Document/Exhibit Description Pages Size
1: 10-K 1993 Form 10-K 29± 164K
5: EX-10 Amended Complaint Filed December 1, 1993 46± 171K
4: EX-10 Forms of Non-Qualified Stock Option Agreements 10± 39K
3: EX-10 Indemnification Agreements 18± 91K
6: EX-10 Investor Relations Letter Agreement Dated 1/6/94 1 9K
7: EX-10 Investor Relations Letter Agreement Dated 12/20/93 1 9K
9: EX-10 Letter Agreement Dated December 4, 1992 1 9K
8: EX-10 Letter Agreement Dated May 28, 1992 2± 9K
2: EX-10 Third Amendment to Agreement With Citibank 4± 19K
10: EX-11 Computation of Earnings Per Share 2 9K
11: EX-13 1993 Annual Report 28± 131K
12: EX-15 Consent of Independent Accountants 1 7K
13: EX-22 Subsidiaries 1 5K
EXHIBIT 13
SafeCard Services, Inc.
Financial Highlights
Selected Statement of Earnings Data (In thousands, except per share data)
Years ended October 31, 1993 1992 1991 1990 1989
Subscription revenue, net $156,600 $146,265 $140,557 $124,133 $106,371
Earnings from operations(1) $ 31,919 $ 16,988 $ 30,215 $ 27,379 $ 20,909
Interest and other income $ 10,526 $ 11,366 $ 11,327 $ 10,119 $ 8,765
Net earnings(1) $ 31,477 $ 22,498 $ 29,713 $ 26,863 $ 24,603
Earnings per share(1) $1.10 $.75 $1.02 $.93 $.82
Weighted average number of
common and common
equivalent shares(2) 28,572 30,158 29,325 29,240 29,936
Cash dividends per share $.20 $.15 $.15 $.125 $.10
Selected Balance Sheet Data(3) (In thousands)
October 31, 1993 1992 1991 1990 1989
Total cash and cash
equivalents and investment
securities(2) $170,039 $187,301 $178,670 $155,860 $128,140
Total assets $378,287 $377,418 $351,566 $324,726 $281,394
Stockholders' equity(2) $157,695 $165,498 $144,903 $119,496 $ 96,812
(1)During 1992, the Company recorded a pre-tax charge of $17.5 million
against earnings in connection with its estimated costs of relocation from
Ft. Lauderdale, Florida to Cheyenne, Wyoming.
(2)During fiscal 1993, the Company repurchased approximately 3.5 million
shares of its common stock at a cost of approximately $41.7 million. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Liquidity and Capital Resources.
(3)The Company has no long-term debt, but did record, in periods ended prior
to October 31, 1992, an obligation arising from the capitalization of the Ft.
Lauderdale Lease. See Notes I and K of Notes to Consolidated Financial
Statements.
SafeCard Services, Inc.
Market Prices and Distributions
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, 1993.
Dividend
Quarter Ended High Low Paid
January 31, 1992 11.88 8.63 --
April 30, 1992 11.63 9.00 $.075
July 31, 1992 10.75 9.50 --
October 31, 1992 10.00 7.75 $.075
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
Closing price of the Company's stock as of December 31, 1993 was $18.88.
In December 1992, the Board of Directors changed the Company's dividend
policy from $.075 per share on a semi-annual basis to $.05 per share on a
quarterly basis, thus increasing the Company's annual dividends from $.15 per
share to $.20 per share. The Company's dividend policy is subject to change
at the discretion of the Board.
The Company had 1,096 shareholders of record on December 31, 1993.
SafeCard Services, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1. Results of Operations
Subscription Revenue, Net
Years ended October 31, 1993 1992 1991
$156,600,000 $146,265,000 $140,557,000
Certain changes have been made in the presentation of 1991 and 1992 financial
information to conform with 1993 presentation.
References herein to the years 1993, 1992 and 1991 refer to the Company's
fiscal years ended October 31st.
The Company's subscription revenue is derived from payments by subscribers
for its service programs 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 of benefit. See Note A of Notes
to Consolidated Financial Statements for a description of those accounting
policies.
Subscription revenue increased 7% (to reach a record $156.6 million) in 1993
and 4% in 1992. The increase in 1993 was primarily due to an increase in the
number of Hot-Line subscribers as well as increases in Fee Card and
CreditLine programs. Also contributing to the increase in 1993 was the price
increase of certain Hot-Line subscriptions which the Company began billing in
1993. The increase in 1992 subscription revenue was primarily due to an
increase in the number of Hot-Line subscribers which was largely the result
of increased marketing with an existing client.
In 1993, 1992 and 1991 Hot-Line accounted for 73%, 73% and 72%, respectively,
of subscription revenue. In 1993, 1992 and 1991, Fee Card represented 13%,
12% and 12%, respectively, of the Company's net subscription revenue.
Commencing in July 1993, the Company discontinued providing services on a
wholesale -- i.e. flat fee per customer with the Company incurring no
marketing costs or commissions -- basis to a group of cardholders of one of
its card issuer clients. Management anticipates that the effect on earnings
before income taxes in 1994 as compared to 1993 from the elimination of the
wholesale program will be approximately $1.6 million. While the Company does
have the right to do new marketing to the same group of cardholders on a
retail -- i.e. with the Company receiving revenues and incurring commissions
and marketing costs -- basis, management cannot predict the extent of offset,
if any.
Renewal rates for single-year Hot-Line subscriptions were 75%, 77% and 76%
for 1993, 1992 and 1991, respectively. Multi-year (primarily three year
subscriptions) renewal rates for Hot-Line subscriptions were 50%, 45% and 45%
for the same periods. Renewal rates for Fee Card subscriptions (primarily
marketed as single-year subscriptions) were 75%, 79% and 80% for 1993, 1992
and 1991, respectively.
Renewal rates of subscribers are affected by a variety of factors including
the mix of subscribers renewing, economic factors, changes in the credit card
industry and certain other factors, which may be beyond the Company's
control. The decrease in the 1993 Hot-Line single year renewal rate was
caused, in part, by the price increase referred to above, as well as an
increase in the number of non-billable accounts. Non-billable accounts
represent card issuer customer accounts which have either been closed or are
in arrears. The increase in the Hot-Line multi-year renewal rate in 1993 was
primarily due to the timing of renewals of a large card issuer whose overall
renewal rate is above the overall average for all card issuers clients. In
addition, a billing policy change by a large card issuer which initially
resulted in a decrease in the multi-year Hot-Line renewal rate in 1991, was
again changed, and had a favorable effect in 1993. The Company anticipates
that Hot-Line renewal rates may decrease in 1994 as a result of the price
increase mentioned earlier. However, the net effect of the price increase
should continue to have a positive effect on revenue and earnings. The
decrease in the 1993 Fee Card renewal rate was primarily caused by a large
number of renewals of certain retailer card issuers, which generally renew at
lower rates than other card issuers (primarily petroleum card issuers).
