<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996
REGISTRATION NO. 333-10541
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEMBERWORKS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 06-1276882
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT 06901
(203) 324-7635
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
GARY A. JOHNSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEMBERWORKS INCORPORATED
680 WASHINGTON BLVD., SUITE 1100
STAMFORD, CONNECTICUT 06901
(203) 324-7635
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
MARK G. BORDEN, ESQ. ALAN K. AUSTIN, ESQ.
THOMAS L. BARRETTE, JR., ESQ. STEVEN V. BERNARD, ESQ.
HALE AND DORR DAVID S. KIM, ESQ.
60 STATE STREET WILSON SONSINI GOODRICH & ROSATI
BOSTON, MASSACHUSETTS 02109 PROFESSIONAL CORPORATION
(617) 526-6000 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(415) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 1996
LOGO
2,700,000 SHARES
COMMON STOCK
Of the 2,700,000 shares of Common Stock offered hereby, 2,400,000 shares
are being sold by MemberWorks Incorporated ("MemberWorks" or the "Company") and
300,000 shares are being sold by certain Selling Stockholders. See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds from
the sale of the shares by the Selling Stockholders. Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently anticipated that the initial public offering price will be between
$15.00 and $17.00 per share. See "Underwriting" for information relating to the
method of determining the initial public offering price.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C> <C>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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Per Share.......................... $ $ $ $
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Total(2)........................... $ $ $ $
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</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $900,000.
(2) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an additional 405,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Selling Stockholders will be $ , $ and
$ , respectively.
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
------------------------
ROBERTSON, STEPHENS & COMPANY
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
The date of this Prospectus is , 1996
<PAGE> 3
THE COMPANY'S MEMBERSHIP SERVICE PROGRAMS CREATE A SYNERGISTIC RELATIONSHIP
AMONG MEMBERS, VENDORS, CLIENTS AND THE COMPANY.
[CHART]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Capitalization........................................................................ 16
Dilution.............................................................................. 17
Selected Consolidated Financial Information........................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Business.............................................................................. 26
Management............................................................................ 38
Certain Transactions.................................................................. 46
Principal and Selling Stockholders.................................................... 47
Description of Capital Stock.......................................................... 49
Shares Eligible for Future Sale....................................................... 52
Underwriting.......................................................................... 54
Legal Matters......................................................................... 55
Experts............................................................................... 55
Additional Information................................................................ 55
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by its independent accountants, and with quarterly reports for the
first three quarters of each fiscal year containing unaudited consolidated
financial information.
Countrywide Dental Program and HealthTrends are registered trademarks of
the Company. Connections, Your source for entertainment values; Countrywide
Dental and Health Program; Home PC Link; MoneyMaster; Official Sports
Connection; and Travel Arrangements are trademarks of the Company. This
Prospectus also includes trademarks and registered trademarks of other
companies.
The Company was incorporated in Delaware on July 12, 1989. The Company's
principal executive offices are located at 680 Washington Blvd., Suite 1100,
Stamford, Connecticut 06901 and its telephone number is (203) 324-7635. In
August 1996, the Company changed its name from CardMember Publishing Corporation
to MemberWorks Incorporated.
3
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
MemberWorks Incorporated ("MemberWorks" or the "Company") is a leading
designer and provider of innovative membership service programs. The Company
addresses the needs of organizations seeking to leverage the expertise of an
outside provider in offering these programs. MemberWorks offers its programs to
increasingly sophisticated consumers seeking economy, efficiency and convenience
in their purchase of products and services. For participating vendors, the
programs provide the opportunity to reach a large number of demographically
attractive members at minimal incremental marketing cost. As of June 30, 1996,
the Company had approximately 40 client organizations and approximately 1.5
million members.
The Company currently offers eight membership programs in broad lifestyle
areas such as health, dental, travel, entertainment, sports, financial, and
computers and software. The Company offers memberships primarily on an
individual basis. Individual memberships are marketed by the Company to
consumers listed in databases provided to it by clients. The Company analyzes
these client lists to identify likely members utilizing a sophisticated,
proprietary membership database system. Individual members pay fees directly to
the Company, while the Company incurs the marketing costs to solicit these
members and pays royalties to the clients on membership fees. The Company
solicits members for its programs primarily through third-party telemarketers
and to a lesser extent direct mail campaigns. Some of the Company's individual
memberships are available at retail stores and on-line through the World Wide
Web. Recently, the Company also began to offer memberships on a wholesale basis.
Wholesale memberships incorporate elements from the Company's eight membership
programs and are sold to client organizations who then market them to their
consumers.
The Company distributes its programs almost exclusively through credit card
issuers. Currently, the Company has 36 credit card issuer clients to whom it
pays royalties, including 10 of the top 20 issuers of bank credit cards, such as
Household Credit Services, Inc. and Capital One Financial Corp., four of the top
five issuers of oil company credit cards, such as Shell Oil Company and Texaco
Credit Card Services, and Sears, Roebuck and Co., the leading issuer of retail
company credit cards.
The Company has developed a consultative product development process which
it believes has allowed it to respond quickly and effectively to market demand
for new products. The Company believes it was the first membership services
company to introduce aggregated discount services in health, sports, financial
and, most recently, through Home PC Link, personal computers and software. The
Company also believes that its programs are innovative with respect to the
variety and quality of particular services, discounts and other features which
those programs offer.
To achieve its objective of becoming the leading provider of innovative
membership programs, the Company intends to continue to develop innovative
service programs for broad markets, expand existing and develop new distribution
channels, maintain and build its renewal membership base, offer premium quality
services, develop and use innovative technical solutions, leverage and develop
multiple vendor partners, and pursue international opportunities.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 2,400,000 shares
Common Stock offered by the Selling Stockholders........... 300,000 shares
Common Stock outstanding after the offering................ 14,550,177 shares(1)
Use of Proceeds............................................ Redemption of redeemable preferred stock
and general corporate purposes, including
the acquisition of new members, program
development, capital expenditures and
working capital.
Proposed Nasdaq National Market symbol..................... MBRS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................ $25,830 $41,547 $57,012
Total expenses.......................................................... 31,846 52,279 62,259
Net loss................................................................ (6,016) (10,732) (5,247)
Pro forma net loss per share(2)......................................... $ (0.42)
Pro forma weighted average common and common equivalent shares
outstanding(2)........................................................ 12,798
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(3) AS ADJUSTED(3)(4)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,312 $ 4,312 $36,645
Working capital (deficit)............................... (10,561) (10,561) 21,772
Total assets............................................ 19,715 19,715 52,048
Deferred membership income, net......................... 8,416 8,416 8,416
Long-term obligations................................... 1,089 1,089 1,089
Redeemable preferred stock.............................. 20,487 1,949 --
Total stockholders' equity (deficit).................... (36,332) (17,794) 16,488
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1996, exclusive of 173,830 treasury shares. Excludes 1,277,762 shares of
Common Stock issuable pursuant to stock options outstanding at June 30, 1996
(of which options to purchase 378,180 shares were exercisable) at a weighted
average exercise price of $2.62 per share, and 384,287 shares of Common
Stock issuable upon the exercise of warrants outstanding at June 30, 1996
(all of which warrants were exercisable) at a weighted average exercise
price of $1.24 per share. Also excludes 310,140 shares of Common Stock
issuable pursuant to stock options granted on July 1, 1996 (none of which
were exercisable) at an exercise price of $4.17 per share. See
"Capitalization," "Management -- Stock Plans," "Certain Transactions" and
"Principal and Selling Stockholders." Also excludes 129,600 shares of Common
Stock issuable upon exercise of options that may be granted to an executive
officer of the Company upon achievement of certain performance goals prior
to December 31, 1996. All such options will be exercisable at an exercise
price of $2.78 per share and will vest ratably over a four-year period. See
"Management -- Executive Compensation."
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the computation of pro forma net loss per share and the shares used in
computing pro forma net loss per share.
(3) Gives effect to the conversion of all outstanding shares of the Company's
Class A Common Stock and Series A, Series B, Series C, Series D and Series H
Preferred Stock into an aggregate of 12,062,239 shares of Common Stock.
(4) As adjusted to give effect to the sale of 2,400,000 shares of Common Stock
offered by the Company hereby, at an assumed initial public offering price
of $16.00 per share, the issuance of 3,533 shares of Common Stock pursuant
to the exercise of a warrant by a Selling Stockholder and the application of
the estimated net proceeds therefrom, including the redemption of all
outstanding shares of the Company's Series E and Series F Preferred Stock
upon the closing of this offering. See "Use of Proceeds."
Except as otherwise indicated, all information in this Prospectus (i)
reflects the conversion of all outstanding shares of the Company's Class B
Common Stock into an aggregate of 84,405 shares of Common Stock, effected in
August 1996; (ii) reflects a 7.2 for 1 stock split in issued shares of Common
Stock, to be effected in September 1996; (iii) reflects the issuance of 3,533
shares of Common Stock pursuant to the exercise of a warrant by a Selling
Stockholder concurrent with the closing of this offering, which shares will be
sold in this offering by such Selling Stockholder; (iv) reflects the conversion
of all outstanding shares of the Company's Class A Common Stock and Series A,
Series B, Series C, Series D and Series H Preferred Stock into an aggregate of
12,062,239 shares of Common Stock upon the closing of this offering; (v)
reflects the redemption of all outstanding shares of the Company's Series E and
Series F Preferred Stock upon the closing of this offering; and (vi) assumes no
exercise of the Underwriters' over-allotment option. The Company's fiscal year
ends on June 30 of each year.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth in the following risk factors and elsewhere in this
Prospectus.
HISTORY OF LOSSES
The Company has incurred significant operating losses since its inception.
As of June 30, 1996, the Company had an accumulated deficit of approximately
$38.3 million. For fiscal years 1996 and 1995, the Company incurred net losses
of approximately $5.2 million and $10.7 million, respectively. Because of
on-going costs in connection with obtaining new members, the Company expects to
continue to incur operating and net losses at least through fiscal 1997.
Although the Company has experienced revenue growth in recent periods, such
growth rates may not be sustainable and are not indicative of future operating
results. There can be no assurance that the Company will achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON CLIENTS; CLIENT CONCENTRATION
The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. 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 dependent on first obtaining approval from a client.
Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including approximately 35.2% from customer lists provided by
Sears, Roebuck and Co. ("Sears"). These and other client relationships are
pursuant to contracts which may be terminated by the client upon 30 to 90 days'
notice without penalty. Upon such termination, the Company 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 members'
cancellation or non-renewal of the membership. Approximately 75% of the revenue
attributable to Sears for the year ended June 30, 1996 was generated pursuant to
a contract which also provides that, upon termination of the agreement for
default, Sears may prohibit the Company from renewing memberships and otherwise
cause the Company to terminate its relationship with existing members. Events
that constitute default include events outside the control of the Company,
including acts and omissions by the Company's third-party vendors. There can be
no assurance that one or more of the Company's key or other clients will not
terminate its relationship with the Company or that clients will provide
additional customer lists to the Company for use in further marketing new or
existing membership programs. In addition, the Company's agreement with one of
its key clients is under renewal negotiations, and there can be no assurance
that the client will renew such agreement on favorable terms, if at all.
