UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to_________________________
Commission file number 0-24404
TRANSMEDIA EUROPE, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-3701141
--------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
11 ST. JAMES'S SQUARE, LONDON SW1Y 4LB, ENGLAND
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(Address of principal executive offices) (zip code)
U.K. 011-44-171-930-0706
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(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes |_| No |X|
34,867,431 Shares, $.00001 par value, as of May 19, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date)
TRANSMEDIA EUROPE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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June 30, September 30,
1999 1998
(Unaudited) (Audited)
----------- ---------
Assets
- ------
Current assets
Cash and cash equivalents $ 384,594 $ 747,913
Trade accounts receivable 508,741 656,859
Restaurant credits (net of allowance for irrecoverable
credits of $ 297,403 as of June 30, 1999 and
$ 340,804 as of September 30, 1998) 684,207 1,075,406
Amounts due from related parties (note 7) 1,598,624 2,780,234
Prepaid expenses and other current assets 410,817 380,440
----------- -----------
Total current assets 3,586,983 5,640,852
----------- -----------
Non current assets
Investment in affiliated company (Note 5) 204,517 311,756
Office furniture and equipment, (net of accumulated
depreciation of $ 967,028 as of June 30, 1999 and
$1,037,004 as of September 30, 1998) 380,471 284,602
Goodwill, (net of accumulated amortization
of $ 927,767 as of June 30, 1999 and
$ 678,166 as of September 30, 1998)(note 6) 10,276,113 3,686,832
Intangible and other assets, (net of accumulated
amortization of $731,332 as of June 30, 1999 and
$ 631,944 as of September 30, 1998) (note 6) 1,289,952 989,340
Other assets 287,436 155,583
----------- -----------
Total non-current assets 12,438,489 5,428,113
----------- -----------
TOTAL ASSETS $16,025,472 $11,068,965
=========== ===========
See accompanying notes
2
TRANSMEDIA EUROPE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
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June 30, September 30,
1999 1998
(Unaudited) (Audited)
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities
Trade accounts payable $ 1,487,192 $ 2,146,034
Bank lines of credit 203,664 516,471
Deferred income 985,774 721,542
Accrued liabilities 1,747,926 2,062,879
Liability for sign on fees -- 296,500
Amount due to related parties (note 7) 2,315,499 2,316,405
Notes payable 3,972,541 4,740,000
------------ ------------
Total Current Liabilities 10,712,596 12,799,831
Non-current liabilities 34,986 27,676
------------ ------------
Total liabilities 10,747,582 12,827,507
------------ ------------
Minority interest 145,571 585,421
Stockholders' equity
6 1/2 % Convertible preferred stock, $0.01 par value
per share, 5,000,000 shares authorized, 590,857
issued and outstanding shares as of June 30, 1999
and September 30, 1998 5,909 5,909
Common stock, $0.00001 par value per share
Authorized 95,000,000 shares;
(28,350,177 issued and outstanding as of June 30, 1999
and 18,376,454 as of September 30, 1998) 283 184
Additional paid in capital 27,414,438 17,018,781
Treasury stock (at cost, 196,995 shares) (517,112) (517,112)
Cumulative foreign currency translation
adjustment 37,535 (366,808)
Accumulated deficit (21,808,734) (18,484,917)
------------ ------------
Total Stockholders' Equity 5,132,319 (2,343,963)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,025,472 $ 11,068,965
============ ============
See accompanying notes
3
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
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Three months Three months Nine months Nine months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Total Revenues $ 2,213,530 $ 2,377,941 $ 7,273,831 $ 8,497,335
Cost of revenues (1,148,519) (862,984) (4,221,834) (4,826,392)
------------ ------------ ------------ ------------
Gross profit 1,065,011 1,514,957 3,051,997 3,670,943
Selling, general and
administrative expenses (1,673,628) (2,856,085) (5,688,240) (7,091,432)
------------ ------------ ------------ ------------
Loss from operations (608,617) (1,341,128) (2,636,243) (3,420,489)
Share of profits/losses and amortization of
goodwill of affiliated companies (106,964) 61,191 (107,239) 99,484
Interest expense (162,447) (138,024) (485,996) (211,120)
Interest income 1,172 4,377 7,525 12,578
------------ ------------ ------------ ------------
Loss before income taxes (876,856) (1,413,584) (3,221,953) (3,519,547)
Income taxes (benefit) (1,049) 49,050 (1,049) 49,050
------------ ------------ ------------ ------------
Loss after income taxes (877,905) (1,364,534) (3,223,002) (3,470,497)
Minority Interest 103,464 130,649 -- 303,028
Preferred stock dividend (33,605) (28,564) (100,815) (95,774)
------------ ------------ ------------ ------------
Net loss (808,046) (1,262,449) (3,323,817) (3,263,243)
============ ============ ============ ============
Loss per common share $ (0.03) $ (0.07) $ (0.16) $ (0.20)
Weighted average number of common
shares outstanding 22,154,619 17,866,476 20,608,318 15,928,331
See accompanying notes
4
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
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Three months Three months Nine months Nine months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net loss (808,046) (1,262,449) (3,323,817) (3,263,243)
Other comprehensive income (loss)
Foreign currency translation
adjustment 183,439 (7,648) 404,343 (115,304)
----------- ----------- ----------- -----------
Comprehensive loss $ (624,607) $(1,270,097) $(2,919,474) $(3,378,547)
=========== =========== =========== ===========
5
TRANSMEDIA EUROPE INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
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Nine months ended Nine months ended
June 30, 1999 June 30, 1998
----------------- -----------------
Cash flows from Operating Activities:
- - Net loss $(3,323,817) $(3,263,243)
Adjustment to reconcile net loss
to net cash used in operating activities
- - Depreciation of property and equipment 27,451 121,811
- - Amortization: Goodwill 249,601 228,510
- - Amortization: Affiliates 19,004 89,975
- - Amortization: Intangibles 99,388 61,033
- - Provision for irrecoverable restaurant credits (43,401) 100,000
- - Share of profits/losses of affiliates 88,235 (189,459)
- - Minority interests -- (303,028)
Changes in assets and liabilities:
- - Trade accounts payable (716,322) 485,329
- - Accrued liabilities (622,044) (543,925)
- - Restaurant credits 434,600 69,924
- - Prepaid expense and other current assets 30,655 (653,026)
- - Trade accounts receivable 180,663 (287,740)
- - Deferred income 264,232 (49,063)
- - Accrued sign-on fees (296,500) 1,258,090
- - Other assets (131,853) --
- - Non-current liabilities 7,310 --
- - Accrued interest 47,335 193,456
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Net cash used in operating activities (3,685,463) (2,681,356)
----------- -----------
Cash flows from investing activities:
- - Purchase of NAMA (100,000) --
- - Purchase of Porkpine (25,575) (897,455)
- - Purchase of NHS -- (2,314,143)
- - Property and equipment (purchases)/disposals 25,878 245,550
- - Advances made in connection with potential acquisition -- (32,666)
----------- -----------
Net cash used in investing activities (99,697) (2,998,714)
----------- -----------
Cash flows from financing activities:
- - Net proceeds received from issuance of common stock 3,757,000 4,235,753
- - Due from/(to) related parties 1,126,319 447,790
- - Notes payable/(repayments) (1,432,459) 1,599,163
- - DBS Direct - Capital contribution by TMAP 375,000 --
- - Repayment of Line Credit (312,807) (391,615)
----------- -----------
Net cash (used in)/provided by financing activities 3,513,053 5,891,091
----------- -----------
Effect of foreign currency on cash (93,940) (124,967)
Minority interest -- 123,180
----------- -----------
Net (decrease)/increase in cash and
cash equivalents (366,047) 209,234
Cash and cash equivalents at beginning of period 747,913 554,624
Cash acquired with acquisitions 2,728
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Cash and cash equivalents at end of period $ 384,594 $ 763,858
=========== ===========
See accompanying notes
6
TRANSMEDIA EUROPE INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
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Interest and income tax cash payments during the periods presented were as
follows:
Nine months ended Nine months ended
June 30, 1999 June 30, 1998
----------------- -----------------
Interest $138,057 $ 43,714
Income Taxes -- --
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
(i) In December 1998 the Company issued 600,000 shares of its common
stock to acquire the interests of minority shareholders in
Transmedia France.
