SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2002
Commission File No. 0-21527
MEMBERWORKS INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1276882
- ------------------------ ------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
680 Washington Boulevard
Stamford, Connecticut 06901
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(Address of principal executive offices) (Zip Code)
(203) 324-7635
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(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 Par Value
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 [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at August 5, 2002 was $115,053,670. The aggregate market value was
computed by reference to the closing price of the Registrant's Common Stock as
of that date. For purposes of calculating this amount only, all directors,
executive officers and shareholders reporting beneficial ownership of more than
10% of the Registrant's Common Stock are considered to be affiliates. The number
of shares of Common Stock outstanding as of August 5, 2002 was 13,351,830.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders of
MemberWorks Incorporated are incorporated by reference in Part III of this
report.
Index
Page
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Part I Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 8
Part II Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
Part III Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 19
Item 13. Certain Relationships and Related Transactions 19
Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 20
Signatures 21
Exhibit listing 22
Part I
Item 1. Business
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OVERVIEW
MemberWorks Incorporated ("MemberWorks" or the "Company"), a Delaware
Corporation organized in 1996 and doing business as CardMember Publishing
Corporation since 1989, designs and manages innovative membership programs that
provide substantial benefits to member consumers, those organizations offering
the programs and vendors whose products and services are accessed through the
programs. Members receive value-added benefits, insightful information and
exclusive savings in the areas of healthcare, personal finance, insurance,
travel, entertainment, fashion and personal security. MemberWorks believes that
it is the leading designer and provider of innovative membership service
programs due to its senior management's extensive knowledge of the industry and
its relationships with leading consumer-driven organizations with large numbers
of individual account holders and customers. The Company addresses the needs of
organizations seeking to leverage the expertise of an outside provider in
offering these programs. In return for providing the Company with members, the
Company's clients receive royalty payments. Clients also benefit because the
programs are designed and managed to strengthen the relationship between clients
and their customers. MemberWorks offers its programs to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
purchase of products and services. Members save time by purchasing goods and
services and obtaining useful information over the telephone or the Internet.
Members also benefit from participating vendors who agree to provide discounts
on products and services not generally available to non-members. For the
participating vendors, the programs provide the opportunity to reach a large
number of demographically attractive members at minimal incremental marketing
cost. The Company's programs are primarily marketed to customers through
arrangements with its client organizations which include banks and other
financial institutions, retailers, major oil companies, direct response
television companies, catalog companies, e-commerce companies and other
organizations with large numbers of individual customers.
Businesses that sell services and products to consumers have substantially
increased the use of direct marketing techniques to reach their customers.
According to the Direct Marketing Association, total consumer sales as a result
of direct marketing in the United States were $1,085 billion in 2002, an
increase of 8% over the prior year. Membership service programs, if designed,
marketed and managed effectively, can be of substantial value to the consumers
who become members of such programs, the businesses that market to consumers and
the client organizations that offer the programs to their customers.
Historically, a substantial number of the businesses that utilize membership
service programs have been issuers of credit cards. More recently, however,
other businesses, including banks and other financial institutions, retailers,
major oil companies, direct response television companies, catalog companies,
e-commerce companies and insurance companies have also begun to offer service
programs. In many cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource to companies that are able to apply advanced
database systems to capture, process and store consumer and market information,
are able to use their experience to provide effective programs and are able to
realize economies of scale. In addition, businesses seeking to implement
membership service programs demand that the provider of those programs has the
expertise to continue to introduce innovative new programs and that the provider
has resources such as extensive vendor networks and experienced management teams
in order to market programs quickly and successfully.
The Company's membership service programs, which combined had approximately 6.6
million retail members and over 13 million total members, including wholesale,
as of June 30, 2002, offer unique and valuable services, information and savings
opportunities. The service programs are generally marketed under the name of the
program and are designed and developed to capitalize on the client's existing
relationship with its customers or other constituents. In general, membership
fees, which may be payable monthly or annually, vary depending upon the
particular membership program. Annual membership fees averaged approximately $90
per year during fiscal 2002 and monthly membership fees averaged $9 per month
during fiscal 2002. Most of the membership programs are for one-year renewable
terms and members are generally entitled to unlimited use of the service during
the membership period.
1
DESCRIPTION OF BUSINESS
MemberWorks is a leader in bringing value to consumers by designing innovative
membership programs that offer easy access to significant savings at national
brand name providers and retailers in healthcare, insurance, travel,
entertainment, shopping, personal security, home improvement and more.
MemberWorks combines marketing innovation, entrepreneurial energy and consumer
insight to create industry leading membership programs. These programs create
new revenue streams and increase customer loyalty for clients. MemberWorks
continues to enhance its existing membership programs to add more member value
while systematically increasing the membership fee. During 2002, MemberWorks
introduced four new premium products. These premium products offer members even
more services and discounts at an increased membership fee. The Company's
money-saving programs fall into the following four key categories:
Health and Insurance
The Health membership programs offer significant savings on a comprehensive
array of products including: prescription drugs, vitamins and supplements,
eye glasses and contact lenses, hearing aides and durable medical equipment;
and professional services, including medical, dental, chiropractic,
alternative medicine and elder care.
The Insurance membership programs offer competitively priced insurance
products, including life, accidental death, short-term and catastrophic
disability, supplemental medical and warranty coverage.
Travel, Entertainment and Shopping
These membership programs offer exclusive members only savings with leading
brand name partners. Members have multiple opportunities to save on: travel,
including air fare, hotel rates, car rental and cruise packages;
entertainment, featuring theme parks, amusements parks, restaurants and
movie theaters; and shopping, offering savings on a wide range of
merchandise, apparel and personal services.
Privacy, Protection and Home Improvement
These membership programs offer discounts on products and services that
enhance and improve the member's sense of security and well being. Members
have access to bundles of services that enable them to better manage their:
privacy, including card registration, credit reporting, scoring and
monitoring, and personal information monitoring services; protection,
offering savings on security systems, 24-hour protection services, roadside
assistance, financial, tax and retirement planning and extended warranty
protection; home and household expenses, featuring discounts on home
improvement, consumer electronics and entertainment and family activities.
Specialty Markets and Custom Programs
MemberWorks offers a full line of membership programs in Canada, as well as,
Hispanic versions of certain membership programs. Membership materials and
customer service are offered in English, Spanish and French.
MemberWorks also partners with large clients to offer custom, private label
or co-branded membership programs to meet the specific needs of a defined
customer base.
In general, members subscribe for renewable one-year memberships in the
Company's programs. When consumers agree to enroll in a program, they generally
receive a trial membership. During this time, the member may use the program's
services without obligation, as outlined in the marketing solicitation. A
membership kit, which includes a membership brochure and a membership card with
a membership identification number, is mailed to the consumer during the trial
period. The brochure outlines in detail the benefits offered and contains
toll-free numbers which may be called to access membership benefits and
information. In the event that a consumer elects not to participate in the
service, he or she can call a toll-free number during the trial period to cancel
the service without charge. Trial memberships are generally for a period of 30
days and there are no conditions with respect to the ability of the consumer to
terminate a trial membership. MemberWorks does not record any revenue with
respect to trial memberships.
2
If the membership is not canceled during the trial period, the consumer is
charged the annual or monthly membership fee, depending upon the billing method
selected. For annual members, in the event that the member does not cancel the
membership after the initial membership term, generally one year, he or she
generally receives a renewal notice in the mail in advance of each membership
year and is charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member may cancel his or
her membership in the program, either for a complete refund of the membership
fee for that period or a prorata refund based on the remaining portion of the
membership period depending upon the terms of the membership program. Monthly
members are billed each month after a free trial period and continue to be
billed each month until the member cancels.
MemberWorks markets its programs primarily through arrangements with companies
such as banks and other financial institutions, retailers, major oil companies,
direct response television companies, catalog companies, e-commerce companies
and other organizations with large numbers of individual account holders and
customers, who have an existing relationship with its consumers. Participating
marketing partners provide lists of consumers which MemberWorks inputs into its
database management system to model, analyze and identify likely members.
MemberWorks only collects and maintains customer data that is required to
administer its business activities, such as a customer's name, address and
billing information. MemberWorks pays participating marketing partners an annual
royalty for initial and renewal membership fees received from consumers provided
to MemberWorks by the client.
MemberWorks also offers its service programs through clients who have inbound
call centers. This type of marketing method which MemberWorks refers to as
MemberLinkSM, essentially turns the client call center into a profit center.
Under these arrangements, inbound callers to a client meeting certain criteria
are offered the Company's membership service programs by the client's service
representative or by a MemberWorks membership service representative through a
call transfer. MemberWorks pays the client either an annual royalty for initial
and renewal membership fees or a fee per marketing pitch or per sale. Generally,
MemberLinkSM arrangements serve as a more efficient and cost effective way to
acquire members than the Company's traditional marketing model.
