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 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-22922
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
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(Exact name of Registrant as specified in its charter)
Delaware 06-0995978
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(State or other jurisdiction (IRS Employer Identification
of incorporation or organi- Number)
zation)
c/o Janney Montgomery Scott Inc., 26 Broadway, New York, NY 10004
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 510-0688
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.60 par value
Common Stock Purchase Warrants entitling holders to purchase one share of
Common Stock per Warrant prior to December 31, 1997
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
(CONTINUED NEXT PAGE)
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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 the 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. /X/
The aggregate market value of voting stock (Common Stock, $.60 par
value) held by non-affiliates of the Registrant as of March 14, 1997 was
approximately $12,419,923 (based on the mean between the closing bid and asked
prices of the Common Stock on such date), which value, solely for the purpose of
this calculation, excludes shares held by the Registrant's executive officers
and directors. Such exclusion should not be deemed a determination by the
Registrant that all such individuals are, in fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At March 14, 1997,
there were outstanding 7,903,421 shares of the Registrant's Common Stock, $.60
par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement to be
filed not later than April 30, 1997 pursuant to Regulation 14A are incorporated
by reference in Items 10 through 13 of Part III of this Annual Report on Form
10-K.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On January 3, 1997 the Company sold its Transmedia Network franchise
(the "Franchise") covering the States of California, Oregon, Washington and
parts of Nevada and substantially all of its operating assets other than cash
and cash equivalents (the "Asset Sale") to its franchisor, Transmedia Network
Inc. ("Network"). Upon consummation of the Asset Sale, the Company's assets
consisted principally of cash and cash equivalents aggregating approximately
$9,574,000. These assets (less approximately $800,000 of taxes on the gain
resulting from the Asset Sale) will be utilized by the Company to acquire,
merge, consolidate, invest in transactions or otherwise combine with an
operating business (any such transaction, a "Business Combination"). The Company
intends to enter into Business Combinations that will use substantially all of
the Company's available cash in one or two transactions and structure such
Business Combinations so that the current management of the target business will
remain in place. There can be no assurance, however, that the Company will be
able to effectuate a Business Combination, or that any such Business Combination
will be profitable. In anticipation of the Asset Sale, in the fourth quarter of
1996, the Company initiated activities to seek a Business Combination. At the
present time, there are no Business Combinations under consideration that the
Board of Directors considers probable of consummation. The Board of Directors
will have broad discretion in its search for and negotiations with respect to a
Business Combination.
Pending a Business Combination, the Company's assets will be invested
as management of the Company deems prudent, which investments may include, but
not be limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, bonds or United States Government or municipal securities, provided,
however, that the Company will attempt to invest its assets in a manner that
will not result in the Company being required to register as an investment
company under the Investment Company Act of 1940.
During the year ending December 31, 1997 and until a Business
Combination is effected, the Company expects to generate interest income in
excess of its minimal operating expenses, exclusive of any due diligence and
professional fees incurred in connection with the identification and
consummation of one or more Business Combination.
The Company has used and intends to continue to use various sources in
its search for potential Business Combinations
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including its officers and directors, consultants, special advisors, securities
broker-dealers, venture capitalists, members of the financial community and
others who may present management with unsolicited proposals. The Company may be
required to pay a fee in connection with the consummation of a Business
Combination.
The Company does not intend to restrict its search to any specific kind
of industry or business. The Company may investigate and ultimately acquire a
venture that is in its preliminary or development stage, is already in
operation, or in various stages of its corporate existence and development. The
Board of Directors cannot predict at this time the status or nature of any
venture in which the Company may participate. A potential venture might need
additional capital or merely desire to have its shares publicly traded. The
Board of Directors believes that the Company could provide a potential public
vehicle for a private entity interested in becoming a publicly held corporation
without the time and expense typically associated with an initial public
offering.
Once the Company has identified a particular entity as a potential
acquisition or merger candidate, the Board of Directors will seek to determine
whether acquisition or merger is warranted or whether further investigation is
necessary. Such determination will generally be based on the Board's knowledge
and experience, or with the assistance of outside advisors and consultants
evaluating the preliminary information available to them. The Board of Directors
may elect to engage outside independent consultants to perform preliminary
analysis of potential business opportunities.
In evaluating such potential Business Combinations, the Company will
consider, to the extent relevant to the specific opportunity, several factors
including potential benefits to the Company and its stockholders; working
capital, financial requirements and availability of additional financing;
history of operation, if any; nature of present and expected competition;
quality and experience of management; need for further research, development or
exploration; potential for growth and expansion; potential for profits; and
other factors deemed relevant to the specific opportunity.
Presently, the Company cannot predict the manner in which it might
participate in a prospective Business Combination. Each separate potential
opportunity will be reviewed and, upon the basis of that review, a suitable
legal structure or method of participation will be chosen. The particular manner
in which the Company participates in a specific business opportunity will depend
upon the nature of that opportunity, the respective needs and desires of the
Company and management of the opportunity, and the relative negotiating strength
of the parties involved. Actual participation in a Business Combination may take
the form of an asset purchase, lease, joint venture, license, partnership, stock
purchase, reorganization, merger or consolidation. The Company may
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act directly or indirectly through an interest in a partnership, corporation, or
other form of organization. The Company could participate in opportunities
through the purchase of minority stock positions.
In the Asset Sale, the Company received a total of approximately
$7,500,000 in cash, which, in addition to payment for the Franchise, included
payment for the Company's Rights to Receive (as hereinafter defined). The cash
and cash equivalents retained by the Company amounted to approximately
$2,074,000 at December 31, 1996.
GENERAL
The following information describes the business carried on by the
Company prior to the Asset Sale.
In December 1991, the Company entered into a franchise agreement (the
"Franchise Agreement") with Network that granted to the Company the exclusive
right to operate the Franchise, the primary business of which was the
acquisition of "Rights to Receive" from client restaurants and other dining
establishments located in California that accept a charge card, "The Transmedia
Card," and the sale of such Rights to Receive to holders of The Transmedia Card
("Cardholders"). The Transmedia Card, a private charge card marketed and issued
by Network, which utilizes a diner's MasterCard(R), Visa(R), American Express(R)
or Discover(R) charge account to bill Transmedia Card charges, is used by
Cardholders to pay for food and beverages when dining at restaurants or other
dining establishments (the "Participating Restaurants") that participate in the
network of such establishments that accept The Transmedia Card (the "Transmedia
Network(R)"). The Transmedia Network is a unified system that entitles
Cardholders recruited by Network, the Company or any other Network franchisee to
a savings of up to 25% on the regular menu prices of food and beverages charged
on The Transmedia Card. Rights to Receive were the Company's rights to food and
beverage credits of Participating Restaurants that were purchased by the Company
in exchange for cash in an amount equal to approximately 50% of the retail value
of such food and beverage credits.
The Company derived substantially all of its revenues from the excess
of the proceeds of Cardholders' charges on their Transmedia Cards incurred at
Participating Restaurants in the territory included within the Franchise (net of
the up to 25% Cardholder savings and of fees and other charges payable to
Network) over the Company's cost of purchasing Rights to Receive from
Participating Restaurants. Revenues from Cardholders' membership fees were not
significant as the Company only received 40% of initial membership fees (and no
portion of renewal fees) and, under arrangements with Network, such initial fees
were generally waived by the Company.
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The Company commenced its franchise operations in the San Francisco Bay
Area in August 1992, in the Los Angeles metropolitan area in October 1993, in
Orange County in January 1995, and in the Lake Tahoe, Nevada area in October
1995. At December 31, 1996, there was an aggregate of 557 Participating
Restaurants, consisting of 221 in the San Francisco Bay Area (including Lake
Tahoe), 269 in the Los Angeles Metropolitan Area and 67 in Orange County. At
December 31, 1996, there was an average Rights to Receive balance (net of Rights
to Receive payable by the Company) per Participating Restaurant for the San
Francisco Bay Area, Los Angeles Metropolitan Area and Orange County Area of
approximately $6,300, $5,600, and $2,600, respectively. During 1996, the Company
added 64,000 new Cardholders residing in California. At December 31, 1996, there
were approximately 146,000 Cardholders after giving effect to non- renewals
during the year.
In addition to acquiring the California franchise, the Company acquired
options to operate Transmedia Network franchises in Oregon and Washington upon
payment of certain prescribed fees. In December 1993, the Company exercised its
option to operate the Transmedia Network franchise in Washington and also agreed
with Network to purchase a franchise in Reno, Nevada and the Nevada portion of
the Lake Tahoe resort area. In June 1995, the Company exercised its option to
obtain a Transmedia Network franchise for the State of Oregon. As used herein,
the term "Franchise Territory" means the States of California, Oregon and
Washington, and Reno and Lake Tahoe, Nevada.
In 1995, Network began to offer to holders of The Transmedia Card use
of the card at certain hotels, resorts, golf courses, ski lifts and access to
discount long distance telephone services. The Company's rights under the
Franchise Agreement related only to Participating Restaurants in the Franchise
Territory. The Company did not have any rights to participate in or derive any
income from these other services.
In connection with the Asset Sale, the Company and Network exchanged
general releases of all liabilities, obligations under the Franchise Agreement.
RIGHTS TO RECEIVE
The Company's primary business was the acquisition of Rights to Receive
from Participating Restaurants that it recruited to join the Transmedia Network
of dining establishments and the sale of such Rights to Receive to Cardholders.
The Company derived substantially all of its revenues from purchasing Rights to
Receive from Participating Restaurants operating in the Franchise Territory in
exchange for cash in an amount equal to approximately 50% of the retail value of
the food and beverage credits underlying such Rights to Receive and applying
such Rights to Receive against
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Cardholder charges made at Participating Restaurants operating in its Franchise
Territory.
The Company entered into a contract (a "Restaurant Contract") with each
Participating Restaurant in its Franchise Territory in connection with its
purchase from it of Rights to Receive. The typical Restaurant Contract provided
for the purchase by the Company of between $5,000 and $10,000 in Rights to
Receive. Generally, such Rights to Receive were paid for by the Company in
installments during the initial two-to-three month period thereof. Beginning in
1995, the Company also entered into nine to 12 month commitment agreements with
certain Participating Restaurants. The commitment agreements established a
minimum period of participation by the Participating Restaurant in the event
that the initial credits purchased by the Company from the Participating
Restaurant were exhausted prior to the expiration of the commitment period. The
Company believes that these commitment agreements had a positive effect during
1996 upon restaurant retention and cash flow.
TRANSMEDIA CARD
The Transmedia Card is a private charge card that entitles Cardholders
to a savings of up to 25% on the regular menu price of food and beverages
purchased at any Participating Restaurant within the Transmedia Network.
Participating Restaurants solicited by the Company were located in the San
Francisco Bay Area, metropolitan Los Angeles and Orange County. The Transmedia
Card was developed and is issued and marketed by Network.
Cardholders may use The Transmedia Card as they would any major credit
card. When paying the check at a Participating Restaurant, a Cardholder presents
The Transmedia Card in payment for the amount of goods and services received, as
well as for taxes and tips, and signs a Network credit card receipt for such
amount. Network, upon receiving the credit card receipt from the Participating
Restaurant, gives the Participating Restaurant a credit against the balance of
Rights to Receive that are held by the Company in respect of such Participating
Restaurant. Network then arranges for the processing of the receipt for the full
amount of the charges through the major credit card account (Visa, Mastercard,
American Express or Discover) designated by the Cardholder in his or her
application (the "Major Credit Card Account") and simultaneously issues a credit
to the Cardholder's Major Credit Card Account in an amount equal to the up to
25% savings on the appropriate food and beverage charges. Taxes and tips are not
eligible for the up to 25% savings. Upon receipt by Network of payment from the
Major Credit Card Account, it pays the Participating Restaurant the taxes and
tips incurred by the Cardholder, deducts the fees and expenses payable to it
under the
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Franchise Agreement and remits the balance to the Company on a weekly basis.