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 card. To date
the Company has not noted any material impact as a result of these changes in
business strategy.
In 1993, the Company began placing greater emphasis on the development of new
products and services and is currently test marketing three new services with
various credit card issuer clients. Results to date are too preliminary to
determine the viability of these services. New products and services which
are test marketed are frequently not successful. While the Company believes
that modest growth in Hot-Line through domestic credit card issuers may be
achievable in the future, the Company believes that the successful
development of new products and services, new channels of distribution and
the development of new areas of businesses will become increasingly important
to the future revenue and earnings growth of the Company.
In June 1993, the Company was notified by CreditLine Corporation, a company
owned by Peter Halmos and Steven J. Halmos, the Company's co-founders, and
their families, 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. Notwithstanding its termination,
the CreditLine Agreement gives the Company certain continuing marketing
rights. The CreditLine Agreement, including the continuing marketing rights,
is the subject of litigation between the Company and Peter Halmos. See Notes
I and K of Notes to Consolidated Financial Statements.
Subscriber Acquisition Costs
Years ended October 31, 1993 1992 1991
$95,248,000 $86,828,000 $83,953,000
As a percentage of
subscription
revenue 61% 59% 60%
The cost of subscriber acquisition, which represents the amortization of
deferred subscriber acquisition costs and commissions, increased $8.4
million, or 10%, in 1993 and $2.9 million, or 3%, in 1992 primarily because
of expenditures made to acquire new subscribers in the current and prior
years (see "Financial Condition - Expenditures of Subscriber Acquisition
Costs and Commissions").
Subscriber acquisition costs, as a percentage of subscription revenue,
increased by approximately 2% in 1993. 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 effected by economic conditions,
interest rates, other factors effecting 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, and other factors. In addition, certain cardholder
files respond more favorably than others to similar promotions. In 1993, the
Company noted a decline in certain net response rates, primarily in
telemarketing, which have continued through most of 1993. This decline, as
well as the discontinuance of the wholesale services discussed under
"Subscription Revenue, Net" and the change in amortization described in the
next paragraph, has increased subscriber acquisition costs as a percentage of
subscription revenue and may also cause increases in future quarters.
In connection with a review conducted in 1992 of the Company's contractual
relationships, the Company decided to shorten the period for amortization of
subscriber acquisition expenditures made under its contract with Sears,
Roebuck & Co. starting in fiscal 1993. This accelerated amortization will
have a negative impact on the next several years' reported earnings. The
change in amortization period did not have a material impact in 1993. The
Company currently estimates that the additional amortization in 1994, as
compared to 1993, as a result of the change, will be less than $1 million.
An U.S. postal rate increase is anticipated in 1995. Since postage represents
the largest component of direct mail costs, this could have a direct impact
on the Company.
General, Administrative and Service Costs
Years ended October 31, 1993 1992 1991
$29,433,000 $24,949,000 $26,389,000
As a percentage of
subscription
revenue 19% 17% 19%
General, administrative and service costs increased by approximately $4.5
million in 1993. The increase was primarily the result of increases in legal
and related fees, which were approximately $7.1 million, $1.7 million and
$4.7 million in 1993, 1992 and 1991, respectively, as well as increases in
payroll and related expenses which were partially offset by a decrease in
management fees.
Legal fees in 1993 related primarily to the Company's litigation with Peter
Halmos. See Note K of Notes to the Consolidated Financial Statements and
"Pending Litigation". The Company expects that legal fees will continue to
remain at high levels during the pendency of this litigation.
Legal fees in 1991 include $2 million for a contingent legal fee paid (in
1992) to former counsel to the Company.
As described under "Subscription Revenue, Net", the Company is placing
greater emphasis on the development of new products and services and the
development of new areas of business. The Company's strategy is to broaden
its scope so as to become an entrepreneurial, market-driven consumer services
company. While the development of new products and services, and the
development of other areas of new business, may not contribute significantly
to revenues in 1994, the Company may incur certain expenses in 1994 in
developing these new areas of business.
Relocation to Cheyenne, Wyoming
As discussed in Note E of Notes to Consolidated Financial Statements, the
Company physically relocated, over a period of several months during the
second half of 1992, its headquarters and operations center from Ft.
Lauderdale, Florida to Cheyenne, Wyoming, and recorded a $17.5 million pre-
tax charge to earnings in 1992 in connection with the move.
Interest and Other Income
Years ended October 31, 1993 1992 1991
$10,526,000 $11,366,000 $11,327,000
Interest and other income is predominantly composed of interest income. See
Note B of Notes to Consolidated Financial Statements. The decrease in
interest income in 1993 is primarily due to a decrease in interest rates as
well as lower cash and investment balances as a result of the Company's
repurchase of its common stock. See "Financial Condition --Liquidity and
Capital Resources." Interest and other income was relatively constant in 1992
and 1991, despite higher cash and investment balances at October 31, 1992 as
compared to October 31, 1991, primarily due to an overall decrease in
interest rates. Since interest rates have declined in recent periods, as the
Company's investments mature, or are sold, these funds have been, and may
continue to be, reinvested at lower interest rates than were previously
available.
Income Tax Expense
See Notes A and G of Notes to Consolidated Financial Statements for
information regarding the Company's effective income tax rate.
Pending Litigation
The Company is defending or prosecuting three complex litigations against
Peter Halmos, former Chairman of the Board and Executive Management
Consultant to the Company, and parties related to him. See Note K of Notes to
Consolidated Financial Statements. The Company believes that it has proper
and meritorious claims and defenses in these lawsuits which it intends
vigorously to pursue. Peter Halmos is also a plaintiff in two other lawsuits,
one against an officer and one against a director of the Company, in which
the Company is not named as a defendant.
As a result of the Peter Halmos-related litigation, the Company has incurred
substantial legal fees, to some extent had a diversion of its executives
attention, and the litigation has also had an impact on the Company's
business. Management is seeking to reduce, to the extent it deems reasonable
and feasible, the adverse effects of these lawsuits, but there can be no
assurance that such efforts will be successful. The Company does not expect
the litigation to affect its ability to service its customers.
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 results of our operations and financial condition of the Company.
2. Financial Condition
Liquidity and Capital Resources
Historically, the Company has generated the cash needed to finance its
operations and growth from its earnings. In 1993, 1992 and 1991 cash flow
from operations before income taxes and litigation settlement was $50.3
million, $37.1 million and $45.3 million, respectively. The increase in 1993
is primarily a result of increases in net cash received from subscribers,
partially offset by increases in cash expenditures for subscriber
acquisition, commissions and operations. The increase in net cash received
from subscribers is primarily due to an increase in net billings (multi-year
subscriptions, in particular) over the prior year. The $8.2 million decrease
in 1992 is primarily due to $6.1 million of cash expenditures related to the
Company's relocation to Cheyenne.