MemberWorks coordinates the efforts of its sales and marketing group with those
of its client management group in order to anticipate clients' needs for new
product offerings. The Company's senior management works with both of these
groups to develop and refine new program concepts and then to introduce the new
programs. MemberWorks believes this method of product development has allowed it
to respond quickly and effectively to market demand for new programs.
MemberWorks possesses the in-house operational capabilities and expertise to
perform most aspects of its business with minimal reliance upon third party
outsourcing. For instance, MemberWorks generally creates most of its marketing,
creative and fulfillment materials. MemberWorks also maintains in-house call
center facilities in order to answer its members' phone calls. MemberWorks
believes this in-house approach enables the Company to provide better customer
service and market its products more efficiently.
MemberWorks believes that it was the first membership company to introduce
aggregated discount services in the areas of healthcare, sports, shopping,
financial and personal security. MemberWorks also believes that all of its
programs are innovative with respect to the variety and quality of particular
services, discounts and other features which those programs offer. By bundling
and reconfiguring various features of its standard programs, MemberWorks can
customize a program to the particular needs and demands of its clients.
In addition to marketing its programs directly to consumers either through lists
provided by credit card issuers and other businesses and organizations or
through MemberLinkSM, MemberWorks also delivers its membership service programs
through its wholesale programs. MemberWorks works with a wholesale client to
incorporate elements from one or more of its standard service programs and
designs a custom program for the client. The client will then provide the
membership in the customized format to its customers as a value-added feature or
resell the product. The client pays MemberWorks the membership fees for the
customers who receive the service program. Wholesale programs have substantially
lower acquisition cost, which result in higher profit margins for MemberWorks.
Accordingly, MemberWorks provides membership in the service program for fees
which are less than the Company's standard fees for the program.
3
MEMBER SERVICE
MemberWorks believes that providing high quality service to its members is
extremely important in order to encourage memberships and to strengthen the
affinity of those members for the client that offered the service program.
Currently, MemberWorks (including through its wholly-owned subsidiaries)
maintains four call centers located in Omaha, Nebraska; Houston, Texas; Chicago,
Illinois and Montreal, Canada with a total of almost 700 membership service
representatives. All new membership service representatives are required to
attend on-the-job training. Through its training programs, systems and software,
MemberWorks seeks to provide members with friendly, rapid and effective answers
to questions. MemberWorks also works closely with its clients' customer service
staff to ensure that their representatives are knowledgeable in matters relating
to membership service programs offered by MemberWorks.
TECHNOLOGY
MemberWorks has invested substantially in new technology, including a
state-of-the-art fulfillment center, a sophisticated customer service CRM
platform, data warehousing and mining capabilities and various Internet
applications to allow it to effectively and efficiently service its members.
MemberWorks receives new member information from its marketing partners daily,
and that information is maintained on core infrastructure systems that drive
information consistently to call center, fulfillment, billing and financial
systems. This allows for rapid fulfillment of member information kits as well as
other benefits. All membership information is maintained on a state-of-the-art
CRM system, which allows extremely responsive call center interactions.
MemberWorks receives confirmation of billing data from the Company's merchant
processors on a regular basis, permitting MemberWorks to update the status of
each member, including member profile information.
In providing quality service to its members, the Company's management
information systems interact with the Company's advanced call routing system in
order to display member profile information prior to receiving the call,
allowing the Company's membership service representatives to have the best
possible information prior to serving the members. The Company's
telecommunications systems also monitor the performance quality of its
membership service representatives and other aspects of its business through
sophisticated reporting capabilities. In addition, the Company's marketing
experts use proprietary systems in combination with advanced systems from
outside vendors to review, analyze and model the demographics of lists of
prospective members supplied by clients in order to determine which customers
are most likely to respond to an offer and retain their membership.
FULFILLMENT
In most cases, the products and services offered to members through the
Company's programs are provided directly to members by independent benefit
providers/vendors. MemberWorks evaluates and engages only those vendors who can
cost-effectively deliver high quality products and services. Vendors generally
benefit by gaining significant volume demand with minimal associated marketing
expense. Accordingly, vendors gain access and marketing exposure to the
Company's membership base and, pursuant to contractual arrangements with
MemberWorks, generally quote a discounted price. MemberWorks generally does not
receive any material payments from these vendors for rendering services to the
Company's members and, in certain cases, MemberWorks pays its vendors a fee
based on the volume of members in the Company's program or based on other agreed
upon factors.
The Company's contracts with its vendors are generally for a one-year term, with
subsequent one-year renewal terms at the option of MemberWorks. Vendors may
cancel contracts with MemberWorks, but in most cases, only for cause and subject
to notice provisions to provide MemberWorks time to locate a substitute vendor.
Most vendor contracts are non-exclusive, but have requirements that the vendors
maintain the confidentiality of the terms of the contract.
SALES AND MARKETING
MemberWorks solicits members for its programs primarily by direct marketing
methods, including telemarketing, which it outsources to third party
contractors, and MemberLinkSM inbound call marketing. MemberWorks also solicits
members through the use of direct mail which is mailed either at MemberWorks'
own expense or at its client's expense. Most of the Company's individual
memberships are also available on the Internet.
Under the Company's wholesale programs, MemberWorks does not pay for the
marketing costs to solicit memberships. Instead, the client offering the
memberships is responsible for marketing, usually with the assistance of
MemberWorks. In some cases, the client may provide wholesale memberships to its
customers free of charge and pay the periodic membership fee to MemberWorks for
each customer membership. In other cases, the client may charge a reduced fee to
its customer.
4
MemberWorks continues to pursue its international expansion through the growth
of its subsidiary located in Canada, MemberWorks Canada. MemberWorks Canada
provides retail membership programs similar to those offered in the U.S. as well
as credit card enhancement services to Canadian financial institutions through
wholesale arrangements. The Company's revenues from international operations
represented 3% of total revenues for the fiscal year ended June 30, 2002.
The Company's sales strategy is to establish and maintain long-term
relationships with its clients. MemberWorks employs a consultative sales process
to understand and define client needs and to determine how those needs can be
addressed by the membership service programs offered by MemberWorks. MemberWorks
seeks to build upon its existing customer relationships by integrating and
cross-selling its different membership service programs.
DISTRIBUTION
MemberWorks arranges with its client organizations to market membership programs
to such clients' individual account holders and customers. Clients generally
receive royalties on initial and renewal memberships. The Company's contracts
with these clients typically grant MemberWorks the right to continue providing
membership services directly to such clients' individual account holders even if
the client terminates the contract, provided that the client continues to
receive its royalties.
Substantially all of the information necessary for the Company's marketing
efforts are supplied by its clients in accordance with strict consumer privacy
safeguards. As a result, the Company's ability to market a new program to an
existing customer base or an existing program to a new customer base is
generally dependent upon first obtaining client approval.
Many client relationships are pursuant to contracts that may be terminated by
the client upon 30 to 90 days notice without cause and without penalty. Upon
such termination, MemberWorks generally has the right to continue its
relationship with the client's customers that have become program members for a
specified period to substantially the same extent as prior to the termination,
but may not resolicit those members upon such member's cancellation or
non-renewal of the member's membership.
MemberWorks distributes its programs through direct marketing efforts. The
direct marketing techniques utilized include outbound telemarketing, inbound
marketing, direct mail and internet marketing. All telemarketing is outsourced
to third party contractors. In addition, MemberWorks distributes its products
through wholesale arrangements where MemberWorks is not responsible for
marketing to the customer.
Membership programs sponsored by the Company's largest client, Citibank,
accounted for 16% of revenue for the fiscal year ended June 30, 2002.
RESTRUCTURING
In October 2001, the Company announced the implementation of several cost saving
initiatives due to a slowdown in consumer response rates and increased economic
uncertainty in both the U.S. and abroad. This restructuring program was designed
to improve organizational effectiveness and profitability and included a
workforce reduction, the closing of the Company's United Kingdom operations and
the downsizing of the operational infrastructure throughout the Company.
GOVERNMENT REGULATION
MemberWorks markets its membership programs through various distribution
channels, including outbound telemarketing, inbound marketing, direct mail and
internet marketing. These channels are regulated on both the state and federal
levels and the Company believes that these marketing methods will increasingly
be subject to such regulation, particularly in the area of consumer privacy.
Such regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members. The telemarketing industry has
become subject to an increasing amount of federal and state regulation as well
as general public scrutiny in the past several years. For example, the Federal
Telephone Consumer Protection Act of 1991 limits the hours during which
telemarketers may call consumers and prohibits the use of automated telephone
dialing equipment to call certain telephone numbers. Additionally, the Federal
Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and Federal
Trade Commission ("FTC") regulations, including the Telemarketing Sales Rule,
promulgated thereunder prohibit deceptive, unfair or abusive practices in
telemarketing sales. Both the
5
FTC and state attorneys general have authority to prevent telemarketing
activities deemed by them to be "unfair or deceptive acts or practices."
