The following items were the
subject of a Form 12b-25 and
are included herein (Item 6,
Item 7 and Item 8).
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________________
Commission file number 0-4028
TRANSMEDIA NETWORK INC.
--------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 84-6028875
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
11900 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33181
-------------------------------------------------
(Address of principal executive offices) (zip code)
305-892-3300
-----------------
Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
---------------------
None None
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
--------------------------------------------
(Title of Class)
Indicate by (X) whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
<PAGE>
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of December 9, 1996: $44,361,461.00.
Number of shares outstanding of Registrant's Common Stock, as of December 30,
1996: 10,126,926.
DOCUMENTS INCORPORATED BY REFERENCE:
Location in Form 10-K in which
Document Document is Incorporated
-------- ------------------------
Registrant's Proxy Statement Part III
relating to the 1997
Annual Meeting of Stockholders
- 2 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT
The financial statements for 1994, 1995 and the first three quarters of 1996
have been restated to reflect the writedown of certain costs of acquiring
cardmembers. Previously, to the extent that membership and renewal fees were
expected to be received, the Company had been deferring certain costs of
acquiring cardmembers and amortizing them over the average life of a
cardmembers, 24 months. The restatement reflects the deferral of costs of
acquiring fee paying members only to the extent that initial membership fees are
generated and the amortization of these costs, as required by generally accepted
accounting principles, over twelve months, the period of initial membership.
Accordingly, the restatement resulted in a writedown of previously capitalized
and deferred costs and a corresponding increase in cardmember acquisition
expenses for the respective periods, indicative of the recent trend away from
the Company's utilization of an initial fee requirement and the growing practice
of no fee memberships. The impact of the restatement can be seen in Footnote 17
to the Consolidated Financial Statements.
STATEMENT PRESENTATION
The Company has included all non-capitalizable advertising expenses related to
membership acquisition as a separate line item on its income statement. Also
included on this separate line item is the amortization of capitalizable
advertising costs. Previously, the amortization had been netted against
membership and renewal fee income and all non-capitalizable advertising expenses
had been included in selling, general and administrative expenses. All periods
presented reflect this presentation.
NEW ACCOUNTING PRONOUNCEMENTS
i. Accounting for Stock-Based Compensation
On October 23, 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation (FAS "123"). This Statement applies to all transactions
in which an entity acquires goods or services by issuing equity instruments or
by incurring liabilities where the payment amounts are based on the entity's
common stock price. The Statement covers transactions with employees and
nonemployees and is applicable to both public and nonpublic entities. Entities
are allowed (1) to to continue to use the Accounting Principles Board Opinion
No. 25 (APB 25"), or (2) to adopt the FAS 123 fair value based method. Once the
method is adopted, an entity cannot change and the method selected applies to
all of an entity's compensation plans and transactions. For entities not
adopting the FAS 123 fair value based method, the disclosure requirements of FAS
123, including the pro forma information, are effective for financial statements
for fiscal years beginning after December 15, 1995. The pro forma disclosure are
to include all awards granted in fiscal years that begin after December 15,
1994. However, the disclosures, including the pro forma net income and earnings
per share disclosures, for the fiscal year beginning after December 15, 1994
will not be included in that year's financial statements, but will be included
in the following year-end financial statements if the first fiscal year is
presented for comparative purposes. Management has determined that it will
follow the accounting method for APB 25 for
- 3 -
<PAGE>
employees and that the effect of FAS 123 for non-employees is not significant.
FAS 123 was adopted by the Company as of October 1, 1996.
ii. Accounting for Transfers of Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 ("FAS 125"), "Accounting for Transfers of Servicing of
Financial Assets and Extinguishments of Liabilities." FAS 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on a financial-components
approach that focuses on control. FAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be prospectively applied. The Company believes that
the adoption of FAS 125 will have no impact on its financial statements.
RESULTS OF OPERATIONS (1996 VERSUS 1995)
Net sales for the fiscal year ended September 30, 1996 increased 16.7% to
$68,600,122 as compared to $58,792,454 for the year ended September 30, 1995.
