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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
-------------------
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
---------
iDINE REWARDS NETWORK INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-6028875
------------------------------ ------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11900 Biscayne Boulevard, Miami, Florida 33181
----------------------------------------------------------------
(Address of principal executive offices) (zip code)
305-892-3300
------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.[X] Yes [ ] No
As of July 19, 2002, there were 19,691,418 shares of the Registrant's $.02 par
value common stock outstanding.
I N D E X
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements:
Consolidated Balance Sheets -- 3
June 30, 2002 (unaudited)
and December 31, 2001
Consolidated Statements of Income 4-5
And Comprehensive Income(Loss)
Three and six months ended June 30,
2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows-- 6-7
Six months ended June 30,
2002 and 2001 (unaudited)
Notes to Unaudited Consolidated 8-13
Financial Statements
Item 2. Management's Discussion and Analysis 14-22
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 22
PART II. OTHER INFORMATION 23-24
SIGNATURE 24
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
June 30, December 31,
2002 2001*
---- -----
Assets (unaudited)
------ -----------
Current assets:
Cash and cash equivalents $ 5,868 $ 13,957
Short term investments 3,208 1,001
Accounts receivable 11,176 7,027
Rights to receive, net 81,020 67,466
Deferred tax asset 3,729 --
Prepaid expenses and other current assets 1,064 1,022
---------- ---------
Total current assets 106,065 90,473
Property and equipment, net 8,400 8,479
Other assets 536 767
Excess of cost over net assets acquired 9,671 9,671
---------- ---------
Total assets $ 124,672 $ 109,390
---------- ---------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Secured non-recourse revolving debt 55,500 55,500
Accounts payable - Rights to receive 9,672 10,179
Accounts payable - trade 10,888 7,161
Accrued expenses and other current liabilities 4,442 2,605
Deferred membership fee income 1,977 2,476
---------- ---------
Total current liabilities 82,479 77,921
Other long-term liabilities 492 1,080
---------- ---------
Total liabilities 82,971 79,001
---------- ---------
Shareholders' equity:
Preferred stock, par value $0.10 per share (1,000 shares authorized; none
issued and outstanding) - -
Preferred stock - Series A, senior convertible redeemable, par value $0.10 per
share; authorized 10,000 shares; issued and outstanding 3,985 and 4,149
shares, respectively 404 414
Common stock, par value $0.02 per share; authorized 70,000 shares; issued
and outstanding 19,675 and 16,200 shares, respectively 394 316
Additional paid-in capital 70,400 43,150
Less: Cash designated for tender offer (26,280) -
Cumulative other comprehensive income (loss) 19 (265)
Retained deficit (2,978) (12,968)
Treasury stock, at cost (81 shares) (258) (258)
----------- ----------
Total shareholders' equity 41,701 30,389
--------- ---------
Total liabilities and shareholders' equity $ 124,672 $ 109,390
========== =========
See accompanying notes to unaudited consolidated financial statements.
* The balance sheet at December 31, 2001 is derived from the registrant's
audited consolidated financial statements.
3
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Loss)
Three months and six months ended June 30, 2002 and 2001
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenue:
Gross dining sales $ 65,391 $ 49,435 $ 122,362 $ 98,472
Cost of sales 35,391 26,828 66,410 53,856
Member rewards and savings 12,576 10,498 23,640 20,994
------- ------- -------- -------
Net revenue from dining sales 17,424 12,109 32,312 23,622
Membership and renewal fee income 1,305 1,717 2,717 3,582
Other operating revenue 45 185 112 473
------- -------- -------- -------
Total operating revenues 18,774 14,011 35,141 27,677
------- -------- -------- -------
Operating expenses:
Salaries and benefits 4,076 4,386 8,715 9,095
Sales commission and expense 2,773 1,386 4,355 2,730
Member and merchant marketing 2,180 789 3,325 1,447
Printing and postage 1,578 1,126 2,829 2,252
General and administrative 3,823 4,528 7,883 8,571
------- -------- -------- -------
Total operating expenses 14,430 12,215 27,107 24,095
------- -------- -------- -------
Operating income 4,344 1,796 8,034 3,582
Other income (expense):
Interest and other income 95 108 26 295
Interest expense and financing costs (561) (1,078) (1,165) (2,594)
------- --------- --------- -------
Income before income taxes 3,878 826 6,895 1,283
Income tax benefit 3,595 - 3,676 -
------- -------- -------- -------
Net income $ 7,473 $ 826 $ 10,571 $ 1,283
------- -------- -------- -------
(Continued)
4
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income (Loss), Continued
Three months and six months ended June 30, 2002 and 2001
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Other comprehensive income, net of tax:
Unrealized holding gain on securities
available-for-sale held at end of period 4 (35) (126) (100)
Tax effect of unrealized gain - 13 - 45
-------- ------ ------- ------
Comprehensive income $ 7,477 $ 804 $ 10,445 $ 1,228
======= ====== ====== ======
Operating income per share of common stock:
Basic 0.24 0.09 0.45 0.19
====== ====== ====== ======
Diluted 0.18 0.09 0.35 0.18
====== ====== ====== ======
Net income per share of common stock:
Basic 0.43 0.03 0.61 0.04
====== ====== ====== ======
Diluted 0.31 0.03 0.46 0.04
====== ====== ====== ======
Weighted average number of common and
common equivalent shares outstanding:
Basic 16,851 15,787 16,342 15,982
====== ====== ====== ======
Diluted 23,693 16,198 23,077 16,301
====== ====== ====== ======
See accompanying notes to unaudited consolidated financial statements.