On February 16, 1993, the Company announced that its Board of Directors
authorized the Company to repurchase up to 4 million shares of its
outstanding common stock through February 28, 1994. In September, 1993, the
Company's Board of Directors approved an additional repurchase of 2 million
shares, for a total of up to 6 million shares. The total authorized
repurchases may be made from time to time through October 31, 1994, depending
on the then current market, financial and corporate conditions, through open
market purchases, block trades or private negotiated transactions. As of
October 31, 1993 approximately 3.5 million shares had been repurchased at an
aggregate cost of approximately $41.7 million. Under the plan, there is no
obligation or assurance that any further repurchases will be made.
In connection with the Company's relocation to Cheyenne, in 1991 the Company
acquired approximately 14 acres of land and an approximately 115,000 square
foot building in Cheyenne and in 1992 made capital expenditures of
approximately $6.4 million in connection with the renovation and upgrade of
the facility and the purchase of equipment for that facility.
As described in Note G of Notes to Consolidated Financial Statements, the
Company's income tax payments in 1990 through 1993 increased as a result of
the changes in the Company's income tax accounting methods. These changes
will result in a continued higher level of income tax payments over the next
two years, and may also increase subsequent years' tax payments.
Consequently, the Company's cash flow from operations will continue to be
affected by these higher tax payments for at least two more years. However,
the Company has experienced significant state income tax savings from its
relocation to Wyoming, which has no state income tax.
The Company believes that its cash flow from operations and the Company's
cash and investment balances (which totaled $170.0 million, a portion of
which is restricted, as of October 31, 1993) are adequate to meet the
Company's current liquidity needs. See Note A of Notes to Consolidated
Financial Statements. The Company has no short or long term debt.
The Company's cash flow is materially affected by subscriber acquisition
costs (see "Expenditures of Subscriber Acquisition Costs and Commissions").
Expenditures of Subscriber Acquisition Costs and Commissions Subscriber
acquisition expenditures directly relate to the acquisition of new
subscribers through "direct response" type marketing campaigns and include
payments for telemarketing, printing, postage, mailing services, certain
salaries and other costs incurred to acquire new subscribers.
Expenditures for subscriber acquisition costs in 1993 were $63.7 million
compared to $55.1 million and $47.3 million in 1992 and 1991, respectively.
Total subscriber acquisition campaign volume (mail and telephone contacts)
increased in 1993 as compared to 1992. Contributing to the higher volumes are
increases in telemarketing hours of approximately 8% and a 29% increase in
direct mail volume. The increase in telemarketing hours occurred during the
first three quarters of 1993, while in the fourth quarter of 1993,
telemarketing hours declined 23% compared to the prior year. The Company
expects this decline in telemarketing hours will continue through the first
quarter of 1994. The decrease in telemarketing volume is due primarily to
reduced volume with a few non-bank credit card issuer clients. The decrease
in volume relates to the decline in certain net response rates discussed
under "Results of Operations - Subscriber Acquisition Costs". Part of the
increase in direct mail volume in 1993 was due to the Company's mailing a
greater number of "insert" type mailings which generally have significantly
lower costs and response rates (as compared to "solo" type mailings).
Subscriber acquisition campaign volume increased 20% in 1992 due primarily to
increased marketing levels and the timing of marketing campaigns.
Gross enrollments (new enrollments before cancellations) from new marketing
increased over the prior year. Certain offers that the Company marketed in
1993 produced higher upfront response rates than offers marketed by the
Company in the prior year. However, some of these programs resulted in higher
cancellation rates than experienced in 1992. Also a substantial portion of
new enrollments essentially replaces existing subscribers who do not renew.
This portion of new enrollments, therefore does not generate an increase in
total subscription revenue. On a net basis (gross enrollments net of
attrition), the Company's membership base increased over the prior year.
The volume and type of subscriber acquisition expenditures, as well as
enrollments, fluctuate periodically; such fluctuations are not unusual. Due
to timing differences between periods, there may not always be a direct
correlation between subscriber acquisition expenditures and new enrollments
in a particular period. In addition, historical response rates may not be an
indication of future response rates.
Commissions paid to credit card issuers were $49.5 million in 1993 as
compared to $41.0 million in 1992 and $39.6 million in 1991. The 21% increase
in 1993 and the 4% increase in commissions in 1992 were primarily a result of
increases in billings.
Billings to Subscribers, Net
Net billings were a record $173.8 million in 1993 compared to $150.5 million
in 1992 and $141.4 million in 1991. The 15% increase in 1993 was primarily
due to an increase in Hot-Line (multi year, in particular), Fee Card and
CreditLine billings. The 6% increase in 1992 was primarily a result of
increased new marketing with an existing client.
SafeCard Services, Inc.
Consolidated Balance Sheets
Assets
October 31, 1993 1992
Cash and cash equivalents $ 3,335,000 $ 8,208,000
Investment securities,
maturing within one year 22,916,000
Accrued interest receivable 4,403,000 4,385,000
Accounts receivable, net 8,443,000 12,886,000
Income tax receivable 5,252,000
Deferred subscriber costs
Commissions 28,149,000 24,028,000
Subscriber acquisition costs 47,987,000 42,674,000
----------- -----------
Total 97,569,000 115,097,000
----------- -----------
Investment Securities, maturing after one year 166,704,000 156,177,000
Property And Equipment, net 8,420,000 8,448,000
Subscriber Costs And Other Assets
Deferred commissions 12,825,000 11,558,000
Deferred subscriber acquisition costs 91,976,000 84,646,000
Other assets 793,000 1,492,000
----------- -----------
Total 105,594,000 97,696,000
----------- -----------
$378,287,000 $377,418,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
SafeCard Services, Inc.
Liabilities and Stockholders' Equity
October 31, 1993 1992
Current Liabilities
Accounts payable $ 14,961,000 $ 11,497,000
Accrued expenses 16,573,000 22,496,000
Income taxes currently payable 3,439,000
Allowance for cancellations 8,893,000 7,587,000
Total, excluding deferred credits 40,427,000 45,019,000
Deferred credits, current portion
Subscribers' advance payments 94,460,000 82,159,000
Deferred income taxes 10,554,000 11,366,000
Total 145,441,000 138,544,000
Subscribers' Advance Payments,
less current portion 47,603,000 42,735,000
Deferred Income Taxes,
less current portion 27,548,000 30,641,000
Commitments And Contingencies (Note K)
Stockholders' Equity
Common stock--authorized 35,000,000 shares
of $.01 par value; issued 34,196,000 shares
(33,426,048 in 1992); outstanding 24,118,184
shares (26,646,033 in 1992) 342,000 334,000
Additional paid-in capital 15,990,000 9,625,000
Retained earnings 220,898,000 194,534,000
----------- -----------
237,230,000 204,493,000
Less cost of common shares in treasury
(10,077,816 in 1993 and
6,780,015 in 1992) (79,535,000) (38,995,000)
----------- -----------
Total 157,695,000 165,498,000
$378,287,000 $377,418,000
=========== ===========
SafeCard Services, Inc.