Termination or expiration of a key client relationship could have a material
adverse effect on the future revenues from existing programs of which such
client's customers are members and on the Company's ability to further market
new or existing programs through such client.
Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise be subject to binding arbitration. There can be
no assurance that,
6
<PAGE> 8
upon exercise of such option, the Company would receive, as a result of
negotiation, arbitration or otherwise, revenue or net income commensurate with
the amount which the Company would receive if the option were not exercised.
Failure to receive a commensurate amount, and the loss of the ability to market
to the members of the program following exercise of the option, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in professional relationships, and such clients
may not be replaced on a timely basis, if at all. The loss of any client,
particularly a key client, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Distribution."
DEPENDENCE ON MEMBERSHIP RENEWALS
The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During an initial annual membership term or renewal term, a member may
cancel his or her membership in the program, generally for a complete refund of
the membership fee for that period. Accordingly, the profitability of each of
the Company's programs depends on recurring and sustained membership renewals.
Renewal rates are inherently uncertain and are subject to several factors, many
of which are outside of the Company's control, including changing member
preferences, competitive price pressures, general economic conditions, customer
satisfaction and credit card holder turnover. There can be no assurance that a
particular program will generate sufficient renewals to become profitable or
that memberships, if renewed, will not be canceled. Failure of one or more of
the Company's programs to generate recurring and sustained membership renewals
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of customer orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; the availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected revenues for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the
7
<PAGE> 9
Company will not have an adverse effect upon the Company's results of
operations, particularly in quarters immediately following consummation of such
transactions, while the operations of the acquired business are being integrated
into the Company's operations.
In addition, the Company is required to grant options to purchase up to
129,600 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $2.78 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise price and the trading price of the
Company's Common Stock on the date of the grant. The Company's agreement to
grant such options terminates on December 31, 1996.
Due to the foregoing and other factors, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period to period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. It is also likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors, which, in turn, could have a severe
adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTENSE COMPETITION
Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company 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. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations which
offer benefit programs to their customers. There can be no assurance that the
Company's competitors will not increase their emphasis on programs similar to
those offered by the Company and more directly compete with the Company, that
new competitors will not enter the market, or that other businesses will not
themselves introduce competing programs. Many of the Company's current and
prospective competitors, including CUC, have substantially larger customer bases
and greater financial and other resources than the Company. There can be no
assurance that the Company's current or potential competitors will not provide
programs comparable or superior to those provided by the Company at lower
membership prices or adapt more quickly than the Company to evolving industry
trends or changing market requirements. In addition, alliances among competitors
may emerge and rapidly acquire significant market share. 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. There can be no assurance that the Company
will be able to compete effectively against current and future competitors. See
"Business -- Competition."
NEW PROGRAM INTRODUCTIONS
The Company's business is substantially dependent on its ability to develop
and successfully introduce new programs which generate consumer interest.
Failure to introduce new programs in a timely manner could result in the
Company's competitors acquiring additional market share for a program in a
particular area of consumer interest. In addition, the introduction or
announcement of
8
<PAGE> 10
new programs by the Company or by others could render existing programs
uncompetitive or obsolete, or result in a delay or decrease in orders for
existing programs as customers evaluate new programs or select the new programs
as an alternative to existing programs. Therefore, the announcement or
introduction of new programs by the Company or others, or the failure by the
Company to introduce new programs which have broad consumer appeal, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Membership Service Programs" and
"-- Competition."
DEPENDENCE ON VENDORS AND TELEMARKETERS
The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing."
DEPENDENCE ON CREDIT CARD INDUSTRY
The Company's future success is dependent in large part on continued demand
for the Company's programs from businesses within the industries served by the
Company. In particular, programs marketed through the Company's credit card
issuer clients accounted for substantially all of the Company's revenues in
fiscal 1996. A significant downturn in the credit card industry or a trend in
that industry to reduce or eliminate its use of membership programs would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company is obligated under the terms of
its agreement with credit card issuers and merchant processors under rules
promulgated by credit card associations such as Visa International and Master
Card to maintain certain standards of commercial conduct with respect to credit
card users. Violations of such standards could jeopardize the Company's ability
to sell its programs using such credit cards as the medium of commercial
exchange, which could have a material adverse effect on Company's business,
financial condition and results of operations. See "Business -- Distribution."
MANAGEMENT OF GROWTH
The Company has recently experienced a period of rapid growth that has
placed significant demands on its management and other resources, and continued
growth, if any, could continue to place significant demands on such resources.
Net sales increased from approximately $9.4 million in fiscal 1992 to $57.0
million in fiscal 1996. In addition, the number of employees increased from 76
to approximately 400 during the same period. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
its work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations,
and the failure to support the Company's operations effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Although the Company has not historically generated significant
international revenues, the Company intends to attempt to penetrate
international markets. In order to successfully expand internationally, the
Company must establish foreign operations and hire additional personnel. This
will require significant management attention and financial resources and could
materially adversely affect the Company's operating margins. International sales
and operations are subject to numerous risks,
9
<PAGE> 11
including unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, difficulties in protecting intellectual property rights, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, implementation of foreign
exchange controls and potentially adverse tax consequences. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, financial condition and results of operations. See
"Business -- Strategy" and "-- Sales and Marketing."
MEMBERSHIP PROGRAM INDUSTRY; NEGATIVE IMPACT OF COMPETING INDUSTRIES
Providers of membership service programs compete for client marketing
budget dollars with other marketing activities and, in particular, other forms
of direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange via the World
Wide Web, will proliferate significantly in the foreseeable future. To the
extent such proliferation occurs, it could have a material adverse effect on the
demand for membership service programs. Furthermore, as the telemarketing
industry continues to grow, the effectiveness of telemarketing, which is the
Company's major means of marketing its programs, as a direct marketing tool may
decrease as a result of increased consumer resistance to telemarketing in
general. See "Business -- Industry Overview," "-- Sales and Marketing" and
"-- Competition."
FUTURE CAPITAL NEEDS
The Company typically incurs high costs in the year a program is
introduced. Principal elements of these costs relate to hiring personnel,
developing program content, contracting with vendors, drafting, testing and
refining telemarketing scripts and creating membership kits for mailing to
potential new program members. The Company must incur costs to market programs
to each potential member, regardless of whether that individual actually becomes
a paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RELIANCE ON COMPUTER AND COMMUNICATIONS SYSTEMS; TECHNOLOGY RISKS
The Company's business is highly dependent on its computer and
telecommunications systems and any temporary or permanent loss of either system,
for whatever reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
technologies on which the Company is dependent to compete effectively and meet
its clients' needs are rapidly evolving and in many instances are characterized
by short product life cycles or innovation. As a result, the Company is
dependent on ongoing, significant investment in advanced computer and
telecommunications technology, including automated call distributors and digital
switches, and its ability to anticipate and adapt to technological shifts. There
can be no assurance that the Company will be successful in anticipating or
adapting to technological changes or in selecting and developing new and
enhanced technology on a timely basis. See "Business -- Technology."
DEPENDENCE ON TELEPHONE SERVICE
The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone services provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the
10
<PAGE> 12
Company. Additionally, limitations on the ability of telephone companies to
provide the Company with increased capacity that may be required in the future,
if any, could adversely affect the Company's business, financial condition and
results of operations. Rate increases imposed by these telephone companies will
increase the Company's operating expenses and could materially adversely affect
its business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the members of its management and
marketing staff, the loss of one or more of whom could have a material adverse
effect on the Company. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
managerial and marketing personnel, particularly as the Company expands its
activities. The Company faces significant competition for such personnel, and
there can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires for continued growth, if any. The failure to
hire and retain such personnel could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Management."
GOVERNMENT REGULATION; ADVERSE PUBLICITY
The primary means which the Company uses to market its programs is
telemarketing. 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. 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. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
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 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
non-compliance 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
non-compliance with consumer protection regulations and violations of notions of
fair dealing with consumers, and the membership programs industry is susceptible
to preemptory charges by the media of regulatory noncompliance and unfair
dealing. Any such publicity is potentially damaging to the Company's reputation,
its client relationships and consumer acceptance and loyalty. See "Business --
Government Regulation."
The Company believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it is offered. If this program were in the
future to be viewed by a Federal or any state insurance regulatory authority as
an insurance program, this would subject the Company to the regulatory authority
of such Federal or state insurance authority. The insurance industry currently
is one of the most heavily regulated industries in the United States. In
addition, the program may be subject to licensing requirements in certain
states. In one state, the Company was required to suspend its offering of the
program until it retained a licensed dentists' network to provide services. The
subjection of the Company to such regulatory authority would significantly
increase the Company's costs associated with regulatory compliance and
potentially cause the
11
<PAGE> 13
Company to terminate its Countrywide Dental Program in particular states, either
of which would materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will not in the future become subject to regulatory authority by the Federal or
any state government as the result of its Countrywide Dental Program. See
"Business -- Membership Service Programs" and "-- Government Regulation."
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiations between the Company, the
Selling Stockholders and the Representatives of the Underwriters. See
"Underwriting" for information relating to the method of determining the initial
public offering price. Factors such as fluctuations in the Company's operating
results, announcements of product or service innovations or new contracts by the
Company or its competitors, and market conditions for stocks of companies
similar to the Company and the condition of the capital markets generally could
have a significant impact on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon closing of this offering, based upon the number of shares
outstanding at June 30, 1996 and assuming no exercise after June 30, 1996 of
outstanding stock options or warrants, there will be 14,550,177 shares of Common
Stock of the Company outstanding. Of these shares, the 2,700,000 shares offered
hereby (3,105,000 shares if the Underwriters' over-allotment option is exercised
in full) and 4,046 shares will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"). The
remaining 11,846,131 shares of Common Stock are deemed "restricted securities"
as that term is defined in Rule 144. Of the restricted securities, 11,838,745
shares of Common Stock are subject to certain lock-up agreements (the "Lock-Up
Agreements"). See "Underwriting." Approximately 3,852 shares of Common Stock,
which are not subject to Lock-Up Agreements, will be eligible for sale in the
public market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-Up Agreements 181 days after the date of this Prospectus, approximately
7,764,552 additional shares of Common Stock will be available for sale in the
public market, subject to the provisions of Rule 144 under the Securities Act.
