ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On January 3, 1997 the Company sold its Transmedia Network franchise (the "Franchise") covering the States of California, Oregon, Washington and parts of Nevada and substantially all of its operating assets other than cash and cash equivalents (the "Asset Sale") to its franchisor, Transmedia Network Inc. ("Network"). Upon consummation of the Asset Sale, the Company's assets consisted principally of cash and cash equivalents aggregating approximately $9,574,000. These assets (less approximately $800,000 of taxes on the gain resulting from the Asset Sale) will be utilized by the Company to acquire, merge, consolidate, invest in transactions or otherwise combine with an operating business (any such transaction, a "Business Combination"). The Company intends to enter into Business Combinations that will use substantially all of the Company's available cash in one or two transactions and structure such Business Combinations so that the current management of the target business will remain in place. There can be no assurance, however, that the Company will be able to effectuate a Business Combination, or that any such Business Combination will be profitable. In anticipation of the Asset Sale, in the fourth quarter of 1996, the Company initiated activities to seek a Business Combination. At the present time, there are no Business Combinations under consideration that the Board of Directors considers probable of consummation. The Board of Directors will have broad discretion in its search for and negotiations with respect to a Business Combination.
Pending a Business Combination, the Company's assets will be invested as management of the Company deems prudent, which investments may include, but not be limited to, certificates of deposit, mutual funds, money-market accounts, stocks, bonds or United States Government or municipal securities, provided, however, that the Company will attempt to invest its assets in a manner that will not result in the Company being required to register as an investment company under the Investment Company Act of 1940.
During the year ending December 31, 1997 and until a Business Combination is effected, the Company expects to generate interest income in excess of its minimal operating expenses, exclusive of any due diligence and professional fees incurred in connection with the identification and consummation of one or more Business Combination.
The Company has used and intends to continue to use various sources in its search for potential Business Combinations
including its officers and directors, consultants, special advisors, securities broker-dealers, venture capitalists, members of the financial community and others who may present management with unsolicited proposals. The Company may be required to pay a fee in connection with the consummation of a Business Combination.
The Company does not intend to restrict its search to any specific kind of industry or business. The Company may investigate and ultimately acquire a venture that is in its preliminary or development stage, is already in operation, or in various stages of its corporate existence and development. The Board of Directors cannot predict at this time the status or nature of any venture in which the Company may participate. A potential venture might need additional capital or merely desire to have its shares publicly traded. The Board of Directors believes that the Company could provide a potential public vehicle for a private entity interested in becoming a publicly held corporation without the time and expense typically associated with an initial public offering.
Once the Company has identified a particular entity as a potential acquisition or merger candidate, the Board of Directors will seek to determine whether acquisition or merger is warranted or whether further investigation is necessary. Such determination will generally be based on the Board's knowledge and experience, or with the assistance of outside advisors and consultants evaluating the preliminary information available to them. The Board of Directors may elect to engage outside independent consultants to perform preliminary analysis of potential business opportunities.
In evaluating such potential Business Combinations, the Company will consider, to the extent relevant to the specific opportunity, several factors including potential benefits to the Company and its stockholders; working capital, financial requirements and availability of additional financing; history of operation, if any; nature of present and expected competition; quality and experience of management; need for further research, development or exploration; potential for growth and expansion; potential for profits; and other factors deemed relevant to the specific opportunity.
Presently, the Company cannot predict the manner in which it might participate in a prospective Business Combination. Each separate potential opportunity will be reviewed and, upon the basis of that review, a suitable legal structure or method of participation will be chosen. The particular manner in which the Company participates in a specific business opportunity will depend upon the nature of that opportunity, the respective needs and desires of the Company and management of the opportunity, and the relative negotiating strength of the parties involved. Actual participation in a Business Combination may take the form of an asset purchase, lease, joint venture, license, partnership, stock purchase, reorganization, merger or consolidation. The Company may
act directly or indirectly through an interest in a partnership, corporation, or other form of organization. The Company could participate in opportunities through the purchase of minority stock positions.
In the Asset Sale, the Company received a total of approximately $7,500,000 in cash, which, in addition to payment for the Franchise, included payment for the Company's Rights to Receive (as hereinafter defined). The cash and cash equivalents retained by the Company amounted to approximately $2,074,000 at December 31, 1996.
GENERAL
The following information describes the business carried on by the Company prior to the Asset Sale.
In December 1991, the Company entered into a franchise agreement (the "Franchise Agreement") with Network that granted to the Company the exclusive right to operate the Franchise, the primary business of which was the acquisition of "Rights to Receive" from client restaurants and other dining establishments located in California that accept a charge card, "The Transmedia Card," and the sale of such Rights to Receive to holders of The Transmedia Card ("Cardholders"). The Transmedia Card, a private charge card marketed and issued by Network, which utilizes a diner's MasterCard(R), Visa(R), American Express(R) or Discover(R) charge account to bill Transmedia Card charges, is used by Cardholders to pay for food and beverages when dining at restaurants or other dining establishments (the "Participating Restaurants") that participate in the network of such establishments that accept The Transmedia Card (the "Transmedia Network(R)"). The Transmedia Network is a unified system that entitles Cardholders recruited by Network, the Company or any other Network franchisee to a savings of up to 25% on the regular menu prices of food and beverages charged on The Transmedia Card. Rights to Receive were the Company's rights to food and beverage credits of Participating Restaurants that were purchased by the Company in exchange for cash in an amount equal to approximately 50% of the retail value of such food and beverage credits.
The Company derived substantially all of its revenues from the excess of the proceeds of Cardholders' charges on their Transmedia Cards incurred at Participating Restaurants in the territory included within the Franchise (net of the up to 25% Cardholder savings and of fees and other charges payable to Network) over the Company's cost of purchasing Rights to Receive from Participating Restaurants. Revenues from Cardholders' membership fees were not significant as the Company only received 40% of initial membership fees (and no portion of renewal fees) and, under arrangements with Network, such initial fees were generally waived by the Company.
The Company commenced its franchise operations in the San Francisco Bay Area in August 1992, in the Los Angeles metropolitan area in October 1993, in Orange County in January 1995, and in the Lake Tahoe, Nevada area in October 1995. At December 31, 1996, there was an aggregate of 557 Participating Restaurants, consisting of 221 in the San Francisco Bay Area (including Lake Tahoe), 269 in the Los Angeles Metropolitan Area and 67 in Orange County. At December 31, 1996, there was an average Rights to Receive balance (net of Rights to Receive payable by the Company) per Participating Restaurant for the San Francisco Bay Area, Los Angeles Metropolitan Area and Orange County Area of approximately $6,300, $5,600, and $2,600, respectively. During 1996, the Company added 64,000 new Cardholders residing in California. At December 31, 1996, there were approximately 146,000 Cardholders after giving effect to non- renewals during the year.
