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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-13806
TRANSMEDIA NETWORK INC.
-----------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 84-6028875
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
11900 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33181
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(Address of principal executive offices) (zip code)
305-892-3300
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Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
- ------------------- ON WHICH REGISTERED
---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
--------------------------------------
(Title of Class)
PREFERRED STOCK, PAR VALUE $.10 PER SHARE
-----------------------------------------
(Title of Class)
Indicate by (X) whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of December 6, 1999: $23,190,778
Number of shares outstanding of Registrant's Common Stock, as of December 6,
1999: 13,352,709.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
2
PART I
ITEM 1. BUSINESS
GENERAL
Transmedia Network Inc. and its subsidiaries (the "Company") own and
market a charge card ("the Transmedia Card") offering savings to the
Company's card members on dining as well as lodging, travel, retail
catalogues and long distance telephone calls. The Company's primary
business activity is to acquire, principally through cash advances and
purchases, rights to receive food and beverage credits at full retail
value from restaurants ("rights to receive"), which are then sold for
cash to holders of the Transmedia Card. These rights to receive are
primarily purchased by the Company for cash but may also be acquired in
exchange for services.
On June 30, 1999, the Company acquired from SignatureCard, Inc.
("SignatureCard"), a subsidiary of Montgomery Ward & Co., Incorporated,
assets related to a membership discount program that SignatureCard
operated under the Dining a la Card ("DALC") trade name and service
mark. The assets acquired included various intellectual property rights
and computer software, membership and merchant data, rights-to-receive,
and most significantly, a registered card platform (the "Registered
Card Program"), among other things. The Company simultaneously entered
into a collaboration agreement with SignatureCard pursuant to which the
Company obtains access to their sponsor relationships with the world's
leading airlines. SignatureCard will receive a portion of the profits
derived from members initially acquired from SignatureCard or
subsequently generated through their efforts.
The Registered Card Program complements the Company's existing
proprietary Transmedia Card. In contrast to the Transmedia Card, which
is a private label charge card linked electronically to a member's bank
credit card of choice, registered card members can make discounted
purchases with one of their existing major credit cards so that the
discount is "blind" to both merchant and guests. This allows members to
accumulate savings by using conventional charge cards, such as
MasterCard, Visa, AMEX and Discover. The Company believes that the
registered card concept has broader consumer and restaurant appeal due
to its discrete nature and presently contemplates shifting the majority
of its marketing efforts to this platform.
Prior to the acquisition of DALC, the Company's areas of operation
included Central and South Florida, the New York, Chicago and Los
Angeles metropolitan areas, Boston and surrounding New England,
Philadelphia, San Francisco, Detroit, Indianapolis, Milwaukee, Denver,
Phoenix, North and South Carolina, Georgia, parts of Tennessee,
Dallas/Ft Worth and Houston. Franchised areas include most of New
Jersey, Washington, D.C., Maryland, Virginia, and parts of Texas. With
the acquisition of Dining a la Card, the Company now has a presence in
new areas such as St. Louis, Kansas City, San Diego, Memphis,
Minneapolis, Seattle and other parts of Washington, and to a lesser
degree, Cincinnati, Pittsburgh, Las Vegas, New Orleans, Portland, Salt
Lake City, Tulsa, and Hawaii. Licensing arrangements for the Transmedia
Card tradename and servicemark exist for the United Kingdom, Canada,
and Europe, as well as the Asia-Pacific region and are presently being
terminated.
The Company, in the past, derived income from franchising and licensing
the Transmedia Card tradename and servicemark and related proprietary
rights and know-how, including rights to solicit restaurants, hotels,
resorts and motels and acquire food, beverage and lodging credits,
within and outside the United States. The Company also received revenue
3
from licensing the Transmedia Card. The Company no longer grants new
franchises and has reacquired most of the formerly franchised
territories.
CORPORATE STRUCTURE
The Company commenced operations in 1984 and was reincorporated as a
Delaware corporation in 1987. Currently, it has the following principal
operating subsidiaries:
Transmedia Restaurant Company Inc., which is responsible for obtaining
and servicing restaurants and other service establishments such as
hotels, resort destinations and retailers where the Transmedia Card and
the Registered Card Program may be used.
Transmedia Service Company Inc., which is responsible for (i)
soliciting and servicing all members in the United States, (ii)
providing support services to Transmedia Restaurant Company, and (iii)
all domestic franchising of the Transmedia Card and related proprietary
rights and know- how.
TMNI International Incorporated, which licensed the Transmedia Card,
service marks, proprietary software and know-how outside the United
States.
TNI Funding I, Inc., which was established as a special purpose
corporation for purposes of the securitization of cash advances to
merchants referred to as rights-to-receive.
DESCRIPTION OF RIGHTS TO RECEIVE, PRIVATE LABEL CARD AND REGISTERED
CARD PROGRAMS
The Company's primary business is the acquisition of rights to receive
from participating establishments which are then sold for cash to
holders of the Transmedia Card (the "Private Label Program") or members
of the Registered Card Program. "Rights to Receive" are rights to
receive goods and services, principally food and beverages, which are
acquired and purchased from participating restaurants, for an amount
typically equal to approximately fifty percent (50%) of the food and
beverage credits. Alternatively, the Company may acquire such Rights to
Receive either by financing the merchant's purchase of other goods and
services or providing advertising and media placement services to the
participating establishments. Approximately ninety-five percent (95%)
of Rights to Receive are purchased for cash. The Company typically
purchases food and beverage credits that are anticipated to be utilized
in a period of no more than six to nine months; however, it is not
always possible for the Company to predict with accuracy the amount of
time in which such credits will be consumed, due to seasonality or the
opening of new market areas.
The Transmedia Card, the Company's proprietary private label charge
card, is selectively issued to applicants who are determined to be
creditworthy by virtue of their having a current, valid MasterCard,
Visa, Discover or American Express credit card. The Transmedia
cardmembers have a choice of programs, including (i) a card which
offers a 25% savings at participating establishments for which there is
a $49 annual fee, (ii) a Turn Meals into Miles(R) program which offers
mileage credits with participating airlines of 10 miles for each dollar
spent on food and beverage at participating establishments for an
annual fee of $9.95, and (iii) a no-fee Transmedia Card which affords
them 20% savings at participating establishments. Each account may have
more than one user and, accordingly, more than one cardmember. The
Company's cardmember solicitation efforts over the last fiscal year
have been, by design, focused on the fee paying cardmembers who, while
more expensive to acquire, tend to use the card more frequently and
spend more per dine. The Company also previously offered a silver and
gold fee-based Transmedia Card program designed to supplement the
existing dining only fee program and entitled the cardmember access to
additional benefits and savings at either no-cost or a reduced fee
depending upon the cardmembers' election. Renewal fees are $29.95 under
the silver program and $49.95 under the gold program.
4
When cardmembers present the Transmedia Card, they sign for the goods
or services rendered, as well as for the taxes and tips, as they would
with any other charge card. The Company, upon obtaining the receipt
(directly or via electronic point of sale transmission) from the
appropriate establishment, gives the establishment credit against
Rights to Receive which are owned by the Company. The Company then (i)
processes the receipt through the cardmember's electronically linked
MasterCard, Visa, Discover or American Express card account, which
remits to the Company the full amount of the bill, and (ii) either
credits the cardmember's MasterCard, Visa, Discover or American Express
account the appropriate discount or the cardmember's airline account
the appropriate mileage. Taxes and tips are remitted back to the
various establishments.
At the present time, the Registered Card Program is primarily marketed
through airline reward programs. Members enrolled in the program simply
register a valid major credit card with Transmedia and then present
their registered credit card while dining at a participating
restaurant. On a daily basis, a complete detail of all registered
credit card numbers is transmitted electronically to a central
processor and aggregator of transactions. The aggregator also receives
a complete detail of all merchants who are currently members of the
Registered Card Program. Based on the Company's agreements with various
processors throughout the country, the aggregator receives data for all
the credit card transactions from participating merchants. These
transactions are then matched to the current registered card file.
These matched transactions are transmitted electronically back to the
Company and qualified as to whether they are eligible for rebate.
Qualified transactions are then used to provide member savings, as well
as to invoice and collect from merchants.
Savings are delivered to the members in the form of a direct credit on
their statement, cash rebate or mileage credit program. The credit or
cash rebate provides members with either a monthly check or credit
equivalent to 20% of their total spend with participating merchants.
Alternatively, members can elect to receive rebates in the form of
frequent flyer miles with major airlines, such as United, American,
TWA, US Airways, Continental, British Airways, Northwest and Delta
Airlines.
DOMESTIC FRANCHISING
From 1990 to 1994, the Company franchised the Transmedia Card (then known as The
Restaurant Card) and related proprietary rights and know-how, including rights
to solicit restaurants and acquire Rights to Receive, in the United States, as
part of an expansion strategy to develop a national presence. In recent years,
however, the Company has adopted a strategy of systematically reacquiring the
franchise territories. At September 30, 1999, the Company's remaining franchises
were in the following territories: a large part of New Jersey, the Washington,
D.C./Baltimore, Maryland region, southern Virginia, and parts of Texas. The
Company has also granted an option to acquire a franchise for the State of
Hawaii.
From January 1997 through December 1999, the Company reacquired the former
franchise territories of California, Nevada, Oregon and Washington, Carolinas,
Georgia and eastern Tennessee and Dallas/Forth Worth, Houston, San Antonio and
Austin. The Company now conducts the operations in all of these reacquired
territories directly. The remaining franchises operate under a ten year
franchise agreement that is renewable for an additional ten-year term for all
locations. Each agreement provides that the Company will assist the franchisee
with marketing, advertising, training and other administrative support and
licenses the franchisee to use the Company's trademarks in connection with the
solicitation of new cardmembers (which is not restricted to the franchisee's
territory) and the purchase of Rights to Receive from restaurants in the
territory granted to the franchisee. The franchisee is responsible for, among
other things, soliciting cardmembers and participating establishments,
purchasing Rights to Receive from participating establishments in its territory,
and maintaining adequate insurance. In addition to the initial consideration for
the grant of the franchise, the franchisee pays to the Company the
5
following continuing fees during the term of the franchise agreement: (i) 7 1/2%
of the total meal credits used within the franchisee's territory; (ii) 2 1/2% of
the total meal credits sold within the franchisee's territory into the Company's
advertising and development fund; (iii) a processing fee of $.20 per sales
transaction from the franchisee's territory; and (iv) a monthly service charge
of $1.00 per participating establishment in the franchisee's territory.
After completing the DALC acquisition, the Company established separate
representation agreements with the remaining franchises for those restaurants
participating in the Registered Card Program in the respective franchise
territory.
LICENSING
In November 1995, the Company entered into a license arrangement under which a
licensee was authorized to solicit Rights to Receive from various types of
resorts, hotels and other entities. The territory covered by the license
agreement was the continental United States, excluding the State of Minnesota.
The term of this arrangement was ten years, with a potential renewal period of
ten years and under this arrangement, the Company compensated the licensee
through a commission. In December 1996, the Company terminated the license
agreement. (See Item 3).
In 1993, the Company, through its subsidiary, TMNI International Incorporated,
granted an exclusive, perpetual license to Transmedia Europe, Inc. to establish
the Company's business in Europe, Turkey and the countries that formerly
comprised the Union of Soviet Socialist Republics. In 1994, the Company granted
an exclusive perpetual license to Transmedia Asia Pacific Inc. to establish the
Company's business in Australia, New Zealand and the Asia-Pacific region (such
region covering approximately 16 major countries and areas including, among
others, Japan, Hong Kong, Taiwan, Korea, the Philippines and India). The
licensee also took an option to purchase a franchise for the State of Hawaii.
Both licenses are governed by a Master License Agreement which provides that,
among other things, (i) the licensees have the right to sublicense the rights
granted under the Master License Agreement to others within the territory,
provided that each such sublicense is approved by the Company, (ii) the Company
will assist the licensees with training relating to sales, administration,
technical and operations of the business, and (iii) the licensees are solely
responsible for developing its own market, paying its own expenses for
advertising and soliciting cardmembers and participating establishments in its
territory. In consideration for the licenses, the Company was paid initial fees
aggregating $2,375,000, received an equity interest in the licensee and the
right to receive royalties on gross dining volumes. In December 1996, Transmedia
Europe Inc. amended the sublicense it had granted for France and expanded the
sublicensee's territory to include Belgium and Luxembourg, Italy, Spain and
Switzerland (other than the German speaking area).
In December 1996, the Company entered into an agreement with Transmedia Europe,
Inc. and Transmedia Asia Pacific Inc. amending both of the licenses, among other
things, to permit the companies to be reorganized under one entity and to allow
them to acquire and operate worldwide the business of Countdown plc., which
conducts a discount savings program in Europe and, to a lesser extent, in the
United States. Upon closing of the Countdown acquisition, the Company received
$250,000 in cash and a $500,000 note bearing interest at 10%, which was payable
on April 1, 1998. At September 30, 1999, the licensee had not yet made payments
on the note. Given the uncertainty regarding resolution of this matter, the
Company has provided a reserve for the face value of the note and related
accrued interest. The Company is in negotiations with its licensee to reacquire
the licenses for Transmedia Europe and Asia-Pacific, Inc.
With the acquisition of DALC, the Company established a reciprocity relationship
with CardPlus Japan.
6
AREAS OF OPERATION
The Company's areas of operation include Central and South Florida, New York,
Chicago and Los Angeles metropolitan areas, Boston and surrounding New England,
Philadelphia, San Francisco, Detroit, Indianapolis, Milwaukee, Denver, Phoenix,
North and South Carolina, Georgia, parts of Tennessee, Dallas/Forth Worth and
Houston. Franchised areas include most of New Jersey, Washington, D.C.,
Maryland, Virginia and parts of Texas. With the acquisition of Dining a la Card,
the Company now has a presence in new areas such as St. Louis, Kansas City, San
Diego, Memphis, Minneapolis, Seattle and other parts of Washington, and to a
lesser degree, Cincinnati, Pittsburgh, Las Vegas, New Orleans, Portland, Salt
Lake City, Tulsa, and Hawaii.
Licensing arrangements continue to exist for the United Kingdom, Canada, and
Europe, as well as the Asia-Pacific region.
PARTICIPATING MERCHANTS AND MEMBERS
As of September 30, 1999, the most recent quarterly directories published by the
Company, listed 6,400 merchants available to Transmedia cardmembers. As of that
date, the Transmedia Card was held by approximately 1,000,000 members, comprised
of 690,000 accounts with an average of 1.45 members per account. Separate
quarterly directories distributed to members of the Registered Card Program
listed 4,180 merchants available to 1,700,000 members of this program. Of these
members, 663,000 were non-airline members. The Company has a combined merchant
base of 9,500 separate restaurants after eliminating duplicate program
participants. The following table sets forth (i) the number of restaurants
listed in directories published by the Company and (ii) the number of members,
as of the fiscal years ended September 30, 1995 through 1999:
1999 1998 1997 1996 1995
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Restaurants:
- ------------------------------------------------------------------------------------------------------------
Private label 6,400 7,300 7,100 7,000 5,300
- ------------------------------------------------------------------------------------------------------------
Registered card 4,180 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Total, net 9,500 7,300 7,100 7,000 5,300
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Members:
- ------------------------------------------------------------------------------------------------------------
Private label 1,000,000 1,200,000 1,300,000 900,000 600,000
- ------------------------------------------------------------------------------------------------------------
Registered Card 1,700,000 -- -- -- --
The majority of all restaurants listed in the directories published by the
Company renew their contracts with the Company after the initial amount of
Rights to Receive is expended. At the second renewal, the Company retains
approximately eighty (80%) of those restaurants continuing in business. After
the second renewal, however, attrition tends to increase because the
restaurants, with the Company's help, have either become successful and no
longer require the Company's financial and marketing resources, the Company
chooses not to renew the restaurant, or the restaurant has gone out of business.
Offsetting this decrease are new restaurants that choose to participate as old
ones go out of business, and restaurants that were formerly on the program that
often re-sign as they further expand and/or desire the program's benefits again.
This provides the Company with a continuous flow of new restaurant prospects.
