SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
Commission file number 1-13806
-------
TRANSMEDIA NETWORK INC.
-----------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 84-6028875
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
11900 BISCAYNE BOULEVARD, MIAMI, FLORIDA 33181
----------------------------------------------
(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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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 -------
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of December 21, 1998: $32,880,065.
-------------
Number of shares outstanding of Registrant's Common Stock, as of December 21,
1998: 12,831,245.
-----------
DOCUMENTS INCORPORATED BY REFERENCE:
None.
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Transmedia Network Inc. and subsidiaries' (the "Company") owns and markets
a charge card ("the Transmedia Card") offering savings to the Company's
card members on dining as well as lodging, travel, retail catalogues and
long distance telephone calls. The Company's primary business activity is
to acquire, principally through cash advances, the rights-to-receive food
and beverage credits at full retail value from restaurants
("Rights-to-receive"), which are then sold for cash to holders of the
Transmedia card. These Rights-to-receive are primarily purchased by the
Company for cash but may also be acquired in exchange for services.
The Company's areas of operation include Central and South Florida, the New
York, Chicago and Los Angeles metropolitan areas, Boston and surrounding
New England, Philadelphia, San Francisco, Detroit, Indianapolis, Milwaukee,
Denver, Phoenix, North and South Carolina, Georgia, parts of Tennessee and
Dallas/Ft Worth. Franchised areas include most of New Jersey, Washington,
D.C., Maryland, Virginia, and parts of Texas. Licensing arrangements exist
for the United Kingdom, Canada, and Europe, as well as the Asia-Pacific
region.
The Company derives income from franchising and licensing The Transmedia
Card and related proprietary rights and know-how, including rights to
solicit restaurants, hotels, resorts and motels and acquire food, beverage
and lodging credits, in the United States. The Company also receives
revenue from licensing The Transmedia Card and related proprietary rights
and know-how outside the United States. The Company no longer engages in
franchising.
CORPORATE STRUCTURE
The Company commenced operations in 1984 and was reincorporated as a
Delaware corporation in 1987. Currently, it has the following principal
operating subsidiaries:
/bullet/ Transmedia Restaurant Company Inc. which is responsible for
obtaining and servicing restaurants and other service
establishments such as hotels, resort destinations and retailers
where the Transmedia Card may be used.
/bullet/ Transmedia Service Company Inc., which is responsible for
soliciting and servicing all cardmembers in the United States,
for providing support services to Transmedia Restaurant Company,
and for all domestic franchising of The Transmedia Card and
related proprietary rights and know-how.
/bullet/ TMNI International Incorporated, which licenses the Transmedia
Card, service marks, proprietary software and know-how outside
the United States and, has licensed rights to Europe, Turkey, the
countries comprising the former Union of Soviet Socialist
Republics, Australia, New Zealand and the Asia-Pacific region, to
date.
/bullet/ TNI Funding I, Inc., which was established as a special purpose
corporation for purposes of the securitization of cash advances
to merchants referred to as rights-to-receive.
3
<PAGE>
DESCRIPTION OF RIGHTS TO RECEIVE AND THE TRANSMEDIA CARD
The Company's primary business is the acquisition of Rights to Receive from
participating establishments which are then sold for cash to holders of The
Transmedia Card. "Rights to Receive" are rights to receive goods and
services, principally food and beverages, which are acquired and purchased
from participating restaurants, for an amount equal to approximately fifty
percent (50%) of the food and beverage credits. Alternatively, the Company
may acquire such Rights to Receive either by financing the purchase of
other goods or services or providing advertising and media placement
services to the participating establishments. Approximately ninety-five
percent (95%) of Rights to Receive are purchased for cash. The Company
typically advances cash in amounts such that the food and beverage credits
acquired are anticipated to be utilized in a period of no more than six
months; however, it is not always possible for the Company to predict with
accuracy the amount of time in which such credits will be consumed, due to
seasonality or the opening of new market areas.
The Transmedia Card is selectively issued to applicants who are determined
to be creditworthy by virtue of their having a current, valid MasterCard,
Visa, Discover or American Express credit card or who are otherwise deemed
creditworthy by Company management. The Transmedia Cardmembers have a
choice of programs, including (i) a card which offers a 25% savings at
participating establishments for which there is a $49 annual fee, (ii) a
Turn Meals into Miles/registered trademark/ program which offers mileage
credits with Continental Airlines, US Airways and United Airlines of 10
miles for each dollar spent on food and beverage at participating
establishments for an annual fee of $9.95, and (iii) a "Free for Life"
Transmedia Card which affords them 20% savings at participating
establishments. Each account may have more than one user and, accordingly,
more than one cardmember. The Company has also offered a "family of
savings" concept through a silver and gold Transmedia Card program designed
to supplement the existing 25% savings on dining only fee program. Both
the silver and gold programs are fee based, offer 25% savings at
participating establishments and entitle the cardmember access to
additional benefits and savings at either no-cost or a reduced fee
depending upon the cardmembers' election. The silver program retails for
$29.95 and the gold program for $59.95.
In presenting The Transmedia Card, cardmembers sign for the goods or
services rendered, as well as for the taxes and tips, as they would with
any other charge card. The Company, upon obtaining the receipt (directly or
via electronic point of sale transmission) from the appropriate
establishment, gives the establishment credit against Rights to Receive
which are owned by the Company. The Company then (i) processes the receipt
through the cardmember's MasterCard, Visa, Discover or American Express
card account, which remits to the Company the full amount of the bill, and
(ii) credits to the cardmember's MasterCard, Visa, Discover or American
Express account the appropriate discount or credits to the cardmember's
airline account the appropriate mileage. Taxes and tips are not discounted
and such sums are remitted to the various establishments.
DOMESTIC FRANCHISING
In 1990, the Company commenced franchising The Transmedia Card (then known as
The Restaurant Card) and related proprietary rights and know-how, including
rights to solicit restaurants and acquire Rights to Receive, in the United
States, as part of an expansion strategy to develop a national presence. The
Company has determined that it will no longer offer franchises in the United
States and a number of the franchise territories have subsequently been
reacquired. At September 30, 1998, the Company's remaining franchises were in
the following territories: a large part of New Jersey, the Washington,
D.C./Baltimore, Maryland region, southern Virginia, and parts of Texas. The
Company has also granted a certain third party an option to acquire a franchise
for the State of Hawaii.
4
<PAGE>
In January 1997, the Company purchased certain of the assets of The Western
Transmedia Company, Inc., the Company's franchisee in the states of California,
Nevada, Oregon and Washington. In December 1997, the Company acquired the
Rights-to-Receive of East American Trading Company, its franchisee in the
Carolinas, Georgia and eastern Tennessee and terminated the franchise agreement.
In July 1998, the Company acquired the Rights-to-Receive and the right to
conduct business in the Dallas/Fort Worth franchise territory. In addition, the
Company has an option to acquire the remainder of the Texas franchise. The
Company now conducts the operations in all of these territories directly.
Each franchise sold by the Company is operated under a ten year franchise
agreement that is renewable for an additional ten-year term for all locations.
Each agreement provides that the Company will assist the franchisee with
marketing, advertising, training and other administrative support; relates to a
territory that contains a minimum number of full-service restaurants that accept
MasterCard, Visa, Discover or American Express credit cards; and licenses the
franchisee to use the Company's trademarks in connection with the solicitation
of new cardmembers (which is not restricted to the franchisee's territory) and
the purchase of Rights to Receive from restaurants in the territory granted to
the franchisee. The franchisee is responsible for, among other things,
soliciting cardmembers and participating establishments, purchasing Rights to
Receive from participating establishments in its territory, and maintaining
adequate insurance. In consideration for the grant of the franchise, the
franchisee pays to the Company (i) a one-time franchise fee which varies based
upon the number of full-service restaurants located within the territory granted
to the franchisee, and (ii) the following continuing fees during the term of the
franchise agreement: (A) 7 1/2% of the total meal credits used within the
franchisee's territory; (B) 2 1/2% of the total meal credits sold within the
franchisee's territory into the Company's advertising and development fund; (C)
a processing fee of $.20 per sales transaction from the franchisee's territory;
and (D) a monthly service charge of $1.00 per participating establishment in the
franchisee's territory.
U.S. LICENSING
In November 1995, the Company entered into a license arrangement under which a
licensee was authorized to solicit Rights to Receive from various types of
resorts, hotels and other entities. The territory covered by the license
agreement is the continental United States, excluding the State of Minnesota.
The term of this arrangement was ten years, with a potential renewal period of
ten years and under this arrangement, the Company compensated the licensee
through a commission. In December 1996, the Company terminated the license
agreement. (See Item 3).
NON-U.S. LICENSING
In 1993, the Company commenced licensing The Transmedia Card and related
proprietary rights and know-how outside the United States. The Company's
non-U.S. operations are conducted by its subsidiary, TMNI International
Incorporated. In 1993, the Company granted an exclusive, perpetual license to
Transmedia Europe, Inc. to establish the Company's business in Europe, Turkey
and the countries that formerly comprised the Union of Soviet Socialist
Republics. In 1994, the Company granted an exclusive perpetual license to
Transmedia Asia Pacific Inc. to establish the Company's business in Australia,
New Zealand and the Asia-Pacific region (such region covering approximately 16
major countries and areas including, among others, Japan, Hong Kong, Taiwan,
Korea, the Philippines and India). The licensee also took an option to purchase
a franchise for the State of Hawaii.
Both licenses are governed by a Master License Agreement which provides that,
among other things, (i) the licensees have the right to sublicense the rights
granted under the Master License Agreement to others within the territory,
provided that each such sublicense is approved by the Company, (ii) the Company
will assist the licensees with training relating to sales, administration,
technical and operations of the business, and (iii) the licensees are solely
responsible for developing its own market, paying its own expenses for
advertising and soliciting
5
<PAGE>
cardmembers and participating establishments in its territory. In consideration
for the licensees, the Company was paid initial fees aggregating $2,375,000,
received an equity interest in the licenses and the right to receive royalties
on gross dining volumes. In December 1996, Transmedia Europe Inc. amended the
sublicense it had granted for France and expanded the sublicensee's territory to
include Belgium and Luxemborg, Italy, Spain and Switzerland (other than the
German speaking area).
In December 1996, the Company entered into an agreement with Transmedia
Europe, Inc. and Transmedia Asia Pacific Inc. amending both of the licenses,
among other things, to permit the companies to be reorganized under one entity
and to allow them to acquire and operate worldwide the business of Countdown
plc., which conducts a discount savings program in Europe and, to a lesser
extent, in the United States. Upon closing of the Countdown acquisition, the
Company received $250,000 in cash and a $500,000 note bearing interest at 10%,
which was payable on April 1, 1998. The Company is in negotiations with its
licensee to reacquire the licenses for Transmedia Europe and Asia-Pacific,Inc.
At September 30, 1998, the licensee had not yet made payments on the note.
Given the uncertainty regarding resolution of this matter, the Company has
provided a reserve for the face value of the note and related accrued interest.
AREAS OF OPERATION
The Company's areas of operation include Central and South Florida, the New
York, Chicago and Los Angeles metropolitan areas, Boston and surrounding New
England, Philadelphia, San Francisco, Detroit, Indianapolis, Milwaukee, Denver,
Phoenix, North and South Carolina, Georgia, parts of Tennessee and Dallas/Forth
Worth. Franchised areas include most of New Jersey, Washington, D.C., Maryland,
Virginia and parts of Texas. Licensing arrangements exist for the United
Kingdom, Canada, and Europe, as well as the Asia-Pacific region.
PARTICIPATING RESTAURANTS AND CARDMEMBERS
As of September 30, 1998, directories published by the Company, which are
distributed to cardmembers six times a year, listed 7,274 restaurants available
to cardmembers, and The Transmedia Card was held by an aggregate of 1,203,080
cardmembers, comprised of 838,118 accounts with an average of 1.44 cardmembers
per account. The following table sets forth (i) the number of restaurants listed
in directories published by the Company and (ii) the number of cardmembers, as
of the fiscal years ended September 30, 1994 though 1998:
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Restaurants 7,274 7,087 6,974 5,330 3,628
- --------------------------------------------------------------------------------
Cardmembers 1,203,080 1,298,061 924,418 593,161 395,968
The increase in the number of restaurants listed in directories published by the
Company during the fiscal years ended September 30, 1994 through September 30,
1998, as indicated in the table, is attributable to the strategy of expanding
the Company from an East Coast regional operation to a national company. The
majority of all restaurants listed in the directories published by the Company
renew their contracts with the Company after the initial amount of rights to
receive is expended. At the second renewal, the Company retains approximately
eighty (80%) of those restaurants continuing in business. After the second
renewal, however, attrition tends to increase because the restaurants, with the
Company's help, have either become successful and no longer require the
Company's financial and marketing resources, the Company chooses not to renew
the restaurant, or the restaurant has gone out of business. Offsetting this drop
are new restaurants that sign on as old ones go out of business, and restaurants
that were formerly on the program that often re-sign as they further expand
and/or desire the program's benefits again. This provides the Company with a
continuous flow of new restaurant prospects. The Company believes that in no
area where the Company operates is it close to restaurant or cardmember
saturation. The number of cardmembers has increased 807,112 or 204% over the
same period, however during the most recent fiscal year, cardmembers declined by
approximately 95,000 or 7.3%. This net decrease was partially due to a planned
reduction in certain inactive members.
MARKETING
The Company markets The Transmedia Card through the use of advertising, direct
mail and through promotion with co-marketing partners such as banks and affinity
groups. Additionally, the Company periodically develops promotions such as
frequent dining rewards or additional seasonal discounts to help stimulate
utilization by existing cardmembers.
6
<PAGE>
Over the past three years, the Company's strategy for new cardmember acquisition
has focused to a large degree on the no-fee, 20% discount member. This strategy
was premised on the need to grow the cardmember base more rapidly, but also cost
effectively, in order to support the national expansion plans. While the fee
income was foregone, the cost per acquired member was lower and the margin on
dining transactions would be higher. While this strategy has been successful in
acquiring new members, it has also been the Company's experience that the no-fee
cardmembers annual spending and overall activity level is significantly lower
than the amount derived from the fee paying members. Accordingly, in the latter
part of fiscal 1998, the Company shifted its cardmember acquisition strategy to
focus predominantly on the fee paying, 25% discount members, using the no-fee,
lower discount approach only in large volume campaigns that have demonstrated
good spending patterns in the past. While fee based card acquisition is a more
expensive means of solicitation, the Company believes that the value proposition
to the member, appropriately conveyed and executed, will provide sufficient
response such that initial fees will be more than adequate to cover the cost of
acquisition and dining transactions from these new members will yield immediate
incremental margin.
