REWARDS NETWORK INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2004

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-13806

REWARDS NETWORK INC.

(Exact name of registrant as specified in its charter)

DELAWARE

84-6028875

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Two North Riverside Plaza, Suite 950, Chicago, Illinois 60606

(Address of principal executive offices) (Zip code)

312-521-6767

(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. x Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes ¨ No

As of August 2, 2004, there were 24,775,444 shares of the registrant’s common stock, par value $.02 per share, outstanding.

INDEX

REWARDS NETWORK INC. AND SUBSIDIARIES


		PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets—June 30, 2004 (unaudited) and December 31, 2003	3

	Consolidated Statements of Income—Three and six months ended June 30, 2004 and 2003 (unaudited)	4

	Consolidated Statements of Cash Flows—Six months ended June 30, 2004 and 2003 (unaudited)	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6-11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-24

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	25

Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 4.	Submission of matters to a vote of security holders	26-28

Item 6.	Exhibits and Reports on Form 8-K	29-30

SIGNATURES		31

REWARDS NETWORK INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share data)


	June 30, 2004			December 31, 2003*
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	5,956		$	9,709
Short-term investments		5,543			10,291
Accounts receivable, net of allowance for doubtful accounts of $2,325 and $2,502, respectively		6,798			6,268
Rights to Receive, net of allowance for doubtful accounts of $21,559 and $19,253, respectively		136,269			119,233
Deferred income taxes		7,471			6,901
Prepaid expenses and other current assets		3,129			3,764

Total current assets		165,166			156,166
Property and equipment, net		9,259			9,254
Other assets		2,298			2,745
Investments		12,393			8,395
Deferred income taxes		899			894
Excess of cost over net assets acquired		9,671			9,671

Total assets	$	199,686		$	187,125

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable—Rights to Receive	$	16,015		$	15,197
Accounts payable—trade		19,221			16,458
Accrued compensation and other current liabilities		6,240			7,547
Deferred membership fee income		1,678			2,101

Total current liabilities		43,154			41,303
Convertible subordinated debentures		70,000			70,000
Deferred income taxes		1,898			2,024
Other long-term liabilities		53			151

Total liabilities		115,105			113,478

Stockholders’ equity :
Common stock, par value $0.02 per share; authorized 70,000 shares; issued 25,057 and 24,473 shares, respectively; and outstanding 24,775 and 24,191 shares, respectively		501			489
Additional paid-in capital		56,968			54,172
Cumulative other comprehensive (loss) income		(80	)		11
Deferred restricted stock compensation		467			—
Retained earnings		28,935			21,185
Treasury stock, at cost (282 shares)		(2,210	)		(2,210	)

Total stockholders’ equity		84,581			73,647

Total liabilities and stockholders’ equity	$	199,686		$	187,125

*	The balance sheet at December 31, 2003 is derived from the registrant’s audited consolidated financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

REWARDS NETWORK INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(in thousands, except earnings per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Operating revenues:
Sales	$	90,580		$	87,669		$	179,229		$	170,264
Cost of sales		43,568			42,280			85,963			82,302
Provision for losses		4,545			4,454			7,788			8,669
Member rewards and savings		17,161			17,974			35,078			34,841

Net revenue		25,306			22,961			50,400			44,452
Membership fees and other income		924			1,168			1,872			2,555

Total operating revenues		26,230			24,129			52,272			47,007

Operating expenses:
Salaries and benefits		5,027			3,957			10,605			7,597
Sales commissions and expenses		5,100			4,902			10,524			9,998
Member and merchant marketing		2,137			2,010			4,664			3,635
Printing and postage		1,049			1,680			2,198			3,457
General and administrative		4,805			4,603			9,767			9,474

Total operating expenses		18,118			17,152			37,758			34,161

Operating income		8,112			6,977			14,514			12,846

Other income (expense):
Interest and other income		91			48			230			81
Interest expense and financing costs		(780	)		(506	)		(1,712	)		(945	)

Income before income tax provision		7,423			6,519			13,032			11,982
Income tax provision		3,010			2,553			5,282			4,627

Net income	$	4,413		$	3,966		$	7,750		$	7,355

Earnings per share of common stock:
Basic	$	0.18		$	0.18		$	0.32		$	0.33

Diluted	$	0.17		$	0.16		$	0.30		$	0.30

Weighted average number of common and common equivalent shares outstanding:
Basic		24,500			22,403			24,339			22,002

Diluted		25,776			24,092			25,785			24,100

See accompanying notes to unaudited condensed consolidated financial statements.

REWARDS NETWORK INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	7,750		$	7,355
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		2,003			1,973
Amortization of deferred financing cost		419			176
Deferred income taxes		(701	)		(1,950	)
Provision for losses on Rights to Receive		7,788			8,669
Restricted stock compensation		467			—
Changes in assets and liabilities:
Accounts receivable		(530	)		(2,539	)
Rights to Receive including accounts payable—Rights to Receive		(24,006	)		(10,201	)
Prepaid expenses and other current assets		635			(334	)
Other assets		(107	)		(539	)
Accounts payable		2,763			845
Accrued compensation and other current liabilities		(1,307	)		(79	)
Deferred membership fee income		(423	)		(216	)

Net cash (used in) provided by operating activities		(5,249	)		3,160

Cash flows from investing activities:
Additions to property and equipment		(1,971	)		(2,993	)
Decrease (increase) in short-term investments		4,748			(2,577	)
(Increase) decrease in investments		(4,089	)		87

Net cash used in investing activities		(1,312	)