The remaining 4,077,727 shares will be eligible for sale thereafter upon
expiration of their respective holding periods under Rule 144. In addition, as
of June 30, 1996, there were outstanding stock options to purchase 1,277,762
shares, and on July 1, 1996, additional stock options to purchase 310,140 shares
were granted. Of such shares subject to outstanding stock options: (i) 90 days
following the date of this Prospectus, 27,000 shares subject to exercisable
stock options, if exercised, will be eligible for sale pursuant to Rule 701;
(ii) upon expiration of the Lock-up Agreements 181 days after the date of this
Prospectus, 465,120 additional shares subject to exercisable stock options, if
exercised, will be eligible for sale pursuant to Rule 701; and (iii) the
remaining shares subject to stock options will be eligible for sale thereafter
upon vesting and exercise. Such shares may also be sold pursuant to an effective
registration statement, if any, under the Securities Act, registering such
shares for resale. As of June 30, 1996 there were outstanding warrants to
purchase 384,287 shares of Common Stock. Of these warrants, warrants to purchase
128,166 shares contain net exercise provisions. Accordingly, any shares issued
upon net exercise will be eligible for sale upon expiration of the Lock-Up
Agreements, subject to the requirements of Rule 144. The 256,121 shares issuable
upon exercise of the remaining warrants, which do not contain net exercise
provisions, will be eligible for sale upon expiration of their respective
holding periods under Rule 144 from the date of their respective exercise. See
"Shares Eligible for Future Sale." In addition, after this offering, the holders
of approximately 9,253,584 shares of Common Stock and warrants to purchase an
12
<PAGE> 14
aggregate of 384,287 shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to include in a
Company initiated registration such shares pursuant to the exercise of piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to raise additional capital. See "Description of Capital
Stock -- Registration Rights."
CONTROL BY DIRECTORS AND OFFICERS
Upon completion of this offering, the Company's officers and directors and
their affiliates will beneficially own approximately 45.3% of the Company's
outstanding Common Stock. These stockholders, if acting together, would have the
ability to significantly influence the election of the Company's directors and
also may have the ability to determine the outcome of corporate actions
requiring stockholder approval. This concentration of ownership also may have
the effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal and Selling Stockholders."
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
Excluding approximately $2.5 million designated to redeem the Company's
Series E and F Preferred Stock, the Company has not designated any specific use
for the net proceeds from the sale of Common Stock described in this Prospectus.
Rather, the Company expects to use the net proceeds for general corporate
purposes, including working capital. Consequently, the Board of Directors and
management of the Company will have significant discretion in applying the net
proceeds of this offering. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Charter")
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Charter provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least two-thirds of the
shares of capital stock of the Company entitled to vote. In addition, shares of
the Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Preferred Stock that may be issued in the
future. The Company has no present plans to issue any shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions, and other provisions of the Charter, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions."
13
<PAGE> 15
DILUTION
Purchasers of shares of Common Stock in this offering will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. To the extent that
outstanding options to purchase the Company's Common stock are exercised, there
will be further dilution. See "Dilution."
LACK OF DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,400,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $16.00 per share (after deducting estimated underwriting discounts and
commissions and offering expenses) are estimated to be approximately $34.8
million. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders.
Approximately $2.5 million of the estimated net proceeds will be applied to
redeem all outstanding shares of Series E and Series F Preferred Stock,
including approximately $537,000 in accrued dividends. The remaining proceeds
will be used for general corporate purposes, including acquisition of new
members, program development, capital expenditures and working capital. A
portion of the net proceeds may also be used for the acquisition of businesses,
services and technologies that are complementary to those of the Company. The
Company presently has no commitments or understandings for any such
acquisitions, and is not presently engaged in any discussions or negotiations
for any such acquisitions, and no portion of the net proceeds has been allocated
for any specific acquisition. Pending such uses, the Company intends to invest
the net proceeds from this offering in short-term interest-bearing securities.
DIVIDEND POLICY
The Company 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. The Company's future dividend policy will depend on the
Company's earnings, capital requirements, financial condition, requirements of
the financing agreements to which the Company is a party and other factors
considered relevant by the Board of Directors.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 on (i) an actual basis, (ii) a pro forma basis to give effect to the
conversion of all outstanding shares of the Company's Class A Common Stock and
Series A, Series B, Series C, Series D and Series H Preferred Stock into an
aggregate of 12,062,239 shares of Common Stock upon the closing of this
offering, and (iii) a pro forma as adjusted basis to reflect the issuance and
sale by the Company of 2,400,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $16.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, the issuance of 3,533 shares of Common Stock pursuant to the exercise
of a warrant by a Selling Stockholder and the application of the net proceeds
therefrom, including the redemption of all outstanding shares of the Company's
Series E and Series F Preferred Stock upon the closing of this offering. See
"Use of Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred membership income, net.......................... $ 8,416 $ 8,416 $ 8,416
Long-term obligations.................................... 1,089 1,089 1,089
Redeemable Preferred Stock, $0.01 par value; actual:
978,226 shares authorized, 978,226 shares issued and
outstanding; pro forma: 978,226 shares authorized,
80,536 shares issued and outstanding; pro forma as
adjusted: no shares authorized, issued and
outstanding ........................................... 20,487 1,949 --
Total stockholders' equity (deficit)(1):
Preferred Stock, $0.01 par value; actual and pro forma:
no shares authorized, issued and outstanding; pro forma
as adjusted: 1,000,000 shares authorized, no shares
issued and outstanding................................. -- -- --
Common Stock, $0.01 par value; 40,000,000 shares
authorized; actual: 5,857,105 shares issued and
outstanding; pro forma: 12,320,474 shares issued and
outstanding; pro forma as adjusted: 14,724,007 shares
issued and outstanding................................. 59 123 147
Additional paid-in-capital.......................... 2,202 20,676 55,471
Accumulated deficit................................. (38,320) (38,320) (38,857)
Treasury Stock, 173,830 shares at cost.............. (273) (273) (273)
-------- -------- --------
Total stockholders' equity (deficit).............. (36,332) (17,794) 16,488
-------- -------- --------
Total capitalization (deficit)................. $ (6,340) $ (6,340) $ 25,993
======== ======== ========
</TABLE>
- ---------------
(1) Excludes 1,277,762 shares of Common Stock issuable pursuant to stock options
outstanding at June 30, 1996 (of which options to purchase 378,180 shares
were exercisable) at a weighted average exercise price of $2.62 per share
and 384,287 shares of Class A Common Stock issuable upon exercise of
warrants outstanding at June 30, 1996 (all of which warrants were
exercisable) at a weighted average exercise price of $1.24 per share. Also
excludes 310,140 shares of Common Stock issuable pursuant to stock options
granted on July 1, 1996 (none of which were exercisable) at an exercise
price of $4.17 per share. See "Management -- Stock Plans." Also excludes
129,600 shares of Common Stock that may be granted to an executive officer
of the Company upon achievement of certain performance goals prior to
December 31, 1996. All of such options will be exercisable at an exercise
price of $2.78 per share and will vest ratably over a four-year period. See
"Management -- Executive Compensation."
16
<PAGE> 18
DILUTION
The pro forma deficit in net tangible book value of the Company's Common
Stock as of June 30, 1996, was approximately $18,459,000, or $1.52 per share of
Common Stock. Pro forma net tangible book value per share of Common Stock
represents the amount of tangible assets (total assets less intangible assets)
of the Company reduced by the Company's total liabilities and the redemption
value of the Series E and Series F preferred stock, divided by the pro forma
number of shares of Common Stock outstanding assuming conversion of all
outstanding shares of Class A Common Stock and convertible preferred stock.
After giving effect to the sale by the Company of 2,400,000 shares of Common
Stock offered by the Company hereby (assuming an initial public offering price
of $16.00 per share) and receipt of the net proceeds therefrom, the net tangible
book value of the Company at June 30, 1996 would have been approximately
$16,360,000, or $1.12 per share. This represents an immediate increase in pro
forma net tangible book value of $2.64 per share to existing stockholders and an
immediate dilution of $14.88 per share to new investors purchasing shares in
this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $16.00
Pro forma deficit in net tangible book value per share
as of June 30, 1996................................. $ (1.52)
Increase per share attributable to new investors....... 2.64
--------
Pro forma net tangible book value per share after
offering............................................... 1.12
------
Dilution per share to new investors...................... $14.88
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average consideration paid per share
by the existing stockholders and by the new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)......... 12,150,177 83.5% $18,780,943 32.8% $ 1.55
New investors(1)................. 2,400,000 16.5 38,400,000 67.2 $ 16.00
------- --- -------- ---
Total.................. 14,550,177 100.0% $57,180,943 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will cause the number of
shares held by existing stockholders as of June 30, 1996 to be reduced to
11,850,177 shares or 81.4% of the total number of shares of Common Stock
outstanding after this offering, and will increase the number of shares held
by new investors to 2,700,000 or 18.6% of the total number of shares of
Common Stock outstanding after this offering. See "Principal and Selling
Stockholders."
The foregoing table assumes no exercise after June 30, 1996 of options or
warrants to purchase shares of Common Stock outstanding at the date of this
Prospectus. As of June 30, 1996, there were options outstanding to purchase an
aggregate of 1,277,762 shares of Common Stock at a weighted average exercise
price of $2.62 per share, and warrants outstanding to purchase an aggregate of
384,287 shares of Common Stock at a weighted average exercise price of $1.24 per
share. In addition, options to purchase 310,140 shares of Common Stock, at an
exercise price of $4.17 per share, were granted on July 1, 1996. To the extent
that outstanding options or warrants are exercised, there will be further
dilution to new investors. See "Management -- Stock Option Plans." The foregoing
table also excludes 129,600 shares of Common Stock issuable upon exercise of
options that may be granted to an executive officer of the Company upon
achievement of certain performance goals prior to December 31, 1996. All of such
options will be exercisable at an exercise price of $2.78 per share and will
vest ratably over a four-year vesting period. See "Management -- Executive
Compensation."
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated statements of operations data for the years ended
June 30, 1992 and 1993, and the selected consolidated balance sheet data as of
June 30, 1992, 1993 and 1994 set forth below are derived from audited financial
statements which are not included in this Prospectus. The selected consolidated
statements of operations data for each of the years ended June 30, 1994, 1995
and 1996 and the selected consolidated balance sheet data as of June 30, 1995
and 1996 set forth below are derived from audited consolidated financial
statements of the Company, which are included elsewhere in this Prospectus. The
selected consolidated financial information of the Company is qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues.............................. $ 9,414 $ 17,269 $ 25,830 $ 41,547 $57,012
Total expenses........................ 13,879 21,527 31,846 52,279 62,259
------- -------- -------- -------- -------
Net loss.............................. $(4,465) $ (4,258) $ (6,016) $(10,732) $(5,247)
======= ======== ======== ======== =======
Pro forma net loss per share.......... $ (0.42)
=======
Pro forma weighted average common and
common equivalent shares
outstanding......................... 12,798
=======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 463 $ 1,017 $ 2,566 $ 5,323 $ 4,312
Working capital (deficit)............. (2,910) (2,205) (8,345) (8,148) (10,561)
Total assets.......................... 5,146 5,789 9,521 11,396 19,715
Long-term obligations................. 2,863 4,338 3,731 8,065 1,089
Redeemable preferred stock............ 4,573 5,216 6,096 10,926 20,487
Stockholders' equity (deficit)........ (8,841) (12,737) (18,627) (30,367) (36,332)
</TABLE>
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs. The
Company was founded in 1989 and had approximately 1.5 million members as of June
30, 1996. Membership service programs offer selected products and services from
a variety of vendors intended to enhance the existing relationships between
businesses and consumers. MemberWorks offers these programs to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. The membership programs which the Company
offers address such broad lifestyle needs as health and dental, travel,
entertainment, sports, personal finance and computers and software. The
Company's programs are marketed to credit card holders through arrangements with
its client organizations, including banks, retailers, major oil companies and
other credit card issuers. Such organizations include Household Credit Services,
Capital One Financial Corp. ("Capital One"), Sears, Shell Oil Company ("Shell")
and Texaco Credit Card Services ("Texaco").