The Company believes that in no area where the Company operates is it close to
restaurant or member saturation. The increase in membership is mainly due to the
addition of 1,700,000 members with the acquisition of DALC. This increase is
offset by a reduction of 200,000 members participating in the Transmedia program
from 1,200,000 at September 30, 1998 to 1,000,000 at September 30, 1999. The
reduction in the Transmedia Card members is a result of the Company's strategy
of forcing attrition in the inactive no-fee members and focusing on
7
marketing only the fee-based membership. For fiscal 1999, fee-paying members
have a net increase of 50,000 members while the no-fee members have a net
decrease of 250,000 members. New fee paying members acquired in 1999 amounted to
95,000, while new no-fee members added were approximately 90,000.
MARKETING
The Company markets the Transmedia Card through the use of advertising, direct
mail and through promotion with co-marketing partners such as banks and affinity
groups. Additionally, the Company periodically develops promotions such as
frequent dining rewards or additional seasonal discounts to help stimulate
utilization by existing cardmembers.
Towards the latter part of fiscal 1998, the Company shifted its cardmember
acquisition strategy to focus predominantly on the solicitation of fee paying
consumers, offering a 25% discount, private label charge card program. The
no-fee, lower discount offer is now used only in large volume campaigns that
have demonstrated good spending patterns in the past. The Company continues to
implement its strategy of marketing primarily fee-based memberships with large
marketing partners, principally financial institutions. While recently adopted
consumer credit regulations have caused us to alter certain solicitation
techniques that produced favorable response rates, the Company is currently
testing a series of offers and rollouts and other alternatives such as "earn
your fee" through rebates. The various solicitation methods are determined to be
successful when the incremental cost of solicitation and promotion is
substantially offset by the initial fee income and where future renewal income
may have a positive contribution towards profitability. The Company has sent
solicitation mailings with marketing partners of approximately 6.5 million
pieces during the year ended September 30, 1999.
The registered card member base acquired in the DALC transaction is heavily
skewed towards airline programs, which enjoy higher renewal rates because the
product is both free and in a desirable currency, i.e. frequent flier miles. The
increased use of airline programs as a primary source for registered card
members has resulted from the dining program's attractiveness to the airlines
because of the enhanced value of the frequent flyer membership and the
opportunity to sell miles in advance. From the Company's perspective, the
business and vacation traveler is an excellent demographic segment and the cost
of acquisition is low.
There are formal guidelines for the enrollment of registered card members. For
the airline members, SignatureCard had established marketing alliances with
United Airlines, American Airlines, British Airways, Northwest Airlines, Delta
Airlines, Continental Airlines, Trans World Airlines, and US Airways. Under the
terms of the DALC acquisition and Service Collaboration Agreement, SignatureCard
consented to delegate their duties with respect to dining under the various
airline agreements. It is through SignatureCard's sponsor relationship with the
airlines that the Company is able to enroll airline members through a variety of
methods that often depend on whether the frequent flyer has a relationship with
the airlines affinity partners, particularly card issuers such as Citibank,
First Card, American Express and Bank of America. The earn miles by dining
program is considered advantageous to both the airline carriers and the Company.
The airlines benefit because the dining program enhances loyalty among their
frequent flyer members and also allows them to sell miles, in advance, similar
to a prepaid ticket. The arrangement is attractive to the Company because (1)
mileage is purchased on an as needed basis which improves cash flow, (2) by
offering airline members 10 miles for each dollar spent at participating
merchants, the cost of the 20% rebate discount is effectively reduced if airline
miles are elected, and (3) there is no charge by the airline for adding new
members. SignatureCard benefits through a profit sharing agreement provided for
in the Service Collaboration Agreement with the Company based on revenue
generated from members acquired either in the acquisition or subsequently
through SignatureCard's efforts. There were no amounts payable under this
agreement at September 30, 1999.
8
EMPLOYEES
As of September 30, 1999, the Company employed 211 persons, including 26 former
SignatureCard employees. The Company had initially employed forty-eight of the
former employees for a planned period of transition estimated through March
2000. With the completion of the integration of the registered card operation in
November 1999, five of those employees remained in the Chicago offices of whom
only one will be permanent. Additionally, the Company has added twelve new
employees in its corporate headquarters for information technology, contract
administration and the call center. The Company believes that its relationships
with its employees are good.
COMPETITION
The discount dining business remains competitive and the Company competes for
both members and participating merchants, such as restaurants, hotels and other
applicable service establishments. The Company also anticipates growing
competition from various e-commerce ventures. Competitors include discount
programs offered by major credit card companies, other companies that offer
different kinds of discount marketing programs and numerous small companies
which offer services which may compete with the services offered or to be
offered by the Company. Certain of the Company's competitors may have
substantially greater financial resources and expend considerably larger sums
than does the Company for new product development and marketing. Further, the
Company must compete with many larger and better-established companies for the
hiring and retaining of qualified marketing personnel. The Company believes that
the unique features of its programs: the Private Label Card can be used by
members at participating establishments with very few restrictions; the programs
provide substantial savings without the need for a member to present discount
coupons when paying for a meal; and participating establishments are provided
with cash in advance of customer charges -- contribute to the Company's
competitiveness and allow the Company to offer better value and service to its
members and merchants. The Company has also initiated the development of a
broader e-commerce strategy, focused on the "dining space" in which it already
maintains a dominant position, that it plans to roll out in fiscal year 2000.
ITEM 2. PROPERTIES
The Company's present executive office consists of 14,546 square feet, located
in Miami, Florida, which the Company occupies pursuant to two lease agreements
expiring on February 28, 2002. Both leases provide for a total annual base
rental of $294,750. The lease for the executive offices is currently being
renegotiated to allow for expansion of an additional 4,944 square feet. The
lease cost is expected to be approximately $357,345 per annum with a term of two
years and two, two-year renewal periods. The Company's Miami office also houses
both the Company's member and merchant service center. The Company leases 5,710
square feet of office space in New York City. The lease, which expires on June
30, 2001, provides for minimum annual rentals of $199,850. In addition, the
Company has a five-year office lease in Philadelphia, Pennsylvania for
approximately 1,641 square feet, which commenced October 1, 1998. The lease
provides for a base annual rent of $27,897 in the first three years and $29,128
for the following two years. In Boston, Massachusetts, the Company has a
sixty-four month lease with an option for a three-year renewal, for
approximately 1,500 square feet, which commenced May 1, 1995. The lease provides
for base annual rentals of $31,418. In Chicago, the Company has a six-year
office lease for approximately 1,876 square feet, which commenced August 1,
1998. The lease provides for an initial annual lease rental of $45,024,
increasing by approximately 2% each year thereafter. In North Carolina, the
Company has a two-year lease, with an option for an additional year, for
approximately 3,000 square feet for an annual rental of $36,000, which commenced
March 1, 1999. In Detroit, the Company leases an executive office for a
twelve-month period that began on April 1, 1999 for a total rental of $15,000.
In Tampa, the Company leases an executive office for a twelve-month period that
began on July 1, 1999 for a total rental of $9,681. In Phoenix, the Company
leases an executive office for a twelve-month period that
9
began on February 1, 1999 for a total rental of $6,336. In Denver, the Company
leases an executive office on a month to month basis that began on June 1, 1999
for a monthly rental of $1,400. In Atlanta, the Company leases an executive
office for a six-month period that began on July 1, 1999 for a total rental of
$6,990. In Dallas, the Company leases an executive office for a five-year period
that commenced November 1, 1998. The lease provides for base annual rentals of
$25,745. In San Francisco, the Company has a five-year lease that commenced on
May 15, 1998 for an initial annual lease rental of $40,128 increasing by
approximately 5% each year thereafter. In Los Angeles, the Company has a
thirty-seven month lease that commenced on February 1, 1998 for a base annual
rental of $46,953.
ITEM 3. LEGAL PROCEEDINGS
In December 1996, the Company terminated its license agreement with Sports &
Leisure Inc. ("S&L"). In February 1997, S&L commenced an action against the
Company in the 11th Judicial Circuit, Dade County, Florida, alleging that the
Company improperly terminated the S&L license agreement and seeking money
damages. In the quarter ended December 31, 1998, a reserve of $1,000,000 was
established and recorded in selling, general and administrative expenses to
cover management's best estimate at the time of the potential cost and expenses
of this litigation and other legal matters.
The Company, in order to avoid prolonged litigation, settled the outstanding
lawsuit with its former licensee in November of 1999. Under the terms of the
settlement S&L. will receive $2,100,000 in cash and 280,000 shares of common
stock for a total of $2,835,000. Based on the fair value of the common stock
included in the settlement and net of reserve amounts previously provided by the
Company, a charge of $1,835,000 has been recognized in the fourth quarter ended
September 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1999, no matters were submitted to a vote
of the security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME POSITION AGE
- ---- -------- ---
Gene M. Henderson Director, President and Chief Executive 52
Officer
Stephen E. Lerch Executive Vice President and 45
Chief Financial Officer
James M. Callaghan Vice President; President of Transmedia 60
Restaurant Company Inc.
Christine Donohoo Vice President, President of 49
Transmedia Service Company Inc.
Paul A. Ficalora Executive Vice President 48
of Transmedia Restaurant
Company Inc.
Gregory Borges Treasurer 63
Kathryn Ferara Secretary and Vice President of Operations 43
Mr. Henderson was appointed as President and Chief Executive Officer of the
Company in October 1998. Previously, Mr. Henderson was President and Chief
Executive Officer of DIMAC
10
Marketing, a full service direct marketing company based in St. Louis. Prior to
that, Mr. Henderson was Chief Operating Officer of Epsilon, an operating unit of
American Express.
Mr. Callaghan was elected Vice President of the Company and President of
Transmedia Restaurant Company Inc., a subsidiary, in 1994. He was also a
director of the Company from 1991 to 1998. Mr. Callaghan joined the Company in
1989 and served as its Executive Vice President, Vice President, Sales and
Marketing and Treasurer.
Christine Donohoo joined the Company in January 1999, as Vice President and
President of Transmedia Service Company Inc. Mrs. Donohoo was formerly Senior
Vice President of Credit Card Marketing for Nationsbank (now Bank of America).
Mr. Lerch was elected Executive Vice President and Chief Financial Officer of
the Company, as well as Vice President of TMNI International Incorporated,
Transmedia Restaurant Company Inc. and Transmedia Service Company Inc,
subsidiaries, in 1997. Previously, Mr. Lerch was a Partner at Coopers and
Lybrand LLP (now PriceWaterhouse Coopers), where he worked from 1978 to 1997.
Mr. Ficalora was elected Executive Vice President of the Restaurant Company in
1994, having served as Vice President, Operations of the Company from 1992 until
1994, and Director of Franchise Sales from 1991 to 1992.
Mr. Borges was elected Treasurer of the Company in 1992. He joined the Company
in 1985 as Controller.
Mrs. Ferara was elected Secretary of the Company in 1992. She joined the Company
in 1989 as Office Manager and Assistant Secretary.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "TMN". The following table sets forth the high and low sale prices for
the common stock for each fiscal quarter ended from December 31, 1997 as
reported on the New York Stock Exchange, as well as the dividends paid during
each such fiscal quarter.
The payment of dividends, if any, in the future, will depend upon, among other
things, the Company's earnings and financial requirements, as well as general
business conditions.
QUARTER ENDED LOW HIGH DIVIDEND PAID
------------- --- ---- -------------
December 31, 1997 $3.813 $ 6.313 $0.02
March 31, 1998 5.000 6.686 --
June 30, 1998 5.438 8.313 --
September 30, 1998 3.188 6.188 --
December 31, 1998 1.938 4.625 --
March 31, 1999 2.375 5.125 --
June 30, 1999 3.000 4.188 --
September 30, 1999 2.688 4.375 --
The aggregate number of holders of record of the Company's Common Stock on
December 6, 1999 was approximately 406.
11
On August 5, 1999, the New York Stock Exchange notified the Company of the
pending adoption of amendments to its continued listing criteria and of the
Company's noncompliance with the new standards. In accordance with the
requirements of the notification, the Company submitted to the Exchange its plan
to come into compliance with the new criteria. On September 16, 1999, the
Company was advised by the Exchange that its plan had been accepted and that it
will continue to be listed on the Exchange. The Company's performance relative
to the plan of compliance is subject to monitoring by the Exchange over the next
six fiscal quarters. The rights offering that closed on November 9, 1999 and
resulted in the issuance of $10 million in Series A preferred stock was
intended, in part, to position the Company to come into compliance with these
standards. The Company commenced trading of its Series A preferred stock on the
Exchange on that date under the symbol TMN PrA.
12
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30,
------------------------
(THOUSANDS EXCEPT PER SHARE DATA)
---------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Registered card sales $ 25,942 -- -- -- --
Private label sales 94,530 $ 95,549 $ 101,301 $ 90,076 $ 78,632
Total dining sales 120,472 95,549 101,301 90,076 78,632
Net revenues from rights-to-receive 23,882 19,659 21,232 19,504 15,769
Membership and renewal fee income 8,281 7,321 7,251 6,646 4,081
Franchise fee income 1,073 1,249 1,438 1,839 1,881
Other income 1,552 1,912 1,023 497 423
Total operating revenues 34,788 30,141 30,944 28,486 22,154
Total operating expenses 40,782 37,606 30,246 23,729 15,809
Operating income (loss) (5,994) (7,465) 698 4,757 6,345
Income (loss) before taxes (8,398) (10,436) (684) 4,107 6,879
Net income (loss) $ (10,398) $ (7,836) $ (424) $ 2,546 $ 4,196
========= ========= ========= ========= =========
Operating income (loss) per share
Basic and diluted (.46) (.63) .07 .46 .64
Net income (loss) per share
Basic (.80) (.67) (.04) .25 .42
Diluted (.79) (.66) (.04) .25 .42
Weighted average number of common
and common equivalent shares
outstanding:
Basic 13,043 11,773 10,166 -- --
Diluted 13,157 11,825 10,180 -- --
Primary -- -- -- 10,299 10,112
Fully diluted -- -- -- 10,299 10,112
BALANCE SHEET DATA:
Total assets 119,710 74,425 72,685 54,514 38,383
Long-term debt:
Recourse -- -- -- 15,000 2,000
Non-recourse 43,000 33,000 33,000 -- --
Stockholders' equity 18,113 27,734 25,304 25,753 24,191
Debt to total assets 36% 44% 45% 28% 5%
Earnings to fixed charges -109% -245% 73% 582% 1,774%
Cash dividends per common share 0.00 0.02 0.02 0.04 0.04
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS (1999 VERSUS 1998)
Gross dining sales for the fiscal year ended September 30, 1999 increased 26.1%
to $120,472 as compared to $95,549 for the year ended September 30, 1998,
primarily reflecting the registered card dining sales associated with the
acquisition of Dining a la Card (DALC). Sales for the registered card program
from June 30, 1999, the date of acquisition, through September 30, 1999 were
$25,942. Actual sales for the Transmedia private label program decreased 1.1% to
$94,530 compared to $95,549 for the year ended September 30, 1998. The Company
continues to experience a decline in private label sales in its largest and most
established market of New York. Sales for New York decreased 8.6% to $38,211 as
compared to $41,788 for the year ended September 30, 1998. Other noticeable
declines occurred in Boston and Philadelphia that decreased 16% and 9%,
respectively. During 1999, Transmedia's private label program experienced a
higher average monthly spend per cardmember and a higher overall utilization by
the cardmember base. However, part of this increased utilization is a function
of a forced reduction in inactive cardmembers and a corresponding lower member
base in the denominator. The overall private label cardmember base has been
reduced when compared to the prior year, and the average number of monthly
active accounts decreased from 112 thousand in 1998 to 107 thousand in 1999.
Offsetting the sales territories showing decreases were continued higher sales
volumes in Chicago, Indiana, Wisconsin, Denver, and Phoenix. Additionally, sales
for the reacquired franchise territories of Carolinas, Georgia and Dallas/Ft.
Worth (which were reacquired in 1998), and the more recently reacquired Houston
territory amounted to approximately $4,610 for the year ended September 30,
1999, compared to $1,474 in 1998.
Private-label cardmember accounts decreased 16.9% to 690,000 for the year and
total cardmembers at September 30, 1999 were approximately 1,000,000 or 1.45
cardmembers per account. The net decrease in accounts in fiscal 1999 is
primarily due to the Company's continued policy of proactively eliminating
inactive no-fee accounts while marketing extensively the fee-paying membership
that tends to have higher activity.
Registered card membership at September 30, 1999 was approximately 1,700,000. Of
these members, 663,000 were non-airline members. Airline members, which
accounted for approximately 61% of total membership and approximately 68% of
sales, do not pay membership fees and typically receive rebates in the form of
frequent flyer mileage.