5
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001
(unaudited)
(in thousands)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 10,571 $ 1,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,006 2,273
Amortization of deferred financing cost 267 763
Deferred tax benefit (3,676) -
Provision for Rights to receive losses 6,649 4,364
Changes in assets and liabilities:
Accounts receivable (4,149) 947
Rights to receive (20,712) (771)
Prepaid expenses and other current assets (95) (159)
Other assets (173) (647)
Accounts payable 3,518 1,672
Income taxes 301 (17)
Accrued expenses and other current liabilities 2,049 928
Deferred membership fee income (499) (312)
--------- ---------
Net cash provided by (used in) operating activities (3,943) 10,324
--------- ---------
Cash flows from investing activities:
Cash designated for tender offer (26,280) -
Increase in short term investments (2,207) -
Additions to property and equipment (1,925) (2,548)
Decrease in restricted deposits and investments (455) (32)
--------- ---------
Net cash used in investing activities (30,867) (2,580)
--------- ---------
Cash flows from financing activities:
Net proceeds from private equity placement 26,280 -
Preferred stock dividends (597) (601)
Exercise of options and conversion of warrants, net 1,048 17
Conversion of preferred stock (10) -
Repayment of revolving securitization - (942)
Payment of put options on common stock - (3,200)
--------- ---------
Net cash provided by (used in) financing activities $ 26,721 $ (4,726)
--------- ---------
6
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six months ended June 30, 2002 and 2001
(unaudited)
(in thousands)
2002 2001
---- ----
Net (decrease) increase in cash and cash equivalents $ (8,089) $ 3,018
Cash and cash equivalents:
Beginning of year 13,957 12,470
-------- --------
End of period $ 5,868 $ 15,488
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 822 $ 1.556
========
Dividends $ 150 $ 301
======== ========
Income taxes $ 0 $ 17
======== ========
See accompanying notes to unaudited consolidated financial statements.
7
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
(1) Basis of Presentation
The condensed consolidated financial statements, other than the
consolidated balance sheet of December 31, 2001, included herein are
unaudited; however, they contain all normal recurring accruals and
adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of iDine Rewards
Network Inc. (formerly Transmedia Network Inc.) and its subsidiaries
(collectively, the "Company") at June 30, 2002, the consolidated
results of its operations for the three and six months ended June 30,
2002 and 2001 and the consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001. All intercompany accounts and
transactions have been eliminated. The results of operations for the
three and six months ended June 30, 2002 are not necessarily indicative
of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements do not
include all footnotes and certain financial presentations normally
required under accounting principles generally accepted in the United
States. Therefore, these financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto for the year ended September 30, 2001, included in the
Company's Form 10-K filed with the Securities and Exchange Commission
on December 31, 2001 and the audited consolidated financial statements
and notes thereto for the transition period ended December 31, 2001,
included in the Company's Form 10-KT filed with the Securities and
Exchange Commission on March 26, 2002. The balance sheet as of December
31, 2001 was derived from the registrant's audited consolidated
financial statements.
Cost of sales is composed of the cost of Rights to receive sold,
related transaction processing fees and provision for Rights to receive
losses.
Certain prior year amounts have been reclassified to conform to the
current presentation.
(2) Equity Private Placement and Preferred Stock Tender Offer
On June 12, 2002, the Company sold 3,000 shares of common stock at
$9.50 per share in a private placement to a group of 15 unaffiliated
institutional investors from which the Company received $26,280, net of
financial advisory, agent and legal fees.
The net proceeds from the stock issuance were intended to be used to
buyback shares of the Company's outstanding Series A Convertible
Preferred Stock. The Company commenced a cash tender offer on June 13,
2002 to purchase up to 2,475 shares, or 61.1%, of its outstanding
Series A Convertible Preferred Stock at a price of $10.62 per share. In
the event that more than 2,475 shares of the Series A Convertible
Preferred Stock were tendered, iDine would accept and pay for shares on
a pro rata basis from
8
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
among validly tendered shares. The tender offer expired on July 15,
2002, and a total of 3,177 shares of the Series A Convertible Preferred
Stock were tendered.
In addition to the purchase price, tendering stockholders also received
a payment in lieu of cash dividends for the period July 1 through July
15, 2002 equal to $0.006041667 per share of Series A Convertible
Preferred Stock accepted totaling $15. Immediately following the
closing of the tender offer, 1,577 shares of the Series A Convertible
Preferred Shares remained outstanding.
(3) Tax Valuation Allowance
As a result of the Company's history of losses prior to fiscal 2001,
the Company has maintained a valuation allowance on the net deferred
tax asset resulting from net operating loss carryforwards and
deductible temporary differences, principally the provision for Rights
to receive losses. At December 31, 2001, the valuation allowance was
$8,757.
During the three month period ended June 30, 2002, the Company
evaluated the need to maintain a valuation allowance for net deferred
tax assets and determined, based on the factors described below, that
the valuation allowance will no longer be required. As a result of this
redetermination, the second quarter reflects the reversal of the
valuation allowance and a corresponding income tax benefit of $3,670 or
16 cents per share. In addition, an estimated benefit of approximately
$4,493 has been reflected in the Company's calculation of its projected
2002 annual effective tax rate. The estimated annual effective tax rate
was utilized in the current quarter generating a tax expense of $75
(before the benefit from the redetermination recorded in the current
quarter). This estimated annual effective tax rate will be utilized,
and adjusted if necessary, for the remainder of 2002. The statutory
income tax rate would be 38% without the valuation allowance benefit.
Factors contributing to the elimination of the valuation allowance were
(i) profits for year ended December 31, 2001 and six months ended June
30, 2002, of $3.3 and approximately $10.6 million, respectively, and
(ii) the Company's expectation of continuing profits through the
remainder of 2002 and in 2003.
(4) Securitization of Rights to Receive
The Company's $80,000 revolving securitization of its combined rights
to receive is privately placed through two asset backed commercial
paper conduits. Borrowing capacity under the facility is recalculated
weekly based on a formula driven advance rate applied to the current
balance of Rights to receive that is eligible to be securitized. The
advance rate is determined based on recent sales trends and months on
hand of Rights to receive. Available capacity was $74,577 at June 30,
2002 and the outstanding borrowing was $55,500. The facility provides
various restrictive covenants regarding collateral eligibility,
concentration limitations and also requires the Company to maintain net
worth
9
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data
of at least $24,000. At June 30, 2002, the Company was in compliance with
these covenants.