The sales increase was due to an increased number of cardmembers and restaurants
available to cardmembers. Approximately ninety percent (90%) of all restaurants
listed in the directories published by the Company renew their contracts with
the Company after the initial amount of rights to receive meal credits purchased
by the Company is expended. In the second year of renewal, the Company renews
approximately 80% of those restaurants continuing in business. After the second
year, renewal rates drop sharply because the restaurants with the Company's help
have become successful and no longer REQUIRE THE COMPANY'S FINANCIAL AND
MARKETING RESOURCES, the Company chooses not to renew the restaurant or the
restaurant has gone out of business. However, offsetting this drop is the fact
that new restaurants start-up as old ones go out of business, providing the
Company with new restaurant prospects. The Company believes that in no area
where the Company operates is it close to restaurant or cardmember saturation.
At September 30, 1996, the average Rights to Receive balance per Company
restaurant participating was $9,220 versus $8,592 at September 30, 1995.
Membership and renewal fee income increased to $6,833,013, of which $1,164,883
was initial fee income in 1996 from $4,207,368, of which $835,151 was initial
fee income in 1995 as the result of an increased number of cardmembers, as well
as renewals.
In 1996, 7% of joining cardmembers paid a fee. The others joined under no-fee
programs. In 1995, the initial fee was waived 93% of the time. The renewal rates
in both 1996 and 1995 approximated 55% to 60%. Fee income is recognized over a
twelve-month period beginning in the month the fee is received. Continuing
franchise fee and royalty income decreased to $2,469,316 from $2,633,031. This
decrease resulted from the purchase by the Company of its Chicago franchisee on
July 1, 1995. As a result of the growth in the overall elements of revenue,
gross profits increased by $6,688,213 to $33,438,014 in 1996.
In 1996, selling, general and administrative ("SG&A") expenses increased by
$5,262,636, as compared to 1995, representing a 27.8% increase. In 1996, SG&A
expenses of a variable nature amounted to $11,170,000 (46.1% of total SG&A
expenses) versus $9,498,000 (50.1% of total SG&A expenses) in 1995. Main
components of SG&A expenses included sales salaries and
- 4 -
<PAGE>
commissions ($2,362,000 in 1996 versus $1,866,000 in 1995), bank processing fees
($3,433,000 in 1996 versus $2,834,000 in 1995), Rights to Receive loss expense
($2,075,000 in 1996 versus $2,332,000 in 1995) and salaries expense ($4,230,000
in 1996 versus $3,604,000 in 1995). The Company also incurred $801,000 of
expenses in 1996 associated with the start-up of new territories operated by the
Company compared with $268,000 in 1995.
In 1996, cardmember acquisition expenses were $4,456,435 versus $1,442,560 in
1995. Included in cardmember acquisition expenses was the amortization of
deferred advertising costs amounting to $1,164,865 in 1996 and $751,802 in 1995.
Costs capitalized in 1996 and 1995 were $969,129 and $1,012,740, respectively.
(See Footnote 1(e) to Consolidated Financial Statements.)
Operating income in 1996 was $4,756,552, a 25.0% decrease from $6,344,850 in
1995.
Other income, net of expense in 1996 was a net expense amounting to $650,000
versus net income of $534,000 in 1995, a difference of $1,184,000. Reasons for
the reduction included $736,000 more interest expense and financing costs in
1996 than 1995, $578,000 less initial franchise fee and license income in 1996
than 1995, $165,000 less in interest and other income in 1996 than 1995, and no
merger and acquisition expenses in 1996 versus $295,000 in 1995, which was
related to the Company's acquisition of its Chicago franchisee.
Earnings before taxes amounted to $4,106,572 in 1996 compared with $6,879,013 in
1995. The effective tax rate in 1996 was 38.0% versus 39.0% in 1995.
Net income was $2,546,072 or $.25 per share, versus $4,196,213 or $.42 per share
in 1995.
RESULTS OF OPERATIONS (1995 VERSUS 1994)
Net sales for the fiscal year ended September 30, 1995 increased 28.9% to
$58,792,454, as compared to $45,605,656 for the year ended September 30, 1994.