In addition to acquiring the California franchise, the Company acquired options to operate Transmedia Network franchises in Oregon and Washington upon payment of certain prescribed fees. In December 1993, the Company exercised its option to operate the Transmedia Network franchise in Washington and also agreed with Network to purchase a franchise in Reno, Nevada and the Nevada portion of the Lake Tahoe resort area. In June 1995, the Company exercised its option to obtain a Transmedia Network franchise for the State of Oregon. As used herein, the term "Franchise Territory" means the States of California, Oregon and Washington, and Reno and Lake Tahoe, Nevada.
In 1995, Network began to offer to holders of The Transmedia Card use of the card at certain hotels, resorts, golf courses, ski lifts and access to discount long distance telephone services. The Company's rights under the Franchise Agreement related only to Participating Restaurants in the Franchise Territory. The Company did not have any rights to participate in or derive any income from these other services.
In connection with the Asset Sale, the Company and Network exchanged general releases of all liabilities, obligations under the Franchise Agreement.
RIGHTS TO RECEIVE
The Company's primary business was the acquisition of Rights to Receive from Participating Restaurants that it recruited to join the Transmedia Network of dining establishments and the sale of such Rights to Receive to Cardholders. The Company derived substantially all of its revenues from purchasing Rights to Receive from Participating Restaurants operating in the Franchise Territory in exchange for cash in an amount equal to approximately 50% of the retail value of the food and beverage credits underlying such Rights to Receive and applying such Rights to Receive against
Cardholder charges made at Participating Restaurants operating in its Franchise Territory.
The Company entered into a contract (a "Restaurant Contract") with each Participating Restaurant in its Franchise Territory in connection with its purchase from it of Rights to Receive. The typical Restaurant Contract provided for the purchase by the Company of between $5,000 and $10,000 in Rights to Receive. Generally, such Rights to Receive were paid for by the Company in installments during the initial two-to-three month period thereof. Beginning in 1995, the Company also entered into nine to 12 month commitment agreements with certain Participating Restaurants. The commitment agreements established a minimum period of participation by the Participating Restaurant in the event that the initial credits purchased by the Company from the Participating Restaurant were exhausted prior to the expiration of the commitment period. The Company believes that these commitment agreements had a positive effect during 1996 upon restaurant retention and cash flow.
TRANSMEDIA CARD
The Transmedia Card is a private charge card that entitles Cardholders to a savings of up to 25% on the regular menu price of food and beverages purchased at any Participating Restaurant within the Transmedia Network. Participating Restaurants solicited by the Company were located in the San Francisco Bay Area, metropolitan Los Angeles and Orange County. The Transmedia Card was developed and is issued and marketed by Network.
Cardholders may use The Transmedia Card as they would any major credit card. When paying the check at a Participating Restaurant, a Cardholder presents The Transmedia Card in payment for the amount of goods and services received, as well as for taxes and tips, and signs a Network credit card receipt for such amount. Network, upon receiving the credit card receipt from the Participating Restaurant, gives the Participating Restaurant a credit against the balance of Rights to Receive that are held by the Company in respect of such Participating Restaurant. Network then arranges for the processing of the receipt for the full amount of the charges through the major credit card account (Visa, Mastercard, American Express or Discover) designated by the Cardholder in his or her application (the "Major Credit Card Account") and simultaneously issues a credit to the Cardholder's Major Credit Card Account in an amount equal to the up to 25% savings on the appropriate food and beverage charges. Taxes and tips are not eligible for the up to 25% savings. Upon receipt by Network of payment from the Major Credit Card Account, it pays the Participating Restaurant the taxes and tips incurred by the Cardholder, deducts the fees and expenses payable to it under the
Franchise Agreement and remits the balance to the Company on a weekly basis.
CARDHOLDER MARKETING
In January 1996, Network initiated a policy to offer both new and existing Cardholders an alternative to the traditional arrangement of a 25% savings with an annual membership fee of $50. The new program (the "20% Program") provides a 20% savings to Cardholders with no annual fee so long as Cardholder usage is at least $200 during each membership year. Commencing in 1996, substantially all programs initiated by Network to obtain new cardholders utilized the 20% Program and Network took a leading role to promote the Transmedia Card on a national basis utilizing arrangements with large national organizations and businesses. Since January 1, 1996 substantially all new cardholders were enrolled in the 20% Program.
The Company commenced active franchise operations in the San Francisco Bay Area in August 1992. During 1993, the Company focused its principal efforts on recruiting restaurants and other dining establishments doing business in the San Francisco Bay Area to join the Transmedia Network and on marketing The Transmedia Card to prospective Cardholders. Initial franchise activities concentrated primarily on establishing a base of restaurants in San Francisco as a foundation for commencing programs to market The Transmedia Card to prospective Cardholders. Active marketing efforts to solicit Cardholders commenced in late 1992 and were directed primarily to professionals, investment banking and real estate firms and various small and mid-sized businesses. Marketing to larger businesses, banks, radio station listeners' clubs and various non-profit organizations commenced in April 1993.
Active marketing efforts to solicit Cardholders in the Los Angeles metropolitan area commenced in January 1994 and followed the same marketing strategy implemented by the Company in the San Francisco Bay Area. Active marketing efforts to solicit Cardholders in Orange County commenced in mid-1995.
FRANCHISE AGREEMENT
The Company entered into the Franchise Agreement with Network on December 9, 1991. Under the original terms of the Franchise Agreement, the Company was required to pay Network the following fees and charges: (i) $250,000 as an initial franchise fee (which had been paid); (ii) $250,000 as an initial contribution to Network's advertising and development fund, of which $125,000 was paid and the remaining $125,000 was payable, without interest, in 12 consecutive equal monthly payments commencing July 1993; and (iii) 150,000 shares of the Common Stock of the Company valued at $21,000, which have been issued. In September 1993, the Company and Network agreed that the Company would pay for substantially all
of its advertising in California and entered into an agreement providing, effective as of September 30, 1993, for (i) a refund to the Company of the remaining unused balance (approximately $55,000) of the Company's previously advanced $145,000 initial contribution to Network's advertising and development fund (which refund has been made) and (ii) the termination of the Company's obligation to pay the remaining monthly installments of such obligation (approximately $105,000).
In addition, the Company was obligated to pay to Network continuing service charges as follows: (i) a general service charge equal to 7.5%, and an advertising fee of 2.5%, of the total dollar amount of Rights to Receive meal credits used by Cardholders at Participating Restaurants within the Franchise Territory; (ii) a monthly restaurant service charge of $1.00 per Participating Restaurant located in the preceding month within the Franchise Territory; and (iii) a processing charge equal to $.20 per Cardholder transaction slip forwarded to Network by Participating Restaurants in the Franchise Territory.