(ii) In December 1997 the Company issued 500,000 shares of its common
stock as part payment of the purchase consideration paid by NHS
Australia Pty Limited for the business assets and undertaking of
Nationwide Helpline Services Pty Limited.
(iii) In June 1999 the Company issued 4,831,057 shares of common stock as
part payment of the purchase consideration paid by the Company to
acquire its interest in DSS Direct Connect, LLC.
7
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - The Company
Transmedia Europe, Inc. ("TME" or "the Company") is a global provider of
membership-based consumer and business services through its subsidiaries and
affiliates. These services are primarily marketed to major corporations
providing specifically designed loyalty programs to assist in customer
acquisition, activation and retention. The Company's various member-benefit
programs are currently offered in 28 countries and globally via the internet.
The Company estimates that it currently has over 9 million members participating
in its various loyalty programs.
The business of the Company comprises four segments:
1. The design and supply of a range of loyalty marketing and member benefit
programs to corporations and affinity groups. Additionally, the Company
provides member benefit packages to individuals on an international scale,
2. E-commerce and internet services,
3. Direct marketing through DBS Direct, and
4. Travel services.
History
The Company was incorporated under the laws of the State of Delaware in February
1993. On May 19, 1993 the Company acquired, pursuant to a Master License
Agreement ("License Agreement") dated December 14, 1992, as amended April 12,
and August 11, 1993 an exclusive license (the "License") to use certain
trademarks and service marks, proprietary computer software programs and
know-how of Transmedia Network, Inc. ("Network") to establish and operate a
discount restaurant charge card business in clearly defined geographical areas.
On April 7, 2000 the Company and Network executed a termination agreement
("Termination Agreement") pursuant to which the Company agreed to cancel the
License Agreement in return for forgiveness of indebtedness. See "Recent
Developments" below. The License was limited to the United Kingdom and France
(the "Licensed Territories"). The Company commenced operations as a discount
restaurant charge card business in the United Kingdom in January 1994 and in
France in March 1996. Network was issued 496,284 shares of common stock, par
value $.00001 per share ("Common Stock") of the Company, as part consideration
for the License.
The Company has worked closely with Transmedia Asia Pacific, Inc. ("TMAP") for a
number of years. TMAP acquired a similar license to that of the Company to
operate a discount restaurant charge card business in Asia and other Pacific Rim
countries. TMAP commenced operations in Sydney, Australia in November 1994. TMAP
also executed the Termination Agreement on April 7, 2000.
Through 1996 the Company operated solely as a discount restaurant charge card
business in the United Kingdom through its wholly owned subsidiary Transmedia UK
PLC. In late 1996 management identified the need to expand the Company's
operations to become a broader based "member benefits" provider, believing that
the Company needed a range of benefits to offer its corporate clients and
individual members, in addition to discount dining. Such benefits included
discount shopping, travel, hotel accommodation and telephone helpline services.
TMAP made a similar strategic decision. As a result the Company and TMAP jointly
acquired in April
8
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - The Company (continued)
1997 Countdown Holdings Limited ("Countdown"), an international provider of
membership based discount shopping and services. In December 1997 the Company
and TMAP acquired control of NHS Australia Pty Limited ("NHS"), through
Transmedia Australia Holdings Pty Limited ("Transmedia Australia"). NHS owned
the business operations of Nationwide Helpline Services Pty Limited
("Nationwide"). NHS is a provider of telephone helpline services covering advice
on legal, tax, accounting, medical and home emergency. In addition, NHS offers
travel related products such as airline tickets, vacation packages, insurance
and provides international medical case management and repatriation services to
a number of insurance companies. On May 14, 1998 the Company and TMAP jointly
acquired Porkpine Limited ("Porkpine"). Porkpine trades as Logan Leisure, a
business which produces and sells discount shopping and services directories in
Ireland. On May 22, 1998 the Company and TMAP jointly acquired, through
Transmedia Australia Travel Holdings Pty Limited ("Transmedia Holdings")
Breakaway Travel Club Pty Limited ("Breakaway"). Breakaway is a licensed travel
agent specializing in discount packaged vacations for individuals employed in
the travel industry in Australia. In July 1998 the Company and TMAP jointly
established Countdown USA, Inc. ("Countdown USA") to offer member benefits in
the United States and in November 1998 Countdown USA acquired the membership
base and certain assets of National Association of Mature Americans, Inc., a
provider primarily of discounted mail order and retail pharmacy products. On
November 17, 1998, Transmedia Australia acquired the balance of 49% of the
shares of common stock of NHS. In November 1998 Countdown launched an internet
shopping web-site, Countdown-Arcade. Finally, on June 15, 1999 the Company and
TMAP jointly acquired DSS Direct Connect, L.L.C. ("DBS Direct") a marketer and
full-service installer of DirecTV.
Recent Developments
In light of the close collaboration between the Company and TMAP since
incorporation and, more particularly, in view of their joint ownership of
Countdown, DBS Direct, Countdown USA, Logan Leisure, NHS, and Breakaway Travel,
management of the Company and TMAP assessed the rationale for a merger of the
two entities. Management believed that keeping the two companies distinct and
separate is not appropriate or advantageous to shareholders and therefore on
December 28, 1999 they executed a definitive merger agreement ("Merger
Agreement"). Under the terms of the Merger Agreement, TMAP will issue one share
of its common stock for each share of Common Stock of the Company. The merger,
which is expected to be completed in the third quarter of 2000, is subject to a
number of conditions, including shareholder approval. The Company and TMAP each
established independent committees to determine the fairness of the proposed
transaction from a financial point of view.
On April 7, 2000 the Company and Network executed the Termination Agreement
pursuant to which the Company agreed to cancel the License Agreement in return
for forgiveness of a promissory note in default in the sum of $250,000 together
with accrued interest of approximately $69,000, forgiveness of a non-interest
bearing promissory note in default in the sum of $750,000 and forgiveness of
past due royalty payments under the License Agreement in the sum of
approximately $170,000. The Termination Agreement provides for a transition
period through June 30, 2000 during which period the Company will transfer its
restaurant cardholder and participating restaurant bases to a new
discount-dining product not bearing the Transmedia name. The Company believes
that termination of the License Agreement is in the best interests of the
Company because the License Agreement was no longer fundamental to the success
of the Company's restaurant card business. The restaurant card business is now
an integral part of the Company's member benefit/loyalty marketing operations
and therefore is expected to operate more favorably under a brand developed by
the Company. Further, the Company developed its own software and systems and
therefore the Company received no benefit from the systems and software provided
under the License Agreement for the conduct of its day-to-day operations. The
Company realized a material financial benefit from the Termination Agreement.
