jacksonville, Florida in May 1995. This move will not impact the Cheyenne operational facility. Also in December 1994, the Company announced that it had agreed in principle to purchase the American Express Regional Operating Center in Jacksonville, Florida to serve as headquarters and an operations center. The building has approximately 350,000 square feet located on approximately 60 acres and will eventually replace the 110,000 square feet of leased space.
Wright Express currently leases a 33,000 square foot building in Portland, Maine which serves as its headquarters and operational facility.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is defending or prosecuting five complex lawsuits against Peter Halmos, former Chairman of the Board and Executive Management Consultant to the Company, and parties related to him. See Note 14 of Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data.
The Company is involved in certain other claims and litigation, which are not currently considered material.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the symbol "SSI". The following table sets forth the quarterly high and low sales prices of SafeCard's common stock as reported on the New York Stock Exchange as well as cash dividends paid during the two years ended October 31, 1994: Dividend Quarter Ended High Low Paid
January 31, 1994 20.75 11.50 $.05 April 30, 1994 20.00 16.00 $.05 July 31, 1994 19.00 14.13 $.05 October 31, 1994 17.00 13.75 $.05
January 31, 1993 10.38 8.00 $.05 April 30, 1993 13.13 9.88 $.05 July 31, 1993 13.75 11.63 $.05 October 31, 1993 14.00 11.75 $.05
The closing price of the Company's stock on December 30, 1994 was $18.875.
The Company had 942 stockholders of record on December 30, 1994.
(1) During 1994, the Company recorded a $2,000,000 benefit ($.07 per share) resulting from a change in its method of accounting for income taxes.
(2) During 1994, the Company recognized $4,257,000 of income from the settlement of two lawsuits. In addition, Wright Express contributed $2,107,000 in other operating revenues in 1994. During 1992, the Company recognized $550,000 of income from the settlement of a lawsuit.
(3) During 1993, the Company repurchased approximately 3,470,000 shares of its common stock at a cost of approximately $41,699,000 (see Liquidity and Capital Resources under Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References herein to the years 1994, 1993 and 1992 refer to the Company's fiscal years ended October 31. On December 14, 1994 the Company announced that it would change its fiscal year-end from October 31 to December 31. The change in year-end was approved by the Board of Directors on December 8, 1994.
Results of Operations
Subscription Revenue, Net
Year ended October 31, 1994 1993 1992
$173,434,000 $156,600,000 $146,265,000
The Company's subscription revenue is derived from payments by subscribers for its credit card enhancement continuity services and is reported net of an allowance for cancellations. Billings for subscriptions, as well as expenditures for subscriber acquisition costs and commissions, are deferred and amortized to revenue or expense, as applicable. Billings and commissions are amortized over the related subscription periods while subscriber acquisition costs are amortized over the estimated future periods benefited (estimated life of the subscriber). For a description of the Company's accounting policies see Note 1 of Notes to Consolidated Financial Statements under Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
Financial Statements:
Report of Independent Accountants 25 Consolidated Balance Sheet as of October 31, 1994 and 1993 26 Consolidated Statement of Earnings for the three years ended October 31, 1994 27 Consolidated Statement of Changes in Stockholders' Equity for the three years ended October 31, 1994 28 Consolidated Statement of Cash Flows for the three years ended October 31, 1994 29 Notes to Consolidated Financial Statements 30-46
Financial Statement Schedules:
For the three years ended October 31, 1994 VIII - Valuation and Qualifying Accounts 53
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SafeCard Services, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of SafeCard Services, Inc. and its subsidiaries at October 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three 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 14 to the consolidated financial statements, the Company's former Executive Management Consultant has asserted certain claims against the Company. The ultimate outcome of these claims cannot presently be determined.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" in November 1993.
PRICE WATERHOUSE LLP Denver, Colorado December 5, 1994
SafeCard Services, Inc. Consolidated Balance Sheet (in thousands, except share data)
October 31, 1994 1993
Assets Cash and cash equivalents $ 17,921 $ 3,335 Investment securities 166,704 Securities available for sale 166,612 Receivables, net 42,449 12,846 Income taxes receivable 2,114 5,252 Deferred subscriber acquisition costs and related commissions 195,397 180,937 Property and equipment, net 16,410 8,420 Excess of cost over fair value of net assets acquired 28,739 Other assets 2,191 793 ------- ------- Total assets $471,833 $378,287 ======= =======
Liabilities and Stockholders' Equity
Liabilities Accounts payable $ 30,833 $ 14,961 Accrued expenses 24,654 16,573 Subscribers' advance payments 158,554 142,063 Allowance for cancellations 7,656 8,893 Deferred income taxes 20,751 38,102 Notes payable to bank 11,793 ------- ------- Total liabilities 254,241 220,592
Stockholders' Equity Common stock--authorized 35,000,000 shares ($.01 par value); 34,946,000 shares issued (34,196,000 in 1993); 28,933,599 shares outstanding (24,118,184 in 1993) 349 342 Additional paid-in capital 41,058 15,990 Retained earnings 225,459 220,898 Unrealized loss on securities available for sale (607) ------- ------- 266,259 237,230 Less cost of common shares in treasury (6,012,401 in 1994 and 10,077,816 in 1993) (48,667) (79,535) ------- -------
Total stockholders' equity 217,592 157,695 ------- ------- Commitments and contingencies (Note 14) ------- -------
Total liabilities and stockholders' equity $471,833 $378,287 ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
SafeCard Services, Inc. Consolidated Statement of Earnings (in thousands, except share data)
Year ended October 31, 1994 1993 1992
Revenues Subscription revenue, net $173,434 $156,600 $146,265 Other operating revenue 2,107 Interest income 8,421 8,736 10,022 Other income 5,124 1,790 1,894 ------- ------- ------- 189,086 167,126 158,181 ------- ------- -------
Costs and expenses Subscriber acquisition costs 105,981 95,248 86,828 General, administrative and service costs 43,324 29,433 24,949 Research and product development costs 7,682 Restructuring costs 7,900 Estimated relocation expenses 17,500 ------- ------- ------- 164,887 124,681 129,277 ------- ------- -------
Earnings before income taxes 24,199 42,445 28,904
Provision for income taxes 6,178 10,968 6,406 ------- ------- ------- Earnings before cumulative effect of change in accounting for income taxes 18,021 31,477 22,498