CARDHOLDER MARKETING
In January 1996, Network initiated a policy to offer both new and
existing Cardholders an alternative to the traditional arrangement of a 25%
savings with an annual membership fee of $50. The new program (the "20%
Program") provides a 20% savings to Cardholders with no annual fee so long as
Cardholder usage is at least $200 during each membership year. Commencing in
1996, substantially all programs initiated by Network to obtain new cardholders
utilized the 20% Program and Network took a leading role to promote the
Transmedia Card on a national basis utilizing arrangements with large national
organizations and businesses. Since January 1, 1996 substantially all new
cardholders were enrolled in the 20% Program.
The Company commenced active franchise operations in the San Francisco
Bay Area in August 1992. During 1993, the Company focused its principal efforts
on recruiting restaurants and other dining establishments doing business in the
San Francisco Bay Area to join the Transmedia Network and on marketing The
Transmedia Card to prospective Cardholders. Initial franchise activities
concentrated primarily on establishing a base of restaurants in San Francisco as
a foundation for commencing programs to market The Transmedia Card to
prospective Cardholders. Active marketing efforts to solicit Cardholders
commenced in late 1992 and were directed primarily to professionals, investment
banking and real estate firms and various small and mid-sized businesses.
Marketing to larger businesses, banks, radio station listeners' clubs and
various non-profit organizations commenced in April 1993.
Active marketing efforts to solicit Cardholders in the Los Angeles
metropolitan area commenced in January 1994 and followed the same marketing
strategy implemented by the Company in the San Francisco Bay Area. Active
marketing efforts to solicit Cardholders in Orange County commenced in mid-1995.
FRANCHISE AGREEMENT
The Company entered into the Franchise Agreement with Network on
December 9, 1991. Under the original terms of the Franchise Agreement, the
Company was required to pay Network the following fees and charges: (i) $250,000
as an initial franchise fee (which had been paid); (ii) $250,000 as an initial
contribution to Network's advertising and development fund, of which $125,000
was paid and the remaining $125,000 was payable, without interest, in 12
consecutive equal monthly payments commencing July 1993; and (iii) 150,000
shares of the Common Stock of the Company valued at $21,000, which have been
issued. In September 1993, the Company and Network agreed that the Company would
pay for substantially all
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of its advertising in California and entered into an agreement providing,
effective as of September 30, 1993, for (i) a refund to the Company of the
remaining unused balance (approximately $55,000) of the Company's previously
advanced $145,000 initial contribution to Network's advertising and development
fund (which refund has been made) and (ii) the termination of the Company's
obligation to pay the remaining monthly installments of such obligation
(approximately $105,000).
In addition, the Company was obligated to pay to Network continuing
service charges as follows: (i) a general service charge equal to 7.5%, and an
advertising fee of 2.5%, of the total dollar amount of Rights to Receive meal
credits used by Cardholders at Participating Restaurants within the Franchise
Territory; (ii) a monthly restaurant service charge of $1.00 per Participating
Restaurant located in the preceding month within the Franchise Territory; and
(iii) a processing charge equal to $.20 per Cardholder transaction slip
forwarded to Network by Participating Restaurants in the Franchise Territory.
Under the Franchise Agreement, the Company purchased options to obtain
Transmedia Network franchises for the States of Oregon and/or Washington for
initial total franchise and advertising fees of $200,000 and $300,000,
respectively. In December 1993, the Company exercised its option for the State
of Washington and in June 1995, the Company exercised its option for the State
of Oregon. In connection with the exercise of such option and the Company's
assumption of certain advertising costs described above, the Company also agreed
with Network to provide for (i) a reduction in the Company's exercise price for
the Transmedia Network franchises in the States of Oregon and/or Washington to
$100,000 and $150,000, respectively, to reflect the Company's assumption of such
advertising obligations; (ii) the exercise of the Washington option by issuance
to Network of 50,000 shares of Common Stock (in lieu of the $150,000 exercise
price) and the exercise of the Oregon option by issuance to the Network of
35,000 shares of Common Stock (in lieu of the $100,000 exercise price); and
(iii) the acquisition of the right to operate the Transmedia Network franchise
in limited areas of Nevada by issuance to Network of 10,000 shares of Common
Stock. The Company was required to commence franchise operations in the State of
Washington, by December 31, 1996 and in the State of Oregon by April 1997.
Pending the completion of the Asset Sale, expansion activities were suspended.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 17 persons,
one of whom was the general manager of the Los Angeles office and one of whom
was an executive officer and director of the Company. Effective with the Asset
Sale, 11 of such persons became employees of Network. During the first quarter
of 1997, the
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Company will operate with a staff of two full time administrative employees in
order to fulfill its public reporting responsibilities. After the first quarter
of 1997, pending completion of one or more Business Combinations, the Company
will have no full time employees or office overhead and will contract out all
required administrative and compliance functions.
COMPETITION
The charge card business, including the restaurant charge card
business, is highly competitive and the Company competed for both Cardholders
and restaurants. Competitors included discount programs offered by major credit
card companies such as American Express(R), Visa, MasterCard and Diners Club(R),
other companies (including Dining a la Card(sm) and Entertainment(R)) that offer
different kinds of discount marketing programs and numerous smaller companies.
ITEM 2. PROPERTIES
The Company presently leases no business premises but maintains an
office c/o Janney Montgomery Scott Inc., 26 Broadway, New York, New York 10004.
During 1996, the Company's principal executive and sales offices were
located at 475 Sansome Street, San Francisco, California. These premises
consisted of approximately 3,000 square feet of space leased until August 31,
1999. The annual base rental during 1996 was approximately $55,200. The Company
leased an additional executive office located at 233 Wilshire Boulevard, Santa
Monica, California. These premises consisted of approximately 2,000 square feet
of space leased until February 1998 at an annual base rent of approximately
$50,400. The Company leased approximately 100 square feet of space at an
executive suite in Costa Mesa in Orange County at a cost of $640 per month.
Effective with the Asset Sale, the San Francisco and Santa Monica
leases were assigned to, and assumed by, Network. The Company's Orange County
lease expired January 31, 1997 and was not renewed.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of stockholders was held on December 27, 1996.
Proxies were solicited with respect to approval of the Asset Sale and approval
of certain amendments to the Company's 1992
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Stock Option Plan. The stockholders approved the Asset Sale. The
votes cast for, against or abstaining were as follows:
For 4,611,055
Against 40,919
Abstaining 9,508
The stockholders also approved the amendments to the 1992 Stock Option
Plan. The number of votes cast for, against or abstaining with respect to
approval were as follows:
For 4,310,864
Against 233,659
Abstaining 116,959
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on NASDAQ under the symbol
("WTSM") since December 23, 1993. The Company's Units are traded on NASDAQ under
the symbol ("WTSMU"). The Company's Warrants are traded on NASDAQ under the
symbol ("WTSMW").
The Company's Common Stock was traded in the over-the-counter market in
what is commonly referred to as the "pink sheets" or on the "OTC Bulletin Board"
of the National Association of Securities Dealers, Inc. under the symbol "WTSM"
from July 16, 1992 to December 22, 1993.
The following table sets forth the high and low bid prices on the OTC
Bulletin Board and the high and low closing bid prices as reported on NASDAQ for
the Company's Common Stock during the quarters indicated. The prices reported
reflect inter-dealer quotations and may not represent actual transactions and do
not include retail mark-ups, mark-downs or commissions.
QUARTER ENDED HIGH LOW
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March 31, 1995................................. 3.875 3.25
June 30, 1995.................................. 3.75 2.75
September 30, 1995............................. 2.75 1.375
December 31, 1995.............................. 2.50 1.00
March 31, 1996................................. 2.50 1.00
June 30, 1996.................................. 2.625 1.50
September 30, 1996............................. 2.185 1.125
December 31, 1996.............................. 1.375 .750
At March 14, 1997, there were approximately 394 holders of record of
the Company's Common Stock. This number does not include an indeterminate number
of stockholders whose shares are held by brokers in "street name." The Company
has not paid any cash dividends on the Common Stock since it became publicly
traded.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
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1996 1995 1994 1993 1992
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SELECTED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net Sales................... $9,301,155 $11,368,903 $8,698,738 $926,852 $14,023
Interest Income............. 132,951 146,342 38,941 44,709 16,924
Net Income (Loss)........... 545,024 10,942 (280,994) (924,733) (741,882)
Net Income (Loss) Per Common
Share*................... $.07 $0.0 $(.04) $(.16) $ (.24)
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
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1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total Assets................ $7,119,072 $6,203,976 $6,615,697 $4,017,551 $1,493,718
Long Term Obligations....... 12,026 15,602 4,108 1,702 64,862
</TABLE>
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*Based on a weighted average number of shares of Common Stock (as restated,
and see Note 8(a) of Notes to Financial Statements) outstanding: 7,955,752,
8,030,685, 7,072,754, 5,804,297 and 3,123,659, shares, respectively, at December
31, 1996, 1995, 1994, 1993 and 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
See ITEM 1. "Business-Recent Developments" for information in respect
of the sale of substantially all of the Company's operating assets. The
information presented under "Results of Operations" in this Item 7. relates to
the operations of the business the operating assets of which were sold.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $9,301,155. This
was a decrease of $2,067,748 as compared to $11,368,903 in net sales during the
year ended December 31, 1995. Sales for the year ended December 31, 1996
continued to be negatively impacted by a decrease in the average restaurant
spending per Cardholder and by continued competition from other restaurant
promotion programs in the California market. Since the beginning of 1996
substantially all new cardholders were developed, primarily utilizing
telemarketing, under national 20% Programs by Network. Although these programs
resulted in a significant increase in Cardholders, the percentage of these
Cardholders who are active card users is not as great as the percentage of
active
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card users enrolled in the 25% Program. The Company attributes the continued
decrease in average restaurant spending per Cardholder to this fact as well as
to continued competition.
The Company's net sales contributed $3,185,652 and $3,792,589 in gross
profit for the years ended December 31, 1996 and 1995, respectively. The Company
operated with an approximate 34% gross profit margin from net sales of Rights to
Receive to Cardholders during the year ended December 31, 1996, compared to 33%
during the year ended December 31, 1995. The approximate 1% increase in gross
profit margin is attributable to restaurant charges by Cardholders who have
enrolled in the 20% program. Operating expenses as a percentage of net sales
increased to 25.2% for the year ended December 31, 1996 compared to 20.6% for
the year ended December 31, 1995. The 4.6% increase in operating expenses as a
percentage of net sales is attributable to the fact that while net sales
decreased, the Company's operating expenses (overhead) are primarily of a fixed
nature.
The Company has incurred franchise costs of approximately 14% of net
sales. Franchise costs were $1,285,214 and $1,586,781 during the years ended
December 31, 1996 and 1995, respectively.