Consolidated Statements of Earnings
Years ended October 31, 1993 1992 1991
Subscription Revenue, net $156,600,000 $146,265,000 $140,557,000
Operating Costs And Expenses
Subscriber acquisition costs 95,248,000 86,828,000 83,953,000
General,administrative
and service costs 29,433,000 24,949,000 26,389,000
Estimated relocation expenses 17,500,000
----------- ----------- -----------
124,681,000 129,277,000 110,342,000
----------- ----------- -----------
Earnings From Operations 31,919,000 16,988,000 30,215,000
Interest and other income 10,526,000 11,366,000 11,327,000
Gain from litigation 550,000
----------- ----------- -----------
Earnings Before Income Taxes 42,445,000 28,904,000 41,542,000
----------- ----------- -----------
Income Tax Expense
Currently payable 15,709,000 17,802,000 18,390,000
Deferred (4,741,000) (11,396,000) (6,561,000)
----------- ----------- -----------
10,968,000 6,406,000 11,829,000
----------- ----------- -----------
Net Earnings $ 31,477,000 $ 22,498,000 $ 29,713,000
========== ========== ==========
Earnings Per Share $1.10 $.75 $1.02
==== === ====
Weighted average number of common
and common equivalent shares 28,572,000 30,158,000 29,325,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
[Enlarge/Download Table]
SafeCard Services, Inc.
Consolidated Statements of Changes in
Stockholders' Equity
Additional Commmon Stock Total
Common Stock Paid-In Retained In Treasury Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
Balance at October 31, 1990 33,108,148 $331,000 $7,150,000 $150,235,000 (6,719,584) ($38,220,000) $119,496,000
Net earnings 29,713,000 29,713,000
Cash dividends paid,
$.15 per share (3,939,000) (3,939,000)
Exercise of employee
stock options 22,000 176,000 210,331 753,000 929,000
Purchase of treasury stock (263,174) (1,296,000) (1,296,000)
Balance at October 31, 1991 33,130,148 $331,000 $7,326,000 $176,009,000 (6,772,427) ($38,763,000) $144,903,000
Net earnings 22,498,000 22,498,000
Cash dividends paid,
$.15 per share (3,973,000) (3,973,000)
Exercise of employee
stock options
and related tax benefit 295,900 3,000 2,299,000 54,662 313,000 2,615,000
Purchase of treasury stock (62,250) (545,000) (545,000)
Balance at October 31, 1992 33,426,048 $334,000 $ 9,625,000 $194,534,000 (6,780,015) ($38,995,000) $165,498,000
Net earnings 31,477,000 31,477,000
Cash dividends paid,
$.20 per share (5,113,000) (5,113,000)
Exercise of employee
stock options
and related tax benefit 769,952 8,000 6,365,000 172,059 1,159,000 7,532,000
Purchase of treasury stock (3,469,860) (41,699,000) (41,699,000)
Balance at October 31, 1993 34,196,000 $342,000 $15,990,000 $220,898,000 (10,077,816) ($79,535,000) $157,695,000
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
SafeCard Services, Inc.
Consolidated Statements of Cash Flows
Years ended October 31, 1993 1992 1991
Cash Flows From Operating Activities
Net cash received from subscribers $175,596,000 $153,303,000 $140,737,000
Cash expenditures for subscriber
acquisition, commissions
and operations (137,537,000) (120,306,000) (106,885,000)
Relocation expenditures (1,753,000) (6,104,000)
Interest received 13,952,000 10,675,000 12,059,000
Interest paid (428,000) (606,000)
Cash flow from operations before
income taxes and litigation
settlement 50,258,000 37,140,000 45,305,000
Income taxes paid, net (21,413,000) (18,518,000) (15,903,000)
Gain from litigation settlement 550,000
----------- ----------- -----------
Net cash provided by operating
activities 28,845,000 19,172,000 29,402,000
----------- ----------- -----------
Cash Flows From Investing Activities
Purchase of investment securities (63,174,000) (167,760,000) (164,564,000)
Proceeds from sale of investment
securities 71,607,000 153,730,000 149,557,000
Payments for property and equipment (975,000) (6,380,000) (1,821,000)
Sale of property and equipment 56,000
---------- ---------- -----------
Net cash provided by (used in)
investing activities 7,714,000 (20,410,000) (16,828,000)
---------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid (5,113,000) (3,973,000) (3,939,000)
Payments for purchase of
treasury shares (41,699,000) (545,000) (1,296,000)
Proceeds from exercise of
stock options 5,380,000 1,940,000 929,000
Principal payments on the Ft.
Lauderdale Lease (155,000) (132,000)
----------- ---------- ----------
Net cash used in financing
activities (41,432,000) (2,733,000) (4,438,000)
----------- ---------- ----------
Net Increase (Decrease) In Cash (4,873,000) (3,971,000) 8,136,000
Cash and cash equivalents at
beginning of period 8,208,000 12,179,000 4,043,000
----------- ----------- ----------
Cash and cash equivalents at
end of period $ 3,335,000 $ 8,208,000 $ 2,179,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
SafeCard Services, Inc.
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
SafeCard Services, Inc. ("SafeCard") sells subscriptions, principally through
credit card issuers, by mail and telephone for continuity services it
provides to subscribers. Subscriptions for continuity services typically
continue annually or periodically unless cancelled by the subscriber.
SafeCard's principal service is credit card loss notification ("Hot-Line"),
whereby SafeCard gives prompt notice to credit card issuers upon being
informed that a subscriber's credit cards have been lost or stolen. SafeCard
also markets other continuity services including those related to fee-based
credit cards, reminder services, a personal credit information service
("CreditLine") and others.
Certain changes have been made in the presentation of 1991 and 1992 financial
information to conform with 1993 presentation.
References herein to the years 1993, 1992 and 1991 refer to the Company's
fiscal years ended October 31st.
1. Principles of Consolidation
The consolidated financial statements include the accounts of SafeCard, its
100% owned subsidiaries, SafeCard Services Insurance Company, SafeCard Travel
Services, Inc., SafeCard Marketing, Inc. and one inactive subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
The term "Company" as used herein refers to SafeCard and its subsidiaries.