EMPLOYEES
As of December 21, 1998, the Company employed 174 persons. The Company believes
that its relationships with its employees are good.
COMPETITION
The charge card business is highly competitive and the Company competes for both
cardmembers and participating merchants, such as restaurants, hotels and other
applicable service establishments. Competitors include discount programs offered
by major credit card companies, other companies that offer different kinds of
discount marketing programs and numerous small companies which offer services
which may compete with the services offered or to be offered by the Company. The
Company has experienced increased competition in its core dining business in
recent years as variations on the basic discount dining concept have been
introduced. Such variations include restricted usage programs and registered
credit card programs, as well as different levels of discounts and cash advances
to merchants. Certain of the Company's competitors may have substantially
greater financial resources and expend considerably larger sums than does the
Company for new product development and marketing. Further, the Company must
compete with many larger and better established companies for the hiring and
retaining of qualified marketing personnel. The Company believes that the unique
features of its program -- that The Transmedia Card can be used by cardmembers
at participating establishments with very few restrictions, that The Transmedia
Card provides substantial savings without the need for a cardmember to present
discount coupons when paying for a meal, and that participating establishments
are provided with cash in advance of customer charges -- contribute to the
Company's competitiveness and allow the Company to offer better value and
service to its cardmembers.
ITEM 2. PROPERTIES
The Company's present executive office consists of 14,546 square feet, located
in Miami, Florida, which the Company occupies pursuant to two lease agreements
expiring on February 28, 2002 and September 30, 1999. Both leases provide for a
total annual base rental of $294,750. The Company's Miami office also houses the
Company's cardmember service center. The Company leases 5,710 square feet of
office space in New York City. The lease, which expires on June 30, 2001,
provides for minimum annual rentals of $199,850. In addition, the Company has a
five year office lease in Philadelphia, Pennsylvania for approximately 1,641
square feet, which commenced October 1, 1998. The lease provides for a base
annual rent of $27,897 in the first three years, and $29,128 for the following
two years. In Boston, Massachusetts, the Company has a sixty-four month lease
with an option for a three-year renewal, for approximately 1,500 square feet,
which commenced May 1, 1995. The lease provides for base annual rentals of
7
<PAGE>
$29,400. In Chicago, the Company has a six year office lease for approximately
1,876 square feet, which commenced August 1, 1998. The lease provides for an
initial annual lease rental of $45,024 increasing by approximately 2% each year
thereafter. In Detroit, the Company leases an executive office for a
twelve-month period which began on May 1, 1998 for a total rental of $13,920. In
Tampa, the Company leases an executive office for a twelve-month period which
began on July 1, 1998 for a total rental of $9,493. In Phoenix, the Company
leases an executive office for a twelve-month period which began on February 1,
1998 for a total rental of $6,348. In Atlanta, the Company leases an executive
office for a six-month period which began on July 1, 1998 for a total rental of
$12,120. In Dallas, the Company leases an executive office for a five year
period which commenced November 1, 1998. The lease provides for base annual
rentals of $25,745. In San Francisco, the Company has a five-year lease which
commenced on May 15, 1998 for an initial annual lease rental of $40,128
increasing by approximately 5% each year thereafter. In Los Angeles, the Company
has a thirty seven month lease which commenced on February 1, 1998 for a base
annual rentals of $46,953.
ITEM 3. LEGAL PROCEEDINGS
In December 1996, the Company terminated its license agreement (the "Agreement")
with Sports & Leisure Inc. ("S&L"). In February 1997, S&L commenced an action
against the Company in the 11th Judicial Circuit, Dade County, Florida, alleging
that the Company improperly terminated the S&L license agreement and seeking
money damages. The Company has counterclaimed against S&L for breach of the
Agreement and intends to pursue the action vigorously. Management does not
expect the outcome of this case to have a material adverse impact on the
financial position, cash flows or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1998, no matters were submitted to a vote
of the security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME POSITION AGE
- ---- -------- ---
Gene M. Henderson Director, President and Chief 51
Executive Officer
James M. Callaghan Vice President; President of 59
Transmedia Restaurant Company Inc.
Stephen E. Lerch Executive Vice President and 44
Chief Financial Officer
Paul A. Ficalora Executive Vice President 47
of Transmedia Restaurant
Company Inc.
Gregory Borges Treasurer 62
Kathryn Ferara Secretary and Vice President of 42
Operations
Mr. Henderson was hired in October 1998 as President and Chief Executive Officer
of the Company. Previously, Mr. Henderson was President and Chief Executive
Officer of DIMAC Marketing, a full service direct marketing company based in St.
Louis.
Mr. Callaghan was elected Vice President of the Company and President of
Transmedia Restaurant Company Inc., a subsidiary, in 1994. He was also a
director of the Company from
8
<PAGE>
1991 to 1998. Mr. Callaghan joined the Company in 1989 and served as its
Executive Vice President, Vice President, Sales and Marketing and Treasurer.
Mr. Lerch was elected Executive Vice President and Chief Financial Officer of
the Company, as well as Vice President of TMNI International Incorporated,
Transmedia Restaurant Company Inc. and Transmedia Service Company Inc,
subsidiaries, in 1997. Previously, Mr. Lerch was a Partner at Coopers and
Lybrand LLP, where he worked from 1978 to 1997.
Mr. Ficalora was elected Executive Vice President of the Restaurant Company in
1994, having served as Vice President, Operations of the Company from 1992 until
1994, and Director of Franchise Sales from 1991 to 1992.
Mr. Borges was elected Treasurer of the Company in 1992. He joined the Company
in 1985 as Controller.
Mrs. Ferara was elected Secretary of the Company in 1992. She joined the Company
in 1989 as Office Manager and Assistant Secretary.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "TMN". The following table sets forth the high and low sale
prices for the common stock for each fiscal quarter ended from December 31, 1996
as reported on the New York Stock Exchange, as well as the dividends paid during
each such fiscal quarter.
The payment of dividends, if any, in the future, will depend upon, among
other things, the Company's earnings and financial requirements, as well as
general business conditions.
QUARTER ENDED LOW HIGH DIVIDEND PAID
------------- --- ---- -------------
December 31, 1996 4.750 7.125 .02
March 31, 1997 4.875 5.375 --
June 30, 1997 3.250 5.375 .02
September 30, 1997 3.250 4.186 --
December 31, 1997 3.813 6.313 .02
March 31, 1998 5.000 6.686 --
June 30, 1998 5.438 8.313 --
September 30, 1998 3.188 6.188 --
The aggregate number of holders of record of the Company's Common Stock
on December 21, 1998 was approximately 432.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
(THOUSANDS) EXCEPT PER SHARE DATA
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross dining sales $ 95,549 $ 101,301 $ 90,076 $ 78,632 $ 62,012
Net revenues from rights-to-receive 19,659 21,232 19,504 15,769 11,899
Membership and renewal fee income . 7,321 7,251 6,646 4,081 2,685
Franchise fee income 1,249 1,438 1,839 1,881 1,061
Other income 1,912 1,023 497 423 281
Total operating revenues 30,141 30,944 28,486 22,154 15,926
Total operating expenses 37,606 30,246 23,729 15,809 10,709
Operating income (7,465) 698 4,757 6,345 5,217
Income (loss) before taxes (10,436) (684) 4,107 6,879 6,974
Net income (loss) (7,836) $ (424) $ 2,546 $ 4,196 $ 4,176
========= ========= ========= ========= =========
Operating income (loss) per share
Basic and diluted (.63) .07 .46 .64 .53
Net income (loss)per share
Basic and diluted (.67) (.04) .25 .42 .42
BALANCE SHEET DATA:
Total assets 74,425 72,685 54,514 38,383 28,477
Long-term debt:
Recourse -- -- 15,000 2,000 --
Non-recourse 33,000 33,000 -- -- --
Stockholders' equity 27,734 25,304 25,753 24,191 18,925
Cash dividends per common share 0.02 0.02 0.04 0.04 0.04
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS (1998 VERSUS 1997)
Gross dining sales for the fiscal year ended September 30, 1998 decreased 5.7%
to $95,549 as compared to $101,301 for the year ended September 30, 1997. Lower
sales volume in the Company's larger, more established markets were only
partially offset by increased sales in new regions and reacquired franchises.
Sales volume in the New York metropolitan area and South Florida, two of the
Company's largest and most competitive markets, declined 17% and 19%,
respectively, compared to the prior year. Noticeable declines also occurred in
Philadelphia and Detroit. Factors driving the decline in dining sales were lower
spend per cardmember and lower overall utilization by the cardmember base.
Offsetting these decreases were higher sales volumes in other markets such as
Chicago, Denver, Phoenix, Wisconsin and Indiana. Gross dining sales associated
with the Carolinas, Georgia and Dallas/Fort Worth reacquired franchise
territories amounted to approximately $1,474 since their acquisition in 1998.
Cardmember accounts decreased 7.3% to 838,118 for the year and total cardmembers
at September 30, 1998 were 1,203,080 or 1.44 cardmembers per account. The net
decrease in accounts in fiscal 1998 is primarily due to the Company's policy of
proactively eliminating inactive no-fee accounts.
The total restaurants available to cardmembers remained fairly consistent
between years. At September 30, 1998, the Company had 7,274 restaurants listed
in its directories (7,087 at September 30, 1997), of which 5,495 were in
Company-owned sales territories and 757 were overseas. The increase in
Company-owned restaurants from 4,922 a year ago relates primarily to the
acquisition of the Carolinas, Georgia and Dallas/Fort Worth franchise
territories.
At September 30, 1998, the average Rights to Receive balance per participating
Company restaurant was $7,706 versus $8,198 at September 30, 1997.
Rights-to-Receive turnover for fiscal 1998 was 1.2, or 9.9 months on hand,
compared to 1.3, or 9.2 months on hand, in the prior year. The lower turnover is
attributable to the decreased sales volumes in New York and South Florida and an
increased investment in the California market place.
Cost of sales increased to 57.0% of gross dining sales from 56.3% a year
earlier. Provision for rights-to-receive losses, which are included in cost of
sales, amounted to 3,822 in 1998, compared to $3,209 in the prior year period.
Processing fees based on transactions processed remained constant as a
percentage of gross dining sales at 3.2% for 1998 and 1997. Cardmember discounts
as a percentage of sales remained stable.
Membership and renewal fee income slightly increased to $7,321, of which $701
was initial fee income in 1998, compared to $7,251, of which $670 was initial
fee income in 1997. Initial fee income remains lower, on a relative basis, due
to the continued marketing of the no-fee product in 1998 and does not yet
reflect the Company's new focus on marketing the 25% savings fee card. Fee
income is recognized over a twelve-month period beginning in the month the fee
is received. Cardholder membership fees are cancellable and refunded to
cardmembers, if requested, on a prorata basis based on the remaining portion of
the membership period.
Continuing franchise fee and royalty income decreased to $1,249 from $1,438.
This decrease resulted primarily from the purchase of the Carolinas, Georgia,
and Dallas/Fort Worth franchise territories in 1998.
Processing income relates to the Company's full service electronic processing
services that commenced during fiscal 1997 and comprises the sale or lease of
point-of-sale terminals to merchants, principally restaurants, as well as fees
received for serving as the merchants' processor for all of their credit card
transactions.
11
<PAGE>
Overall selling, general and administrative expenses increased $1,200 or 4.7%
over the prior year. As a percentage of gross dining usage, selling general and
administrative expenses were 28% in 1998 compared to 25.3% in 1997. The
principal components of the increase include salaries and related expenses
($8,189 in 1998 versus $7,923 in 1997), depreciation and amortization,
principally on the software development costs ($3,194 in 1998 versus $2,232 in
1997), office related expenses ($2,882 in 1998 versus $2,688 in 1997), and legal
($1,418 in 1998 versus $983 in 1997). Additionally, the acquisition of the
Carolina and Georgia franchise in December 1997, and the Dallas/Fort Worth
territory in July 1998, resulted in additional costs associated with
establishing these sales territories.
In 1998, cardmember acquisition expenses were $5,097 versus $4,650 in 1997.
Included in cardmember acquisition expenses is the amortization of deferred
acquisitions costs, which amounted to $701 in 1998 and $670 in 1997. Costs
capitalized in 1998 and 1997 were $1,184 and $446, respectively. The Company
used various techniques at different levels of cost to solicit new cardmembers.
Solicitation is accomplished through direct mail, telemarketing and the use of
affinity and loyalty programs with major metropolitan newspapers and
corporations. Third party and strategic marketing partners are often utilized on
either a fee per acquisition or activation basis or through wholesaling of the
fee based savings card. The card is also marketed as an enhancement or
additional benefit, on a co-branded basis or most frequently on a stand alone
basis. The mix of solicitation programs used has a direct correlation to the
overall acquisition cost per member and the spending profile of cardmembers
acquired. The Company seeks to employ the most cost effective means of acquiring
active and frequent users of the card.
The amended employment agreement and termination of the consulting agreement of
the Chief Executive Officer resulted in a one-time $3,081 charge in the first
quarter of 1998. Components included in the charge were a lump-sum cash payment
of $2,750, cancellation of indebtness of $135, and health insurance for the
remainder of his life. The after tax impact of the charge was approximately
$1,900. Also, the Company recorded a charge of $463 relating to the remaining
outstanding obligation under consulting agreements with former employees that
the Company has determined it no longer requires nor intends to utilize.
The continued lag in dining sales in California, reacquired from a former
franchise in January 1997, indicated that presently the undiscounted cash flows
from this former franchise are less than the carrying value of the excess of
cost over net assets acquired. Additional investments in both merchants and new
card members as well as expansion into new markets in the reacquired franchise
territory will be required to generate sales sufficient to realize the value of
the intangible asset. Accordingly, the Company recognized an asset impairment
loss of $2,169 ($.18 per share).
Operating loss in 1998 was $7,465, a $8,163 decrease from 1997.
Other income, net of expense in 1998 was a net expense amounting to $2,971
versus $1,382 in 1997, an increased expense of $1,589. The principal reasons for
the change included $449 additional interest expense and financing costs in
1998, as a result of the $33 million securitization and the write-down of $710
relating to the Company's international licensees. Offsetting these expenses was
a realized gain of $200 on securities available-for-sale
Earnings before taxes amounted to a loss of $10,436 in 1998 compared with loss
of $684 in 1997. The effective tax rate in 1998 and 1997 was 25% and 38.0%,
respectively. The change in the effective tax rate for fiscal 1998 reflects
the valuation reserve of $972 applied to the net deferred tax asset.
Net loss was $7,836 or $.67 per share in 1998, versus net income of $424 or $.04
per share in 1997.