Further, some states have enacted laws and others are considering enacting laws
targeted directly at regulating telemarketing practices, and there can be no
assurance that any such laws, if enacted, will not adversely affect or limit the
Company's current or future operations. Compliance with these regulations is
generally the responsibility of the Company, and the Company could be subject to
a variety of enforcement and/or private actions for any failure to comply with
such regulations. The Company's provision of membership programs requires the
Company to comply with certain state regulations, changes in which could
materially increase the Company's operating costs associated with complying with
such regulations. The risk of noncompliance by the Company with any rules and
regulations enforced by a federal or state consumer protection authority may
subject the Company or its management to fines or various forms of civil or
criminal prosecution, any of which could materially adversely affect the
Company's business, financial condition and results of operations. Also, the
media often publicizes perceived noncompliance with consumer protection
regulations and violations of notions of fair dealing with consumers, and the
membership programs industry is susceptible to peremptory charges by the media
of regulatory noncompliance and unfair dealing.
The Company currently maintains rigorous security and quality controls to ensure
that all of its marketing practices meet or exceed industry standards and all
applicable state and federal laws and regulations. The Company only collects and
maintains customer data that is required to administer its business activities,
such as a customer's name, address and billing information and only public
information is used for marketing and modeling purposes, such as demographic,
neighborhood and lifestyle data. The Company neither resells any confidential
customer information that is obtained or derived in its marketing efforts nor
purchases consumer information from financial institutions.
COMPETITION
MemberWorks believes that the principal competitive factors in the membership
services industry include the ability to identify, develop and offer innovative
service programs, the quality and breadth of service programs offered, price and
marketing expertise. The Company's competitors offer membership programs which
provide services similar to, or which directly compete with, those provided by
MemberWorks. Some of these competitors have substantially larger customer bases
and greater financial and other resources than the Company's. To date,
MemberWorks has effectively competed with such competitors. However, there can
be no assurance that the Company's competitors will not increase their emphasis
on programs similar to those offered by MemberWorks to more directly compete
with MemberWorks; provide programs comparable or superior to those provided by
MemberWorks at lower membership prices; adapt more quickly than MemberWorks to
evolving industry trends or changing market requirements; or that new
competitors will not enter the market or that other businesses will not
themselves introduce competing programs. Such increased competition may result
in price reductions, reduced gross margins and loss of market share, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Additionally, because contracts between
clients and program providers are often exclusive with respect to a particular
service, potential clients may be prohibited from contracting with MemberWorks
to promote a program if the services provided by the Company's program are
similar to, or merely overlap with, the services provided by an existing program
of a competitor.
EMPLOYEES
As of June 30, 2002, MemberWorks employed 1,075 persons on a full-time basis and
141 on a part-time basis. None of the Company's employees are represented by a
labor union. MemberWorks believes that its employee relations are good.
Item 2. Properties
A summary of key information with respect to the Company's leased facilities is
as follows:
Location Square Footage Year of Lease Expiration
- -------- -------------- ------------------------
Omaha, NE 93,123 2009 through 2015
Stamford, CT 98,947 2002 through 2006
Montreal, Canada 48,193 2003 through 2011
Houston, TX 41,591 2006
Atlanta, GA 16,122 2005
Chicago, IL 11,676 2005
White Plains, NY 4,193 2004
6
The Stamford, Connecticut office serves as the Company's corporate headquarters.
All other locations serve as the operational offices for MemberWorks.
Item 3. Legal Proceedings
-----------------
Except as set forth below, in management's opinion, there are no significant
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their properties are subject. The Company is involved in other
lawsuits and claims generally incidental to its business including, but not
limited to, various suits, including previously disclosed suits, brought against
the Company by individual consumers seeking monetary and/or injunctive relief
relating to the marketing of the Company's programs. In addition, from time to
time, and in the regular course of its business, the Company receives inquiries
from various federal and/or state regulatory/enforcement authorities.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The Court has announced that it will deny the motion
for national class certification, but it has certified a class of Michigan
residents. No order has been issued. The Company believes that the claims made
against Coverdell are unfounded and Coverdell and the Company will vigorously
defend their interests against this suit.
In March 2002, the Company and other plaintiffs filed suit against
Homestore.com, Inc. in United States District Court for the District of
Connecticut. The action has been transferred to the United States District Court
for the Central District of California. The suit, seeking injunctive and other
relief, alleges securities fraud, negligent misrepresentation, breach of
contract and other grounds in connection with the Company's sale of its interest
in iPlace, Inc. In response to plaintiffs' preliminary motions, the court
ordered Homestore.com, Inc. to place $58.0 million in a constructive trust
pending resolution of the lawsuit or further order of the court. In August 2002,
the Company announced that it, along with certain of the other former
shareholders of iPlace, Inc., had settled their lawsuit against Homestore.com,
Inc. The total settlement amount in favor of the plaintiffs is $23.0 million of
which the Company will receive approximately $19.2 million.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
June 30, 2002.
7
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the registrant of MemberWorks and their respective
ages as of July 31, 2002 are as follows:
Name Age Position
- ---- --- --------
Gary A. Johnson 47 President and Chief Executive Officer, Director
Vincent DiBenedetto 45 Executive Vice President, Sales and Client
Services
James B. Duffy 48 Executive Vice President and Chief Financial
Officer
Walter Kazmierczak 47 Executive Vice President, Marketing Services
William Olson 44 Executive Vice President, Sales and Client
Services
David Schachne 41 Executive Vice President, Business Development
Dennis P. Walker 57 Executive Vice President and Director
GARY A. JOHNSON, a co-founder of MemberWorks, has served as President and
Chief Executive Officer and a director of MemberWorks since its inception.
VINCENT DIBENEDETTO joined MemberWorks in October 2000 and currently serves as
Executive Vice President, Sales and Client Services. Prior to joining
MemberWorks, Mr. DiBenedetto was President of Discount Development Services,
L.L.C., a subsidiary of MemberWorks which was acquired in October 2000.
JAMES B. DUFFY joined MemberWorks in 1996 and currently serves as Executive
Vice President and Chief Financial Officer.
WALTER KAZMIERCZAK joined MemberWorks in May 2001 and currently serves as
Executive Vice President, Marketing Services. Prior to joining MemberWorks, Mr.
Kazmierczak was Senior Vice President and General Manager of Columbia House,
Chief Internet Officer of Crown Book Corporation and Vice President and General
Manager of Macmillan Publishing.
WILLIAM OLSON joined MemberWorks in March 2001 and currently serves as Executive
Vice President, Sales and Client Services. Prior to joining MemberWorks, Mr.
Olson served in various senior positions such as President & Chief Executive
Officer of Dunlop/Maxfli Sports Corporation, President & Chief Executive Officer
of Gold Coast Beverage Distributors and President & Chief Executive Officer of
Guinness Brewing North America Corporation.
DAVID SCHACHNE joined MemberWorks in 1990 and currently serves as Executive Vice
President, Business Development. He has held various senior management positions
at MemberWorks in Marketing and Business Development.
DENNIS P. WALKER, a co-founder of MemberWorks, has served as Executive Vice
President and a director of MemberWorks since its inception.
8
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
------------------------------------------------------------------------
The Company's Common Stock is listed on the NASDAQ National Market ("NASDAQ")
under the symbol MBRS. The following table sets forth for the periods indicated
the high and low closing sale prices per share as reported on the NASDAQ.
High Low
Fiscal Year Ended June 30, 2002: ---- ---
First Quarter $25.00 $17.90
Second Quarter 21.00 7.98
Third Quarter 18.93 14.26
Fourth Quarter 18.53 16.27
High Low
---- ---
Fiscal Year Ended June 30, 2001:
First Quarter $37.06 $25.56
Second Quarter 36.19 19.38
Third Quarter 27.94 18.69
Fourth Quarter 26.00 20.31
As of August 5, 2002, there were 40,000,000 shares of the Company's Common Stock
authorized of which 13,351,830 shares were outstanding, held by approximately
1,959 stockholders of record. MemberWorks has not declared or paid any cash
dividends to date and anticipates that all of its earnings in the foreseeable
future will be retained for use in its business and to repurchase its common
stock under the stock repurchase program. The Company's future dividend policy
will depend on the Company's earnings, capital requirements, financial
condition, requirements of the financing agreements to which MemberWorks is a
party and other factors considered relevant by the Board of Directors.