Cumulative effect of change in accounting for income taxes 2,000 ------- ------- ------- Net earnings $ 20,021 $ 31,477 $ 22,498 ------- ------- ------- Earnings per share:
Earnings before cumulative effect of accounting change $.63 $1.10 $.75 Cumulative effect of accounting change .07 --- ---- --- Net earnings $.70 $1.10 $.75 === ==== ===
Weighted average number of common and common equivalent shares 28,411,000 28,572,000 30,158,000
The accompanying notes are an integral part of these consolidated financial statements
SafeCard Services, Inc. Consolidated Statement of Cash Flows (in thousands)
Year ended October 31, 1994 1993 1992
Cash Flows From Operating Activities
Net cash received from subscribers $ 187,727 $ 175,596 $ 153,303 Net cash received from other operating revenue sources 4,341 Cash expenditures for subscriber acquisition costs, commissions and operations (166,315) (137,537) (120,306) Relocation expenditures (1,753) (6,104) Interest received 13,922 13,952 10,675 Interest paid (428) Income taxes paid, net of refunds received 3,114 (21,413) (18,518) Gain from litigation settlements 4,257 550 ------- ------- ------- Net cash provided by operating activities 47,046 28,845 19,172
------- ------- -------
Cash Flows From Investing Activities
Purchases of investment securities (96,986) (63,174) (167,760) Proceeds from sales of investment securities 73,748 64,539 119,284 Proceeds from maturing investment securities 18,035 7,068 34,446 Cost of acquisitions, net of cash acquired (35,276) Acquisition of property and equipment, net (8,044) (719) (6,380) ------- ------ ------- Net cash (used in) provided by investing activities (48,523) 7,714 (20,410) ------- ------ -------
Cash Flows From Financing Activities
Net repayments on notes payable to bank (2,792) Proceeds from exercise of stock options 24,658 5,380 1,940 Dividends paid (5,320) (5,113) (3,973) Payments for purchase of treasury shares (483) (41,699) (545) Other (155) ------- ------- ------- Net cash provided by (used in) financing activities 16,063 (41,432) (2,733) ------- ------- -------
Net increase (decrease) in cash and cash equivalents 14,586 (4,873) (3,971) Cash and cash equivalents at beginning of period 3,335 8,208 12,179 ------- ------- -------
Cash and cash equivalents at end of period $ 17,921 $ 3,335 $ 8,208 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
SafeCard Services, Inc. Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
SafeCard Services, Inc. ("SafeCard" or the "Company") is an information-based marketing and servicing company. Subscriptions for continuity services are principally 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"), reminder services, a personal credit information service ("CreditLine") and others. SafeCard is also developing new lines of business including credit card marketing and servicing and direct mail marketing services which are expected to become a significant component of SafeCard's overall operations in future years.
The Company believes that a classified balance sheet does not accurately reflect the Company's operating cycle and results in financial ratios that are not meaningful due to the mix of its assets including marketable investment securities, deferred subscriber acquisition costs and related commissions, and deferred subscribers' advance payments. As a result, the 1994 presentation of the Company's balance sheet is presented in an unclassified format. The applicable 1993 financial information has been restated to conform to this change. Certain other changes have been made in the presentation of 1993 and 1992 financial information to conform with 1994 presentation.
References herein to the years 1994, 1993 and 1992 refer to the Company's fiscal years ended October 31.
Principles of Consolidation
The consolidated financial statements include the accounts of SafeCard 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 Corporation ("Wright Express"). The transaction was accounted for under the purchase method and accordingly the consolidated financial statements include the results of operations of Wright Express from the date of purchase (see Note 2 - Acquisition).
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.
Investment Securities
Investments in securities, which consist primarily of tax-exempt municipal securities, were carried at cost in 1993, adjusted for the amortization of any premium or accretion of any discount. 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 has classified its entire securities portfolio as "available for sale." 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 $11,900,000 of securities available for sale at October 31, 1994 were held in escrow for advance payments of multi-year subscriptions (see "Revenue Recognition/Cost Amortization") or pursuant to the CreditLine Agreement (see Note 12 - Transactions with Related Parties).
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 estimated useful life of the asset, or the lease term, whichever is shorter.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired represents the difference between the purchase price of Wright Express and the value of the net assets acquired in the acquisition. Such excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over 25 years.
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 previously followed an internal policy of restricting use of all advance payments for multi-year subscriptions by placing them in escrow. In March 1994, the Company changed its policy such that it now places funds in escrow when required contractually by credit card issuer clients. The contractual requirement as of October 31, 1994 was approximately $10,300,000. 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.
Subscriber Acquisition Costs
Subscriber acquisition expenditures directly relate to the acquisition of new subscribers through "direct response" type marketing campaigns and primarily include payments for telemarketing, printing, postage, mailing services, certain direct salaries and other direct costs incurred to acquire new subscribers. These expenditures are deferred and amortized to expense in proportion to expected revenue over the expected subscription periods, including renewal periods (life of subscriber). Historically, a significant percentage of the Company's subscribers renew for additional years beyond the initial subscription period. Renewal rates for single-year Hot-Line subscriptions were between 75% and 77% during the period 1992 through 1994. Multi-year Hot-Line renewal rates (primarily three year subscriptions) were between 45% and 50% during the same period. Renewal rates for Fee Card, which to date has primarily been marketed as a single-year program, were between 75% and 81% during the same period. Based on the Company's renewal rate experience, subscriber acquisition expenditures are amortized to expense using an accelerated rate of amortization to reflect subscriber attrition over renewal periods. Expenditures relating to the acquisition of Hot-Line and Fee Card subscribers are generally amortized over a 10-12 year period; other program expenditures are generally amortized over a 3 year period (see Note 8 - Subscriber Acquisition Costs).