Under the Franchise Agreement, the Company purchased options to obtain Transmedia Network franchises for the States of Oregon and/or Washington for initial total franchise and advertising fees of $200,000 and $300,000, respectively. In December 1993, the Company exercised its option for the State of Washington and in June 1995, the Company exercised its option for the State of Oregon. In connection with the exercise of such option and the Company's assumption of certain advertising costs described above, the Company also agreed with Network to provide for (i) a reduction in the Company's exercise price for the Transmedia Network franchises in the States of Oregon and/or Washington to $100,000 and $150,000, respectively, to reflect the Company's assumption of such advertising obligations; (ii) the exercise of the Washington option by issuance to Network of 50,000 shares of Common Stock (in lieu of the $150,000 exercise price) and the exercise of the Oregon option by issuance to the Network of 35,000 shares of Common Stock (in lieu of the $100,000 exercise price); and (iii) the acquisition of the right to operate the Transmedia Network franchise in limited areas of Nevada by issuance to Network of 10,000 shares of Common Stock. The Company was required to commence franchise operations in the State of Washington, by December 31, 1996 and in the State of Oregon by April 1997. Pending the completion of the Asset Sale, expansion activities were suspended.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 17 persons, one of whom was the general manager of the Los Angeles office and one of whom was an executive officer and director of the Company. Effective with the Asset Sale, 11 of such persons became employees of Network. During the first quarter of 1997, the
Company will operate with a staff of two full time administrative employees in order to fulfill its public reporting responsibilities. After the first quarter of 1997, pending completion of one or more Business Combinations, the Company will have no full time employees or office overhead and will contract out all required administrative and compliance functions.
COMPETITION
The charge card business, including the restaurant charge card business, is highly competitive and the Company competed for both Cardholders and restaurants. Competitors included discount programs offered by major credit card companies such as American Express(R), Visa, MasterCard and Diners Club(R), other companies (including Dining a la Card(sm) and Entertainment(R)) that offer different kinds of discount marketing programs and numerous smaller companies.
ITEM 2.
ITEM 2. PROPERTIES
The Company presently leases no business premises but maintains an office c/o Janney Montgomery Scott Inc., 26 Broadway, New York, New York 10004.
During 1996, the Company's principal executive and sales offices were located at 475 Sansome Street, San Francisco, California. These premises consisted of approximately 3,000 square feet of space leased until August 31, 1999. The annual base rental during 1996 was approximately $55,200. The Company leased an additional executive office located at 233 Wilshire Boulevard, Santa Monica, California. These premises consisted of approximately 2,000 square feet of space leased until February 1998 at an annual base rent of approximately $50,400. The Company leased approximately 100 square feet of space at an executive suite in Costa Mesa in Orange County at a cost of $640 per month.
Effective with the Asset Sale, the San Francisco and Santa Monica leases were assigned to, and assumed by, Network. The Company's Orange County lease expired January 31, 1997 and was not renewed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of stockholders was held on December 27, 1996. Proxies were solicited with respect to approval of the Asset Sale and approval of certain amendments to the Company's 1992
Stock Option Plan. The stockholders approved the Asset Sale. The votes cast for, against or abstaining were as follows:
For 4,611,055 Against 40,919 Abstaining 9,508
The stockholders also approved the amendments to the 1992 Stock Option Plan. The number of votes cast for, against or abstaining with respect to approval were as follows:
For 4,310,864 Against 233,659 Abstaining 116,959
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on NASDAQ under the symbol ("WTSM") since December 23, 1993. The Company's Units are traded on NASDAQ under the symbol ("WTSMU"). The Company's Warrants are traded on NASDAQ under the symbol ("WTSMW").
The Company's Common Stock was traded in the over-the-counter market in what is commonly referred to as the "pink sheets" or on the "OTC Bulletin Board" of the National Association of Securities Dealers, Inc. under the symbol "WTSM" from July 16, 1992 to December 22, 1993.
The following table sets forth the high and low bid prices on the OTC Bulletin Board and the high and low closing bid prices as reported on NASDAQ for the Company's Common Stock during the quarters indicated. The prices reported reflect inter-dealer quotations and may not represent actual transactions and do not include retail mark-ups, mark-downs or commissions.
QUARTER ENDED HIGH LOW - ------------- ---- ---
March 31, 1995................................. 3.875 3.25
June 30, 1995.................................. 3.75 2.75
September 30, 1995............................. 2.75 1.375
December 31, 1995.............................. 2.50 1.00
March 31, 1996................................. 2.50 1.00
June 30, 1996.................................. 2.625 1.50
September 30, 1996............................. 2.185 1.125
December 31, 1996.............................. 1.375 .750
At March 14, 1997, there were approximately 394 holders of record of the Company's Common Stock. This number does not include an indeterminate number of stockholders whose shares are held by brokers in "street name." The Company has not paid any cash dividends on the Common Stock since it became publicly traded.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- -----------------
*Based on a weighted average number of shares of Common Stock (as restated, and see Note 8(a) of Notes to Financial Statements) outstanding: 7,955,752, 8,030,685, 7,072,754, 5,804,297 and 3,123,659, shares, respectively, at December 31, 1996, 1995, 1994, 1993 and 1992.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See ITEM 1. "Business-Recent Developments" for information in respect of the sale of substantially all of the Company's operating assets. The information presented under "Results of Operations" in this Item 7. relates to the operations of the business the operating assets of which were sold.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $9,301,155. This was a decrease of $2,067,748 as compared to $11,368,903 in net sales during the year ended December 31, 1995. Sales for the year ended December 31, 1996 continued to be negatively impacted by a decrease in the average restaurant spending per Cardholder and by continued competition from other restaurant promotion programs in the California market. Since the beginning of 1996 substantially all new cardholders were developed, primarily utilizing telemarketing, under national 20% Programs by Network. Although these programs resulted in a significant increase in Cardholders, the percentage of these Cardholders who are active card users is not as great as the percentage of active
card users enrolled in the 25% Program. The Company attributes the continued decrease in average restaurant spending per Cardholder to this fact as well as to continued competition.
The Company's net sales contributed $3,185,652 and $3,792,589 in gross profit for the years ended December 31, 1996 and 1995, respectively. The Company operated with an approximate 34% gross profit margin from net sales of Rights to Receive to Cardholders during the year ended December 31, 1996, compared to 33% during the year ended December 31, 1995. The approximate 1% increase in gross profit margin is attributable to restaurant charges by Cardholders who have enrolled in the 20% program. Operating expenses as a percentage of net sales increased to 25.2% for the year ended December 31, 1996 compared to 20.6% for the year ended December 31, 1995. The 4.6% increase in operating expenses as a percentage of net sales is attributable to the fact that while net sales decreased, the Company's operating expenses (overhead) are primarily of a fixed nature.
The Company has incurred franchise costs of approximately 14% of net sales. Franchise costs were $1,285,214 and $1,586,781 during the years ended December 31, 1996 and 1995, respectively.
Operating expenses (selling, general and administrative expenses) aggregated $2,341,675 and $2,339,648 for the years ended December 31, 1996 and 1995, respectively. Operating expenses remained virtually constant as approximately $86,000 in payroll and related cost savings were offset by an increase in professional fees of $67,000 related to the Asset Sale and acquisition due diligence relating to possible Business Combinations.
For the year ended December 31, 1996, combined operating expenses consisted primarily of salaries and associated payroll expenses ($1,131,000), professional and consulting fees ($230,000), rent and office expenses ($265,000), the Company's reserve for unrealizable Rights to Receive ($206,000), promotion and marketing expenses in connection with attracting and maintaining participating California restaurants ($231,000), advertising and promotional expenses in connection with attracting and maintaining California Cardholders ($69,000, net of Network reimbursement) and electronic processing equipment set up and amortization expenses ($52,000).