9
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 - The Company (continued)
As of June 30, 1999, Transmedia Europe, Inc., had the following equity interests
in its direct subsidiaries and affiliates:
Name Country of Incorporation % Owned
Subsidiaries:
Transmedia UK plc United Kingdom 100
Countdown Holdings Limited United Kingdom 50
Porkpine Limited Channel Islands 50
Countdown USA, Inc. United States 50
DSS Direct Connect, LLC United States 50
Affiliates:
Transmedia Australia Holdings Pty Ltd Australia 50
Transmedia Australia Travel Holdings Pty Ltd Australia 50
All references herein to "Company" and "TME" include Transmedia Europe, Inc. and
its subsidiaries unless otherwise indicated.
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, the statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position as of June 30, 1999, the results of
operations for the three and nine months ended June 30, 1999 and 1998 and the
changes in cash flows for the nine months ended June 30, 1999 and 1998. The
results of operations for the three and nine months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
The September 30, 1998 balance sheet has been derived from the audited
consolidated financial statements as of that date included in the Company's
annual report on Form 10-K. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K.
Although the Company has significant influence over the operating and financial
decisions of its affiliates, the Company does not have effective control over
their operations and therefore they are accounted for under the equity method.
10
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Note 3 - Significant accounting policies
(a) Principles of consolidation
The consolidated unaudited financial statements include the
financial statements of the Company and its subsidiaries and
affiliates, including 50% held subsidiaries where effective control
is exercised by the Company over the financial and operational
decisions of the subsidiary. All significant intercompany
transactions have been eliminated on consolidation.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern.
(b) Restaurant credits
Restaurant credits represent the total advances made to
participating restaurants in exchange for food and beverage credits,
less the amount by which these food and beverage credits are
recouped by the Company as a result of cardholders utilizing their
cards at participating restaurants. The amount by which such food
and beverage credits are recouped amounts to approximately 50% of
the retail value of food and beverage consumed by cardholders. The
Company reviews recoverability of restaurant credits and establishes
an allowance for restaurant credits to restaurants that have ceased
operations or whose credits may not be utilized by cardholders.
The amount of funds advanced to participating restaurants are
generally unsecured and are recoverable as cardholders use their
restaurant charge card at such restaurants. In certain cases the
Company may request a personal guarantee from the owner of a
restaurant as surety for advances made. Generally no other forms of
collateral or security are obtained from restaurant owners.
(c) Long-lived assets
Long-lived assets, such as office furniture and equipment, goodwill
and other intangibles, are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair
value.
(d) Intangible assets excluding goodwill
Other intangible assets consist primarily of the cost of the
Transmedia License paid to Network in cash plus the fair value of
shares of Common Stock granted in exchange for the Transmedia
License to operate in the licensed territories using the systems,
procedures and 'know how' of the Transmedia business. As of June 30,
1999 the license cost was being amortized on a straight-line basis
over its estimated useful life of 15 years from the commencement of
operations in December 1993.
11
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Note 3 - Significant accounting policies (continued)
(e) Office furniture and equipment
Office furniture and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method over the estimated lives of between three and five years.
(f) Goodwill
The excess of cost of investments over the fair value of net assets
acquired which is not otherwise allocated is determined to be
goodwill and is amortized on a straight-line basis over a period of
ten or fifteen years.
(g) 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. Accordingly, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted 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. A valuation
allowance is established to reduce the deferred tax assets when
management determines it is more likely than not that the related
tax benefits will not be realized.
(h) Cash equivalents
For purposes of the statements of cash flows, the Company considers
all investments with an original maturity of three months or less to
be a cash equivalent.
(i) Financial instruments
Financial instruments held by the Company include cash and cash
equivalents, notes payable, restaurant credits and amounts due
from/to related parties and approximated fair value as of June 30,
1999 and September 30, 1998 due to either short maturity or terms
similar to those available to similar companies in the open market.
12
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3 - Significant accounting policies (continued)
(j) Revenue recognition
Revenues and fees comprise:
i) the retail value of food and beverages purchased from
participating restaurants by the Company's Transmedia
cardholders (less the cardholders' 20% or 25% discount) and
cardholders' membership fees.
ii) Countdown cardholders' membership fees and Countdown voucher
sales.
iii) Countdown license fees from licenses.
iv) Porkpine cardholders' membership fees and voucher sales.
v) Countdown USA membership fees.
vi) DBS Direct revenue from the sale of DirecTV equipment and
installation charges and subscriber activation commissions.
Transmedia card membership fees are recognized as revenue in equal
monthly installments over the membership period. All other
components of revenue, including other membership fees and Countdown
license fees are non-refundable and recognized as revenue when the
related services have been performed.
(k) Foreign currencies
The reporting currency of the Company is the United States dollar.
The functional currencies of the Company's operating subsidiaries
and affiliates are UK pound sterling, United States dollar, Irish
punt and the Australian dollar. The UK pound sterling (Countdown and
Transmedia UK), United States dollar (Countdown USA and DBS Direct)
and Irish punt (Porkpine) are the functional currencies of the
Company's member benefits/loyalty marketing and direct marketing
businesses because it is the primary currency of the environments in
which the businesses operate as autonomous units. All cash generated
and expended by these businesses is in those currencies. For the
same reasons the functional currency of the company's interests in
Transmedia Australia and Breakaway is the Australian dollar because
those businesses are located, and primarily operate in Australia.
For consolidation purposes, the assets and liabilities of overseas
subsidiaries are translated at the closing exchange rates.
Consolidated statements of income of such subsidiaries are
consolidated at the average rates of exchange during the period.
Exchange differences arising on the translation of subsidiaries'
financial statements are recorded in the cumulative foreign currency
translation adjustment account as a component of stockholders'
equity.
Transactions in foreign currencies are recorded using the rate of
exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated using
the rate of exchange ruling at the balance sheet date and the gains
or losses on translation are included in the consolidated statement
of operations.
13
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3 - Significant accounting policies (continued)
(k) Foreign currencies (continued)
The average exchange rates during the three and nine months ended
June 30, 1999 and 1998 and the exchange rates in effect at June 30,
1999 and September 30, 1998 were as follows:
UK Pound Australian Irish French
Sterling (pounds) Dollar Punt Franc
Average exchange rates:
3 months ended June 30, 1999 1.6067 0.6539 1.3415 5.1384
3 months ended June 30, 1998 1.6542 0.7697 1.5257 6.0200
9 months ended June 30, 1999 1.6455 0.6374 1.4213 5.5772
9 months ended June 30, 1998 1.6347 0.7810 1.5884 6.0000
Closing exchange rate:
June 30, 1999 1.5763 0.6611 1.4903 5.5866
September 30, 1998 1.6125 0.7251 1.4545 5.6000
(l) Comprehensive income
The Company adopted Statement of Financial Accounting Standard
("SFAS") No.130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income (loss),
its components and accumulated balances. Comprehensive income (loss)
is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, SFAS No.130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income (loss) be reported in a financial statement
that is displayed with the same prominence as other financial
statements. The only item of comprehensive income (loss) is foreign
currency translation adjustments.
(m) Recent accounting pronouncements not yet implemented
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities", which establishes standards for accounting for
the various derivative instruments commonly used in hedging
activities. This standard is now effective for fiscal years
beginning after June 15, 2000. While management is still reviewing
the statement, it believes the adoption of this statement will not
have a material effect on the Company's consolidated financial
position, results of operations or cash flows, and any effect will
generally be limited to the form and content of its disclosures.
14
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4 - Transmedia France
On December 18, 1998 the Company adopted a formal plan to discontinue operations
in France with the dissolution of Transmedia La Carte Restaurant S.A.