The Company divides its memberships into two categories, individual and
wholesale. Individual memberships consist of members who pay fees directly to
the Company. The Company pays the marketing costs to solicit individual members,
primarily using direct marketing techniques and customer lists provided by
client organizations. In the case of wholesale memberships, the Company sells
the membership service program to its client organization. The organization then
either re-sells the program to its customers or provides the program to them as
a benefit. In either wholesale case, the client is responsible for paying
periodic membership fees to the Company and incurs substantially all marketing
costs to solicit members. To date, substantially all of the Company's revenues
have been from individual memberships.
The Company derives its revenues principally from annually renewable
membership fees. The annual membership fees for the Company's programs are
generally billed to subscribers via their credit card accounts and remitted to
the Company by a credit card processor. Upon receipt, the Company then pays
royalties to its client. In certain cases, membership fees are remitted to the
Company by the credit card issuer client, less royalties due the client. Annual
memberships are renewed automatically and continue in effect unless canceled by
the member. Revenues are presented net of expected cancellations.
The Company receives full payment of annual fees at or near the beginning
of the applicable period, but recognizes revenue with respect to the payment
ratably over the membership period. Similarly, the costs associated with
soliciting each member (such as marketing, royalties and printing and mailing of
membership materials) are amortized ratably over the same period.
The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During the course of an initial annual membership term or renewal term,
a member may cancel a membership in the program, generally for a complete refund
of the membership fee paid for that period. Accordingly, the profitability of
each of the Company's programs depends on recurring and sustained membership
renewals. The Company has focused its resources on developing, introducing and
expanding innovative new programs and, primarily as a result of this effort, it
has experienced net
19
<PAGE> 21
losses since its inception. The Company expects these net losses to continue at
least through its current fiscal year.
During December 1994, the Company discontinued its domestic discount coupon
book business and recorded a charge of $659,000 to operations, primarily to
write off unamortized goodwill of $166,000 and other assets of $461,000.
Effective June 30, 1995, the Company returned its domestic discount coupon book
operations, cash of $175,000 and net fixed assets of $14,000 to the former owner
of the business in exchange for the shares of Common Stock issued in the
original exchange. Fiscal 1995 consolidated operating results include revenues
of $556,000 and operating losses of $1.6 million, including the $659,000 charge
discussed above, attributable to the discontinued business.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items on
the Company's consolidated statements of operations as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.............................................. 100.0% 100.0% 100.0%
Expenses:
Operating.......................................... 20.7 23.4 20.4
Marketing.......................................... 78.2 78.9 67.4
General and administrative......................... 21.6 21.4 20.9
Interest expense, net.............................. 2.8 2.1 0.5
----- ----- -----
Total expenses........................................ 123.3 125.8 109.2
----- ----- -----
Net loss.............................................. (23.3)% (25.8)% (9.2)%
===== ===== =====
</TABLE>
YEARS ENDED JUNE 30, 1996 AND 1995
Revenues. Revenues increased 37.2% to $57.0 million in 1996 from $41.5
million in 1995 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.5 million members at June 30, 1996 from 1.1 million members at
June 30, 1995. The increase in the Company's membership base was due to an
increase in the members enrolled in existing programs and the introduction in
1996 of three new programs. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
Revenue attributable to members solicited through Sears, Capital One and
Associates Credit Card Services, Inc. represented 35.2%, 10.5% and 15.6%,
respectively, of total revenues in 1996 and 41.0%, 9.0% and 16.1%, respectively,
of total revenues in 1995. Termination of any of these key relationships could
have a material adverse effect on the future revenue from existing programs of
which such client's customers are members and on the Company's ability to
further market new or existing programs through such clients.
Operating Expenses. Operating expenses consist of costs incurred in
servicing the Company's membership base, including personnel, telephone and
computer processing costs, as well as expenses associated with the production
and distribution of membership information kits. Operating expenses increased
19.8% to $11.6 million in 1996 from $9.7 million in 1995. The increase was due
principally to additional costs incurred to support the growth in the membership
base, partially offset by the absence of costs associated with the Company's
discount coupon business, which was discontinued in 1995. As a percentage of
revenues, operating expenses decreased to 20.4% in 1996 from 23.4% in 1995.
Excluding expenses associated with the discontinued discount coupon business,
operating expenses as a
20
<PAGE> 22
percentage of revenues in 1995 would have been 20.7%. The decrease as a
percentage of revenues primarily resulted from increased efficiencies in the
Company's membership services operations. The Company commenced operations at
its new membership service facility in the quarter ended June 30, 1996 and,
primarily as a result, the Company expects operating expenses to increase as a
percentage of revenues in 1997.
Marketing Expenses. Marketing expenses consist of fees to telemarketers to
solicit potential members, royalties to clients, direct mail costs and other
solicitation expenses. Marketing expenses increased 17.1% to $38.4 million in
1996 from $32.8 million in 1995. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses decreased to
67.4% in 1996 from 78.9% in 1995. The decrease was due to lower per member
telemarketing costs, as well as the favorable effect of an increase in the
weighted average program fee and an increase in renewal revenues as a percentage
of total revenues.
Membership solicitation costs consist of marketing costs and, to a lesser
extent, costs associated with the production and distribution of membership
information kits, and are amortized ratably over the membership period.
Membership solicitation costs increased 17.1% to $47.0 million in 1996 from
$40.1 million in 1995 primarily due to increased marketing efforts.
General and Administrative Expenses. General and administrative expenses
consist of personnel and facilities expenses associated with the Company's
executive, sales, marketing, finance, product and account management functions.
General and administrative expenses increased 34.1% to $11.9 million in 1996
from $8.9 million in 1995. The increase was the result of hiring additional
personnel at all levels and the related increase in facilities costs, partially
offset by the absence of costs associated with the Company's discount coupon
business, which was discontinued in 1995. As a percentage of revenues, general
and administrative expenses decreased to 20.9% in 1996 from 21.4% in 1995.
Excluding general and administrative expenses associated with the discontinued
discount coupon business, general and administrative expenses increased as a
percentage of revenues to 20.9% in 1996 from 18.7% in 1995. The increase as a
percentage of revenues was primarily a result of hiring additional personnel in
the second half of fiscal 1996 and a related increase in facilities costs. The
Company expects general and administrative expenses will continue to increase as
a percentage of revenues in 1997 as the Company incurs full year expenses
associated with these costs.
Interest Expense, Net. Interest expense, net is primarily composed of
interest income from cash and cash equivalents, offset by financing charges
relating to notes payable, equipment leases and other debt. Interest expense,
net decreased to $310,000 in 1996 from $893,000 in 1995 as the result of lower
borrowings by the Company in 1996. The Company generally invests in short-term,
investment-grade, interest bearing securities. The amount of interest income
fluctuates based upon the amount of funds available for investment and
prevailing interest rates.
Provision for Income Taxes. The Company made no provision for income taxes
for the years ended June 30, 1996 and 1995 due to the net operating losses
incurred during those years. As of June 30, 1996, the Company had accumulated
net operating loss carry forwards of $17.7 million.
YEARS ENDED JUNE 30, 1995 AND 1994
Revenues. Revenues increased 60.8% to $41.5 million in 1995 from $25.8
million in 1994 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.1 million members at June 30, 1995 from 820,000 members at June
30, 1994. The increase in the Company's membership base was due to an increase
in the members enrolled in existing programs and the continued roll-out of a new
program introduced in 1994. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
21
<PAGE> 23
Revenue attributable to members solicited through Sears, Capital One and
Associates represented 41.0%, 9.0% and 16.1%, respectively, of total revenues in
1995 and 55.4%, 5.5% and 7.4%, respectively, of total revenues in 1994.
Operating Expenses. Operating expenses increased 81.2% to $9.7 million in
1995 from $5.4 million in 1994. The increase was due principally to additional
costs incurred to support the growth in the membership base. As a percentage of
revenues, operating expenses increased to 23.4% in 1995 from 20.7% in 1994.
Excluding the one-time write-off of $659,000 in costs in 1995 related to the
discontinuation of the Company's discount coupon business, operating expenses as
a percentage of revenues increased to 21.8% in 1995 from 20.7% in 1994. The
increase as a percentage of revenues primarily resulted from decreased
efficiency experienced in membership services operations which was necessary to
support the Company's rapid revenue growth.
Marketing Expenses. Marketing expenses increased 62.5% to $32.8 million in
1995 from $20.2 million in 1994. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses increased to
78.9% in 1995 from 78.2% in 1994. The increase as a percentage of revenues was
primarily due to higher per member telemarketing costs, partially offset by the
favorable effect of an increase in the weighted average program fee and an
increase in renewal revenues as a percentage of total revenues.
Membership solicitation costs increased 40.3% to $40.1 million in 1995 from
$28.6 million in 1994 primarily due to increased marketing efforts.
General and Administrative Expenses. General and administrative expenses
increased 58.9% to $8.9 million in 1995 from $5.6 million in 1994. The increase
was primarily the result of hiring additional personnel at all levels and the
related increase in facilities costs. As a percentage of revenues, general and
administrative expenses decreased to 21.4% in 1995 from 21.6% in 1994.
Interest Expense, Net. Interest expense, net increased to $893,000 in 1995
from $712,000 in 1994 as a result of higher borrowings by the Company in 1995.
Provision for Income Taxes. The Company made no provision for income taxes
for the years ended June 30, 1995 and 1994 due to the net operating losses
incurred during those years.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
statements of operations data for each of the eight quarters in the period ended
June 30, 1996 and the percentage of the Company's revenues represented by each
item in the respective quarter. In the opinion of the Company's management, this
unaudited information has been prepared on a basis consistent with the audited
Consolidated Financial Statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein when read in
conjunction with the Consolidated Financial Statements and related Notes
thereto. The operating results for any quarter are not necessarily indicative of
results for any future period.