For the year ended December 31, 1995, combined operating expenses consisted primarily of salaries and associated payroll expenses ($1,239,000), professional and consulting fees ($196,000), rent and office expenses ($262,000), the Company's reserve for unrealizable Rights to Receive ($194,000), marketing expenses in connection with attracting and maintaining participating California restaurants ($231,000) and advertising and promotional expenses in connection with attracting and maintaining California Cardholders
($51,000 net of Network reimbursement). Electronic processing equipment set up and amortization expenses were not significant.
Interest income was $132,951 and $146,342 for the years ended December 31, 1996 and 1995, respectively.
For the year ended December 31, 1996, the Company incurred a loss before provision for income taxes of $311,976 or $.04 per share. For the year ended December 31, 1995, however, the Company earned a profit before provision for income taxes of $10,942 or $0.00 per share. The approximately $323,000 decrease in earnings before provision for income taxes was primarily due to the decreased gross profit for the period net of franchise costs.
For the year ended December 31, 1996, the Company recorded a $857,000 credit for income taxes related to the tax benefits associated with approximately $1,950,000 in unused operating loss carryforwards and other deductible temporary differences. The Company recorded this tax credit because it generated substantial taxable income in connection with the Asset Sale in January 1997, subsequent to the balance sheet date (see "Recent Developments"). For the years ended December 31, 1995 and earlier, the Company did not record such a tax credit because at that time there was no assurance that the Company would generate future taxable income.
For the year ended December 31, 1996, the Company earned net income of $545,024 or $.07 per share. The net income was attributable to the credit for income taxes of $857,000 recorded by the Company less the $311,976 loss incurred before provision for income taxes. For the year ended December 31, 1995, the Company earned a profit before income taxes and a net profit of $10,942 or $0.00 per share. The Company incurred no provision for income taxes for the year ended December 31, 1995 because the income taxes on the Company's $10,942 pretax profit were eliminated by the Company's net operating loss carryforwards.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 were $11,368,903. This was an increase of $2,670,165 as compared to $8,698,738 in net sales during the year ended December 31, 1994. The sales increase was primarily attributable to the increasing number of Cardholders and restaurants available to Cardholders. However, offsetting this trend, sales for the year ended December 31, 1995 were negatively impacted by a decrease in the average restaurant spending per Cardholder. The Company attributes the decrease in average restaurant spending per Cardholder to increasing competition from other restaurant promotion programs that were introduced into the California market and to softness in California's economy in general.
The Company operated with an approximate gross profit margin from net sales of Rights to Receive to Cardholders of approximately 33%. The Company's net sales resulted in $3,792,589 and $2,891,229 in gross profit for the years ended December 31, 1995 and 1994, respectively.
Operating expenses (selling, general and administrative expenses) aggregated $2,339,648 and $1,996,347 for the years ended December 31, 1995 and 1994, respectively. The increase of $343,301 was primarily due to the fact that the Company incurred additional salaries and associated payroll expenses related to the operation of its business in San Francisco and Los Angeles during the year ended December 31, 1995 and initiated active operations in Orange County in January 1995. The Company incurred approximately $219,000 in additional salaries and associated payroll expenses, excluding Orange County, during the year ended December 31, 1995 compared to the year ended December 31, 1994. These expenses related to the operation of its business in San Francisco and Los Angeles and were primarily attributable to increased officers' and employee compensation including certain bonus and commission arrangements. The Company also incurred additional operating expenses of approximately $131,000 related to the operation of its business in Orange County for the year ended December 31, 1995. The Company did not actively operate in Orange County in 1994 and therefore incurred no such expenses for the year ended December 31, 1994.
For the year ended December 31, 1994, combined operating expenses consisted primarily of salaries and associated payroll expenses ($934,000), professional and consulting fees ($191,000), rent and office expenses ($224,000), the Company's reserve for unrealizable Rights to Receive ($159,000), marketing expenses in connection with attracting and maintaining participating California restaurants ($169,000) and advertising and promotional expenses in connection with attracting and maintaining California cardholders ($153,000 net of Network reimbursement).
Interest income was $146,342 and $38,941 for the years ended December 31, 1995 and 1994, respectively. Interest income increased in 1995 primarily because of the interest earned on the approximately $2,138,000 net proceeds from the Company's December 1994 Offer of Units.
For the year ended December 31, 1995, the Company earned a net profit of $10,942 or $0.00 per share. For the year ended December 31, 1994 the Company incurred a net loss of $280,994 or $.04 per share. The approximately $292,000 increase in net earnings was primarily due to the increased gross profit for the period net of franchise costs and increased interest income, partially offset by increased operating expenses (including Orange County expenses), as described above.
Orange County operations resulted in net losses of approximately $108,000 for the year ended December 31, 1995. Without giving effect to the Orange County losses, the Company would have generated a net profit of approximately $119,000, or $.01 per share, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at December 31, 1996 and 1995 was approximately $4,873,000 and $5,165,000, respectively. At February 28, 1997, as a result of the Asset Sale, its working capital was approximately $8,700,000. The Company has outstanding 2,052,987 warrants exercisable at $4.00 per share. The warrants expire December 31, 1997. The Company presently has no other unused internal sources of liquidity other than cash (or equivalents) on hand and no external sources of liquidity such as a line of credit from a financial institution.
During the year ending December 31, 1997 and until a Business Combination is effected, the Company expects to generate interest income in excess of its minimal operating expenses, exclusive of any due diligence and professional fees incurred in connection with the identification and consummation of one or more Business Combination.
The Company intends to enter into Business Combinations that will use substantially all of the Company's available cash in one or two transactions and structure such Business Combinations so that the current management of the target business will remain in place. There can be no assurance, however, that the Company will be able to effectuate a Business Combination, or that any such Business Combination will be profitable. At the present time, there are no Business Combinations under consideration that the Board of Directors considers probable of consummation. The Board of Directors will have broad discretion in its search for and negotiations with respect to a Business Combination.
Pending a Business Combination, the Company's assets will be invested as management of the Company deems prudent, which investments may include, but not be limited to, certificates of deposit, mutual funds, money-market accounts, stocks, bonds or United States Government or municipal securities, provided, however, that the Company will attempt to invest its assets in a manner that will not result in the Company being required to register as an investment company under the Investment Company Act of 1940.
The Company has used and intends to continue to use various sources in its search for potential Business Combinations including its officers and directors, consultants, special advisors, securities broker-dealers, venture capitalists, members of the financial community and others who may present management
with unsolicited proposals. The Company may be required to pay a fee in connection with the consummation of a Business Combination.
The Company does not intend to restrict its search to any specific kind of industry or business. The Company may investigate and ultimately acquire a venture that is in its preliminary or development stage, is already in operation, or in various stages of its corporate existence and development. The Board of Directors cannot predict at this time the status or nature of any venture in which the Company may participate. A potential venture might need additional capital or merely desire to have its shares publicly traded. The Board of Directors believes that the Company could provide a potential public vehicle for a private entity interested in becoming a publicly held corporation without the time and expense typically associated with an initial public offering.