Operating expenses (selling, general and administrative expenses)
aggregated $2,341,675 and $2,339,648 for the years ended December 31, 1996 and
1995, respectively. Operating expenses remained virtually constant as
approximately $86,000 in payroll and related cost savings were offset by an
increase in professional fees of $67,000 related to the Asset Sale and
acquisition due diligence relating to possible Business Combinations.
For the year ended December 31, 1996, combined operating expenses
consisted primarily of salaries and associated payroll expenses ($1,131,000),
professional and consulting fees ($230,000), rent and office expenses
($265,000), the Company's reserve for unrealizable Rights to Receive ($206,000),
promotion and marketing expenses in connection with attracting and maintaining
participating California restaurants ($231,000), advertising and promotional
expenses in connection with attracting and maintaining California Cardholders
($69,000, net of Network reimbursement) and electronic processing equipment set
up and amortization expenses ($52,000).
For the year ended December 31, 1995, combined operating expenses
consisted primarily of salaries and associated payroll expenses ($1,239,000),
professional and consulting fees ($196,000), rent and office expenses
($262,000), the Company's reserve for unrealizable Rights to Receive ($194,000),
marketing expenses in connection with attracting and maintaining participating
California restaurants ($231,000) and advertising and promotional expenses in
connection with attracting and maintaining California Cardholders
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($51,000 net of Network reimbursement). Electronic processing
equipment set up and amortization expenses were not significant.
Interest income was $132,951 and $146,342 for the years ended December
31, 1996 and 1995, respectively.
For the year ended December 31, 1996, the Company incurred a loss
before provision for income taxes of $311,976 or $.04 per share. For the year
ended December 31, 1995, however, the Company earned a profit before provision
for income taxes of $10,942 or $0.00 per share. The approximately $323,000
decrease in earnings before provision for income taxes was primarily due to the
decreased gross profit for the period net of franchise costs.
For the year ended December 31, 1996, the Company recorded a $857,000
credit for income taxes related to the tax benefits associated with
approximately $1,950,000 in unused operating loss carryforwards and other
deductible temporary differences. The Company recorded this tax credit because
it generated substantial taxable income in connection with the Asset Sale in
January 1997, subsequent to the balance sheet date (see "Recent Developments").
For the years ended December 31, 1995 and earlier, the Company did not record
such a tax credit because at that time there was no assurance that the Company
would generate future taxable income.
For the year ended December 31, 1996, the Company earned net income of
$545,024 or $.07 per share. The net income was attributable to the credit for
income taxes of $857,000 recorded by the Company less the $311,976 loss incurred
before provision for income taxes. For the year ended December 31, 1995, the
Company earned a profit before income taxes and a net profit of $10,942 or $0.00
per share. The Company incurred no provision for income taxes for the year ended
December 31, 1995 because the income taxes on the Company's $10,942 pretax
profit were eliminated by the Company's net operating loss carryforwards.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO
YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 were $11,368,903. This
was an increase of $2,670,165 as compared to $8,698,738 in net sales during the
year ended December 31, 1994. The sales increase was primarily attributable to
the increasing number of Cardholders and restaurants available to Cardholders.
However, offsetting this trend, sales for the year ended December 31, 1995 were
negatively impacted by a decrease in the average restaurant spending per
Cardholder. The Company attributes the decrease in average restaurant spending
per Cardholder to increasing competition from other restaurant promotion
programs that were introduced into the California market and to softness in
California's economy in general.
-13-
<PAGE>
The Company operated with an approximate gross profit margin from net
sales of Rights to Receive to Cardholders of approximately 33%. The Company's
net sales resulted in $3,792,589 and $2,891,229 in gross profit for the years
ended December 31, 1995 and 1994, respectively.
Operating expenses (selling, general and administrative expenses)
aggregated $2,339,648 and $1,996,347 for the years ended December 31, 1995 and
1994, respectively. The increase of $343,301 was primarily due to the fact that
the Company incurred additional salaries and associated payroll expenses related
to the operation of its business in San Francisco and Los Angeles during the
year ended December 31, 1995 and initiated active operations in Orange County in
January 1995. The Company incurred approximately $219,000 in additional salaries
and associated payroll expenses, excluding Orange County, during the year ended
December 31, 1995 compared to the year ended December 31, 1994. These expenses
related to the operation of its business in San Francisco and Los Angeles and
were primarily attributable to increased officers' and employee compensation
including certain bonus and commission arrangements. The Company also incurred
additional operating expenses of approximately $131,000 related to the operation
of its business in Orange County for the year ended December 31, 1995. The
Company did not actively operate in Orange County in 1994 and therefore incurred
no such expenses for the year ended December 31, 1994.
For the year ended December 31, 1994, combined operating expenses
consisted primarily of salaries and associated payroll expenses ($934,000),
professional and consulting fees ($191,000), rent and office expenses
($224,000), the Company's reserve for unrealizable Rights to Receive ($159,000),
marketing expenses in connection with attracting and maintaining participating
California restaurants ($169,000) and advertising and promotional expenses in
connection with attracting and maintaining California cardholders ($153,000 net
of Network reimbursement).
Interest income was $146,342 and $38,941 for the years ended December
31, 1995 and 1994, respectively. Interest income increased in 1995 primarily
because of the interest earned on the approximately $2,138,000 net proceeds from
the Company's December 1994 Offer of Units.
For the year ended December 31, 1995, the Company earned a net profit
of $10,942 or $0.00 per share. For the year ended December 31, 1994 the Company
incurred a net loss of $280,994 or $.04 per share. The approximately $292,000
increase in net earnings was primarily due to the increased gross profit for the
period net of franchise costs and increased interest income, partially offset by
increased operating expenses (including Orange County expenses), as described
above.
-14-
<PAGE>
Orange County operations resulted in net losses of approximately
$108,000 for the year ended December 31, 1995. Without giving effect to the
Orange County losses, the Company would have generated a net profit of
approximately $119,000, or $.01 per share, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at December 31, 1996 and 1995 was
approximately $4,873,000 and $5,165,000, respectively. At February 28, 1997, as
a result of the Asset Sale, its working capital was approximately $8,700,000.
The Company has outstanding 2,052,987 warrants exercisable at $4.00 per share.
The warrants expire December 31, 1997. The Company presently has no other unused
internal sources of liquidity other than cash (or equivalents) on hand and no
external sources of liquidity such as a line of credit from a financial
institution.
During the year ending December 31, 1997 and until a Business
Combination is effected, the Company expects to generate interest income in
excess of its minimal operating expenses, exclusive of any due diligence and
professional fees incurred in connection with the identification and
consummation of one or more Business Combination.
The Company intends to enter into Business Combinations that will use
substantially all of the Company's available cash in one or two transactions and
structure such Business Combinations so that the current management of the
target business will remain in place. There can be no assurance, however, that
the Company will be able to effectuate a Business Combination, or that any such
Business Combination will be profitable. At the present time, there are no
Business Combinations under consideration that the Board of Directors considers
probable of consummation. The Board of Directors will have broad discretion in
its search for and negotiations with respect to a Business Combination.
Pending a Business Combination, the Company's assets will be invested
as management of the Company deems prudent, which investments may include, but
not be limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, bonds or United States Government or municipal securities, provided,
however, that the Company will attempt to invest its assets in a manner that
will not result in the Company being required to register as an investment
company under the Investment Company Act of 1940.
The Company has used and intends to continue to use various sources in
its search for potential Business Combinations including its officers and
directors, consultants, special advisors, securities broker-dealers, venture
capitalists, members of the financial community and others who may present
management
-15-
<PAGE>
with unsolicited proposals. The Company may be required to pay a
fee in connection with the consummation of a Business Combination.
The Company does not intend to restrict its search to any specific kind
of industry or business. The Company may investigate and ultimately acquire a
venture that is in its preliminary or development stage, is already in
operation, or in various stages of its corporate existence and development. The
Board of Directors cannot predict at this time the status or nature of any
venture in which the Company may participate. A potential venture might need
additional capital or merely desire to have its shares publicly traded. The
Board of Directors believes that the Company could provide a potential public
vehicle for a private entity interested in becoming a publicly held corporation
without the time and expense typically associated with an initial public
offering.
Presently, the Company cannot predict the manner in which it might
participate in a prospective Business Combination. Each separate potential
opportunity will be reviewed and, upon the basis of that review, a suitable
legal structure or method of participation will be chosen. The particular manner
in which the Company participates in a specific business opportunity will depend
upon the nature of that opportunity, the respective needs and desires of the
Company and management of the opportunity, and the relative negotiating strength
of the parties involved. Actual participation in a Business Combination may take
the form of an asset purchase, lease, joint venture, license, partnership, stock
purchase, reorganization, merger or consolidation. The Company may act directly
or indirectly through an interest in a partnership, corporation, or other form
of organization. The Company could participate in opportunities through the
purchase of minority stock positions.
The Company may be required to seek additional capital in order to
effecuate a Business Combination. There can be no assurance that additional
financing will be available to the Company or, if available, that it can be
obtained on acceptable terms. Failure to obtain such financing could result in
the delay or abandonment of one or more potential Business Combinations.
INFLATION AND SEASONALITY
Inflation did not significantly impact the Company's business during
1996, nor did the Company believe its business to be seasonal.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements and information that is
based on management's beliefs and assumptions, as well as information currently
available to management. Although the Company believes that the expectations
reflected in such
-16-
<PAGE>
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
expected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements included as part of Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-17-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See PART I, ITEM 4. "Executive Officers of the Company." Other
information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed not later than April 30, 1997
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1997 pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1997 pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April 30,
1997 pursuant to Regulation 14A.
-18-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements: Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for
the Three Years in the Period ended
December 31, 1996 F-4
Consolidated Statement of Stockholders'
Equity for the Three Years in the Period
ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for
the Three Years in the Period ended
December 31, 1996 F-6
Notes to Financial Statements F-8
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits
2.1 Purchase Agreement dated as of November 15, 1996 by and between
the Company and Network, incorporated by reference as Exhibit A
to the Company's Definitive Proxy Statement for Special Meeting
of Stockholders held on December 27, 1996.
3.1 Amended Certificate of Incorporation of the Company, incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991 (the "1991
10-K").
3.2 Certificate of Amendment to Amended Certificate of Incorporation,
incorporated by reference to Exhibit 3(d) to the Company's
Registration Statement on Form S-1 (File No. 33-44845) (the "1992
Form S-1").
-19-
<PAGE>
*3.3 Certificate of Amendment to Amended Certificate of Incorporation,
filed with the Secretary of State of the State of Delaware on
January 3, 1997.
3.4 Amended and Restated By-Laws of the Company, incorporated by
reference to Exhibit 3(b) to the Company's Registration Statement
on Form S-1 (File No. 33-84234) (the "1994 Form S-1").
4.1 Form of Common Stock Certificate, incorporated by reference to
Exhibit 4(b) to the 1992 Form S-1.
4.2 Form of Warrant Certificate, incorporated by reference to Exhibit
4(b) to the 1994 Form S-1.
4.3 Warrant Agreement dated as of June 25, 1993, between the
Registrant and American Stock Transfer & Trust Company, as
Warrant Agent, incorporated by reference to Exhibit 4(c) to the
1994 Form S-1.
4.4 Form of Amendment of Warrant Agreement, incorporated by reference
to Exhibit 4(d) to the 1994 Form S-1.
*10.1 The Company's 1992 Stock Option Plan, as amended through March
26, 1997.
10.2 Form of Indemnification Agreement between the Company and its
officers and directors, incorporated by reference to Exhibit
10(d) to the 1992 Form S-1.