In December 1993, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 93-7, "Reporting on Advertising Costs" which is effective for the Company on November 1, 1994. The Company's historical method of amortizing such advertising costs is similar to the method prescribed by this SOP. The SOP, which, among other things, deals with the reporting of advertising costs for companies in the direct response industry, is not expected to have a material effect on the Company's reported earnings or financial position.
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.
Earnings Per Share
Earnings 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.
2. Acquisition
On September 14, 1994, the Company acquired 100% of the outstanding common stock of Wright Express, a leading provider of information processing, management and financial services to petroleum companies and 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 excess of cost over fair value of net assets acquired. This excess is being amortized on a straight-line basis over 25 years. Amortization expense through October 31, 1994 was $152,000.
The following presents the pro forma results of operations of the Company and Wright Express as if combined throughout the years ended October 31, 1994 and 1993 (pro forma amounts are unaudited):
Year ended October 31, 1994 1993
Revenues, net $ 200,955,000 $ 178,386,000 Costs and expenses 176,060,000 135,904,000 Earnings before provision for income taxes and cumulative effect of accounting change $ 24,895,000 $ 42,482,000 ------------ ------------
Net earnings 20,149,000 31,496,000 ---------- ----------
Earnings per share $ .71 $ 1.10
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.
3. 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 and investment securities 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 and investment securities were as follows:
Securities available for sale October 31, 1994 --------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Market Amount Gains Losses Value
Tax-exempt municipal bonds $ 167,219,000 $ 500,000 $ 1,107,000 $ 166,612,000
Investment securities October 31, 1993 -------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Market Amount Gains Losses Value
Tax-exempt municipal bonds $ 166,524,000 $ 3,389,000 $ 78,000 $ 169,835,000
Other 180,000 180,000 ----------- --------- ------- ----------- $ 166,704,000 $ 3,389,000 $ 78,000 $ 170,015,000 =========== ========= ======= ===========
Maturities of the Company's investment portfolio at October 31, 1994 were as follows:
Carrying Market Value Value
Within one year $ 39,098,000 $ 39,249,000 One to five years 119,416,000 118,401,000 More than five years 8,705,000 8,962,000 ----------- ------------ $ 167,219,000 $ 166,612,000 =========== ===========
Gross realized gains on investment securities totaled $620,000, $1,290,000 and $1,013,000 for the years 1994, 1993 and 1992, respectively. Gross realized losses on sales of investment securities totaled $27,000, $12,000 and $2,000 for the years 1994, 1993 and 1992, respectively. Gains and losses on sales of securities are computed on the specific identification basis and are included as a component of other income.
4. Receivables, net
Receivables and the related allowance for doubtful accounts were as follows:
October 31, 1994 1993
Receivables for transportation fleet services $ 30,027,000 Receivables for continuity services 9,831,000 $ 8,593,000 Accrued interest receivable 4,186,000 4,403,000 ----------- ----------- 44,044,000 12,996,000 Allowance for doubtful accounts (1,595,000) (150,000) ----------- ----------- $ 42,449,000 $ 12,846,000 =========== ===========
The receivables for transportation fleet services primarily relate to amounts due from customers of Wright Express for fleet fueling and other transportation services.
5. Property and Equipment
Property and equipment consisted of the following:
October 31, 1994 1993
Equipment, furniture and fixtures $ 11,367,000 $ 4,390,000 Building 5,268,000 5,215,000 Construction in progress 2,045,000 Land 447,000 447,000 ----------- ----------- 19,127,000 10,052,000 Less: accumulated depreciation (2,717,000) (1,632,000) ----------- ----------- $ 16,410,000 $ 8,420,000 =========== ===========
Construction in progress relates to improvements and additions being added to the Company's operations center in Cheyenne, Wyoming and enhancements to the Company's technology platform. All costs associated with these projects are being capitalized as construction in progress and will begin to be depreciated when the improvements and additions are placed in service.
6. Estimated Relocation Expenses
During 1992, the Company relocated its headquarters and operational facility from Ft. Lauderdale, Florida to Cheyenne, Wyoming. In connection with the relocation, the Company recorded pre-tax charges against earnings of $17,500,000 in 1992. These charges included the Company's estimated cost of moving the Company's operations and certain employees from Ft. Lauderdale to Cheyenne, certain other one-time costs associated with the relocation and the Company's then 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 14 - Commitments and Contingencies). Included within "Accrued expenses" as of October 31, 1994 and 1993 is approximately $10,500,000 relating primarily to the Ft. Lauderdale Lease.
7. Notes Payable to Bank
Notes payable to bank represents a revolving loan agreement assumed in connection with the acquisition of Wright Express (see Note 2 - Acquisition). 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.
Interest on the outstanding borrowings is, at Wright Express' option, either the bank's prime rate minus 0.5% or the London Interbank Offering Rate ("LIBOR"), plus 1.0%. Wright Express pays 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. The revolving line of credit expires in June 1996.
At October 31, 1994, the Company had the following amounts outstanding with related interest rates under the revolving line of credit:
Amount Rate
LIBOR based loan $ 8,600,000 5.875% LIBOR based loan 3,000,000 6.063% Prime rate based loan 193,000 7.250% ---------- $ 11,793,000 ==========
In November 1994, the revolving credit agreement was amended increasing the available line to $27,500,000 and decreasing the LIBOR rate to LIBOR plus 0.625%. The Company was also added as a guarantor under the amended agreement.
8. Subscriber Acquisition Costs and Commissions
Deferred subscriber acquisition costs and related commissions were as follows:
October 31, 1994 1993
Hot-Line $ 123,775,000 $ 121,061,000 Fee Card 9,185,000 5,470,000 Other services 18,796,000 13,432,000 ----------- ----------- Total deferred subscriber acquisition costs 151,756,000 139,963,000
Commissions 43,641,000 40,974,000 ----------- ----------- Total deferred subscriber acquisition costs and commissions $ 195,397,000 $ 180,937,000 =========== ===========
9. Restructuring Costs
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 management closed the Ft. Lauderdale sales office. 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 12 - Transactions with Related Parties). At October 31, 1994 the remaining balance of these reserves of $2,378,000 was included in "Accrued expenses."