The interest rate applicable to the facility is the rate equivalent to
the rate (or if more than one rate, the weighted average of the rates) at
which commercial paper ("CP") having a term equal to the related CP
tranche period that may be sold by any placement agent or commercial
paper dealer selected by the conduit on the first day of such CP tranche
period, plus the amount of any placement agent or commercial paper dealer
fees and commissions incurred or to be incurred in connection with such
sale. For the three and six-month periods ended June 30, 2002, the
effective interest rate for the facility was 3.8% and 4.0% per annum,
respectively.
The conduit requires that a liquidity facility be provided by an A1/P1
rated financial institution in the amount equal to 102% of the
securitization amount. This liquidity facility must be renewed annually.
JP Morgan Chase and BMO Nesbitt Burns Corp both act as 50 percent
co-purchasers on the $80,000 facility. The credit agreement was renewed
on May 14, 2002 for a new 364-day renewable term and the Company paid
fees of $200 which will be amortized over the renewable term. There were
no material changes to the terms of the facility.
10
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share data
(5) Income per Common and Common Equivalent Share
Basic and diluted net income per share was computed by dividing net
income applicable to common stockholders by the weighted-average number
of shares of common stock and common stock equivalents outstanding for
each period presented. Potentially dilutive securities were not
considered for the three and six-month periods ended June 30, 2001 since
their effect would be antidilutive.
Three months ended Six-months ended
06/30/02 06/30/01 06/30/02 06/30/01
-------- -------- -------- --------
Net income $ 7,473 $ 826 $ 10,571 $ 1,282
Series A Preferred Stock dividends (297) (301) (597) (601)
-------- -------- -------- -------
Net income available to common stockholders $ 7,176 $ 525 $ 9,974 $ 681
======== ======== ======== =======
Weighted average number of common and common
equivalent shares outstanding
Basic 16,851 15,787 16,342 15,982
Series A Preferred Stock 4,019 --- 4,033 ---
Stock options 1,416 237 1,194 183
Warrants 1,407 174 1,509 136
-------- -------- -------- -------
Diluted 23,693 16,198 23,077 16,301
======== ======== ======== =======
Net income per share
Basic EPS 0.43 0.03 0.61 0.04
======== ======== ======== =======
Diluted EPS 0.31 0.03 0.46 0.04
======== ======== ======== =======
The 4,019 and 4,033 of preferred shares, respectively, were dilutive and
included with the preferred stock dividend of $297 and $597,
respectively, in the calculation of diluted EPS for the three and six
months ended June 30, 2002. The diluted share base for the three and six
months ended June 30, 2001 excludes 4,149 of convertible preferred
shares.
As discussed in Note 3, the three and six month periods ending June 30,
2002, reflect the reversal of the valuation allowance associated with the
Company's net deferred tax asset. The impact of this redetermination was
16 cents per share in both periods.
The Company has elected to continue 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:
11
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands except per share data)
Three months ended Six month ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income
As reported $ 7,473 $ 826 $ 10,571 $ 1,283
Employee stock option compensation expense 742 506 1,245 1,173
------- ----- -------- -------
Pro forma $ 6,731 320 $ 9,326 $ 110
Net income per Common and Common
Equivalent Share
As reported 0.31 0.03 0.46 0.04
Employee stock option compensation expense 0.03 0.03 0.06 0.07
------- ----- -------- -------
Pro forma 0.28 -- 0.40 (0.03)
(6) Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142,
"Business Combinations" ("SFAS 141") and "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS No. 141 replaces Accounting Principles Board
Opinion (APB) No. 16 and eliminates pooling-of-interests accounting
prospectively. It also provides guidance on purchase accounting related
to the recognition of intangible assets and accounting for negative
goodwill. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under SFAS No. 142,
goodwill will be tested at least annually and whenever events or
circumstances occur indicating that goodwill might be impaired. SFAS No.
141 and SFAS No. 142 are effective for all business combinations
completed after June 30, 2001. Upon a company's adoption of SFAS No. 142,
a company ceases to amortize goodwill recorded for business combinations
consummated prior to July 1, 2001, and intangible assets acquired prior
to July 1, 2001 that do not meet the criteria for recognition under SFAS
No. 141 are reclassified to goodwill. Companies are required to adopt
SFAS No. 142 for fiscal years beginning after December 15, 2001.
Historically, the Company's business combinations have primarily
consisted of reacquiring franchise rights from franchisees and have been
accounted for using the purchase method of accounting. The primary
intangible asset to which we generally allocated value in these business
combinations was the reacquired franchise rights. We have determined that
the reacquired franchise rights do not meet the criteria of SFAS 141 to
be recognized as an asset apart from goodwill.