2. Cash and Cash Equivalents and Investment Securities
Included in cash and cash equivalents are all amounts invested in overnight
U.S. Treasury Bond repurchase agreements, U.S. Treasury Bills, certificates
of deposit and tax-exempt securities which either have maturities of 3 months
or less from the date of purchase by the Company, or have "put" options that
can be exercised by the Company within 3 months from date of purchase.
Current and non-current investments in securities, which consist primarily of
tax-exempt municipal securities, are carried at cost, adjusted for the
amortization of any premium or accretion of any discount. The Company
classifies its investment securities as either current or non-current in
accordance with its current investment policy to generally hold the
securities until their various maturity dates, or if the securities have put
options that can be exercised by the Company at an earlier date, until the
date of the put option. Accordingly, investment securities with maturity
dates, or put dates, less than 1 year from the balance sheet date are
classified as current; all other investment securities are classified as
non-current.
Approximately $106 million of these investments at October 31, 1993 were held
in escrow for advance payments of multi-year subscriptions (see "Revenue
Recognition/Cost Amortization") or pursuant to the CreditLine Agreement. See
Note I - Transactions with Related Parties.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which generally requires companies
under certain circumstances to record investments in marketable securities at
market value. Based on current investment policies, management does not
anticipate the adoption to have a material impact on the Company's earnings
or financial position in the year of adoption. The Company is required to
adopt the Statement no later than the first quarter of fiscal 1995.
3. Property, Equipment and Leaseholds
Property and equipment are recorded at cost. Depreciation is recorded in
amounts sufficient to charge the cost of depreciable assets to operations,
using the straight-line method, over their estimated useful lives.
Capitalized lease amounts have been amortized over the estimated useful life
of the asset, or the lease term, whichever is shorter.
4. Revenue Recognition/Cost Amortization
Subscription Revenue and Commission Expense
The Company generally receives advance payments from subscribers for its
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 and are generally paid
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. Previously paid commissions related to cancelled
subscriptions are reimbursed to the Company by the credit card issuer.
Subscribers' advance payments for multi-year subscriptions are restricted and
not available until earned. The restriction is released ratably over the
subscription period, which coincides with the recognition of revenue.
Unearned subscribers' advance payments for multi-year subscriptions were
approximately $105 million at October 31, 1993 and $93 million at October 31,
1992. Interest earned on these funds is not restricted.
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 salaries and other 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 expected renewal periods. 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 1991 through 1993.
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 80% 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 F - Subscriber Acquisition Costs. Subscription renewal rates are
continually monitored. If current estimates of future revenues from renewals
are significantly lower than anticipated in the Company's amortization
models, the Company adjusts the amortization rate to reflect the revised
estimates.
In December 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 93-7, "Reporting on
Advertising Costs" which will be effective for the Company in fiscal 1995.
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.
5. CreditLine
The Company markets CreditLine under an agreement with CreditLine Corporation
("CLC"), a corporation owned by Steven J. Halmos and Peter Halmos, the
Company's co-founders, and their families. Pursuant to the agreement with
CLC, all billings, costs and any resulting profits or losses are to be shared
50% by the Company and 50% by CLC. Accordingly, the Company records 50% of
CreditLine billings and costs in its financial statements. In June 1993, the
Company was notified by CLC that the license agreement under which the
Company markets CreditLine would not be renewed effective November 1, 1993.
See Note I - Transactions with Related Parties. The CreditLine agreement is
also the subject of litigation. See Note K - Commitments and Contingencies.
6. Income Taxes
Certain transactions are accounted for in different periods for tax purposes
than for financial reporting purposes and, accordingly, provisions for
deferred taxes applicable to such timing differences are made in the
Company's consolidated financial statements. The Company accounts for
deferred taxes using the deferred method (see below) and computes deferred
taxes on timing differences using the "gross change" method under which
deferred taxes are provided on timing differences originating in the current
period using the current period's tax rate. Deferred taxes are reversed as
the corresponding timing differences reverse at the tax rates in effect
during the periods when the timing differences originated.
In February 1992, the FASB issued Statements of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Application of Statement
No. 109 will require a change from the deferred method to the liability
method of accounting for income taxes. One of the principal differences from
the deferred method used in these financial statements is that changes in tax
rates and laws will be reflected in income from continuing operations in the
period such changes are enacted. Under the deferred method, such changes are
reflected over time, if at all. The Company intends to adopt Statement No.
109 on a prospective basis in the first quarter of fiscal 1994. Management
estimates that such adoption will have a one-time positive effect on the
Company's reported earnings in fiscal 1994 of approximately $2 million,
(which is the cumulative effect of adoption at November 1, 1993), but will
also increase slightly the Company's effective tax rate once adopted.
7. Earnings Per Share
Earnings per share are computed using the weighted average number of shares
of common stock and common stock equivalents (common stock issuable upon
exercise of stock options) outstanding. In computing earnings per share, the
Company utilizes the treasury stock method. This method assumes that stock
options, under certain conditions, are exercised and treasury shares are
assumed to be purchased (not to exceed 20% of the common stock outstanding)
from the proceeds using the average market price of the Company's common
stock for the period. Any excess proceeds not utilized for the purchase of
treasury shares are assumed first to reduce any outstanding capitalized lease
obligation, if any, and any remainder invested in interest-bearing securities
with net earnings increased for the hypothetical interest savings or interest
income, net of income taxes. Due to the hypothetical interest savings or
interest income, net earnings, as presented in the Company's Consolidated
Statements of Earnings, divided by the weighted average number of common and
common equivalent shares, will not always equal earnings per share.
B. Investment Securities
A majority of the Company's investment portfolio is invested 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 value for the Company's 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 and estimated market value
of the Company's investment securities were as follows:
October 31, 1993
Financial Statement
Carrying Amount* Market Value
------------------- ------------
Current
Non-Current $166,704,000 $170,015,000
----------- -----------
Total $166,704,000 $170,015,000
=========== ===========
October 31, 1992
Financial Statement
Carrying Amount* Market Value
------------------- ------------
Current $ 22,916,000 $ 23,198,000
Non-Current 156,177,000 158,350,000
----------- -----------
Total $179,093,000 $181,548,000
=========== ===========
*Cost adjusted for amortization of premium or accretion of discount.
Interest income for the years 1993, 1992 and 1991 totaled $8.7 million, $10.0
million and $10.8 million, respectively.