Presently, the Company cannot predict the manner in which it might participate in a prospective Business Combination. Each separate potential opportunity will be reviewed and, upon the basis of that review, a suitable legal structure or method of participation will be chosen. The particular manner in which the Company participates in a specific business opportunity will depend upon the nature of that opportunity, the respective needs and desires of the Company and management of the opportunity, and the relative negotiating strength of the parties involved. Actual participation in a Business Combination may take the form of an asset purchase, lease, joint venture, license, partnership, stock purchase, reorganization, merger or consolidation. The Company may act directly or indirectly through an interest in a partnership, corporation, or other form of organization. The Company could participate in opportunities through the purchase of minority stock positions.
The Company may be required to seek additional capital in order to effecuate a Business Combination. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on acceptable terms. Failure to obtain such financing could result in the delay or abandonment of one or more potential Business Combinations.
INFLATION AND SEASONALITY
Inflation did not significantly impact the Company's business during 1996, nor did the Company believe its business to be seasonal.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements and information that is based on management's beliefs and assumptions, as well as information currently available to management. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements included as part of Item 14 below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See PART I, ITEM 4. "Executive Officers of the Company." Other information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than April 30, 1997 pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than April 30, 1997 pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than April 30, 1997 pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than April 30, 1997 pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements: Page ----
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the Three Years in the Period ended December 31, 1996
Consolidated Statement of Stockholders' Equity for the Three Years in the Period ended December 31, 1996
Consolidated Statements of Cash Flows for the Three Years in the Period ended December 31, 1996
Notes to Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
(c) Exhibits
2.1 Purchase Agreement dated as of November 15, 1996 by and between the Company and Network, incorporated by reference as Exhibit A to the Company's Definitive Proxy Statement for Special Meeting of Stockholders held on December 27, 1996.
3.1 Amended Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K").
3.2 Certificate of Amendment to Amended Certificate of Incorporation, incorporated by reference to Exhibit 3(d) to the Company's Registration Statement on Form S-1 (File No. 33-44845) (the "1992 Form S-1").
*3.3 Certificate of Amendment to Amended Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on January 3, 1997.
3.4 Amended and Restated By-Laws of the Company, incorporated by reference to Exhibit 3(b) to the Company's Registration Statement on Form S-1 (File No. 33-84234) (the "1994 Form S-1").
4.1 Form of Common Stock Certificate, incorporated by reference to Exhibit 4(b) to the 1992 Form S-1.
4.2 Form of Warrant Certificate, incorporated by reference to Exhibit 4(b) to the 1994 Form S-1.
4.3 Warrant Agreement dated as of June 25, 1993, between the Registrant and American Stock Transfer & Trust Company, as Warrant Agent, incorporated by reference to Exhibit 4(c) to the 1994 Form S-1.
4.4 Form of Amendment of Warrant Agreement, incorporated by reference to Exhibit 4(d) to the 1994 Form S-1.
*10.1 The Company's 1992 Stock Option Plan, as amended through March 26, 1997.
10.2 Form of Indemnification Agreement between the Company and its officers and directors, incorporated by reference to Exhibit 10(d) to the 1992 Form S-1.
10.3 Form of Registration Rights Agreement between the Company and certain of the Company's stockholders, incorporated by reference to Exhibit 10(l) to the 1992 Form S-1.
*10.14 Franchise Termination Agreement dated as of January 2, 1997, by and between the Company and Network.
11. Computation of earnings per share of Common Stock, incorporated by reference to Exhibit 11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
22. Subsidiaries of the Registrant, incorporated by reference to Exhibit 22 to the 1991 10-K.
- ------------------------- *Filed herewith.
(d) Financial Statement Schedules: none
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE WESTERN SYSTEMS CORP.
Date: March 26, 1997 /s/ William J. Barrett ------------------------------- William J. Barrett Chief Executive Officer and Director (Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William J. Barrett and Herbert M. Gardner his true and lawful attorney-in-fact, each acting alone, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes, each acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 26, 1997 /s/William J. Barrett ------------------------------------ William J. Barrett Chief Executive Officer and Director (Principal Executive Officer)
Date: March 26, 1997 /s/Stuart M. Pellman ------------------------------------ Stuart M. Pellman Chief Financial Officer and Director (Principal Financial Officer and Principal Accounting Officer)
Date: March , 1997 -------------------------------------- C. Scott Bartlett, Jr. Director
Date: March 26, 1997 /s/ Herbert M. Gardner -------------------------------------- Herbert M. Gardner Director
Date: March 26, 1997 /s/ Howard Grafman -------------------------------------- Howard Grafman Director
Date: March 26, 1997 /s/ Paulette Grafman -------------------------------------- Paulette Grafman Director
Date: March __, 1997 -------------------------------------- Richard O. Starbird Director
EXHIBIT INDEX -------------
EXHIBIT
11. Computation of earnings per share of Common Stock
27. Financial Data Schedule
Page(s) -------
Independent Auditors' Report F - 2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F - 3
Consolidated Statements of Operations for the Three Years in the Period Ended December 31, 1996 F - 4
Consolidated Statement of Shareholders' Equity for the Three Years in the Period Ended December 31, 1996 F - 5
Consolidated Statements of Cash Flows for the Three Years in the Period Ended December 31, 1996 F - 6
Notes to Consolidated Financial Statements F - 8
F - 1
INDEPENDENT AUDITORS' REPORT
To The Board of Directors The Western Systems Corp. (formerly The Western Transmedia Company, Inc.) San Francisco, California
We have audited the accompanying consolidated balance sheets of The Western Systems Corp. (formerly The Western Transmedia Company, Inc.), and subsidiary as of December 31, 1996 and 1995 and the consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Western Systems Corp. (formerly The Western Transmedia Company, Inc.) and subsidiary as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ LAZAR, LEVINE & COMPANY LLP ------------------------------- LAZAR, LEVINE & COMPANY LLP
New York, New York March 12, 1997
F - 2
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) CONSOLIDATED BALANCE SHEETS
- ASSETS -
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS Page 1 of 2 -------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS Page 2 of 2 -------------------------------------
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
a) During the year ended December 31, 1994, the Company acquired the franchise rights for the states of Washington and Nevada in exchange for an aggregate of 60,000 shares of common stock. These shares are valued by the Company at $180,000.
b) During the year ended December 31, 1995, the Company acquired the franchise rights for the state of Oregon in exchange for 35,000 shares of its common stock. These shares are valued by the Company at $100,000.
c) During the years ended December 31, 1995 and 1994 the Company entered into capitalized lease obligations aggregating $15,190 and $6,263, respectively, for new office equipment.
The accompanying notes are an integral part of these consolidated financial statements. F - 7
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 1 - DESCRIPTION OF COMPANY:
On January 3, 1997, the Company completed a sale of its Transmedia Network Inc. (Network) franchise and substantially all of its operating assets, other than cash and cash equivalents, to Network. This sale is described in Footnote 13. The following information and the information in Footnotes 2 - 12 describes the business carried on by the Company prior to the asset sale.