10. 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 income taxes for the years ended October 31, 1994, 1993 and 1992 were as follows:
Year ended October 31, 1994 1993 1992
Current Federal $13,032,000 $15,608,000 $15,255,000 State 272,000 101,000 2,547,000 ---------- ---------- ---------- Total current 13,304,000 15,709,000 17,802,000 ---------- ---------- ---------- Deferred Federal (7,640,000) (3,588,000) (9,894,000) State 514,000 (1,153,000) (1,502,000) ---------- ---------- ---------- Total deferred (7,126,000) (4,741,000) (11,396,000) ---------- ---------- ----------- Total $ 6,178,000 $10,968,000 $ 6,406,000 ========== ========== ===========
The following is a reconciliation of the statutory U.S. federal income tax rate and the Company's effective income tax rate:
Year ended October 31, 1994 1993 1992
Statutory federal income tax rate 35.0% 34.8% 34.0% Increase (reduction) in tax rates resulting from: State income tax, net of federal benefit 2.1 1.2 2.4 Tax-exempt interest income (10.8) (6.8) (13.8) Reversal of prior years' deferred taxes at the rates in effect at that time (2.9) (1.1) Other (.8) (.5) .7 ----- ---- ----- Effective tax rate 25.5% 25.8% 22.2% ==== ==== ====
As a result of legislation enacted in August 1993, the federal corporate income tax rate increased from 34% to 35% effective January 1, 1993. This resulted in a blended federal tax rate for 1993 of 34.8%.
The components of the Company's deferred income tax assets and liabilities under FAS 109 were as follows:
October 31, November 1, 1994 1993 Deferred tax liabilities Subscriber acquisition costs $71,585,000 $68,391,000 Depreciation 549,000 382,000 ---------- ---------- 72,134,000 68,773,000 ---------- ----------
Deferred tax assets Multi-year subscription revenues 36,226,000 29,051,000 Relocation expenses 3,749,000 3,736,000 Net operating loss carryforwards 8,217,000 Reminder/reference subscription revenue 1,195,000 (1,945,000) Other 1,996,000 1,829,000 ---------- ---------- 51,383,000 32,671,000 ---------- ----------
Net deferred tax liability $20,751,000 $36,102,000 ========== ==========
The deferred income tax benefit for 1993 and 1992 (under prior accounting method) resulted from the following items:
Year ended October 31, 1993 1992
Subscriber costs, net $ 450,000 $( 15,000) Multi-year subscription revenues (7,310,000) (7,993,000) Reminder/reference subscription revenue 1,952,000 1,194,000 Relocation expenses 698,000 (4,389,000) Other (531,000) (193,000) ---------- ---------- $(4,741,000) $(11,396,000) ========== ===========
At October 31, 1994, the Company had $23,117,000 of net operating loss carryforwards for tax purposes which, if unused, will expire in 2009.
12. Transactions with Related Parties
Until his resignation as Chief Executive Officer and a Director on December 19, 1992, Steven J. Halmos, the Company's co-founder, provided his services to the Company through High Plains Capital Corporation ("HPCC"), a company owned by himself and his brother, Peter Halmos, the Company'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 the Company pursuant to a written agreement with the Company (as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement"). On May 26, 1994, the Company reached a settlement with Steven J. Halmos to terminate the Steven J. Halmos Agreement and various other agreements between the Company 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 11 - Common Stock and Stock Options). In 1993, the Company paid Steven J. Halmos (or HPCC for Steven J. Halmos' services) a total of approximately $2,100,000. In 1992 the aggregate fee paid to HPCC for Steven J. Halmos' services was approximately $2,700,000, with an additional $1,500,000 being paid to HPCC for the services of Peter Halmos.
In 1993 the Company 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.
The Company 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, the Company's co- founders, and their families. The CreditLine Agreement grants the Company an
exclusive license to market CreditLine through certain credit card issuers (including all issuers with which the Company has contractual relationships) and provides that profits and losses, if any, are shared equally between CLC and the Company. Net CreditLine billings to subscribers totaled approximately $22,900,000, $15,800,000 and $9,700,000 while marketing and other expenditures totaled $17,400,000, $13,400,000 and $6,200,000 in 1994, 1993 and 1992, respectively. In June 1993, the Company was notified by CLC that the CreditLine Agreement would not be renewed effective November 1, 1993.
Notwithstanding its termination, the CreditLine Agreement gives the Company 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 the Company 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 14 - Commitments and Contingencies.
In 1994 CreditLine and certain services marketed in conjunction with CreditLine, accounted for approximately $9,100,000 or 5.3% of the Company's subscription revenues and approximately $2,800,000 or 11.6% of the Company's pre-tax earnings. 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 revenues and pre-tax earnings, respectively. In 1992 such services accounted for approximately $4,500,000 or 3.1% and $1,200,000 or 4.2% of the Company's subscription revenues and pre-tax earnings, respectively.
The CreditLine Agreement provides for the creation of an escrow in the case of certain disputes between the parties. Effective September 1993, the Company began depositing its share and CLC's share of CreditLine profits in escrow accounts. As of October 31, 1994, approximately $1,600,000 of the Company's securities available for sale have been deposited in the escrow account (see Note 1 - Summary of Significant Accounting Policies).
The Company 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 years 1993 and 1992 for the land and building, were approximately $700,000 and $1,200,000, respectively. No payments were made to the Halmos Partnership in 1994. During 1992 the Company also leased warehouse space from the Halmos Partnership and made lease payments of approximately $47,000. The warehouse leases were month-to- month and were terminated in 1992. The Company 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 14 - 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.
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 (see Note 2 - Acquisition). The Company's Chairman and Chief Executive Officer was a director of Wright Express prior to the acquisition. During negotiations between the Company and Wright Express, the Company's Chairman 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.
13. Employee Benefit Plan
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 4% of each employee's salary. 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 1994 and 1993 was approximately $385,000 and $240,000, respectively.