22
<PAGE> 24
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
FISCAL YEAR 1995 FISCAL YEAR 1996
------------------------------------------------ ------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................. $ 8,988 $ 9,884 $10,948 $11,727 $12,679 $14,089 $14,778 $15,466
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Operating............... 2,119 3,024 2,126 2,433 2,488 2,893 2,962 3,280
Marketing............... 7,409 7,948 8,571 8,871 9,127 9,626 9,579 10,078
General and
administrative........ 2,129 2,542 2,083 2,131 2,060 3,229 3,090 3,537
Interest expense
(income), net......... 181 237 232 243 300 (18) 3 25
------- ------- ------- ------- ------- ------- ------- -------
Total expenses............ 11,838 13,751 13,012 13,678 13,975 15,730 15,634 16,920
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................. $(2,850) $(3,867) $(2,064) $(1,951) $(1,296) $(1,641) $ (856) $(1,454)
======= ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF TOTAL REVENUES:
Revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
--------- -------- -------- -------- --------- -------- -------- --------
Expenses:
Operating............... 23.6 30.6 19.4 20.7 19.6 20.5 20.0 21.2
Marketing............... 82.4 80.4 78.3 75.6 72.0 68.3 64.8 65.2
General and
administrative........ 23.7 25.7 19.0 18.2 16.2 22.9 20.9 22.9
Interest expense
(income), net......... 2.0 2.4 2.2 2.1 2.4 (0.1) 0.1 0.1
--------- -------- -------- -------- --------- -------- -------- --------
Total expenses............ 131.7 139.1 118.9 116.6 110.2 111.6 105.8 109.4
--------- -------- -------- -------- --------- -------- -------- --------
Net loss.................. (31.7)% (39.1)% (18.9)% (16.6)% (10.2)% (11.6)% (5.8)% (9.4)%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of client orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected sales for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the Company will not have
an adverse effect upon the Company's results of operations, particularly in
quarters immediately following consummation of such transactions, while the
operations of the acquired business are being integrated into the Company's
operations.
In addition, the Company is required to grant options to purchase up to
129,600 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $2.78 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise
23
<PAGE> 25
price and the trading price of the Company's Common Stock on the date of the
grant. The Company's agreement to grant such options terminates on December 31,
1996.
The Company believes that its quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period to period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. It
is also likely that in some future quarter the Company's operating results will
be below the expectations of public market analysts and investors, which, in
turn, could have a severe adverse affect on the price of the Company's Common
Stock.
The Company's revenue has increased in each of the quarters presented
above. These increases have resulted primarily from an increase in the Company's
overall membership base. Operating expenses have varied quarter to quarter due
primarily to personnel expenses and other costs associated with providing
services for new members or anticipated new members. Operating expenses in the
quarter ended December 31, 1994 were relatively high as compared to other
quarters primarily due to the discontinuance in 1995 of the Company's domestic
discount coupon book business. Marketing expenses have generally increased in
each quarter due to increased marketing efforts and increasing royalties
associated with an expanding membership base. General and administrative
expenses have varied quarter to quarter due primarily to the hiring of
additional personnel, particularly in the last two quarters of fiscal 1996, and
facilities costs for physical expansion needed to support the Company's growth.
General and administrative expenses were lower in the quarters ended March 31,
June 30 and September 30, 1995 as compared to prior quarters primarily as a
result of the absence of general and administrative expenses associated with the
Company's discount coupon business which was discontinued in the quarter ended
December 31, 1994. General and administrative expenses in the quarter ended
December 31, 1995 were higher primarily due to higher legal, employee recruiting
and employee bonus expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded operations primarily through
private sales of securities. Total net proceeds from the sale of stock, warrants
and notes through June 30, 1996 was $25.0 million. In addition, the Company has
a $3.0 million bank line of credit. The line of credit bears interest at 1.5%
per annum plus the higher of the base commercial lending rate for the bank or
the Federal Funds Rate plus 0.5% per annum and expires in February 1997. At June
30, 1996, $10,000 was outstanding under the line of credit.
Net cash provided by operating activities was $1,000 in 1996, net cash used
by operating activities was $3.5 million in 1995 and net cash provided by
operating activities was $600,000 in 1994. These results were attributable to
the Company's strategy to use substantially all of its available cash to fund
costs required to increase its membership base. The Company's capital
expenditures for 1996, 1995 and 1994 were $1.7 million, $500,000 and $700,000,
respectively. These expenditures were for acquisition of fixed assets required
to support the Company's growth over the period from 1994 to 1996.
Accounts receivable includes $3.6 million of unbilled receivables as of
June 30, 1996 (none at June 30, 1995), which were billed and collected
subsequent to the balance sheet date, and arise in certain instances when the
Company elects to bill subsequent to, rather than upon, acceptance of
membership. The Company had cash and cash equivalents of $4.3 million as of June
30, 1996.
The development and marketing of the Company's programs requires
significant expenditures, and the Company must incur costs to market programs to
each potential member, regardless of whether that individual actually becomes a
paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
24
<PAGE> 26
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
The Company believes that the net proceeds from this offering, together
with its cash balances following completion of the offering, funds generated
from operations, and borrowings available under the Company's bank credit
agreement, will be sufficient to meets its capital requirements for at least the
next 18 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The Company
adopted SFAS No. 121, with no effect on operations, in fiscal 1996.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In fiscal 1997, the Company intends to adopt the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
25
<PAGE> 27
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated on these forward-looking statements as a
result of certain factors, including those set forth under "Risk factors" and
elsewhere in this Prospectus.
MemberWorks is a leading designer and provider of innovative membership
service programs. The Company addresses the needs of organizations seeking to
leverage the expertise of an outside provider in offering these programs.
MemberWorks offers its programs to increasingly sophisticated consumers seeking
economy, efficiency and convenience in their purchase of products and services.
For 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 marketed to credit card holders through
arrangements with its client organizations including banks, retailers, major oil
companies and other credit card issuers. Such organizations include Household
Credit Services, Capital One, Sears, Shell and Texaco.
INDUSTRY BACKGROUND
Businesses which sell services and products to consumers have substantially
increased the use of direct marketing techniques to reach their customers. The
estimated total consumer sales as a result of direct marketing in the United
States were approximately $600 billion in 1995. Membership service programs are
one of the fastest growing areas of direct marketing. Membership service
programs, if designed, marketed and managed effectively, can be of substantial
value to the consumers who become members of such programs, to the businesses
which market to consumers and to the client organizations, such as credit card
issuers, banks, insurance companies and others, which offer the programs to
their customers.
Increasingly sophisticated consumers, such as dual income couples and
professionals, are faced with a growing number of products and services that are
advertised and offered through media ranging from network television to
traditional print media to the Internet. In addition, these consumers have
limited time in which to make informed and efficient purchasing decisions. A
well-designed membership service program provides value by allowing consumers to
make purchases more efficiently, conveniently and knowledgeably through access
to discounted products and services, information services and other types of
assistance.
Businesses are seeking more cost-effective and efficient methods to reach
their customers than through the confusing array of traditional mass marketing
channels. In addition, businesses also are seeking to reach new customers,
strengthen relationships with existing customers and generate new, predictable
revenues, including royalties.
Historically, a substantial number of the businesses which utilize
membership service programs have been issuers of credit cards. More recently,
however, other businesses, including retailers, resort operators, banks,
insurance companies and non-profit organizations 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 which 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 have the
expertise to continue to introduce innovative new programs and that the provider
have such resources as extensive vendor networks and experienced management
teams, in order to market programs quickly and successfully.
26
<PAGE> 28
THE MEMBERWORKS SOLUTION
MemberWorks designs and manages innovative membership programs providing
substantial benefits to member consumers, those organizations offering the
programs and vendors whose products and services are offered through the
programs. The Company addresses the needs of organizations seeking to leverage
the expertise of an outside provider in offering membership service programs. In
return for providing the Company with customer lists, the Company's clients
receive royalty payments typically ranging between 15% and 20% of all membership
fees. Clients also benefit because the programs are designed and managed to
strengthen the relationship between clients and their customers. In addition,
MemberWorks markets these programs of products and services to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. Members save time by telephonically
purchasing goods and services and obtaining useful information. Members also
benefit because the vendors agree to allow discounts for products and services
not generally available to non-members. MemberWorks offers participating vendors
the opportunity to reach a large number of demographically attractive members at
minimal incremental marketing cost.
The Company maximizes its marketing effort by utilizing a proprietary
database management system to analyze the demographics of customer lists
provided by its clients in order to target specific consumers. MemberWorks is
able to introduce new programs, as well as improve existing programs, through
telemarketing rather than direct mail or other methods, thereby providing
clients with a rapid, inexpensive means to test and introduce new concepts.
MemberWorks leverages its substantial base of approximately 40 client
organizations and approximately 1.5 million members to decrease its costs and to
pass economic benefits on to its clients and members. The Company's broad
membership base allows MemberWorks to render substantial discounts on its
vendors' products and services. Economies of scale also permit the Company to
maintain approximately 200 member service representatives on a 24 hour a day,
seven day a week basis. These representatives ensure that members receive
high-quality service and help build consumer loyalty with the Company's client
organizations.
STRATEGY
The Company's objective is to become the leading provider of innovative
membership programs. Key elements of the Company's strategy are as follows:
Continue to Develop Innovative Service Programs for Broad Markets. The
Company intends to emphasize the development and rapid introduction of
innovative programs which address the lifestyle needs of large numbers of
people. The Company believes that this strategy will position it to further
penetrate its core membership market, both through existing clients and through
new clients who will find the Company's new and innovative programs to be
valuable to their own customers. For example, the Company believes that its Home
PC Link program, which provides consumers with valuable information regarding,
and purchasing access to, computer hardware, software and advisory services, is
the first such program offered. The Company believes that its health, sports and
financial programs also were the first of their kind when introduced.
Expand and Develop Distribution Channels. The Company will continue to
expand existing distribution channels and to seek new ones, including large and
small banks, retailers, oil companies, insurance companies, interactive computer
services and others. To date, the primary clients offering the Company's
membership service programs have been issuers of credit cards. The Company
believes that this distribution channel will continue to provide substantial
opportunities and, therefore, intends to continue to devote significant
resources to selling its membership service programs through credit card
issuers. As part of this strategy, the Company intends to continue to develop
service programs which can be easily modified to address the needs of a
particular channel of distribution.
27
<PAGE> 29
Maintain and Build a Recurring Revenue Base. The Company seeks to reach
large numbers of members who will renew their membership regularly. The
percentage of the Company's revenues from renewing members increased from 35.9%
in fiscal 1994 to approximately 41.4% in fiscal 1996.
Offer Premium Quality Services. The Company intends to continue investing
significantly in its membership services system. For example, the Company has
developed a proprietary computer interface between its members, clients and
vendors which focuses on directing members to appropriate vendors of products
and services or the Company's membership services representatives for
assistance. Members can access the system 24 hours a day, 7 days a week. In
addition, the Company recently significantly expanded its membership service
capacity by opening its second membership service facility in Houston, Texas.