C.Accounts Receivable
Accounts receivable, primarily from credit card issuers, and the related
allowance for doubtful accounts were as follows:
October 31, 1993 1992
Accounts receivable $8,593,000 $13,236,000
Allowance for doubtful accounts (150,000) (350,000)
-------- ---------
$8,443,000 $12,886,000
========= ==========
D. Property and Equipment
Property and equipment consisted of the following:
Estimated
Useful October 31,
Life 1993 1992
Building 30 years $5,215,000 $5,102,000
Equipment, furniture
and fixtures 3-7 years 4,390,000 4,072,000
--------- ---------
9,605,000 9,174,000
Less: accumulated
depreciation (1,632,000) (1,173,000)
---------- ----------
7,973,000 8,001,000
Land 447,000 447,000
--------- ---------
$8,420,000 $8,448,000
========= =========
E.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 $11
million and $6.5 million in the second and fourth quarters of 1992,
respectively, for a total of $17.5 million. 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 this premises
and is no longer making payments on the Ft. Lauderdale Lease, which is now
the subject of litigation. See Note K -Commitments and Contingencies.
Included within "Accrued Expenses" as of October 31, 1993 and 1992 is
approximately $10.6 million and $12.4 million, respectively, relating to the
relocation expenses described above. The accrued relocation expenses at
October 31, 1993 relate primarily to the Ft. Lauderdale Lease.
F.Subscriber Acquisition Costs
Subscriber acquisition costs (current and deferred) consisted of the
following:
October 31, 1993 1992
Hot-Line $121,061,000 $114,323,000
Fee Card 5,470,000 3,518,000
Other services 13,432,000 9,479,000
----------- -----------
Total subscriber
acquisition costs 139,963,000 127,320,000
Less: Amount classified
as a current asset (47,987,000) (42,674,000)
----------- -----------
Non-current subscriber
acquisition costs $ 91,976,000 $ 84,646,000
=========== ===========
G.Income Taxes
The Company's effective income tax rate varies from the statutory U.S.
federal income tax rate because of the following factors:
Years ended October 31, 1993 1992 1991
Statutory federal income tax rate 34.8% 34.0% 34.0%
Increase (reduction) in tax
rates resulting from:
State income tax, net of federal benefit 1.2 2.4 3.6
Tax-exempt interest income (6.8) (13.8) (7.0)
Reversal of prior years' deferred taxes
at the rates in effect at that time (2.9) (1.1) (1.2)
Other (.5) .7 (.9)
----- ----- -----
Effective tax rate 25.8% 22.2% 28.5%
The deferred income tax benefit resulted from the following items:
Years ended October 31, 1993 1992 1991
Subscriber costs, net $ 450,000 ($ 15,000) ($1,518,000)
Multi-year subscription revenues (7,310,000) (7,993,000) (3,736,000)
Reminder/reference subscription
revenue 1,952,000 1,194,000 (508,000)
Relocation expenses 698,000 (4,389,000)
Other (531,000) (193,000) (799,000)
--------- ---------- ---------
($4,741,000) ($11,396,000) ($6,561,000)
========= ========== =========
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 the Company's fiscal year ended
October 31, 1993 of 34.8%.
During 1989, the Company requested that the Internal Revenue Service ("IRS")
approve certain changes in its tax accounting methods. In August 1990, the
IRS approved these changes, effective commencing in 1990. These requested
changes caused the Company in 1990 through 1993, and will cause the Company
in the future, to pay taxes on a current basis on a significant portion of
income which would, under the Company's prior tax accounting methods, have
been deferred. In addition, the Company is recognizing approximately $105
million of previously deferred taxable income as additional taxable income
spread evenly over a 6 year period which commenced in 1990. The expected
income taxes on the portion of the $105 million of taxable income remaining
to be recognized in 1994 and 1995, at the current statutory rates, are
approximately $12 million, or $6 million per year in 1994 and 1995.
These changes in tax accounting had no material effect on income tax expense
recorded in the Company's financial statements, nor should they effect future
income tax expense. Rather, these changes affect the timing of the Company's
tax payments.
As a result of the Company's relocation to Cheyenne, Wyoming, the Company's
state tax provision has been significantly reduced.
[Enlarge/Download Table]
H.Common Stock And Stock Options
The following table represents information for the previous three years with
respect to options granted and outstanding is as follows:
Shares Under Option
Outstanding Outstanding
Option Option at beginning at end of
Plan Price Range of period Granted Cancelled Exercised period
------ ----------- ------------ ------- --------- --------- -----------
Year ended October 31, 1991
1979 Plan $5.875 141,040 141,040
Outside Directors' Options $5.513-9.00 400,000 100,000 (200,000) 300,000
1987 Plan $5.875 450,000 (4,000) (22,000) 424,000
1989 Executive Options $5.125 1,100,000 1,100,000
1989 Employee Stock
Option Plan $6.00 450,000 (10,000) (10,331) 429,669
Peter & Steven J.
Halmos $5.125-5.50 5,850,000 5,850,000
1991 Employee Stock
Option Plan $9.00 162,000 162,000
--------- ------- ------- -------- ---------
8,391,040 262,000 (14,000) (232,331) 8,406,709
========= ======= ======= ======== =========
Year ended October 31, 1992
1979 Plan $5.875 141,040 141,040
Outside Directors' Options $5.513-9.00 300,000 (100,000) 200,000
1987 Plan $5.875 424,000 (75,900) 348,100
1989 Executive Options $5.125 1,100,000 (120,000) 980,000
1989 Employee Stock
Option Plan $6.00 429,669 (14,003) (54,662) 361,004
Peter & Steven J.
Halmos $5.125-5.50 5,850,000 5,850,000
1991 Employee Stock
Option Plan $9.00 162,000 (24,000) 138,000
--------- ------- ------- -------- ---------
8,406,709 (38,003) (350,562) 8,018,144
========= ======= ======= ======== =========
Year ended October 31, 1993
1979 Plan $5.875 141,040 (141,040) 0
Outside Directors'
Options $6.375-13.00 200,000 200,000 (100,000) 300,000(2)
1987 Plan $5.875 348,100 (348,100) 0
1989 Executive Options $5.125 980,000 (230,000) 750,000
1989 Employee Stock
Option Plan $6.00 361,004 (5,333) (102,671) 253,000
Peter & Steven J.
Halmos $5.125-5.50 5,850,000 (1,950,000) 3,900,000
1991 Employee Stock
Option Plan $9.00 138,000 (24,333) (38,334) 75,333(3)
1992 Employee Stock Option Plan $8.875 75,000 (12,500) 62,500(4)
--------- ------- ---------- -------- ---------
8,018,144 275,000 (1,992,166) (960,145) 5,340,833(1)
========= ======= ========== ======== =========
<FN>
(1) Unless otherwise noted, all shares outstanding are exercisable and no
additional shares are available for granting options under each plan.
(2) Of the 300,000 stock options outstanding under the Outside Directors'
Options, 200,000 are exercisable at October 31, 1993. The remaining 100,000
vest in September 1994.
(3) Of the 75,333 stock options outstanding under the 1991 Employee Stock
Option Plan, 42,997 were exercisable at October 31, 1993. The remaining
32,336 vest equally in 1994 and 1995.