The Western Systems Corp. (formerly The Western Transmedia Company, Inc.), the "Company", was incorporated in the State of Delaware on May 30, 1978, under the name of Vigilance Systems Corp..
In accordance with Statement of Financial Accounting Standards No. 7, the Company was treated as a development stage company from January 1, 1991, the date the Company began devoting substantially all of its efforts towards establishing a new business, through September 30, 1993. During this period, the Company incurred a cumulative loss of $1,009,443.
In December 1991, the Company, through an exchange of stock, acquired 100% of the shares of a newly formed affiliate, TM West Corp. ("TM West"). This transaction was accounted for as the reorganization of entities under common control which is accounted for utilizing the pooling of interests method. TM West had raised approximately $150,000 in a private offering of its common stock in October 1991. In December 1991, TM West entered into a franchise agreement with Network . See also Note 5.
The franchise agreement (which was assigned by TM West to the Company in May 1992) allowed the Company to acquire rights to receive goods and services from restaurants ("Rights to Receive" - see Note 2f) which are then sold to the franchisors' cardholders for cash. The Rights to Receive are primarily purchased for cash or obtained in exchange for media advertising and other services purchased by the Company on behalf of the restaurants.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's financial statements are prepared in accordance with generally accepted accounting principles (GAAP). Those principles considered particularly significant are detailed below.
(a) USE OF ESTIMATES:
In preparing financial statements in accordance with generally accepted accounting principles, management makes certain estimates and assumptions, where applicable, that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. While actual results could differ from those estimates, management does not expect such variances, if any, to have a material effect on the financial statements.
F - 8
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of The Western Systems Corp. and its wholly-owned subsidiary, TM West, an inactive company. All material intercompany balances and transactions have been eliminated.
(c) CONCENTRATION OF CREDIT RISK/ FAIR VALUE:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and rights to receive.
The Company maintains significant cash investments, which exceed the Federal depository insurance coverage limit, primarily with one financial institution. The Company performs periodic reviews of the relative credit rating of this institution as part of its investment strategy.
Concentration with regards to rights to receive (see Note 2f below) are limited due to the Company's large customer base. However, at December 31, 1996 all of these rights to receive do pertain to the restaurant industry.
The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable and debt obligations approximate fair value.
(d) STATEMENTS OF CASH FLOWS:
For purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
An allowance for doubtful accounts has not been established as of December 31, 1996 and 1995, since accounts receivable as reflected on the balance sheet consists entirely of cash collected by and in transit from the franchisor (see Note 5).
(f) RIGHTS TO RECEIVE:
Rights to Receive (see Note 5) are composed primarily of food and beverage credits due from restaurants. Rights to Receive are stated at cost which approximates 50% of the retail value of Rights to Receive obtained. Cost is determined by the first-in, first-out method. Accounts payable - Rights to Receive represents the unfunded portion of the total commitment.
The Company reviews the realizability of the Rights to Receive on a periodic basis and writes-off those amounts receivable from restaurants that have ceased operations or whose credits are not utilized by the franchisors' cardholders. The analysis of rights to receive is as follows:
F - 9
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) RIGHTS TO RECEIVE (CONTINUED):
(g) PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation on property and equipment is provided on a straight-line basis over the estimated useful lives of the assets of 5 to 7 years. Leasehold improvements are amortized over the term of the lease. Maintenance and repairs are charged to operating expenses as incurred; renewals and betterments are capitalized.
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 aggregated $28,629, $25,498 and $16,631, respectively.
(h) AMORTIZATION:
The cost of the franchise rights acquired (see Note 5) is being amortized on a straight-line basis through the end of the franchise term. Amortization expense charged to operations for the years ended December 31, 1996, 1995 and 1994 aggregated $31,600, $27,850 and $27,100, respectively.
(i) NET SALES/COST OF SALES:
Net sales represent the retail value of the Rights to Receive sold, less up to the 25% savings offered to the franchisors' cardholders. A sale is recognized when the franchisor (see Note 5) receives a restaurant charge card receipt from a restaurant in the Company's franchise area, indicating that a cardholder has charged a meal. The cost of a sale consists of the actual cost of rights to receive from a restaurant (see Note 2f above).
F - 10
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) NET SALES/COST OF SALES (CONTINUED):
Revenues from card membership fees generated prior to 1996 were not been material since the Company waived substantially all first year membership fees. The Company received no portion of renewal fees.
Additionally, in January 1996, Network initiated a policy to offer both new and existing cardholders an alternative to the traditional arrangement of a 25% savings with an annual membership fee of $50.00. The new program provides a 20% savings to cardholders with no annual fee so long as cardholder usage is at least $200 during each membership year. Since January 31, 1996 substantially all new cardholders were enrolled in the 20% Program (see Note 5).
(j) INCOME TAXES:
In February 1992, the Financial Accounting Standards Board issued Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of the asset and liability approach of providing for income taxes and required implementation no later than for fiscal years beginning after December 15, 1992. Effective January 1, 1993 the Company adopted the provisions of SFAS 109. (See also, Note 10).
(k) RECLASSIFICATIONS:
Certain reclassifications were made to the 1995 and 1994 financial statements to conform to the current year's reporting format.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
F - 11
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 4 - OTHER ASSETS:
NOTE 5 - FRANCHISE AGREEMENT:
TM West, a wholly-owned subsidiary of the Company (see Note 1), was formed for the purpose of negotiating and entering into a franchise agreement with Network. This franchise agreement was executed in December, 1991, and assigned by TM West to the Company in May 1992. The term of the franchise agreement was for 10 years with an option exercisable by the Company for two additional successive 10 year periods, provided certain conditions are met. In connection with this operation, the Company changed its name to The Western Transmedia Company, Inc. (see Note 1).
Under the initial franchise agreement, the Company acquired the exclusive right to operate a franchise in the state of California, the primary business of which is the acquisition of "Rights to Receive" from restaurants located in California that accept the Transmedia Card (a private charge card marketed and issued by Network) and the sale of such Rights to Receive to holders of the card who are then entitled to either a 25% or 20% savings from listed menu prices when dining at participating restaurants.
Restaurants that join the Transmedia program are provided with two of their essential needs: advance financing and additional diners. The Company purchases for cash, and in some instances, prepaid advertising, from full service restaurants, food and beverage credits (Rights to Receive) which are then used by card members when patronizing such restaurants. Rights to Receive are purchased in an amount equal to approximately 50% of the listed menu prices of such food and beverage credits.