(Transmedia France"). This dissolution was completed on November 29, 1999.
Transmedia France recorded an operating loss in the quarter ended December 31,
1998 of $235,082 and a loss on liquidation of $36,768. The assets of Transmedia
France were written down to fair value in the year ended September 30, 1998.
Note 5 - Investment in Affiliated Companies
Investment in affiliated company comprises the Company's interest in Transmedia
Australia Holdings and Transmedia Australia Travel Holdings, which are made up
as follows:
June 30, September 30,
1999 1998
Transmedia Australia Holdings
Cost of investment $ 253,349 $ 253,349
Share of profits/(losses)
- From acquisition date to September 30, 1998 (68,666) (68,666)
- Nine months ended June 30, 1999 (25,597) --
- Amortization of goodwill on investment (20,430) (7,763)
--------- ---------
$ 138,656 $ 176,920
========= =========
Transmedia Australia Travel Holdings
Cost of investment $ 126,748 $ 126,748
Share of profits/(losses)
- From acquisition date to September 30, 1998 9,496 9,496
- Nine months ended June 30, 1999 (62,638) --
- Amortization of goodwill on investment (7,745) (1,408)
--------- ---------
$ 65,861 $ 134,836
========= =========
Total investment in affiliates $ 204,517 $ 311,756
========= =========
15
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6 - Goodwill and Other Intangible Assets
Goodwill is made up as follows:
June 30, September 30,
1999 1998
Acquisition of Countdown $ 3,560,591 $ 3,560,591
Acquisition of Transmedia France -- (64,621)
Acquisition of Porkpine 894,603 869,028
Acquisition of DBS Direct 6,748,686 --
------------ ------------
Total 11,203,880 4,364,998
Less: accumulated amortization (927,767) (678,166)
------------ ------------
$ 10,276,113 $ 3,686,832
============ ============
Intangible assets are made up as follows:
June 30, September 30,
1999 1998
Cost of Transmedia License 1,621,284 2,371,284
Impairment of Transmedia License -- (750,000)
Acquisition of NAMA 400,000 --
----------- -----------
2,021,284 1,621,284
Less: accumulated amortization (731,332) (631,944)
----------- -----------
Total $ 1,289,952 $ 989,340
=========== ===========
16
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7 - Related Parties
Amounts due from related parties comprise the following:
June 30, September 30,
1999 1998
Related Party:
Transmedia Asia Pacific, Inc. 931,366 1,567,312
Transmedia Australia 151,306 224,901
Conestoga Partners Inc. 208,035 208,035
International Advance 307,917 779,986
---------- ----------
Total $1,598,624 $2,780,234
========== ==========
Amounts due to related parties comprise the following:
June 30, September 30,
1999 1998
Related Party:
J. V. Vittoria 1,227,507 1,182,137
TMNI 1,087,992 1,037,533
E. Guinan III -- 96,735
---------- ----------
Total $2,315,499 $2,316,405
========== ==========
Note 8 - Notes Payable
On April 29, 1998 the Company engaged in a private placement of debt securities.
The placement was made pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. The placement consisted of three 250,000 pounds sterling
(approximately $425,000) face amount 8% promissory notes payable on November 1,
1998 and one 200,000 pounds sterling (approximately $340,000) face amount 8%
promissory note payable on the same date. The holders of the 250,000 pounds
sterling promissory notes each received a three and a half year warrant to
purchase 41,660 shares of Common Stock at an exercise price of $2.00 per share
(the market price of the Company's Common Stock on the date of grant) and the
holder of the 200,000 pounds sterling promissory note received a warrant to
purchase 33,328 shares on the same terms. The Company failed to pay the
promissory notes on the due date and accordingly, pursuant to the terms of the
promissory notes, the holders each received additional warrants for the same
number of shares and exercisable on the same terms as the original warrants. The
warrants are exercisable at any time after issuance through November 1, 2001.
The Company has now repaid all the promissory notes in full, together with
accrued interest.
17
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8 - Notes Payable (continued)
In consideration for extending the time available to the Company to repay the
balance of the promissory notes, two of the note holders received additional
warrants to purchase in aggregate 74,988 shares of Common Stock at an exercise
price of $1.00 per share. Such warrants are exercisable at anytime through
November 1, 2001. In addition, the Company agreed to adjust the exercise price
of all warrants issued to the four promissory note holders to $1.00 per share.
On July 2, 1998 the Company engaged in a private placement of debt securities.
The placement was made pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. The placement consisted of a $3,125,000 face amount, 8%
promissory note ("Note") payable on January 5, 1999 and resulted in net proceeds
to the Company of $2,926,588 after deduction of arrangement fees. The Note was
secured by a pledge of 2 million shares of the common stock of TMAP ("Security
Shares") held by Edward J. Guinan III, then Chairman of the Board and Chief
Executive Officer of the Company. Additionally, the note holder received a
warrant to purchase 600,000 shares of Common Stock at an exercise price of $2.00
per share. The warrant was exercisable at anytime from July 6, 1998 through July
6, 2001. The Company failed to pay the Note on the due date. The Company was in
discussions with the note holder through September 1999 to agree extensions of
time to repay the Note. In consideration for extending the time available to the
Company to repay the Note, on September 15, 1999 the Company agreed to replace
the warrant issued to the note holder with a new warrant to purchase 700,000
shares of Common Stock at an exercise price of $1.00 per share. The warrant was
exercisable at anytime from September 15, 1999 through September 30, 2002.
Through September 1999 the Company made repayments totaling $1,050,000. In
November 1999 the note holder commenced sales of the Security Shares realizing
net proceeds of $2,100,230. The Company has now paid the principle of the Note
in full together with accrued interest.
Note 9 - Stockholders Equity
On October 16, 1998 the Company commenced a private placement pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder. The placement closed
on November 30, 1998 upon the sale of 842,666 shares of common stock at $0.75
per share, resulting in net proceeds to the company of $632,000. See Note 17 -
Subsequent Events.
On January 25, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on February 24, 1999 upon the sale of 700,000
shares of Common Stock at $1.25 per share resulting in net proceeds to the
Company of $875,000.
On May 11, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on June 25, 1999 upon the sale of 3 million
shares of common stock at $.75 per share resulting in net proceeds to the
Company of $2,250,000.
18
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10 - Acquisitions
NHS
On December 2, 1997, Transmedia Australia purchased 51% of the shares of common
stock of NHS. NHS purchased the net assets and business of Nationwide. The total
consideration paid by Transmedia Australia for its 51% interest in the equity
capital of NHS was Aus$6,000,000 (approximately $4,290,000 as of December 2,
1997). Transmedia Australia also agreed to purchase the balance of the equity
capital of NHS for Aus$2,500,000 (approximately $1,787,500) on June 30, 1998
with the right to extend such obligation ("Balance Obligation") until September
30, 1998. Transmedia Australia agreed to pay interest at 5% per annum on the
Balance Obligation for the three months ended September 30, 1998. Transmedia
Australia exercised the extension right. In addition, the Company and TMAP
agreed to pay Aus$4,000,000 in sign-on fees to the two former executive
directors of Nationwide, payable in two equal installments. The first
installment was payable on January 31, 1998 and the second installment was due
for payment on June 30, 1998 but was deferred until September 30, 1998.
Transmedia Australia was unable to make the payments due on September 30, 1998.