The sales increase was primarily due to an increased number of cardmembers and
restaurants available to cardmembers. Approximately ninety percent (90%) of all
restaurants listed in the directories published by the Company renew their
contracts with the Company after the initial amount of Rights to Receive meal
credits purchased by the Company is expended. In the second year of renewal, the
Company renews approximately 80% of those restaurants continuing in business.
After the second year, renewal rates drop sharply because the restaurants with
the Company's help have become successful and no longer REQUIRE THE COMPANY'S
FINANCIAL AND MARKETING RESOURCES, the Company chooses not to renew the
restaurant or the restaurant has gone out of business. However, offsetting this
drop is the fact that new restaurants start-up as old ones go out of business,
providing the Company with new restaurant prospects. The Company believes that
in no area where the Company operates is it close to restaurant or cardmember
saturation. At September 30, 1995, the average Rights to Receive balance per
Company restaurant participating was $8,592 versus $8,719 at September 30, 1994.
Membership and renewal fee income increased to $4,207,368, of which $835,151 was
initial fee income in 1995 from $2,769,618, of which $788,345 was initial fee
income in 1994 as the result of an increased number of cardmembers, as
- 5 -
<PAGE>
well as renewals. In 1995 and 1994, the initial fee was waived 93% and 90% of
the time, respectively. In April 1994 the Company ceased waiving renewal fees.
In 1994 prior to April, the Company waived renewal fees 35% of the time. The
renewal rate in 1995 and 1994 approximated 55% to 60%. Fee income is recognized
into income over a twelve-month period beginning in the month the fee is
received. Continuing franchise fee and royalty income increased to $2,633,031 in
1995 from $1,503,028 in 1994 as a result of the growth in the Company's
franchisees and the start-up of the licensees in the United Kingdom and
Australia. Commission income received by the company increased to $605,441 in
1995 from $405,054 in 1994. As a result of the growth in the overall elements of
revenue, gross profits increased by $6,938,391 to $26,749,801 in 1995.
In 1995, selling, general and administrative ("SG&A") expenses increased by
$4,910,504, as compared to 1994, representing a 34.9% increase. In 1995, SG&A
expenses of a variable nature amounted to $9,498,000 (50.1% of total SG&A
expenses) versus $6,540,000 (46.5% of total SG&A expenses) in 1994. Main
components of SG&A expenses included sales salaries and commissions ($1,866,000
in 1995 versus $1,147,000 in 1994), bank processing fees ($2,834,000 in 1995
versus $2,045,000 in 1994), Rights to Receive loss expense ($2,332,000 in 1995
versus $1,743,000 in 1994) and salaries expense ($3,604,000 in 1995 versus
$2,603,000 in 1994). The Company also incurred $268,000 of expenses in 1995
associated with the start-up of new territories operated by the Company.
In 1995 cardmember acquisition expenses were $1,442,560 versus $542,945 in 1994.
Included in cardmember acquisition expenses was the amortization of deferred
advertising costs amounting to $751,802 in 1995 and $303,590 in 1994. Costs
capitalized in 1995 and 1994 were $1,012,740 and $581,770, respectively. (See
Footnote 1(e) to Consolidated Financial Statements.)
Operating income in 1995 was $6,344,850, a 21.6% increase over the $5,216,578 in
1994.
Other income, net of expense in 1995 amounted to $534,163 compared to $1,757,093
in 1994. The reduction of $1,222,930 results from an $863,789 decrease in
initial franchise and license fee income, net of expenses in 1995. The Company
in 1994 had entered into a major license for Australia, New Zealand and the
right to sublicense Asia. In 1995, the Company incurred merger and acquisitions
costs amounting to $294,600 in connection with the acquisition of its Chicago
franchisee.
Earnings before taxes amounted to $6,879,013 in 1995 compared with 6,973,671 in
1994. The effective tax rate in 1995 was 39.0% compared with 40.1% in 1994.
Net income in 1995 was $4,196,213 or $.42 per share, versus $4,176,171 or $.42
per share in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $36,952,479 at September 30,
1996 from $23,263,096 at September 30, 1995. The Company's
rights-to-receive increased by $11,378,557 funded by an increase in the
use of the Company's line of credit, which
- 6 -
<PAGE>
increased by $13,000,000 to $15,000,000 at September 30, 1996 and was
subsequently refinanced in December 1996.