9
Item 6. Selected Financial Data
-----------------------
The selected consolidated statements of operations data for each of the years
ended June 30, 2002 through 1998 and the selected consolidated balance sheet
data as of June 30, 2002 through 1998 set forth below are derived from the
consolidated financial statements of MemberWorks which have been audited by
PricewaterhouseCoopers LLP. The selected consolidated financial information of
MemberWorks is qualified by reference to and should be read in conjunction with
Item 8, "Consolidated Financial Statements and Supplementary Data," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
Year Ended June 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ 427,602 $ 475,726 $ 330,107 $ 218,086 $ 120,834
Total expenses 415,713 509,050 331,547 212,292 119,449
----------- ------------ ----------------------------------
Operating income (loss) 11,889 (33,324) (1,440) 5,794 1,385
Gain on sale of subsidiary 65,608 - - - -
Net (loss) gain on investment (33,628) (2,172) 8,854 - -
Other (expense) income, net (401) (450) 873 2,154 1,700
----------- ------------ ----------------------------------
Income (loss) before equity in affiliate and minority 43,468 (35,946) 8,287 7,948 3,085
interest
Equity in income (loss) of affiliate - 83 19 (1,912) (638)
Minority interest 450 9,106 2,027 - -
----------- ------------ ----------------------------------
Net income (loss) before cumulative effect of accounting
change 43,918 (26,757) 10,333 6,036 2,447
Cumulative effect of accounting change (5,907) (25,730) - (3,367) -
----------- ------------ ----------------------------------
Net income (loss) $ 38,011 $ (52,487) $ 10,333 $ 2,669 $ 2,447
=========== ============ ==================================
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting
change $ 3.03 $ (1.75) $ 0.68 $ 0.39 $ 0.16
Cumulative effect of accounting change (0.41) (1.69) - (0.22) -
----------- ------------ ----------------------------------
Basic earnings (loss) per share $ 2.63 $ (3.44) $ 0.68 $ 0.17 $ 0.16
=========== ============ ==================================
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting
change $ 2.95 $ (1.75) $ 0.61 $ 0.35 $ 0.15
Cumulative effect of accounting change (0.40) (1.69) - (0.20) -
----------- ------------ ----------------------------------
Diluted earnings (loss) per share $ 2.55 $ (3.44) $ 0.61 $ 0.16 $ 0.15
=========== ============ ==================================
Weighted average common shares outstanding
Basic 14,477 15,248 15,162 15,361 14,837
=========== ============ ==================================
Diluted 14,909 15,248 16,993 17,124 16,381
=========== ============ ==================================
June 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 51,185 $ 22,736 $ 30,169 $ 50,939 $ 35,933
Total assets 280,817 348,461 316,772 209,827 133,291
Long-term liabilities 3,627 3,057 1,083 6 69
Shareholders' (deficit) equity (20,630) (25,965) 19,021 30,287 28,442
Cash flow provided by operating activities 21,706 13,013 44,910 50,573 8,930
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------------
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors for a monthly or annual fee. Membership service programs intend to
enhance existing relationships between businesses and consumers. MemberWorks
derives its revenues principally from annually renewable membership fees. The
Company generally receives full payment of annual fees at or near the beginning
of the membership period, but recognizes revenue as the member's refund
privilege expires. Similarly, the costs associated with soliciting each new
member, as well as the cost of royalties, are recognized as the related revenue
is recognized. Profitability and cash flow generated from renewal memberships
exceed that of new memberships due to the absence of solicitation costs
associated with new member procurement.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the Securities and Exchange Commission issued Financial
Reporting Release ("FRR") No. 60, "Cautionary Advice Regarding Disclosure About
Critical Accounting Policies" ("FRR 60"), suggesting that companies provide
additional disclosure on those accounting policies considered most critical to
their organization. Critical accounting policies are those policies that are
important to the Company's financial condition and results and involve
subjective or complex judgments on the part of management, often as a result of
the need to make estimates. The following areas all require the use of judgments
and estimates: membership cancellation rates, deferred marketing costs,
intangible assets and income taxes. Estimates in each of these areas are based
on historical experience and various assumptions that MemberWorks believes are
appropriate. Actual results may differ from these estimates. MemberWorks
believes the following represent the critical accounting policies of the Company
as contemplated by FRR 60. For a summary of all of the Company's significant
accounting policies, see Note 2 of the Notes to the consolidated financial
statements located in this 2002 Annual Report on Form 10-K.
Revenue recognition
Membership fees are billed through clients of the Company primarily through
credit cards. During an initial annual membership term or renewal term, a member
may cancel his or her membership in the program, either for a complete refund of
the membership fee for that period or a prorata refund based on the remaining
portion of the membership period depending upon the terms of the membership
program. Deferred membership fees are recorded, net of estimated cancellations,
after the trial period has expired, and are amortized as revenues from
membership fees upon the expiration of membership refund privileges. An
allowance for cancellations is established based on management's estimates and
is updated regularly. In determining the estimate of allowance for
cancellations, management analyzes historical cancellation experience, current
economic trends and changes in customer demand for the Company's products.
Actual membership cancellations are charged against the allowance for
cancellations on a current basis. If actual cancellations differ from the
estimate, the results of operations would be impacted. Accrued liabilities set
forth in the accompanying consolidated balance sheets as of June 30, 2002 and
2001 include an allowance for membership cancellations of $23.8 million and
$30.0 million, respectively.
Membership solicitation and other deferred costs
Membership solicitation costs include marketing and direct mail costs related
directly to membership solicitation (i.e., direct response advertising costs).
In accordance with the American Institute of Certified Public Accountants
Statement of Position 93-7, "Reporting on Advertising Costs," direct response
advertising costs are deferred and charged to operations as revenues from
membership fees are recognized. Other deferred costs consist of royalties paid
to clients, which relate to the same revenue streams as the direct response
advertising costs and are also charged to income over the membership period.
Membership solicitation costs incurred to obtain a new member generally are less
than the estimated total membership fees. However, if membership solicitation
costs were to exceed total estimated membership fees, an adjustment would be
made to the extent of any impairment.
Goodwill and other intangibles
In connection with the implementation of Financial Accounting Standards Board
("FASB") Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
MemberWorks reviewed the carrying value of its goodwill and other intangible
assets by comparing such amounts to their fair values. The Company determined
that at July 1, 2001, there was an impairment of goodwill of $5.9 million at one
11
of its reporting units due to the change in methodology of calculating
impairment under SFAS 142 concurrent with recent downward trends in the
operations of that reporting unit (see Note 3 to the consolidated financial
statements contained in this 2002 Annual Report on Form 10-K). This amount was
recorded as a cumulative effect of accounting change in the statement of
operations in the fiscal quarter ended September 30, 2001. MemberWorks is
required to perform this comparison at least annually, or more frequently if
circumstances indicate possible impairment. When determining fair value, the
Company utilizes various assumptions, including projections of future cash
flows. A change in these underlying assumptions will cause a change in the
results of the tests and, as such, could cause fair value to be less than the
carrying amounts. In such an event, MemberWorks would then be required to record
a corresponding charge, which would impact earnings.
Income Taxes
Income taxes are determined in accordance with FASB Statement No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred liabilities and assets are determined
based on the difference between the financial statement basis and the tax basis
of liabilities and assets using enacted tax rates in effect for the year in
which the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years. A valuation allowance has been established for
deferred tax assets for which realization may not be likely. As of June 30, 2002
and 2001, the deferred tax asset of $6.6 million and $22.7 million,
respectively, has been fully reserved. In assessing the valuation allowance,
MemberWorks has considered future taxable income and ongoing tax planning
strategies.
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES. Revenues decreased 10% to $427.6 million in 2002 from $475.7 million
in 2001 primarily due to the effect of the sale of iPlace, Inc. and the
controlled slow down in new member marketing implemented in the beginning of the
fiscal year. This controlled slow down was a reaction to decreased consumer
response rates. Excluding iPlace, Inc. revenues of $9.4 million and $42.4
million in 2002 and 2001, respectively, revenues would have decreased 3%.
Revenues before deferral, which are revenues before the application of Staff
Accounting Bulletin 101, "Revenue Recognition in the Financial Statements" ("SAB
101"), decreased 15% to $410.5 million in 2002 from $485.0 million in 2001 due
to the sale of iPlace, Inc., the controlled slow down in new member marketing
implemented in the beginning of the fiscal year, and the closing of the United
Kingdom operations. Excluding iPlace, Inc. revenues before deferral of $11.0
million and $53.7 million in 2002 and 2001, respectively, revenues before
deferral would have decreased 7%. The Company's membership base decreased to
approximately 6.6 million members at June 30, 2002 from 7.9 million members at
June 30, 2001 due to the controlled slow down in new member marketing
implemented in the beginning of the fiscal year, the sale of iPlace, Inc. and
the closing of the United Kingdom operations. As a percentage of total revenues,
annual renewal revenues were 48% in 2002 and 41% in 2001. As a percentage of
total revenues before deferral, annual renewal revenues were 51% in 2002 and 44%
in 2001. The increase in renewal revenues as a percentage of total revenues is
due to the controlled slow down in new member marketing implemented in the
beginning of the fiscal year. Revenue from members who are charged on a monthly
payment program increased to $41.3 million in 2002 from $27.6 million in 2001.