However, Transmedia Australia commenced negotiations with Nationwide and on
October 21, 1998 reached an agreement pursuant to which the settlement date for
the Balance Obligation and the final installment of the sign-on fees was
extended to November 16, 1998. In addition, the second installment of the
sign-on fees was reduced from Aus$1 million for each of the Company and TMAP (a
total of Aus$2 million) to Aus$500,000 for each of the Company and TMAP (a total
of Aus$1 million). Finally, it was agreed that the employment contracts of
Messrs. Bostridge and Swinbourn be terminated effective November 16, 1998 upon
payment of three months salary to each. On November 17, 1998 Transmedia
Australia acquired the remaining 49% and settled the Balance Obligation. The
Company and TMAP also paid the balance of the reduced sign-on fees on that date
and the three months salary to Bostridge and Swinbourn. In addition, accrued
interest in the amount of Aus$47,557 (approximately $29,960) was paid. The total
revised sign-on fees of Aus$3,000,000 (approximately $1,940,000) were charged in
full as compensation expense in the income statements of the Company and TMAP
for the year ended September 30, 1998.
The final payments to Nationwide and Bostridge and Swinbourn were funded from
the proceeds of a One Year Secured Promissory Note ("Promissory Note") in the
principal sum of $3.4 million executed on November 16, 1998 between TMAP and FAI
General Insurance, a shareholder of the Company. Interest on the Promissory Note
accrues at the rate of 10% per annum and is payable quarterly in arrears. The
Promissory Note was secured by a charge over Transmedia Australia and was
guaranteed by the Company. The Promissory Note holder received a three-year
warrant to purchase 1 million shares of the common stock of TMAP at an exercise
price of $1.00 per share. In addition, TMAP agreed to exchange warrants to
purchase 633,366 shares of Common Stock at exercise prices of $1.00 to $1.40,
already held by the Promissory Note holder, for a warrant to purchase 633,366
shares of Common Stock at an exercise price of $1.00. The warrant is exercisable
at any time from November 16, 1998 through November 15, 2001. The Promissory
Note holder also held warrants on similar terms to purchase 633,366 shares of
the common stock of the Company. Such warrants were exchanged by the Company for
a new warrant on the same terms as those of TMAP. The Note was repayable on
November 16, 1999. Interest was paid to November 15, 1999 and $400,000 of
principal was repaid in November 1999. On November 30, 1999 the Note holder and
TMAP executed a new note representing the balance of principal of $3 million.
The new note was payable on February 15, 2000, together with accrued interest at
the rate of 10% per annum. The new note was secured by a charge over Transmedia
Australia and was guaranteed by the Company. The new note has now been repaid in
full, together with accrued interest.
19
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10 - Acquisitions (continued)
NAMA
In November 1998 the Company and TMAP purchased from National Association of
Mature Americans, Inc. ("NAMA") through a wholly owned subsidiary of Countdown
USA, Countdown Connect, Inc., the membership base and certain business assets of
NAMA. The acquisition provided Countdown USA with an established membership base
as well as a defined set of benefit packages. Additionally, the business assets
acquired included a series of contracts pursuant to which Countdown USA will
provide customized benefit packages, on a wholesale basis, to other membership
based organizations and corporations throughout the United States.
The consideration paid totaled $400,000 payable in cash. $100,000 was paid at
closing and the balance is payable in three installments as follows: (i)
$100,000 upon final disposition by NAMA of outstanding litigation against it,
(ii) $100,000 on December 31, 1999 and (iii) $100,000 on December 31, 2000.
Additionally, Mr. Rick Washburne, owner of NAMA, entered into an employment
agreement with Countdown Connect, Inc. The employment agreement was for a period
of five years and provided for an annual salary of $55,000 and other
compensation. The employment agreement between Countdown Connect, Inc. and Mr.
Washburne was terminated for cause in April 1999. On April 21, 1999 the Company,
TMAP, Countdown USA and Countdown Connect, Inc. filed suit against Mr. Washburne
and NAMA seeking to withhold any further payments pursuant to the acquisition
agreement and further to uphold the termination for cause provision of the
employment agreement. As of the date hereof, the legal proceeding is at
deposition stage.
DBS DIRECT
On June 15, 1999 the Company and TMAP each purchased 50% of DBS Direct. The
transaction (the "Acquisition") was consummated pursuant to an Equity Purchase
Agreement dated May 10, 1999, as amended June 11, 1999 (the "Acquisition
Agreement") among the Company, DBS Direct, the Sellers and TMAP. The
consideration paid by the Company for its 50% interest in DBS Direct comprised
4,831,057 shares of the Company's common stock. TMAP paid 4,589,732 shares of
its common stock for the remaining 50% of DBS Direct. In addition, the Company
and TMAP each contributed $500,000 to the capital of DBS Direct at the closing
of the Acquisition. Such capital contribution was used to repay existing
indebtedness of DBS Direct. Additionally, the Company and TMAP agreed to each
contribute a further $1 million to the capital of DBS Direct to fund the
expansion of its network of sales offices nationally. As of the date hereof such
additional capital contributions have been advanced in full by the Company and
TMAP.
Pursuant to the terms of the Acquisition Agreement, William D. Marks entered
into an employment agreement with DBS Direct and joined the board of directors
of the Company and TMAP. Mr. Marks resigned as a director of the Company on
October 25, 1999. The employment agreement is for a period of three years and
provides for an annual salary of $175,000. Mr. Marks will serve as President of
DBS Direct. The employment agreement also provides for participation in any
incentive stock option plans that may be established in the future by the
Company and TMAP.
20
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11 - Loss per common share
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" in fiscal 1998. SFAS 128 requires restatement of prior
periods. Assumed exercise of warrants is not included in the calculation of
diluted loss per share since the effect would be anti-dilutive. Accordingly,
basic and diluted loss per share do not differ for any period presented. The
following table summarizes securities that were outstanding at June 30, 1999 and
1998 but not included in the calculation of diluted loss per share because such
shares are anti-dilutive.
June 30, June 30,
1999 1998
Stock options and warrants 4,436,343 2,583,041
Note 12 - Industry and geographic area segments
The Company, its subsidiaries and affiliates are engaged in four lines of
business: member benefits/loyalty programs, travel services, direct marketing
and e-commerce, with the latter being insignificant in the three and six months
ended June 30, 1999 and 1998. Operations of the Company's subsidiaries are
conducted in Europe and the United States. The following is a summary of the
Company's operations by business segment and by geographical segment. The
accounting policies of the segments are the same as those described in Note 2 -
Significant accounting policies.
