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 September 30, 2004
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 1-13806
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)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 November 5, 2004, there were 24,778,069 shares of the registrant’s common stock, par value $.02 per share, outstanding.
REWARDS NETWORK INC. AND SUBSIDIARIES
| PAGE NO. | ||||
| PART I. |
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| Item 1. |
Financial Statements: |
|||
| Consolidated Balance Sheets—September 30, 2004 (unaudited) and December 31, 2003 |
3 | |||
| 4 | ||||
| Consolidated Statements of Cash Flows—Nine months ended September 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 |
12-25 | ||
| Item 3. |
25 | |||
| Item 4. |
26 | |||
| PART II. |
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| Item 1. |
26 | |||
| Item 6. |
26-28 | |||
| 29 | ||||
2
REWARDS NETWORK INC. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
(in thousands, except per share data)
| September 30, 2004 |
December 31, 2003* |
|||||||
| Unaudited | ||||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 2,075 | $ | 9,709 | ||||
| Short-term available for sale securities |
2,268 | 10,291 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $2,534 and $2,502, respectively |
6,546 | 6,268 | ||||||
| Rights to Receive, net of allowance for doubtful accounts of $25,370 and $19,253, respectively |
142,529 | 119,233 | ||||||
| Deferred income taxes |
8,235 | 6,901 | ||||||
| Prepaid expenses and other current assets |
1,386 | 3,764 | ||||||
| Total current assets |
163,039 | 156,166 | ||||||
| Property and equipment, net of accumulated depreciation of $12,047 and $9,092, respectively |
10,265 | 9,254 | ||||||
| Other assets |
1,617 | 2,745 | ||||||
| Long-term available for sale securities |
9,455 | 8,395 | ||||||
| Deferred income taxes |
7 | 894 | ||||||
| Excess of cost over net assets acquired |
9,671 | 9,671 | ||||||
| Total assets |
$ | 194,054 | $ | 187,125 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable—Rights to Receive |
$ | 12,501 | $ | 15,197 | ||||
| Accounts payable—trade |
13,764 | 16,458 | ||||||
| Accrued compensation and other current liabilities |
7,085 | 7,547 | ||||||
| Deferred membership fee income |
1,608 | 2,101 | ||||||
| Total current liabilities |
34,958 | 41,303 | ||||||
| Convertible subordinated debentures |
70,000 | 70,000 | ||||||
| Deferred income taxes |
1,756 | 2,024 | ||||||
| Other long-term liabilities |
6 | 151 | ||||||
| Total liabilities |
106,720 | 113,478 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, par value $0.02 per share; authorized 70,000 shares; issued 25,083 and 24,473 shares, respectively; and outstanding 24,801 and 24,191 shares, respectively |
502 | 489 | ||||||
| Additional paid-in capital |
57,099 | 54,172 | ||||||
| Cumulative other comprehensive income |
19 | 11 | ||||||
| Retained earnings |
31,924 | 21,185 | ||||||
| Treasury stock, at cost (282 shares) |
(2,210 | ) | (2,210 | ) | ||||
| Total stockholders’ equity |
87,334 | 73,647 | ||||||
| Total liabilities and stockholders’ equity |
$ | 194,054 | $ | 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.
3
REWARDS NETWORK INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands, except earnings per share data)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Operating revenues: |
||||||||||||||||
| Sales |
$ | 86,818 | $ | 89,530 | $ | 266,047 | $ | 259,794 | ||||||||
| Cost of sales |
42,291 | 42,844 | 128,254 | 125,140 | ||||||||||||
| Provision for losses |
6,788 | 4,468 | 14,576 | 13,143 | ||||||||||||
| Member rewards and savings |
15,518 | 18,463 | 50,596 | 53,304 | ||||||||||||
| Total direct expenses |
64,597 | 65,775 | 193,426 | 191,587 | ||||||||||||
| Net revenue |
22,221 | 23,755 | 72,621 | 68,207 | ||||||||||||
| Membership fees and other income |
871 | 1,121 | 2,743 | 3,676 | ||||||||||||
| Total operating revenues |
23,092 | 24,876 | 75,364 | 71,883 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Salaries and benefits |
3,347 | 4,251 | 13,915 | 11,848 | ||||||||||||
| Sales commissions and expenses |
5,011 | 5,301 | 15,572 | 15,299 | ||||||||||||
| Member and merchant marketing |
2,056 | 1,729 | 6,720 | 5,364 | ||||||||||||
| Printing and postage |
1,160 | 1,313 | 3,358 | 4,770 | ||||||||||||
| General and administrative |
5,880 | 4,472 | 15,647 | 13,944 | ||||||||||||
| Total operating expenses |
17,454 | 17,066 | 55,212 | 51,225 | ||||||||||||
| Operating income |
5,638 | 7,810 | 20,152 | 20,658 | ||||||||||||
| Other income (expense): |
||||||||||||||||
| Interest and other income |
76 | 49 | 305 | 130 | ||||||||||||
| Interest expense and financing costs |
(697 | ) | (529 | ) | (2,408 | ) | (1,474 | ) | ||||||||
| Income before income tax provision |
5,017 | 7,330 | 18,049 | 19,314 | ||||||||||||
| Income tax provision |
2,028 | 2,896 | 7,310 | 7,525 | ||||||||||||
| Net income |
$ | 2,989 | $ | 4,434 | $ | 10,739 | $ | 11,789 | ||||||||
| Earnings per share of common stock: |
||||||||||||||||
| Basic |
$ | 0.12 | $ | 0.19 | $ | 0.44 | $ | 0.53 | ||||||||
| Diluted |
$ | 0.12 | $ | 0.17 | $ | 0.42 | $ | 0.47 | ||||||||
| Weighted average number of common and common equivalent shares outstanding: |
||||||||||||||||
| Basic |
24,752 | 23,215 | 24,476 | 22,411 | ||||||||||||
| Diluted |
25,566 | 26,407 | 25,662 | 25,172 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
REWARDS NETWORK INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 10,739 | $ | 11,789 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
3,009 | 2,904 | ||||||
| Amortization of deferred financing cost |
543 | 315 | ||||||
| Deferred income taxes |
(715 | ) | (1,950 | ) | ||||
| Provision for losses on Rights to Receive |
14,576 | 13,137 | ||||||
| Impairment on investment |
500 | — | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
(278 | ) | (430 | ) | ||||
| Rights to Receive including accounts payable—Rights to Receive |
(40,568 | ) | (20,457 | ) | ||||
| Prepaid expenses and other current assets |
2,378 | (24 | ) | |||||
| Other assets |
(116 | ) | (527 | ) | ||||
| Accounts payable |
(2,694 | ) | 1,425 | |||||
| Accrued compensation and other current liabilities |
(392 | ) | (118 | ) | ||||
| Deferred membership fee income |
(493 | ) | (155 | ) | ||||
| Net cash (used in) provided by operating activities |
(13,511 | ) | 5,909 | < | ||||