F - 12
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5 - FRANCHISE AGREEMENT (CONTINUED):
The Company derives its revenues from the difference between the amount it pays to restaurants for the food and beverage credits and the cardmember's charges at such restaurants net of the up to 25% savings (exclusive of tip and applicable taxes) and franchise fees payable to Network. The Company also receives 40% of the Restaurant Card membership fee for the initial year of membership of cardholders solicited by the Company and no portion of any renewal fees. However, the Company and Network have waived substantially all first year membership fees in connection with its marketing programs. Additionally, in January 1996, Network initiated a policy to offer both new and existing cardholders an alternative to the traditional arrangement of a 25% savings with an annual membership fee of $50.00. The new program provides a 20% savings to cardholders with no annual fee so long as cardholder usage is least $200 during each membership year. Since January 1, 1996 substantially all new cardholders were enrolled in the 20% Program (see Note 2(i)).
The franchise agreement to operate in California, provided for an initial franchise fee of $250,000 (which was paid in July 1992) as well as 150,000 shares of common stock of the Company (see Note 7b), which shares were issued in January 1992. The franchise agreement also provided for payments to Network's advertising and promotion fund in the amount of $250,000; one-half of which was paid with the initial franchise fee and the balance to be paid in 12 equal consecutive monthly installments, without interest, commencing in July 1993. The funds for advertising and promotion were to be used by Network for the exclusive benefit of the Company during the two year period following the effective date of the franchise agreement. Effective September 30, 1993 the Company entered into an agreement with Network whereby substantially all local advertising expenses would be paid directly by the Company, instead of through the advertising and promotional fund to which the Company had contributed. As a result of this agreement, the Company's remaining obligation under this note was terminated. In addition, Network reimbursed the Company approximately $55,000 for the unused portion of the fund contributed by the Company.
In December 1993, the Company exercised it's option to acquire the franchise to operate in the state of Washington through the issuance of 50,000 shares of common stock to Network valued by the Company at $150,000. The Company also acquired the franchise to operate in the City of Reno, Nevada and the Nevada portion of the Lake Tahoe resort area by issuing 10,000 shares of common stock to Network at a value of $30,000. The Company also exercised an option in June, 1995 to operate in the state of Oregon for an initial payment of $100,000. The Company issued 35,000 shares of its common stock to effect this payment.
F - 13
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5 - FRANCHISE AGREEMENT (CONTINUED):
For each of the franchises, the Company was also required to pay Network a 7 1/2% general service charge and a 2 1/2% advertising fee based on the gross dollar amount of food and beverage credits used by cardmembers within each territory. The Company was also required to pay a miscellaneous administrative fee based upon the number of participating restaurants and charge card transactions during any given month. Additionally, the Company was subject to a non-compete agreement.
SEE NOTE 13 RE: SUBSEQUENT EVENT - SALE OF SUBSTANTIALLY ALL OPERATING ASSETS.
NOTE 6 - LONG-TERM DEBT:
The Company is the lessee of office and computer equipment through leases which expire in years through 2000. The assets (and liability) under these leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset. The assets are depreciated over their estimated productive lives. Depreciation of assets under capitalized leases, included in depreciation expense for the years ended December 31, 1996, 1995 and 1994, aggregated $5,250, $3,381 and $2,914, respectively.
Minimum future lease payments under capitalized leases as of December 31, 1996 and for each of the next four fiscal years and in the aggregate are as follows:
1997 $ 6,544 1998 5,583 1999 4,349 2000 6,324 -------- Total minimum lease payments 22,800 Less: amount representing interest 7,198 --------- $15,602 =========
The interest rate has been calculated at approximately 10% and was based upon the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return.
In connection with the sale of the Company's assets, subsequent to the balance sheet date, the leases and the liabilities thereunder were assigned to Network (see Note 13).
NOTE 7 - COMMON STOCK:
(a) In December 1991, the Company effected a reverse stock split of its issued and outstanding common stock on a one (1) for thirty (30) basis. The number of authorized shares (25,000,000) was not changed.
F - 14
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 7 - COMMON STOCK (CONTINUED):
In May 1992, the Company effected a second reverse stock split on a one (1) for two (2) basis resulting in 1,500,000 shares, $.60 par value, issued and outstanding. The number of authorized shares was not changed.
All references to the number of common shares and per share amounts in the accompanying financial statements, have been restated to reflect the reverse stock splits.
(b) In January 1992, the Company issued 150,000 shares, as restated, of its common stock to Network (see Note 5) in connection with the franchise agreement. These shares were issued at a post reverse stock split price of $.14 per share.
In July 1992, the Company completed a private placement of 3,397,317 shares of its common stock at a price of $.60 per share (par value) which yielded net proceeds of approximately $1,966,000. With the completion of this private placement, the Company had 4,897,265 shares of its common stock outstanding. In addition, during 1991 and 1992 the Company also expended approximately $369,000 in costs associated with a terminated public offering.
(c) In July 1993, the Company completed a private placement of 1,764,624 units (each unit consisting of one share of common stock and one common stock purchase warrant) at a price of $1.70 per unit which yielded net proceeds of approximately $2,625,000. In November 1993, the Company also completed a private placement of 294,117 units (each unit consisting of one share of common stock and one common stock purchase warrant) at a price of $1.70 per unit for net proceeds of approximately $463,000. The warrants are exercisable at a price of $3.00 per share through December 1994 and at $4.00 per share thereafter and through December 1997. The warrants are also redeemable at a price of $1.00 per warrant, at the option of the Company, based upon certain circumstances.
In July 1993, the Company also issued 2,500 shares of common stock in lieu of consulting fees aggregating $6,250.
Pursuant to the terms of a employment agreement with an officer of the Company (see Note 12a) the Company reflected $46,875 as additional compensation for the year ended December 31, 1993. Payment was made by issuing 25,000 shares of common stock. The value of the shares is included in common stock subscribed as of December 31, 1993.
As payment for the exercise of franchise options for the states of Washington and the City of Reno, Nevada and the Nevada portion of the Lake Tahoe resort area (see Note 5), the Company has agreed to issue 60,000 shares of common stock to Network. These shares are valued by the Company at $180,000. This amount is also included in common stock subscribed as of December 31, 1993.
F - 15
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 7 - COMMON STOCK (CONTINUED):
(d) In December 1994, through a unit offering, warrant holders of 800,000 warrants exchanged their warrants and paid $3.00 per warrant for a unit consisting of a share of common stock and a new warrant. This offering resulted in net proceeds to the Company of $2,138,393. These new warrants are exercisable at a price of $4.00 per share through December 31, 1997. In addition, in December 1994, holders of 5,754 existing warrants exercised their right to purchase common stock at a price of $3.00 per share.
(e) In June 1995, as payment for the exercise of a franchise option for the state of Oregon, the Company issued 35,000 shares of its common stock to Network. These shares are valued by the Company at $100,000.