(4) Of the 62,500 stock options outstanding under the 1992 Employee Stock
Option Plan, none were exercisable at October 31, 1993 as they vest over a
three-year period beginning in November, 1993.
On December 5, 1993, the Company's Compensation Committee approved, and the
Board of Directors adopted, subject to shareholder approval, a 1994 long term
Stock-Based Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the
award of stock options, stock appreciation rights and restricted stock
covering a maximum of 2,400,000 shares. The Company's new Chief Executive
Officer and Chairman of the Board, Paul G. Kahn, has been granted a ten-year
option to acquire 1,000,000 of these shares. The 1994 Plan will be submitted
for shareholder approval at the 1994 meeting of the shareholders. If the 1994
Plan is not approved, option grants made thereunder will become null and
void.
All stock options granted in fiscal 1993 and prior thereto were administered
by the Board of Directors and were granted at market price on the date of
grant or amendment. As of October 31, 1993, options to acquire 5,145,997
shares were exercisable under the option plans.
As of October 31, 1993, 4,590,833 of the shares held in treasury and 750,000
unissued shares of the Company's common stock were reserved for the issuance
of shares under the above described stock options.
I. Transactions with Related Parties
Until his resignation as Chief Executive Officer and 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.
Since that date, Steven J. Halmos, acting in the capacity of an Advisor on
Marketing and Operational Strategy, has 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"). In 1993, the
Company paid Steven J. Halmos (or HPCC for Steven J. Halmos' services) a
total of approximately $2.1 million. In the years 1992 and 1991 the annual
aggregate fee paid to HPCC for Steven J. Halmos' services was approximately
$2.7 million, with an additional $1.5 million being paid to HPCC each year
for the services of Peter Halmos. In addition, the Company paid or accrued
$14,000 and $362,000 in 1992 and 1991, respectively, for direct and allocated
expenses that the Company was advised had been incurred by HPCC.
The Steven J. Halmos Agreement provides for a consulting
arrangement, contains certain non-compete provisions, and includes a
standstill, voting and right of first refusal agreement. The Steven J. Halmos
Agreement also provided the Company would repurchase certain shares of the
Company's common stock owned by Steven J. Halmos pursuant to the Company's
stock repurchase program.
Under the consulting arrangement, Steven J. Halmos provides the Company, for
a period of five years, with his full-time services for annual compensation
in the amount of $750,000. This arrangement will terminate in 1998.
In addition, Steven J. Halmos, agreed not to compete with the Company until
the year 2000. He also entered a standstill, voting and right of first
refusal agreement which, among other things, limits his future acquisition of
shares of Company common stock to the additional 3,950,000 shares ("Option
Shares") of stock he could acquire pursuant to previously granted stock
options, commits him to vote the Option Shares with management and subjects
the Option Shares to a right of first refusal in favor of the Company.
subject to the terms of the Steven J. Halmos Agreement, the Company will pay
him $1,250,000 a year for five years for the non-compete and standstill,
voting and right of first refusal undertakings.
The agreements also called for Steven J. Halmos to sell the 1,645,760 shares
of Company stock he owned (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 certain credit information products and services. The
Company markets CreditLine pursuant to an agreement (as amended, the
"CreditLine Agreement") with CLC. 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 all billings, costs and any resulting profits and losses,
if any, are shared equally between CLC and the Company. Net CreditLine
billings to subscribers totaled approximately $15.8 million, $9.7 million and
$8.4 million while marketing and other expenditures totaled $13.4 million,
$6.2 million and $7.8 million in 1993, 1992 and 1991, 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 has a CreditLine
marketing agreement on November 1, 1993 or enters into such a marketing
agreement within the following three years. This amendment has been
challenged in the Cook County, Illinois, litigation described below.
As discussed in Note K - Commitments and Contingencies, the Company is
engaged in litigation with Peter Halmos and certain related parties,
including CLC. In an action brought by the Company in state court in Wyoming,
the Company alleges, among other things, that the CreditLine Agreement
represents a misappropriation of corporate opportunity and breach of
fiduciary duty on Peter Halmos' part and seeks, among other things, monetary
damages and equitable relief including protection of the Company's CreditLine
business free of interference from Peter Halmos and CLC. In litigation
brought by Peter Halmos and certain related parties in Cook County, Illinois,
Mr. Halmos seeks rescission of an amendment to the CreditLine Agreement and
an accounting. The Company believes it has substantial defenses to Peter
Halmos' claim and intends to defend its position, and pursue its own claims,
vigorously.
In 1993, CreditLine and certain services marketed in conjunction with
CreditLine, accounted for approximately $6.5 million or 4.2% of the Company's
subscription revenues and approximately $1.9 million or 4.5% of the Company's
pre-tax earnings.
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, 1993, approximately $.9 million of the
Company's non current investment securities have been deposited in the escrow
account. See Note A - 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, 1992 and 1991 for
the land and building, were approximately $.7 million, $1.2 million and $1.2
million, respectively. During 1992 and 1991 the Company also leased
warehouse space from the Halmos Partnership and made lease payments of
approximately $47,000 and $72,000, respectively. 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 K - Commitments and
Contingencies.
On October 1, 1991, the Company and The Dilenschneider Group entered into a
consulting agreement, which was renewed in October 1992 and again in October
1993, to provide public relations counsel and advice to the Company for an
annual retainer of $180,000. Robert L. Dilenschneider, a SafeCard Director,
is the majority owner and Chief Executive Officer of The Dilenschneider
Group. In January 1993, for an additional annual retainer of $150,000, the
arrangements with The Dilenschneider Group were expanded to include
consulting on, and assistance with, investor relations.
J. Employee Pension 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, who have worked at least 100
hours in the past year and have completed one year of service. 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 1993 was approximately
$240,000.
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 3 of the previous 5 calendar years.
Amounts recorded for the Company's contributions to the SEP/IRA for 1993,
1992 and 1991 were $75,000, $402,000 and $388,000, respectively.
K. Commitments and Contingencies
1. 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
34%, 37% and 41% of the Company's consolidated subscription revenue in 1993,
1992 and 1991, respectively. The principal Citicorp contract, which had an
initial term through June 1993, was amended on March 31, 1992 to extend the
contract to December 31, 1997 and again on September 1, 1993 to extend the
contract to 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 11% of the
Company's consolidated subscription revenue in 1993 (and less than 10% in
1992 and 1991). The agreement, which contains a provision for cancellation
without cause by either party upon 90 days notice, is subject to renewal
annually.
Contracts with Shell Oil Company accounted for approximately 10% of the
Company's consolidated subscription revenue during 1991 (and less than 10% in
1993 and 1992). The Shell contracts have varying initial terms, but
automatically renew on an annual basis unless terminated by either party.
On April 1, 1993, the Company entered into the Steven J. Halmos Agreement.