Prior to 1993, the Company maintained a Simplified Employer Pension Plan ("SEP/IRA") for its employees over 21 years of age, who had worked for the Company for some period of time in any three of the previous five calendar years. Amounts recorded for the Company's contributions to the SEP/IRA for 1993 and 1992 were $75,000 and $402,000, respectively.
14. Commitments and Contingencies
Contracts
The Company has written agreements with a few 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 Citicorp (South Dakota), N.A. and related entities contributed 30%, 34% and 37% of the Company's consolidated subscription revenue in 1994, 1993 and 1992, respectively. The principal Citicorp contract, as amended, expires December 31, 1999. Citicorp 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.
Contracts with Sears, Roebuck and Co. contributed approximately 12% and 11% of the Company's consolidated subscription revenue in 1994 and 1993, respectively (and less than 10% in 1992). The contracts, which contain a provision for cancellation without cause by either party upon 90 days notice, is subject to renewal annually.
During the year, the Company entered into operating leases for facilities in Jacksonville, Florida in the normal course of business. Rent expense for 1994 was $283,000. There was no rental expense for 1993 or 1992. 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 October 31, 1994:
1995 $ 1,522,000 1996 1,424,000 1997 1,386,000 1998 482,000 1999 390,000 Thereafter 1,243,000 --------- $ 6,447,000 =========
Pending Litigation
The Company is defending or prosecuting five complex lawsuits involving Peter Halmos, former Chairman of the Board and Executive Management Consultant to the Company, and various parties related to him. Peter Halmos is also a plaintiff in two other lawsuits, one against an officer and one against a director of the Company. The five cases in which the Company is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former lawyer for the Company) in April 1993 in Cook County Circuit Court in Illinois against the Company and one of its 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. The Company 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. The Company and the director have filed motions seeking dismissal of the second amended complaint.
A suit by Peter Halmos, purportedly in the name of Halmos Trading & Investment Company, against the Company, one of its officers and one of its directors in Circuit Court in Broward County, Florida, making a variety of claims related to the contested lease of the Company's former Ft. Lauderdale headquarters. The Company has vacated the building, ceased making payments related to the Ft. Lauderdale lease and has filed counterclaims. The court has denied motions to dismiss filed by both Peter Halmos and the Company. 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. The Company's motion to dismiss the second amended counterclaim was denied, and it has filed an answer to the second amended counterclaim. Discovery is proceeding. No trial date has yet been set.
A suit which seeks monetary damages and certain equitable relief filed by the Company in August 1993 in Laramie County Circuit Court in Wyoming against Peter Halmos and related entities alleging that Peter Halmos dominated and controlled the Company, breached his fiduciary duties to the Company, and misappropriated material non-public information to make $48 million in profits on sales of Company stock. Discovery is proceeding. In March 1994, Mr. Halmos and related entities filed a counterclaim in which claims are 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. The Company'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.
A suit by Peter Halmos, purportedly in his name and in the name of CreditLine Corporation and Continuity Marketing Corporation against the Company, one of its officers and three of its directors in United States District Court in the Southern District of Florida, in September 1994, seeking monetary damages and certain equitable relief 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 the Company and its directors moved to dismiss the lawsuit.
A suit by Peter Halmos, as trustee for the Peter A. Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc., individually and James L. Binder as custodian for Elizabeth Binder; Edward Dubois; Sheila Ann Dubois, as personal representative of the Estate of Winifred Dubois; G. Neal Goolsby, John E. Masters, individually and as custodian for Gregory Halmos and Nicholas Halmos; and J.B. McKinney on behalf of themselves and all others similarly situated against SafeCard, one of its officers, one of its former officers and three of its directors in the United States District Court for the Southern District of Florida in December 1994. This litigation seeks monetary damages and certain equitable relief and 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. Peter Halmos has filed individual claims in connection with the sale of stock by the two trusts controlled by him. The Company intends to file an appropriate response to the complaint.
The Company believes that it has proper and meritorious defenses in these lawsuits which it intends to vigorously pursue. Resolution of any or all of the Peter Halmos-related litigation could have a material impact (either favorable or unfavorable depending on the outcome) upon the Company's operations, liquidity and financial condition.
During 1994, the Company recognized $4,257,000 in other income from the settlement of two lawsuits. The Company is involved in certain other claims and litigation which are not considered material to the operations of the Company.
15. Statement Of Cash Flows
The following is a reconciliation of net earnings to net cash provided by operating activities:
Year ended October 31, 1994 1993 1992
Net Earnings $20,021,000 $31,477,000 $22,498,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting for income taxes (2,000,000) Depreciation 1,197,000 864,000 769,000
Amortization of excess of cost over fair value of net assets acquired 152,000 Restructuring costs, net 1,978,000 Income tax expense 6,178,000 10,968,000 6,406,000 Income taxes paid, net of refunds received 3,114,000 (16,161,000) (18,518,000) Restricted stock expense 123,000 Net decrease (increase) in receivables 3,763,000 (627,000) (4,427,000)
Net amortization of bond premiums/discounts 5,281,000 5,233,000 2,439,000 Provision for uncollectible accounts and commissions 307,000 (250,000) 137,000 Billings to subscribers, net 189,925,000 173,769,000 150,495,000 Amortization of subscribers' advance payments to revenue (173,434,000) (156,600,000) (146,265,000) Expenditures for subscriber acquisition costs (68,029,000) (63,717,000) (55,065,000) Payment of commissions, net (52,412,000) (49,511,000) (41,024,000) Amortization of subscriber acquisition costs 56,236,000 51,075,000 46,516,000 Amortization of commissions 49,745,000 44,173,000 40,312,000 Net (decrease) increase in allowance for cancellations (1,237,000) 1,306,000 597,000 Net increase (decrease) in accounts payable and accrued expenses 7,868,000 (2,459,000) 15,680,000 Gains on sales of investment securities, net (593,000) (1,277,000) (1,011,000) (Gain) loss on sale/disposition of equipment (12,000) (117,000) 271,000 Net (increase) decrease in other assets (1,125,000) 699,000 (638,000) ----------- ----------- ----------- Net cash provided by operating activities $ 47,046,000 $ 28,845,000 $ 19,172,000 =========== =========== ===========
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item with regard to Directors and Executive Officers who are also Directors is incorporated by reference to the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's Annual Meeting of Stockholders.