NOTE 8 - STOCK OPTION PLAN:
The Company has established a Stock Option Plan (the "Plan"), as amended, under which options to purchase up to a maximum of 750,000 shares of common stock may be granted to officers and other key employees. Stock options granted under this Plan, which may be either incentive stock options or nonqualified stock options for federal income tax purposes, expire up to ten years after date of grant and become exercisable over a three year period. Employees who have left the Company have 90 days to exercise their options. In December 1996, the stockholders agreed to an amendment to the Plan, whereby in the event of a sale of the assets of the Company (see Note 13) all options outstanding would become immediately exercisable without regard to any vesting provisions.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.8 % and 8.4%; volatility factors of the expected market price of the Company's common stock of .41 and .38; and a weighted average expected life of the options of 7 1/2 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
F - 16
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 8 - STOCK OPTION PLAN (CONTINUED):
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Company's pro forma information follows:
1996 1995 ---- ---- Net income As reported $545,024 $ 10,942 Pro forma 475,054 (85,248)
Primary earnings per share As reported $.07 $ - Pro forma .06 (.01)
A summary of stock activity, and related information for the years ended December 31 follows:
Weighted Average Options Exercise Price ------- --------------
Outstanding, December 31, 1993 349,000 $1.72 Granted 32,500 3.25 Exercised (17,500) .76 Cancelled (12,500) 2.39 ----------- ------
Outstanding, December 31, 1994 351,500 1.88 Granted 320,000 2.85 Exercised - - Cancelled (2,500) 1.75 ------------ ------
Outstanding, December 31, 1995 669,000 2.35
Weighted average fair value of options granted during the year .94
Granted 50,000 1.94 Exercised - - Cancelled (245,000) 2.46 ---------- ------ OUTSTANDING, DECEMBER 31, 1996 474,000 $2.24 =========== =====
Weighted average fair value of options granted during the year $ .18
Options exercisable as of: December 31, 1994 106,833 $1.43 December 31, 1995 179,833 1.61 December 31, 1996 278,167 2.02
Exercise prices for options outstanding as of December 31, 1996 ranged from $.60 to $3.75. The weighted average remaining contractual life of these options is 8 years.
F - 17
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 9 - BUSINESS CONCENTRATIONS:
Most of the Company's participating restaurants are located in the San Francisco/Los Angeles areas. No single participating restaurant accounted for more than 5% of the Company's sales in any fiscal year presented.
No single participating restaurant's Rights to receive balance was greater than 5% of the total Rights to receive balance at December 31, 1996 and 1995.
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
For the Year Ended December 31, ---------------------------- 1996 1995 1994 ---- ---- ---- Current taxes: Federal $ - $ - $ - State - - - ---------- ------ ------ Total - - - ---------- ------ ------
Deferred taxes: Federal (104,000) - - State (33,000) - - ---------- ------ ------ Total (137,000) - - ---------- ------ ------
Benefit of operating loss carryforwards (720,000) - - ---------- ------ ------
Provision (credit) for income taxes $(857,000) $ - $ - ========= ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts for assets and liabilities for financial reporting purposes as well as the effect of operating loss carryforwards. Significant components of the Company's net deferred tax asset are as follows:
1996 1995 ---- ---- Tax effects of: Operating loss carryforwards $720,000 $ 680,000 Allowance for rights to receive 140,000 115,000 Property and equipment (3,000) (2,500) -------- ----------- Gross deferred tax asset 857,000 792,500 Valuation allowance - (792,500) -------- ---------- Net deferred tax asset $857,000 $ - ========= ===========
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THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 10 - INCOME TAXES (CONTINUED):
The Company has available at December 31, 1996 and 1995, unused operating loss carryforwards of approximately $1,950,000 and $1,744,000 respectively which expire in various years through 2011. As of December 31, 1996, the Company has recorded the tax benefits associated with future deductible temporary differences and NOL carryforwards since it generated taxable income in connection with a sale of its operating assets in January 1997, subsequent to the balance sheet date (see Note 13).
NOTE 11 - EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share has been computed on the basis of the weighted average number of common shares and common equivalent shares outstanding during each period presented. The effect on earnings (loss) per share resulting from the exercise of common stock warrants and options is antidilutive and therefore not shown for 1994.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
(a) EMPLOYMENT/CONSULTING AGREEMENTS:
The Company entered into an employment agreement with its Chief Executive Officer, which agreement commenced January 1, 1995 and expired on December 31, 1996. The agreement provided for a base annual salary of $175,000 for the first year and $200,000 for 1996. This employee is also entitled to a bonus, based upon pre-tax earnings, of 5% on the first $2,000,000 and 6 1/2% on all earnings in excess of $2,000,000. The employee was also granted options to acquire 150,000 shares of common stock at prices ranging from $2.82 to $3.75 per share. The employment agreement also contains provisions for a covenant not to compete in the event of termination and various buy-out provisions in the event of termination, disability, death or a sale of a controlling interest or substantially all the assets of the Company.
The Company also entered into an agreement with an Executive Vice President. This agreement was effective as of January 1, 1995 and would have expired on December 31, 1996. The terms of this agreement provided for an annual base salary of $115,000 for the first year and $140,000 for the second year. This employee was also granted options to acquire 105,000 shares of common stock at prices ranging from $2.82 to $3.75 per share. The Executive Vice President resigned from the Company in January 1996.
The Company had also entered into a consulting agreement with a company in which a director and its executive vice president are shareholders. The agreement provided for monthly consulting fees of $2,500 for the first 12 months, increasing to $2,917 per month thereafter through December 1996. This agreement was terminated effective December 31, 1995.
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THE WESTERN SYSTEMS CORP. AND SUBSIDIARY (FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(B) OPERATING LEASE:
The Company has entered into operating leases for office space which expire in various years through 1999 with renewal options. The leases provide for payment of taxes and the Company's proportionate share of basic operating costs.
Minimum future base rental payments under these leases, for each of the next three years and in the aggregate are as follows:
Year ending December 31, 1997 $ 60,078 Year ending December 31, 1998 58,874 Year ending December 31, 1999 40,399 --------- $159,351
Rent expense for the years ended December 31, 1996, 1995 and 1994 aggregated $115,991, $113,859 and $91,931, respectively.
Effective with the asset sale (see Note 13) the aforementioned leases were assigned to and assumed by Network.
The Company also leases office space in Orange County, California, on a month-to-month basis, at a cost of $640 per month. The Company terminated this lease on January 31, 1997.
(C) SUBSEQUENT EVENT:
See Note 13 regarding sale of substantially all operating assets.
NOTE 13 - SUBSEQUENT EVENT - SALE OF ASSETS:
On January 3, 1997, the Company sold its Transmedia Network franchise for the states of California, Oregon, Washington and parts of Nevada and substantially all of its operating assets, other than cash and cash equivalents, to its franchisor, Transmedia Network, Inc. ("Network"). Upon consummation of the asset sale, the Company's assets consisted principally of cash and cash equivalents aggregating approximately $9,574,000 and liabilities consisting of approximately $800,000 of taxes on the gain resulting from the asset sale. The Company also transferred its obligations under capital and operating leases entered into, to Network. In connection with the asset sale the Company and Network exchange general releases of all liabilities and obligations under the franchise agreement (see Note 5). However, pursuant to the terms of the contract, should the Rights to Receive of a certain restaurant group become uncollectible within 12 months of the closing date, the Company is obligated to repurchase those Rights to Receive from Network at the then outstanding full cash amount. The Company would then have the opportunity to recover the amount paid to Network from the restaurant group and guarantors. Such Rights to Receive totaled approximately $100,000.
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