10.3 Form of Registration Rights Agreement between the Company and
certain of the Company's stockholders, incorporated by reference
to Exhibit 10(l) to the 1992 Form S-1.
*10.14 Franchise Termination Agreement dated as of January 2, 1997, by
and between the Company and Network.
11. Computation of earnings per share of Common Stock, incorporated
by reference to Exhibit 11 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
22. Subsidiaries of the Registrant, incorporated by reference to
Exhibit 22 to the 1991 10-K.
- -------------------------
*Filed herewith.
(d) Financial Statement Schedules: none
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WESTERN SYSTEMS CORP.
Date: March 26, 1997 /s/ William J. Barrett
-------------------------------
William J. Barrett
Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William J. Barrett and Herbert M. Gardner
his true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 26, 1997 /s/William J. Barrett
------------------------------------
William J. Barrett
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 26, 1997 /s/Stuart M. Pellman
------------------------------------
Stuart M. Pellman
Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
-21-
<PAGE>
Date: March , 1997
--------------------------------------
C. Scott Bartlett, Jr.
Director
Date: March 26, 1997 /s/ Herbert M. Gardner
--------------------------------------
Herbert M. Gardner
Director
Date: March 26, 1997 /s/ Howard Grafman
--------------------------------------
Howard Grafman
Director
Date: March 26, 1997 /s/ Paulette Grafman
--------------------------------------
Paulette Grafman
Director
Date: March __, 1997
--------------------------------------
Richard O. Starbird
Director
-22-
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
11. Computation of earnings per share of Common Stock
27. Financial Data Schedule
-23-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Independent Auditors' Report F - 2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F - 3
Consolidated Statements of Operations for the Three Years
in the Period Ended December 31, 1996 F - 4
Consolidated Statement of Shareholders' Equity for the
Three Years in the Period Ended December 31, 1996 F - 5
Consolidated Statements of Cash Flows for the Three Years
in the Period Ended December 31, 1996 F - 6
Notes to Consolidated Financial Statements F - 8
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
The Western Systems Corp.
(formerly The Western Transmedia Company, Inc.)
San Francisco, California
We have audited the accompanying consolidated balance sheets of The Western
Systems Corp. (formerly The Western Transmedia Company, Inc.), and subsidiary as
of December 31, 1996 and 1995 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of The Western Systems
Corp. (formerly The Western Transmedia Company, Inc.) and subsidiary as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, New York
March 12, 1997
F - 2
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED BALANCE SHEETS
- ASSETS -
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
-----------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash (including interest bearing deposits) (Note 2c) $ 2,073,697 $ 3,040,620
Accounts receivable (Note 2e) 107,717 134,544
Rights to receive - net of reserve for unrealizable rights to receive
(Notes 2c and 2f) 3,335,763 2,321,626
Deferred income taxes (Note 10) 857,000 -
Prepaid expenses and other current assets 194,800 133,590
------------ ------------
TOTAL CURRENT ASSETS 6,568,977 5,630,380
PROPERTY AND EQUIPMENT - NET (NOTES 2g, 3 AND 6) 81,871 109,376
OTHER ASSETS (NOTES 2h, 4 AND 5) 468,224 464,220
------------ ------------
TOTAL ASSETS $ 7,119,072 $ 6,203,976
============ ============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable - rights to receive (Note 2f) $ 633,436 $ 365,941
Accrued liabilities 202,112 96,681
Capitalized lease obligations - current portion (Note 6) 3,576 2,854
------------ ------------
TOTAL CURRENT LIABILITIES 839,124 465,476
------------ ------------
LONG-TERM DEBT (NOTE 6) 12,026 15,602
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 9, 12 AND 13)
SHAREHOLDERS' EQUITY (NOTES 7 AND 8):
Preferred stock, $.10 par value, 2,000,000 shares authorized;
none issued or outstanding - -
Common stock, $.60 par value, 25,000,000 shares authorized; 7,903,421
issued and outstanding for December 31, 1996 and 1995, respectively 4,742,053 4,742,053
Additional paid-in capital 5,542,062 5,542,062
Retained earnings (deficit) (4,016,193) (4,561,217)
--------------- ------------
TOTAL SHAREHOLDERS' EQUITY 6,267,922 5,722,898
--------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,119,072 $ 6,203,976
=============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 3
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Year Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
NET SALES (NOTE 2i) $9,301,155 $11,368,903 $8,698,738
COST OF SALES (NOTE 2i) 6,115,503 7,576,314 5,807,509
---------- ----------- ----------
GROSS PROFIT 3,185,652 3,792,589 2,891,229
---------- ----------- ----------
EXPENSES AND OTHER (INCOME):
Franchise costs 1,285,214 1,586,781 1,212,262
Operating expenses 2,341,675 2,339,648 1,996,347
Interest expense 3,690 1,560 2,555
Interest income (132,951) (146,342) (38,941)
---------- ----------- -----------
3,497,628 3,781,647 3,172,223
---------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (311,976) 10,942 (280,994)
PROVISION (CREDIT) FOR INCOME TAXES
(NOTES 2j AND 10) (857,000) - -
---------- ----------- -----------
NET INCOME (LOSS) $ 545,024 $ 10,942 $ (280,994)
========== =========== ===========
INCOME (LOSS) PER COMMON SHARE (NOTE 11) $.07 $ - $(.04)
==== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (NOTES 7 AND 11) 7,955,752 8,030,685 7,072,754
========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 4
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Additional Retained Common Total
(As Restated Common Paid-In Earnings Stock Shareholders'
Notes 7a and 7b) Stock Capital (Deficit) Subscribed Equity
---------------- ----- ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,960,169 $4,176,101 $3,612,109 $(4,291,165) $226,875 $3,723,920
Shares issued in connection with exercise of
franchise option (Note 7c) 60,000 36,000 144,000 - (180,000) -
Shares issued re: employment agreement (Note 7c) 25,000 15,000 31,875 - (46,875) -
Exercise of stock options 17,500 10,500 2,875 - - 13,375
Shares issued upon exercise of warrants in unit
offering (Note 7d) 800,000 480,000 1,658,393 - - 2,138,393
Exercise of warrants (Note 7d) 5,754 3,452 13,810 - - 17,262
Adjustment for fractional shares resulting from
reverse stock split (2) - - - - -
Net loss for the year ended December 31, 1994 - - - (280,994) - (280,994)
---------- --------- --------- ----------- ------- -----------
Balance at December 31, 1994 7,868,421 4,721,053 5,463,062 (4,572,159) - 5,611,956
Shares issued in connection with exercise of
franchise option (Note 7e) 35,000 21,000 79,000 - - 100,000
Net income for the year ended December 31, 1995 - - - 10,942 - 10,942
---------- ---------- --------- ----------- ------- ----------
Balance at December 31, 1995 7,903,421 4,742,053 5,542,062 (4,561,217) - 5,722,898
Net income for the year ended December 31, 1996 - - - 545,024 - 545,024
---------- ---------- ---------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1996 7,903,421 $4,742,053 $5,542,062 $(4,016,193) $ - $6,267,922
========== ========== ========== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 5
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS Page 1 of 2
-------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1995 1994
---------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from franchisor for cardholder restaurant spending $ 9,322,378 $11,390,947 $ 8,533,074
Cash paid for franchise fees (1,288,992) (1,591,277) (1,188,947)
Cash paid for rights to receive (7,035,292) (7,237,918) (7,698,146)
Cash paid to suppliers and employees (2,051,261) (2,314,820) (1,754,795)
Interest received 132,951 146,342 38,941
Interest paid (3,690) (1,560) (2,555)
NET CASH PROVIDED (UTILIZED) BY OPERATING ACTIVITIES (923,906) 391,714 (2,072,428)
------------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (39,500) (22,024) (59,053)
Security deposits (663) (805) (4,064)
------------- ------------ -------------
NET CASH (UTILIZED) BY INVESTING ACTIVITIES (40,163) (22,829) (63,117)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - - 13,375
Proceeds from exercise of warrants - - 17,262
Proceeds from sale of units - - 2,400,000
Expenses associated with offering of stock and units - - (261,607)
Payments on capital lease obligations (2,854) (2,674) (5,121)
------------ ------------ -------------
NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES (2,854) (2,674) 2,163,909
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (966,923) 366,211 28,364
Cash and cash equivalents, at beginning of year 3,040,620 2,674,409 2,646,045
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 2,073,697 $ 3,040,620 $ 2,674,409
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 6
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS Page 2 of 2
-------------------------------------
<TABLE>
<CAPTION>
For The Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED (UTILIZED) BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 545,024 $ 10,942 $ (280,994)
Adjustments to reconcile net income (loss) to net cash provided
(utilized) by operating activities:
Depreciation and amortization 63,664 53,348 43,731
Reserve for unrealizable rights to receive 206,301 194,112 158,570
Other - 897 -
Deferred tax asset (857,000) - -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 26,826 14,696 (143,021)
Decrease (increase) in rights to receive (1,220,438) 753,181 (2,564,153)
(Increase) decrease in prepaid expenses and other current assets (61,209) (100,283) 4,471
(Decrease) increase in accounts payable - rights to receive 267,496 (412,624) 672,148
(Decrease) increase in accrued expenses 105,430 (122,555) 36,820
---------- --------- -----------
NET CASH PROVIDED (UTILIZED) BY OPERATING ACTIVITIES$ $ (923,906) $ 391,714 $(2,072,428)
========== ========= ===========
</TABLE>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
a) During the year ended December 31, 1994, the Company acquired the
franchise rights for the states of Washington and Nevada in exchange for
an aggregate of 60,000 shares of common stock. These shares are valued by
the Company at $180,000.
b) During the year ended December 31, 1995, the Company acquired the
franchise rights for the state of Oregon in exchange for 35,000 shares of
its common stock. These shares are valued by the Company at $100,000.
c) During the years ended December 31, 1995 and 1994 the Company entered into
capitalized lease obligations aggregating $15,190 and $6,263,
respectively, for new office equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F - 7
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 1 - DESCRIPTION OF COMPANY:
On January 3, 1997, the Company completed a sale of its Transmedia
Network Inc. (Network) franchise and substantially all of its
operating assets, other than cash and cash equivalents, to Network.
This sale is described in Footnote 13. The following information and
the information in Footnotes 2 - 12 describes the business carried on
by the Company prior to the asset sale.
The Western Systems Corp. (formerly The Western Transmedia Company,
Inc.), the "Company", was incorporated in the State of Delaware on
May 30, 1978, under the name of Vigilance Systems Corp..
In accordance with Statement of Financial Accounting Standards No. 7,
the Company was treated as a development stage company from January
1, 1991, the date the Company began devoting substantially all of its
efforts towards establishing a new business, through September 30,
1993. During this period, the Company incurred a cumulative loss of
$1,009,443.
In December 1991, the Company, through an exchange of stock, acquired
100% of the shares of a newly formed affiliate, TM West Corp. ("TM
West"). This transaction was accounted for as the reorganization of
entities under common control which is accounted for utilizing the
pooling of interests method. TM West had raised approximately
$150,000 in a private offering of its common stock in October 1991.
In December 1991, TM West entered into a franchise agreement with
Network . See also Note 5.