OPERATING EXPENSES. Operating expenses consist of member service call center
costs, membership benefit costs and membership kit costs. Operating expenses
decreased 13% to $78.7 million in 2002 from $90.4 million in 2001 primarily due
to the sale of iPlace, Inc., the closing of the United Kingdom operations and
lower revenues during the year. As a percentage of revenues before deferral,
operating expenses increased to 19.2% in 2002 from 18.6% in 2001 primarily due
to the effect of lower revenues reported in 2002.
MARKETING EXPENSES. Marketing expenses consist of direct solicitation costs
incurred to obtain new members and royalties paid to clients, which are
generally amortized in the same manner as the related revenue. Marketing
expenses decreased 18% to $249.0 million in 2002 from $305.0 million in 2001
primarily due to the effect of the controlled slow down in new member marketing
implemented in the beginning of the fiscal year and the effect of the sale of
iPlace, Inc. As a percent of revenue, marketing expenses decreased to 58.2% in
2002 from 64.1% in 2001 primarily due to the increase in the mix of renewal
revenue as a percent of total revenue. The lower level of new member marketing
resulted in an increase in the ratio of renewal member revenues to total
revenues. Marketing expenses related to renewal revenues are typically
12
significantly lower than expenses related to new member revenues. Expenses
related to new member marketing, as a percent of new member revenues, increased
in 2002 compared to 2001 primarily due to a decrease in consumer response rates.
Marketing expenses before deferral, which are marketing expenses before the
application of SAB 101, decreased 19% to $233.9 million in 2002 from $287.9
million in 2001 and, as a percent of revenues before deferral, decreased to
57.0% in 2002 from 59.4% in 2001. The decrease in marketing expenses before
deferral was due to a controlled slow down in new member marketing implemented
in the beginning of fiscal 2002, the effect of the sale of iPlace, Inc. and the
closing of the United Kingdom operations. The decrease in marketing expenses
before deferral as a percent of revenue before deferral was due to an increase
in the mix of renewal revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily include personnel-related costs, occupancy costs and other overhead
costs. General and administrative expenses decreased 21% to $79.2 million in
2002 from $99.7 million in 2001, and as a percentage of revenues before
deferral, decreased to 19.3% in 2002 from 20.6% in 2001. These decreases were
primarily due to the sale of iPlace, Inc. and the effect of cost saving
initiatives related to the restructuring, as described below.
RESTRUCTURING CHARGES. In October 2001, the Company implemented certain cost
saving initiatives due to a slowdown in consumer response rates and increased
economic uncertainty in both the U.S. and abroad. This restructuring program
included a workforce reduction of approximately 190 employees, the closing of
the Company's United Kingdom operations and the downsizing of the operational
infrastructure throughout the Company. As a result of this restructuring
program, the Company recorded restructuring charges of $6.9 million during the
second quarter ended December 31, 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $1.9 million in 2002 from $10.9 million in 2001 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets, and the sale of iPlace, Inc. Excluding the amortization of
indefinite lived intangible assets in 2001, amortization of goodwill and other
intangibles would have been $3.1 million.
GAIN ON SALE OF SUBSIDIARY. In August 2001, the Company sold its investment
in and advances to iPlace, Inc. in exchange for $50.1 million in cash, including
$3.7 million held in escrow, and 1.6 million shares of Homestore.com, Inc.
common stock, including 0.5 million shares held in escrow. The fair value of the
Homestore.com, Inc. common stock as of the date of sale was $34.5 million. The
Homestore.com, Inc. common stock received is unregistered. Once the
Homestore.com, Inc. stock is registered, MemberWorks may only sell 1/12th of the
shares in any calendar month pursuant to the merger agreement. In connection
with this sale, the Company recognized a gain of $65.6 million before the write
down of Homestore.com, Inc. stock described below.
LOSS ON SALE OF INVESTMENT, NET. The Company's investment in Homestore.com,
Inc. declined in value during fiscal 2002 and management determined that the
decline was other than temporary. As a result, the Company wrote down its
investment in Homestore.com, Inc. to its fair market value and recognized a loss
of $33.6 million during fiscal 2002. As of June 30, 2002, the Company's
investment in Homestore.com, Inc. is valued at $0.9 million.
OTHER EXPENSE, NET. Other expense, net is primarily composed of interest income
from cash and cash equivalents and interest expense on the Company's borrowings
under its line of credit and notes payable. Other expense decreased to $0.4
million in 2002 from $0.5 million in 2001. The Company had no borrowings
outstanding under its line of credit as of June 30, 2002.
PROVISION FOR INCOME TAXES. MemberWorks was not required to record a provision
for income taxes for the year ended June 30, 2002 due to the ability to utilize
net operating losses to offset taxable income. MemberWorks was not required to
record a provision for income taxes for the year ended June 30, 2001 due to tax
losses realized. As of June 30, 2002, MemberWorks had accumulated federal net
operating loss carry forwards of $68.7 million.
FISCAL 2001 COMPARED TO FISCAL 2000
REVENUES. Revenues increased 44% to $475.7 million in 2001 from $330.1 million
in 2000 due to an increase in the Company's membership base and an increase in
the weighted average program fee. Excluding the effects of SAB 101, revenues
would have increased 40% to $462.3 million in 2001. Revenues before deferral
increased 26% to $485.0 million in 2001 from $383.6 million in 2000 due to an
increase in the Company's membership base and an increase in the weighted
13
average program fee. The Company's membership base increased to 7.9 million
members at June 30, 2001 from 6.9 million members at June 30, 2000. The increase
in the Company's membership base was due to increased demand for the Company's
existing programs, as well as the introduction of new programs in 2001 and the
Company's expansion into international markets. The increase in the weighted
average program fee was due to an increase in program pricing and introduction
of new programs with higher fees. As a percentage of total revenues, annual
renewal revenues were 41% in 2001 and 38% in 2000. As a percentage of total
revenues before deferral, annual renewal revenues were 44% in 2001 and 38% in
2000.
OPERATING EXPENSES. Operating expenses increased 46% to $90.4 million in 2001
from $62.0 million in 2000 due to the servicing requirements of a larger
membership base. As a percentage of revenues before deferral, operating expenses
increased to 18.6% in 2001 from 16.2% in 2000 primarily due to an increase in
the mix of revenue generated from our online business, which has a higher
operating expense ratio than our other businesses.
MARKETING EXPENSES. Marketing expenses increased 56% to $305.0 million in 2001
from $195.3 million in 2000 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses increased to
64.1% in 2001 from 59.1% in 2000. Excluding the effect of SAB 101, marketing
expenses would have been 62.3% of revenues in 2001. Marketing expenses, as a
percentage of revenues, increased primarily due to a shift in the marketing mix
and higher cancellation rates. Marketing expenses before deferral increased 17%
to $287.9 million in 2001 from $245.7 million in 2000. As a percent of revenues
before deferral, marketing expenses decreased to 59.4% in 2001 from 64.1% in
2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 48% to $99.7 million in 2001 from $67.6 million in 2000 due to higher
staff related expenses and occupancy costs required to support the Company's
growth. As a percentage of revenues before deferral, general and administrative
expenses increased to 20.6% in 2001 from 17.6% in 2000 primarily due to an
increase in the mix of revenue generated from our online business, which has a
higher general and administrative expense ratio than our other businesses.
NON-RECURRING CHARGE. In April 2001, the Company entered into a voluntary
agreement with the State of California and Ventura and Orange Counties to
implement certain marketing practices in the State of California. Pursuant to
the agreement, the Company paid costs of investigation and certain penalties to
be split between the state and the counties and established a reserve to cover
specific future costs related to the agreement. As a result of the agreement,
the Company recorded a non-recurring charge of $3.0 million.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
increased to $10.9 million in 2001 from $6.7 million in 2000 due to the
acquisition of Discount Development Services, L.L.C. and its subsidiary,
Uni-Care, Inc., (together "DDS") during fiscal 2001 and the effect of a full
year of amortization related to the Company's acquisition of eNeighborhoods and
Qspace, Inc. in February and April of 2000, respectively.
GAIN ON SALE OF INVESTMENT, NET. During fiscal 2001, the Company wrote down its
investment in 24/7 Media, Inc. ("24/7') by $1.8 million due to a decline in
value which was determined to be other than temporary. In addition, during
fiscal 2001, MemberWorks sold its remaining shares of 24/7 stock, received
proceeds of $4.1 million and recognized a loss of $0.4 million. The financial
impact of these transactions on fiscal 2001 is a net loss of $2.2 million.