The total merchants available to members of the private label and registered
card programs were 6,400 and 4,180 at September 30, 1999, respectively. Of the
6,400 merchants available to the members of the private label program, 5,800 are
merchants in Company-owned sales territories. There are no franchise territories
associated with the registered card program. Due to duplication of merchants in
both programs, the total Company-owned merchants listed in both directories at
September 30, 1999, were approximately 9,500.
At September 30, 1999, the average Rights to Receive balance per participating
Company merchant in the private label program was $6.9 versus $7.7 at September
30, 1998. With the inclusion of the registered card program, the combined
average Rights to Receive balance per participating Company merchant was $8.0 at
September 30, 1999. Rights-to-Receive turnover for the private label program for
fiscal 1999 was 1.2, or 10.0 months on hand, compared to 1.2, or 9.9 months on
hand, in the prior year. With the inclusion of the DALC portfolio, the Rights to
Receive turnover for the combined portfolio is 1.2 or 9.8 months on hand. The
Company is presently negotiating a single financing facility intended to
securitize the rights to receive in both programs. By having both a private
label and a registered card program to offer restaurants, and consolidating the
programs into a single securitized debt facility, the Company believes that it
14
can optimize its asset allocation efficiency, more effectively manage credit
risk and bring the overall months of Rights to Receive on hand, presently at
just between nine and ten months, down to a more acceptable level of six to
seven months.
Cost of sales increased to 58.2% of gross dining sales from 57.0% a year
earlier. The increase in cost of sales is directly related to the addition of
the DALC registered card portfolio which was traditionally offered to merchants
at an advance rate less than the customary Transmedia private label rate of 2:1
and therefore results in a somewhat higher cost of sales than the private label
portfolio. Since the acquisition, however, all new restaurants signed on under
the registered card program, as well as the majority of those renewed, have been
converted to the 2:1 proposition. While this initially results in a somewhat
slower inventory turn, the individual dining transactions are more profitable
due to the corresponding reduction in the cost of the Rights to Receive
consumed. The provision for Rights-to-Receive losses on the private label
program, which are included in cost of sales, decreased to $3,308 or 3.5% of
gross sales in 1999, compared to $3,822 or 4.0% in the prior year period. The
provision for losses recorded for the registered card program amounted to $780
or 3% of gross sales in 1999. Processing fees based on transactions processed
remained constant as a percentage of private label gross dining sales at 3.2%
for 1999 and 1998.
Member discounts as a percentage of sales decreased slightly from 22.4% in 1998
to 22.0% in 1999. While the effective rate of discount on private label sales
increased from 22.4% to 22.9%, reflecting more usage by fee-paying, 25% discount
members, the overall decrease is a result of the inclusion of the registered
card portfolio during the last quarter of 1999. The majority of the registered
card members are enrolled in the airline program and earn 10 miles for each
dollar spent at participating merchants. The Company purchases airline mileage
from the airlines on an as needed basis at a contractual rate that allows the
Company to effectively reduce the cost of the member rebate in the airline
program to less than that of the 20% cash rebates.
Membership and renewal fee income increased to $8,281, of which $3,387 was
initial fee income in 1999, compared to $7,321, of which $701 was initial fee
income in 1998. The increased initial fee income is reflective of the Company's
continued marketing of the 25% savings fee card with the private label program.
Renewal fee income relating to the registered card program was $53. The
Company's strategy is to continue to enroll members of the airline mileage
programs for which there is very little acquisition cost and the rebate
percentage tends to be lower and also to commence marketing a fee-based
registered card. Marketing of the private label fee program will continue on a
lesser scale and focus on key partner affinity programs. Fee income is
recognized over a twelve-month period beginning in the month the fee is
received. Cardholder membership fees are cancelable and refunded to members, if
requested, on a prorata basis based on the remaining portion of the membership.
Continuing franchise fee and royalty income decreased to $1,073 from $1,249.
This decrease resulted primarily from the purchase of the Houston franchise
territories in 1999.
Processing income relates to the Company's full service electronic processing
services that commenced during fiscal 1997 and comprises the sale or lease of
point-of-sale terminals to merchants, principally restaurants, as well as fees
received for serving as the merchants' processor for all of their credit card
transactions.
Overall selling, general and administrative expenses increased $3,068 or 16.4%
over the prior year, mainly as a result of additional costs associated with
maintaining separate infrastructures to support both programs during the period
of transition. Many of these additional costs will be eliminated when the
integration is completed and both dining programs are processed and supported on
one platform. The integration of the registered card program was completed in
November 1999. At that time substantially all operations in Chicago ceased and
the transition agreement with Signature Card was terminated.
15
As a percentage of gross dining sales, selling general and administrative
expenses were 18.0% in 1999 compared to 19.5% in 1998. However, this expense
increased overall by $3,068 from $18,607 to $21,675. The principal components of
the increase include sales commission and related expenses ($3,245 in 1999
versus $2,818 in 1998), depreciation and amortization, principally on the
software development costs ($3,462 in 1999 versus $3,194 in 1998), professional
fees, mainly legal fees ($2,460 in 1999 versus $2,253 in 1998), rent and other
office expenses ($1,819 in 1999 versus $1,530 in 1998), telephone ($1,504 in
1999 versus $1,063 in 1998) and software development and maintenance, inclusive
of Y2K charges ($1,800 in 1999 versus $653 in 1998).
Salaries and benefits increased $1,636 or 20.0% over the prior year. With the
acquisition of DALC, the Company employed forty-eight of the former
SignatureCard employees for the expected transition period. In addition, the
Company contracted with SignatureCard for customer service, information
technology and facilities services. At September 30, 1999, there were 26 former
SignatureCard employees still on the payroll. With the completion of the
integration of SignatureCard in November 1999, five of those employees remained
of which only one will be permanent and all services under the transition
agreement were terminated. The Company has added twelve new employees in the
corporate headquarters to information technology, contract administration and
the call center.
In 1999, member acquisition expenses were $6,447 versus $5,097 in 1998. Included
in member acquisition expenses is the amortization of deferred acquisitions
costs, which amounted to $3,335 in 1999 and $701 in 1998. Costs capitalized in
1999 and 1998 were $4,184 and $1,184, respectively. The Company used various
techniques at different levels of cost to solicit new members. Consumer privacy
regulations adopted in 1999 required the Company to change certain methods of
solicitations that had resulted in favorable response rates. Prospective
cardmembers continue to be solicited through direct mail and the use of affinity
and loyalty programs with major credit card issuers and corporations. Third
party and strategic marketing partners are compensated through a commission on
fees received and to a lesser degree, on an activation basis or through
wholesaling of the fee based savings card. The mix of solicitation programs used
has a direct correlation to the overall acquisition cost per member and the
spending profile of members acquired. The Company seeks to employ the most
cost-effective means of acquiring active and frequent users of the card and
typically uses solicitation methods whereby the fees earned substantially offset
the cost of acquisition.
The Company, in order to avoid prolonged litigation, settled the outstanding
lawsuit with its former licensee, Sports & Leisure, Inc., in November of 1999.
Under the terms of the settlement, Sports & Leisure, Inc. will receive $2,100 in
cash and 280,000 shares of common stock for a total of $2,835. Based on the fair
value of the common stock included in the settlement and net of reserve amounts
previously provided by the Company in the first quarter of 1999, a charge of
$1,835 has been recognized in the fourth fiscal quarter of 1999.
The amended employment agreement and termination of the consulting agreement of
the Chief Executive Officer resulted in a one-time charge of $3,081 1998.
Components included in the charge were a lump-sum cash payment of $2,750,
cancellation of indebtedness of $135, and health insurance for the remainder of
his life. The after tax impact of the charge was approximately $1,900. Also, the
Company recorded a charge of $463 in fiscal 1998 relating to the remaining
outstanding obligation under consulting agreements with former employees that
the Company has determined it no longer requires nor intends to utilize.
The Company recognized an asset impairment loss of $2,169 ($.18 per share) in
1998. The continued lag in dining sales in California, reacquired from a former
franchise in January 1997, indicated that the projected undiscounted cash flows
from this former franchise were less than the carrying value of the excess of
cost over net assets acquired. Additional investments in both merchants and new
card members as well as expansion into new markets in reacquired franchise
territory were required to generate sales sufficient to realize the value of the
intangible asset.
16
Operating loss in 1999 was $5,994 compared to $7,465 in 1998.
Other income, net of expense in 1999 was a net expense amounting to $2,404
versus $2,971 in 1998, a decrease of $567. The principal reasons for the change
included $1,149 of realized gain on sale of securities available for sale which
is offset by additional interest expense and financing costs in 1999, as a
result of the additional $39 million of term loans, in part, used to purchase
the DALC Rights to Receive.
Earnings before taxes amounted to a loss of $8,398 in 1999 compared with loss of
$10,436 in 1998. Due to the Company's continued losses, an additional valuation
reserve of $2,000 has been applied to the net deferred tax asset for fiscal
1999. At September 30, 1999, the net deferred tax asset, principally related to
net operating loss carryforward amount to $2,000 has been fully reserved. The
effective tax rate for fiscal 1999 was 24% and reflects the valuation reserve of
$2,000 applied to the net deferred tax asset.
Net loss was $10,398 or $.80 per share in 1999, versus net loss of $7,836 or
$.67 per share in 1998.
RESULTS OF OPERATIONS (1998 VERSUS 1997)
Gross dining sales for the fiscal year ended September 30, 1998 decreased 5.7%
to $95,549 as compared to $101,301 for the year ended September 30, 1997. Lower
sales volume in the Company's larger, more established markets were only
partially offset by increased sales in new regions and reacquired franchises.
Sales volume in the New York metropolitan area and South Florida, two of the
Company's largest and most competitive markets, declined 17% and 19%,
respectively, compared to the prior year. Noticeable declines also occurred in
Philadelphia and Detroit. Factors driving the decline in dining sales were lower
spend per cardmember and lower overall utilization by the cardmember base.
Offsetting these decreases were higher sales volumes in other markets such as
Chicago, Denver, Phoenix, Wisconsin and Indiana. Gross dining sales associated
with the Carolinas, Georgia and Dallas/Fort Worth reacquired franchise
territories amounted to approximately $1,474 since their acquisition in 1998.
Cardmember accounts decreased 7.3% to 838,118 for the year and total cardmembers
at September 30, 1998 were 1,203,080 or 1.44 cardmembers per account. The net
decrease in accounts is primarily due to the Company's new policy in fiscal 1998
of proactively eliminating inactive no-fee accounts.
The total restaurants available to cardmembers remained fairly consistent
between years. At September 30, 1998, the Company had 7,274 restaurants listed
in its directories (7,087 at September 30, 1997), of which 5,495 were in
Company-owned sales territories and 757 were overseas. The increase in
Company-owned restaurants from 4,922 a year ago relates primarily to the
acquisition of the Carolinas, Georgia and Dallas/Fort Worth franchise
territories.
At September 30, 1998, the average Rights to Receive balance per participating
Company restaurant was $7,706 versus $8,198 at September 30, 1997.
Rights-to-Receive turnover for fiscal 1998 was 1.2, or 9.9 months on hand,
compared to 1.3, or 9.2 months on hand, in the prior year. The lower turnover is
attributable to the decreased sales volumes in New York and South Florida and an
increased investment in the California marketplace.
Cost of sales increased to 57.0% of gross dining sales from 56.3% a year
earlier. Provision for Rights-to-Receive losses, which are included in cost of
sales, amounted to 3,822 in 1998, compared to $3,209 in the prior year.
Processing fees based on transactions processed remained constant as a
percentage of gross dining sales at 3.2% for 1998 and 1997. Cardmember discounts
as a percentage of sales remained stable.
17
Membership and renewal fee income slightly increased to $7,321, of which $701
was initial fee income in 1998, compared to $7,251, of which $670 was initial
fee income in 1997. Initial fee income remains lower, on a relative basis, due
to the continued marketing of the no-fee product in 1998 and does not yet
reflect the Company's new focus on marketing the 25% savings fee card. Fee
income is recognized over a twelve-month period beginning in the month the fee
is received. Cardholder membership fees are cancelable and refunded to
cardmembers, if requested, on a prorata basis based on the remaining portion of
the membership.
Continuing franchise fee and royalty income decreased to $1,249 from $1,438.
This decrease resulted primarily from the purchase of the Carolinas, Georgia and
Dallas/Fort Worth franchise territories in 1998.
Processing income relates to the Company's full service electronic processing
services that commenced during fiscal 1997 and comprises the sale or lease of
point-of-sale terminals to merchants, principally restaurants, as well as fees
received for serving as the merchants' processor for all of their credit card
transactions.
Overall selling, general and administrative expenses increased $1,200 or 4.7%
over the prior year. As a percentage of gross dining usage, selling general and
administrative expenses were 28% in 1998 compared to 25.3% in 1997. The
principal components of the increase include salaries and related expenses
($8,189 in 1998 versus $7,923 in 1997), depreciation and amortization,
principally on the software development costs ($3,194 in 1998 versus $2,232 in
1997), office related expenses ($2,882 in 1998 versus $2,688 in 1997), and legal
($1,418 in 1998 versus $983 in 1997). Additionally, the acquisition of the
Carolina and Georgia franchise in December 1997, and the Dallas/Fort Worth
territory in July 1998, resulted in additional costs associated with
establishing these sales territories.
In 1998, cardmember acquisition expenses were $5,097 versus $4,650 in 1997.
Included in cardmember acquisition expenses is the amortization of deferred
acquisitions costs, which amounted to $701 in 1998 and $670 in 1997. Costs
capitalized in 1998 and 1997 were $1,184 and $446, respectively.
The amended employment agreement and termination of the consulting agreement of
the Chief Executive Officer resulted in a one-time charge of $3,081 in the first
quarter of 1998. Components included in the charge were a lump-sum cash payment
of $2,750, cancellation of indebtedness of $135, and health insurance for the
remainder of his life. The after tax impact of the charge was approximately
$1,900. Also, the Company recorded a charge of $463 relating to the remaining
outstanding obligation under consulting agreements with former employees that
the Company has determined it no longer requires nor intends to utilize.
The continued lag in dining sales in California, reacquired from a former
franchise in January 1997, indicated that presently the undiscounted cash flows
from this former franchise are less than the carrying value of the excess of
cost over net assets acquired. Additional investments in both merchants and new
card members as well as expansion into new markets in reacquired franchise
territory will be required to generate sales sufficient to realize the value of
the intangible asset. Accordingly, the Company recognized an asset impairment
loss of $2,169 ($.18 per share).
Operating loss in 1998 was $7,465, a $8,163 decrease from 1997.
Other income, net of expense in 1998 was a net expense amounting to $2,971
versus $1,382 in 1997, an increased expense of $1,589. The principal reasons for
the change included $449 additional interest expense and financing costs in
1998, as a result of the $33 million securitization and the write-down of $710
relating to the Company's international licensees. Offsetting these expenses was
a realized gain of $200 on securities available-for-sale
18
Earnings before taxes amounted to a loss of $10,436 in 1998 compared with loss
of $684 in 1997. The effective tax rate in 1998 and 1997 was 25% and 38.0%,
respectively. The change in the effective tax rate for fiscal 1998 reflects the
valuation reserve of $972 applied to the net deferred tax asset.
Net loss was $7,836 or $.67 per share in 1998, versus net income of $424 or $.04
per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $49,398 at September 30, 1999 from
$45,995 at September 30, 1998.
EQUITY GROUP INVESTMENT
On March 4, 1998, the Company issued and sold 2.5 million common shares and
non-transferable warrants to purchase an additional 1.2 million common shares
for a total of $10,625 to affiliates of Equity Group Investments, Inc., a
privately held investment company. Net proceeds amounted to $9,825 after
transaction costs. The non-transferable warrants have a term of five years; one
third of the warrants are exercisable at $6.00 per share, another third are
exercisable at $7.00 per share and the third are exercisable at $8.00 per share.
As part of this strategic investment, Equity Group nominated and the
shareholders elected two candidates for the Board of Directors who joined three
of the Company's existing directors and two new independent directors.