The franchise agreement (which was assigned by TM West to the Company
in May 1992) allowed the Company to acquire rights to receive goods
and services from restaurants ("Rights to Receive" - see Note 2f)
which are then sold to the franchisors' cardholders for cash. The
Rights to Receive are primarily purchased for cash or obtained in
exchange for media advertising and other services purchased by the
Company on behalf of the restaurants.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's financial statements are prepared in accordance with
generally accepted accounting principles (GAAP). Those principles
considered particularly significant are detailed below.
(a) USE OF ESTIMATES:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain estimates
and assumptions, where applicable, that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting
period. While actual results could differ from those estimates,
management does not expect such variances, if any, to have a material
effect on the financial statements.
F - 8
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of The
Western Systems Corp. and its wholly-owned subsidiary, TM West, an
inactive company. All material intercompany balances and transactions
have been eliminated.
(c) CONCENTRATION OF CREDIT RISK/ FAIR VALUE:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments
and rights to receive.
The Company maintains significant cash investments, which exceed the
Federal depository insurance coverage limit, primarily with one
financial institution. The Company performs periodic reviews of the
relative credit rating of this institution as part of its investment
strategy.
Concentration with regards to rights to receive (see Note 2f below)
are limited due to the Company's large customer base. However, at
December 31, 1996 all of these rights to receive do pertain to the
restaurant industry.
The carrying amounts of cash and cash equivalents, trade receivables,
other current assets, accounts payable and debt obligations
approximate fair value.
(d) STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
An allowance for doubtful accounts has not been established as of
December 31, 1996 and 1995, since accounts receivable as reflected on
the balance sheet consists entirely of cash collected by and in
transit from the franchisor (see Note 5).
(f) RIGHTS TO RECEIVE:
Rights to Receive (see Note 5) are composed primarily of food and
beverage credits due from restaurants. Rights to Receive are stated
at cost which approximates 50% of the retail value of Rights to
Receive obtained. Cost is determined by the first-in, first-out
method. Accounts payable - Rights to Receive represents the unfunded
portion of the total commitment.
The Company reviews the realizability of the Rights to Receive on a
periodic basis and writes-off those amounts receivable from
restaurants that have ceased operations or whose credits are not
utilized by the franchisors' cardholders. The analysis of rights to
receive is as follows:
F - 9
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) RIGHTS TO RECEIVE (CONTINUED):
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Total Funded Unfunded
<S> <C> <C> <C>
Cost $3,722,523 $3,089,087 $633,436
Reserve for unrealizable rights to receive (386,760) (386,760) -
---------- ---------- --------
Net $3,335,763 $2,702,327 $633,436
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------
Total Funded Unfunded
<S> <C> <C> <C>
Cost $2,616,041 $2,250,100 $365,941
Reserve for unrealizable rights to receive (294,415) (294,415) -
----------- ----------- ---------
Net $2,321,626 $1,955,685 $365,941
=========== =========== =========
</TABLE>
(g) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation on property
and equipment is provided on a straight-line basis over the estimated
useful lives of the assets of 5 to 7 years. Leasehold improvements
are amortized over the term of the lease. Maintenance and repairs are
charged to operating expenses as incurred; renewals and betterments
are capitalized.
Depreciation expense for the years ended December 31, 1996, 1995 and
1994 aggregated $28,629, $25,498 and $16,631, respectively.
(h) AMORTIZATION:
The cost of the franchise rights acquired (see Note 5) is being
amortized on a straight-line basis through the end of the franchise
term. Amortization expense charged to operations for the years ended
December 31, 1996, 1995 and 1994 aggregated $31,600, $27,850 and
$27,100, respectively.
(i) NET SALES/COST OF SALES:
Net sales represent the retail value of the Rights to Receive sold,
less up to the 25% savings offered to the franchisors' cardholders. A
sale is recognized when the franchisor (see Note 5) receives a
restaurant charge card receipt from a restaurant in the Company's
franchise area, indicating that a cardholder has charged a meal. The
cost of a sale consists of the actual cost of rights to receive from
a restaurant (see Note 2f above).
F - 10
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) NET SALES/COST OF SALES (CONTINUED):
Revenues from card membership fees generated prior to 1996 were not
been material since the Company waived substantially all first year
membership fees. The Company received no portion of renewal fees.
Additionally, in January 1996, Network initiated a policy to offer
both new and existing cardholders an alternative to the traditional
arrangement of a 25% savings with an annual membership fee of $50.00.
The new program provides a 20% savings to cardholders with no annual
fee so long as cardholder usage is at least $200 during each
membership year. Since January 31, 1996 substantially all new
cardholders were enrolled in the 20% Program (see Note 5).
(j) INCOME TAXES:
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the use of the asset and liability approach of providing
for income taxes and required implementation no later than for fiscal
years beginning after December 15, 1992. Effective January 1, 1993
the Company adopted the provisions of SFAS 109. (See also, Note 10).
(k) RECLASSIFICATIONS:
Certain reclassifications were made to the 1995 and 1994 financial
statements to conform to the current year's reporting format.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Furniture and fixtures $ 70,964 $ 69,990
Office equipment 89,744 89,594
Leasehold improvements 1,285 1,285
---------- ----------
161,993 160,869
Less: accumulated depreciation and amortization 80,122 51,493
---------- --------
$ 81,871 $109,376
========= ========
</TABLE>
F - 11
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 4 - OTHER ASSETS:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
Other assets consists of the following:
<S> <C> <C>
Franchise agreement - net of accumulated amortization of $127,200
and $95,600 for 1996 and 1995, respectively (Notes 2g and 5) $423,800 $455,400
Security deposits 9,483 8,820
Point of sale equipment - net of accumulated amortization of
$3,435 for 1996 34,941 -
-------- --------
$468,224 $464,220
======== ========
</TABLE>
NOTE 5 - FRANCHISE AGREEMENT:
TM West, a wholly-owned subsidiary of the Company (see Note 1), was
formed for the purpose of negotiating and entering into a franchise
agreement with Network. This franchise agreement was executed in
December, 1991, and assigned by TM West to the Company in May 1992.
The term of the franchise agreement was for 10 years with an option
exercisable by the Company for two additional successive 10 year
periods, provided certain conditions are met. In connection with this
operation, the Company changed its name to The Western Transmedia
Company, Inc. (see Note 1).
Under the initial franchise agreement, the Company acquired the
exclusive right to operate a franchise in the state of California,
the primary business of which is the acquisition of "Rights to
Receive" from restaurants located in California that accept the
Transmedia Card (a private charge card marketed and issued by
Network) and the sale of such Rights to Receive to holders of the
card who are then entitled to either a 25% or 20% savings from listed
menu prices when dining at participating restaurants.
Restaurants that join the Transmedia program are provided with two of
their essential needs: advance financing and additional diners. The
Company purchases for cash, and in some instances, prepaid
advertising, from full service restaurants, food and beverage credits
(Rights to Receive) which are then used by card members when
patronizing such restaurants. Rights to Receive are purchased in an
amount equal to approximately 50% of the listed menu prices of such
food and beverage credits.
F - 12
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5 - FRANCHISE AGREEMENT (CONTINUED):
The Company derives its revenues from the difference between the
amount it pays to restaurants for the food and beverage credits and
the cardmember's charges at such restaurants net of the up to 25%
savings (exclusive of tip and applicable taxes) and franchise fees
payable to Network. The Company also receives 40% of the Restaurant
Card membership fee for the initial year of membership of cardholders
solicited by the Company and no portion of any renewal fees. However,
the Company and Network have waived substantially all first year
membership fees in connection with its marketing programs.
Additionally, in January 1996, Network initiated a policy to offer
both new and existing cardholders an alternative to the traditional
arrangement of a 25% savings with an annual membership fee of $50.00.
The new program provides a 20% savings to cardholders with no annual
fee so long as cardholder usage is least $200 during each membership
year. Since January 1, 1996 substantially all new cardholders were
enrolled in the 20% Program (see Note 2(i)).
The franchise agreement to operate in California, provided for an
initial franchise fee of $250,000 (which was paid in July 1992) as
well as 150,000 shares of common stock of the Company (see Note 7b),
which shares were issued in January 1992. The franchise agreement
also provided for payments to Network's advertising and promotion
fund in the amount of $250,000; one-half of which was paid with the
initial franchise fee and the balance to be paid in 12 equal
consecutive monthly installments, without interest, commencing in
July 1993. The funds for advertising and promotion were to be used by
Network for the exclusive benefit of the Company during the two year
period following the effective date of the franchise agreement.
Effective September 30, 1993 the Company entered into an agreement
with Network whereby substantially all local advertising expenses
would be paid directly by the Company, instead of through the
advertising and promotional fund to which the Company had
contributed. As a result of this agreement, the Company's remaining
obligation under this note was terminated. In addition, Network
reimbursed the Company approximately $55,000 for the unused portion
of the fund contributed by the Company.
In December 1993, the Company exercised it's option to acquire the
franchise to operate in the state of Washington through the issuance
of 50,000 shares of common stock to Network valued by the Company at
$150,000. The Company also acquired the franchise to operate in the
City of Reno, Nevada and the Nevada portion of the Lake Tahoe resort
area by issuing 10,000 shares of common stock to Network at a value
of $30,000. The Company also exercised an option in June, 1995 to
operate in the state of Oregon for an initial payment of $100,000.
The Company issued 35,000 shares of its common stock to effect this
payment.
F - 13
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5 - FRANCHISE AGREEMENT (CONTINUED):
For each of the franchises, the Company was also required to pay
Network a 7 1/2% general service charge and a 2 1/2% advertising fee
based on the gross dollar amount of food and beverage credits used by
cardmembers within each territory. The Company was also required to
pay a miscellaneous administrative fee based upon the number of
participating restaurants and charge card transactions during any
given month. Additionally, the Company was subject to a non-compete
agreement.
SEE NOTE 13 RE: SUBSEQUENT EVENT - SALE OF SUBSTANTIALLY ALL
OPERATING ASSETS.
NOTE 6 - LONG-TERM DEBT:
The Company is the lessee of office and computer equipment through
leases which expire in years through 2000. The assets (and liability)
under these leases are recorded at the lower of the present value of
the minimum lease payments or the fair market value of the asset. The
assets are depreciated over their estimated productive lives.
Depreciation of assets under capitalized leases, included in
depreciation expense for the years ended December 31, 1996, 1995 and
1994, aggregated $5,250, $3,381 and $2,914, respectively.
Minimum future lease payments under capitalized leases as of December
31, 1996 and for each of the next four fiscal years and in the
aggregate are as follows:
1997 $ 6,544
1998 5,583
1999 4,349
2000 6,324
--------
Total minimum lease payments 22,800
Less: amount representing interest 7,198
---------
$15,602
=========
The interest rate has been calculated at approximately 10% and was
based upon the lower of the Company's incremental borrowing rate at
the inception of the lease or the lessor's implicit rate of return.
In connection with the sale of the Company's assets, subsequent to
the balance sheet date, the leases and the liabilities thereunder
were assigned to Network (see Note 13).
NOTE 7 - COMMON STOCK:
(a) In December 1991, the Company effected a reverse stock split of its
issued and outstanding common stock on a one (1) for thirty (30)
basis. The number of authorized shares (25,000,000) was not changed.
F - 14
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 7 - COMMON STOCK (CONTINUED):
In May 1992, the Company effected a second reverse stock split on a
one (1) for two (2) basis resulting in 1,500,000 shares, $.60 par
value, issued and outstanding. The number of authorized shares was
not changed.
All references to the number of common shares and per share amounts
in the accompanying financial statements, have been restated to
reflect the reverse stock splits.