The Company adopted SFAS No. 142 on January 1, 2002, the beginning of
fiscal 2002. In connection with the adoption of SFAS No. 142, the Company
has performed a goodwill impairment assessment. No impairment charge has
been recognized as of the date of adoption of SFAS No. 142. The
following table presents the pro forma affect of SFAS No. 142 for the
three and six months ended June 30, 2002 and June 30, 2001:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
Reported net income $ 7,473 $ 826 $ 10,571 $ 1,283
Goodwill amortization -- 160 -- 320
------- ------ -------- -------
Adjused net income $ 7,473 $ 986 $ 10,571 $ 1,603
======= ====== ======== =======
Basic earnings per share:
Reported net income $ 0.43 $ 0.03 $ 0.61 $ 0.04
Goodwill amortization -- 0.01 -- 0.02
------- ------ -------- -------
Adjused net income $ 0.43 $ 0.04 $ 0.61 $ 0.06
======= ====== ======== =======
Diluted earnings per share:
Reported net income $ 0.31 $ 0.03 $ 0.46 $ 0.04
Goodwill amortization -- 0.01 -- 0.02
------- ------ -------- -------
Adjused net income $ 0.31 $ 0.04 $ 0.46 $ 0.06
======= ====== ======== =======
12
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Amounts in thousands except per share data)
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 143, "Accounting for Asset Retirement Obligations." This statement
addresses the diverse accounting practices for obligations associated
with the retirement of tangible long-lived assets and the associated
asset retirement costs. We plan to adopt this standard on January 1,
2003. We do not expect the adoption of this standard to have an effect on
the Company's consolidated financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This Statement establishes a single
accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company adopted this new accounting
standard on January 1, 2002. The adoption of SFAS No. 144 did not have an
impact on the Company's consolidated financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to
FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145
eliminates the requirement (in SFAS No. 4) that gains and losses from the
extinguishments of debt be aggregated and classified as extraordinary
items, net of the related income tax. In addition, SFAS No. 145 requires
sales-lease back treatment for certain modifications of a capital lease
that result in the lease being classified as an operating lease. The
rescission of SFAS No. 4 is effective for fiscal years beginning after
May 15, 2002, which for the Company would be January 1, 2003. Earlier
application is encouraged. Any gain or loss on extinguishment of debt
that was previously classified as an extraordinary item would be
reclassified to other income (expense). The remainder of the statement is
generally effective for fiscal years beginning after May 15, 2002. The
Company does not expect that the adoption of SFAS No. 145 will have a
material impact on the Company's financial condition, cash flows and
results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS
146 will be effective for the Company for disposal activities initiated
after December 31, 2002. The Company is in the process of evaluating the
effect that adopting SFAS 146 will have on its financial statements, but
does not expect that the adoption of SFAS No. 146 will have a material
impact on the Company's financial condition, cash flows and results of
operations.
13
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We have made, and continue to make, various forward-looking statements
with respect to our 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 we believe that our expectations are based on reasonable
assumptions within the bounds of our 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. Our
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; our continued access to credit; regulations affecting the use
of credit card files and other data; extreme weather conditions;
participating restaurants' continued acceptance of discount dining
programs and the availability of other alternative sources of capital
to them.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to the provision for rights to receive losses, the valuation allowance
for net deferred tax asset, and investments and intangible assets. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the consolidated
financial statements. We provide allowances for Rights to receive losses based
on our estimate of losses that may result from the inability of certain of our
merchants to continue to participate in our dining program and thereby provide a
vehicle to repay the cash advanced for food and beverage. If the financial
condition of our merchant base were to deteriorate, and result in their
inability to provide food and beverage to our members thereby reducing the cash
we advanced to them, additional allowances may be required.
We record a valuation allowance to reduce our deferred tax assets when future
realization is in question. We consider future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for such a
valuation allowance. In the event we determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
14
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
We record an investment impairment charge when we believe an investment has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future.
We continually evaluate whether events and changes in circumstances warrant
revised estimates of useful lives or recognition of an impairment loss of
unamortized goodwill. The conditions that would trigger an impairment assessment
of unamortized goodwill include a significant, sustained negative trend in our
operating results or cash flows, a decrease in demand for our dining programs, a
change in the competitive environment and other industry and economic factors.
We measure impairment of unamortized goodwill utilizing the undiscounted cash
flow method. The estimated cash flows are then compared to our goodwill amount;
if the unamortized balance of the goodwill exceeds the estimated cash flows, the
excess of the unamortized balance is written off. As of June 30, 2002, we
determined that there has been no impairment of goodwill.
We adopted Statement of Financial Accounting Standards (SFAS No. 142), "Goodwill
and Other Intangible Assets" in January 2002. With the adoption of SFAS No. 142,
we assessed the impact of SFAS 142 based on a two-step approach to assess
goodwill based on applicable reporting units and reassessed any intangible
assets, including goodwill, recorded in connection with our previous
acquisitions. In lieu of amortization, we performed an impairment review of our
goodwill in March 2002 and again in June 2002, and will perform, at least, an
annual impairment review thereafter. We would have recorded approximately $607
of amortization during 2002. As of June 30, 2002, we had unamortized goodwill of
$9,671.
The Company recognizes gross dining sales as revenue when our members dine in
one of our participating restaurants. Revenue is only recognized if the member
dining transaction qualifies in accordance with the rules of the particular
dining program. The amount of revenue recognized is that portion of the total
spending by the member that the Company is entitled to receive in cash, in
accordance with the terms of the contract with the restaurant. For the typical
cash advance based contract where we have acquired or prepaid for food and
beverage credits on a wholesale basis, we often leave some portion of the
member's dining spend with the merchant to provide liquidity for payment of
sales tax and tips. For example, if the total dining spend by the member is one
hundred dollars at our participating restaurants, as evidenced by the full
amount of the credit card transaction, and our contract provides for us to leave
behind 20%, the amount of gross dining sales recognized is eighty dollars
representing what we will actually realize in cash. Similarly, for members'
dining transactions at restaurants in the revenue management program where we
have not advanced cash and the rewards or savings may vary by the time of day or
day of the week, revenue is only recognized to the extent that we are
contractually entitled to receive cash for a portion of the member's spend. The
same one hundred dollar transaction referred to above in a revenue management
restaurant may only yield thirty dollars in cash to be realized; however, there
is no cash advanced, and therefore no cost of the Rights to receive sold.
Fee income, which is now principally renewal fees from the cash reward iDine
Prime members, 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 pro rata basis based on the remaining portion of the
membership.
The forward-looking information set forth in this Form 10-Q is as of June 30,
2002, and we undertake no duty to update this information. Should events occur
subsequent to make it necessary to update the forward-looking information
contained in this Form 10-Q, the updated forward-looking information will be
filed with the SEC in the next Quarterly Report on Form 10-Q available at the
SEC's website at www.sec.gov or as an earnings release.