OTHER EXPENSE/INCOME, NET. Other expense/income, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other expense in 2001 was $0.5
million compared to other income of $0.9 million in 2000. Other expense in 2001
increased due to the Company's borrowings under its line of credit during the
period.
PROVISION FOR INCOME TAXES. MemberWorks was not required to record a provision
for income taxes for the years ended June 30, 2001 and 2000 due to tax losses
realized. As of June 30, 2001, MemberWorks had accumulated federal net operating
loss carry forwards of $102.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow before changes in assets and liabilities was $26.9 million,
$16.0 million and $16.0 million for the years ended June 30, 2002, 2001 and
2000, respectively. The increase in operating cash flow before changes in assets
14
and liabilities in 2002 was primarily due to decreased losses incurred related
to iPlace, Inc. and the United Kingdom operations, as well as the cost saving
initiatives related to the restructuring plan.
Revenues before deferral were $410.5 million, $485.0 million and $383.6 million
for the years ended June 30, 2002, 2001 and 2000, respectively. The Company's
membership base was 6.6 million, 7.9 million and 6.9 million members at June 30,
2002, 2001 and 2000, respectively. The decrease in the membership base in 2002
was due to a controlled slow down in new member marketing implemented in the
beginning of the 2002 fiscal year, the sale of iPlace, Inc. and the closing of
the United Kingdom operations.
Marketing expenses before deferral were $233.9 million, $287.9 million and
$245.7 million in 2002, 2001 and 2000, respectively. As a percent of revenues
before deferral, marketing expenses before deferral were 57.0% in 2002, 59.4% in
2001 and 64.1% in 2000. The decrease in marketing expenses before deferral was
due to a controlled slow down in new member marketing implemented in the
beginning of fiscal 2002, the effect of the sale of iPlace, Inc. and the closing
of the United Kingdom operations. The decrease in marketing expenses before
deferral as a percent of revenue before deferral was due to an increase in the
mix of renewal revenues. Marketing expenses related to renewal revenues are
typically significantly lower than expenses related to new member revenues.
Expenses related to new member marketing, as a percent of new member revenues,
increased in 2002 compared to 2001 primarily due to a decrease in consumer
response rates.
Changes in assets and liabilities decreased cash from operating activities by
$5.1 million in 2002, $3.0 million in 2001 and increased cash by $29.0 million
in 2000. The negative effect of changes in assets and liabilities in 2002 was
primarily due to the controlled slow down in new member marketing implemented in
the beginning of fiscal 2002, as well as the effect of an increase in the
members enrolled in a monthly versus annual payment plan. In total, cash
provided by operations was $21.7 million, $13.0 million and $44.9 million in
2002, 2001 and 2000, respectively.
Net cash provided by investing activities was $40.2 million in 2002, while net
cash used in investing activities was $18.2 million in 2001 and $34.2 million in
2000. Net cash provided by investing activities in 2002 reflected the receipt of
$46.0 million in net proceeds from the sale of iPlace, Inc. In fiscal 2001,
MemberWorks paid $8.2 million in cash to acquire the remaining 81% of DDS. In
fiscal 2000, MemberWorks acquired ConsumerInfo.com for $15.9 million in cash. In
addition, during fiscal 2001 and 2000, MemberWorks received $4.1 million and
$5.2 million, respectively, in proceeds from the sale of its investment in 24/7.
Capital expenditures were $5.8 million, $15.1 million and $20.3 million in 2002,
2001 and 2000, respectively.
Net cash used in financing activities was $33.5 million, $2.1 million and $31.5
million in 2002, 2001 and 2000, respectively. The increase in cash used in
financing activities was due to an increase in the number of treasury shares
acquired under the Company's stock repurchase program. The Company purchased 2.2
million shares for $34.3 million during the year ended June 30, 2002 compared to
0.3 million shares for $8.9 million during the year ended June 30, 2001 and 1.1
million shares purchased for $36.3 million during the year ended June 30, 2000.
The Company utilizes cash from operations to repurchase shares, as the Company
believes this enhances shareholder value. As of June 30, 2002, the Company had
0.5 million shares authorized for repurchase under its buyback program. In July
and August of 2002, the Board of Directors authorized an additional 1 million
and 1.5 million shares, respectively, to be purchased under the buyback program.
Subsequent to these additional authorizations, the Company had 3.0 million
shares available for repurchase under its buyback program.
As of June 30, 2002, the Company had cash and cash equivalents of $51.2 million.
In addition, the Company has an $18.0 million bank credit facility which bears
interest at the higher of the base commercial lending rate for the bank or the
Federal Funds Rate plus 0.5% per annum. As of June 30, 2002, the effective
interest rate for borrowings was 5.25%. There were no borrowings outstanding
under this bank credit facility as of June 30, 2002. The bank credit facility
has certain financial covenants, including a maximum debt coverage ratio, a
minimum fixed charge ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. The Company believes
that existing cash balances, together with its available bank credit facility,
will be sufficient to meet its funding requirements for at least the next twelve
months.
In August 2001, the Company received 1.6 million shares of Homestore.com, Inc.
common stock at a market value of $34.5 million, of which 0.4 million shares are
currently held in escrow to secure the Company's indemnification obligations
under the iPlace, Inc. merger agreement. The Homestore.com, Inc. common stock
15
received is unregistered and it is unknown when the stock will be
registered. MemberWorks may only sell 1/12th of the shares in any calendar month
pursuant to the merger agreement. During the year ended June 30, 2002, the
Company wrote down its investment in Homestore.com, Inc. to its fair market
value and recognized a loss of $33.6 million. The financial impact of these
transactions was a net gain of $32.0 million.
The Company did not have any material commitments for capital expenditures as of
June 30, 2002. The Company intends to utilize cash generated from operations to
fulfill any capital expenditure requirements during 2003.
COMMITMENTS
On January 22, 2002, the Securities and Exchange Commission issued FRR No. 61,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations", suggesting that companies provide
additional disclosures related to liquidity and capital resources, including
off-balance sheet arrangements, certain trading activities that include
non-exchange traded contracts accounted for at fair value and the effect of
transactions with related and certain other parties. The Company is not aware of
factors that are reasonably likely to adversely affect liquidity trends, other
than the risk factors presented in the Forward Looking Statements in this 2002
Annual Report on Form 10-K. The Company does not have off-balance sheet
arrangements, non-exchange traded contracts or material related party
transactions.
Future minimum payments of contractual obligations as of June 30, 2002 are as
follows (amounts in thousands):
Payments Due by Period
-------------------------------------------------------------------------------
Less than
Total 1 year 1-3 years 4-5 years After 5 years
-------------- ------------- -------------- -------------- ---------------
Operating leases 30,882 6,893 11,607 6,532 5,850
Capital leases 68 60 8 - -
Notes payable 760 760 - - -
Other obligations 927 416 511 - -
-------------- ------------- -------------- -------------- ---------------
Total payments due 32,637 8,129 12,126 6,532 5,850
============== ============= ============== ============== ===============
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. See Notes 8 and 9 of the condensed consolidated financial
statements contained in this 2002 Annual Report filed on Form 10-K.
DIVESTITURES
In August 2001, the Company sold its investment in and advances to iPlace,
Inc. to Homestore.com, Inc. in exchange for $50.1 million in cash, including
$3.7 million held in escrow, and 1.6 million shares of Homestore.com, Inc.
common stock, including 0.5 million shares held in escrow. The fair value of the
Homestore.com, Inc. common stock as of the date of sale was $34.5 million. The
Homestore.com, Inc. common stock received is unregistered. Once the
Homestore.com, Inc. stock is registered, MemberWorks may only sell 1/12th of the
shares in any calendar month. In connection with this sale, the Company
recognized a gain of $65.6 million. During the year ended June 30, 2002, the
Company wrote down its investment in Homestore.com, Inc. to its fair market
value and recognized a loss of $33.6 million. The financial impact of these
transactions was a net gain of $32.0 million.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS 142, which was effective for fiscal years
beginning after December 15, 2001. Early adoption was permitted for entities
with fiscal years beginning after March 15, 2002, provided that the first
interim financial statements have not been previously issued. The Company
adopted SFAS 142 effective July 1, 2001. SFAS 142 addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives.