On June 30, 1995 the Company obtained a loan facility with NationsBank
of Florida ("NationsBank") under which it could borrow, at the bank's
prime rate of interest, up to Six Million Dollars ($6,000,000) until
May 15, 1996, and thereafter, up to Seven Million Five Hundred Thousand
Dollars ($7,500,000). On January 26, 1996, the loan facility was
amended and increased to Twenty Million Dollars ($20,000,000) and the
expiration date was changed to January 26, 1999; however, because of
the Company's asset securitization described below, the line of credit
terminated on December 24, 1996.
In December 1996, the Company entered into a revolving securitization
transaction to provide for additional liquidity, as well as a platform
for future growth, at a cost of funds lower than had been historically
available to it. The transaction structure, among other things,
isolated the securitized rights-to-receive beyond the reach of the
Company in the unlikely event of bankruptcy or receivership, thus
enabling characterization of the transferred assets as a true sale at
law and an "A" rating on the securities to be issued. The Company
believed that the transaction also allowed for derecognition of the
transferred rights-to-receive and treatment of the securitization as
off-balance sheet financing under generally accepted accounting
principles.
On December 24, 1995, the Company made an initial transfer of $33
million of its rights-to-receive to a special purpose corporation
("SPC"), an indirect wholly owned subsidiary of the Company, as part of
the revolving securitization. The rights-to-receive, which were sold to
the SPC without recourse, were in turn transferred to a limited
liability corporation (Issuer), which issued $33 million of fixed rate,
five-year term securities in a private placement to various third party
investors. In exchange for the rights-to-receive, which have a retail
value of $66 million before cardmember discounts, the Company will
receive approximately $32 million, after transactions costs, and a 1%
equity interest in the Issuer. Future excess cash flows, expected to be
generated from the securitized assets as the rights-to-receive are
exchanged for meals by Company CARDMEMBERS, are to be remitted to the
Company on a monthly basis as a return on capital from the Issuer.
Excess cash flows are determined after payments of interest to
noteholders and investors, as well as trustee and servicing fees.
During the five-year revolving period, the Issuer will be responsible
for ongoing purchase of rights-to-receive from the Company to ensure
that the initial pool of $33 million is continually replenished. It is
anticipated that the net revenue from securitized assets will be
received in approximately the same amount and within the same time
frame that such revenue would have been received had the secuitization
not taken place.
In March 1997, the Company was advised by the SEC staff that, while the
transfers of assets may be a true sale under applicable legal
principles, the second transfer of assets from the SPC to the Issuer
should not be characterized as a sale under applicable generally
- 7 -
<PAGE>
accepted accounting principles, thus precluding the derecognition of
the rights-to-receive and resulting in the presentation of the
transaction as secured non-recourse financing on the consolidated
balance sheet of the Company.
Assuming the December 24, 1996 securitization had been completed on
September 30, 1996 and that part of the proceeds was used to pay off
the Company's outstanding line-of-credit balance, the following
pro-forma condensed balance sheet is presented:
September 30, 1996
------------------
Original Pro-Forma
------------ -----------
Cash $ 3,603,409 $20,603,409
Rights-to Receive
Unrestricted 37,525,957 4,525,957
Securitized -- 33,000,000
Other current assets 4,545,339 4,545,339
------------ -----------
Total current assets 45,674,705 62,674,705
Non-current assets 8,839,550 9,839,550
------------ -----------
Total assets $54,515,255 $72,514,255
=========== ===========
Current liabilities 8,722,226 8,722,226
Line of credit 15,000,000 --
Secured non-recourse notes payable -- 33,000,000
Other non-current liabilities 5,039,131 5,039,131
------------ -----------
Total liabilities 28,761,357 46,761,357
Stockholders' equity 25,752,898 25,752,898
------------ -----------
Total liabilities and
stockholders' equity $54,514,255 $72,514,255
=========== ===========
On November 15, 1996, the Company entered into a purchase agreement
with The Western Transmedia Company, Inc. ("Western"), a franchisee of
the Company. Under the terms of the agreement, the Company reacquired
the right to operate its business in California, Oregon, Washington and
a portion of Nevada. In addition, the Company acquired Western's Rights
to Receive, and its furniture, fixtures and equipment. The purchase
price will approximate $7,750,00, of which $4,750,000 represents the
cost of the franchise. Closing of the proposed transaction occurred in
take place in January 1997.