(b) In January 1992, the Company issued 150,000 shares, as restated, of
its common stock to Network (see Note 5) in connection with the
franchise agreement. These shares were issued at a post reverse stock
split price of $.14 per share.
In July 1992, the Company completed a private placement of 3,397,317
shares of its common stock at a price of $.60 per share (par value)
which yielded net proceeds of approximately $1,966,000. With the
completion of this private placement, the Company had 4,897,265
shares of its common stock outstanding. In addition, during 1991 and
1992 the Company also expended approximately $369,000 in costs
associated with a terminated public offering.
(c) In July 1993, the Company completed a private placement of 1,764,624
units (each unit consisting of one share of common stock and one
common stock purchase warrant) at a price of $1.70 per unit which
yielded net proceeds of approximately $2,625,000. In November 1993,
the Company also completed a private placement of 294,117 units (each
unit consisting of one share of common stock and one common stock
purchase warrant) at a price of $1.70 per unit for net proceeds of
approximately $463,000. The warrants are exercisable at a price of
$3.00 per share through December 1994 and at $4.00 per share
thereafter and through December 1997. The warrants are also
redeemable at a price of $1.00 per warrant, at the option of the
Company, based upon certain circumstances.
In July 1993, the Company also issued 2,500 shares of common stock in
lieu of consulting fees aggregating $6,250.
Pursuant to the terms of a employment agreement with an officer of
the Company (see Note 12a) the Company reflected $46,875 as
additional compensation for the year ended December 31, 1993. Payment
was made by issuing 25,000 shares of common stock. The value of the
shares is included in common stock subscribed as of December 31,
1993.
As payment for the exercise of franchise options for the states of
Washington and the City of Reno, Nevada and the Nevada portion of the
Lake Tahoe resort area (see Note 5), the Company has agreed to issue
60,000 shares of common stock to Network. These shares are valued by
the Company at $180,000. This amount is also included in common stock
subscribed as of December 31, 1993.
F - 15
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 7 - COMMON STOCK (CONTINUED):
(d) In December 1994, through a unit offering, warrant holders of 800,000
warrants exchanged their warrants and paid $3.00 per warrant for a
unit consisting of a share of common stock and a new warrant. This
offering resulted in net proceeds to the Company of $2,138,393. These
new warrants are exercisable at a price of $4.00 per share through
December 31, 1997. In addition, in December 1994, holders of 5,754
existing warrants exercised their right to purchase common stock at a
price of $3.00 per share.
(e) In June 1995, as payment for the exercise of a franchise option for
the state of Oregon, the Company issued 35,000 shares of its common
stock to Network. These shares are valued by the Company at $100,000.
NOTE 8 - STOCK OPTION PLAN:
The Company has established a Stock Option Plan (the "Plan"), as
amended, under which options to purchase up to a maximum of 750,000
shares of common stock may be granted to officers and other key
employees. Stock options granted under this Plan, which may be either
incentive stock options or nonqualified stock options for federal
income tax purposes, expire up to ten years after date of grant and
become exercisable over a three year period. Employees who have left
the Company have 90 days to exercise their options. In December 1996,
the stockholders agreed to an amendment to the Plan, whereby in the
event of a sale of the assets of the Company (see Note 13) all
options outstanding would become immediately exercisable without
regard to any vesting provisions.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 1996 and
1995, respectively: risk-free interest rates of 6.8 % and 8.4%;
volatility factors of the expected market price of the Company's
common stock of .41 and .38; and a weighted average expected life of
the options of 7 1/2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
F - 16
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 8 - STOCK OPTION PLAN (CONTINUED):
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting period.
The Company's pro forma information follows:
1996 1995
---- ----
Net income
As reported $545,024 $ 10,942
Pro forma 475,054 (85,248)
Primary earnings per share
As reported $.07 $ -
Pro forma .06 (.01)
A summary of stock activity, and related information for the years
ended December 31 follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding, December 31, 1993 349,000 $1.72
Granted 32,500 3.25
Exercised (17,500) .76
Cancelled (12,500) 2.39
----------- ------
Outstanding, December 31, 1994 351,500 1.88
Granted 320,000 2.85
Exercised - -
Cancelled (2,500) 1.75
------------ ------
Outstanding, December 31, 1995 669,000 2.35
Weighted average fair value of options
granted during the year .94
Granted 50,000 1.94
Exercised - -
Cancelled (245,000) 2.46
---------- ------
OUTSTANDING, DECEMBER 31, 1996 474,000 $2.24
=========== =====
Weighted average fair value of options
granted during the year $ .18
Options exercisable as of:
December 31, 1994 106,833 $1.43
December 31, 1995 179,833 1.61
December 31, 1996 278,167 2.02
Exercise prices for options outstanding as of December 31, 1996
ranged from $.60 to $3.75. The weighted average remaining contractual
life of these options is 8 years.
F - 17
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 9 - BUSINESS CONCENTRATIONS:
Most of the Company's participating restaurants are located in the
San Francisco/Los Angeles areas. No single participating restaurant
accounted for more than 5% of the Company's sales in any fiscal year
presented.
No single participating restaurant's Rights to receive balance was
greater than 5% of the total Rights to receive balance at December
31, 1996 and 1995.
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
For the Year Ended
December 31,
----------------------------
1996 1995 1994
---- ---- ----
Current taxes:
Federal $ - $ - $ -
State - - -
---------- ------ ------
Total - - -
---------- ------ ------
Deferred taxes:
Federal (104,000) - -
State (33,000) - -
---------- ------ ------
Total (137,000) - -
---------- ------ ------
Benefit of operating loss carryforwards (720,000) - -
---------- ------ ------
Provision (credit) for income taxes $(857,000) $ - $ -
========= ====== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts for assets and liabilities
for financial reporting purposes as well as the effect of operating
loss carryforwards. Significant components of the Company's net
deferred tax asset are as follows:
1996 1995
---- ----
Tax effects of:
Operating loss carryforwards $720,000 $ 680,000
Allowance for rights to receive 140,000 115,000
Property and equipment (3,000) (2,500)
-------- -----------
Gross deferred tax asset 857,000 792,500
Valuation allowance - (792,500)
-------- ----------
Net deferred tax asset $857,000 $ -
========= ===========
F - 18
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 10 - INCOME TAXES (CONTINUED):
The Company has available at December 31, 1996 and 1995, unused
operating loss carryforwards of approximately $1,950,000 and
$1,744,000 respectively which expire in various years through 2011.
As of December 31, 1996, the Company has recorded the tax benefits
associated with future deductible temporary differences and NOL
carryforwards since it generated taxable income in connection with a
sale of its operating assets in January 1997, subsequent to the
balance sheet date (see Note 13).
NOTE 11 - EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share has been computed on the basis of the
weighted average number of common shares and common equivalent shares
outstanding during each period presented. The effect on earnings
(loss) per share resulting from the exercise of common stock warrants
and options is antidilutive and therefore not shown for 1994.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
(a) EMPLOYMENT/CONSULTING AGREEMENTS:
The Company entered into an employment agreement with its Chief
Executive Officer, which agreement commenced January 1, 1995 and
expired on December 31, 1996. The agreement provided for a base
annual salary of $175,000 for the first year and $200,000 for 1996.
This employee is also entitled to a bonus, based upon pre-tax
earnings, of 5% on the first $2,000,000 and 6 1/2% on all earnings in
excess of $2,000,000. The employee was also granted options to
acquire 150,000 shares of common stock at prices ranging from $2.82
to $3.75 per share. The employment agreement also contains provisions
for a covenant not to compete in the event of termination and various
buy-out provisions in the event of termination, disability, death or
a sale of a controlling interest or substantially all the assets of
the Company.
The Company also entered into an agreement with an Executive Vice
President. This agreement was effective as of January 1, 1995 and
would have expired on December 31, 1996. The terms of this agreement
provided for an annual base salary of $115,000 for the first year and
$140,000 for the second year. This employee was also granted options
to acquire 105,000 shares of common stock at prices ranging from
$2.82 to $3.75 per share. The Executive Vice President resigned from
the Company in January 1996.
The Company had also entered into a consulting agreement with a
company in which a director and its executive vice president are
shareholders. The agreement provided for monthly consulting fees of
$2,500 for the first 12 months, increasing to $2,917 per month
thereafter through December 1996. This agreement was terminated
effective December 31, 1995.
F - 19
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(B) OPERATING LEASE:
The Company has entered into operating leases for office space which
expire in various years through 1999 with renewal options. The leases
provide for payment of taxes and the Company's proportionate share of
basic operating costs.
Minimum future base rental payments under these leases, for each of
the next three years and in the aggregate are as follows:
Year ending December 31, 1997 $ 60,078
Year ending December 31, 1998 58,874
Year ending December 31, 1999 40,399
---------
$159,351
Rent expense for the years ended December 31, 1996, 1995 and 1994
aggregated $115,991, $113,859 and $91,931, respectively.
Effective with the asset sale (see Note 13) the aforementioned leases
were assigned to and assumed by Network.
The Company also leases office space in Orange County, California, on
a month-to-month basis, at a cost of $640 per month. The Company
terminated this lease on January 31, 1997.
(C) SUBSEQUENT EVENT:
See Note 13 regarding sale of substantially all operating assets.
NOTE 13 - SUBSEQUENT EVENT - SALE OF ASSETS:
On January 3, 1997, the Company sold its Transmedia Network franchise
for the states of California, Oregon, Washington and parts of Nevada
and substantially all of its operating assets, other than cash and
cash equivalents, to its franchisor, Transmedia Network, Inc.
("Network"). Upon consummation of the asset sale, the Company's
assets consisted principally of cash and cash equivalents aggregating
approximately $9,574,000 and liabilities consisting of approximately
$800,000 of taxes on the gain resulting from the asset sale. The
Company also transferred its obligations under capital and operating
leases entered into, to Network. In connection with the asset sale
the Company and Network exchange general releases of all liabilities
and obligations under the franchise agreement (see Note 5). However,
pursuant to the terms of the contract, should the Rights to Receive
of a certain restaurant group become uncollectible within 12 months
of the closing date, the Company is obligated to repurchase those
Rights to Receive from Network at the then outstanding full cash
amount. The Company would then have the opportunity to recover the
amount paid to Network from the restaurant group and guarantors.
Such Rights to Receive totaled approximately $100,000.
F - 20
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE WESTERN TRANSMEDIA COMPANY, INC.
Under Section 242 of the General Corporation Law
================================================================================
It is hereby certified that:
1. The name of the corporation is The Western Transmedia Company, Inc.
(the "Corporation").
2. The amendment of the certificate of incorporation effected by this
certificate of amendment is to change the name of the Corporation.
3. To accomplish the foregoing amendment, Article FIRST of the
certificate of incorporation, relating to the name of the Corporation, is hereby
stricken out in its entirety, and the following new Article is substituted in
lieu thereof:
"FIRST: The name of the corporation is The Western Systems Corp. (the
"Corporation")."
4. The amendment of the certificate of incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware.
Signed and attested to on January 2, 1997.
THE WESTERN TRANSMEDIA COMPANY, INC.
/s/ Stuart M. Pellman
-----------------------------------
Stuart M. Pellman
President & Chief Executive Officer
ATTEST:
/s/ Ann C.W. Green
- ------------------
Ann C.W. Green
Assistant Secretary
[As amended through
March 26, 1997]
THE WESTERN SYSTEMS CORP.