12
<PAGE>
RESULTS OF OPERATIONS (1997 VERSUS 1996)
Gross dining sales for the fiscal year ended September 30, 1997 increased 12.5%
to $101,301 as compared to $90,076 for the year ended September 30, 1996. The
sales increase is attributable to an increased base of cardholders and the
acquisition of the Western Transmedia franchise in January 1997. Gross dining
sales associated with the Western Transmedia sales territories, principally Los
Angeles, Orange County and San Francisco, amounted to approximately $7,900 since
the acquisition in January 1997. Sales volume in the New York metropolitan area,
the Company's largest market, declined 10% compared to the prior year.
Offsetting this decrease were increases in other large markets such as Chicago,
Boston and Detroit, as well as in new markets such as Phoenix and Denver.
Overall, gross dining sales have not grown proportionately with the increase in
the cardmember base.
Cardmember accounts increased 42% to over 900,000 for the year and total
cardmembers at September 30, 1997 were 1,289,061 or 1.4 cardmembers per account.
While the introduction of a 20% discount, no-fee card in 1996 was very effective
in building a desired critical mass of cardmembers, the no fee cardholders, to
date, have not been as active as the traditional fee-paying cardmembers and
spending per account has decreased from prior years. The Company has instituted
a number of programs that make the card easier to both activate and use and to
stimulate more frequent usage. The initial results from the programs implemented
in the latter part of fiscal 1997, as measured in incremental sales, have been
positive, particularly the frequent dining rewards program. The Company intends
to continue to focus on activation and stimulation of its existing cardholder
base to better leverage its card solicitation investment.
The total restaurants available to cardmembers remained consistent between
years. At September 30, 1997, the Company had 7,087 restaurants listed in its
directories (6,974 at September 30, 1996), of which 4,922 were in Company-owned
sales territories and 876 were overseas. The increase in Company-owned
restaurants from 4,047 a year ago relates primarily to the acquisition of the
California franchise discussed above.
At September 30, 1997, the average Rights to Receive balance per participating
Company restaurant was $8,198 versus $9,220 at September 30, 1996.
Rights-to-receive turnover for fiscal 1997 was 1.3, or 9.2 months on hand,
compared to 1.415, or 8.5 months on hand, in the prior year. The lower turnover
relates to an increase in rights-to-receive in the California marketplace as
additional restaurants have been signed on in the reacquired franchise.
Additionally, the continued development of new markets such as Denver and
Phoenix traditionally take longer to achieve expected turnover. As markets
mature, however, additional cardmembers are acquired and dining usage tends to
stabilize at more predictable levels, allowing for more normal carrying amounts
of rights-to-receive.
Cardmember discounts as a percentage of sales declined to 22.7% from 23.8% in
the 1996 comparable period reflecting the continued growth of new memberships in
the 20% discount category. Provision for rights-to-receive losses, which are
included in cost of sales, amounted to $3,209 in 1997, compared to $2,075 in the
prior year period. Processing fees (i.e., the standard fees established by the
major credit card companies for which the Company is responsible for) based on
transactions processed, declined as a percentage of gross dining sales to 3.2%
from
13
<PAGE>
3.8% in the prior year reflecting economies of scale associated with higher
volume and the Company's quality initiatives.
Membership and renewal fee income increased to $7,251, of which $670 was initial
fee income in 1997, compared to $6,646, of which $1,165 was initial fee income
in 1996. The anticipated decline in initial fee income reflects the Company's
continued focus on marketing the 20% savings, no-fee card which was introduced
in 1996. Offsetting this decrease, however, were strong renewals of the 25%
savings, fee-based cardholders. 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 $1,438 from $1,839.
This decrease resulted primarily from the purchase of the California franchisee
in January 1997. On a same territory basis however, exclusive of California,
franchise dining sales increased 17% over the prior year.
Processing income relates to the Company's full service electronic processing
initiative and comprises the sale or lease of point-of-sale terminals to
merchants, principally restaurants, as well as fees received for serving as the
merchants' processor for all of their credit card transactions.
In 1997, selling, general and administrative expenses were significantly
impacted by the 40% net increase in the cardmember base and the related
increases in gross dining volume and other revenue items. The opening of new
territories in the latter part of fiscal 1996 and the acquisition of the
California franchise in January 1997 resulted in additional costs associated
with establishing five new sales territories. The Company also expanded its
support services infrastructure in fiscal 1997 to address gross dining sales
volume that now exceeds $100 million per year and a cardholder base of almost
1.3 million. Increased expenditures, principally personnel related costs, were
made in important functional areas such as cardmember services, merchant support
for credit card processing and marketing. Overall selling, general and
administrative expenses increased $6,323, or 32.8% over the prior year. As a
percentage of gross dining usage, selling general and administrative expenses
were 25.3% in 1997 compared to 21.4% in 1996. The principal components of the
increase include salaries and related expenses ($7,923 in 1997 versus $5,620 in
1996), depreciation and amortization, principally on the software development
costs ($2,232 in 1997 versus $1,163 in 1996), sales commissions ($2,457 in 1997
versus $1,672 in 1996), postage (2,878 in 1997 versus $2,524 in 1996), office
related expenses ($2,688 in 1997 versus $1,810 in 1996) and legal ($983 in 1997
versus $529 in 1996).
In 1997, cardmember acquisition expenses were $4,650 versus $4,456 in 1996.
Included in cardmember acquisition expenses is the amortization of deferred
advertising costs, which amounted to $670 in 1997 and $1,165 in 1996. Costs
capitalized in 1997 and 1996 were $446 and $969, respectively, again reflecting
the acquisition of fewer fee paying cardmembers and correspondingly, lower
initial fee income. The Company uses various techniques at different levels of
cost to solicit new cardmembers. Solicitation is accomplished through direct
mail, telemarketing and the use of affinity and loyalty programs with major
metropolitan newspapers, charitable and other not-for-profit organizations,
alumnae associations and corporations. Third party and strategic marketing
partners are often utilized on either a fee per acquisition or activation basis
or through wholesaling of the fee based savings card. The Company also generates
a significant amount of new cardmembers internally using its in-house business
development group as well as the sales force in the field. The card is marketed
as an enhancement or additional benefit, on a co-branded basis or most
frequently on a stand alone basis. The mix of solicitation programs used has a
direct correlation to the overall acquisition cost per member and the spending
profile of cardmembers acquired. The Company seeks to employ the most cost
effective means of acquiring active and frequent users of the card.
Operating income in 1997 was $698, a 85.0% decrease from $4,757 in 1996.
14
<PAGE>
Other income, net of expense in 1997 was a net expense amounting to $1,382
versus $650 in 1996, an increased expense of $732. The principal reasons for the
change included $1,719 additional interest expense and financing costs in 1997
as a result of a $33 million securitization transaction that closed in December
1996, offset by $750 of license income from the Company's international
licensees and a $401 increase in interest and other income in 1997.
Earnings before taxes amounted to a loss of $684 in 1997 compared with income of
$4,107 in 1996. The effective tax rate in 1997 and 1996 was 38.0%.
Net loss was $424 or $.04 per share in 1997, versus net income of $2,546 or $.25
per share in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $46,195 at September 30, 1998 from
$42,062 at September 30, 1997. This is due primarily to an increase in the
Company's rights-to-receive of $1,992 and an increase in other current assets of
$2,788.
On December 24, 1996, the Company made an initial transfer of $33 million of
rights-to-receive to a special purpose corporation ("SPC"), an indirect wholly
owned subsidiary, as part of a revolving securitization. The rights-to-receive,
which were sold to the SPC without recourse, were in turn transferred to a
limited liability corporation ("Issuer"), which issued $33 million of fixed rate
securities in a private placement to various third party investors.
In exchange for the rights-to-receive, which have a retail value of
approximately $66 million before cardmember discounts, the Company received
approximately $32 million, after transaction costs, and a 1% equity interest in
the Issuer. Future excess cash flows, expected to be generated from the
securitized assets as the rights-to-receive are exchanged for meals by Company
cardholders, are remitted to the Company on a monthly basis as a return on
capital from the Issuer. Excess cash flows are determined after payments of
interest to noteholders and investors, as well as trustee and servicing fees. 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 securitization not taken place.
Rights-to-receive currently held by the Issuer, as well as cash and certain
deposits restricted under the securitization agreement, have been separately
depicted in the consolidated balance sheet.
The private placement certificates have a five-year term before amortization of
principal and have an interest rate of 7.4%. During this revolving period, the
Issuer is responsible for the ongoing purchase of rights-to-receive from the
Company to ensure that the initial pool of $33 million is continually
replenished as the rights-to-receive are utilized by cardholders. It is
anticipated that replenishment of rights-to-receive will provide for a
continuous stream of additional net revenue throughout the period.
The Company's intention in executing the revolving securitization transaction
was to provide current liquidity, as well as a platform for future growth, at a
cost of funds lower than has historically been available to the Company. The
Company also has the ability to securitize additional tranches or pools of
rights-to-receive in the future at a more economical transaction cost should it
so desire.
The Company also has a $10 million line of credit with a bank to be used
principally to finance the purchase of rights-to-receive. This line of credit is
unsecured and may be drawn down based on an advance rate calculated as a
percentage of unrestricted rights-to-receive. The line of credit matures on
February 1, 1999 and bears interest at the prime rate with a LIBOR option. There
is presently nothing outstanding under the line.
15
<PAGE>
On March 4, 1998, the Company issued and sold 2.5 million common shares and
non-transferable warrants to purchase an additional 1.2 million common shares
for a total of $10,625 to affiliates of Equity Group Investments, Inc., a
privately held investment company. Net proceeds amounted to $9,825 after
transaction costs. The non-transferable warrants have a term of five years; one
third of the warrants are exercisable at $6.00 per share, another third are
exercisable at $7.00 per share and the third are exercisable at $8.00 per share.
As part of this strategic investment, Equity Group nominated and the
stockholders elected two candidates for the Board of Directors who joined three
of the Company's existing directors and two new independent directors.
Capital expenditures by the Company over the past three fiscal years
(approximately $8.9 million) 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 $2.6 million on capital expenditures, consisting primarily
of computer software in fiscal year 1999.
The Company believes that cash on hand at September 30, 1998, together with cash
generated from operations and the existing line of credit, if need be, will
satisfy the Company's operating capital needs during the 1999 fiscal year.
The Company's inventory of Rights to Receive increased by $1,992 to a total of
$42,347 at September 30, 1998.
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.
Analysis of Rights to Receive
1998 1997 1996
- --------------------------------------------------------------------------------
Rights to Receive, beginning of year $ 40,355 $ 37,526 $ 26,147
- --------------------------------------------------------------------------------
Purchase of Rights to Receive 53,625 56,244 59,181
- --------------------------------------------------------------------------------
Write-offs of Rights to Receive (3,550) (2,764) (2,655)
-------- -------- --------
90,430 91,006 82,673
- --------------------------------------------------------------------------------
Cost of Rights to Receive, included
in cost of sales 48,083 50,651 45,147
-------- -------- --------
- --------------------------------------------------------------------------------
Rights to Receive, end of year $ 42,347 $ 40,355 $ 37,526
======== ======== ========
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 and satisfy existing cardmembers. Further, management believes that
the purchase of Rights to Receive can be funded generally from cash on hand,
operations and the new line of credit, as well as from funds made available
through future securitizations.
Operating activities have resulted in either reduced cash generated from
operations or a net use of cash during the most recent three fiscal years,
principally due to the growth in rights-to-receive and in fiscal 1998, to fund
the operating loss sustained. Further expansion into new markets and planned
increases in existing markets could continue this trend depending on the rate of
growth management deems appropriate. As described in the preceding paragraph,
funds generated from operations, supplemented by the line of credit, if needed,
should be sufficient to fund such growth over the next twelve months.
Additionally, the Company's recent initiative to focus on acquiring fee paying
card members is expected to generate net positive cash flow in fiscal 1999.
16
<PAGE>
Cash used in investing activities was $3,407 in the fiscal year ended September
30, 1998, compared with $9,450 used in 1997 and $3,354 used in 1996. 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 Cardmember Service Center and the acquisition of the California,
Georgia and the North and South Carolina franchises. Management believes that
cash to be used in investing activities associated with capital expenditures in
the fiscal year ended September 30, 1999 will approximate $2,600.
Cash flows provided by financing activities was $8,353 for the fiscal year ended
September 30, 1998, compared with cash flows provided by financing activities of
$14,499 in 1997 and $12,629 in 1996. In 1998, the principal source of cash flow
was proceeds from the issuance of common stock in connection with the investment
by the Equity Group Investment, Inc. In 1997, the principal source of cash flow
was proceeds from the issuance of secured non-recourse notes relating to the
securitization. In 1996, the principal source of cash flow was from borrowings
under the Company's bank line of credit.
YEAR 2000
In 1998, the Company initiated a plan ("Plan") to identify, assess, and
remediate "Year 2000" issues within each of its computer programs and certain
equipment which contain micro-processors. The Plan is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and 2000, if a program or chip uses only two digits rather
than four to define the applicable year. The Company has divided the Plan into
six major phases-assessment, planning, validation, conversion, implementation
and testing. After completing the assessment and planning phase late this year,
the Company hired an independent consulting firm to validate the Plan. All
software development and installation effected in the past year is already in
compliance. The Company is working with an outside vendor on the conversion,
implementation and testing phases. Systems which have been determined not to be
Year 2000 compliant are being either replaced or reprogrammed, and thereafter
tested for Year 2000 compliance. The Plan anticipates that by June 1999 the
conversion, implementation and testing phases will be completed. The current
budget for the total cost of remediation (including replacement software and
hardware) and testing, as set forth in the Plan, is $500.
The Company is in the process of identifying and contacting critical suppliers
and customers whose computerized systems interface with the Company's systems,
regarding their plans and progress in addressing their Year 2000 issues. The
Company has received varying information from such third parties on the state of
compliance or expected compliance. Contingency plans are being developed in the
event that any critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial conditions. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or financial
conditions.