FINANCING OF DINING A LA CARD ACQUISITION
In connection with the acquisition of Dining A La Card on June 30, 1999, the
Company obtained a senior secured revolving bridge loan from the Chase Manhattan
Bank (note 4). The loan permitted the Company to borrow an amount equal to the
lesser of (i) $35 million and (ii) the amount available under a borrowing base
formula based on the amount of registered card rights-to-receive which meet
certain eligibility criteria. At September 30, 1999, the borrowing base capacity
was $31.5 million and the amount drawn down by the Company was $29 million. The
facility expired on December 30, 1999 and was paid off with the proceeds of the
$80 million securitization described further in this section.
RIGHTS OFFERING
On November 9, 1999, the Company completed its Rights Offering to existing
shareholders resulting in the issuance of 4,149,378 convertible, redeemable
preferred shares. The preferred shares have a dividend rate of 12%, of which 6%
is payable in cash, quarterly in arrears, and the remaining 6% accrues unless
otherwise paid currently at the Company's discretion, until conversion by the
holder. Each preferred share may be converted into common stock at the option of
the holder at any time. The initial rate of conversion is one to one. Subsequent
conversion rates could be higher to the extent of accrued but unpaid dividends.
If not previously converted, the Company may commence redemption of the
preferred shares on the fifth anniversary of the rights offering.
The proceeds from the stock issuance of $10,000 were used to retire the $10,000
bridge loan obtained from GAMI Investment. Pursuant to its subscription
privileges and as a Standby Purchaser for any unsubscribed shares, EGI acquired
2.84 million of the preferred shares. The additional investment provides EGI
with the right to designate an additional member to the Board of Directors. The
size of the Board will increase by one if EGI chooses to exercise that right.
19
The terms of this loan also required the Company to pay GAMI, at closing, a cash
fee of $500, which was reimbursable to the Company upon the consummation of the
rights offering and the issuance to Samstock L.L.C. of warrants to purchase 1
million shares of the Company's common stock in consideration of providing the
loan and if it acted as a standby purchaser in connection with the rights
offering.
SECURITIZATION OF RIGHTS TO RECEIVE
On December 24, 1996, the Company made an initial transfer of $33 million of
rights-to-receive to a special purpose corporation ("SPC"), an indirect wholly
owned subsidiary, as part of a revolving securitization. The Rights-to-Receive,
which were sold to the SPC without recourse, were in turn transferred to a
limited liability corporation ("Issuer"), which issued $33 million of five-year
term fixed rate securities, bearing interest at 7.4%, in a private placement to
various third party investors.
In exchange for the rights-to-receive, which have a retail value of
approximately $66 million before cardmember discounts, the Company received
approximately $32 million, after transaction costs, and a 1% equity interest in
the Issuer. Excess cash flows generated from the securitized assets as the
rights-to-receive are exchanged for meals by Company cardholders, are remitted
to the Company on a monthly basis as a return on capital from the Issuer. Excess
cash flows are determined after payments of interest to noteholders and
investors, as well as trustee and servicing fees. During the five-year revolving
period, the Issuer is responsible for the ongoing purchase of rights-to-receive
from the Company to ensure that the initial pool of $33 million is continually
replenished as the rights-to-receive are utilized by cardholders.
Rights-to-receive currently held by the Issuer, as well as cash and certain
deposits restricted under the securitization agreement, have been separately
depicted in the consolidated balance sheet.
The Company has engaged Chase Securities Inc. to arrange an $80 million
securitization facilty, using the assets of its recently acquired registered
card rights-to-receive portfolio combined with the existing securitized
portfolio. The permanent financing vehicle will be established with an asset
backed commercial paper conduit administered by the Chase Manhattan Bank. This
loan will permit the Company to borrow an amount equal to the lesser of (i) $80
million and (ii) the amount available under a borrowing base formula based on
the amount of aggregate rights-to-receive which meet certain eligibility
criteria. The interest rate applicable to the facility will be either (1) the
Eurodollar which is a rate 1.25% in excess of a rate per annum equal to the
LIBOR Rate and will be limited to interest periods of up to three months and (2)
the Alternate Base Rate which is the higher of (i) Chase's Prime rate and (ii)
the Federal Funds Effective Rate plus 1.5%. The new facility was closed on
December 30, 1999 and $65 million was drawn down. Simultaneously, the 1996
securitization was terminated and the outstanding principal plus a termination
penalty was paid off in the aggregate of $33.9 million. Additionally, the
outstanding balance of the Chase bridge loan of $27.1 million was paid off.
Financing fees of $1.1 million were also paid. In addition to this $80 million
securitization facility, the Company is negotiating a warehouse line of credit
with Chase Securities to fund the growth in new markets and the purchase of the
corresponding new Rights to Receive.
The Company's inventory of Rights to Receive increased by $34,107 to a total of
$76,454 at September 30, 1999. The reason for this increase is the acquisition
of DALC which represents $36,434 of the Rights to Receive balance at September
30, 1999. In many instances the Rights to Receive purchased by the Company are
secured by the furniture, fixtures and kitchen equipment of the related
restaurants as filed pursuant to the Uniform Commercial Code. The Company also
attempts to obtain personal guarantees from the restaurant owners.
20
Analysis of Rights to Receive
1999 1998 1997
---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------
Rights to Receive, beginning of year $ 42,347 $ 40,355 $ 37,526
- ----------------------------------------------------------------------------------------------------------------------
Acquisition of Registered Card
Rights-to-receive in DALC transaction, net 40,782 -- --
- ----------------------------------------------------------------------------------------------------------------------
Purchase of Rights to Receive 60,053 53,625 56,244
- ----------------------------------------------------------------------------------------------------------------------
Write-offs of Rights to Receive (3,871) (3,550) (2,764)
-------- -------- --------
139,311 90,430 91,006
- ----------------------------------------------------------------------------------------------------------------------
Cost of Rights to Receive, included in cost of sales
62,857 48,083 50,651
-------- -------- --------
- ----------------------------------------------------------------------------------------------------------------------
Rights to Receive, end of year $ 76,454 $ 42,347 $ 40,355
======= ======== ========
Management of the Company believes that continued increase in the number of
restaurants that participate in the private label and registered card dining
programs is essential to attract and retain members. The Company strives to
constantly manage the dynamics of each market by balancing the rights-to-receive
acquired to the cardmember demand. This balance is critical to achieving the
participating restaurants objectives of incremental business and yield
management and the cardmembers desire for an adequate amount of desirable dining
establishments. Management believes that the purchase of Rights to Receive can
be funded generally from cash generated from operations, and from funds made
available through the securitization.
GENERAL
The Company expects to continue to make significant marketing expenditures over
the next fiscal year, with a primary focus on fee paying registered card
members. The Company believes that member acquisition cost can either be
substantially funded by the initial fee income or minimized through the ongoing
relationship with SignatureCard and their airline agreements. Furthermore, the
Company believes that the rights to receive inventory levels in the existing
markets, currently averaging approximately ten months on hand on an aggregate
basis, are sufficient to absorb much of the new member demand over the next
fiscal year, particularly when targeting new members in existing markets. The
Company believes that there will be sufficient capacity available under the new
securitization and the warehouse line currently being negotiated to fund the
entry into new territories and the expansion of existing markets.
Capital expenditures by the Company over the past three fiscal years
(approximately $7.7 million) have been due almost exclusively to the Company's
development and acquisition of computer hardware and software supporting the
credit card processing technology necessary to the operation of the dining
programs, the Cardmember Service Center and the integration of the registered
card platform.
The Company believes that cash on hand at September 30, 1999, together with cash
generated from operations and available under the securitization facility will
satisfy the Company's operating capital needs during the 2000 fiscal year.
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. A valuation allowance was recorded for the
remaining amount of the net deferred tax assets as of September 30, 1999, due to
the Company's recurring losses. The valuation allowance at September 30, 1999
and 1998 was $6,005 and $972, respectively. The net deferred tax asset relates
primarily to net operating loss carryforwards which are available through 2019
and amount to $12,044 at September 30, 1999.
Operating activities during fiscal 1999 resulted in net cash provided of $3,361.
However, further expansion into new markets and planned increases in existing
markets could reverse this trend
21
depending on the rate of growth management deems appropriate. As described in
the above paragraph, funds generated from operations, as well as capacity under
the securitization, should be sufficient to fund such growth over the next
twelve months. Additionally, the Company's continued focus on acquiring
fee-paying cardmembers is expected to generate net positive cash flows in fiscal
2000.
Cash used in investing activities was $38,148 in the fiscal year ended September
30, 1999, compared with $3,624 used in 1998 and $11,887 used in 1997. Cash
utilized in investing activities were due primarily to the acquisition of DALC,
and the development and acquisition of computer hardware and software necessary
for the operation of the Company's Cardmember Service Center and the integration
of the registered card platform into the Company's exisiting systems. Management
believes that cash to be used in investing activities associated with capital
expenditures in the fiscal year ended September 30, 2000 will approximate $2.5
million.
Cash flows provided by financing activities were $39,098 for the fiscal year
ended September 30, 1999, compared with cash flows provided by financing
activities of $8,353 in 1998 and $14,499 in 1997. In 1999, the principal source
of cash flow was proceeds from short term borrowing of $29,000 from Chase
Manhattan Bank and $10,000 from GAMI Investments, Inc used to finance the
purchase of DALC. In 1998, the principal source of cash flow was from the
issuance of common stock in connection with the investment by the Equity Group
Investment, Inc. In 1997, the principal source of cash flow was proceeds from
the issuance of secured non-recourse notes relating to the securitization.
On August 5, 1999, the New York Stock Exchange notified the Company of the
pending adoption of amendments to its continued listing criteria and of the
Company's noncompliance with the new standards. In accordance with the
requirements of the notification, the Company submitted to the Exchange its plan
to come into compliance with the new criteria. On September 16, 1999, the
Company was advised by the Exchange that its plan had been accepted and that it
will continue to be listed on the Exchange. The Company's performance relative
to the plan of compliance is subject to monitoring by the Exchange over the next
six fiscal quarters. The rights offering that closed on November 9, 1999, and
resulted in the issuance of $10 million in Series A preferred stock was
intended, in part, to position the Company to come into compliance with these
standards. The Company commenced trading of its Series A preferred stock on the
Exchange on that date under the symbol TMN PFA.
YEAR 2000
In 1998, the Company initiated a plan ("Plan") to identify, assess, and
remediate "Year 2000" issues within each of its computer programs and certain
equipment which contain micro-processors. The Plan addressed the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and 2000, if a program or chip uses only two digits rather
than four to define the applicable year. The Company divided the Plan into six
major phases: assessment, planning, validation, conversion, implementation and
testing. After completing the assessment and planning phase in late 1998, the
Company hired an independent consulting firm to validate the Plan. All software
development and installation effected during 1999 is currently in compliance.
The Company worked with an outside vendor on the conversion, implementation and
testing phases. Systems that were determined not to be Year 2000 compliant have
been either replaced or reprogrammed, and thereafter tested for Year 2000
compliance. The Company believes that at September 30, 1999 the conversion,
implementation and testing phases had been materially completed. The original
budget for the total cost of remediation (including replacement software and
hardware) and testing, as set forth in the Plan, was $500. The Company's
aggregate spending on the Year 2000 remediation at September 30, 1999, which has
been expensed, was $641.
22
The Company has identified and contacted critical suppliers and customers whose
computerized systems interface with the Company's systems, regarding their plans
and progress in addressing their Year 2000 issues. The Company has received
varying information from such third parties on the state of compliance or
expected compliance. Contingency plans are being developed in the event that any
critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or financial
conditions.
FORWARD-LOOKING STATEMENTS
The Company has made, and continues to make, various forward-looking statements
with respect to its financial position, business strategy, projected costs,
projected savings and plans and objectives of management. Such forward-looking
statements are identified by the use of forward-looking words or phrases such as
"anticipates," "intends," "expects," "plans," "believes," "estimates," or words
or phrases of similar import. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge, investors and prospective investors are cautioned that such
statements are only projections and that actual events or results may differ
materially from those expressed in any such forwarding looking statements. The
Company's actual consolidated quarterly or annual operating results have been
affected in the past, or could be affected in the future, by factors, including,
without limitation, general economic, business and market conditions;
relationships with credit card issuers and other marketing partners; regulations
affecting the use of credit card files, extreme weather conditions;
participating restaurants' continued acceptance of discount dining programs and
the availability of other alternative sources of capital to them.
23
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F - 1
Financial Statements:
Consolidated Balance Sheets, F - 2
September 30, 1999 and 1998
Consolidated Statements of Income F - 3,4
and Comprehensive Income/(Loss)
for each of the years in the three-year
period ended September 30, 1999
Consolidated Statements of Shareholders' F - 5
Equity for each of the years in the three-year
period ended September 30, 1999
Consolidated Statements of Cash Flows F - 6,7,8
for each of the years in the three-year
period ended September 30, 1999
Notes to Consolidated Financial Statements F - 9
Schedule II - Valuation and Qualifying Accounts F - 30
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders
Transmedia Network Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Transmedia
Network Inc. and subsidiaries (the "Company") as of September 30, 1999 and 1998,
and the related consolidated statements of operations, and comprehensive loss,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transmedia Network Inc. and subsidiaries as of September 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
December 3, 1999, except as to notes (4)
and (21), which are
as of December 30, 1999
F-1
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
(in thousands)
ASSETS 1999 1998
------ --------- ---------
Current assets:
Cash and cash equivalents $ 8,943 $ 4,632
Restricted cash 3,726 3,518
Accounts receivable, net 8,107 2,061
Rights-to-receive, net
Unrestricted 41,833 7,909
Securitized and owned by Trust 34,621 34,438
Prepaid expenses and other current assets 5,259 5,067
--------- ---------
Total current assets 102,489 57,625
Securities available for sale, at fair value 631 1,267
Equipment held for sale or lease, net 702 988
Property and equipment, net 6,413 6,832
Other assets 2,583 1,142
Restricted deposits and investments 2,070 1,980
Excess of cost over net assets acquired and other intangible assets 4,822 4,591
--------- ---------
Total assets $ 119,710 $ 74,425
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short term borrowing - bank $ 29,000 $ --
Accounts payable - rights-to-receive 6,691 4,181
Accounts payable - trade 8,376 3,348
Accrued expenses and other 5,174 1,507
Deferred membership fee income 3,850 2,594
--------- ---------
Total current liabilities 53,091 11,630
Secured non-recourse notes payable 33,000 33,000
Term loan - affiliate 10,000 --
Other long-term liabilities 3,170 2,061
--------- ---------
Total liabilities 99,261 46,691
--------- ---------
Guaranteed value of puts 2,336 --
Shareholders' equity :
Preferred stock, par value $0.10 per share (1,000 shares authorized;
none issued and outstanding ) -- --
Common stock, par value $0.02 per share (20,000 shares authorized;
13,376 and 12,876 shares issued and outstanding in 1999 and 1998,
respectively) 264 258
Additional paid-in capital 22,661 21,496
Cumulative other comprehensive income 218 612
Retained (deficit) earnings (5,030) 5,368
--------- ---------
Total shareholders' equity 18,113 27,734
--------- ---------
Total liabilities and shareholders' equity $ 119,710 $ 74,425
========= =========
See accompanying notes to consolidated financial statements.