Other Executive Officer information is as follows:
NAME POSITION AGE
John R. Birk President and Chief Operating Officer, 43 from January 1, 1995 to present; President and Chief Executive Officer of Wright Express Corporation, from August 1992 to December 1994; President and Chief Operating Officer of Advo, Inc., the nation's largest direct mail marketing company, from February 1989 to April 1992; Executive Vice President & Chief Operating Officer of Advo, Inc., from September 1988 to February 1989.
G. Thomas Frankland Vice Chairman and Chief Financial Officer, 48 from May 1994 to present; Partner of Price Waterhouse, independent public accountants, from July 1980 to April 1994.
Robert M. Frechette Executive Vice President - Sales, from 55 April 1994 to present; Senior Vice President - U. S. Acceptance Group of MasterCard International, from 1991 to 1994; Vice President - General Merchandise Manager of Montgomery Ward from 1987 to 1991.
Susan R. Gottesmann Senior Vice President - Human Resources, 49 from March 1994 to present; Vice President of Human Resources and Public Affairs of American Express, from 1988 to February 1994.
Richard M. Interdonato Executive Vice President - Operations, 46 from April 1994 to present; President of Intec International, Inc., manufacturer of specialty lubricants from January 1993 to March 1994; Senior Vice President of American Express managing the Optima Card Operations Center, from 1987 to 1992.
Marc F. Joseph Senior Vice President - Law, from February 36 1994 to present; Senior Vice President - General Counsel of Merrill Lynch Credit Corporation, from September 1989 to February 1994.
Francis J. Marino Vice Chairman, from February 1994 to 51 present; Senior member of the law firm of Mahoney Adams & Criser, P. A., from January 1990 to January 1994.
Donelyn N. Merritt, Jr. Senior Vice President - Corporate 39 Development & Strategy, from May 1994 to present; Principal of a private consulting firm primarily concentrating on strategy development and implementation, from 1986 to May 1994; Consultant with Boston Consulting Group, a strategic consulting firm, from 1983 to 1986.
Dorothy S. Schechter Executive Vice President - Marketing, 42 from January 1994 to present; Senior Vice President of Card Product Marketing for AT&T Universal Card Services, from October 1989 to January 1994; Vice President of Mellon Bank, from October 1989 to June 1980.
Harry Strauss Executive Vice President - Information 54 Technology, from July 1994 to present; Principle of Microtec Planning, a technical and management consulting firm, from 1980 to June 1994.
David C. Thompson Senior Vice President & Controller, 39 from June 1994 to present; Vice President and Chief Financial Officer of the bank card division of Fidelity Investments, from February 1992 to June 1994; Vice President and Controller for a regional operating center of American Express, from October 1988 to February 1992.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's Annual Meeting of Stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated by reference to the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference to the Company's definitive proxy statement which is to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's Annual Meeting of Stockholders.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Certain of the agreements listed below are the subject of litigation with Peter Halmos and parties related to him.
(a)1. Financial Statements
The Consolidated Financial Statements and Notes thereto required by Item 8 are listed in the Index set forth in Item 8. Financial Statements and Supplementary Data.
(a)2. Financial Statement Schedules
The Financial Statement Schedules required by Item 8 are listed in the Index set forth in Item 8. Financial Statements and Supplementary Data.
(a)3. Exhibits
3(a) SafeCard Services, Incorporated's Certificate of Incorporation, incorporated by reference to Exhibit 3(a) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1992.
3(b) SafeCard Services, Incorporated's Certificate of Amendment of Certificate of Incorporation, as filed with the Secretary of State of Delaware, Division of Corporations on August 20, 1987, incorporated by reference to Exhibit 3(g) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1987.
3(c) SafeCard Services Insurance Company's Certificate of Incorporation, incorporated by reference to Exhibit 3(e) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1987.
3(d) SafeCard Services Insurance Company's By-Laws, incorporated by reference to Exhibit 3(f) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1987.
3(e) SafeCard Services, Incorporated By-Laws as amended through December 31, 1994.
Management Contracts and Compensatory Plans
10(a) Form of Non-Qualified Stock Option Agreement dated August 30, 1989 between the Company and an outside director, incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended July 31, 1989.
10(b) Form of Non-Qualified Stock Option Agreement dated October 16, 1991 between the Company and an outside director, incorporated by reference to Exhibit 10(n) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(c) Form of Non-Qualified 1991 Employee Stock Option Plan dated October 16, 1991 between the Company and twenty key employees, incorporated by reference to Exhibit 10(o) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(d) Board of Directors' Resolution dated December 6, 1991 establishing a non-employee director retirement plan, incorporated by reference to Exhibit 10(s) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(e) Indemnification Agreements for certain of the Company's Directors dated October 2, 1992 incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1992.
10(f) Indemnification Agreements for two of the Company's Directors dated February 11, 1993 and September 1, 1993, incorporated by reference to Exhibit 10(ai) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1993.
10(g) Forms of Non-Qualified Stock Option Agreements dated February 11, 1993 and September 1, 1993 between the Company and two outside directors, incorporated by reference to Exhibit 10(aj) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1993.
10(h) 1994 Long Term Stock-Based Incentive Plan, incorporated by reference to the Company's 1993 definitive proxy statement.
10(i) Second Amendment to the 1994 Long Term Stock-Based Incentive Plan.
10(j) Employment Agreement, effective as of December 1, 1993, between the Company and Paul G. Kahn, incorporated by reference to Exhibit 1 of the Company's Current Report on Form 8-K filed on December 6, 1993.
10(k) Employment Agreement, effective as of February 1, 1994, between the Company and Francis J. Marino, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 1994.
10(l) Amendment to Exhibit 3 of the Employment Agreement, effective as of February 1, 1994, between the Company and Francis J. Marino.