16
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets. The Company
determined that at July 1, 2001, there was an impairment of goodwill of $5.9
million at one of its reporting units due to the change in methodology of
calculating impairment under SFAS 142 concurrent with recent downward trends in
the operations of the reporting unit. This amount was recorded as a cumulative
effect of accounting change in the statement of operations during the fiscal
quarter ended September 30, 2001.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which is effective for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. MemberWorks does not believe
that the adoption of SFAS 143 will have a material impact on the Company's
financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." MemberWorks does not believe that the adoption of
SFAS 144 will have a material impact on the Company's financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"), which is effective for fiscal years beginning after
May 15, 2002. SFAS 145 addresses the financial accounting and reporting for a
number of areas, including gains and losses derived from the extinguishment of
debt and the treatment of sale-leaseback transactions. MemberWorks does not
believe that the adoption of SFAS 145 will have a material impact on the
Company's financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities that are initiated after December 31, 2002. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)." MemberWorks
does not believe that the adoption of SFAS 146 will have a material impact on
the Company's financial statements.
FORWARD-LOOKING STATEMENTS
This 2002 Annual Report filed on Form 10-K contains forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industry in which MemberWorks operates and the Company's management's
beliefs and assumptions. Forward-looking statements include all statements that
do not relate solely to historical or current facts and can be identified by the
use of words such as "believe," "expect," "estimate," "project," "continue" or
"anticipate." These forward-looking statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance and are
based on a number of assumptions and estimates that are inherently subject to
significant risks and uncertainties, many of which are beyond our control,
cannot be foreseen and reflect future business decisions that are subject to
change. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. Among the many
factors that could cause actual results to differ materially from the
forward-looking statements are:
- - The Company's ability to integrate acquired businesses into the Company's
management and operations and operate successfully;
- - Changes in the marketing techniques of credit card issuers;
- - Increases is the level of commission rates and other compensation required
by marketing partners to actively market with MemberWorks;
- - Unanticipated cancellation or termination of marketing agreements and the
extent to which MemberWorks can continue successful development and
marketing of new products and services;
17
- - Higher than expected membership cancellations;
- - Potential requirements by business partners such as the Company's payment
processors;
- - Lower than expected membership renewal rates;
- - Unanticipated changes in or termination of the Company's ability to process
membership fees through third parties, including clients, payment
processors and bank card associations;
- - The Company's ability to introduce new programs on a timely basis;
- - The Company's ability to develop and implement operational and financial
systems to manage rapidly growing operations;
- - The Company's ability to recover from a complete or partial system failure
or impairment, other hardware or software related malfunctions or
programming errors;
- - The Company's ability to obtain financing on acceptable terms to finance
the Company's growth strategy and to operate within the limitations imposed
by financing arrangements;
- - Further changes in the already competitive environment for the Company's
products or competitors' responses to the Company's strategies;
- - Changes in the growth rate of the overall U.S. economy, or the
international economy where MemberWorks does business, such that credit
availability, interest rates, consumer spending and related consumer debt
are impacted;
- - Additional government regulation of the Company's industry; and
- - New accounting pronouncements
Many of these factors are beyond MemberWorks' control, and, therefore, its
ability to generate predictable revenue and income growth may be adversely
affected by these factors.
MemberWorks cautions that such factors are not exclusive. All of the
forward-looking statements made in this Annual Report on Form 10-K are qualified
by these cautionary statements and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Annual Report on Form 10-K. Except as required under the Federal Exchange
Commission, MemberWorks does not have any intention or obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Interest Rate
The Company has an $18.0 million bank credit facility which bears interest at
the higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. There were no borrowings outstanding under this bank
credit facility as of June 30, 2002. Management believes that an increase in the
commercial lending rate or the Federal Funds rate would not be material to the
Company's financial position or its results of operations. If the Company is not
able to renew its existing credit facility agreement, which matures on April 1,
2003, it is possible that any replacement lending facility obtained by the
Company may be more sensitive to interest rate changes. The Company does not
currently hedge interest rates with respect to its outstanding debt.
Foreign Currency
The Company has international sales and facilities in Canada and therefore, is
subject to foreign currency rate exposure. Canadian sales have been denominated
in the Canadian dollar and its functional currency is the local currency. Assets
and liabilities of the Canadian subsidiary are translated into U.S. dollars at
the exchange rate in effect as of the balance sheet date. Income and expense
items are translated at the average exchange rate for the period. Accumulated
net translation adjustments are recorded in shareholders' equity. Foreign
exchange transaction gains and losses are included in the results of operations,
and were not material for all periods presented. As a result, the Company's
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic condition. To the
extent the Company incurs expenses that are based on locally denominated
sales volume paid in local currency, the exposure to foreign exchange risk is
reduced. The Company has determined that the impact of a near-term 10%
appreciation or depreciation of the U.S. dollar would have an insignificant
effect on its financial position, results of operations and cash flows. The
Company does not maintain any derivative instruments to mitigate the exposure to
translation and transaction risk. However, this does not preclude the Company's
adoption of specific hedging strategies in the future. MemberWorks will assess
the need to utilize financial instruments to hedge currency exposures on an
ongoing basis.
18
Fair Value
In August 2001, MemberWorks acquired stock in Homestore.com, Inc. valued at
$34.5 million in exchange for its interest in iPlace, Inc. The carrying value of
this investment is affected by changes in the quoted market prices of
Homestore.com, Inc. common stock. The investment in Homestore.com, Inc. declined
in value and management determined that the decline was other than temporary. As
a result, the Company wrote down its investment in Homestore.com, Inc. to its
fair market value and recognized a loss of $33.6 million during the year ended
June 30, 2002. MemberWorks does not use derivative financial instruments for
speculative or trading purposes. However, this does not preclude the Company's
adoption of specific hedging strategies in the future.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements and related notes and report of independent accountants
for MemberWorks are included following Part IV, beginning on page F-1, and
identified in the index appearing at Item 14(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
-----------------------------------------------------------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information contained in the Company's Proxy Statement under the sections
titled "Election of Directors" is incorporated herein by reference in response
to this item. Information regarding the Executive Officers of MemberWorks is
furnished in Part I of this Annual Report on Form 10-K under the heading
"Executive Officers of the Registrant".
Item 11. Executive Compensation
----------------------
The information contained in the Company's Proxy Statement under the section
titled "Executive Compensation" is incorporated herein by reference in response
to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information contained in the Company's Proxy Statement under the section
titled "Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the Company's Proxy Statement under the section
titled "Certain Relationships and Related Transactions" is incorporated herein
by reference in response to this item.
19
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) Index to Financial Statements and Financial Statement Schedules
Page
----
Report of PricewaterhouseCoopers LLP, Independent Accountants F-1
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended June 30,
2002, 2001 and 2000 F-3
Consolidated Statements of Shareholders' (Deficit) Equity for
the years ended June 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended June 30,
2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
The following Financial Statement Schedule is included:
Schedule II - Valuation and Qualifying Accounts - Years ended June 30,
2002, 2001 and 2000 F-22
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, or are inapplicable, and therefore
have been omitted.
(b) Reports on Form 8-K
None
(c) Exhibits:
Exhibits filed as a part of this Annual Report on Form 10-K are listed
in the Index to Exhibits immediately preceding the exhibits located at
the end of this Annual Report.
20
MEMBERWORKS INCORPORATED
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEMBERWORKS INCORPORATED
------------------------
(Registrant)
By: /s/ GARY A. JOHNSON
------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: August 23, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
By: /s/ Gary A. Johnson President, Chief Executive Officer and Director August 23, 2002
--------------------
Gary A. Johnson
By: /s/ James B. Duffy Executive Vice President, Chief Financial Officer August 23, 2002
---------------------------
James B. Duffy
By: /s/ Dennis P. Walker Executive Vice President and Director August 23, 2002
--------------------------
Dennis P. Walker
By: /s/ Alec L. Ellison Director August 23, 2002
---------------------------
Alec L. Ellison
By: /s/ Scott N. Flanders Director August 23, 2002
---------------------------
Scott N. Flanders
By: /s/ Michael T. McClorey Director August 23, 2002
---------------------------
Michael T. McClorey
By: /s/ Edward M. Stern Director August 23, 2002
---------------------------
Edward M. Stern
By: /s/ Marc S. Tesler Director August 23, 2002
---------------------------
Marc S. Tesler
21
Exhibit
- -------
No. Description
- -- ------------
*3.1 Restated Certificate of Incorporation of the Registrant. (filed as
Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 333-10541, filed on October 18, 1996)
*3.2 Restated By-laws of the Registrant. (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*4.1 Amended and Restated Registration Rights Agreement, dated as of
September 9, 1994 between the Registrant and Brown Brothers Harriman &
Co. (filed as Exhibit 4.3 to the Company's Registration Statement on
Form S-1, Registration No. 333-10541, filed on October 18, 1996)
*4.2 Registration Rights Agreement, dated September 20, 1995 among the
Registrant and the Stockholders set forth on Schedule I thereto.