F-2
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For each of the years in the three-year period ended September 30, 1999
(in thousands, except income per share)
1999 1998 1997
---- ---- ----
Operating revenue:
Sales of rights-to-receive:
Owned by Company $ 34,919 5,566 23,189
Owned by Trust 85,553 89,983 78,112
--------- --------- ---------
Gross dining sales 120,472 95,549 101,301
Cost of sales 70,110 54,446 57,065
Member discounts 26,480 21,444 23,004
--------- --------- ---------
Net revenue from rights-to-receive 23,882 19,659 21,232
Membership and renewal fee income 8,281 7,321 7,251
Franchise fee income 1,073 1,249 1,438
Commission income 150 369 403
Processing income 1,402 1,543 620
--------- --------- ---------
Total operating revenues 34,788 30,141 30,944
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 21,675 18,607 17,673
Salaries and benefits 9,825 8,189 7,923
Acquisition and promotion expenses 6,447 5,097 4,650
Settlement of licensee litigation 2,835 -- --
Amended compensation agreements -- 3,544 --
Asset impairment loss -- 2,169 --
--------- --------- ---------
Total operating expenses 40,782 37,606 30,246
--------- --------- ---------
Operating (loss) income (5,994) (7,465) 698
Other income (expense):
Realized gains on sale of securities available for
sale 1,149 200 --
Interest and other income 468 560 450
Initial franchise fee and license fee income, net -- (710) 740
Interest expense and financing cost (4,021) (3,021) (2,572)
--------- --------- ---------
Loss before income taxes (8,398) (10,436) (684)
Income tax provision (benefit) 2,000 (2,600) (260)
--------- --------- ---------
Net loss $ (10,398) (7,836) (424)
========= ========= =========
(Continued)
F-3
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS, CONTINUED
For each of the years in the three-year period ended September 30, 1999
1999 1998 1997
-------- -------- --------
Net loss $(10,398) (7,836) (424)
======== ======== ========
Other comprehensive income
Unrealized holding gain (loss) on securities
available-for-sale 78 (607) 119
Beginning unrealized loss for all securities sold (562) (114) --
Tax effect of unrealized gain (loss) 90 274 (45)
-------- -------- --------
Comprehensive loss $(10,792) (8,283) (350)
-------- -------- --------
Operating income (loss) per common and common equivalent share:
Basic and Diluted $ (.46) (.63) .07
======== ======== ========
Net loss per common and common equivalent share:
Basic $ (.80) (.67) (.04)
======== ======== ========
Diluted $ (.79) (.66) (.04)
======== ======== ========
Weighted average number of common and common equivalent shares outstanding:
Basic 13,043 11,773 10,166
Effect of dilutive securities:
Warrants 0 0 14
Options 114 52 0
-------- -------- --------
Diluted 13,157 11,825 10,180
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the years in the three-year period ended September 30, 1999
(in thousands)
COMMON STOCK CUMULATIVE
------------------- ADDITIONAL OTHER RETAINED
NUMBER PAID-IN COMPREHENSIVE (DEFICIT)
OF SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
--------- ------ ---------- ------------- --------- -------
Balance, September 30, 1996 10,127 202 10,547 985 14,019 25,753
Net loss -- -- -- -- (424) (424)
Exercise of stock options 63 2 64 -- -- 66
Income tax benefit related to stock option plan -- -- 24 -- -- 24
Dividend -- -- -- -- (189) (189)
Cumulative other comprehensive income, net -- -- -- 74 -- 74
------- ------- ------- ------- ------- -------
Balance, September 30, 1997 10,190 204 10,635 1,059 13,406 25,304
Net loss -- -- -- -- (7,836) (7,836)
Issuance of common stock 2,674 53 10,797 -- -- 10,850
Exercise of stock options 12 1 54 -- -- 55
Income tax benefit related to stock option plan -- -- 10 -- -- 10
Dividend -- -- -- -- (202) (202)
Cumulative other comprehensive loss, net -- -- -- (447) -- (447)
------- ------- ------- ------- ------- -------
Balance, September 30, 1998 12,876 $ 258 21,496 612 5,368 27,734
Net loss -- -- -- -- (10,398) (10,398)
Issuance of common stock 500 10 2,025 -- -- 2,035
Accretion of guaranteed value of puts -- (4) (860) -- -- (864)
Cumulative other comprehensive loss, net -- -- -- (394) -- (394)
------- ------- ------- ------- ------- -------
Balance, September 30, 1999 13,376 264 22,661 218 (5,030) 18,113
======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-5
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three-year period ended September 30, 1999
(in thousands)
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss $(10,398) (7,836) (424)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,444 5,346 2,232
Amortization of deferred financing cost 354 278 158
Provision for losses on rights-to-receive 4,606 3,822 3,209
Gain on sale of investments (1,149) (200) --
Deferred income taxes 2,000 (1,980) (256)
Changes in assets and liabilities:
Accounts receivable (5,545) 199 357
Rights-to-receive 4,706 (5,882) (3,396)
Prepaid expenses and other current assets (3,766) (457) 886
Other assets (1,411) (373) (327)
Accounts payable 5,022 554 242
Income taxes receivable (payable) 1,259 (378) (791)
Accrued expenses and other 2,982 249 (35))2
Deferred membership fee income 1,257 (662) (847)
-------- -------- --------
Net cash provided (used) in operating
activities 3,361 (7,320) (1,008)
-------- -------- --------
Cash flow from investing activities:
Acquisition of Dining a la Card (36,453) -- --
Additions to property and equipment (2,106) (2,066) (3,443)
Acquisition of franchises (648) (1,758) (7,454)
Proceeds from sale of securities available for sale 1,149 200 --
Increase in restricted deposits and investments (90) -- (990)
-------- -------- --------
Net cash used in investing activities (38,148) (3,624) (11,887)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of secured
non-recourse notes -- -- 31,978
Proceeds from short term borrowings - bank 29,000 -- --
Proceeds from term loan - affiliate 10,000 -- --
Net borrowings (repayments) on revolving line of credit -- -- (15,000)
Net proceeds from issuance of common stock 306 9,854 --
Increase in restricted cash (208) (1,364) (2,166)
Conversion of warrants and options for common stock, net of
tax benefits -- 65 90
Dividends paid -- (202) (403)
-------- -------- --------
Net cash provided by financing activities 39,098 8,353 14,499
-------- -------- --------
(Continued)
F-6
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
1999 1998 1997
------- ------- -------
Net (decrease) increase in cash $(4,311) (2,591) 3,620
Cash and cash equivalents:
Beginning of year 4,632 7,223 3,603
------- ------- -------
End of year $ 8,943 4,632 7,223
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 2,873 2,454 2,219
======= ======= =======
Income taxes $(1,259) 23 764
======= ======= =======
Supplemental schedule of noncash investing and financing activities: Noncash
investing and financing activities:
At September 30, 1999, 1998 and 1997, the Company adjusted its available
for sale investment portfolio to fair value resulting in a net
(decrease) increase to Shareholders' equity of ($394), ($447) and
$74, net of deferred income taxes.
There is no dividend payable outstanding as of September 30, 1999, 1998
and 1997.
The acquisition of Dining a la Card for $35,000, 400,000 shares of
common stock, with a put value of $8 per share, and options to
purchase 400,000 shares of common stock, was recorded at the end of
the third quarter of fiscal 1999 as follows (Note 2):
Fair value of assets acquired:
Rights-to-receive $ 40,782
Other assets 231
Accrued expenses (663)
Stock options outstanding (697)
Guaranteed value of puts (1,471)
Common stock issued (1,729)
--------
Cash paid $ 36,453
========
The acquisition of the Houston franchisee was recorded during the second
quarter of fiscal year 1999 as follows (see Note 13):
Fair value of assets acquired:
Rights-to-receive $ 127
Other assets 13
Excess of cost over net assets acquired 536
--------
676
Less: Cash paid 648
--------
Liabilities assumed $ 28
========
F-7
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
The acquisition of the Dallas/Ft. Worth franchisee was recorded during
the fourth quarter of fiscal year 1998 as follows (see Note 13):
Fair value of assets acquired:
Rights-to-receive $ 266
Other assets 8
Excess of cost over net assets acquired 1,541
--------
1,815
Less: Cash paid 1,758
--------
Liabilities assumed $ 57
========
The acquisition of the rights-to-receive and cancellation of the
franchise of East American Trading Company, for 170,000 shares of
common stock, was recorded during the first quarter of fiscal year
1998 as follows (see Note 13):
Fair value of assets acquired:
Rights-to-receive $ 267
Excess of cost over net assets acquired 740
--------
Net assets acquired $ 1,007
========
The acquisition of the West Coast franchisee in fiscal year 1997 (see
Note 13) was recorded as follows:
Fair value of assets acquired:
Rights-to-receive $ 2,659
Other assets 45
Excess of cost over net assets acquired 5,017
--------
7,721
Less: Cash paid 7,454
--------
Liabilities assumed $ 267
========
See accompanying notes to consolidated financial statements.
F-8
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Transmedia Network Inc. and subsidiaries' (the "Company") owns
and markets a charge card ("the Transmedia Card") offering
savings to the Company's card members on dining as well as
lodging, travel, retail catalogues and long distance telephone
calls. The Company's primary business activity is to acquire,
principally through cash advances, the rights-to-receive food
and beverage credits at full retail value from restaurants
("Rights-to-receive"), which are then sold for cash to its
members. These Rights-to-receive are primarily purchased by the
Company for cash but may also be acquired in exchange for
services.
The Company's areas of operation included Central and South
Florida, the New York, Chicago and Los Angeles metropolitan
areas, Boston and surrounding New England, Philadelphia, San
Francisco, Detroit, Indianapolis, Milwaukee, Denver, Phoenix,
North and South Carolina, Georgia, parts of Tennessee and
Dallas/Ft Worth. Franchised areas include most of New Jersey,
Washington, D.C., Maryland, Virginia, and parts of Texas.
Licensing arrangements exist for the United Kingdom, Canada, and
Europe, as well as the Asia-Pacific region.
On June 30, 1999, the Company acquired from SignatureCard, Inc.
("SignatureCard"), a subsidiary of Montgomery Ward & Co.,
Incorporated, assets related to a membership discount program
SignatureCard operated under the trade name and service mark
"Dining A La Card". The assets acquired included various
intellectual property rights and computer software, membership
and merchant data, rights-to-receive, and most significantly, a
registered card platform, among other things. The registered
card program is primarily marketed through airline reward
programs where savings are passed on to members in the form of
frequent flyer miles. With the acquisition of Dining a la Card,
the Company now has a presence in new areas such as St. Louis,
Kansas City, San Diego, Memphis, Minneapolis, Seattle and other
parts of Washington, and to a lesser degree, Cincinnati,
Pittsburgh, Las Vegas, New Orleans, Portland, Salt Lake City,
Tulsa, and Hawaii. The Statement of Income includes the results
of the acquired registered card operation commencing June 30,
1999.
Transmedia Network Inc.'s corporate structure consists of three
wholly owned subsidiaries: Transmedia Restaurant Company Inc.,
functions as the sales organization and is responsible for
merchant acquisition and relationship management; TMNI
International Incorporated is responsible for all foreign
licensing; and Transmedia Service Company Inc., is responsible
for all card member-related facets of the business, including
the card member service center, domestic franchising, and
support services to Transmedia Restaurant Company. In 1997, TNI
Funding I, Inc. was established as a special purpose corporation
as part of the securitization discussed in Note 5. TNI Funding
I, Inc. is a wholly owned subsidiary of Transmedia Service
Company, Inc. All intercompany accounts and transactions have
been eliminated in consolidation.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are instruments with original
maturities at the date of purchase of three months or less.
(C) RIGHTS-TO-RECEIVE
Rights-to-receive ("Rights") are composed primarily of food and
beverage credits acquired from restaurants. Rights are stated at
the gross amount of the commitment to the establishment.
Accounts payable-rights-to-receive represent the unfunded
portion of the total commitments.
F - 9
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cost is determined by the first-in, first-out method. The
Company reviews the realizability of the Rights on a periodic
basis and provides for anticipated losses on Rights-to-receive
from restaurants that have ceased operations or whose credits
are not utilized by cardholders. These losses are offset by
recoveries from restaurants previously written off.
(D) SECURITIES AVAILABLE FOR SALE
All of the Company's investments are available to be sold in
response to the Company's liquidity needs and asset-liability
management strategies, among other reasons. Investments
available-for-sale on the balance sheet are stated at fair
value. Unrealized gains and losses are excluded from earnings
and are reported in a separate component of shareholders' equity
(cumulative other comprehensive income), net of related deferred
income taxes.
A decline in the fair value of an available-for-sale security
below cost that is deemed other than temporary results in a
charge to income, resulting in the establishment of a new cost
basis for the security. All declines in fair values of the
Company's investment securities in 1999 and 1998 were deemed to
be temporary.
Dividends are recognized when earned. Realized gains and losses
are included in earnings and are derived using the
specific-identification method for determining the cost of
securities sold.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment used in the business is calculated on the
straight-line method over an estimated useful life of five
years. Amortization of leasehold improvements is calculated over
the shorter of the lease term or estimated useful life of the
asset.
Equipment held for sale or lease consists primarily of
electronic terminals used for credit card processing and is
stated at cost. Depreciation is calculated on a straight-line
basis over a three-year life.
(F) EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired has resulted primarily
from the acquisition of franchise territories (see note 13) and
is amortized on a straight line basis over the expected periods
to be benefited, generally 20 years. The Company's accounting
policy regarding the assessment of the recoverability of
intangibles is to review the carrying value of goodwill and
other intangibles if the facts and circumstances suggest that
they may be impaired. The Company assesses the recoverability of
intangible assets by determining whether the amortization of the
goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash
flows using a discount rate reflecting the Company's average
cost of funds. The assessment of the recoverability of goodwill
will be impacted if estimated future operating cash flows are
not achieved.
(G) DEFERRED MEMBERSHIP AND RENEWAL FEE INCOME
Initial membership and renewal fees are billed in advance and
amortized on a straight-line basis over twelve months, which
represents the standard membership period. Membership fees are
cancelable and are refunded to members, if requested, on a
prorata basis based on the remaining portion of the membership
period.
F - 10
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Certain costs of acquiring members are deferred and amortized,
on a straight-line basis over 12 months. The acquisition costs
capitalized as assets by the Company represent initial
fee-paying member acquisition costs resulting from
direct-response campaign costs that are recorded as incurred.
Campaign costs include incremental direct costs of
direct-response advertising, such as printing of brochures,
campaign applications and mailing. Such costs are deferred only
to the extent of initial membership fees generated by the
campaign.
Acquisition expenses represent the cost of acquiring members and
consist primarily of direct-response advertising costs incurred
in excess of fees received and amortization of previously
deferred costs and costs associated with soliciting no-fee
members.
(H) REVENUE RECOGNITION
Gross dining sales represent the retail value of the
rights-to-receive that are recognized when members use either of
the two programs at a dining establishment.
Continuing franchise fee revenue represents royalties calculated
as a percentage of the franchisees' sales and is recognized when
earned. Initial franchise fees and license fees are recognized
when material services or conditions relating to the sale of the
franchise have been substantially performed.
Commission income represents income earned on discounted
products and services provided by third parties to the Company's
members. Such services consist of retail catalogues, phone cards
and travel services.
Processing income represent the net fees charged to restaurants
when the Company serves as merchant of record for processing of
all other non-Transmedia point of sale transactions.
Processing income is recognized when collected.
(I) COST OF SALES AND MEMBER DISCOUNTS
Cost of sales is composed of the cost of rights-to-receive sold,
related processing fees and provision for rights-to-receive
losses.
Member discount represents the cost of the specific discount
earned by members whenever one of the two programs is used.
(J) INCOME TAXES
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(K) STOCK BASED COMPENSATION
In fiscal 1997, the Company adopted the disclosure only
provision of Statement of Financial Accounting Standards
("SFAS") No.123, "Accounting for Stock-Based Compensation." The
F - 11
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company continues to account for its stock compensation
arrangements using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No.25, "Accounting
for Stock Issued to Employees."
(L) LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Basic loss per share is based on the weighted average number of
common shares outstanding during the period presented.
Diluted loss per share is computed using the weighted average
number of common and dilutive common equivalent shares
outstanding in the periods, assuming exercise of options and
warrants calculated under the treasury stock method, based on
average stock market prices at the end of the periods.
(M) COMPREHENSIVE INCOME AND LOSS
Comprehensive income and loss presents a measure of all changes
in shareholders' equity except for changes in equity resulting
from transactions with shareholders in their capacity as
shareholders. The Company's other comprehensive loss presently
consists of net unrealized holding (losses) gains on investments
available for sale. Total comprehensive losses were ($10,098),
($8,283), and ($350) for the years ended September 30, 1999,
1998 and 1997, respectively.
(N) RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to
the 1999 presentation.
(O) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates. The principal estimates used by the Company
relate to the provision for rights to receive losses and the
valuation allowance for net deferred tax assets.
(2) ACQUISITION OF DINING A LA CARD
On June 30, 1999, the Company concluded the acquisition from
SignatureCard, Inc. ("SignatureCard"), a subsidiary of Montgomery Ward
& Co., Incorporated, of assets related to a membership discount dining
program SignatureCard operated under the Dining A La Card trade name
and service mark. The assets acquired included various intellectual
property rights and computer software, membership and merchant data,
rights-to-receive, and, most significantly, a registered card platform,
among other things.