The following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of the Form 10-K filed on
December 31, 2001 and in conjunction with the consolidated
15
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
financial statements provided under Part II, Item 8 the Form 10-KT filed on
March 26, 2001. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
(a) Net Dining Revenue - Comparison of three months ended June 30, 2002 and
2001
2002 2001
----------------------------------- --------------------------------------
RTR NON-RTR TOTAL RTR NON-RTR TOTAL
--- ------- ----- --- ------- -----
Qualified member spend $ 80,633 $ 10,477 $ 91,110 $ 60,343 $ 4,917 $ 65,260
Sales yield 77.3% 29.1% 71.8% 79.4% 31.5% 75.8%
Gross dining sales 62,343 3,048 65,391 47,888 1,547 49,435
Cost of sales 31,793 -- 31,793 24,061 -- 24,061
Provision for RTR losses 3,436 -- 3,436 2,130 -- 2,130
Processing fee 143 19 162 589 48 637
------- ------- ------- ------- ------- --------
Total cost of sales $ 35,372 $ 19 $ 35,391 $ 26,780 $ 48 26,828
------- -------- ------- ------- ------- --------
Member rewards and savings 12,576 10,498
------- --------
Net dining revenue $ 17,424 $ 12,109
======= ========
(b) Net Dining Revenue - Comparison of six months ended June 30, 2002 and 2001
2002 2001
----------------------------------- -------------------------------------
RTR NON-RTR TOTAL RTR NON-RTR TOTAL
--- ------- ----- --- ------- -----
Qualified member spend $ 149,967 $ 19,787 $ 169,754 $ 120,352 $ 8,609 $ 128,961
Sales yield 77.6% 30.2% 72.1% 79.5% 31.9% 76.4%
Gross dining sales 116,396 5,966 122,362 95,730 2,742 98,472
Cost of sales 59,470 -- 59,470 48,337 -- 48,337
Provision for RTR losses 6,649 -- 6,649 4,364 -- 4,364
Processing fee 257 34 291 1,077 78 1,155
------- ------- ------- -------- ------- --------
Total cost of sales $ 66,376 $ 34 $ 66,410 $ 53,778 $ 78 $ 53,856
------- ------- ------- -------- ------- --------
Members rewards and
savings 23,640 20,994
------ -------
Net dining revenue $ 32,312 $ 23,622
======= =======
RTR - Rights to receive
NON-RTR - represents sales where there was no cash advanced to the merchant
(i.e. arrears and revenue management)
16
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
Results of operations - Comparison of three and six months ended June 30,
2002 and 2001
Qualified member dining spend in our participating restaurants for the
three and six months ended June 30, 2002 was $91,110 and $169,754,
respectively, an increase of $25,850 and $40,793 or 39.6% and 31.6%,
respectively, over the comparable periods in the prior year. The average
dining ticket decreased from $53.83 and $54.57 ("in dollars") for the
three and six months ended June 30, 2001, respectively, to $52.38 and
$52.59 ("in dollars"), respectively, for the same periods in 2002.
Impacting the increased dining spend during the periods were the increase
in the number of dines from 1,211 and 2,356, respectively, for the three
and six months ended June 30, 2001, to 1,739 and 3,228 for the same
period in 2002 resulted in a higher overall spend for the three and six
months ended June 30, 2002 versus the same periods in the prior year. The
increase in the number of dines was mainly the result of the increase in
our enrolled accounts from 6.1 million at June 30, 2001 to 9.8 million
at June 30, 2002, as well as the increase in the participating merchants
from approximately 7.7 thousand at June 30, 2001 to approximately 8.5
thousand at June 30, 2002. The reduction in the average ticket is
reflective of our move into secondary markets where the average ticket
tends to be lower than the large metropolitan markets such as New York,
Los Angeles and San Francisco.
Sales yield, which represents gross dining sales as a percentage of
qualified member dining spend, decreased from 75.8% and 76.4%,
respectively, for the three and six months ended June 30, 2001 to 71.8%
and 72.1%, respectively, for the three and six months ended June 30,
2002. The difference in the sales yield reflects the various propositions
available to our participating merchants. Under our typical cash advance
plan, the merchant receives cash in advance for food and beverage
credits, customarily in the ratio of 1:2. Gross dining sales are
recognized as the portion of the ticket recovered from the merchant,
typically 80%. The 20% is left with the merchants to provide the merchant
with liquidity for items such as sales tax and tips. In this example, our
sales yield would be 80%. The sales yield is affected not only by the
percentage of the dining ticket (spend) left behind in our cash advance
deal, but also by the amount of spend associated with our revenue
management and arrears plan deals (non-Rights to receive plans).
Non-Rights to receive spend increased 113.1% and 129.8%, respectively, to
$10,477 and $19,787, respectively, when comparing the three and six
months ended June 30, 2002 with the same periods in the prior year. In
these plans, the merchant receives no cash advance. When a member dines
at these establishment, we may receive between 15% and 35% of the
transaction from the merchant. In these non-cash advance deals the sales
yield would be between 25% and 35%. Sales yield on these non-RTR deals
also decreased from 31.5% and 31.9%, respectively, for the three and six
months ended June 30, 2001 to 29.1% and 30.2%, respectively, for the
three and six months ended June 30, 2002. While the actual cash received
from these transactions is less than the cash advance plan, we have
neither the cost of capital nor a material credit risk for these
merchants.
Gross dining sales for the three and six months ended June 30, 2002 were
$65,391 and $122,362, respectively, an increase of $15,956 and $23,890 or
32.3% and 24.2%, respectively, over the same periods in the prior year.
The increased sales can be mainly attributed to the expansion of our
airline relationships and the maturity of our alliances with affiliate
partners
17
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
such as Upromise which started April 2001. Upromise members can dine at
iDine restaurants and use their savings for college tuition through the
use of a Section 529 defined plan. A 529 plan is an investment plan
operated by a state designed to help families save for future college
costs. As long as the plan satisfies a few basic requirements, the
federal tax law provides special tax benefits to the plan participant
(Section 529 of the Internal Revenue Code).