The Company also maintains and monitors relationships with over 50 vendors to
assure that those vendors are providing high quality products and services in
order to enhance the relationship between the consumer and the Company's client
offering the service program.
Develop and Use Innovative Technical Solutions. The Company intends to
continue its practice of developing and improving proprietary software designed
to coordinate with telemarketing vendors and to accelerate the delivery of new
member information kits and membership billings. Currently, the Company, through
its sophisticated membership database management system, can model and analyze
client lists to identify likely members. In addition, the Company's strategy
includes investing in state-of-the-art technology in other key areas of its
business, such as sophisticated call routing equipment for the Company's
membership service centers and advanced modeling techniques for use with the
customer databases provided to the Company by its clients.
Leverage and Develop Multiple Vendor Partners. The Company intends to
continue its practice of developing strong relationships with a wide variety of
vendors who provide services at substantial discounts, rather than providing
those services internally. The Company believes that its strengths are in
designing new service programs, marketing those service programs to consumers
and providing a high quality, member-friendly interface between the members and
the service providers. The Company outsources these products and services from
vendors instead of developing the infrastructure to integrate vertically for
each new program, thereby preserving program flexibility. As a result, the
Company is able to respond to and quickly develop new programs that address the
changing needs of its clients.
Pursue International Opportunities. The Company intends to seek
international clients, particularly in Canada, Mexico and Europe, in the near
future in order to further expand its client base. MemberWorks believes that,
for the same reasons that membership service programs are growing rapidly in the
United States, there is significant demand for such programs in foreign markets.
MEMBERSHIP SERVICE PROGRAMS
The Company's eight membership service programs, which had approximately
1.5 million members as of June 30, 1996, offer unique and valuable services,
information and savings opportunities. The service programs are marketed under
the name of the program on behalf of the client 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,
quarterly or annually depending on the program, ranged from approximately $40
per year to approximately $95 per year
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<PAGE> 30
during fiscal 1996. The Company can create customized service programs for
clients based on elements of its standard programs. Currently, the Company
markets the following eight programs:
<TABLE>
<CAPTION>
TYPE OF SERVICE
PROGRAM SERVICEMARK OR REGISTERED TRADEMARK
<S> <C>
Health HealthTrends
Dental Countrywide Dental Program
Dental and Health Countrywide Dental and Health Program
Travel Travel Arrangements
Entertainment Connections, Your source for entertainment values
Sports Official Sports Connection
Financial MoneyMaster
Computers and
Software Home PC Link
</TABLE>
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 a membership brochure received by
mail along with a membership card and membership identification number. The
brochure outlines in detail the benefits which the service offers and contains
toll free numbers which may be called to access service 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. If the membership is not canceled during the trial
period, the consumer is charged the annual membership fee. In the event that the
member does not cancel the membership after the initial membership term, he or
she generally receives a renewal kit 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 is free to cancel
a membership in the program, generally for a complete refund of the membership
fee for that period.
The Company offers its service programs to consumers through clients, such
as credit card issuers, who have an existing relationship with those consumers.
The client provides the Company with lists of consumers which the Company inputs
into its database management system to model, analyze and identify likely
members. The Company pays the client an annual royalty for initial and renewal
membership fees received by the Company from consumers provided to it by the
client. The royalties paid to clients by the Company typically range between 15%
and 20% of initial and renewal membership fees.
The Company has developed a consultative product development process
coordinating the efforts of its sales and marketing group with those of its
client management group in order to anticipate client 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 program.
An important factor in the Company's ability to develop innovative programs is
its emphasis on telemarketing, which allows it to obtain and analyze market
trend information quickly. The Company believes this method of product
development has allowed it to respond quickly and effectively to market demand
for new programs, as evidenced by the recent introduction of Home PC Link.
The Company believes that it was the first membership company to introduce
aggregated discount services in the areas of health, sports, financial and
personal computer programs. The Company 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, the Company can
customize a program to the particular needs and demands of its clients.
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<PAGE> 31
The Company's standard programs contain the following features:
HealthTrends
HealthTrends is a unique membership program for the health conscious
individual or family, providing convenient information and substantial savings
on quality health and personal care services and maintenance.
Benefits include:
- Substantial discounts on brand name eyewear and contact lenses
- Savings on prescription drugs, quality vitamins and personal care
products
- A Physicians Directory
- Quality brand name hearing aids at significant discounts
- Choice of an annual subscription to a popular health magazine, such as
Prevention or Walking, or a health reference source book
- A health risk appraisal service and a health reference library
Countrywide Dental Program
The Countrywide Dental Program ("CDP") consists of a network of independent
dentists in 45 states who have agreed to accept a reduced fee schedule for
subscribers in the program. CDP is not an insurance plan, but can be used with
any dental insurance program to reduce a member's insurance co-payments.
Benefits include:
- Annual oral exams and bitewing x-rays at minimal or no cost
- A discount ranging from 20% to 30% below rates offered to non-members.
Countrywide Dental and Health Program
The Countrywide Dental and Health Program offers a combination of benefits
from the Company's Countrywide Dental Program and HealthTrends services. This
combined service provides members and their families dental services at special
discounted rates in addition to substantial discounts on eyewear,
pharmaceuticals and hearing aids.
Travel Arrangements
Travel Arrangements is a comprehensive discount travel program that offers
substantial savings and convenience on a broad range of business, leisure, and
vacation travel services.
Benefits include:
- Guaranteed lowest airfares
- Discounts of up to 50% at select hotels nationwide
- Automatic 5% credit card rebates on qualified travel
- Exclusive discounts on travel booked through a full-service travel
agency
- Discounts on car rentals from national agencies
- Personalized travel planning services
- Discounts on travel accessories
- Complimentary memberships to hotel and car rental priority clubs
- 24-Hour message service center in the contiguous 48 States
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<PAGE> 32
Connections, Your source for entertainment values
Connections, Your source for entertainment values is designed to provide
savings to members on a broad range of entertainment and leisure time activities
and contains a shopping service for substantial savings on a wide array of
merchandise.
Benefits include:
- Guaranteed lowest prices on over 50,000 brand-name entertainment
products such as stereo equipment and televisions
- Member only discounts on compact discs, movies, videos, and books
- Discounts of up to 50% off the regular room rate at thousands of
hotels nationwide
- Discount admission to major amusement and theme parks and major
attractions nationwide
- Choice of an annual subscription to an entertainment magazine or a
movie reference guide
- Access to a toll-free activities hotline where members can learn about
local events or events in an area they plan to visit
- Discounts on movie theater tickets at major national cinemas, such as
AMC, Loews Cineplex Odeon and General Cinema
- Transmedia restaurant discount card
Official Sports Connection
Official Sports Connection provides discounts on all types of sports and
athletic merchandise, apparel, and services.
Benefits include:
- Discounts on sports merchandise and apparel through major retail
stores and popular sports catalogs
- Savings on autographs, collectibles, personalized team scoreboards,
and videos
- Discounts on full-service sports event travel packages and premium
tickets to sports events
- Discounts of up to 50% off greens fees at participating golf courses,
resorts, and driving ranges worldwide
- Access to a toll-free sports event hotline
- Choice of an annual subscription to a popular sports magazine or
sports reference guide such as Football Digest, Inside Sports or
Fodor's USA Today's Complete Four Sport Stadium Guide
MoneyMaster
MoneyMaster helps members plan for and manage their personal finances,
taxes, insurance, and retirement planning. This service complements and can
integrate some of the benefits currently offered by the Company's financial
institution clients.
Benefits include:
- Discounts on tax preparation fees and an electronic filing service
- Complimentary appraisal and discounts on competitively priced
mortgages
- Do-it-yourself retirement planning, will and estate planning kits with
easy to understand guidelines
- Choice of a complimentary annual subscription to a personal finance
magazine such as Kiplinger's Personal Finance, Your Money or Worth, or
a personal finance service reference guide
- Reference library with articles and forms on financial topics
including budgeting, credit management and investing
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<PAGE> 33
Home PC Link
Home PC Link is the Company's newest program offering, introduced in August
1996. It offers a wide range of assistance to the first time computer purchaser
as well as to existing users seeking information on upgrading their systems and
enhancements.
Benefits include:
- Personal Computer ("PC") configuration and discount mail order service
- PC registration and software upgrade service
- PC tech support service
- Product information and advisory service
- Internet access kit
- Shareware sampler, a CD-based catalog of software available for free
and for purchase
- Computer magazine and reference materials, including Family PC,
Computer Life, or MacUser
WHOLESALE PROGRAMS
In addition to marketing its programs directly to consumers through lists
provided by credit card issuers and other businesses and organizations, the
Company has begun to provide membership service programs on a wholesale basis.
Typically, the Company works with a wholesale client to incorporate elements
from one or more of its standard service programs in the design of 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. The client pays the
Company the membership fees for the customers who receive the service program.
Because wholesale programs substantially eliminate any cost for the Company to
acquire new members, which results in substantially higher profit margins for
the Company, the Company usually will agree to provide membership in the service
program for periodic fees which are less than the Company's standard fees for
the program.
MEMBER SERVICE
The Company 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 which offered the service program.
Currently, the Company maintains two call centers, in Omaha, Nebraska and
Houston, Texas, with a total of approximately 200 membership service
representatives. The Company's service centers are available to members, toll
free, 24 hours a day, seven days a week. All new membership service
representatives are required to complete a two-week classroom training course
before beginning to take calls and attend on-the-job training thereafter.
Through both its training programs, its systems and its software, the Company
seeks to provide members with friendly, rapid and effective answers to
questions. The Company also works closely with its clients' customer service
staffs to ensure that their representatives are knowledgable in matters relating
to membership service programs offered by the Company.
TECHNOLOGY
The Company has invested substantially in advanced management information
systems to allow it to operate its business more efficiently and productively.
Accordingly, the Company has developed proprietary software that is designed to
accept its clients' customer databases for review, analysis and modeling in
order to identify likely members. The Company receives new member information
from telemarketers on a daily basis, and the system routes that data to other
Company facilities for member fulfillment and allows the Company to mail member
information kits to new members very rapidly. The system also receives
confirmation of billing data from the Company's merchant processors on a regular
basis, permitting the Company to update the status of each member, including
member profile information.
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<PAGE> 34
In providing quality service to its members, the Company's management
information system interacts with the Company's advanced call routing system to
prepare the Company's membership service representatives to better serve members
by displaying a member's profile prior to receiving the call. 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 both the Company's proprietary systems and 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 the members by independent vendors.
The Company evaluates and engages only those vendors which can cost-effectively
deliver high quality products and services. Vendors generally benefit by gaining
significant volume demand with minimal associated marketing expense.