FORWARD-LOOKING STATEMENTS
The Company has made, and continues to make, various forward-looking statements
with respect to its financial position, business strategy, projected costs,
projected savings and plans and objectives of management. Such forward-looking
statements are identified by the use of forward-looking words or phases such as
"anticipates,""intends," "expects," "plans," "believes," "estimates," or words
or phases of similar import. Although the Company believes that its expectations
are based on reasonable assumptions within the bounds of its knowledge,
investors and prospective investors are cautioned that such statements are only
projections and that actual events or results may differ materially from those
expressed in any such forward-looking statements. The Company's actual
consolidated quarterly or annual operating results have been affected in the
past, or could be affected in the future, by factors, including, without
limitation, general economic, business and market conditions; relationships
with credit card issuers and other marketing partners; extreme weather
conditions; participating restaurants' continued acceptance of discount dining
programs and the availability of other alternative sources of capital to them.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F - 1
Financial Statements:
Consolidated Balance Sheets, F - 2
September 30, 1998 and 1997
Consolidated Statements of Income F - 3, 4
and Comprehensive Income/(Loss)
for each of the years in the three-year
period ended September 30, 1998
Consolidated Statements of Stockholders' F - 5
Equity for each of the years in the three-year
period ended September 30, 1998
Consolidated Statements of Cash Flows F - 6,7
for each of the years in the three-year
period ended September 30, 1998
Notes to Consolidated Financial Statements F - 8
Schedule II - Valuation and Qualifying Accounts F - 22
18
<PAGE>
[KPMG PEAT MARWICK LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders
Transmedia Network Inc.:
We have audited the accompanying consolidated balance sheets of Transmedia
Network Inc. and subsidiaries as of September 30, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transmedia Network Inc. and subsidiaries at September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
December 10, 1998
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
(in thousands)
ASSETS 1998 1997
------- -------
Current assets:
Cash and cash equivalents $ 4,632 $ 7,223
Restricted cash (note 4) 3,518 2,166
Accounts receivable, net 2,061 2,260
Rights-to-receive, net (note 4)
Unrestricted 7,909 5,110
Securitized and owned by Trust 34,438 35,245
Prepaid expenses and other current assets 5,067 2,279
------- -------
Total current assets 57,625 54,283
Securities available for sale, at fair value (note 5) 1,267 1,988
Equipment held for sale or lease, net (note 6) 988 981
Property and equipment, net (note 7) 6,832 7,275
Other assets 1,142 1,375
Restricted deposits and investments (note 4) 1,980 1,980
Excess of cost over net assets acquired and other
intangible assets(note 12) 4,591 4,803
Total assets $74,425 $72,685
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - rights-to-receive $ 4,181 $ 4,768
Accounts payable - trade 3,348 2,996
Accrued expenses and other 1,507 1,201
Deferred membership fee income 2,594 3,256
------- -------
Total current liabilities 11,630 12,221
Secured non-recourse notes payable (note 4) 33,000 33,000
Other long-term liabilities 2,061 2,160
------- -------
Total liabilities 46,691 47,381
------- -------
Commitments (notes 9, 14, 15, 17 and 18) -- --
Shareholders' equity (notes 9 and 10):
Preferred stock -- --
Common stock 258 204
Additional paid-in capital 21,496 10,635
Cumulative other comprehensive income 612 1,059
Retained earnings 5,368 13,406
------- -------
Total shareholders' equity 27,734 25,304
------- -------
Total liabilities and shareholders'equity $74,425 $72,685
======= =======
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For each of the years in the three-year period ended September 30, 1998
(in thousands, except income per share)
1998 1997 1996
---- ---- ----
Operating revenue:
Sales of rights-to-receive:
Owned by Company $ 5,566 23,189 90,076
Owned by Trust (note 4) 89,983 78,112 --
-------- -------- -------
Gross dining sales 95,549 101,301 90,076
Cost of sales 54,446 57,065 49,096
Cardmember discounts 21,444 23,004 21,476
-------- -------- -------
Net revenue from rights-to-receive 19,659 21,232 19,504
Membership and renewal fee income 7,321 7,251 6,646
Franchise fee income 1,249 1,438 1,839
Commission income 369 403 497
Processing income 1,543 620 --
-------- -------- -------
Total operating revenues 30,141 30,944 28,486
-------- -------- -------
Operating expenses:
Selling, general and administrative 26,796 25,596 19,273
expenses
Cardmember acquisition expenses 5,097 4,650 4,456
Amended compensation agreements 3,544 -- --
Asset impairment loss 2,169 -- --
-------- -------- -------
Total operating expenses 37,606 30,246 23,729
-------- -------- -------
Operating income (7,465) 698 4,757
Other income (expense):
Initial franchise fee and license (710) 740 30
fee income, net
Realized gains on sale of
securities available for sale 200 -- --
Interest and other income 560 450 172
Interest expense and financing cost (3,021) (2,572) (852)
-------- -------- -------
Income (loss) before income taxes (10,436) (684) 4,107
Income tax provision (benefit) (note 11) (2,600) (260) 1,561
-------- -------- -------
Net income (loss) $ (7,836) (424) 2,546
======== ======== =======
(Continued)
F-3
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME, CONTINUED
For each of the years in the three-year period ended September 30, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (7,836) (424) 2,546
-------- --------- ---------
Other comprehensive income
Unrealized holding gain (loss) on securities (607) 119 (989)
available -for-sale held at end of period
Beginning unrealized gain for all securities sold (114) -- --
Tax effect of unrealized gain (loss) 274 (45) 376
-------- --------- ---------
Comprehensive (loss) income $ (8,283) (350) 1,933
-------- --------- ---------
Operating income (loss) per common and common
equivalent share:
Basic and Diluted $ (.63) .07 .46
======== ========= =========
Net income (loss) per common and common
equivalent share:
Basic and Diluted $ (.67) (.04) .25
======== ========= =========
Weighted average number of common and common
equivalent shares outstanding:
Basic 11,773 10,166 10,121
======== ========= =========
Diluted 11,825 10,180 10,299
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the years in the three-year period ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------ ADDITIONAL OTHER
NUMBER PAID-IN COMPREHENSIVE RETAINED
OF SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
--------- ------ ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 10,119 202 10,513 1,598 11,878 24,191
Net income -- -- -- -- 2,546 2,546
Exercise of stock options 8 -- 34 -- -- 34
Dividend -- -- -- -- (405) (405)
Cumulative other comprehensive income, net -- -- -- (613) -- (613)
------- ------- ------- ------- ------- -------
Balance, September 30, 1996 10,127 202 10,547 985 14,019 25,753
Net loss -- -- -- -- (424) (424)
Exercise of stock options 63 2 64 -- -- 66
Income tax benefit related to stock -- -- 24 -- -- 24
option plan
Dividend -- -- -- -- (189) (189)
Cumulative other comprehensive income, net -- -- -- 74 -- 74
------- ------- ------- ------- ------- -------
Balance, September 30, 1997 10,190 $10,635 1,059 13,406 25,304
204
Net loss -- -- -- -- (7,836) (7,836)
Issuance of common stock 2,674 53 10,797 -- -- 10,850
Exercise of stock options 12 1 54 -- -- 55
Income tax benefit related to stock -- -- 10 -- -- 10
option plan
Dividend -- -- -- -- (202) (202)
Cumulative other comprehensive income, net -- -- -- (447) -- (447)
------- ------- ------- ------- ------- -------
Balance, September 30, 1998 12,876 258 21,496 612 5,368 27,734
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three-year period ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,836) (424) 2,546
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 5,346 2,232 1,163
Amortization of deferred financing
cost 278 158 --
Provision for losses on
rights-to-receive 3,822 3,209 2,075
Gain on sale of investments (200) -- --
Deferred income taxes (1,980) (256) 304
Changes in assets and liabilities:
Accounts receivable 199 357 (845)
Rights-to-receive (6,148) (6,055) (13,603)
Prepaid expenses and other current
assets (457) 886 (131)
Other assets (381) (372) (1,175)
Accounts payable 554 242 1,073
Income taxes receivable (payable) (378) (791) (330)
Accrued expenses and other 306 232 (255)
Deferred membership fee income (662) (847) 1,236
------- ------- -------
Net cash used in operating
activities (7,537) (1,429) (7,942)
------- ------- -------
Cash flow from investing activities:
Additions to property and equipment (2,066) (3,443) (3,354)
Excess of cost over net assets acquired
and other intangible assets (1,541) (5,017) --
Proceeds from sale of securities
available for sale 200 -- --
Increase in restricted deposits and
investments -- (990) --
------- ------- -------
Net cash used in investing
activities (3,407) (9,450) (3,354)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of secured
non-recourse notes -- 31,978 --
Net borrowings (repayments) on revolving
line of credit -- (15,000) 13,000
Net proceeds from issuance of common
stock 9,854 -- --
Increase in restricted cash (1,352) (2,166) --
Conversion of warrants and options for
common stock, net of tax benefits 65 90 34
Dividends paid (202) (403) (405)
------- -------
Net cash provided by
financing activities 8,353 14,499 12,629
------- ------- -------
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in
cash $(2,591) 3,620 1,333
Cash and cash equivalents:
Beginning of year 7,223 3,603 2,270
------- ------- -------
End of year $ 4,632 7,223 3,603
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 2,454 2,219 580
======= ======= =======
Income taxes $ 23 764 1,382
======= ======= =======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Noncash investing and financing activities:
At September 30, 1998, 1997 and 1996, the Company adjusted its available
for sale investment portfolio to fair value resulting in a net
(decrease) increase to Shareholders' equity of ($447), $74 and ($613),
net of deferred income taxes.
At September 30, 1996, dividends payable of $214, is recorded as accrued
expenses. There is no dividend payable outstanding as of September 30,
1998 and 1997.
The acquisition of the rights-to-receive and cancellation of the franchise
of East American Trading Company, for 170,000 shares of common stock,
was recorded during the first quarter of fiscal year 1998 as follows:
Fair value of assets acquired:
Rights-to-receive $ 267
Excess of cost over net assets acquired 740
---------
Net assets acquired $ 1,007
=========
The acquisition of the West Coast franchisee in fiscal year 1997 (see Note
12) was recorded as follows:
Fair value of assets acquired:
Rights-to-receive $ 2,659
Other assets 45
Excess of cost over net assets acquired 5,017
---------
7,721
Less: Cash paid 7,454
Liabilities assumed $ 267
=========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Transmedia Network Inc. and subsidiaries' (the "Company") owns and
markets a charge card ("the Transmedia Card") offering savings to the
Company's card members on dining as well as lodging, travel, retail
catalogues and long distance telephone calls. The Company's primary
business activity is to acquire, principally through cash advances,
the rights-to-receive food and beverage credits at full retail value
from restaurants ("Rights-to-receive"), which are then sold for cash
to holders of the Transmedia card. These Rights-to-receive are
primarily purchased by the Company for cash but may also be acquired
in exchange for services.
The Company's areas of operation include Central and South Florida,
the New York, Chicago and Los Angeles metropolitan areas, Boston and
surrounding New England, Philadelphia, San Francisco, Detroit,
Indianapolis, Milwaukee, Denver, Phoenix, North and South Carolina,
Georgia, parts of Tennessee and Dallas/Ft Worth. Franchised areas
include most of New Jersey, Washington, D.C., Maryland, Virginia, and
parts of Texas. Licensing arrangements exist for the United Kingdom,
Canada, and Europe, as well as the Asia-Pacific region.
Transmedia Network Inc.'s corporate structure consists of three
wholly owned subsidiaries: Transmedia Restaurant Company Inc.,
functions as the sales organization and is responsible for merchant
acquisition and relationship management; TMNI International
Incorporated is responsible for all foreign licensing; and Transmedia
Service Company Inc., is responsible for all card member-related
facets of the business, including the card member service center,
domestic franchising, and support services to Transmedia Restaurant
Company. In 1997, TNI Funding I, Inc. was established as a special
purpose corporation as part of the securitization discussed in note
4. TNI Funding I, Inc. is a wholly owned subsidiary of Transmedia
Service Company, Inc. All intercompany accounts and transactions have
been eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are instruments with original maturities at
the date of purchase of three months or less.
(c) RIGHTS-TO-RECEIVE
Rights-to-receive ("Rights") are composed primarily of food and
beverage credits acquired from restaurants. Rights are stated at the
gross amount of the commitment to the establishment (approximately 50
percent of the retail value of Rights obtained). Accounts
payable-rights-to-receive represent the unfunded portion of the total
commitments. Cost is determined by the first-in, first-out method.
The Company reviews the realizability of the Rights on a periodic
basis and provides for anticipated losses on Rights-to-receive from
restaurants that have ceased operations or whose credits are not
utilized by cardholders. These losses are offset by recoveries from
restaurants previously written off.
(d) SECURITIES AVAILABLE FOR SALE
All of the Company's investment are available to be sold in response
to the Company's liquidity needs and asset-liability management
strategies, among other reasons. Investments available-for-sale on
the balance sheet are stated at fair value. Unrealized gains and
losses are excluded from earnings and are reported in a separate
component of shareholders' equity (cumulative other comprehensive
income), net of related deferred income taxes.
F-8
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A decline in the fair value of an available-for-sale security below
cost that is deemed other than temporary results in a charge to
income, resulting in the establishment of a new cost basis for the
security. All declines in fair values of the Company's investment
securities in 1998 and 1997 were deemed to be temporary.
Dividends are recognized when earned. Realized gains and losses are
included in earnings and are derived using the
specific-identification method for determining the cost of securities
sold.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property
and equipment used in the business is calculated on the straight-line
method over an estimated useful life of five years. Amortization of
leasehold improvements is calculated over the shorter of the lease
term or estimated useful life of the asset.
Equipment held for sale or lease consists primarily of electronic
terminals used for credit card processing and is stated at cost.
Depreciation is calculated on a straight-line basis over a three-year
life.
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired has resulted primarily from
the acquisition of franchise territories (see note 12) and is
amortized on a straight line basis over the expected periods to be
benefited, generally 20 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(g) DEFERRED MEMBERSHIP AND RENEWAL FEE INCOME
Initial membership and renewal fees are billed in advance and
amortized on a straight-line basis over 12 months, which represents
the standard cardholder's membership period. Membership fees are
cancelable and are refunded to cardmembers, if requested, on a
prorata basis based on the remaining portion of the membership
period.
Certain costs of acquiring cardmembers are deferred and amortized, on
a straight-line basis over 12 months. The acquisition costs
capitalized as assets by the Company represent initial fee-paying
member acquisition costs resulting from direct-response campaign
costs that are recorded as incurred. Campaign costs include
incremental direct costs of direct-response advertising, such as
printing of brochures, campaign applications and mailing.Such costs
are deferred only to the extent of initial membership fees generated
by the campaign.
Card member acquisition expenses represent the cost of acquiring
cardmembers and consist primarily of direct-response advertising
costs incurred in excess of fees received and amortization of
previously deferred costs and costs associated with soliciting no-fee
cardmembers.
F-9
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(h) REVENUE RECOGNITION
Gross dining sales represent the retail value of the
rights-to-receive that are recognized when cardmembers use the
Transmedia Card at a dining establishment.
Continuing franchise fee revenue represents royalties calculated as a
percentage of the franchisees' sales and is recognized when earned.