All territories, with the exception of Chicago, Denver and Sacramento had
increased sales when comparing the three and six months ending June 30,
2002 with the same periods in the prior year. Sales in the Chicago,
Denver and Sacramento markets are lower when comparing the six-month
period ended June 30, 2002 with the same period a year ago. However,
these three markets demonstrate modest signs of improvement, with
increased sales of $350 or 9.6%, $25 or 2.3% and $15 or 7.5%,
respectively when comparing the three-month period ended June 30, 2002
with the same period in the prior year. We continue to expect increasing
sales with the addition of members and restaurants as well in these sales
territories as planned marketing activities in the upcoming quarters.
Cost of sales increased by $8,563 and $12,554 or 31.9% and 23.3%,
respectively, when comparing the three and six months ended June 30, 2002
to the same periods in the prior year. This increase is attributable to
the overall increase in sales. However, as a percentage of sales, cost of
sales decreased from 54.3% and 54.7%, respectively, for the three and six
months ended June 30, 2001 to 54.1% and 54.3%, respectively, for the
three and six month ended June 30, 2002. The decrease as a percentage is
the result of (i) an increase in non-RTR sales as a percentage of overall
dining sales from 3.1% and 2.8%, respectively, for the three and six
months ended June 30, 2001 to 4.7% and 4.9%, respectively, for the three
and six months ended June 30, 2002. There is no Rights to receive costs
associated with these sales and therefore the higher non-RTR sales
results in a lower overall cost of sales as a percentage of gross dining
sales and (ii) a reduction in processing costs (which are included in
cost of sales) associated with the registered card program versus the
private label program from 1.3% and 1.2% of sales, respectively, for the
three and six months ended June 30, 2001 to 0.2% of sales for the three
and six months ended June 30, 2002. These reductions are somewhat offset
by an increase in the provision for Rights to receive losses from 4.3% of
gross dining sales for the three and six months ended June 30, 2001 to
5.3% and 5.4% of gross dining sales, respectively, for the three and six
months ended June 30, 2002. The increase in the provision for Rights to
receive losses reflect our perception of the increased market risk in the
dining and hospitality industry as a result of the downturn in the US
economy particularly over the past nine months since September 11/th/.
Member savings and rewards increased $2,078 and $2,646 or 19.8% and
12.6%, respectively, when comparing the three and six months ended June
30, 2002 with the same periods in the prior year. However, as a
percentage of sales, member savings and rewards decreased from 21.2% and
21.3%, respectively, during the three and six months ended June 30, 2001
to 19.2% and 19.3%, respectively, during the three and six months ended
June 30, 2002. The reduction was mainly the result of an increase in
spending by members obtained in our newly acquired affiliate programs
along with multi-unit restaurants sales, both of which, have a slightly
lower effective reward cost than our standard 20% benefit. Finally, the
corporate expense reduction program introduced in fiscal 2001 has a
feature whereby the rebates back to the corporate partners are not paid
until a certain level of qualified spend is achieved by their employees.
18
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
These foregone corporate partner savings are deferred and recognized on
an effective rate basis as a reduction in our overall savings and rewards
expense.
Membership and renewal fee income for the three and six-month periods
ended June 30, 2002 were $1,305 and $2,717, respectively, compared to
$1,717 and $3,582, respectively, for the comparable prior year periods.
Fee revenue is composed primarily of renewal billings as we have not
focused on the acquisition of new fee-paying members. Marketing of the
fee-based membership was reduced significantly due to changes in the
regulatory environment regarding direct marketing solicitations. Our
marketing strategy has shifted to focus mainly on marketing our dining
programs to key affinity and loyalty partners at no fee billing to their
members where we can take advantage of the registered card platform and
enroll large quantities of accounts at a very low cost of acquisition and
solicitation.
Salaries and benefits decreased $310 and $380 or 7.1% and 4.2%,
respectively, when comparing the three and six-month periods ended June
30, 2002 with the same periods in the prior year. The decrease during the
three and six-month periods is mainly the result of the implementation of
a new sales consultants compensation structure in April 2002, whereby,
sales consultants' compensation is based solely on commissions earned.
Prior to this, sales consultants received a base salary as well as
commission earned on sales for restaurants signed to the program. As in
the past, sales consultants continue to only receive commissions when
sales occur in the restaurants they have signed. This reduction is
partially offset by increased wages in marketing and sales consulting,
both of which had planned increased headcounts, as well as increased
bonus accruals as a result of the improved profitability of the Company.
Selling, general and administrative expenses for the three and six months
ended June 30, 2002 were $3,823 and $7,883, respectively, a decrease of
$705 and $688 or 15.6% and 8.0%, respectively, compared with the prior
year periods. The change is mainly the result of decreases in
depreciation and amortization ($210 and $204 or 18.4% and 9.0%,
respectively) primarily due to the adoption of Statement of Financial
Standards (SFAS No.142) "Goodwill and Other Intangible Assets" and the
change in the accounting for goodwill from and amortization method to an
impairment-only approach; rent and office expense ($145 and $316 or 26.1%
and 28.0%, respectively) mainly due to a decrease in temporary staffing
and equipment rental as well as the lower rent associated with the move
of our New York offices; programming and systems of ($230 and $315 or
27.5% and 20.6%, respectively) reflecting reduced cost of maintenance
agreements and website programming; and telephone expense of ($42 and $70
or 14.7% and 12.1%, respectively) mainly resulting from the negotiating
of lower long distance rates. The period is partially offset by increases
in other expenses ($191 or 9.6%) six-month mainly due to increases in
recruiting, general insurance and investor relation costs.