Three months Three months Nine months Nine months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(a) Statement of operations
Revenues:
Member benefits/loyalty programs $ 2,174,598 $ 2,377,941 $ 7,234,889 $ 8,497,335
Direct marketing 38,942 -- 38,942 --
----------- ----------- ----------- -----------
Revenue for reportable segments
and consolidated revenues 2,213,530 2,377,941 7,273,831 8,497,335
=========== =========== =========== ===========
Operating loss:
Member benefits/loyalty programs 117,870 (395,513) (108,808) (769,122)
Direct marketing (82,331) -- (82,331) --
Corporate overhead (644,146) (945,615) (2,445,104) (2,651,367)
----------- ----------- ----------- -----------
Total operating loss for
reportable segments (608,617) (1,341,128) (2,636,243) (3,420,489)
----------- ----------- ----------- -----------
21
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12 - Industry and geographic area segments (continued)
Three months Three months Nine months Nine months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Share of affiliate profits/(losses):
Member benefits/loyalty programs (81,844) 91,206 (26,408) 80,625
Travel services (25,120) (30,015) (80,831) 18,859
----------- ----------- ----------- -----------
Total share of affiliate profits/
(losses) (106,964) 61,191 (107,239) 99,484
----------- ----------- ----------- -----------
Net interest expense (161,275) (133,647) (478,471) (198,542)
----------- ----------- ----------- -----------
Loss before taxation and
minority interests (876,856) (1,413,584) (322,953) (3,519,547)
=========== =========== =========== ===========
Geographic region
Revenues
Europe 2,112,313 2,377,941 7,095,351 8,497,335
United States of America 101,217 -- 178,480 --
----------- ----------- ----------- -----------
$ 2,213,530 $ 2,377,941 $ 7,273,831 $ 8,497,335
=========== =========== =========== ===========
Net loss before taxation, minority interests
and dividends
Europe (667,381) (1,474,775) (2,841,658) (2,191,302)
United States of America (102,511) -- (273,056) --
Australia (106,964) 61,191 (107,239) (1,328,245)
----------- ----------- ----------- -----------
$ (876,856) $(1,413,584) $(3,221,953) $(3,519,547)
=========== =========== =========== ===========
As of As of
June 30, September 30,
1999 1998
----------- -----------
Long-lived assets
Europe 4,074,256 4,127,017
United States of America 8,159,716 989,340
Australia 204,517 311,756
----------- -----------
$12,438,489 $ 5,428,113
=========== ===========
22
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12 - Industry and geographic area segments (continued)
(b) Total assets
As of As of
June 30, September 30,
1999 1998
----------- -----------
Direct marketing 8,171,153 --
Member benefits/loyalty programs 6,750,328 9,853,021
Investment in affiliates 204,517 311,756
Unallocated 899,474 904,188
----------- -----------
Total assets $16,025,472 $11,068,965
=========== ===========
Note 13 - Subsequent Events
(a) Stockholders' Equity
On August 11, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on September 10, 1999 upon the sale of 166,666
shares of common stock at $.75 per share resulting in net proceeds to the
Company of $125,000.
On September 30, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on October 5, 1999 upon the sale of 625,000
shares of common stock at $.65 per share resulting in net proceeds to the
Company of $406,250.
On October 21, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on November 20, 1999 upon the sale of 3,906,250
shares of common stock at $.80 per share resulting in net proceeds to the
Company of $3,125,000.
(b) Notes Payable
During fiscal 1997, the Company entered into an agreement with Mr. Joseph
Vittoria, a director and shareholder of the Company, whereby Mr. Vittoria
advanced a loan of $1,000,000 to the Company. The purpose of the loan was to
enable the Company to pay the cash element of Countdown acquisition purchase
consideration. The loan, which was bearing interest at 12% per annum and was
collateralized by a pledge of all the shares of Countdown purchased by the
Company, was originally scheduled to mature on September 27, 1997. The loan was
renewed upon maturity for an indefinite period by agreement between the Company
and Mr. Vittoria. On November 1, 1999, Mr. Vittoria agreed to convert the
principal of the loan, together with accrued interest in the sum of $308,804, to
shares of common stock at a price of $0.80 per share. Accordingly Mr. Vittoria
received 1,636,005 shares of common stock in full satisfaction of the principal
of the loan and accrued interest.
23
TRANSMEDIA EUROPE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13 - Subsequent Events (continued)
(b) Notes Payable (continued)
On October 25, 1999, Mr. M. Chambrello advanced a short-term loan to the Company
in the sum of $100,000. The loan was used to meet the short term cash needs of
the Company. On November 1, 1999 Mr. Chambrello agreed to convert the loan into
shares of common stock at $0.80 per share. Accordingly, 125,000 shares of common
stock were issued to Mr. Chambrello.
(c) Transmedia Network License Termination
On April 7, 2000 the Company and Network executed the Termination Agreement
pursuant to which the Company agreed to cancel the License Agreement in return
for forgiveness of a promissory note in default in the sum of $250,000 together
with accrued interest of approximately $69,000, forgiveness of a non-interest
bearing promissory note in default in the sum of $750,000 and forgiveness of
past due royalty payments under the License Agreement in the sum of
approximately $170,000. See "Note 1 - The Company - Recent Developments".
24
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those described below and those presented elsewhere by management
from time to time. When used in this Quarterly Report, statements that are not
statements of current or historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipate", "plan,"
"intend," "believe", "estimate" and similar expressions are intended to identify
such forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Except as required by law, the Company undertakes no obligation to
update any forward-looking statement, whether as a result of new information,
future events or otherwise.
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and notes thereto.
General
Historically, the business of the Company was the design and supply of a range
of member-benefit programs to corporations, affinity groups and individuals. In
1996 the Company and TMAP decided to work closely to implement a strategy to
create a broader based international member benefits/loyalty marketing business.
As a result the Company currently has established business operations in Europe,
the United States and elsewhere through Countdown, Countdown USA, DBS Direct and
Logan Leisure. Additionally, through its affiliates Transmedia Australia and
Transmedia Holdings, it has an interest in businesses in Australia.
The business of the Company comprises four segments:
1. The design and supply of a range of loyalty marketing and member
benefit programs to corporations and affinity groups. Additionally,
the Company provides member benefit packages to individuals on an
international scale,
2. E-commerce and internet services,
3. Direct marketing through DBS Direct, and
4. Travel services.
The future success of the Company is primarily dependent upon its ability to
implement its strategy to leverage its existing assets to develop and expand its
Internet activities and generate additional revenues from its member and
merchant bases. In its member benefits/loyalty marketing, the Company has
recently focused its sales effort as a loyalty and affinity marketing service to
corporate clients. Management will continue to build the Company's membership
base and broaden the range of member-benefit programs offered. As of the date
hereof, management is actively recruiting senior sales, marketing and other
executives to strengthen the management team to facilitate such development and
expansion. The Company will continue to look for new opportunities within the
member benefits/loyalty marketing industry and may expand its operations through
further acquisitions.
25
Management believes there is significant opportunity for the Company in its
e-commerce and internet services business. Such opportunity includes revenue
generation, not only through the Countdown-Arcade shopping web site, but also by
providing Internet services to its merchant base, corporate clients and
Countdown licensees. The Company will continue to develop and expand its
e-commerce and internet services activities primarily through strategic
alliances.
In the United States the Company intends to aggressively develop its Countdown
USA and DBS Direct businesses through cross marketing and strategic
partnerships. The Company is actively recruiting senior sales, marketing and
program executives to be based in the United States to support the development
and expansion of Countdown USA and DBS Direct. This strengthening of the
Company's United States based management team will also help to facilitate the
expansion of its e-commerce and other internet services in the United States
marketplace.
In light of the close collaboration between the Company and TMAP in recent years
and, more particularly, in view of the joint ownership of Countdown, Countdown
USA, DBS Direct, NHS, Logan Leisure and Breakaway Travel, management of the
Company and TMAP have executed a Merger Agreement, subject to shareholder
approval. The proposed merger is also subject to fairness opinions by
independent investment advisers.
The Company aims to become a leading global provider of customized loyalty
programs and services to corporations worldwide, providing superior
"business-to-consumer" solutions for businesses. The Company's objective is to
package online commerce and Internet content with traditional offline commerce
into a web-based and real world affinity solution for corporations and
associations. For members, online offerings will include Internet access (free
in some jurisdictions), a customized multi-media portal, targeted e-commerce and
global directory services. The Company's (including its affiliates) offline
content is currently available in 28 countries and includes a wide range of
products and services such as discount shopping, discount dining, travel and
telephone helpline services.