Initial franchise fees and license fees are recognized when material
services or conditions relating to the sale of the franchise have
been substantially performed.
Commission income represents income earned on discounted products and
services provided by third parties to the Company's cardholders. Such
services consist of retail catalogues, phone cards and travel
services.
(i) COST OF SALES AND CARDMEMBER DISCOUNTS
Cost of sales is composed of the cost of rights-to-receive sold,
related processing fees and provision for rights-to-receive losses.
Cardmember discount represents the specific discount given to
cardmembers whenever the Transmedia Card is used.
(j) INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(k) STOCK BASED COMPENSATION
In fiscal 1997, the Company adopted the disclosure only provision of
Statement of Financial Accounting Standards ("SFAS") No.123,
"Accounting for Stock-Based Compensation." The Company continues to
account for its stock compensation arrangements using the intrinsic
value method in accordance with Accounting Principles Board ("APB")
Opinion No.25, "Accounting for Stock Issued to Employees."
(l) INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic income or (loss) per share is based on the weighted average
number of common shares outstanding during the period presented.
Diluted income or (loss) per share is computed using the weighted
average number of common and dilutive common equivalent shares
outstanding in the periods, assuming exercise of options and warrants
calculated under the treasury stock method, based on average stock
market prices at the end of the periods.
F-10
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(m) COMPREHENSIVE INCOME
On October 1, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all
changes in shareholders' equity except for changes in equity
resulting from transactions with shareholders in their capacity as
shareholders. The Company's other comprehensive income presently
consists of net unrealized holding (losses) gains on investments
available for sale. Total comprehensive (loss) income were ($8,283),
($350) and $1,933 for the years ended September 30, 1998, 1997 and
1996, respectively. The Statement also requires the separate
presentation of the accumulated balance of comprehensive income other
than net earnings in the consolidated balance sheets.
(n) RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
(o) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) INVESTMENT BY EQUITY GROUP INVESTMENTS, INC.
On March 4, 1998, the Company sold 2.5 million new-issued common shares
and non-transferable warrants to purchase an additional 1.2 million common
shares for a total of $10,625 to affiliates of Equity Group Investments,
Inc., a privately held investment company. Net proceeds amounted to $9,825
after transaction costs. The non-transferable warrants have a term of five
years; one third of the warrants are exercisable at $6.00 per share,
another third are exercisable at $7.00 per share and the final third are
exercisable at $8.00 per share. As part of this strategic investment,
Equity Group nominated and the stockholders elected two candidates to the
Board of Directors who joined three of the Company's existing directors
and two new independent directors.
(3) AMENDED COMPENSATION AGREEMENTS
On December 29, 1997, the Company and Melvin Chasen, former Chairman of
the Board, Chief Executive Officer and President, agreed to amend his
employment agreement and to terminate his consulting agreement. As part of
the agreement, Mr. Chasen agreed to a five year non-compete and
confidentiality agreement with the Company and relinquished his right to
receive $1 million in the event of the sale of a control block of stock,
as described in Note 2 above. Pursuant to this agreement, the Company made
a cash payment of $2.75 million to Mr. Chasen and recognized a one-time
pre-tax charge of $3.1 million in the quarter ending December 31, 1997.
During 1998, the Company entered into consulting agreements with certain
former senior management personnel. These agreements required these
personnel to perform services at the Company's request for a period not to
exceed more than one year. The Company has determined that it no longer
requires, nor intends to utilize the service of these individuals, and has
recorded a charge of $463 relating to these remaining outstanding
obligations under the consulting agreements.
F-11
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) SALE OF RIGHTS-TO-RECEIVE
On December 24, 1996, the Company made an initial transfer of $33 million
of rights-to-receive to a special purpose corporation ("SPC"), an indirect
wholly owned subsidiary, as part of a revolving securitization. The
rights-to-receive, which were sold to the SPC without recourse, were in
turn transferred to a limited liability corporation ("Issuer"), which
issued $33 million of fixed rate securities in a private placement to
various third party investors.
In exchange for the rights-to-receive, which have a retail value of
approximately $66 million before cardmember discounts, the Company
received approximately $32 million, after transaction costs, and a 1%
equity interest in the Issuer. Future excess cash flows, expected to be
generated from the securitized assets as the rights-to-receive are
exchanged for meals by Company cardholders, are remitted to the Company on
a monthly basis as a return on capital from the Issuer. Excess cash flows
are determined after payments of interest to noteholders and investors, as
well as trustee and servicing fees. 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 securitization not taken place. Rights-to-receive currently held
by the Issuer, as well as cash and certain deposits restricted under the
securitization agreement, have been separately depicted in the
consolidated balance sheet.
The private placement certificates have a five-year term before
amortization of principal and have an interest rate of 7.4%. During this
revolving period, the Issuer is responsible for the ongoing purchase of
rights-to-receive from the Company to ensure that the initial pool of $33
million is continually replenished as the rights-to-receive are utilized
by cardholders. It is anticipated that replenishment of rights-to-receive
will provide for a continuous stream of additional net revenue throughout
the period.
The Company's intention in executing the revolving securitization
transaction was to provide current liquidity, as well as a platform for
future growth, at a cost of funds lower than has been historically
available to the Company. This was accomplished by, among other things,
isolating the rights-to-receive beyond the reach of the Company or its
creditors in the event of bankruptcy or other receivership through a
transfer of assets that constitutes a true sale at law.
(5) SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of marketable equitable securities
that are recorded at fair value and have an aggregate basis of $280 as of
September 30, 1998 and 1997. Gross unrealized gains were $1,030, $1,774
and $1,750 and gross unrealized losses were $43, $66 and $161 as of
September 30, 1998, 1997 and 1996, respectively. Realized gains were $200
for the year ended September 30, 1998. There were no realized gains in
1997 and 1996. Deferred income taxes associated with the net unrealized
gains were $375, $649 and $604 at September 30, 1998, 1997 and 1996,
respectively.
(6) EQUIPMENT HELD FOR SALE OR LEASE
Equipment held for sale and lease consists primarily of electronic
terminals used for credit card processing. The cost of the terminals on
hand is determined on a first in, first out basis. The amount presented on
the balance sheet represents the net book value of terminals after
reduction
F-12
<PAGE>
for terminals sold and accumulated depreciation of $490 and $172 on
terminals under lease at September 30, 1998 and 1997.
(7) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
----------------------
1998 1997
---- ----
Furniture and fixtures $ 651 644
Office equipment 11,993 10,463
Leasehold improvements 135 131
--------- ---------
12,779 11,238
Less accumulated depreciation
and amortization (5,947) (3,963)
--------- ---------
$ 6,832 7,275
========= =========
Depreciation and amortization expense for the years ended September 30,
1998, 1997 and 1996 was $2,711, $1,812 and $1,153, respectively.
(8) FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The fair value of cash and cash equivalents, restricted cash,
accounts receivable, rights-to-receive, securities available for sale,
accounts payable and notes payable approximate the carrying amounts at
September 30, 1998 and 1997. The fair value of the rights-to-receive is
based upon the sale described in note 2. The fair value of the securities
available for sale is based upon quoted market prices for these or similar
instruments.
(9) STOCK OPTION PLANS
In March 1996, the 1996 Long-Term Incentive Plan (the "1996 Plan") was
approved for adoption by the
F-13
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company's stockholders as a successor plan to the 1987 Stock Option and
Rights Plan (the "1987 Plan") the 1996 Plan was amended August 5, 1998 to
allow for non-employee directors to choose to take directors fees in either
cash or a current or deferred stock award. In addition, the amount of
shares available for grant under the 1996 Plan was increased to 1,505,966.
Under the 1996 Plan, the Company may grant awards, which may include stock
options, stock appreciation rights, restricted stock, deferred stock, stock
granted as a bonus or in lieu of other awards, dividend equivalents and
other stock based awards to directors, officers and other key employees and
consultants of the Company. Stock options granted under the 1996 Plan may
not include more than 505,966 incentive stock options for federal income
tax purposes. The exercise price under an incentive stock option to a
person owning stock representing more than 10 percent of the common stock
must equal at least 110 percent of the fair market value at the date of
grant. Options are exercisable beginning not less than one year after date
of grant. All options expire either five or ten years from the date of
grant and each becomes exercisable in installments of 25 percent of the
underlying shares for each year the option is outstanding, commencing on
the first anniversary of the date of grant.
At September 30, 1998, there were 1,000,641 shares available for grant
under the 1996 Stock Plan. The per share weighted average fair
value of stock options granted during 1998 and 1997 was approximately
$4.95 and $2.63 on the date of grant using the Black-Scholes
option-pricing model with the following assumption: 1998-no expected
dividend yield, risk-free interest rate of 5.25%, and expected lives
ranging from five to ten years; 1997-expected dividend yield is 4%,
risk-free interest rate or 5.8%, and expected lives ranging from five to
ten years.
The Company has continued to comply with APB No.25 to account for stock
options and accordingly, no compensation expense has been recognized in
the financial statements. Had the Company determined compensation expense
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1998 1997 1996
---- ---- ----
Net Income
As reported $(7,836) $(424) $2,546
Pro forma (8,919) (719) 2,365
Net Income per Common and
Common Equivalent Share
As reported (.67) (.04) .25
Pro forma (.76) (.06) .24
The full impact of the calculation of compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation expense is reflected over the
option's vesting period which could be up to five years. Also, the
provisions of SFAS 123 apply to grants awarded subsequent to December 15,
1994.
F-14
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Stock option activity during the periods indicated is as follows:
INCENTIVE STOCK NONQUALIFIED
OPTIONS OPTIONS
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Balance at September 30, 1996 586,373 $ 9.82 421,250 $ 5.23
Granted 206,800 4.52 - -
Exercised (26,156) 3.88 (168,748) 3.88
Cancellations (57,049) 9.3 (5,002) 11.37
------- ------- -------- ------
Balance at September 30, 1997 709,968 8.54 247,500 6.02
------- ------- -------- ------
Granted 364,500 5.16 - -
Exercised (23,250) 4.38 - -
Cancellations (279,550) 9.72 (112,500) 7.44
------- ------- -------- ------
Balance at September 30, 1998 771,668 $ 6.57 135,000 $ 4.83
======= ======= ======== ======
At September 30, 1998, the range of weighted average exercise prices and
remaining contractual life of outstanding options was $4.38 to $15.00 and
1 to 10 years, respectively.
At September 30, 1998 and 1997, the number of options exercisable was
630,918 and 635,718 and the weighted-average exercise price of those
options was $6.99 and $8.29, respectively.
(10) SHAREHOLDERS' EQUITY
The Company has 1 million authorized shares of preferred stock, $.10 par
value per share; none of which has been issued.
The Company has 20 million authorized shares of common stock, $.02 par
value per share; with 12,876,206 and 10,189,956 issued and outstanding at
September 30, 1998 and 1997, respectively.
F-15
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) INCOME TAXES
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1998
and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Reserve for rights-to-receive losses $ 394 $ 298
Travel programs and reserve for frequent
flyer miles obligation 78 252
Charitable contributions 65 72
Net operating loss carryforward 1,610 -
Consulting charges 234 -
Intangible assets 864 34
Other 557 19
---------- ----------
Gross deferred tax assets 3,802 675
Less valuation allowance (972) -
---------- ----------
Deferred tax assets 2,830 675
---------- ----------
Deferred tax liabilities:
Unrealized gain on securities available for sale 375 649
Deferred acquisition costs 229 47
Property and equipment 467 474
---------- ----------
Deferred tax liabilities 1,071 1,170
---------- ----------
Net deferred tax asset (liability) 1,759 (495)
========== ===========
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The valuation allowance at
September 30, 1998 was $972. There was no valuation allowance for deferred
tax assets as of September 30, 1997. The increase/(decrease) in deferred
tax liability related to securities available for sale was ($274) and $45
during 1998 and 1997, respectively.
A net operating loss carryforward of $4,237 was generated during the year
(net of carryback). The loss will expire in 2018.
Income tax provision (benefit) for the years ended September 30, 1998,
1997 and 1996 is as follows:
CURRENT DEFERRED TOTAL
------- -------- -----
1998:
U.S. federal $ (587) (1,774) (2,361)
State and local (33) (206) (239)
----------- ------ ------
$ (620) (1,980) (2,600)
=========== ====== ======
F-16
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1997:
U.S. federal $ (4) (206) (210)
State and local - (50) (50)
----------- ------ ------
$ (4) (256) (260)
=========== ====== ======
1996:
U.S. federal $ 922 336 1,258
State and local 335 (32) 303
----------- ------ ------
$ 1,257 304 1,561
=========== ====== ======
Reconciliation of the statutory federal income tax rate and the Company's
effective rate for the years ended September 30, 1998, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ------------------------
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------ ----------- ------ ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Federal tax rate $(3,548) 34.0 $ (232) 34.0 $ 1,396 34.0%
State and local
taxes, net
of federal
income tax
benefit (417) 4.0 (33) 4.8 200 4.9
Valuation allowance
change 972 (9.3) -- -- -- --
Other 393 (3.8) 5 (0.8) (35) (0.9)
------- ---- ------- ---- ------- ----
$(2,600) 24.9% $ (260) 38.0% $ 1,561 38.0%
======= ==== ======= ==== ======= ====
</TABLE>
(12) FRANCHISE AGREEMENTS
The Company, as franchiser, had previously entered into various ten-year
franchising agreements to assist in its national expansion. In accordance
with these agreements, franchisees were granted a territory with a defined
minimum of full-service restaurants that accept certain major credit
cards. The Company continues to develop trademarks for itself and the
system of franchisees and, in addition, provides marketing, advertising,
training and other administrative support.
The franchisees are responsible for soliciting restaurants and
cardholders, advancing consideration to the restaurants to obtain
rights-to-receive food and beverage credits, and maintaining adequate
insurance.
In consideration for granting the franchises, the franchisees paid the
Company initial franchise fees and an initial fee to the Company's
advertising and development fund. Continuing fees to be paid by the
franchisees are as follows:
/bullet/ 7.5 percent of the total food and beverage credits used within
the franchisee's territory.
/bullet/ 2.5 percent of the total credits used within the franchisee's
territory to be deposited into the advertising and development
fund.
F-17
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
/bullet/ A processing fee of twenty cents per sale transaction.
/bullet/ A weekly service charge of twenty-three cents per
participating restaurant in the franchisee's territory.
There were no franchise territories sold during 1998, 1997 and 1996.