Sales commission and expense increased $1,387 and $1,625 or 100.0% and
59.5%, respectively, when comparing the three and six-month periods ended
June 30, 2002 with the same periods in the prior year. The increase in
sales commissions for the 2002 periods is twofold. As previously
mentioned, the Company has changed the sales consultants compensation
structure resulting in compensation being paid only in the form of sales
commissions. In addition to the new compensation structure, sales for the
three and six-month periods increased 32.3% and 24.2%, respectively, when
compared to the same periods in the prior year.
19
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
Member and merchant marketing expenses increased $1,391 and $1,878 or
176.3% and 129.8%, respectively, when comparing the three and six-month
periods ended June 30, 2002 with the same periods in the prior year. The
main reason for the increase in member and merchant marketing during the
2002 periods was increased commissions paid to leadfinders and partners,
such as Upromise and America Online Inc., to provide us access to their
large membership. Also contributing to the overall increase was the ramp
up of marketing costs which were delayed from previous quarters. These
marketing efforts were designed to stimulate our current member base by
providing additional rewards and incentives to increase member spending
in our programs. The Company also continues to market to activate certain
enrolled accounts not yet activated in our database, mainly airline
frequent flyers.
Printing and postage increased $452 and $577 or 40.1% and 25.6%,
respectively, when comparing the three and six-month periods ended June
30, 2002 with the same periods in the prior year. The increase is
principally due to the increase in directory mailing and fulfillment
costs as a result of the increase in our active members base.
Other expense, net of income during the three and six months ended June
30, 2002 amounted to $466 and $1,139, respectively, versus $970 and
$2,299, respectively, for the same period in 2001, a decrease of $504 and
$1,160, respectively. The effective interest rate of the securitization
decreased from 7.4% and 8.8%, respectively, for the three and six months
ended June 30, 2001 to 3.8% and 4.2%, respectively, for the three and six
months ending June 30, 2002. The principal reasons for the change was a
decrease of $517 and $1,429 in interest expense and financing costs
during the three and six months ended June 30, 2002. The decrease related
to reduced upfront financing fees and favorable interest rates. Also, in
the August 2001, we prepaid two subordinated convertible promissory notes
totaling $2,000 which were issued as part of the purchase price of our
former Washington, DC franchise. The exclusion of interest expense
related to these notes during the three and six months ended June 30,
2002 also served to reduce our overall interest expense.
Income before taxes was $3,878 and $6,895, respectively, for the three
and six months ended June 30, 2002 compared to $826 and $1,283 for the
same periods in 2001. Since iDine has been profitable for six quarters
ended June 30, 2002, and projects continued profitability through fiscal
2002, the valuation allowance was released during the quarter ended June
30, 2002. This resulted in a tax benefit of $3,595 being recognized in
the three-month period ended June 30, 2002. Also, affecting the six-month
period ended June 30, 2002 is a tax benefit of $81 relating to a repeal
of alternative minimum tax is calculated for 2001 and 2002.
Net income was $7,473 and $10,571 or $0.31 and $0.46 per share,
respectively, for the three and six months ended June 30, 2002 compared
to $826 and $1,283 or $0.03 and $0.04 per share, respectively, for the
same periods of the prior year.
20
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
(b) Liquidity and Capital Resources
Our short term investments, cash and cash equivalents amounted to $9,076
at June 30, 2002. We believe that cash on hand, together with short term
investments, cash generated from operations, and cash available under the
securitization facility, will be sufficient to fund the Company's normal
cash requirements for the 2002 fiscal year.
The $80,000 revolving securitization of our combined Rights to receive is
privately placed through two asset backed commercial paper conduits.
Borrowing capacity under the facility is recalculated weekly based on a
formula driven advance rate applied to the current balance of Rights to
receive that is eligible to be securitized. The advance rate is
determined based on recent sales trends and months on hand of Rights to
receive. Available capacity was $74,577 at June 30, 2002 and the
outstanding borrowing was $55,500. The facility provides various
restrictive covenants regarding collateral eligibility, concentration
limitations and also requires the Company to maintain net worth of at
least $24,000. At June 30, 2002, we were in compliance with the
covenants.
The interest rate applicable to the facility is the rate equivalent to
the rate (or if more than one rate, the weighted average of the rates) at
which commercial paper ("CP") having a term equal to the related CP
tranche period that may be sold by any placement agent or commercial
paper dealer selected by the conduit on the first day of such CP tranche
period, plus the amount of any placement agent or commercial paper dealer
fees and commissions incurred or to be incurred in connection with such
sale. For the three month periods ended June 30, 2002, the effective
interest rate for the facility, inclusive of upfront financing fees, was
3.8% per annum.
The conduit requires that a liquidity facility be provided by an A1/P1
rated financial institution in the amount equal to 102% of the
securitization amount. This liquidity facility must be renewed annually.
JP Morgan Chase and BMO Nesbitt Burns Corp both act as 50 percent
co-purchasers on the $80,000 facility. The credit agreement was renewed
on May 14, 2002 for a new 364-days renewable term and the Company paid
renewal fees of $200. There were no material changes to the terms of the
facility. It is our intention to establish another liquidity facility to
support our $80 million securitization.
On December 9, 2000, we executed a Payment and Termination of Exclusivity
Agreement (the "Agreement") with GE Financial Assurance ("GEFA"), the
parent of SignatureCard, to extinguish all obligations associated with
the Dining A La Card ("DALC") acquisition, to eliminate SignatureCard
exclusivity rights in dealing with the airline frequent flyer member
files, and to fully resolve and terminate the joint marketing and revenue
sharing relationship. In consideration for the above, we paid GEFA $3,800
in cash and honored GEFA's right to put 400,000 shares held by it as part
of the acquisition consideration, at a value of $8 per share. This put
right was exercised and we paid GEFA two equal installments on January 17
and on February 13, 2001 to repurchase and retire the 400,000 shares at
$8 per share. The $3,200 guaranteed value of the put was recorded in the
prior fiscal year. We also cancelled 160,000 options of the original
400,000 issued as part of the original DALC purchase price, leaving
SignatureCard with 240,000 options which were exercised on June 21, 2002
at a strike price of $4.00. GEFA elected
21
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
to exercise this option by having shares of iDine Rewards Network Inc.
common stock withheld from the 240,000 shares, with such withheld shares
having an aggregate fair market value equal to the $960, which is the
exercise price. Based on the current market price of the Company's
common stock at the date of GEFA's exercise, GEFA was issued a net
amount of 148,571 shares of iDine Rewards Network Inc. common stock.