10(m) Employment Agreement as of May 2, 1994, between the Company and G. Thomas Frankland, incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report for its fiscal quarter ended April 30, 1994.
10(n) Amendment to Exhibit 3 of the Employment Agreement, effective as of May 2, 1994, between the Company and G. Thomas Frankland.
10(o) Indemnification Agreement as of April 7, 1994, between the Company and one outside director, incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report for its fiscal quarter ended April 30, 1994.
10(p) Non-Qualified Stock Option Agreement as of April 7, 1994, between the Company and one outside director, incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report for its fiscal quarter ended April 30, 1994.
10(q) Employment Agreement, effective as of September 14, 1994, between the Company and John R. Birk.
10(r) Amendment, effective as of January 1, 1995, to Employment Agreement, between the Company and John R. Birk.
10(s) Executive Deferred Compensation Plan.
10(t) Form of Executive Agreement between the Company and certain senior officers.
10(u) Form of Non-Qualified Stock Option Agreement under the 1994 Long Term Stock-Based Incentive Plan between the Company and certain officers of the Company.
Other Material Contracts
10(v) Termination Agreement dated as of May 26, 1994 between the Company and Steven J. Halmos and Recission Agreement made and entered into as of June 9, 1994 between the Company and Steven J. Halmos, incorporated by reference to Exhibit 10(e) from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1994.
10(w) Agreement with Citicorp (South Dakota), N.A., effective January 1, 1989, incorporated by reference to the Company's Form 8 Amendment No. 3, dated November 10, 1989, to its Quarterly Report on Form 10-Q for its fiscal quarter ended April 30, 1989.
10(x) Second Amendment to Agreement with Citicorp (South Dakota), N.A. dated March 31, 1992 incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended April 30, 1992.
10(y) Third Amendment to the Agreement with Citibank (South Dakota), N.A., dated August 30, 1993, incorporated by reference to Exhibit 10(ah) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1993.
10(z) Agreement with Peter Halmos, dated November 1, 1988, regarding a marketing license for credit information services, incorporated by reference to Exhibit 10(e) of the Company's Annual Report on Form 10-K, for its fiscal year ended October 31, 1988.
10(aa) First Amendment to Agreement, dated January 25, 1991, regarding marketing license for credit information services, incorporated by reference to Exhibit 10(m) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1990.
10(ab) Letter Agreement dated January 27, 1992, between CreditLine Corporation and the Company, incorporated by reference to Exhibit 10(q) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(ac) Confirmation Agreement between Peter Halmos, High Plains Capital Corporation, CreditLine Corporation and the Company dated January 27, 1992, incorporated by reference to Exhibit 10(r) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(ad) Public Relations Consulting Agreement dated October 25, 1994 between the Dilenschneider Group, Inc. and the Company.
10(ae) Special Projects Public Relations Consulting Agreement dated December 14, 1994 between the Company and the Dilenschneider Group, Inc. . 11(a) Computation of Primary Earnings Per Share.
11(b) Computation of Fully Diluted Earnings Per Share.
22 Subsidiaries of the Registrant.
23 Consent of Independent Accountants to incorporation by reference of their report in Prospectuses constituting part of Registration Statements on Forms S-3 and S-8.
24 Powers of Attorney.
27 Financial Data Schedule
(b) Reports on Form 8-K
(b)1 Announcement of the completion of the acquisition of Wright Express Corporation of South Portland, Maine dated September 29, 1994.
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.
SAFECARD SERVICES, INCORPORATED
By: PAUL G. KAHN -------------------------------- Paul G. Kahn Chairman and Chief Executive Officer
January 16, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature Title
January 16, 1995 PAUL G. KAHN Director, Chairman and ------------------ Chief Executive Officer Paul G. Kahn
January 16, 1995 * Director -------------------- William T. Bacon, Jr.
January 16, 1995 * Director -------------------- Marshall L. Burman
January 16, 1995 * Director ------------------------ Robert L. Dilenschneider
January 16, 1995 * Director ------------------------ Eugene Miller
January 16, 1995 * Director ---------------------- Thomas F. Petway, III
January 16, 1995 G. THOMAS FRANKLAND Vice Chairman and ------------------- Chief Financial Officer G. Thomas Frankland (Principal Financial and Accounting Officer)
January 16, 1995 G. THOMAS FRANKLAND ------------------- G. Thomas Frankland * Attorney in Fact
By signing his name hereto, G. Thomas Frankland, does sign this document on behalf of each of the persons indicated by an asterisk above, pursuant to Powers of Attorney duly executed by such persons and filed with the Securities and Exchange Commission herewith
Exhibit Index
Exhibit Page Numbers
3(a) SafeCard Services, Incorporated's Incorporated by reference to Certificate of Incorporation Exhibit 3(a) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1992.
3(b) SafeCard Services, Incorporated's Incorporated by reference to Certificate of Amendment of Exhibit 3(g) of the Company's Certificate of Incorporation, as Annual Report on Form 10-k filed with the Secretary of State for its fiscal year ended of Delaware, Division of Corporations October 31, 1987. on August 20, 1987.
3(c) SafeCard Services Insurance Incorporated by reference to Company's Certificate of Incorporation. Exhibit 3(e) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1987.
3(d) SafeCard Services Insurance Incorporated by reference to Company's By-Laws. Exhibit 3(f) of the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 1987.
3(e) SafeCard Services, Incorporated 60 - 71 By-Laws as amended through December 31, 1994.
Management Contracts and Compensatory Plans
10(a) Form of Non-Qualified Stock Incorporated by reference to Option Agreement dated August 30, Exhibit 10(a) of the Company's 1989 between the Company and an Quarterly Report on Form 10-Q outside director. for its fiscal quarter ended July 31, 1989.
10(b) Form of Non-Qualified Stock Incorporated by reference to Option Agreement dated October 16, Exhibit 10(n) of the Company's 1991 between the Company and an Annual Report on Form 10-K for outside director. its fiscal year ended October 31, 1991.