See Note I - Transactions with Related Parties.
2. Pending Litigation
The Company is defending or prosecuting three complex litigations against
Peter Halmos, former Chairman of the Board and Executive Management
Consultant to the Company, and 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 three cases in which the Company is a party are:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for the Company) 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, libel and the CreditLine Agreement
pursuant to which the Company markets CreditLine. 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. The Company and the director have sought
dismissal of the revised complaint.
A suit by Peter Halmos, purportedly in the name of the Halmos Partnership,
against the Company and one of its officers in Circuit Court in Broward
County, Florida, making a variety of claims related to the Ft. Lauderdale
Lease. 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. Discovery is
proceeding. No trial date has yet been set.
A suit filed by the Company 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. This suit was filed after
similar litigation brought by the Company in Federal Court for the District
of Wyoming was dismissed on federal venue grounds. Peter Halmos secured an
injunction from the Cook County Circuit Court in Illinois barring the Company
from pursuing these claims in the Wyoming state court until further order of
the Cook County Circuit Court. The Company appealed the issuance of the
injunction and sought a stay of the injunction pending appeal. On September
10, 1993, a three-judge panel of the Appellate Court, State of Illinois,
First District, granted the Company's emergency motion to stay the
injunction. The Wyoming court has denied the Peter Halmos parties' initial
motion to dismiss and has set the case for trial on September 12, 1994.
Discovery is proceeding.
The Company believes that it has proper and meritorious claims and defenses
in these lawsuits which it intends to vigorously pursue.
The Company is involved in certain other claims and litigation which are not
currently considered material.
L. Statements Of Cash Flows
Supplemental cash flow disclosures are presented below.
Reconciliation of net earnings to net cash provided by operating activities:
Years ended October 31, 1993 1992 1991
Net Earnings $ 31,477,000 $ 22,498,000 $ 29,713,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 864,000 769,000 865,000
Income tax expense 10,968,000 6,406,000 11,829,000
Income tax payments, net (16,161,000) (18,518,000) (15,903,000)
Net (increase) decrease in
interest receivable (18,000) (1,786,000) 649,000
Net (increase) decrease in
accounts receivable 4,643,000 (2,641,000) (1,186,000)
Net increase in income
tax receivable (5,252,000)
Net amortization of bond
premiums/discounts 5,233,000 2,439,000 659,000
Provision for uncollectible
accounts and commissions (250,000) 137,000
Billings to subscribers, net 173,769,000 150,495,000 141,435,000
Amortization of subscribers'
advance payments to revenue (156,600,000 (146,265,000) (140,557,000)
Expenditures for subscriber
acquisition costs (63,717,000) (55,065,000) (47,334,000)
Payment of commissions, net (49,511,000) (41,024,000) (39,556,000)
Amortization of subscriber
acquisition costs 51,075,000 46,516,000 43,862,000
Amortization of commissions 44,173,000 40,312,000 40,091,000
Net increase in allowance
for cancellations 1,306,000 597,000 232,000
Net increase (decrease) in
accounts payable and
accrued expenses (2,459,000) 15,680,000 5,138,000
Gain on sale of investment
securities (1,277,000) (1,011,000) (321,000)
(Gain) loss on sale/disposition
of equipment (117,000) 271,000 44,000
Net (increase) decrease in
other assets 699,000 (638,000) (258,000)
----------- ----------- -----------
Net cash provided by
operating activities $ 28,845,000 $ 19,172,000 $ 29,402,000
=========== =========== ===========
M. Unaudited Quarterly Financial Data
Quarters Ended
1993 January 31 April 30 July 31 October 31
Subscription Revenue,net $37,570,000 $39,116,000 $39,717,000 $40,197,000
Gross Profit(A) $15,409,000 $15,334,000 $15,392,000 $15,217,000
Net Earnings $ 8,896,000 $ 8,528,000 $ 7,492,000 $ 6,561,000
Earnings per Share $.30 $.29 $.27 $.24
Weighted average number
of common and common
equivalent shares 29,312,000 29,360,000 27,814,000 27,465,000
Quarters Ended
1992 January 31 April 30 July 31 October 31
Subscription Revenue, net $36,441,000 $36,597,000 $36,563,000 $36,664,000
Gross Profit(A) $14,762,000 $15,143,000 $14,987,000 $14,545,000
Net Earnings(B) $ 8,162,000 $ 1,016,000 $ 9,046,000 $ 4,274,000
Earnings per Share(B) $.27 $.03 $.30 $.14
Weighted average number
of common and common
equivalent shares 30,249,000 30,263,000 30,342,000 29,738,000
(A) Certain amounts have been reclassified to conform with the 1993
Consolidated Financial Statements.
(B) The second and fourth quarters of 1992 include pre-tax charges against
earnings of $11.0 million and $6.5 million, respectively, in connection
with the Company's relocation to Cheyenne, Wyoming (see Note E - Estimated
Relocation Expenses).
Report of Independent Accountants
To the Board of Directors and Shareholders
of SafeCard Services, Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of SafeCard Services, Incorporated and its subsidiaries at October
31, 1993 and 1992, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 1993, 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 K to the 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.
Accordingly, no provision for any liability for these claims has been made in
the accompanying financial statements.
PRICE WATERHOUSE
Denver, Colorado
December 10, 1993
Corporate Information
Board of Directors
William T. Bacon Jr.
Bacon, Whipple
Division of Stifel, Nicolaus & Co., Inc.
Marshall L. Burman
Of Counsel
Wildman, Harrold, Allen & Dixon
Gerald R. Cahill
Chief Operating Officer of the Company
Robert L. Dilenschneider
Chief Executive Officer
The Dilenschneider Group, Inc.
Paul G. Kahn
Chairman of the Board and
Chief Executive Officer of the Company
Eugene Miller*
Retired, Former Vice Chairman and Chief
Financial Officer, USG Corporation
W.M. Stalcup Jr.
President of the Company
*Vice Chairman of the Board and lead outside Director
Transfer Agent/Registrar
American Stock Transfer and Trust
Form 10-K
A copy of the Company's Form 10-K Annual Report filed with the Securities and
Exchange Commission may be obtained by shareholders by writing the Company's
Investor Relations department at the address listed.
Corporate Officers
Paul G. Kahn
Chairman of the Board and Chief Executive Officer
W.M. Stalcup Jr.
President
Gerald R. Cahill
Chief Operating Officer
John Bochak
Senior Vice President
Agenta K. Breslin
Executive Vice President &
Assistant Secretary
David Gallimore
Executive Vice President
Joanne J. Seehousen
Executive Vice President
Lynn C. Torrent
Chief Financial Officer
Executive Offices
3001 East Pershing Boulevard
Cheyenne, WY 82001
(307) 771-2700
Dates Referenced Herein and Documents Incorporated by Reference
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