1992 STOCK OPTION PLAN
1. PURPOSES
The purpose of this 1992 Stock Option Plan (the "Plan") is to
provide additional incentive to the officers, directors and employees of the
Company who are primarily responsible for the management and growth of the
Company, and to consultants and advisors to the Company who otherwise materially
contribute to the conduct and direction of its business, operations and affairs,
in order to strengthen their desire to remain in the employ of the Company and
to stimulate their efforts on behalf of the Company, and to retain and attract
to the employ of the Company persons of competence. Each option granted pursuant
to the Plan shall be designated at the time of grant as either an "incentive
stock option" or as a "non-qualified stock option." The terms and conditions of
the Plan shall be set forth or incorporated by reference in the option
agreements evidencing the options.
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. Further, the Plan is intended to satisfy the
performance-based compensation exception to the limitation on the Company's tax
deductions imposed by Section 162(m) of the Code. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
2. DEFINITIONS
For the purposes of the Plan, unless the context otherwise requires,
the following definitions shall be applicable:
(a) "Board" or "Board of Directors" means the Company's Board of
Directors.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
(c) "Committee" means the Compensation and Stock Option Committee
composed of two or more directors who are Non-Employee Directors and Outside
Directors who shall be elected by, and who shall serve at the pleasure of, the
Board of Directors, and who shall be responsible for administering the Plan.
(d) "Company" means The Western Systems Corp.
(e) "Employee" means an employee of the Company or of a Subsidiary
(including a director or officer of the Company or a Subsidiary who is also an
employee).
(f) "Fair Market Value" of the Shares means the closing price of
publicly traded Shares on the national securities exchange on which the Shares
are listed (if the Shares are so listed) or on the Nasdaq National Market or
Small Cap Market (if the Shares are regularly quoted on the Nasdaq National
Market or Small Cap Market), or, if not so listed or regularly quoted, the mean
between the closing bid and asked prices of publicly traded Shares in the
over-the-counter market, or, if such bid and asked prices shall not be
available, as reported by any nationally recognized quotation service selected
by the Company, or as determined by the Committee in a manner consistent with
the provisions of the Code.
(g) "ISO" means an option intended to qualify as an incentive stock
option under Section 422 of the Code.
(h) "Non-Employee Director" means a non-employee director as defined
in Rule 16b-3.
(i) "NQO" means an option that does not qualify as an ISO.
(j) "Outside Director" means an outside director as defined in
Section 162(m) of the Code.
(k) "Plan" means the 1992 Stock Option Plan of the Company.
(l) "Rule 16b-3" means Rule 16b-3 under the Exchange Act.
(m) "Securities Act" means the Securities Act of 1933,
as amended.
(n) "Shares" means shares of the Company's Common Stock, $.60 par
value, including authorized but unissued shares and shares that have been
previously issued and reacquired by the Company.
(o) "Subsidiary" of the Company means and includes a "Subsidiary
Corporation," as that term is defined in Section 424(f) of the Code.
-2-
<PAGE>
3. ADMINISTRATION
Subject to the express provisions of the Plan, the Committee shall
have authority to interpret and construe the Plan, to prescribe, amend and
rescind rules and regulations relating to it, to determine the terms and
conditions of the respective option agreements (which need not be identical) and
to make all other determinations necessary or advisable for the administration
of the Plan. Subject to the express provisions of the Plan, the Committee, in
its sole discretion, shall from time to time determine the persons from among
those eligible under the Plan to whom, and the time or times at which, options
shall be granted, the number of Shares to be subject to each option, whether an
option shall be designated an ISO or an NQO and the manner in and price at which
such option may be exercised. In making such determination, the Committee may
take into account the nature and period of service rendered by the respective
optionees, their level of compensation, their past, present and potential
contributions to the Company and such other factors as the Committee shall in
its discretion deem relevant. The determination of the Committee with respect to
any matter referred to in this Section 3 shall be conclusive.
In the event that for any reason the Committee is unable to act or
if the Committee at the time of any grant, award or other acquisition under the
Plan of options or Shares does not consist of two or more Non-Employee
Directors, then any such grant, award or other acquisition may be approved or
ratified in any other manner contemplated by subparagraph (d) of Rule 16b-3.
4. ELIGIBILITY FOR PARTICIPATION
Any Employee shall be eligible to receive ISOs or NQOs granted under
the Plan. Consultants and advisors to the Company and directors of the Company
who are not Employees shall be eligible to receive NQOs.
5. LIMITATION ON SHARES SUBJECT TO THE PLAN
Subject to adjustment as hereinafter provided, no more than 750,000
Shares may be issued pursuant to the exercise of options granted under the Plan.
If any option shall expire or terminate for any reason, without having been
exercised in full, the unpurchased Shares subject thereto shall again be
available for the purposes of the Plan. The maximum number of Shares that may be
subject to options granted under the Plan to any individual in any calendar year
shall not exceed 100,000, and the method of counting such Shares shall conform
to any requirements applicable to performance-based compensation under Section
162(m) of the Code.
-3-
<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS
Each option granted under the Plan shall be subject to the following
terms and conditions:
(a) Except as provided in Subsection 6(j), the option price per
Share shall be determined by the Committee, but (i) as to an ISO shall not be
less than 100% of the Fair Market Value of a Share on the date such ISO is
granted; and (ii) as to an NQO, shall not be less than 75% of the Fair Market
Value of a Share on the date such NQO is granted.
(b) The Committee shall, in its discretion, fix the term of each
option, provided that the maximum length of the term of each option granted
hereunder shall be 10 years and provided further than the provisions of
Subsection 6(j) hereof shall be applicable to the grant of ISOs to Employees
therein identified.
(c) If a holder of an option dies while he is employed by the
Company or a Subsidiary or, if the Committee so determines in its discretion at
the time such option is granted or at any time thereafter, such option may, to
the extent that the holder of the option was entitled to exercise such option on
the date of his death, be exercised during a period after his death fixed by the
Committee, in its discretion, at the time such option is granted or at any time
thereafter, but in no event to exceed one year, by his personal representative
or representatives or by the person or persons to whom the holder's rights under
the option shall pass by will or by the applicable laws of descent and
distribution; provided, however, that no option granted under the Plan may be
exercised to any extent by anyone after its expiration.
(d) In the event that a holder of an option shall voluntarily retire
or quit his employment without the written consent of the Company or a
Subsidiary or if the Company shall terminate the employment of a holder of an
option for cause, the options held by such holder shall forthwith terminate.
Except as otherwise provided in Section 6(k), if a holder of an option shall
voluntarily retire or quit his employment with the written consent of the
Company or a Subsidiary, or if the employment of such holder shall have been
terminated by the Company or a Subsidiary for reasons other than cause, such
holder may (unless his option shall have previously expired pursuant to the
provisions hereof) exercise his option at any time prior to the first to occur
of the expiration of the original option period or three months after the
termination of employment, to the extent of the number of Shares subject to such
option that were purchasable by him on the date of termination of his
employment. Options granted under the Plan shall not be affected by any change
of employment so long as the holder thereof continues to be an Employee.
-4-
<PAGE>
(e) Anything to the contrary contained herein or in any option
agreement executed and delivered hereunder, no option shall be exercisable
unless and until the Plan has been approved by stockholders of the Company in
accordance with Section 13 hereof.
(f) Each option shall be nonassignable and nontransferable by the
option holder otherwise than by will or by the laws of descent and distribution
and shall be exercisable during the lifetime of the option holder solely by him;
provided, however, that options may be transferred pursuant to a qualified
domestic relations order (as defined in the Code or Title I of the Employee
Retirement Income Security Act, or the rules promulgated thereunder).
(g) An option holder desiring to exercise an option shall exercise
such option by delivering to the Company written notice of such exercise,
specifying the number of Shares to be purchased, together with payment of the
purchase price therefor; provided, however that no option may be exercised in
part with respect to fewer than 50 Shares, except to purchase the remaining
Shares purchasable under such option. Payment shall be made as follows: (i) in
United States dollars by cash or by check, certified check, bank draft or money
order payable to the order of the Company; (ii) at the discretion of the
Committee, by delivering to the Company Shares already owned by the option
holder and having a Fair Market Value on the date of exercise equal to the
exercise price, or a combination of such Shares and cash; or (iii) by any other
proper method specifically approved by the Committee.
(h) In order to assist an option holder with the acquisition of
Shares pursuant to the exercise of an option granted under the Plan, the
Committee may, in its discretion and subject to the requirements of applicable
statutes, rules and regulations, whenever, in its judgment, such assistance may
reasonably be expected to benefit the Company, authorize, either at the time of
the grant of the option or thereafter (i) the extension of a loan to the option
holder by the Company, (ii) the payment by the option holder of the purchase
price of the Shares in installments, or (iii) the guaranty by the Company of a
loan obtained by the option holder from a third party. The Committee shall
determine the terms of any such loan, installment payment arrangement or
guaranty, including the interest rate and other terms of repayment thereof.
Loans, installment payment arrangements and guaranties may be authorized with or
without security and the maximum amount thereof shall be the option price for
the Shares being acquired plus related interest payments.
(i) The aggregate Fair Market Value (determined at the time an ISO
is granted) of the Shares as to which an Employee may first exercise ISOs in any
one calendar year under all incentive stock option plans of the Company and its
Subsidiaries may not exceed $100,000.
-5-
<PAGE>
(j) An ISO may be granted to an Employee owning, or who is
considered as owning by applying the rules of ownership set forth in Section
424(d) of the Code, over 10% of the total combined voting power of all classes
of stock of the Company or any Subsidiary if the option price of such ISO equals
or exceeds 110% of the Fair Market Value of a Share on the date the option is
granted and such ISO expires not more than five years after the date of grant.
(k) In the event of a sale of all or substantially all of the
Company's assets, each outstanding option shall become exercisable in whole or
in part, without regard to any vesting provisions or employment conditions that
may be contained in this Plan or in any agreement with the optionee, and shall
remain exercisable, in whole or in part, until it expires by its terms.
(l) If an option granted to the Company's Chief Executive Officer or
to any of the Company's other four most highly compensated officers is intended
to qualify as "performance-based" compensation under Section 162(m) of the Code,
the exercise price of such option shall not be less than 100% of the Fair Market
Value of a Share on the date such option is granted.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
(a) Subject to any required regulatory approval, new option rights
may be substituted for the option rights granted under the Plan, or the
Company's duties as to options outstanding under the Plan may be assumed, by a
corporation other than the Company, or by a parent or subsidiary of the Company
or such corporation, in connection with any merger, consolidation, acquisition,
sale of all or substantially all assets, separation, reorganization, liquidation
or like occurrence in which the Company is involved.
(b) The existence of outstanding options shall not affect in any way
the right or power of the Company or its stockholders to make or authorize any
or all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issuance of shares or subscription rights or any merger or
consolidation of the Company, or any issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise; provided, however, that if the
outstanding Shares shall at any time be changed or exchanged by declaration of a
stock dividend, stock split, combination of shares or recapitalization, the
number and kind of Shares subject to the Plan or subject to any options
theretofore granted, and the option prices, shall be
-6-
<PAGE>
appropriately and equitably adjusted so as to maintain the proportionate number
of Shares without changing the aggregate option price.
(c) Adjustments under this Section 7 shall be made by the Committee
whose determination as to what adjustments, if any, shall be made, and the
extent thereof, shall be final.