10(c) Form of Non-Qualified 1991 Incorporated by reference to Employee Stock Option Plan dated Exhibit 10(o) of the Company's October 16, 1991 between the Company Annual Report on Form 10-K for and twenty key employees. its fiscal year ended October 31, 1991.
10(d) Board of Directors' Resolution Incorporated by reference to dated December 6, 1991 establishing Exhibit 10(s) of the Company's a non-employee director retirement plan. Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(e) Indemnification Agreements for Incorporated by reference to certain of the Company's Directors Exhibit 10(x) to the Company's dated October 2, 1992. Annual Report on Form 10-K for its fiscal year ended October 31, 1992.
10(f) Indemnification Agreements Incorporated by reference to for two of the Company's Directors Exhibit 10(ai) of the Company's dated February 11, 1993 and September Annual Report on Form 10-K for 1, 1993. its fiscal year ended October 31, 1993.
10(g) Forms of Non-Qualified Stock Incorporated by reference to Option Agreements dated February Exhibit 10(aj) of the Company's 11, 1993 and September 1, 1993 Annual Report on Form 10-K for between the Company and two its fiscal year ended October outside directors. 31, 1993.
10(h) 1994 Long Term Stock-Based Incorporated by reference to the Incentive Plan. Company's 1993 definitive proxy statement.
10(i) Second Amendment to the 72 1994 Long Term Stock-Based Incentive Plan.
10(j) Employment Agreement, Incorporated by reference to effective as of December 1, 1993, Exhibit 1 of the Company's between the Company and Paul G. Kahn. Current Report on Form 8-K filed on December 6, 1993.
10(k) Employment Agreement, effective Incorporated by reference to the as of February 1, 1994, between the Company's Quarterly Report on Company and Francis J. Marino. Form 10-Q for the fiscal quarter ended January 31, 1994.
10(l) Amendment to Exhibit 3 of the 73 - 78 Employment Agreement, effective as of February 1, 1994, between the Company and Francis J. Marino.
10(m) Employment Agreement as of Incorporated by reference to May 2, 1994, between the Company Exhibit 10(a) of the Company's and G. Thomas Frankland. Quarterly Report for its fiscal quarter ended April 30, 1994.
10(n) Amendment to Exhibit 3 of the 79 - 84 Employment Agreement, effective as of May 2, 1994, between the Company and G. Thomas Frankland.
10(o) Indemnification Agreement as of Incorporated by reference to April 7, 1994, between the Company Exhibit 10(b) of the Company's and one outside director. Quarterly Report for its fiscal quarter ended April 30, 1994.
10(p) Non-Qualified Stock Option Incorporated by reference to Agreement as of April 7, 1994, between Exhibit 10(c) of the Company's the Company and one outside director. Quarterly Report for its fiscal quarter ended April 30, 1994.
10(q) Employment Agreement, effective 85 - 125 as of September 14, 1995, between the Company and John R. Birk.
10(r) Amendment, effective as of 126 - 135 January 1, 1995, to Employment Agreement, between the Company and John R. Birk.
10(s) Executive Deferred Compensation Plan. 136 - 146
10(t) Form of Executive Agreement between 147 - 157 the Company and certain senior officers.
10(u) Form of Non-Qualified Stock 158 - 163 Option Agreement under the 1994 Long Term Stock-Based Incentive Plan between the Company and certain officers of the Company.
Other Material Contracts
10(v) Termination Agreement dated as Incorporated by reference of May 26, 1994 between the Company to Exhibit 10(e) from the and Steven J. Halmos and Recission Company's Quarterly Report Agreement made and entered into as on Form 10-Q for the fiscal of June 9, 1994 between the Company quarter ended July 31,1994. and Steven J. Halmos.
10(w) Agreement with Citicorp (South Incorporated by reference to the Dakota), N.A., effective January 1, 1989. Company's Form 8 Amendment No. 3, dated November 10, 1989, to its Quarterly Report on Form 10-Q for its fiscal quarter ended April 30, 1989.
10(x) Second Amendment to Agreement Incorporated by reference to with Citicorp (South Dakota), N.A. Exhibit 10(b) to the Company's dated March 31, 1992. Quarterly Report on Form 10-Q for its fiscal quarter ended April 30, 1992.
10(y) Third Amendment to the Agreement Incorporated by reference to with Citibank (South Dakota), N.A., Exhibit 10(ah) of the Company's dated August 30, 1993. Annual Report on Form 10-K for its fiscal year ended October 31, 1993.
10(z) Agreement with Peter Halmos, Incorporated by reference to dated November 1, 1988, regarding Exhibit 10(e) of the Company's a marketing license for credit Annual Report on Form 10-K, for information services. its fiscal year ended October 31, 1988.
10(aa) First Amendment to Agreement, Incorporated by reference to dated January 25, 1991, regarding Exhibit 10(m) of the Company's marketing license for credit Annual Report on Form 10-K for information services. its fiscal year ended October 31, 1990.
10(ab) Letter Agreement dated Incorporated by reference to January 27, 1992, between CreditLine Exhibit 10(q) of the Company's Corporation and the Company. Annual Report on Form 10-K for its fiscal year ended October 31, 1991.
10(ac) Confirmation Agreement Incorporated by reference to between Peter Halmos, High Plains Exhibit 10(r) of the Company's Capital Corporation, CreditLine Annual Report on Form 10-K Corporation and the Company dated for its fiscal year ended January 27, 1992. October 31, 1991.
10(ad) Public Relations Consulting 164 - 169 Agreement dated October 25, 1994 between the Dilenschneider Group, Inc. and the Company.
10(ae) Special Projects Public 170 - 172 Relations Consulting Agreement dated December 14, 1994 between the Company and the Dilenschneider Group, Inc.
11(a)Computation of Primary 173 Earnings Per Share.
11(b) Computation of Fully Diluted 174 Earnings Per Share.
22 Subsidiaries of the Registrant 175
23 Consent of Independent Accountants to 176 incorporation by reference of their report in Prospectuses constituting part of Registration Statements on Forms S-3 and S-8.
24 Powers of Attorney 177 - 181
27 Financial Data Schedule 182
EXHIBITS
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