(c) Outlook
As we look out at the remaining months of 2002, we are anticipating
increased utilization of our program by the current member base as well
as increased activation of certain enrolled accounts not yet activated
in our database, mainly our airline frequent flyers. The stimulation and
activation of these portfolios should allow us to increase 2002 sales by
at least 25% over prior year. In an effort to achieve these results, we
expect to increase spending on member marketing and communications over
the upcoming months. We believe that these marketing promotional
investments are critical to sustaining our growth objectives, and we
intend to aggressively but prudently move forward in this area. Aside
from marketing expenses and sales commission, selling, general and
administrative expenses are expected to be maintained as we now have the
infrastructure substantially in place to support the planned revenue
growth. Interest expense is expected to decrease as a result of the
reduction in our upfront financing fees associated with our $80 million
securitization which was renewed in May 2002.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various types of market risk, including changes in
interest rates. Market risk is the potential loss arising from adverse
changes in the market rates and prices, such as interest rates. Our
exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments used to finance the purchase of
Rights to receive and short term investments which are tied to market
rates. Our current $80,000 revolving securitization of the combined
Rights to receive is privately placed through two asset backed
commercial paper conduits. The interest rate applicable to this facility
is the rate equivalent to the rate (or if more than one rate, the
weighted average of the rates) at which commercial paper ("CP") having a
term equal to the related CP tranche period that may be sold by any
placement agent or commercial paper dealer selected by the conduit on
the first day of such CP tranche period, plus the amount of any
placement agent or commercial paper dealer fees and commissions incurred
or to be incurred in connection with such sale. As of June 30, 2002, we
had $55,500 outstanding under this securitization. The commercial paper
and the interest payment are subject to interest rate risk. If market
interest rates were to increase immediately and uniformly by 100 basis
points at June 30, 2002, the interest payments would increase by
approximately $555 per annum. We are still reviewing a hedging strategy
that would allow us to hedge against higher interest rates. This may
include the purchase of an interest rate cap which will allow us to
benefit from the current low rates while establishing a known maximum
interest rate cost.
Our short term investments are made according to a policy to ensure the
safety and preservation of our invested principal funds by limiting
default risks, market risk and reinvestment risk. We had investments in
equity securities at June 30, 2002 of $11, as well as short-term
investments
22
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
in corporate and government bonds of $3,208. We plan to ensure the
safety and preservation of our invested principal funds by limiting
default risks, market risk and reinvestment risk. We plan to invest in
high-credit quality securities. Cash equivalents consist of short term
investments with reputable financial institutions with duration of no
more than 90 days.
PART II - OTHER INFORMATION
Items 1, 3, 4, and 5
Items 1, 3, 4, and 5 of Part II are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
Item 2
Changes in securities and Use of Proceeds
(a) Issuance or Modification of Securities
On June 12, 2002, the Company sold 3,000 shares of common stock at $9.50
per share in a private placement to a group of 15 unaffiliated
institutional investors from which the Company received $26,280, net of
financial advisory, agent and legal fees.
The net proceeds from the stock issuance were intended to be used to
buyback shares of the Company's outstanding Series A Convertible
Preferred Stock. The Company commenced a cash tender offer on June 13,
2002 to purchase up to 2,475 shares, or 61.1%, of its outstanding Series
A Convertible Preferred Stock at a price of $10.62 per share. In the
event that more than 2,475 shares of the Series A Convertible Preferred
Stock were tendered, iDine would accept and pay for shares on a pro rata
basis from among validly tendered shares. The tender offer expired on
July 15, 2002, and a total of 3,177 shares of the Series A Convertible
Preferred Stock were tendered.
In addition to the purchase price, tendering stockholders also received
a payment in lieu of cash dividends for the period July 1 through July
15, 2002 equal to $0.006041667 per share of Series A Convertible
Preferred Stock accepted totaling $15 thousand. Immediately following
the closing of the tender offer, 1,577 shares of the Series A
Convertible Preferred Shares remained outstanding.
Item 6
Exhibits and reports on Form 8K
(a) Exhibits
(i) Form of Purchase Agreements, dated May 28, 2002
(ii) Press Release announcing purchase agreements dated
May 30, 2002
23
iDINE REWARDS NETWORK INC. (formerly TRANSMEDIA NETWORK INC.)
AND SUBSIDIARIES
(Amounts in thousands except per share data)
(iii) Press Release announcing its completion of the sale
of three million shares of common stock date June
10, 2002
(b) Reports on Form 8K
A Current Report on Form 8K dated May 28, 2002 was filed
with the Securities and Exchange Commission with attached
press release announcing definitive purchase agreements with
fifteen unaffiliated institutional investors with respect to
the purchase in the aggregate of three million shares of
common stock at a price of $9.50 per share or an aggregate
purchase price of $28.5 million.
S I G N A T U R E S
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDINE REWARDS NETWORK INC.
(Registrant)
August 14, 2002 /s/Gene M. Henderson
-------------------------------------
Gene M. Henderson
President and Chief Executive Officer
August 14, 2002 /s/Stephen E. Lerch
-------------------------------------
Stephen E. Lerch
Executive Vice President
and Chief Financial Officer
24
Exhibit Index
Exhibit Description
Exhibit
Number
Exhibit 99-A Certification of Gene Y. Henderson Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, filed herewith.
Exhibit 99-B Certification of Stephen E. Lerch Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to section of the Sarbanes-Oxley Act of
2002, filed herewith.