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 for cash
the right to operate its business in California, Oregon, Washington and a
portion of Nevada, Western's rights-to-receive and its furniture, fixtures
and equipment, as well as the assumption of certain obligations. The
transaction closed on January 2, 1997. The purchase price was
approximately $7,454 of which $4,750 represented the cost of the
franchise, which has been recorded as the excess of cost over net assets
acquired. The Company had previously received 60,000 shares of publicly
traded common stock in connection with the initial sale of this franchise,
representing 2.3 percent of the franchisee's common stock. The shares are
included in securities available for sale. In addition, a director of the
Company owns 6.5 percent of the franchisee's common stock.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company recorded an impairment loss on the
excess of cost over net assets acquired relating to the purchase of the
Western Transmedia franchise. Lagging performance in the reacquired sales
territories indicated that the undiscounted cash flows from this former
franchise would be less than the carrying value of the long-lived assets
related to the franchise. Accordingly, on September 30, 1998, the Company
recognized an asset impairment loss of $2,169 ($.18 per share). This loss
is the difference between the carrying value of the related excess of cost
over net assets acquired and the fair value of the asset based on
discounted estimated future cash flows.
On December 4, 1997, the Company acquired all the rights-to-receive of,
and the right to conduct business in East America Trading Company, its
franchisee in the Carolinas and Georgia, and terminated and canceled the
franchise agreement in exchange for 170,000 shares of Transmedia Network
stock. The Company assumed operational control of these sales territories.
On July 15, 1998, the Company acquired all the rights-to-receive of the
Dallas/Fort Worth sales territory from its franchisee, the Texas
Restaurant Card, Inc. The purchase price was approximately $1,758 of which
$1,541 represented the cost of the franchise, which has been recorded as
the excess of cost over net assets acquired. The Company assumed
operational control of the territory and has an option to acquire the
remaining territories in the franchise.
(13) LICENSE AGREEMENTS
The Company has an agreement for exclusive perpetual licenses of its
software and trademark in the Asia-Pacific region and the continent of
Europe. In accordance with the agreements, the Company agreed to assist
the licensees with training relating to sales, administration, technology
and operations of the business. All material services or conditions
relating to the license sales have been substantially performed or
satisfied by the Company. The licensee may grant sublicenses in the
territories and is responsible for the operations of the business in the
respective regions, including procuring member restaurants and providing
related services and activities throughout the territory.
In consideration for granting the exclusive licenses, the licensee paid
the Company license fees
F-18
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
aggregating $2,375 for the master license agreements and has granted to
the Company a five percent equity interest in the new entities which will
operate in the United Kingdom, Australia and New Zealand. The shares
comprising the equity interests are included in securities available for
sale. Continuing fees to be paid by the licensee are as follows:
/bullet/ 25 percent of any amounts that the licensee receives from any
sublicensee within the territory, other than Australia, New
Zealand and the United Kingdom. Such amounts shall include,
but not be limited to, royalty payments, transfer fee payments
and up-front sublicense fee payments. The portion of the
up-front sublicense fee paid to the Company shall not be less
than $250, unless otherwise agreed to by the Company, and in
no event less than $500, for each of the People's Republic of
China and Japan.
/bullet/ Royalty of two percent of gross sales of the Australia and New
Zealand sublicensee and the United Kingdom sublicensee, and 25
percent of any other amounts that the licensee receives from
the sublicensee.
In December 1996, the Company amended its agreements with its
international licensees, Transmedia Europe, Inc. and Transmedia
Asia-Pacific, Inc. permitting them to acquire, on a worldwide basis, the
business of Countdown, plc Holding Corp. ("Countdown"). Upon closing of
the Countdown acquisition, the Company received $250 in cash and a $500
note bearing interest at 10%, which was payable on April 1, 1998.
The Company is in negotiations with its licensee to reacquire the licenses
for Transmedia Europe and Asia-Pacific, Inc. To date, the Company has not
received payment on either the aforementioned note receivable or certain
outstanding royalty obligations. At September 30, 1998, the Company has
provided a reserve of $710 relating to the note and accrued interest.
(14) LEASES
The Company leases certain equipment and office space under long-term
lease agreements.
Future minimum lease payments under noncancelable operating leases as of
September 30, 1998 are as follows:
YEAR ENDING
SEPTEMBER 30, AMOUNT
------------- ------
1999 $ 729
2000 685
2001 529
2002 252
2003 122
Thereafter 40
----------
Total minimum lease payments $ 2,357
==========
Rent expense charged to operations was $710, $625, and $387 for the years
ended September 30, 1998, 1997 and 1996, respectively.
F-19
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(15) COMMITMENTS
On July 14, 1995, the Company entered into an unconditional guaranty
agreement with a financial institution, to extend credit in the amount of
$450 to a franchisee, which agreement is still outstanding at September
30, 1998.
The Company has amended its employment agreement with the president of its
wholly owned subsidiary, Transmedia Reastaurant Company. The agreement
provides for salary at an annual rate of $335 through September 30, 2001,
plus eligibility for a bonus up to 50% of his salary.
(16) LINE OF CREDIT
The Company maintains a line of credit with a bank for $10 million to be
used principally to finance the purchase of rights-to-receive. This line
of credit is unsecured and may be drawn down based on an advance rate
calculated as a percentage of unrestricted rights-to-receive. The line of
credit matures on February 1, 1999 and bears interest at the prime rate
with a LIBOR option.
(17) YEAR 2000
The Company has initiated a plan ("Plan") to identify, assess, and
remediate "Year 2000" issues within each of its computer programs and
certain equipment which contain micro-processors. The Plan addresses the
issue of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and 2000, if a program or chip uses only
two digits rather than four to define the applicable year. The Company has
divided the Plan into six major phases-assessment, planning, validation,
conversion, implementation and testing. After completing the assessment
and planning phase earlier this year, the Company hired an independent
consulting firm to validate the Plan. All software development and
installation effected in the past year is already in compliance. The
Company is working with an outside vendor on the conversion,
implementation and testing phases. Systems which have been determined not
to be Year 2000 compliant are being either replaced or reprogrammed, and
thereafter tested for Year 2000 compliance. The Plan anticipates that by
June 1999 the conversion, implementation and testing phases will be
completed. The current budget for the total cost of remediation (including
replacement software and hardware) and testing, as set forth in the Plan,
is $500.
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing their
Year 2000 issues. The Company has received varying information from such
third parties on the state of compliance or expected compliance.
Contingency plans are being developed in the event that any critical
supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's operations, liquidity and financial conditions. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's operations, liquidity or financial conditions.
F-20
<PAGE>
TRANSMEDIA NETWORK INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(18) BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the New York City,
California, Massachusetts and Florida areas. No single customer accounted
for more than 5 percent of the Company's sales in any fiscal year
presented.
No single restaurant's rights-to-receive balance was greater than 5
percent of the total rights-to-receive balance at September 30, 1998 or
1997.
(19) LITIGATION
In December 1996, the Company terminated its license agreement (the
"Agreement") with Sports & Leisure Inc. ("S&L"). In February 1997, S&L
commenced an action against the Company in the 11th Judicial Circuit, Dade
County, Florida, alleging that the Company improperly terminated the S&L
license agreement and seeking money damages. The Company has
counterclaimed against S&L for breach of the Agreement and intends to
pursue the action vigorously. Management does not expect the outcome of
this case to adversely impact the financial position of the Company.
(20) SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------------ -------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross dining sales: 24,091 23,661 24,761 23,036 95,549
Operating revenue: 7,244 7,556 7,664 7,677 30,141
Operating income(loss): (4,263) (245) (165) (2,792) (7,465)
Net income: (4,739) (502) (490) (2,105) (7,836)
Basic and diluted
earnings per share: (.37) (.04) (.04) (.21) (.67)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
------------------------------------------------------ ------------- -------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1998 1997 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross dining sales: $ 26,507 25,640 26,473 22,681 101,301 90,076
Operating revenue: 8,982 7,702 7,283 6,977 30,944 28,486
Operating income: 855 118 (271) (4) 698 4,757
Net Income: 183 184 (587) (204) (424) 2,546
Earnings per share: .02 .02 (.06) (.02) (.04) .25
</TABLE>
F-21
<PAGE>
TRANSMEDIA NETWORK, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For each of the years in the three-years ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
BALANCE, CHARGED BALANCE,
BEGINNING TO END OF
OF YEAR EXPENSES WRITE-OFFS YEAR
------- -------- ---------- ----
<S> <C> <C> <C> <C>
Accounts receivable:
Year ended September 30, 1998:
Allowance for doubtful accounts $ 15 497 (497) 15
======= ====== ====== =====
Year ended September 30, 1997:
Allowance for doubtful accounts $ 15 501 (501) 15
======= ====== ====== =====
Year ended September 30, 1996:
Allowance for doubtful accounts $ 15 425 (425) 15
======= ====== ====== =====
Rights to receive:
Year ended September 30, 1998:
Allowance for doubtful accounts $ 765 3,822 (3,550) 1,037
======= ====== ====== =====
Year ended September 30, 1997:
Allowance for doubtful accounts $ 320 3,209 (2,764) 765
======= ====== ====== =====
Year ended September 30, 1996:
Allowance for doubtful accounts $ 900 2,075 (2,655) 320
======= ====== ====== =====
</TABLE>
F-22
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is set forth under the heading
"Executive Officers of the Registrant" in Part I hereof and in "Election
of Directors" in the Company's 1998 Proxy Statement, which is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is set forth under the heading
"Executive Compensation" in the Company's 1998 Proxy Statement, which is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1998 Proxy Statement, which is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 is set forth under the heading
"Certain Relationships and Related Transactions" in the Company's 1998
Proxy Statement, which is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) Financial Statements:
Transmedia Network Inc.
See "Index to Financial Statements" contained in Part II,
Item 8.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits
DESIGNATION DESCRIPTION
- ----------- -----------
2.1 Assignment and Assumption of Franchise Agreements dated September 30,
1994 between Transmedia Network Inc. and the Service Company.(1)
2.2 Capital Contribution dated September 30, 1994 by Transmedia Network Inc.
to the Service Company.(1)
19
<PAGE>
2.3 Trademark Contribution dated September 30, 1994 from Transmedia Network
to the Service Company.(1)
2.4 Capital Contribution dated September 30, 1994 from Transmedia Network
Inc. to the Restaurant Company.(1)
2.5 Administrative Services Agreement dated as of September 30, 1994 between
Transmedia Service Company Inc. and Transmedia Restaurant Company
Inc.(1)
2.6 Franchise Agreement dated September 30, 1994 between Transmedia Service
Company Inc. and Transmedia Restaurant Company Inc.(1)
3.1 Certificate of Incorporation of the Company, as amended.(2)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company.(9)
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on March 22,
1994.(1)
3.4 By-Laws of the Company.(3)
10.2 1987 Stock Option and Rights Plan, as amended.(1)(10)
10.3 Form of Stock Option Agreement (as modified) between the Company and
certain Directors.(13)
10.4 Amended and Restated Employment Agreement dated as of November 15, 1996
between the Company and Melvin Chasen.(12)
10.5 Amended and Restated Consulting Agreement dated as of November 15, 1996
between the Company and Melvin Chasen.(12)
10.6 Employment Agreement effective April 1, 1992 between the Company and
James Callaghan.(9) (10)
10.7 Amendment dated October 1, 1994, to Employment Agreement between the
Company and James Callaghan.(1)(10)
10.8 Employment Agreement dated as of October 1, 1995 between the
Company and Barry Kaplan. (10)(12)
10.9 Amendment dated January 20, 1997 to Employment Agreement between Company
and James Callaghan (10)
10.10 Amendment dated January 20, 1997 to Employment Agreement between Company
and Barry Kaplan (10)
10.11 Master License Agreement dated December 14, 1992 between the Company and
Conestoga Partners, Inc.(8)
10.12 First Amendment to Master License Agreement dated April 12, 1993,
between the Company and Conestoga Partners, Inc.(9)
20
<PAGE>
10.13 Second Amendment to Master License Agreement -- Assignment and
Assumption Agreement dated August 11, 1993 among the Company, TMNI
International Incorporated and Transmedia Europe, Inc.(9)
10.14 Master License Agreement Amendment No. 3 dated November 22, 1993 between
TMNI International Incorporated and Transmedia Europe, Inc.(9)
10.15 Master License Agreement dated March 21, 1994 between TMNI International
Incorporated and Conestoga Partners II, Inc. licensing rights in the
Asia Pacific region.(1)
10.16 Agreement, dated as of December 6, 1996, among the Company, TMNI
International Incorporated, Transmedia Europe Inc. and Transmedia Asia
Pacific Inc.(12)
10.17 Agreement, dated as of November 15, 1996 between the Company and The
Western Transmedia Company Inc.(12)
10.18 Stock Purchase and Sale Agreement, dated as of November 6, 1997, among
Transmedia Network Inc., Samstock, L.L.C., and Transmedia Investors,
L.L.C. (14)
10.19 Form of Warrant to purchase Common Stock (14)
10.20 Investment Agreement, dated as of November 6, 1997, among Transmedia
Network Inc., Samstock, L.L.C., and Transmedia Investors, L.L.C. (14)
10.21 Agreement Among Stockholders Agreement, dated as of November 6, 1997,
among Transmedia Network Inc., Samstock, L.L.C., Transmedia Investors,
L.L.C., Melvin Chasen and Iris Chasen (14)
10.22 Stockholder Cooperation Agreement, dated as of November 6, 1997, among
Transmedia Investors, L.L.C., Samstock, L.L.C. and Melvin Chasen and
Iris Chasen. (14)
10.23 Security Agreement dated as of December 1, 1996 among TNI Funding
Company I, L.L.C. as Issuer, The Chase Manhattan Bank as Trustee and as
Collateral Agent, TNI Funding I, Inc., as Seller and Transmedia Network
Inc., as Servicer. (13)
10.24 Purchase Agreement dated as of December 1, 1996 among Transmedia Network
Inc., Transmedia Restaurant Company Inc., Transmedia Service Company
Inc. and TNI Funding I, Inc., as Purchaser. (13)
10.25 Purchase and Servicing Agreement dated as of December 1, 1996 among TNI
Funding Company I, L.L.C., as Issuer, TNI Funding I, Inc. as Seller,
Transmedia Network Inc., as Servicer, Frank Felix Associates, Ltd., as
Back-up Servicer and The Chase Manhattan Bank, as Trustee. (13)
10.26 Indenture dated as of December 1, 1996 between TNI Funding Company I,
L.L.C., as Issuer and The Chase Manhattan Bank, as Trustee. (13)
10.27 Comerica Bank and Transmedia Network Inc., Transmedia Restaurant Company
Inc., TMNI International Incorporated, Transmedia Service Company Inc.,
- $10,000,000.00 Line of Credit. (13)
10.28 Letter of Agreement dated January 29, 1997 between Company and Stephen
E. Lerch.(13)
10.29 Transmedia Network Inc. 1996 Long Term Incentive Plan (including
amendments through August 5, 1998).