Accordingly, vendors generally quote a discount price to gain access and
marketing exposure to the Company's membership base. The Company receives no
material payments from these vendors for rendering services to the Company's
members and, in certain cases, the Company 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 believes that the establishment of its vendor network can be
leveraged and represents a valuable corporate asset in that it can be used by
clients in a number of different distribution channels. For example, the Company
has developed and maintains a national network of in excess of 6,000 independent
dentists practicing in 45 states. The dentists have agreed to provide to Company
members dental services at considerable discounts, ranging from 20% to 30% below
rates offered to non-members. The Company believes that there is opportunity to
engage other users for the dental network and to increase its revenues from this
source with marginal associated incremental cost.
The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
SALES AND MARKETING
The Company solicits members for its programs primarily by direct marketing
methods, including telemarketing, which it outsources to third party
contractors. To a lesser extent the Company uses direct mail, either as a solo
piece mailed at its own expense or at its client's expense. Some of the
Company's individual memberships are available at retail stores and on-line to
interactive computer users through the World Wide Web. In fiscal 1996,
approximately 3.3 million membership kits were mailed, and approximately 22
million telephone calls were made.
The Company primarily offers its programs to consumers listed in databases
provided to it by clients. The Company's proprietary software and systems permit
it to accept this information from a client in electronic form. Marketing
specialists at MemberWorks are then able to review, analyze and model the
information on the database in order to design and implement an effective
telemarketing program. In addition, the Company has recently begun to sell
service programs on a wholesale basis.
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<PAGE> 35
Under those programs, the Company 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 the Company. In some cases, the
client may provide wholesale memberships to its customer free of charge and pay
the periodic membership fee to the Company for each customer membership. In
other cases, the client may charge a reduced fee to its customer.
The Company's sales strategy is to establish and maintain long-term
relationships with those clients who offer its programs. The Company 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
which the Company offers. MemberWorks seeks to build upon its existing customer
relationships by integrating and cross-selling its different membership service
programs. The term of the sales cycle for a new service program varies and can
be six months or more if the client is new to the Company. The Company's client
sales force currently consists of five executives and seven sales
representatives and support staff.
The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone service provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the Company.
Additionally, limitations on the ability of telephone companies to provide the
Company with increased capacity that may be required in the future, if any,
could adversely affect the Company's business, financial condition and results
of operations. Rate increases imposed by these telephone companies will increase
the Company's operating expenses and could materially adversely affect its
business, financial condition and results of operations.
DISTRIBUTION
Currently, MemberWorks distributes its programs almost exclusively through
credit card issuers. The Company arranges with client financial institutions,
retailers, oil companies and other credit card issuers to market membership
programs to such clients' individual account holders and customers. Clients
generally receive royalties on initial and renewal memberships typically ranging
between 15% and 20% of annual membership fees. The Company's contracts with
these clients typically grant the Company 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 commission. Currently, the Company has 36 credit card issuer clients
to whom it pays royalties, including 10 of the top 20 issuers of bank credit
cards, four of the top five issuers of oil company credit cards and the leading
issuer of retail company credit cards.
The Company is also actively developing new distribution channels.
Recently, for example, the Company entered into an agreement to offer its
membership service programs through marketing programs at retail stores. In
addition, the Company has entered into a new arrangement with one of its credit
card issuer clients whose call centers receive numerous inbound calls from
cardholders. If the inbound caller meets certain criteria, the client's service
representative is instructed by the Company to offer the Company's membership
service programs to the caller. Access and information about several of the
Company's membership service programs are also available through home pages on
the World Wide Web.
The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. 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 dependent on first obtaining approval from a client.
Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including 35.2% from customer lists provided by Sears. These
and other client relationships are pursuant to contracts which may be terminated
by the client upon 30 to 90 days' notice without penalty. Upon such termination,
the Company generally has the right to continue its relationship with the
client's customers that have
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<PAGE> 36
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. Approximately
75% of the revenue attributable to Sears for the year ended June 30, 1996 was
generated pursuant to a contract which also provides that, upon termination of
the agreement for default, Sears may prohibit the Company from renewing
memberships and otherwise cause the Company to terminate its relationship with
existing members. Events that constitute default include events outside the
control of the Company, including acts and omissions by the Company's
third-party vendors. There can be no assurance that one or more of the Company's
key or other clients will not terminate its relationship with the Company or
that clients will provide additional customer lists to the Company for use in
further marketing new or existing membership programs.
Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise subjected to binding arbitration. There can be
no assurance that, upon exercise of such option, the Company would receive, as a
result of negotiation, arbitration or otherwise, revenue or net income
commensurate with the amount which the Company would receive if the option were
not exercised. Failure to receive a commensurate amount, and the loss of the
ability to market to the members of the program following exercise of the
option, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in personal relationships, and such clients may
not be replaced on a timely basis, if at all.
GOVERNMENT REGULATION
The primary means which the Company uses to market its programs is
telemarketing. 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. 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. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
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 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
non-compliance 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 believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it
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<PAGE> 37
is offered. If this program were in the future to be viewed by a Federal or any
state insurance regulatory authority as an insurance program, this would subject
the Company to the regulatory authority of such Federal or state insurance
authority. The insurance industry currently is one of the most heavily regulated
industries in the United States. In addition, the program may be subject to
licensing requirements in certain states. In one state, the Company was required
to suspend its offering of the program until it retained a licensed dentists'
network to provide services. The subjection of the Company to such regulatory
authority would significantly increase the Company's costs associated with
regulatory compliance and potentially cause the Company to terminate its
Countrywide Dental Program in particular states, either of which would
materially adversely affect the Company's business, financial condition and
results of operations.
COMPETITION
Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company 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. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations.
There can be no assurance that the Company's competitors will not increase their
emphasis on programs similar to those offered by the Company and more directly
compete with the Company, that new competitors will not enter the market, or
that other businesses will not themselves introduce competing programs.
Many of the Company's current and prospective competitors, including CUC,
have substantially larger customer bases and greater financial and other
resources than the Company. There can be no assurance that the Company's current
or potential competitors will not provide programs comparable or superior to
those provided by the Company at lower membership prices or adapt more quickly
than the Company to evolving industry trends or changing market requirements. In
addition, alliances among competitors may emerge and rapidly acquire significant
market share. 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.
There can be no assurance that the Company will be able to compete effectively
against current and future competitors.
The Company 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 believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability to hire and retain employees, the development by
others of service programs that are competitive with the Company's service
programs, the price at which others offer comparable service programs and the
extent of the Company's competitors' responsiveness to customer needs.
Providers of membership programs compete for client marketing budget
dollars with other marketing activities and, in particular, other forms of
direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange through the
World Wide Web, will proliferate significantly in the foreseeable future. To the
extent such proliferation occurs, it could have a material adverse effect on the
demand
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for membership programs. Furthermore, as the telemarketing industry continues to
grow, the effectiveness of telemarketing, which is the Company's major means of
marketing its programs, as a direct marketing tool may decrease as a result of
increased consumer resistance to telemarketing in general.
EMPLOYEES
As of June 30, 1996, the Company employed 349 persons on a full-time basis
and 47 on a part-time basis. None of the Company's employees are represented by
a labor union. The Company believes that its employee relations are good.
FACILITIES
The Company leases space in Stamford, Connecticut, Omaha, Nebraska and
Houston, Texas. The Stamford office serves as the Company's headquarters. The
Omaha and Houston locations are primarily call centers for membership services
representatives, operations and telemarketing personnel. The Omaha location is
also the Company's main computer and telecommunications systems center and
contains member fulfillment and warehouse facilities.
A summary of key information with respect to the Company's leased
facilities is as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
------------------------------------------------ -------------- ------------------
<S> <C> <C>
Stamford, CT.................................... 18,650 March 14, 2006
Omaha, NE....................................... 19,800 June 30, 2000
Omaha, NE....................................... 11,000 December 31, 1997
Omaha, NE....................................... 16,400 December 31, 2000
Houston, TX..................................... 26,000 July 31, 2006
</TABLE>
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation or in
settlement proceedings relating to claims arising out of its operations in the
normal course of business. Except as described below, the Company is not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, could have a material adverse effect on the
Company's business, financial condition and results of operations.
On June 29, 1995, Thomas J. St. Denis, a co-founder of the Company, filed a
complaint against the Company, Gary A. Johnson and Steven H. Levenherz, who are
executive officers of the Company, in Stamford, Connecticut Superior Court,
alleging various claims arising out of his termination on October 3, 1994 as
Executive Vice President and Chief Operating Officer of the Company. Mr. St.
Denis alleges wrongful termination, breach of fiduciary duty, fraudulent
inducement and certain other claims arising out of alleged accounting
irregularities in fiscal 1994. On September 13, 1996, the parties entered into
an agreement settling the litigation and all related matters, whereby the
litigation is stayed until such time as the settlement terms become effective
upon the closing of this offering. Pursuant to the settlement agreement, (i) the
closing of this offering must occur on or prior to December 31, 1996; (ii) the
Company will pay Mr. St. Denis $165,000, representing severance, bonus and legal
expenses, and allow Mr. St. Denis to participate in this offering, and (iii) the
parties will exchange a full mutual release and waiver of the claims related to
the litigation. The fulfillment of the settlement terms will not have a material
impact on the Company's business, financial condition and results of operations.
In June 1996, the Company received notice from a third party that "Money
Master" was a registered servicemark of such party and that the Company's use of
its MoneyMaster servicemark infringes such party's rights. The Company believes
that its servicemark does not infringe such party's servicemark, but there can
be no assurance that the Company's will prevail in its position on this matter.
Any litigation arising from this dispute could have a material adverse effect on
the Company's business, financial condition and results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their respective
ages as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------
<S> <C> <C>
Gary A. Johnson............. 41 President and Chief Executive Officer, Director
Dennis P. Walker............ 51 Executive Vice President, Director
James B. Duffy.............. 42 Senior Vice President and Chief Financial
Officer
David Schachne.............. 35 Senior Vice President -- Marketing/Operations
Steven H. Levenherz......... 52 Senior Vice President -- Administration/Law
Stephen J. Clearman......... 45 Director
Alec L. Ellison............. 33 Director
Michael R. O'Brien.......... 53 Director
Marc S. Tesler.............. 50 Director
</TABLE>
Gary A. Johnson, a co-founder of the Company, has served as President and
Chief Executive Officer and a Director of the Company since its inception. From
1987 to 1989, Mr. Johnson founded and served as President of American Target
Group Marketing, a marketer of membership services for magazine publishers. From
1983 to 1987, Mr. Johnson was Vice President of New Product Development and
Marketing for CUC, a membership program services marketing firm. From 1981 to
1983, Mr. Johnson was a Marketing Director of the Marketing Consulting Division
of General Electric. Mr. Johnson received a B.S. from Tufts University and an
M.B.A. from Harvard Business School.