The acquisition was accounted for under the purchase method, and
accordingly, the results of operations of the acquired company have
been included in the consolidated results of Transmedia Network Inc.,
since the effective date of acquisition. The purchase price of $40,783
has been allocated, in its entirety, to the rights to receive. As
consideration for the assets, the Company (1) paid SignatureCard
$35,000 in cash at closing, (2) issued to SignatureCard 400,000 shares
of the Company's common stock and (3) issued to SignatureCard a
three-year option to purchase an additional 400,000 shares of the
Company's common stock at a price of $4.00 per share. The options,
which are included in the cost of the acquired assets, were valued
using the Black-Scholes model and assigned a value of $697. The shares
issued were valued at $4.32 per share using an average price over the
measurement period. Commencing
F - 12
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, 1999, SignatureCard, at any time prior to June 30, 2002,
may require the Company to repurchase all or part of the 400,000 shares
issued at the closing at a price of $8.00 per share. The guaranteed
value of the puts recorded at September 30, 1999, is $2,336. In
addition, during the two-year period following the closing, the Company
has agreed to share with SignatureCard certain amounts recovered from
rights to receive acquired, but not funded, at closing.
In connection with the acquisition of Dining A La Card, the Company
entered into a Services Collaboration Agreement with SignatureCard.
Under this agreement, SignatureCard will continue to provide dining
members from its airline frequent flyer partner programs and other
marketing programs. It will also share, for 12.5 years, certain profits
the Company derives from SignatureCard-generated members as well as a
portion of the membership fee revenues generated from fee paying
members acquired in this transaction or subsequently through
SignatureCard's efforts.
To finance the acquisition, the Company obtained a $35,000 senior
secured revolving bridge loan facility from The Chase Manhattan Bank
(from which $29,000 was drawn down at closing) and a $10,000 term loan
from GAMI Investments, Inc., an affiliate of EGI (which was drawn down
in full) See Note 4.
In connection with this acquisition, the Company paid a fee for
transaction advisory services to Equity Group Investments LLC, an
affiliate of the Company's largest stockholder ("EGI"), which is
included in the cost of the acquired assets, of $386.
(3) INVESTMENT BY EQUITY GROUP INVESTMENTS, INC.
On March 4, 1998, the Company sold 2.5 million new-issued common shares
and non-transferable warrants to purchase an additional 1.2 million
common shares for a total of $10,625 to affiliates of Equity Group
Investments, Inc., ("EGI") a privately held investment company. Net
proceeds amounted to $9,825 after transaction costs. The
non-transferable warrants have a term of five years; one third of the
warrants are exercisable at $6.00 per share, another third are
exercisable at $7.00 per share and the final third are exercisable at
$8.00 per share. As part of this strategic investment, EGI nominated
and the stockholders elected two candidates to the Board of Directors
who joined three of the Company's existing directors and two new
independent directors.
As more fully described in Note 21, EGI invested an additional $6,846
in November, 1999, as a result of a Standby Purchase Agreement that
they provided to support the Company's $10 million rights offering and
eventual issuance of convertible preferred stock. As consideration for
the standby note agreement, EGI received one million warrants,
exercisable over a five-year period, at a price of $2.48.
(4) FINANCING ACTIVITIES
The facility obtained for the acquisition of Dining a la Card through
Chase Manhattan Bank permits the Company to borrow up to an aggregate
principal amount equal to the lesser of (i) $35,000 and (ii) the amount
available under a borrowing base formula based on the amount of
registered card program rights to receive receivables which meet
certain eligibility criteria (which was $36,600 at the closing). The
facility is secured by liens on substantially all of the Company's
assets (including those purchased pursuant to the acquisition), other
than those subject to an existing securitization facility, as well as
the stock of the three principal subsidiaries: Transmedia Restaurant
Company Inc., Transmedia Service Company Inc., and TMNI International
Incorporated. The remaining proceeds of the facility are available in
connection with the ongoing registered card business.
Amounts drawn down under the facility accrue interest, at the Company's
election, at either (i) 0.25% plus the greater of (a) the prime rate
publicly announced by Chase in effect in New York, New York
F - 13
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and (b) the federal funds effective rate from time to time plus 1.5% or
(ii) one month LIBOR plus 1.25%, and mature on December 30, 1999, or
upon the earlier effectiveness of a permanent securitization facility
of the registered card program rights-to-receive. The effective rate of
interest at September 30, 1999 was 7.4%. Interest is payable monthly in
arrears. Any amounts overdue under the facility accrues interest at the
applicable rate plus 2%. The agreement contains customary events of
default, as well a cross default to all other material indebtedness,
including the Company's existing securitization facility and the GAMI
loan. In connection with this facility, the Company paid a $500 fee to
Chase upon the closing and was required to pay a monthly unused line
fee equal to 0.375% of the average unused amount. The facility was paid
off on December 30, 1999 with the proceeds of the $80 million
securitization described below. Financing fees of $1.1 million were
also paid.
On December 30, 1999, the Company entered into the $80 million
securitization of the combined rights to receive of both the private
label and the registered card dining program. The proceeds drawn down
at closing, approximately $65 million based on a similar borrowing base
formula used in the bridge loan, were utilized to terminate and payoff
$33 million non recourse notes from the 1996 securitization and the $27
million outstanding under the bridge loan. Additionally, the Company
was required to pay a termination payment of approximately $900 to the
investors of the 1996 securitization. The interest rate applicable to
the facility will be either (1) the Eurodollar which is a rate 1.25% in
excess of a rate per annum equal to the LIBOR Rate and will be limited
to interest periods of up to three months and (2) the Alternate Base
Rate which is the higher of (i) Chase's Prime rate and (ii) the Federal
Funds Effective Rate plus 1.5%.
The GAMI facility is a term loan made through an affiliate of EGI in
the amount of $10,000 and was unsecured and subordinated to the Chase
facility. Interest accrued on the principal amount outstanding was at
the prime rate (as announced from time to time by Chase) plus 4%,
payable monthly in arrears. The effective rate of interest at September
30, 1999 was 12.25%.
The GAMI agreement required the Company to conduct a rights offering of
rights to purchase a new series of preferred stock to be offered to
each existing stockholder of record on a pro rata basis. The proceeds
of the rights offering were earmarked to repay all outstanding amounts
under this loan.
In connection with the rights offering, EGI, through its affiliate and
the Company's largest stockholder, Samstock L.L.C., agreed to act as a
standby purchaser whereby, after exercising its initial rights and any
additional subscription privileges, would purchase any shares not
otherwise subscribed for by other stockholders. The rights offering
closed on November 9, 1999, and $10 million of convertible preferred
stock was issued (see Note 21). The proceeds were used to retire the
GAMI obligation.
The terms of this loan also required the Company to pay GAMI, at
closing a cash fee of $500, which was reimbursable to the Company upon
the consummation of the rights offering and the issuance to Samstock
L.L.C. of warrants to purchase 1 million shares of the Company's common
stock in consideration of providing the loan and if it acted as a
standby purchaser in connection with the rights offering.
(5) SALE OF RIGHTS-TO-RECEIVE
On December 24, 1996, the Company made an initial transfer of $33
million of rights-to-receive to a special purpose corporation ("SPC"),
an indirect wholly owned subsidiary, as part of a revolving
securitization. The rights-to-receive, which were sold to the SPC
without recourse, were in turn transferred to a limited liability
corporation ("Issuer"), which issued $33 million of fixed rate
securities in a private placement to various third party investors.
F - 14
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In exchange for the rights-to-receive, which have a retail value of
approximately $66 million before member discounts, the Company received
approximately $32 million, after transaction costs, and a 1% equity
interest in the Issuer. Future excess cash flows, expected to be
generated from the securitized assets as the rights-to-receive are
exchanged for meals by Company cardholders, are remitted to the Company
on a monthly basis as a return on capital from the Issuer. Excess cash
flows are determined after payments of interest to noteholders and
investors, as well as trustee and servicing fees. Rights-to-receive
currently held by the Issuer, as well as cash and certain deposits
restricted under the securitization agreement, have been separately
depicted in the consolidated balance sheet.
The private placement certificates have a five-year term before
amortization of principal and have an interest rate of 7.4%. During
this revolving period, the Issuer is responsible for the ongoing
purchase of rights-to-receive from the Company to ensure that the
initial pool of $33 million is continually replenished as the
rights-to-receive are utilized by cardholders. It is anticipated that
replenishment of rights-to-receive will provide for a continuous stream
of additional net revenue throughout the period.
As more fully discussed in Note 4, on December 30, 1999, the Company
entered into a new securitization agreement and simultaneously
terminated the 1996 facility and paid off the non-recourse notes.
(6) AMENDED COMPENSATION AGREEMENTS
On December 29, 1997, the Company and Melvin Chasen, former Chairman of
the Board, Chief Executive Officer and President, agreed to amend his
employment agreement and to terminate his consulting agreement. As part
of the agreement, Mr. Chasen agreed to a five-year non-compete and
confidentiality agreement with the Company and relinquished his right
to receive $1 million in the event of the sale of a control block of
stock, as described in Note 2 above. Pursuant to this agreement, the
Company made cash payment of $2.75 million to Mr. Chasen and recognized
a one-time pre-tax charge of $3.1 million in the quarter ending
December 31, 1997.
During 1998, the Company entered into consulting agreements with
certain former senior management personnel. These agreements required
these personnel to perform services at the Company's request for a
period not to exceed more than one year. The Company determined that it
no longer requires, nor intended to utilize the service of these
individuals, and recorded a charge of $463 relating to the remaining
outstanding obligation under the consulting agreements for the year
ended September 30, 1998
(7) SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of marketable equitable
securities that are recorded at fair value and have an aggregate cost
basis of $280 as of September 30, 1999, 1998 and 1997. Gross unrealized
gains were $545, $1,030, and $1,774 and gross unrealized losses were
$194, $43, and $66 as of September 30, 1999, 1998 and 1997,
respectively. Realized gains were $1,149 and $200 for the years ended
September 30, 1999 and 1998, respectively. There were no realized gains
in 1997. Deferred income taxes associated with the net unrealized gains
were $134, $375, and $649 at September 30, 1999, 1998 and 1997,
respectively.
F - 15
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale and lease consists primarily of electronic
terminals used for credit card processing. The cost of the terminals on
hand is determined on a first in, first out basis. The amount presented
on the balance sheet represents the net book value of terminals after
reduction for terminals sold and accumulated depreciation of $972 and
$490 on terminals under lease at September 30, 1999 and 1998.
(9) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30,
--------------------------------
1999 1998
------- ------
Furniture and fixtures $ 674 651
Office equipment 12,136 11,993
Leased equipment 174
Leasehold improvements 129 135
--------- ---------
13,113 12,779
Less accumulated depreciation and
amortization (6,700) (5,947)
--------- ---------
$ 6,413 6,832
========= =========
Depreciation and amortization expense for the years ended September 30,
1999, 1998 and 1997 was $2,859, $2,711, and $1,812, respectively.
(10) FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The fair value of cash and cash equivalents, restricted cash,
accounts receivable, rights-to-receive, accounts payable, accrued
expenses and notes payable is based on the short maturity of these
instruments which approximate the carrying amounts at September 30,
1999 and 1998. The fair value of the rights-to-receive approximates the
carry value due to their short-term nature. The fair value of the
securities available for sale is based upon quoted market prices for
these or similar instruments.
(11) STOCK OPTION PLANS
In March 1996, the 1996 Long-Term Incentive Plan (the "1996 Plan") was
approved for adoption by the Company's stockholders as a successor plan
to the 1987 Stock Option and Rights Plan (the "1987 Plan"). The 1996
Plan was amended August 5, 1998 to allow for non-employee directors to
choose to take directors fees in either cash or a current or deferred
stock award. In addition, the amount of shares available for grant
under the 1996 Plan was increased to 1,505,966. Under the 1996 Plan,
the Company may grant awards, which may include stock options, stock
appreciation rights, restricted stock, deferred stock, stock granted as
a bonus or in lieu of other awards, dividend equivalents and other
stock based awards to directors, officers and other key employees and
consultants of the Company. Stock options granted under the 1996 Plan
may not include more than 505,966 incentive stock options for federal
income tax purposes. The exercise price under an incentive stock option
to a person owning stock representing more than 10 percent of the
common stock must equal at least 110 percent of the fair market value
at the date of grant. Options are exercisable beginning not less than
one year after date of
F - 16
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
grant. All options expire either five or ten years from the date of
grant and each becomes exercisable in installments of 25 percent of the
underlying shares for each year the option is outstanding, commencing
on the first anniversary of the date of grant.
At September 30, 1999, there were 443,716 shares available for grant
under the 1996 Stock Plan. The per share weighted average fair value of
stock options granted during 1999 and 1998 was approximately $2.70 and
$4.95 on the date of grant using the Black-Scholes option-pricing model
with the following assumption: 1999-expected no dividend yield
risk-free interest rate or 6.25%, and expected lives ranging from five
to ten years; 1998-expected no dividend yield, risk-free interest rate
or 5.25%, and expected lives ranging from five to ten years.
The Company has continued to comply with APB No.25 to account for stock
options and accordingly, no compensation expense has been recognized in
the financial statements. Had the Company determined compensation
expense based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net Income
As reported $(10,398) $ (7,836) $(424)
Pro forma (12,581) (8,919) (719)
Net Income per Common and
Common Equivalent Share
As reported (.80) (.67) (.04)
Pro forma (.96) (.76) (.06)
The full impact of the calculation of compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation expense is reflected over
the option's vesting period which could be up to five years.
Stock option activity during the periods indicated is as follows:
Incentive Stock Options Nonqualified Options
--------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Balance at September 30, 1997 709,968 8.54 247,500 6.02
Granted 364,500 5.16 - -
Exercised (23,250) 4.38 - -
Cancellations (279,550) 9.72 (112,500) 7.44
--------- ----- --------- ----
Balance at September 30, 1998 771,668 $ 6.57 135,000 $ 4.83
--------- ----- --------- ----
Granted 570,000 2.49 - -
Exercised - - - -
Cancellations (80,575) 12.52 (135,000) 4.83
--------- ----- --------- ----
Balance at September 30, 1999 1,261,093 4.34 - -
========= ===== ========= ====
At September 30, 1999, the range of weighted average exercise prices
and remaining contractual life of outstanding options was $2.0 to
$15.00 and 2.75 to 10 years, respectively.
At September 30, 1999 and 1998, the number of options exercisable were
901,593 and 630,918 and the
F - 17
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
weighted-average exercise price of those options was $5.30 and $6.99,
respectively.
(12) INCOME TAXES
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
September 30, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Reserve for rights-to-receive losses $ 694 $ 394
Lawsuit settlement 1,077 -
Travel programs and reserve for frequent flyer miles
obligation 37 78
Charitable contributions 58 65
Net operating loss carryforward 4,577 1,610
Consulting charges - 234
Intangible assets 758 864
Other 156 557
--- ---
Gross deferred tax assets 7,357 3,802
Less valuation allowance (6,005) (972)
------ ------
Deferred tax assets 1,352 2,830
------ ------
Deferred tax liabilities:
Unrealized gain on securities available for sale 134 375
Deferred acquisition costs 551 229
Property and equipment 667 467
------ ------
Deferred tax liabilities 1,352 1,071
------ ------
Net deferred tax asset - 1,759
====== ======
SFAS No. 109 requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or
all of the deferred tax asset will not be realized. A valuation
allowance was recorded for the full amount of the net deferred tax
assets as of September 30, 1999, due to the Company's recurring losses.
The valuation allowance at September 30, 1999 and 1998 was $6,005 and
$972, respectively. The decrease in deferred tax liability related to
securities available for sale was ($241), and ($274) during 1999 and
1998, respectively.
A net operating loss carryforward of $12,044 was available at the year
ended September 30, 1999. The loss will expire in 2019.