8. PRIVILEGES OF STOCK OWNERSHIP
No option holder shall be entitled to the privileges of stock
ownership as to any Shares not actually issued and delivered to him.
9. SECURITIES REGULATION
(a) Each option shall be subject to the requirement that if at any
time the Board of Directors or Committee shall in its discretion determine that
the listing, registration or qualification of the Shares subject to such option
upon any securities exchange or under any Federal or state law, or the approval
or consent of any governmental regulatory body, is necessary or desirable in
connection with the issuance or purchase of Shares thereunder, such option may
not be exercised in whole or in part unless such listing, registration,
qualification, approval or consent shall have been effected or obtained free
from any conditions not reasonably acceptable to the Board of Directors or
Committee.
(b) Unless at the time of the exercise of an option and the issuance
of the Shares thereby purchased by any option holder hereunder there shall be in
effect as to such Shares a Registration Statement under the Securities Act and
the rules and regulations of the Securities and Exchange Commission, or there
shall be available an exemption from the registration requirements of the
Securities Act, the option holder exercising such option shall deliver to the
Company at the time of exercise a certificate (i) acknowledging that the Shares
so acquired may be "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act, (ii) certifying that he is acquiring the
Shares issuable to him upon such exercise for the purpose of investment and not
with a view to their sale or distribution; and (iii) containing such option
holder's agreement that such Shares may not be sold or otherwise disposed of
except in accordance with applicable provisions of the Securities Act. The
Company shall not be required to issue or deliver certificates for Shares until
there shall have been compliance with all applicable laws, rules and
regulations, including the rules and regulations of the Securities and Exchange
Commission and of any securities exchange or automated quotation system on which
the Shares may be listed or traded.
-7-
<PAGE>
10. EMPLOYMENT OR RETENTION OF OPTION HOLDERS
Nothing contained in the Plan or in any option agreement executed
and delivered thereunder shall confer upon any option holder any right to
continue in the employ or retention of the Company or any Subsidiary or to
interfere with the right of the Company or any Subsidiary to terminate such
employment or retention at any time.
11. WITHHOLDING; DISQUALIFYING DISPOSITION
(a) The Company shall have the right to withhold from any salary or
other compensation for employment services of an option holder all amounts
required to satisfy withholding tax liabilities arising from the grant or
exercise of an option under the Plan or the acquisition or disposition of Shares
acquired upon exercise of any such option.
(b) In the case of disposition by an option holder of Shares
acquired upon exercise of an ISO within (i) two years after the date of grant of
such ISO, or (ii) one year after the transfer of such Shares to such option
holder, such option holder shall give written notice to the Company of such
disposition not later than 30 days after the occurrence thereof, which notice
shall include all such information as may be required by the Company to comply
with applicable provisions of the Code and shall be in such form as the Company
shall from time to time determine.
12. AMENDMENT, SUSPENSION AND TERMINATION OF THE PLAN
Subject to any required regulatory approval, the Board of Directors
or Committee may at any time amend, suspend or terminate the Plan, provided
that, except as set forth in Section 7 above, no amendment may be adopted
without the approval of stockholders which would:
(a) increase the number of Shares which may be issued
pursuant to the exercise of options granted under the Plan;
(b) permit the grant of an ISO under the Plan with an option price
less than 100% of the Fair Market Value of the Shares at the time such option is
granted;
(c) change the provisions of Section 4;
(d) extend the term of an option or the period during
which an option may be granted under the Plan; or
(e) decrease an option exercise price (provided that the foregoing
does not preclude the cancellation of an option and a new grant at a lower
exercise price without stockholder approval).
-8-
<PAGE>
Unless the Plan shall theretofore have been terminated by the Board of Directors
or Committee, the Plan shall terminate on April 9, 2002. No option may be
granted during the term of any suspension of the Plan or after termination of
the Plan. The amendment or termination of the Plan shall not, without the
written consent of the option holder to be affected, alter or impair any rights
or obligations under any option theretofore granted to such option holder under
the Plan.
13. EFFECTIVE DATE
The effective date of the Plan shall be April 10, 1992, subject to
its approval by stockholders of the Company not later than April 9, 1993.
-9-
FRANCHISE TERMINATION AGREEMENT
This FRANCHISE TERMINATION AGREEMENT ("Agreement") is entered into as
of this 2nd day of January, 1997 by and between THE WESTERN TRANSMEDIA COMPANY,
INC., a Delaware corporation (the "Franchisee"), and TRANSMEDIA NETWORK INC., a
Delaware corporation (the "Franchisor").
W I T N E S S E T H:
WHEREAS, the Franchisee and the Franchisor have entered into a
Franchise Agreement, dated December 9, 1991, as amended (the "Franchise
Agreement"), pursuant to which the Franchisor granted to the Franchisee the
exclusive right to acquire rights to receive food and beverage credits from
participating restaurants and other establishments located in the States of
California, Oregon, Washington and parts of Nevada that accept the Transmedia
Card (the "Rights to Receive") and to sell such Rights to Receive to holders of
the Transmedia Card;
WHEREAS, the Franchisee and the Franchisor have entered into a Purchase
Agreement, dated as of November 15, 1996 (the "Purchase Agreement"), pursuant to
which the Franchisee agreed to sell to the Franchisor, and the Franchisor agreed
to purchase from the Franchisee, all of the Franchisee's Rights to Receive and
certain other related assets of the Franchisee; and
WHEREAS, the Franchisee and the Franchisor agreed that at the closing
of the transactions contemplated by the Purchase Agreement, the Franchise
Agreement would be completely and forever terminated and all of the rights
granted to the Franchisee thereunder would revert to the Franchisor;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and in the Purchase Agreement, the parties hereto hereby agree
as follows:
1. TERMINATION. The Franchise Agreement is hereby and forever
terminated, effective immediately, and all rights granted to the Franchisee
thereunder shall hereby revert to the Franchisor. The Franchisee represents that
it has not previously transferred to any other person any of the rights granted
to it under the Franchise Agreement. The Franchisee agrees that it shall
immediately cease to hold itself out in any way as a franchisee of the
Franchisor or to do anything which would indicate any relationship between the
Franchisee and the Franchisor.
<PAGE>
2. RELEASES.
a. BY THE FRANCHISEE. Except as set forth in the Purchase Agreement,
the Franchisee, for itself and on behalf of its subsidiaries, affiliates,
shareholders, directors, officers, agents, successors and assigns, hereby
releases, acquits and forever discharges the Franchisor and its subsidiaries,
affiliates, shareholders, directors, officers, agents, successors and assigns
from any and all costs, expenses, attorneys' fees, losses, claims, damages,
demands, obligations, liability or causes of action of any nature whatsoever
arising out of, resulting from or relating to the Franchise Agreement, whether
known or unknown, whether based on acts, omissions or both, whether based on
tort, contract, statutory obligations or any other theory of recovery, whether
legal or equitable, whether for compensatory, punitive or any other form of
damages or for any other form of relief (the "Franchisee Released Claims").
b. BY THE FRANCHISOR. Except as set forth in the Purchase Agreement,
the Franchisor, for itself and on behalf of its subsidiaries, affiliates,
shareholders, directors, officers, agents, successors and assigns, hereby
releases, acquits and forever discharges the Franchisee and its subsidiaries,
affiliates, shareholders, directors, officers, agents, successors and assigns
from any and all costs, expenses, attorneys' fees, losses, claims, damages,
demands, obligations, liability or causes of action of any nature whatsoever
arising out of, resulting from or relating to the Franchise Agreement, whether
known or unknown, whether based on acts, omissions or both, whether based on
tort, contract, statutory obligations or any other theory of recovery, whether
legal or equitable, whether for compensatory, punitive or any other form of
damages or for any other form of relief (the "Franchisor Released Claims").
3. UNKNOWN CLAIMS.
a. BY THE FRANCHISEE.
(1) The Franchisee understands and agrees that the Franchisee
Released Claims include all claims of every nature and kind whatsoever, whether
known or unknown, suspected or unsuspected, and has read and understands, and
hereby expressly waives to the fullest extent permitted by law any right or
benefit it now has, or in the future may have in any capacity, under the
provisions of Section 1542 of the Civil Code of California, which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
(2) The Franchisee acknowledges that it may hereafter discover
facts different from or in addition to those which it now knows or believes to
be true with
-2-
<PAGE>
respect to the Franchisee Released Claims and agrees that the release set forth
in Paragraph 2 hereof shall be and remain effective in all respects
notwithstanding such different or additional facts or the discovery thereof.
b. BY THE FRANCHISOR.
(1) The Franchisor understands and agrees that the Franchisor
Released Claims include all claims of every nature and kind whatsoever, whether
known or unknown, suspected or unsuspected, and has read and understands, and
hereby expressly waives to the fullest extent permitted by law any right or
benefit it now has, or in the future may have in any capacity, under the
provisions of Section 1542 of the Civil Code of California, which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
(2) The Franchisor acknowledges that it may hereafter discover
facts different from or in addition to those which it now knows or believes to
be true with respect to the Franchisor Released Claims and agrees that the
release set forth in Paragraph 2 hereof shall be and remain effective in all
respects notwithstanding such different or additional facts or the discovery
thereof.
4. MISCELLANEOUS.
a. MODIFICATION. This Agreement may not be modified or amended
except by a written agreement executed by the Franchisee and the Franchisor.
b. ATTORNEYS' FEES. In the event legal action is commenced to
enforce or interpret, or for breach of, any provision of this Agreement, the
prevailing party shall be entitled to recover from the losing party costs and
expenses incurred, not limited to taxable costs, and reasonable attorneys' fees
incurred by the prevailing party, in addition to all other relief and remedies
to which the prevailing party may be entitled.
c. SURVIVAL OF COVENANTS, ETC. All agreements, conditions,
acknowledgments, representations and other obligations set forth in this
Agreement shall survive the execution hereof.
d. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of New York, without giving effect to the choice of law provisions
thereof.
e. ENTIRE AGREEMENT. This Agreement and the Purchase Agreement
set forth the entire agreement and understanding among the parties as to the
subject matter of this
-3-
<PAGE>
Agreement and merge and supersede all prior discussions, agreements and
understandings among them with respect thereto.
f. COUNTERPARTS. This instrument may be executed in any number of
counterparts and each counterpart shall be deemed to be an original instrument.
IN WITNESS HERETO, the parties hereto have caused this Agreement to be
executed as of the date set forth above.
THE WESTERN TRANSMEDIA COMPANY,
INC.
By: /s/ Stuart M. Pellman
----------------------------------
Name: Stuart M. Pellman
Title:
TRANSMEDIA NETWORK INC.
By: /s/ Melvin Chasen
-----------------------------------
Name: Melvin Chasen
Title:
-4-
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1995 1994
-------- ----------- ------------
PRIMARY EARNINGS:
<S> <C> <C> <C>
Net income (loss) $545,024 $ 10,942 $ (280,994)
======== =========== ===========
SHARES:
Weighted average of common shares outstanding 7,903,421 7,886,257 7,072,754
Assumed conversions of stock options 52,331 144,428 -
--------- ---------- ----------
7,955,752 $8,030,685 $7,072,754
--------- ---------- ----------
PRIMARY INCOME (LOSS) PER COMMON SHARE $.07 $ - $(.04)
==== ========= =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the year ended December 31, 1996 and is qualified in
its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,073,697
<SECURITIES> 0
<RECEIVABLES> 3,830,240
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0
0
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</TABLE>