(filed as Exhibit 4.4 to the Company's Registration Statement on Form
S-1, Registration No. 333-10541, filed on October 18, 1996)
*10.1 Amended Employee Incentive Stock Option Plan. (filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*10.3 1995 Non-Employee Directors' Stock Option Plan. (filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*10.4 1996 Stock Option Plan. (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1, Registration No. 333-10541, filed
on October 18, 1996)
*10.5 1996 Employee Stock Purchase Plan. (filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*10.6 Amended and Restated 401(k) Profit Sharing Plan of the Registrant,
dated July 1, 2000. (filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K, Registration No. 333-10541, filed on September 6,
2001)
*10.8 Credit Agreement dated September 15, 1999 among MemberWorks
Incorporated, the lenders parties hereto and Brown Brothers Harriman &
Co. (filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K, Registration No. 333-10541, filed on August 30, 2000)
*10.9 Amendment No. 1 to Credit Agreement dated February 25, 2000 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co. (filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K, Registration No. 333-10541, filed on August 30,
2000)
*10.10 Amendment No. 2 to Credit Agreement dated March 13, 2001 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co. (filed as Exhibit 10.10 to the Company's
Annual Report on Form 10-K, Registration No. 333-10541, filed on
September 6, 2001)
10.11 Amendment No. 3 to Credit Agreement dated November 14, 2001 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co.
10.12 Amendment No. 4 to Credit Agreement dated February 1, 2002 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co.
10.13 Amendment No. 5 to Credit Agreement dated February 28, 2002 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co.
10.14 Amendment No. 6 to Credit Agreement dated April 1, 2002 among
MemberWorks Incorporated, the lenders parties hereto and Brown
Brothers Harriman & Co.
*10.15 Warrant Agreement dated as of September 9, 1994, between the
Registrant and Brown Brothers Harriman & Co. (filed as Exhibit 10.12
to the Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*10.16 Form of Stock Subscription Warrant with Voting Rights, dated August 3,
1995. (filed as Exhibit 10.15 to the Company's Registration Statement
on Form S-1, Registration No. 333-10541, filed on October 18, 1996)
*10.18 Lease Agreement between Stamford Towers Limited Partnership and the
Registrant, dated January 15, 1996. (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996)
*10.20 Arena Tower II Lease Agreement by and between Arena Tower II
Corporation and the Registrant, dated February 12, 1996, as amended.
(filed as Exhibit 10.24 to the Company's Registration Statement on
Form S-1, Registration No. 333-10541, filed on October 18, 1996)
22
*10.23 Lease Agreement between Stamford Towers Limited Partnership and the
Registrant, dated May 20, 1997. (filed as Exhibit 10.23 to the
Company's Annual Report on Form 10-K, Registration No. 333-10541,
filed on September 29, 1997)
*10.24 Second Amendment to Lease Agreement between Arena Tower II Corporation
and Registrant dated January 24, 1997. (filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K, Registration No. 333-10541,
filed on September 29, 1997)
*10.25 Third Amendment to Lease Agreement between Arena Tower II Corporation
and Registrant dated July 23, 1997. (filed as Exhibit 10.25 to the
Company's Annual Report on Form 10-K, Registration No. 333-10541,
filed on September 29, 1997)
*18 Letter re: Change in Accounting Principle. (filed as Exhibit 18 to the
Company's Annual Report on Form 10-K, Registration No. 333-10541, filed on
October 8, 1998)
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
- ---------------------------------------------------
*Previously filed.
23
MEMBERWORKS INCORPORATED
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholders
of MemberWorks Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 20 present fairly, in all material respects,
the financial position of MemberWorks Incorporated and its subsidiaries at June
30, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
aforementioned index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for membership fee revenue in fiscal 2001 and
goodwill and other intangible assets in fiscal 2002.
PricewaterhouseCoopers LLP
New York, New York
July 29, 2002, except for Note 21, which is as of August 12, 2002
F-1
MEMBERWORKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30,
---------------------------
2002 2001
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 51,185 $ 22,736
Marketable securities 912 -
Accounts receivable 9,831 20,446
Prepaid membership materials 2,061 3,903
Prepaid expenses 4,325 5,857
Membership solicitation and other deferred costs 129,085 154,059
------------ -------------
Total current assets 197,399 207,001
Fixed assets, net 31,420 39,687
Goodwill 42,039 84,814
Intangible assets, net 8,049 14,283
Other assets 1,910 2,676
------------ -------------
Total assets $ 280,817 $ 348,461
============ =============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations $ 1,070 $ 516
Accounts payable 32,769 49,505
Accrued liabilities 57,709 64,634
Due to related parties - 2,028
Deferred membership fees 206,272 243,024
------------ -------------
Total current liabilities 297,820 359,707
Long-term liabilities 3,627 3,057
------------ -------------
Total liabilities 301,447 362,764
------------ -------------
Commitments and Contingencies (Note 9)
Minority interest - 6,505
Mandatorily redeemable convertible preferred securities of subsidiary - 5,157
Shareholders' deficit:
Preferred stock, $0.01 par value --
1,000 shares authorized; no shares issued - -
Common stock, $0.01 par value --
40,000 shares authorized; 17,493 shares issued
(17,308 shares at June 30, 2001) 175 173
Capital in excess of par value 109,254 107,835
Accumulated deficit (42,185) (80,196)
Accumulated other comprehensive loss (373) (370)
------------ -------------
Total shareholders' equity before treasury stock 66,871 27,442
Treasury stock, 4,139 shares at cost (1,920 shares at June 30, 2001) (87,501) (53,407)
------------ -------------
Total shareholders' deficit (20,630) (25,965)
------------ -------------
Total liabilities and shareholders' deficit $ 280,817 $ 348,461
============ =============
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the year ended June 30,
----------------------------------------
2002 2001 2000
------------ ----------- ------------
Revenues $ 427,602 $ 475,726 $ 330,107
Expenses:
Operating 78,694 90,368 62,040
Marketing 248,974 305,032 195,253
General and administrative 79,211 99,732 67,600
Restructuring charges (Note 10) 6,893 - -
Non-recurring charge (Note 9) - 3,000 -
Amortization of goodwill and other intangibles 1,941 10,918 6,654
------------ ----------- ------------
Operating income (loss) 11,889 (33,324) (1,440)
Gain on sale of subsidiary (Note 5) 65,608 - -
Net (loss) gain on investment (Note 5) (33,628) (2,172) 8,854
Other (expense) income, net (401) (450) 873
------------ ----------- ------------
Income (loss) before equity in affiliate and minority interest 43,468 (35,946) 8,287
Equity in income of affiliate - 83 19
Minority interest (Notes 13 and 14) 450 9,106 2,027
------------ ----------- ------------
Income (loss) before income taxes 43,918 (26,757) 10,333
Provision for income taxes - - -
------------ ----------- ------------
Income (loss) before cumulative effect of accounting change 43,918 (26,757) 10,333
Cumulative effect of accounting change (Note 3) (5,907) (25,730) -
------------ ----------- ------------
Net income (loss) $ 38,011 $ (52,487) $ 10,333
============ =========== ============
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 3.03 $ (1.75) $ 0.68
Cumulative effect of accounting change (0.41) (1.69) -
------------ ----------- ------------
Basic earnings (loss) per share $ 2.63 $ (3.44) $ 0.68
============ =========== ============
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 2.95 $ (1.75) $ 0.61
Cumulative effect of accounting change (0.40) (1.69) -
------------ ----------- ------------
Diluted earnings (loss) per share $ 2.55 $ (3.44) $ 0.61
============ =========== ============
Pro forma assuming accounting changes are retroactively applied:
Net income (loss) $ 43,918 $ (18,978) $ 27,009
Basic earnings (loss) per share 3.03 (1.24) 1.78
Diluted earnings (loss) per share 2.95 (1.24) 1.59
Weighted average common shares used in earnings (loss) per share calculations:
Basic 14,477 15,248 15,162
============ =========== ============
Diluted 14,909 15,248 16,993
============ =========== ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(In thousands)
Accumulated
Common Stock Capital in Other
----------------- Excess of Deferred Accumulated Comprehensive Treasury
Shares Amount Par Value Compensation Deficit Loss Stock Total
-------------------------------------------------------------------- ---------- -------
Balance - June 30, 1999 15,909 $ 159 $ 76,999 $ (511) $ (38,042) $ (14) $(8,304) $ 30,287
Issuance of common stock 598 6 4,395 4,401
Acquisition of treasury stock (36,340) (36,340)
Deferred compensation 467 467
Issuance of subsidiary stock for
acquisitions (Note 4) 10,004 10,004
Comprehensive income:
Net income 10,333
Currency translation adjustment (131)
Total comprehensive income 10,202
-------------------------------------------------------------------- ---------- -------
Balance - June 30, 2000 16,507 165 91,398 (44) (27,709) (145) (44,644) 19,021
Issuance of common stock 376 4 3,234 3,238
Issuance of common stock for
an acquisition (Note 4)