F - 18
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income tax provision (benefit) for the years ended September 30, 1999,
1998 and 1997 is as follows:
Current Deferred Total
------- -------- -----
1999:
U.S. federal $ - 1,240 1,240
State and local - 760 760
----- ------ -------
$ - 2,000 2,000
===== ====== =======
1998:
U.S. federal $ (587) (1,774) (2,361)
State and local (33) (206) (239)
------ ------- --------
$ (620) (1,980) (2,600)
====== ======= ========
1997:
U.S. federal $ (4) (206) (210)
State and local - (50) (50)
----- ------- --------
$ (4) (256) (260)
====== ======= ========
Reconciliation of the statutory federal income tax rate and the
Company's effective rate for the years ended September 30, 1999, 1998
and 1997, is as follows:
1999 1998 1997
--------------------------- -------------------------- ---------------------------
$ of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
------ -------- ------ -------- ------ --------
Federal tax rate $ (2,855) 34.0 $ (3,548) 34.0 $ (232) 34.0
State and local taxes,
net of federal
income tax benefit (336) 4.0 (417) 4.0 (33) 4.8
Valuation allowance
change 5,033 (59.9) 972 (9.3) - -
Other 158 (1.9) 393 (3.8) 5 (0.8)
------- ----- ------ ----- ----- -----
$ 2,000 (23.8)% $ (2,600) 24.9% $ (260) 38.0%
======= ======= ======= ===== ===== =====
(13) FRANCHISE AGREEMENTS
The Company, as franchiser, had previously entered into various
ten-year franchising agreements to assist in its national expansion
through the years 1990 to 1995. In accordance with these agreements,
franchisees were granted a territory with a defined minimum of
full-service restaurants that accept certain major credit cards. The
Company provides marketing, advertising, training and other
administrative support.The franchisees are responsible for soliciting
restaurants and cardholders, advancing consideration to the restaurants
to obtain rights-to-receive food and beverage credits, and maintaining
adequate insurance.
F - 19
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In consideration for granting the franchises, the franchisees paid the
Company initial franchise fees and an initial fee to the Company's
advertising and development fund. Continuing fees paid by the
franchisees are as follows:
o 7.5 percent of the total food and beverage credits used within
the franchisee's territory.
o 2.5 percent of the total credits used within the franchisee's
territory to be deposited into the advertising and
development fund.
o A processing fee of twenty cents per sale transaction.
o A weekly service charge of twenty-three cents per
participating restaurant in the franchisee's territory.
The Company ceased francising in 1995, and in 1997, the Board
authorized a systematic reacquisition of the franchise territories. In
1997, the Company reacquired for cash the right to operate its business
in California, Oregon, Washington and a portion of Nevada, Western's
rights-to-receive and its furniture, fixtures and equipment, as well as
the assumption of certain obligations. The transaction closed on
January 2, 1997. The purchase price was approximately $7,454 of which
$5,017 represented the cost of the franchise, which has been recorded
as the excess of cost over net assets acquired. The Company had
previously received 60,000 shares of publicly traded common stock in
connection with the initial sale of this franchise, representing 2.3
percent of the franchisee's common stock. The shares are included in
securities available for sale. In addition, a director of the Company
owns 6.5 percent of the franchisee's common stock.
In fiscal 1998, the Company determined that lagging performance in the
reacquired West Coast sales territories indicated that the undiscounted
cash flows from this former franchise would be less than the carrying
value of the long-lived assets related to the franchise. Accordingly,
the Company recognized an asset impairment loss of $2,169 ($.18 per
share) for the difference between the carrying value of the related
excess of cost over net assets acquired and the fair value of the asset
based on discounted estimated future cash flows.
On December 4, 1997, the Company acquired all the rights-to-receive of
East America Trading Company, its franchisee in the Carolinas and
Georgia, and terminated and canceled the franchise agreement in
exchange for 170,000 shares of Transmedia Network stock. On July 15,
1998, and February 10, 1999, respectively the Company acquired all the
rights-to-receive, and the right to conduct business, in the
Dallas/Fort Worth and Houston sales territories from its franchisee,
the Texas Restaurant Card, Inc (TRC). The aggregate purchase price was
approximately $2,406 of which $1,653 represented the cost of the
franchise, which has been recorded as the excess of cost over net
assets acquired. The Company assumed operational control of these
reacquired territories. (See Note 21)
(14) LICENSE AGREEMENTS
The Company has an agreement for exclusive perpetual licenses of its
software and trademark in the Asia-Pacific region and the continent of
Europe. In accordance with the agreements, the Company agreed to assist
the licensees with training relating to sales, administration,
technology and operations of the business. All material services or
conditions relating to the license sales have been substantially
performed or satisfied by the Company. The licensee may grant
sublicenses in the territories and is responsible for the operations of
the business in the respective regions, including procuring member
restaurants and providing related services and activities throughout
the territory.
F - 20
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In consideration for granting the exclusive licenses, the licensee paid
the Company license fees aggregating $2,375 for the master license
agreements and has granted to the Company a five percent equity
interest in the new entities which will operate in the United Kingdom,
Australia and New Zealand. The shares comprising the equity interests
are included in securities available for sale. The principal continuing
fees to be paid by the licensee are royalties of two percent of gross
sales of the Australia and New Zealand sublicensee and the United
Kingdom sublicensee, and 25 percent of any other amounts that the
licensee receives from the sublicensee.
In December 1996, the Company amended its agreements with its
international licensees, Transmedia Europe, Inc. and Transmedia
Asia-Pacific, Inc. permitting them to acquire, on a worldwide basis,
the business of Countdown, plc Holding Corp. ("Countdown"). Upon
closing of the Countdown acquisition, the Company received $250 in cash
and a $500 note bearing interest at 10%, which was payable on April 1,
1998.
The Company continues to negotiate with its licensee to reacquire the
licenses for Transmedia Europe and Asia-Pacific, Inc. To date, the
Company has not received payment on either the aforementioned note
receivable or certain outstanding royalty obligations. Both the note
and accrued interest has been reserved. In fiscal 1999, the Company
realized gains of $1,149 in connection with the sale of the licensee
securities.
(15) LEASES
The Company leases certain equipment and office space under long-term
lease agreements.
Future minimum lease payments under noncancelable operating leases as
of September 30, 1999 are as follows:
Year ending
September 30, Amount
------------- ------
2000 $ 831
2001 633
2002 201
2003 113
2004 29
Thereafter -
-----
Total minimum lease payments $ 1,807
=====
Rent expense charged to operations was $794, $710, and $625 for the
years ended September 30, 1999, 1998 and 1997, respectively.
(16) RELATED PARTY TRANSACTIONS
On June 30, 1999, the Company entered into a short term loan with GAMI,
an affiliate of Samstock, its largest stockholder, to provide interim
debt financing in a total aggregate amount of $10,000 (See Note 4).
During the year ended September 30, 1999, the Company paid interest
relating to the GAMI loan of $310.
F - 21
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has a management agreement with EGI, an affiliate of
Samstock, its largest stockholder, in which EGI provides investment
advisory and other managerial services to the Company. During the year
ended September 30, 1999, the Company paid approximately $250 to EGI
for these services.
(17) COMMITMENTS
On July 14, 1995, the Company entered into an unconditional guaranty
agreement with a financial institution, to extend credit in the amount
of $450 to a franchisee, which agreement is still outstanding at
September 30, 1999.
The Company has amended its employment agreement with the president of
its wholly-owned subsidiary, Transmedia Restaurant Company. The
agreement provides for salary at an annual rate of $335 through
September 30, 2001, plus eligibility for a bonus up to 50% of his
salary.
The Company has an ongoing Service Collaboration Agreement with
SignatureCard as a result of the DALC acquisition. In exchange for
providing the Company with members, either through their own marketing
efforts or their agreement with the airlines, SignatureCard is entitled
to receive a profit participation, if applicable, based on dining sales
generated by those members, as well as a percentage of the fees
received from those members. For the three-month period, from
acquisition to September 30, 1999, SignatureCard received approximately
$106 in fees. There was no profit participation due at that date.
(18) YEAR 2000 COMPUTER COMPLIANCE
In 1998, the Company initiated a plan ("Plan") to identify, assess, and
remediate "Year 2000" issues within each of its computer programs and
certain equipment which contain micro-processors. The Plan addressed
the issue of computer programs and embedded computer chips being unable
to distinguish between the year 1900 and 2000, if a program or chip
uses only two digits rather than four to define the applicable year.
The Company divided the Plan into six major phases: assessment,
planning, validation, conversion, implementation and testing. After
completing the assessment and planning phase in late last 1998, the
Company hired an independent consulting firm to validate the Plan. All
software development and installation is currently believed to be in
compliance. The Company worked with an outside vendor on the
conversion, implementation and testing phases. Systems that were
determined not to be Year 2000 compliant have been either replaced or
reprogrammed, and thereafter tested for Year 2000 compliance. The
Company believes that at September 30, 1999 the conversion,
implementation and testing phases have been materially completed. The
original budget for the total cost of remediation (including
replacement software and hardware) and testing, as set forth in the
Plan, was $500. The Company's aggregate spending on the Year 2000
remediation at September 30, 1999, which has been expensed, was $641.
The Company has identified and contacted critical suppliers and
customers whose computerized systems interface with the Company's
systems, regarding their plans and progress in addressing their Year
2000 issues. The Company has received varying information from such
third parties on the state of compliance or expected compliance.
Contingency plans are being developed in the event that any critical
supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party
F - 22
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a
material impact on the Company's operations, liquidity or financial
conditions.
(19) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the New York City,
California, Massachusetts and Florida areas. No single customer
accounted for more than 5 percent of the Company's sales in any fiscal
year presented.
No single restaurant's rights-to-receive balance was greater than 5
percent of the total rights-to-receive balance at September 30, 1999 or
1998.
Airline membership represents approximately 61% of the total registered
card members and approximately 38% of the Company's total membership.
(20) LITIGATION
In December 1996, the Company terminated its license agreement with
Sports & Leisure Inc. ("S&L"). In February 1997, S&L commenced an
action against the Company in the 11th Judicial Circuit, Dade County,
Florida, alleging that the Company improperly terminated the S&L
license agreement and seeking money damages. In the quarter ended
December 31, 1998, a reserve of $1,000 was established and recorded in
selling, general and administrative expenses to cover management's
estimate of the potential cost and expenses of this litigation and
other legal matters.
On November 19, 1999, the Company, in an effort to avoid prolonged
litigation, settled the outstanding lawsuit with its former licensee.
Under the terms of the settlement S & L, Inc. will receive $2.1 million
in cash and 280,000 shares of common stock for a total of approximately
$2,835 or 22 cents per share. The impact of the settlement based on the
fair value of the common stock and net of the $1,000 reserve amount
previously provided by the Company in the first quarter of fiscal 1999,
is approximately $1.835 million and has been recognized in the fourth
quarter ended September 30, 1999.
(21) SUBSEQUENT EVENTS
On November 9, 1999, the Company completed its Rights Offering to
existing stockholders resulting in the issuance of 4,149,378
convertible, redeemable preferred shares. The preferred shares have a
dividend rate of 12%, of which 6% is payable in cash, quarterly in
arrears, and the remaining 6% accrues unless otherwise paid currently
at the Company's discretion, until conversion by the holder. Each
preferred share may be converted into common stock at the option of the
holder at any time. The initial rate of conversion is one to one.
Subsequent conversion rates could be higher to the extent of accrued
but unpaid dividends. If not previously converted, the Company may
commence redemption of the preferred shares on the fifth anniversary of
the rights offering.
The proceeds from the stock issuance of $10,000 were used to retire the
$10,000 bridge loan obtained from GAMI Investment. Pursuant to its
subscription privileges and as a Standby Purchaser for any unsubscribed
shares, EGI acquired 2.84 million of the preferred shares. The
additional investment provides EGI with the right to designate an
additional member to the Board of Directors. The size of the Board will
increase by one if EGI chooses to exercise that right.
On December 16, 1999, the Company acquired all the Rights-to-Receive,
and the right to conduct business of the San Antonio and Austin sales
territory from its franchisee, the Texas Restaurant Card,
F - 23
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Inc. The purchase price was $950 of which $788 represents the cost of
the franchise which has been recorded as the excess of cost over net
assets acquired. With the acquisition of these sales territories, the
Company has reacquired all of the sales territories of the Texas
Restaurant Card, Inc., and the right to conduct business in Texas and
has settled any and all obligations under the franchise agreement, as
amended.
(22) SELECTED QUARTERLY FINANCIAL DATA
(a) Selected quarterly financial data is as follows:
Three months ended Year ended
--------------------------------------------------------- ---------------
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1999
---- ---- ---- ---- ----
Gross dining sales: 49,618 23,893 24,205 22,756 120,472
Operating revenue: 12,584 7,679 7,599 6,926 34,788
Operating income (loss): (1,498) (1,410) (1,307) (1,779) (5,994)
Net income: (5,109) (2,065) (1,871) (1,353) (10,398)
Basic earnings per share (.39) (.16) (.14) (.11) (.80)
Diluted earnings per (.38) (.16) (.14) (.11) (.79)
share:
Three months ended
Year ended Year ended
September 30, June 30, March 31, December 31, September 30, September 30,
1998 1998 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Gross dining sales: $ 24,091 23,661 24,761 23,036 95,549 101,301
Operating revenue: 7,244 7,556 7,664 7,677 30,141 30,944
Operating income: (4,263) (245) (165) (2,792) (7,465) 698
Net Income: (4,739) (502) (490) (2,105) (7,836) (424)
Basic and diluted
earnings per share: (.37) (.04) (.04) (.21) (.67) (.04)
F - 24
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(B) UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
On June 30, 1999 the Company acquired most of the assets and operations related
to a membership discount dining program SignatureCard operated under the Dining
A La Card trade name and service mark. Accordingly, the Company's Consolidated
Statements of Operations for the year ended September 30, 1998 reflects the
operations of Transmedia only. Unaudited Pro forma Consolidated Statements of
Operations have been provided herein to report the results of operations for the
years ended September 30, 1998 and for comparative purposes, the nine-month
period ending September 30, 1999 as though the companies had combined at the
beginning of the periods being reported. The pro forma consolidated results do
not purport to be indicative of results that would have occurred had the
acquisition been in effect for the periods presented, nor do they purport to be
indicative of the results that will be obtained in the future.
F-25
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
TRANSMEDIA NETWORK INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
HISTORICALS
---------------- PRO FORMA PRO FORMA
TMN DALC(A) ADJUSTMENTS COMBINED
--- ------- ----------- --------
Operating revenue:
Gross dining sales 95,549 120,512 - 216,061
Cost of sales 54,446 98,964 (B) (8,000) 145,410
Cardmember discounts 21,444 24,262 45,706
------- ------- ------- -------
Net revenues from rights-to-receive 19,659 (2,714) 8,000 (I) 24,945
Other income 10,482 10,629 (7,100) (C) 14,001
------- ------- ------- -------
Total operating revenue 30,141 7,915 890 38,946
------- ------- ------- -------
Operating expenses:
Selling, general & administrative expenses 26,796 22,281 (10,873) (H) 38,204
Cardmember acquisition and promotion 5,097 32,927 (21,069) (D) 16,955
Amended compensation agreements 3,544 - 3,544
Assets impairment loss 2,169 - 2,169
------- ------- ------- -------
Total operating expenses 37,606 55,208 (31,942) 60,872
Operating income (loss) (7,465) (47,293) 32,832 (21,926)
Other income (expenses) (2,971) - (3,617) (E) (6,588)
------- ------- ------- -------
Income (loss) before taxes (10,436) (47,293) 29,215 (28,514)
Income tax provision (benefit) (2,600) (7,806) (F) (10,835)
Income tax valuation allowance (F) 10,835
Loss before equity loss and accounting
change (7,836) (39,487) 29,215 (28,514)
Equity in loss of Cardplus Japan - (220) 220 (G) -
Cumulative effect of accounting change - (2,105) 2,105 (J) -
------- ------- ------- -------
Net income (loss) (7,836) (41,812) 31,540 (28,514)
======= ======= ======= =======
Operating income (loss) per common and common
equivalent share:
Basic and Diluted (0.63) - (1.80)
======= ======= ======= =======
Net income (loss) per common and common
equivalent share:
Basic and Diluted (0.67) - (2.33)
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding:
Basic 11,773 400 12,173
======= ======= ======= =======
Diluted 11,825 400 12,225
======= ======= ======= =======
See notes to unaudited pro forma financial information
F - 26
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
TRANSMEDIA NETWORK INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
HISTORICALS
---------------- PRO FORMA PRO FORMA
TMN DALC(K) ADJUSTMENTS COMBINED
--- ------- ----------- --------
Operating revenue:
Gross dining sales 97,716 61,384 - 159,100
Cost of sales 57,051 39,099 (L) 96,150
Cardmember discounts 21,284 13,195 34,479
------- ------- ------- -------
Net revenues from rights-to-receive 19,381 9,090 - 28,471
Other income 8,481 4,378 (2,933) (M) 9,926
------- ------- ------- -------
Total operating revenue 27,862 13,468 (2,933) 38,397
------- ------- ------- -------
Operating expenses:
Selling, general & administrative expenses 26,811 10,008 (5,437) (R) 31,382
Cardmember acquisition and promotion 5,266 8,890 (2,690) (N) 11,466
------- ------- ------- -------
Total operating expenses 32,077 18,898 (8,127) 42,848
Operating income (loss) (4,215) (5,430) 5,193 (4,452)
Other income (expenses) (2,830) - (1,888) (O) (4,718)
------- ------- ------- -------
Income (loss) before taxes (7,045) (5,430) 3,305 (9,170)
Income tax provision (benefit) (3,484) (P) (3,484)
Income tax valuation allowance 2,000 3,484 (P) 5,484
Loss before equity loss and gain on sale
of dining assets (9,045) (5,430) 3,305 (11,169)
Gain on sale of dining assets 2,089 (2,089) (S) -
Equity in loss of Cardplus Japan (212) 212 (Q) -
------- ------- ------- -------
Net income (loss) (9,045) (3,553) 1,428 (11,169)
======= ======= ======= =======
Operating loss per common and common
equivalent share:
Basic and Diluted (0.32) - (0.34)
======= ======= ======= =======
Net loss per common and common
equivalent share:
Basic and Diluted (0.69) - (0.85)
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding:
Basic 13,043 13,043
======= ======= ======= =======
Diluted 13,157 13,157
======= ======= ======= =======
See notes to unaudited pro forma financial information
F - 27
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. SIGNIFICANT ACCOUNTING POLICIES
There are currently no material differences in the significant accounting
policies of Transmedia Network, Inc. and Dining A La Card ("the Companies")
therefore, no consideration has been given to conforming the Companies'
significant accounting policies in this pro forma presentation. The Companies do
not expect to have material changes to current accounting policies in connection
with the transaction.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the historical statement of
operations of Dining A La Card to conform to the presentation used by Transmedia
Network Inc. These reclassification relates to the presentation of rights to
receive losses and cost of sales.
3. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE TWELVE
MONTHS ENDING SEPTEMBER 30, 1998
(A) Dining A La Card statement of operations is for the twelve-month period
ending December 31, 1998 while Transmedia's statement of operations is for
the twelve-month period ending September 30, 1998.
(B) Dining A La Card rights-to-receive losses of $25,962 have been reclassified
to cost of sales to conform with Transmedia's presentation.
(C) In accordance with the Marketing Collaboration Agreement between Transmedia
and Signature, SignatureCard will receive 67% of all membership dues
collected from Dining A La Card members.
(D) To remove marketing amortization, since under the Marketing Collaboration
Agreement, SignatureCard will provide Dining A La Card members to
Transmedia at no cost.
(E) To record the amortization of deferred financing cost of $567 over the
estimated six-month life of the GAMI loan, plus record interest expense on
the outstanding debt.
(F) To adjust the income tax benefit using Transmedia's statutory rate for 1998
of 38%, and record an income tax valuation allowance required by SFAS No.
109.
(G) To eliminate Dining A La Card's equity loss in CardPlus Japan since
Transmedia did not purchase those assets.
(H) To remove Dining A La Card's internal interest expense included in general
and administrative and a portion of the general and administrative expenses
allocated from Signature, which was eliminated as part of the acquisition.
(I) To remove one time write-down of Dining A La Card's RTR portfolio of
approximately $8,000 and bring to fair value.
(J) Remove cumulative effect of accounting change
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE NINE
MONTHS ENDING SEPTEMBER 30, 1999
(K) Dining A La Card interim statement of operations is for the six-month
period ending June 30, 1999. A statement of operations for the nine-month
period ending June 30, 1999 for Dining A La Card is not available and
therefore not presented. Dining A La Card operations from June 30, 1999 to
September 30, 1999 are included in Transmedia's operations. For
comparability purposes, Transmedia derived its statement of operations for
the nine-month period ending September 30, 1999 by removing the operations
for the three months ending December 31, 1998 from the operation for the
twelve-months ending
F - 28
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, 1999. For the period excluded, Transmedia's reported gross
dining sales of $22,756 and a net loss of $1,353, which were reported in
the 10-Q for that period and are incorporated herein by reference.
(L) Dining A La Card rights-to-receive losses of $2,749 have been reclassified
to cost of sales to conform with Transmedia's presentation.
(M) In accordance with the Marketing Collaboration Agreement between Transmedia
and SignatureCard, SignatureCard will receive 67% of all membership dues
collected from Dining A La Card members.
(N) To remove marketing amortization, since under the Marketing Collaboration
Agreement, SignatureCard will provide Dining A La Card members to
Transmedia at no cost.
(O) To record the amortization of deferred financing cost of $567 over the
estimated six month life of the GAMI loan, plus record interest expense on
the outstanding debt.
(P) To adjust the income tax benefit using Transmedia's statutory rate for 1999
of 38%, and record an income tax valuation allowance required by SFAS No.
109.
(Q) To eliminate Dining A La Card's equity loss in Cardplus Japan since
Transmedia did not purchase those assets.
(R) To remove Dining A La Card's internal interest expense included in general
and administrative and a portion of the general and administrative expenses
allocated from SignatureCard, which were eliminated as part of the
acquisition.
(S) To remove gain on sale of dining assets which resulted from Transmedia's
purchase of Dining A La Card.
F-29
TRANSMEDIA NETWORK, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For each of the years in the three-years ended September 30, 1999
(in thousands)
Balance, Charged Balance,
beginning to Acquisition end of
of year expenses Write-offs Of DALC year
------- -------- ---------- ------- ----
Accounts receivable:
Year ended September 30, 1999:
Allowance for doubtful
accounts $ 15 514 (514) - 15
==== === ===== ========= ==
Year ended September 30, 1998:
Allowance for doubtful
accounts $ 15 497 (497) - 15
==== ====== ======= ========= ====
Year ended September 30, 1997:
Allowance for doubtful
accounts $ 15 501 (501) - 15
==== ====== ======= ========= ====
Rights to receive:
Year ended September 30, 1999:
Allowance for doubtful
accounts $ 1,037 4,088 (2,772) 12,519 14,872
===== ===== ======= ====== ======
Year ended September 30, 1998:
Allowance for doubtful
accounts $ 765 3,822 (3,550) - 1,037
=== ===== ====== ========== =======
Year ended September 30, 1997:
Allowance for doubtful
accounts $ 320 3,209 (2,764) - 765
=== ===== ====== ========== ========
F - 30
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is set forth under the heading
"Executive Officers of the Registrant" in Part I hereof and in
"Election of Directors" in the Company's 1999 Proxy Statement, which is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is set forth under the heading
"Executive Compensation" in the Company's 1999 Proxy Statement, which
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1999 Proxy Statement, which is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 is set forth under the heading
"Certain Relationships and Related Transactions" in the Company's 1999
Proxy Statement, which is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) Financial Statements:
Transmedia Network Inc.
See "Index to Financial Statements" contained in Part II,
Item 8.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
DESIGNATION DESCRIPTION
- ----------- -----------
1.1 Form of Standby Purchase Agreement between Transmedia Network Inc. and
Samstock, L.L.C. (k)
3.1 Certificate of Incorporation of Transmedia Network Inc., as amended.
(b)
25
3.2 Certificate of Amendment to the Certificate of Incorporation of
Transmedia Network Inc. (e)
3.3 Certificate of Amendment to the Certificate of Incorporation of
Transmedia Network Inc., as filed with the Delaware Secretary of
State on March 22,1994.(a)
3.4 Form of Amendment to the Certificate of Incorporation of Transmedia
Network Inc. (k)
3.5 Form of Certificate of Designations, Preferences and Rights of Series A
Senior Convertible Redeemable Preferred Stock. (k)
3.6 By-Laws of Transmedia Network Inc. (c)
4.1 Form of Series A Preferred Stock certificate (k)
4.2 Form of Rights Agreement between Transmedia Network Inc. and American
Stock Transfer & Trust Company, as subscription agent. (k)
4.3 Second Amended and Restated Investment Agreement dated as of June 30,
1999 among Transmedia Network Inc., Samstock, L.L.C., EGI-Transmedia
Investors, L.L.C., and, with respect to Section 5 of the Agreement
only, Robert M. Steiner, as trustee under declaration of trust dated
March 9, 1983, as amended, establishing the Robert M. Steiner
Revocable Trust.(k)
10.1 Asset Purchase Agreement, dated as ofMarch 17, 1999, between
Transmedia Network Inc. and SignatureCard, Inc., as amended by
Amendment No. 1 thereto dated as of April 15, 1999 and Amendment No.
2 thereto dated as of May 31, 1999.(j)
10.2 Option Agreement, dated as of June 30, 1999, between Transmedia Network
Inc. and SignatureCard, Inc. (j)
10.3 Services Collaboration Agreement, dated as of June 30, 1999, between
Transmedia Network Inc. and SignatureCard, Inc.(j)
10.4 Credit Agreement, dated as of June 30, 1999, between Transmedia Network
Inc. and The Chase Manhattan Bank.(j)
10.5 Security Agreement, dated as of June 30, 1999, between Transmedia
Network Inc. and The Chase Manhattan Bank. (j)
10.6 Pledge Agreement, dated as of June 30, 1999, between Transmedia Network
Inc. and The Chase Manhattan Bank. (j)
10.7 Credit Agreement, dated as of June 30, 1999, between GAMI Investments,
Inc., Transmedia Network Inc., Transmedia Restaurant Company Inc.,
Transmedia Service Company Inc. and TMNI International Incorporated.
(j)
26
10.8 1987 Stock Option and Rights Plan, as amended. (a)
10.9 Form of Stock Option Agreement (as modified) between Transmedia Network
Inc. and certain Directors.(g)
10.10 Amended and Restated Employment Agreement dated as of November 15, 1996
between Transmedia Network Inc. and Melvin Chasen.(f)
10.11 Amended and Restated Consulting Agreement dated as of November 15, 1996
between Transmedia Network Inc. and Melvin Chasen.(f)
10.12 Second Restated and Amended Employment Agreement dated as of October 1,
1998 between Transmedia Network Inc. and James Callaghan. (k)
10.13 Master License Agreement dated December 14, 1992 between Transmedia
Network Inc. and Conestoga Partners, Inc.(d)
10.14 First Amendment to Master License Agreement dated April 12, 1993,
between Transmedia Network Inc. and Conestoga Partners, Inc. (e)
10.15 Second Amendment to Master License Agreement -- Assignment and
Assumption Agreement dated August 11, 1993 among Transmedia Network
Inc., TMNI International Incorporated and Transmedia Europe, Inc.(e)
10.16 Master License Agreement Amendment No. 3 dated November 22, 1993
between TMNI International Incorporated and Transmedia Europe,
Inc.(e)
10.17 Master License Agreement dated March 21, 1994 between TMNI
International Incorporated and Conestoga Partners II, Inc. licensing
rights in the Asia Pacific region. (a)
10.18 Agreement, dated as of December 6, 1996, among Transmedia Network Inc.,
TMNI International Incorporated, Transmedia Europe Inc. and
Transmedia Asia Pacific Inc.(f)
10.19 Stock Purchase and Sale Agreement, dated as of November 6, 1997, among
Transmedia Network Inc., Samstock, L.L.C., and Transmedia Investors,
L.L.C. (h)
10.20 Form of Warrant to purchase Common Stock.(i)
10.21 Amended and Restated Agreement Among Stockholders Agreement, dated as
of March 3, 1998, among Transmedia Network Inc., Samstock, L.L.C.,
EGI-Transmedia Investors, L.L.C., Melvin Chasen, Iris Chasen and
Halmstock Limited Partnership. (i)
10.22 Stockholders Agreement, dated as of March 3, 1998, among Transmedia
Network Inc., EGI-Transmedia Investors, L.L.C., Samstock, L.L.C. and
Melvin Chasen and Halmstock Limited Partnership. (i)
27
10.23 Security Agreement dated as of December 1, 1996 among TNI Funding
Company I, L.L.C. as Issuer, The Chase Manhattan Bank as Trustee and
as Collateral Agent, TNI Funding I, Inc., as Seller and Transmedia
Network Inc., as Servicer. (g)
10.24 Purchase Agreement dated as of December 1, 1996 among Transmedia
Network Inc., Transmedia Restaurant Company Inc., Transmedia Service
Company Inc. and TNI Funding I, Inc., as Purchaser.(g)
10.25 Purchase and Servicing Agreement dated as of December 1, 1996 among TNI
Funding Company I, L.L.C., as Issuer, TNI Funding I, Inc. as Seller,
Transmedia Network Inc., as Servicer, Frank Felix Associates, Ltd.,
as Back-up Servicer and The Chase Manhattan Bank, as Trustee.(g)
10.26 Indenture dated as of December 1, 1996 between TNI Funding Company I,
L.L.C., as Issuer and The Chase Manhattan Bank, as Trustee.(g)
10.27 Letter of Agreement dated January 29, 1997 between Transmedia Network
Inc. and Stephen E. Lerch. (g)
10.28 Transmedia Network Inc. 1996 Long-Term Incentive Plan (including
Amendments through August 5, 1998).(b)
10.29 Employment Agreement dated as of January 5, 1999 between Transmedia
Network Inc. and Christine Donohoo.(k)
10.30 Employment Agreement dated as ofOctober 14, 1998 between Transmedia
Network Inc. and Gene M. Henderson.(k)
12.1 Statement regarding calculation of earnings to fixed charges. (k)
21.1 Subsidiaries of Transmedia Network Inc.(a)
23.2 Consent of KPMG LLP. (l)
23.3 Consent of Arthur Andersen LLP. (l)
24.1 Power of Attorney (included in the signature page hereto). (l)
27.1 Financial datat schedule
Legend:
(a) Filed as an exhibit to Transmedia's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated
by reference.
(b) Filed as an exhibit to Transmedia's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated
by reference thereto.
(c) Filed as an exhibit to the Post Effective Amendment to the
Registration Statement on Form S-1 (Registration No. 33-5036),
and incorporated by reference thereto.
28
(d) Filed as an exhibit to Transmedia's Annual Report on Form 10-K
for the fiscal year ended September 30, 1992, and incorporated
by reference thereto.
(e) Filed as an exhibit to Transmedia's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993, and incorporated
by reference thereto.
(f) Filed as an exhibit to Transmedia's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996, and incorporated
by reference thereto.
(g) Filed as an exhibit to Transmedia's Annual Report on Form
10-K/A for the fiscal year ended September 30, 1997, and
incorporated by reference thereto.
(h) Filed as an exhibit to Transmedia's Current Report on Form 8-K
dated as of November 6, 1997, and incorporated by reference
thereto.
(i) Filed as an exhibit to Transmedia's Current Report on Form 8-K
filed on March 3, 1998.
(j) Filed as an exhibit to Transmedia's Current Report on Form 8-K
filed on July 14, 1999, and incorporated by reference thereto.
(k) Filed as an exhibit to Transmedia's Registration Statement in
Form S-2 (registration no. 333-84947), and incorporated by
reference thereto.
(i) The Company did not file any Form 8-K Current Reports during
the fourth quarter of the fiscal year ended September 30,
1999.
(ii) Exhibits:
See paragraph (a) (3) above for items filed as exhibits to
this Annual Report on Form 10-K as required by Item 601 of
Regulation S-K.
(iii) Financial Statement Schedules:
See paragraphs (a)(1) and (a)(2) above for financial statement
schedules and supplemental financial statements filed as part
of this Annual Report on Form 10-K.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 5th day of
January, 2000.
TRANSMEDIA NETWORK INC.
By: /s/STEPHEN E. LERCH
------------------------------------
Name: Stephen E. Lerch
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant, Transmedia Network Inc., in the capacities and on the dates
indicated.
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
--------- ------------ ----
/s/ F. Philip Handy Chairman of the Board, January 4, 2000
- -------------------------
F. Philip Handy
/s/ Gene M. Henderson Director January 4, 2000
- ------------------------- President and
Gene M. Henderson Chief Executive Officer
/s/ Rod Dammeyer Director January 4, 2000
- -------------------------
Rod Dammeyer
/s/ Lester Wunderman Director December 30, 1999
- -------------------------
Lester Wunderman
/s/ George Wiedemann Director January 4, 2000
- -------------------------
George Wiedemann
/s/ Jack Africk Director January 4, 2000
- -------------------------
Jack Africk
Director January __, 2000
- -------------------------
Herbert Gardner
30
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial data schedule