Capital expenditures by the Company over the past three fiscal years
(approximately $7,062,105) have been due almost exclusively to the
Company's development and acquisition of computer hardware and software
necessary for the operation of the Cardmember Service Center. The
Company estimates that it will spend approximately $2,600,000 on
capital expenditures, consisting primarily of computer software in
fiscal year 1997.
- 8 -
<PAGE>
The Company believes that cash on hand at September 30, 1996, together
with cash generated FROM operations plus cash received from the
December 1996 securitization, (after paying off the Company's line of
credit) will satisfy the Company's total need for cash during the 1997
fiscal year.
The Company's inventory of Rights to Receive increased by $11,378,557
to a total of $37,525,957 at September 30, 1996. As noted above, the
Company sold approximately $33,000,000 of its Rights to Receive in a
securitization transaction in December 1996.
In many instances the Rights to Receive purchased by the Company are
secured by the furniture, fixtures and kitchen equipment of the related
restaurants as filed pursuant to the Uniform Commercial Code. The
Company also attempts to obtain personal guarantees from the restaurant
owners.
<TABLE>
<CAPTION>
Analysis of Rights to Receive
1996 1995 1994
- ---------------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
Rights to Receive, beginning of year $26,147,400 $17,472,712 $ 9,968,102
- ---------------------------------------- ---------------- ----------------- ---------------
Purchase of Rights to Receive 59,179,978 50,295,531 39,419,189
- ---------------------------------------- ---------------- ----------------- ---------------
Write-offs of Rights to Receive (2,654,863) (2,132,350) (1,442,633)
---------------- ----------------- ---------------
82,672,515 65,635,893 47,944,658
- ---------------------------------------- ---------------- ----------------- ---------------
Cost of sales 45,146,558 39,488,493 30,471,946
- ---------------------------------------- ================ ================= ===============
Rights to Receive, end of year $37,525,957 $26,147,400 $17,472,712
---------------- ----------------- ---------------
</TABLE>
Management of the Company believes that continued increase in the
number of restaurants which honor the Transmedia Card (and, therefore,
increases in the inventory of Rights to Receive purchased) is essential
to attract additional cardmembers, satisfy existing cardmembers and
continue the Company's revenue growth. Further, management believes
that the purchase of Rights to Receive can be funded generally from
cash on hand, from operations and from funds made available from future
securitizations.
Cash flow used in operating activities was $7,941,637 in fiscal year
ended September 30, 1996, compared with cash used in operating
activities of $843,422 and $1,526,902 in 1995 and 1994, respectively.
Cash is primarily used in purchasing Rights to Receive meal credits.
Management of the Company anticipates that the expenditure for the
purchases of Rights to Receive will continue to increase as the Company
expands the number of participating full service restaurants available
to its cardmembers.
Cash used in investing activities was $3,354,072 in the fiscal year
ended September 30, 1996, compared with $2,020,055 used in 1995 and
$1,860,978 used in 1994. Cash flow deficits from investing activities
were due primarily to the development and acquisition of computer
hardware and software necessary for the operation of the Company's
- 9 -
<PAGE>
Cardmember Service Center. Management believes that cash to be used in
investing activities in the fiscal year ended September 30, 1997 will
approximate $2,600,000.
Cash flow provided by financing activities was $12,628,796 for the
fiscal year ended September 30, 1996, compared with cash flows provided
by financing activities of $2,654,900 in 1995 and $861,734 in 1994. In
1996, the principal source of cash flow was from borrowings under the
Company's bank line of credit. In 1995, the principal source of cash
flow were from borrowings under the Company's bank line of credit and
from the exercise of options for common stock. In 1994, the principal
source of cash flow from financing activities was from the exercise of
options for common stock and the conversion of warrants.
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.
TRANSMEDIA NETWORK INC.
By: /s/ MELVIN CHASEN
-------------------------
Melvin Chasen, President
and Chief Executive Officer
Dated: May 2, 1997
- 10 -