Results of Operations
Three Months ended June 30, 1999 compared to Three Months ended June 30, 1998
The Company generated revenues of $2,213,530 (1998: $2,377,941) in the three
months ended June 30,1999, a decrease of $164,411 or 6.9% over the corresponding
period in 1998. Countdown recorded a year on year decrease in revenues of
$268,018 and Transmedia France, which ceased operations in December 1998,
accounted for $83,450 of the decrease in revenues year on year. Such decreases
were partially offset by the restaurant charge card business in the UK which
recorded an increase in revenues of $47,655 and Logan Leisure, acquired in May
1998, which recorded a year-on-year increase in revenues of $38,185.
Additionally, Countdown USA, which commenced operations in October 1998 and DBS
Direct, which was acquired in June 1999, generated revenues of $62,275 and
$38,942 respectively.
Cost of revenues totaled $1,148,519 (1998: $862,984) for the three months ended
June 30,1999, generating a gross profit percentage of 48.1% (1998: 63.7%). Gross
profit % achieved in pre-existing operations were consistent year-on-year with
the exception of Countdown where gross profit % decreased from 68.4% in 1998 to
40.4% in the three months ended June 30,1999. Such decrease in gross profit % at
Countdown was due to costs of revenues incurred with respect to future
contracts.
Selling, general and administrative expenses totaled $1,673,628 (1998:
$2,856,085) for the three months ended June 30, 1999, a decrease of $1,182,457
over the corresponding period in 1998. Excluding the impact of Transmedia France
($338,183), Logan Leisure ($46,426), Countdown USA ($112,593) and DBS Direct
($108,226) selling, general and administrative expenses on a like-for-like basis
decreased by $1,111,519 in the three months ended June 30, 1999 as compared to
the corresponding period in 1998. Of such decrease Countdown accounted for
$322,264, the restaurant card business $397,409 and head office $391,846.
Countdown expense reductions primarily comprised payroll $45,507, professional
fees $139,043 and
26
bad debt expense $125,637. Year on year expense decreases in the restaurant card
business primarily comprised selling expenses $75,314, professional fees $99,956
and bad debt expense $122,332. Head Office expense decreases were primarily due
to foreign currency exchange rate fluctuations $199,160, professional fees
$47,907 and payroll costs $28,804.
The Company's share of profits/(losses) of its affiliates Transmedia Australia
and Transmedia Holdings, including amortization of underlying goodwill, were
$(72,307) and $(34,657) respectively for the three months ended June 30,1999
(1998: $53,304 and $7,887).
The minority interest in the Company comprises TMAP's interest in Countdown,
Porkpine, Countdown USA and DBS Direct.
Results of Operations
The Company generated revenues of $7,273,831 (1998: $8,497,335) in the nine
months ended June 30, 1999, a decrease of $1,223,504 or 14.4% over the
corresponding period in 1998. Countdown recorded a year on year decrease in
revenues of $1,326,960 and the restaurant charge card business in the UK
recorded a decline in revenues of $231,219. Such decreases were partially
off-set by Logan Leisure which was acquired in May 1998 ($425,380), Countdown
USA which commenced operations in October 1998 ($139,538) and DBS Direct which
was acquired in June 1999 ($38,942). Transmedia France, which ceased operations
in December 1998, accounted for $269,185 of the decrease in revenues year on
year.
Cost of revenues totaled $4,221,834 (1998: $4,826,392) for the nine months ended
June 30, 1999, generating a gross profit percentage of 42.0% (1998: 43.2%).
Selling, general and administrative expenses totaled $5,688,240 (1998:
$7,091,432) for the nine months ended June 30, 1999, a decrease of $1,403,192
over the corresponding period in 1998. Selling, general and administrative
expenses for the nine months ended June 30, 1998 included $1,427,729 in respect
of sign-on fees paid to the former executive directors of NHS. Excluding the
impact of such sign-on fees, Transmedia France, Countdown USA, DBS Direct and
Logan Leisure, selling, general and administrative expenses decreased by
$116,513 on a like-for-like in the nine ended June 30, 1999 as compared to the
corresponding period in 1998. Of such decrease Countdown accounted for $709,584
and the UK restaurant card business $353,947 while head office expenses
increased by $947,018. Countdown recorded expense reductions across most cost
categories, primarily payroll ($128,962), professional fees ($107,272), bad debt
provision ($352,378), communication costs ($41,465) and travel expenses
($39,143). In the UK restaurant card business the most significant year-on-year
expense reductions were payroll ($212,396), selling expenses ($75,910),
professional fees ($56,974) and bad debt provision ($102,134). Such cost
decreases were partially offset by an increase in travel costs of $97,192. Head
office expenses increased by $947,018 in the nine months ended June 30, 1999 as
compared to the corresponding period in 1998. Expenses incrased in most cost
categories the primary incrases being payroll ($139,682), goodwill amortization
charges ($192,270), relocation and recruitment costs ($145,460), travel
($81,140) and the impact of foreign exchange rate fluctuations ($142,913).
Nine Months ended June 30, 1999 compared to Nine Months ended June 30, 1998
The Company's share of profits/(losses) of its affiliates Transmedia Australia
and Transmedia Holdings, including amortization of underlying goodwill, were
$(38,264) and $(68,975) respectively for the nine months ended June 30,1999
(1998: $89,258 and $10,226).
The minority interest in the Company comprises TMAP's interest in Countdown,
Porkpine, Countdown USA and DBS Direct.
Liquidity and Capital Resources
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period as indicated:
Nine Months Ended
-----------------
June 30, 1999 June 30, 1998
Cash used in
Operating Activities $(3,685,463) $(2,681,356)
Cash used in
Investing activities (99,697) (2,998,714)
Cash provided by financing
Activities 3,513,053 5,891,091
The Company recorded a net loss of $3,323,817 for the nine months ended June
30,1999. Such loss, adjusted for non-cash items, namely depreciation and
amortization charges totaling $395,447, the Company's share of losses of
affiliates of $88,235 and a release of provision for irrecoverable restaurant
credits of $(43,401) resulted in funds used in operating activities totaling
$3,549,215, net of working capital movements.
Net cash used in investing activities of $99,697 comprised the cash elements of
the Company's investment in its subsidiaries Porkpine ($25,575) and NAMA
($100,000). In addition, the Company realized $25,878 from the sale of fixed
assets in the nine months ended June 30,1999. In the corresponding period in
1998 net cash used in investing activities comprised the cash element of the
Company's investment to acquire its subsidiary Porkpine ($897,455), an
investment of $2,346,809 in the Company's affiliate Transmedia Australia and
advances of $32,666, net of $245,550 realized from the sale of fixed assets.
27
To meet its cash requirements during the nine months ended June 30, 1999, the
Company sold in aggregate 4,542,666 shares of its common stock in an equity
private placement, resulting in net proceeds to the Company of $3,757,000.
Additionally, the Company received $635,946 from TMAP by way of repayment of
prior cash advances to TMAP and the Company's affiliates and $490,373 from
related parties. Other financing activities during the nine months ended June
30, 1999 comprised the repayment of short-term note payable $1,432,459 and a
credit line repayment of $312,807.
During the nine months ended June 30,1999 and prior periods the Company relied
on net revenues and the net proceeds of equity placements and short-term debt
financing to fund its operating needs and investments. Management has taken
steps to reduce the amount of cash used by operations, however the Company's
operations did not provide sufficient internally generated cash flows to meet
its projected requirements in the short-term. Accordingly, the Company required
further capital infusions to meet its loan repayment commitments and the ongoing
funding requirements of its operations. Subsequent to June 30,1999 through the
date hereof, the Company sold in aggregate 4,697,916 shares of its common stock
in equity private placements, resulting in net proceeds to the Company of
$3,656,250.