21.1 Subsidiaries of Transmedia Network Inc.(1)
21
<PAGE>
23.1 Consent of Independent Auditors.(13)
27.1 Financial Data Schedule
99.1 Prospectus of the Company dated July 10, 1992 filed pursuant to the
Securities Act of 1933.(5)
99.2 Prospectus of the Company dated August 12, 1992 filed pursuant to the
Securities Act of 1933.(6)
99.3 Form of Subscription Agreement.(7)
99.4 Agency Agreement dated April 9, 1992 between the Company and Janney
Montgomery Scott Inc.(8)
99.5 Warrant Purchase Agreement dated June 15, 1992 between the Company and
Janney Montgomery Scott.(8)
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1988, and incorporated by
reference thereto.
(3) Filed as an exhibit to the Post Effective Amendment to the
Registration Statement on Form S-1 (Registration No. 33-5036),
and incorporated by reference thereto.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1990, and incorporated by
reference thereto.
(5) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (Registration No. 33-494460), and incorporated by
reference thereto.
(6) Filed as an exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 33-49374), and incorporated by
reference thereto.
(7) Filed as an exhibit to the Company's Form 8-K Current Report
dated June 15, 1992, and incorporated by reference thereto.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1992, and incorporated by
reference thereto.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993, and incorporated by
reference thereto.
(10) Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K
pursuant to Item 14(c) hereof.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 and incorporated by
reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996, and incorporated by
reference.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997, and incorporated by
reference
22
<PAGE>
(14) Filed as an exhibit to the Company's Current Report on Form 8-K
as of November 6, 1997
(b) The Company did not file any Form 8-K Current Reports during the
fourth quarter of the fiscal year ended September 30, 1998.
(c) Exhibits:
See paragraph (a) (3) above for items filed as exhibits to this
Annual Report on Form 10-K as required by Item 601 of Regulation
S-K.
(d) Financial Statement Schedules:
See paragraphs (a)(1) and (a)(2) above for financial statement
schedules and supplemental financial statements filed as part of
this Annual Report on Form 10-K.
<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 Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
December, 1998.
TRANSMEDIA NETWORK INC.
By: /s/ STEPHEN E. LERCH
------------------------
Name: Stephen E. Lerch
Title: Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant, Transmedia Network Inc., in the capacities and on the dates indated.
CAPACITY IN
SIGNATURE WHICH SIGNED DATE
--------- ------------ ----
/s/ F. PHILIP HANDY Chairman of the Board December 29, 1998
- ----------------------
F. Philip Handy
/s/ GENE M. HENDERSON Director December 29, 1998
- ---------------------- President and
Gene M. Henderson Chief Executive Officer
/s/ ROD DAMMEYER Director December 29, 1998
- ----------------------
Rod Dammeyer
/s/ MELVIN CHASEN Director December 29, 1998
- ----------------------
Melvin Chasen
/s/ GEORGE WIEDEMANN Director December 29, 1998
- ----------------------
George Wiedemann
/s/ JACK AFRICK Director December 30, 1998
- ----------------------
Jack Africk
23
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.29 Transmedia Network Inc. 1996 Long Term Incentive Plan
(including amendments through August 5, 1998).
27.1 Financial Data Schedule
EXHIBIT 10.29
TRANSMEDIA NETWORK INC.
1996 LONG-TERM INCENTIVE PLAN
(including amendments through August 5, 1998)
l. PURPOSE. The purpose of this 1996 Long-Term Incentive Plan (the
"Plan") of Transmedia Network Inc., a Delaware corporation (the "Company"), is
to advance the interests of the Company and its stockholders by providing a
means to attract, retain, and reward directors, officers and other key employees
and consultants of the Company and its subsidiaries (including consultants
providing services of substantial value) and to enable such persons to acquire
or increase a proprietary interest in the Company, thereby promoting a closer
identity of interests between such persons and the Company's stockholders.
2. DEFINITIONS. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents, and Other
Stock-Based Awards, are set forth in Section 6 of the Plan. Such awards,
together with any other right or interest granted to a Participant under the
Plan, are termed "Awards." For purposes of the Plan, the following additional
terms shall be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust, or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under this Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust, or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) A "Change in Control" shall be deemed to have occurred if:
(i) any person (as defined in Sections 3(a)(9) and 13(d)(3) of
the Exchange Act), other than the Company or an employee benefit plan of
the Company, acquires directly or indirectly the beneficial ownership
(within the meaning of Rule 13d-3 promulgated pursuant to the Exchange
Act) of any voting security of the Company and immediately after such
acquisition such person is, directly or indirectly, the beneficial owner
of voting securities representing 50 percent or more of the total voting
power of all of the then-outstanding voting securities of the Company;
(ii) the individuals (A) who constitute the Board as of the date
this Plan is adopted by the Board (the "Original Directors") or (B) who
thereafter are elected to the Board and whose election, or nomination
for election, to the Board was approved by a vote of at least two-thirds
(2/3) of the Original Directors then still in office (such directors
becoming "Additional Original Directors" immediately following their
election) or (C) who are elected to the Board and whose election, or
nomination for election, to the Board was approved by a vote of at least
two-thirds (2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also becoming "Additional
Original Directors" immediately following their election) (such
individuals being the "Continuing Directors"), cease for any reason to
constitute a majority of the members of the Board;
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
<PAGE>
any such transaction if stockholder approval is not sought or obtained,
other than any such transaction which would result in at least 75
percent of the total voting power represented by the voting securities
of the surviving entity outstanding immediately after such transaction
being beneficially owned (within the meaning of Rule 13d-3 promulgated
pursuant to the Exchange Act) by at least 75 percent of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., 50 percent or more of the total assets of the
Company).
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
(f) "Committee" means the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan;
provided, however, that to the extent necessary to comply with Rule 16b-3, the
Committee shall consist of two or more directors, each of whom is a
"disinterested person" within the meaning of Rule 16b-3.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time. References to any provision of the Exchange Act shall be
deemed to include rules thereunder and successor provisions and rules thereto.
(h) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee, provided, however, that if the Stock is listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Stock on a given date shall be based upon the last
sales price or, if unavailable, the average of the closing bid and asked prices
per share of the Stock on such date (or, if there was no trading or quotation in
the Stock on such date, on the next preceding date on which there was trading or
quotation) as provided by one of such organizations.
(j) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(k) "Non-Employee Director" shall mean a member of the Board who is not
otherwise an employee of the Company or any subsidiary.
(l) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(m) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(n) "Stock" means the Common Stock, $.02 par value, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 4.
- 2 -
<PAGE>
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. Except as otherwise provided below, the
Plan shall be administered by the Committee. The Committee shall have full and
final authority to take the following actions, in each case subject to and
consistent with the provisions of the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
such person;
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions
of any Award granted under the Plan (including, but not limited to, any
exercise price, grant price, or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating
to transferability or forfeiture, exercisability, or settlement of an
Award, and waivers or accelerations thereof, and waivers of or
modifications to performance conditions relating to an Award, based in
each case on such considerations as the Committee shall determine), and
all other matters to be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price of an Award
may be paid, in cash, Stock, other Awards, or other property, or an
Award may be cancelled, forfeited, or surrendered;
(v) to determine whether, to what extent, and under what
circumstances cash, Stock, other Awards, or other property payable with
respect to an Award will be deferred either automatically, at the
election of the Committee, or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary
or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement, or other instrument
hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem
necessary or advisable for the administration of the Plan.
Other provisions of the Plan notwithstanding, the Board shall perform the
functions of the Committee for purposes of granting awards to directors who
serve on the Committee (subject to Section 8), and may perform any function of
the Committee under the Plan for any other purpose, including without limitation
for the purpose of ensuring that transactions under the Plan by Participants who
are then subject to Section 16 of the Exchange Act in respect of the Company are
exempt under Rule 16b-3. In any case in which the Board is performing a function
of the Committee under the Plan, each reference to the Committee herein shall be
deemed to refer to the Board, except where the context otherwise requires.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, subsidiaries of the Company, Participants,
any person claiming any rights under the Plan from or through any Participant,
and stockholders. The express grant of any specific power to the Committee, and
the taking of any action by the Committee, shall not be
- 3 -
<PAGE>
construed as limiting any power or authority of the Committee. The Committee may
delegate to officers or managers of the Company or any subsidiary of the Company
the authority, subject to such terms as the Committee shall determine, to
perform such functions as the Committee may determine, to the extent permitted
under applicable law.
(c) LIMITATION OF LIABILITY. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants, or any
executive compensation consultant, legal counsel, or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
their behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination, or
interpretation.
4. STOCK SUBJECT TO PLAN.
(a) AMOUNT OF STOCK RESERVED. The total amount of Stock that may be
subject to outstanding Awards, determined immediately after the grant of any
Award, shall not exceed 1,505,966. Notwithstanding the foregoing, the number of
shares that may be delivered upon the exercise of ISOs shall not exceed 505,966
provided, however, that shares subject to ISOs shall not be deemed delivered if
such Awards are forfeited, expire or otherwise terminate without delivery of
shares to the Participant. If an Award valued by reference to Stock may only be
settled in cash, the number of shares to which such Award relates shall be
deemed to be Stock subject to such Award for purposes of this Section 4(a). Any
shares of Stock delivered pursuant to an Award may consist, in whole or in part,
of authorized and unissued shares or treasury shares.
(b) ANNUAL PER-PARTICIPANT LIMITATIONS. During any calendar year, no
Participant may be granted Options and other Awards under the Plan that may be
settled by delivery of more than 250,000 shares of Stock, subject to adjustment
as provided in Section 4(c). In addition, with respect to Awards that may be
settled in cash (in whole or in part), no Participant may be paid during any
calendar year cash amounts relating to such Awards that exceed the greater of
the Fair Market Value of the number of shares of Stock set forth in the
preceding sentence at the date of grant or the date of settlement of Award. This
provision sets forth two separate limitations, so that awards that may be
settled solely by delivery of Stock will not operate to reduce the amount of
cash-only Awards, and vice versa; nevertheless, Awards that may be settled in
Stock or cash must not exceed either limitation.
(c) ADJUSTMENTS. In the event that the Committee shall determine that
any dividend or other distribution (whether in the form of cash, Stock, or other
property), recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of shares
of Stock reserved and available for Awards under Section 4(a), (ii) the number
and kind of shares of outstanding Restricted Stock or other outstanding Award in
connection with which shares have been issued, (iii) the number and kind of
shares that may be issued in respect of other outstanding Awards, (iv) the
exercise price, grant price, or purchase price relating to any Award (or, if
deemed appropriate, the Committee may make provision for a cash payment with
respect to any outstanding Award), (v) the number of shares with respect to
which Options and SARs may be granted to a Participant in any calendar year, as
set forth in Section 4(b), and (vi) the number and kind of shares to be subject
to Options granted pursuant to Section 6(i) . In addition, the Committee is
authorized to make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or nonrecurring events (including,
without
- 4 -
<PAGE>
limitation, events described in the preceding sentence) affecting the Company or
any subsidiary or the financial statements of the Company or any subsidiary, or
in response to changes in applicable laws, regulations, or accounting
principles. The foregoing notwithstanding, without the consent of the
Participant, no adjustments shall be authorized under this Section 4(c) with
respect to ISOs to the extent that such adjustment would cause such ISOs to fail
to qualify as ISOs.
5. ELIGIBILITY. Directors, executive officers and other key employees of
the Company and its subsidiaries, and persons who provide consulting or other
services to the Company deemed by the Committee to be of substantial value to
the Company, are eligible to be granted Awards under the Plan. In addition, a
person who has been offered employment by the Company or its subsidiaries, and a
person who is employed by an entity expected to become a subsidiary, is eligible
to be granted an Award under the Plan, provided that such Award shall be
cancelled if such person fails to commence such employment, or if such entity
fails to become a subsidiary, and no payment of value may be made in connection
with such Award until such person has commenced such employment or until such
entity has become a subsidiary.
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 8(e)),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of employment or service of the
Participant.
(b) OPTIONS. The Committee is authorized to grant Options to
Participants (including "reload" options automatically granted to offset
specified exercises of options) on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee; provided, however,
that, the exercise price of an ISO shall be not less than 100 percent
(110 percent in the case of an ISO granted to a person who owns (within
the meaning of Section 422(b)(6) of the Code) 10 percent of the Stock)
of the Fair Market Value of a share on the date of grant of such Option.
(ii) TIME AND METHOD OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part,
the methods by which such exercise price may be paid or deemed to be
paid, the form of such payment, including, without limitation, cash,
Stock, other Awards or awards granted under other Company plans, or
other property (including notes or other contractual obligations of
Participants to make payment on a deferred basis, such as through
"cashless exercise" arrangements, to the extent permitted by applicable
law), and the methods by which Stock will be delivered or deemed to be
delivered to Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall comply in
all respects with the provisions of Section 422 of the Code, including
but not limited to the requirement that no ISO shall be granted more
than ten years after the effective date of the Plan. Anything in the
Plan to the contrary notwithstanding, no term of the Plan relating to
ISOs shall be interpreted, amended, or altered, nor shall any discretion
or authority granted under the Plan be exercised, so as to disqualify
either the Plan or any ISO under Section 422 of the Code.
(iv) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee, upon termination of a Participant's employment with the
Company and its subsidiaries for any reason other than death, disability
- 5 -
<PAGE>
(within the meaning of Section 22(e)(3) of the Code) or cause, such
Participant may exercise any Options during the 90-day period following
such termination of employment. In the event such termination is on
account of death or disability, the Participant may exercise any Options
during the one-year period following such termination. If the Committee
determines that termination of employment is for cause, all Options held
by the Participant shall immediately terminate. In any case where
Options remain exercisable following termination of employment, such
Options shall be exercisable only to the extent exercisable immediately
prior to such termination of employment.
(c) STOCK APPRECIATION RIGHTS. The Committee is authorized to grant SARs
to Participants on the following terms and conditions:
(i) RIGHT TO PAYMENT. An SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of
(A) the Fair Market Value of one share of Stock on the date of exercise
(or, if the Committee shall so determine in the case of any such right
other than one related to an ISO, the Fair Market Value of one share at
any time during a specified period before or after the date of
exercise), over (B) the grant price of the SAR as determined by the
Committee as of the date of grant of the SAR, which, except as provided
in Section 7(a), shall be not less than the Fair Market Value of one
share of Stock on the date of grant.