Historically, the Company's ability to grow and generate cash from operations
has been restricted by the single product offered, the Transmedia dining card.
However, in recent years the Company and TMAP have worked closely to implement a
strategy to create a broader based international business. As a result the
Company currently has established business operations in Europe and the United
States and through its affiliates, has an interest in business operations in
Australia. Management believes that after completion of the proposed merger with
TMAP, the Company and TMAP will be well positioned to achieve profitability in
the medium term.
Inflation and Seasonality
The Company does not believe that its operations have been materially influenced
by inflation in the three and nine months ended June 30,1999, a situation which
is expected to continue for foreseeable future. The business of individual
Participating Restaurants may be seasonal depending on their location and the
types of food and beverage sold. However, the Company has no basis at this time
on which to project the seasonal effects, if any, on its business as a whole.
Year 2000 disclosure issues
The Company has considered the guidance of the Statement of the Commission
regarding disclosure of Year 2000 issues for public companies (Release No.
33-7558) effective date August 4, 1998. Full disclosure of Year 2000 issues was
made in the Company's annual report on Form 10-K for the year ending September
30, 1998.
28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal
proceedings and claims in the ordinary course of business.
On January 12, 1998 the Company entered into a settlement agreement
("Settlement") with J.L. Ernst, N.H. Ernst and Ernst Enterprises, Inc.
(collectively "Ernst") for the purpose of settling all claims alleged by Ernst
in a suit filed in Texas in 1996. The suit related to a transaction pursuant to
which the Company would have granted Ernst a license to operate a restaurant
card business similar to the Company's in Belgium/Luxemburg. The Settlement
called for the issuance by the Company to Ernst shares of the Company's common
stock with a market value of $75,000. The Agreement further provided that such
shares be registered and freely tradable on or before June 30, 1998. The
Agreement further provided that in the event that the shares were not registered
and freely tradable by that time the Agreement called for the Company to buy
back the shares for $100,000. At June 30, 1998 the shares were not registered
and freely tradable and on December 8, 1998 Ernst filed a motion to enforce the
Settlement. As a result Ernst held a judgment against the Company in the amount
of $105,000. The Company made such payment on April 16, 1999 together with
$1,450 interest, a total of $106,450.
On September 29, 1999 NAMA of Texas filed a civil action against the Company,
TMAP and Countdown USA in Harris County, Texas. NAMA of Texas is a licensee of
NAMA, a business acquired by the Company and TMAP through Countdown USA in
November 1998. NAMA of Texas is claiming breach of contract pursuant to a
License and Consulting Agreement for the provision, by NAMA, of medical and
other benefit programs to NAMA of Texas. NAMA of Texas is claiming damages for
loss of business and income in the sum of $5 million, punitive damages in the
sum of $3 million, interest, attorney fees and all costs including court costs.
Management of the Company, TMAP and Countdown USA believe that the claims of
NAMA of Texas are unfounded and that they have meritorious defenses against such
claims. The Company, TMAP and Countdown USA filed their original answer on
November 5, 1999 and on November 12, 1999 filed a Notice of Removal to Federal
Court. The Federal Court ordered an initial pre-trial conference for May 18,
2000. At the pre-trial conference the Judge dismissed the case against the
Company and TME with the condition that should Countdown USA ultimately lose the
case and is not capable of paying any judgment against it, then the Company and
TME could be enjoined again.
The Company is engaged in a dispute with Edward J. Guinan, III, its former Chief
Executive Officer, with respect to amounts which the Company claims Mr. Guinan
owes to the Company and with respect to amounts which Mr. Guinan claims are owed
to him by the Company. Mr. Guinan's employment agreement was terminated for
cause on September 30, 1999 and the Company considers the employment agreement
to no longer be effective. Mr. Guinan's attorneys recently have challenged this
position and have also asserted claims for various advances which Mr. Guinan
asserts were made on behalf of the Company and for which he claims to be
entitled to reimbursement. No legal action has been commenced by the Company or
Mr. Guinan. At this time it cannot be determined when and if this dispute can be
resolved or what the net amount, if any, which Mr. Guinan owes to the Company or
the Company owes to Mr. Guinan.
The Company is engaged in a dispute with Carl Freyer, a former director and
consultant to the Company. Mr. Freyer claims that an agreement was reached in
December 1999 pursuant to which he, or his affiliate, was granted warrants plus
cash payments in lieu of prior compensation arrangements. The Company asserts
that there is no such valid agreement and that the only rights of Mr. Freyer, or
his affiliate, relate to the Company's obligation to submit for shareholder
approval, warrants previously granted covering 300,000 shares exercisable at
$1.00 per share. At this time no litigation has been commenced.
Except as disclosed above, the Company is not aware of any material pending
legal proceedings or claims against the Company or any of its subsidiaries.
29
ITEM 2. Change in Securities and Use of Proceeds
On October 16, 1998 the Company commenced a private placement pursuant to the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder. The placement is
closed on November 30, 1998 upon the sale of 842,666 shares of common stock at
$0.75 per share, resulting in the net proceeds to the company of $632,000. The
net proceeds were applied to working capital.
On January 25, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on February 24, 1999 upon the sale of 700,000
shares of Common Stock at $1.25 per share resulting in net proceeds to the
Company of $875,000. The net proceeds were applied to loan repayments and
working capital.
On May 11, 1999 the Company commenced a private placement of shares of its
Common Stock pursuant to the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder. The placement closed on June 25, 1999 upon the sale of 3 million
shares of common stock at $.75 per share resulting in net proceeds to the
Company of $2,250,000. The net proceeds were applied to capital contributions to
DBS Direct, loan repayments and working capital.
See also "Default Upon Senior Securities" below.
ITEM 3. Default Upon Senior Securities
On April 29, 1998 the Company engaged in a private placement of securities. The
placement was made pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. The placement consisted of three 250,000 pounds sterling
(approximately $413,000) face amount, 8% promissory notes payable on November 1,
1998 and one 200,000 pounds sterling (approximately $330,000) face amount, 8%
promissory note payable on the same date. The holders of the 250,000 pounds
sterling promissory notes each received a three and a half year warrant to
purchase 41,660 shares of the common stock of the Company at an exercise price
of $2.00 per share and the holder of the $200,000 pounds sterling promissory
note received a warrant to purchase 33,328 shares on the same terms. The Company
failed to pay the promissory notes on the due date and accordingly, pursuant to
the terms of the promissory notes, the holders each received additional warrants
for the same number of shares and exercisable on the same terms as the original
warrants. The warrants are exercisable at any time after issuance through
November 1, 2001. In consideration for extending the time available to the
Company to repay the balance of the promissory notes, two of the note holders
received additional warrants to purchase in aggregate 74,988 shares of Common
Stock at an exercise price of $1.00 per share. Such warrants are exercisable at
anytime through November 1, 2001. In addition, the Company agreed to adjust the
exercise price of all warrants issued to the four promissory note holders to
$1.00 per share. As of the date hereof, the Company has repaid all the
promissory notes in full, together with accrued interest.
30
ITEM 4. Exhibits and Reports on Forms 8-K
(A) Exhibits filed herewith:
None
(B) Forms 8-K filed during quarter
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSMEDIA EUROPE, INC.
By: /S/ Grant White
- --------------------
Chief Executive Officer
31