(ii) OTHER TERMS. The Committee shall determine the time or times at
which an SAR may be exercised in whole or in part, the method of
exercise, method of settlement, form of consideration payable in
settlement, method by which Stock will be delivered or deemed to be
delivered to Participants, whether or not an SAR shall be in tandem with
any other Award, and any other terms and conditions of any SAR. Limited
SARs that may only be exercised upon the occurrence of a Change in
Control may be granted on such terms, not inconsistent with this Section
6(c), as the Committee may determine. Limited SARs may be either
freestanding or in tandem with other Awards. Notwithstanding anything
contained herein to the contrary, no award shall be an SAR unless the
Award Agreement explicitly so provides.
(d) RESTRICTED STOCK. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the
Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such
installments, or otherwise, as the Committee may determine. Except to
the extent restricted under the terms of the Plan and any Award
Agreement relating to the Restricted Stock, a Participant granted
Restricted Stock shall have all of the rights of a stockholder
including, without limitation, the right to vote Restricted Stock or the
right to receive dividends thereon.
(ii) FORFEITURE. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria
established by the Committee) during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided, however, that the
Committee may provide, by rule or regulation or in any Award Agreement,
or may determine in any individual case, that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in
part in the event of termination resulting from specified causes.
(iii) CERTIFICATES FOR STOCK. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, such certificates shall bear an appropriate legend
referring to the terms, conditions, and
- 6 -
<PAGE>
restrictions applicable to such Restricted Stock, the Company shall
retain physical possession of the certificate, and the Participant
shall have delivered a stock power to the Company, endorsed in blank,
relating to the Restricted Stock.
(iv) DIVIDENDS. Dividends paid on Restricted Stock shall be either
paid at the dividend payment date in cash or in shares of unrestricted
Stock having a Fair Market Value equal to the amount of such dividends,
or the payment of such dividends shall be deferred and/or the amount or
value thereof automatically reinvested in additional Restricted Stock,
other Awards, or other investment vehicles, as the Committee shall
determine or permit the Participant to elect. Stock distributed in
connection with a Stock split or Stock dividend, and other property
distributed as a dividend, shall be subject to restrictions and a risk
of forfeiture to the same extent as the Restricted Stock with respect to
which such Stock or other property has been distributed.
(e) DEFERRED STOCK. The Committee is authorized to grant Deferred Stock
to Participants, subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred
Stock by the Committee (or, if permitted by the Committee, as elected by
the Participant). In addition, Deferred Stock shall be subject to such
restrictions as the Committee may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments, or otherwise, as
the Committee may determine.
(ii) FORFEITURE. Except as otherwise determined by the Committee, upon
termination of employment or service (as determined under criteria
established by the Committee) during the applicable deferral period or
portion thereof to which forfeiture conditions apply (as provided in the
Award Agreement evidencing the Deferred Stock), all Deferred Stock that
is at that time subject to deferral (other than a deferral at the
election of the Participant) shall be forfeited; provided, however, that
the Committee may provide, by rule or regulation or in any Award
Agreement, or may determine in any individual case, that restrictions or
forfeiture conditions relating to Deferred Stock will be waived in whole
or in part in the event of termination resulting from specified causes.
(f) BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash, Stock,
other Awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Stock. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee may
provide that Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles, and subject to such restrictions on transferability and
risks of forfeiture, as the Committee may specify.
(h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Stock and factors that may influence
the value of Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, convertible or exchangeable
debt securities, other rights convertible or exchangeable into Stock, purchase
rights for Stock, Awards with value and payment contingent upon performance of
the Company or any other factors designated by
- 7 -
<PAGE>
the Committee, and Awards valued by reference to the book value of Stock or the
value of securities of or the performance of specified subsidiaries. The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
(i) NON-EMPLOYEE DIRECTORS OPTIONS.
(i) On the day after the Company's annual meeting of stockholders
at which the Plan is approved, each person who is then a Non-Employee
Director shall receive, without the exercise of the discretion of any
person, a non-qualified stock option under the Plan relating to the
purchase of 5,000 shares of Stock. Thereafter, each person who becomes a
Non-Employee Director shall receive a non-qualified stock option under
the Plan relating to the purchase of 5,000 shares of Stock on the day
after the date that he becomes a Non-Employee Director. On the day after
each of the Company's annual meetings occurring in 1997 and thereafter,
each person who is a Non-Employee Director on any such day shall
receive, without the exercise of the discretion of any person, a
non-qualified stock option under the Plan relating to the purchase of
5,000 shares of Stock, plus an additional 500 shares for each full year
of service as a Non-Employee Director performed from the date that the
Plan was approved by the Company's stockholders to the date of such
annual meeting, provided, however, that any Non-Employee Director who
was granted an Option pursuant to the preceding sentence within 30 days
of the date of an annual meeting shall be not be granted an Option
pursuant to this sentence on the day after such annual meeting. In the
event that there are not sufficient shares available under this Plan to
allow for the grant to each Non-Employee Director of an Option for the
number of shares provided herein, each Non-Employee Director shall
receive an Option for his pro rata share of the total number of shares
of Stock available under the Plan.
(ii) The exercise price of each share of Stock subject to an
Option granted to a Non-Employee Director shall equal the Fair Market
Value of a share of Stock on the date such Option is granted. Payment of
the exercise price for the shares being purchased shall be made in cash,
Stock, or a combination of both.
(iii) Each Option granted to a Non-Employee Director shall be
exercisable in full one year from the date the Option is granted, and
shall have a term of ten years from such date. Upon a Non-Employee
Director's cessation of service as a Non-Employee Director, the Option,
to the extent it was exercisable upon such cessation, shall remain
exercisable for a period of 90 days (one year in the event such
cessation is on account of death or disability). A Non-Employee
Director's removal for cause shall result in an immediate termination of
all Options. For purposes of this clause (iii), "cause" shall mean the
director's fraud, intentional misrepresentation, or embezzlement
committed against the Company, its agents or employees, or otherwise in
connection with his or her service as a director of the Company, the
director's misappropriation or conversion of assets or opportunities of
the Company or its subsidiaries, or the director's conviction of a
crime, whether or not in connection with his or her service as a
director, other than a traffic infraction or other violation not deemed
a felony or misdemeanor.
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Award granted under the Plan or any award granted under any other plan of
the Company, any subsidiary, or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive payment
from the Company or any subsidiary. Awards granted in addition to or in tandem
with other Awards or
- 8 -
<PAGE>
awards may be granted either as of the same time as or a different time from
the grant of such other Awards or awards.
(b) TERM OF AWARDS. The term of each Award shall be for such period as
may be determined by the Committee; provided, however, that in no event shall
the term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) FORM OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and
any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant or exercise of an Award may be made in such forms as
the Committee shall determine, including, without limitation, cash, Stock, other
Awards, or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of Dividend
Equivalents in respect of installment or deferred payments denominated in Stock.
(d) RULE 16B-3 COMPLIANCE.
(i) SIX-MONTH HOLDING PERIOD. Unless a Participant could
otherwise dispose of equity securities, including derivative securities,
acquired under the Plan without incurring liability under Section 16(b)
of the Exchange Act, equity securities acquired under the Plan must be
held for a period of six months following the date of such acquisition,
provided that this condition shall be satisfied with respect to a
derivative security if at least six months elapse from the date of
acquisition of the derivative security to the date of disposition of the
derivative security (other than upon exercise or conversion) or its
underlying equity security.
(ii) OTHER COMPLIANCE PROVISIONS. With respect to a Participant
who is then subject to Section 16 of the Exchange Act in respect of the
Company, the Committee shall implement transactions under the Plan and
administer the Plan in a manner that will ensure that each transaction
by such a Participant is exempt from liability under Rule 16b-3, except
that such a Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been given to the
Participant regarding the non-exempt nature of such transaction. The
Committee may authorize the Company to repurchase any Award or shares of
Stock resulting from any Award in order to prevent a Participant who is
subject to Section 16 of the Exchange Act from incurring liability under
Section 16(b). Unless otherwise specified by the Participant, equity
securities, including derivative securities, acquired under the Plan
which are disposed of by a Participant shall be deemed to be disposed of
in the order acquired by the Participant.
(e) LOAN PROVISIONS. With the consent of the Committee, and subject at
all times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or arrange for a
loan or loans to a Participant with respect to the exercise of any Option or
other payment in connection with any Award, including the payment by a
Participant of any or all federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
- 9 -
<PAGE>
(f) PERFORMANCE-BASED AWARDS. The Committee may, in its discretion,
designate any Award the exercisability or settlement of which is subject to the
achievement of performance conditions as a performance-based Award subject to
this Section 7(f), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Section 162(m) of the Code
and regulations thereunder. The performance objectives for an Award subject to
this Section 7(f) shall consist of one or more business criteria and a targeted
level or levels of performance with respect to such criteria, as specified by
the Committee but subject to this Section 7(f). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code and regulations thereunder. Business criteria used by the Committee in
establishing performance objectives for Awards subject to this Section 7(f)
shall be selected exclusively from among the following:
(1) Annual return on capital;
(2) Annual earnings per share;
(3) Annual cash flow provided by operations;
(4) Changes in annual revenues; and/or
(5) Strategic business criteria, consisting of one or more objectives
based on meeting specified revenue, market penetration,
geographic business expansion goals, cost targets, and goals
relating to acquisitions or divestitures.
The levels of performance required with respect to such business criteria may be
expressed in absolute or relative levels. Achievement of performance objectives
with respect to such Awards shall be measured over a period of not less than one
year nor more than five years, as the Committee may specify. Performance
objectives may differ for such Awards to different Participants. The Committee
shall specify the weighting to be given to each performance objective for
purposes of determining the final amount payable with respect to any such Award.
The Committee may, in its discretion, reduce the amount of a payout otherwise to
be made in connection with an Award subject to this Section 7(f), but may not
exercise discretion to increase such amount, and the Committee may consider
other performance criteria in exercising such discretion. All determinations by
the Committee as to the achievement of performance objectives shall be in
writing. The Committee may not delegate any responsibility with respect to an
Award subject to this Section 7(f).
(g) ACCELERATION UPON A CHANGE OF CONTROL. Notwithstanding anything
contained herein to the contrary, unless otherwise provided by the Committee in
an Award Agreement, all conditions and/or restrictions relating to the continued
performance of services and/or the achievement of performance objectives with
respect to the exercisability or full enjoyment of an Award shall immediately
lapse upon a Change in Control.
8. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system, or
any other law, regulation, or contractual obligation of the Company, until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations, and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
- 10 -
<PAGE>
(b) LIMITATIONS ON TRANSFERABILITY. Awards and other rights under the
Plan, including any Award or right which constitutes a derivative security as
generally defined in Rule 16a-1(c) under the Exchange Act, will not be
transferable by a Participant except by will or the laws of descent and
distribution (or to a designated Beneficiary in the event of the Participant's
death), and, if exercisable, shall be exercisable during the lifetime of a
Participant only by such Participant or his guardian or legal representative;
provided, however, that such Awards and other rights (other than ISOs and SARs
in tandem therewith) may be transferred to one or more Beneficiaries during the
lifetime of the Participant in connection with the Participant's estate
planning, and may be exercised by such transferees in accordance with the terms
of such Award, consistent with the registration of the offer and sale of Stock
on Form S-8 or Form S-3 or a successor registration form of the Securities and
Exchange Commission, and permitted by the Committee. Awards and other rights
under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered, and shall not be subject to the claims of creditors.
(c) NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any action
taken hereunder shall be construed as giving any employee the right to be
retained in the employ of the Company or any of its subsidiaries, nor shall it
interfere in any way with the right of the Company or any of its subsidiaries to
terminate any employee's employment at any time.
(d) TAXES. The Company and any subsidiary is authorized to withhold from
any Award granted or to be settled, any delivery of Stock in connection with an
Award, any other payment relating to an Award, or any payroll or other payment
to a Participant amounts of withholding and other taxes due or potentially
payable in connection with any transaction involving an Award, and to take such
other action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations;
in such case, the shares withheld shall be deemed to have been delivered for
purposes of Section 4(a).
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any such action shall be subject to the approval of the Company's stockholders
at or before the next annual meeting of stockholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; provided, however, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
(f) NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or
employee shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Participants and employees. No
Award shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater
- 11 -
<PAGE>
than those of a general creditor of the Company; provided, however, that the
Committee may authorize the creation of trusts or make other arrangements to
meet the Company's obligations under the Plan to deliver cash, Stock, other
Awards, or other property pursuant to any Award, which trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan unless
the Committee otherwise determines with the consent of each affected
Participant.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
(i) NO FRACTIONAL SHARES. No fractional shares of Stock shall be issued
or delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) COMPLIANCE WITH SECTION 162(M) OF THE CODE. It is the intent of the
Company that Options granted at or above Fair Market Value, SARs, and other
Awards designated as Awards subject to Section 7(f) shall constitute "qualified
performance-based compensation" within the meaning of Section 162(m) of the Code
and regulations thereunder. Accordingly, if any provision of the Plan or any
Award Agreement relating to such an Award does not comply or is inconsistent
with the requirements of Section 162(m) of the Code or regulations thereunder,
such provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the amount of
compensation otherwise payable in connection with any such Award upon attainment
of the performance objectives.
(k) GOVERNING LAW. The validity, construction, and effect of the Plan,
any rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the Delaware General Corporation Law, without
giving effect to principles of conflicts of laws, and applicable federal law.
(l) EFFECTIVE DATE; PLAN TERMINATION. The Plan shall become effective as
of the date of its adoption by the Board and shall continue in effect until
terminated by the Board.
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,632 7,223
<SECURITIES> 0 0
<RECEIVABLES> 2,061 2,260
<ALLOWANCES> 0 0
<INVENTORY> 42,347 40,355
<CURRENT-ASSETS> 57,625 54,283
<PP&E> 12,779 11,238
<DEPRECIATION> (5,947) (3,963)
<TOTAL-ASSETS> 74,425 72,685
<CURRENT-LIABILITIES> 11,630 12,221
<BONDS> 0 0
268 204
0 0
<COMMON> 0 0
<OTHER-SE> 27,734 25,304
<TOTAL-LIABILITY-AND-EQUITY> 74,426 72,685
<SALES> 95,549 101,301
<TOTAL-REVENUES> 30,141 30,944
<CGS> 0 0
<TOTAL-COSTS> 37,606 30,246
<OTHER-EXPENSES> 50 1,190
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (3,021) (2,572)
<INCOME-PRETAX> (10,436) (684)
<INCOME-TAX> (2,600) (280)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,836) (424)
<EPS-PRIMARY> (0.67) (0.04)
<EPS-DILUTED> (0.67) (0.04)
</TABLE>