Dennis P. Walker, a co-founder of the Company, has served as Executive Vice
President and a Director of the Company since its inception. Prior to founding
MemberWorks, Mr. Walker founded and served as President of Walker Enterprises, a
direct marketing and credit card merchandising business from 1978 to 1988. Mr.
Walker received a B.A. from the University of Nebraska.
James B. Duffy joined the Company as Senior Vice President and Chief
Financial Officer in June 1996. Prior to joining the Company, Mr. Duffy served
in various senior financial management positions, most recently as Senior Vice
President, Business Planning, at Merck Medco Managed Care, Inc., a prescription
benefit management company, from 1986 to November 1995. Mr. Duffy received a
B.B.A. from Pace University.
David Schachne joined the Company as Senior Vice
President -- Marketing/Operations in 1990. Prior to joining the Company, Mr.
Schachne was Vice President of Sleep Technologies, Inc., a manufacturer and
wholesaler of home furnishing products. Mr. Schachne received a B.A. from the
State University of New York, Albany and his M.B.A. from Harvard Business
School.
Steven H. Levenherz, Senior Vice President -- Administration/Law, joined
the Company in May 1993 and, through June 1996, served as Chief Financial
Officer. Prior to joining the Company, Mr. Levenherz was an independent
consultant in financial and mergers and acquisitions matters from 1992 through
1993 and, from 1990 to 1992, he served as Chief Financial Officer at Phoenix
Partners, a merchant banking firm. From 1987 to 1990 Mr. Levenherz served as
Senior Vice President of Financial Planning at Horsehead Industries, Inc., a
leveraged buy-out company. Mr. Levenherz received a B.B.A. from the Baruch
School of the City College of New York and a J.D. from the University of North
Carolina, Chapel Hill.
Stephen J. Clearman has been a Director of the Company since 1989. Since
1984, Mr. Clearman has been a general partner of Geocapital Partners, a venture
fund he co-founded. Mr. Clearman received a B.A. from Haverford College, an M.S.
from Columbia University and a J.D. from Harvard Law School. Mr. Clearman is
also a director of Expert Software, Inc. and Restor Industries, Inc.
38
<PAGE> 40
Alec L. Ellison has been a Director of the Company since 1989. Mr. Ellison
has served as Managing Director of Broadview Associates LLC, an investment bank,
since 1988. Prior to 1988, Mr. Ellison was affiliated with the Technology and
Emerging Growth Group of Morgan Stanley & Co. Incorporated, an investment
banking firm. Mr. Ellison holds a B.A. from Yale University and an M.B.A from
Harvard Business School, where he was a Baker Scholar.
Michael R. O'Brien has been a Director of the Company since June 1996. Mr.
O'Brien founded Catalina Marketing, Inc. ("Catalina"), a direct marketing
company, in 1983, and served as Catalina's President until 1989 and as its
Chairman of the Board and Chief Executive Officer until 1992. Since 1992, Mr.
O'Brien has been Chairman Emeritus of, and a consultant to, Catalina. Prior to
founding Catalina, Mr. O'Brien was President of TRIM, Inc., a marketing research
and information company specializing in the utilization of scanner data.
Previously, he held various sales management positions with several consumer
product manufacturers, including the Liggett Group, Inc. Mr. O'Brien received a
B.A. from the University of Kansas.
Marc S. Tesler has been a Director of the Company since January 1996. Since
July 1995, he has been a member of the general partner of Technology Crossover
Ventures, L.P., a private partnership specializing in information technology
investments. From 1982 to June 1995, Mr. Tesler served in various positions at
Chancellor Capital Management, an investment management firm, most recently as
head of its Alternative Asset Management Group. Mr. Tesler received his B.S.
from the University of Massachusetts and his M.B.A. from New York University.
The Company is party to a Stockholders' Agreement dated December 28, 1990,
as amended, with certain of its stockholders, including certain of its executive
officers and entities affiliated with certain of its directors, pursuant to
which such stockholders agreed, subject to certain exceptions, to vote all
securities of the Company owned by them to elect as directors of the Company (i)
one person nominated by Chancellor Capital Management, Inc. ("Chancellor"), (ii)
one person nominated by Geocapital II, L.P. ("Geocapital"), (iii) Messrs.
Johnson, St. Denis and Walker (the "Founders"), and (iv) an independent director
designated by Chancellor, Geocapital and the Founders. The Stockholders'
Agreement will terminate by its terms upon the closing of this offering.
Following this offering, the Board of Directors will be divided into three
classes, and each director will serve for a staggered three-year term. The Board
will consist of two Class I Directors (Messrs. Tesler and Ellison), two Class II
Directors (Messrs. Clearman and O'Brien) and two Class III Directors (Messrs.
Johnson and Walker). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors or
director of the same class whose terms are then expiring. The terms of the Class
I Directors, Class II Directors and Class III Directors expire upon the election
and qualification of successor directors at the annual meeting of stockholders
held during the calendar years 1997, 1998 and 1999, respectively. To the extent
there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal numbers of directors.
Each officer serves at the discretion of the Board of Directors. The
Company does not have any existing employment agreements with any executive
officer. There are no family relationships among any of the directors and
executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, currently composed of
Messrs. Clearman Ellison and Tesler which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to the
Company and administers and grants stock options pursuant to the Company's stock
option plans. The Board of Directors also has an Audit Committee, currently
composed of Messrs. Clearman, O'Brien and Tesler, which reviews the results and
scope of the audit and other services provided by the Company's independent
public accountant.
39
<PAGE> 41
DIRECTOR COMPENSATION
The Company's Directors do not receive any compensation for their services
on the Board of Directors or any committee thereof and are not reimbursed for
expenses incurred in connection with their attendance at Board or committee
meetings. However, non-employee directors have received options to purchase
shares of Common Stock pursuant to the 1995 Non-Employee Director Stock Option
Plan. See "-- Stock Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Certificate of Incorporation (the "Charter")
contains certain provisions permitted under the Delaware General Corporation Law
("DGCL") relating to the liability of directors. These provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty, except
in certain circumstances involving wrongful acts, such as the breach of a
director's duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, unlawful payments or
dividends or unlawful stock repurchases or redemptions or any transaction from
which the director derived an improper personal benefit. As a result, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of duty of care. Although stockholders may continue to seek
injunctive or other equitable relief for an alleged breach of fiduciary duty by
a director, stockholders may not have any effective remedy against the
challenged conduct if equitable remedies are not available. The Charter also
contains provisions indemnifying the directors and officers of the Company to
the fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
See "Business -- Legal Proceedings."
40
<PAGE> 42
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth the compensation earned for the fiscal year
ended June 30, 1996 by the Company's Chief Executive Officer and three
additional executive officers (together with the Chief Executive Officer, the
"Named Executive Officers"), each of whom earned aggregate compensation for such
year in excess of $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- -------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Gary A. Johnson......................................... $203,881 $51,550 108,000
President and Chief Executive Officer
Dennis P. Walker........................................ 197,802 40,378 36,000(1)
Executive Vice President
David Schachne.......................................... 149,025 36,625 14,400
Senior Vice President -- Marketing/Operations
Steven H. Levenherz..................................... 160,485 22,088 21,600
Senior Vice President -- Administration/Law
</TABLE>
- ---------------
(1) Mr. Walker entered into an agreement with the Company whereby the Company is
required to grant options to purchase up to 144,000 shares of Common Stock
to Mr. Walker for achievement of certain performance goals. Specifically,
the Company will grant an option to purchase 14,400 shares of Common Stock
for each new client, from a selected list of ten prospective large clients,
he obtains for the Company prior to December 31, 1996. These options become
exercisable over a four-year period, one quarter of such options vesting
each 12 months commencing on the last day of the first 12-month period after
the date of grant, at an exercise price of $2.78 per share. In April 1996,
Mr. Walker was granted an option to purchase 14,400 shares of Common Stock
pursuant to this agreement.
Option Grants
The following table sets forth certain information concerning grants of
stock options made during fiscal 1996 to each of the Named Executive Officers.
No stock appreciation rights were granted to the Named Executive Officers during
such year.
41
<PAGE> 43
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE(3) DATE 5% 10%
- ------------------------ ---------- ---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gary A. Johnson......... 108,000 20.4% $2.78 7/31/05 $188,670 $478,110
Dennis P. Walker........ 21,600 4.1% 2.78 7/31/05 37,734 95,622
14,400(4) 2.7% 2.78 4/30/06 57,734 115,622
David Schachne.......... 14,400 2.7% 2.78 7/31/03 19,100 45,744
Steven H. Levenherz..... 21,600 4.1% 2.78 7/31/03 28,650 68,616
</TABLE>
- ---------------
(1) The option referenced in footnote (4) and options granted under the 1995
Executive Officers' Stock Option Plan (the "1995 Plan") have a term of ten
years, and options granted prior to December 31, 1995 under the Amended 1990
Stock Option Plan (the "1990 Plan") have a term of eight years. These
options are subject to earlier termination in certain events related to
termination of employment. All such options become exercisable over a
four-year period, one-quarter of such options vesting each 12 months
commencing on the last day of the first 12-month period after the date of
grant.
(2) In accordance with the rules of the Commission, the potential realizable
values for such options shown in the table are reported net of the option
exercise price and are based on assumed rates of stock price appreciation of
5% and 10% compounded annually from the date the respective options were
granted (based on the fair market value of the Common Stock on the date of
the grant as determined by the Board of Directors) to their expiration date.
These assumed rates of appreciation do not represent the Company's
estimation or projection of the appreciation of shares of Common Stock of
the Company.
(3) All options, other than the option referenced in footnote (4), were granted
at an exercise price equal to the fair market value as determined by the
Board of Directors of the Company on the date of grant.
(4) This option was granted pursuant to an agreement with the Company, whereby
the Company will grant Mr. Walker an option to purchase 14,400 shares of
Common Stock for each new client, from a selected list of certain
prospective large clients, he obtains for the Company prior to December 31,
1996. This option has an exercise price of $2.78 per share. See footnote (1)
to the table appearing in "-- Summary of Cash and Other Compensation."
42
<PAGE> 44
Option Exercises and Holdings
The following table sets forth certain information concerning the number
and value of unexercised stock options held as of June 30, 1996 by each of the
Named Executive Officers. No options were exercised by the Named Executive
Officers in fiscal 1996, and no stock appreciation rights were exercised or were
outstanding during and at the end of fiscal 1996.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END(1) AT FISCAL YEAR END(2)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary A. Johnson............................... -- 108,000 $ -- $ 150,000
Dennis P. Walker(3)........................... -- 36,000 -- 50,000
David Schachne................................ 64,800 46,800 172,275 92,885
Steven H. Levenherz........................... 108,907 57,895 282,554 124,166
</TABLE>
- ------------
(1) All options granted become exercisable over a four-year period, one-quarter
of such options vesting each 12 months commencing on the last day of the
first 12-month period after the date of grant.
(2) There was no public trading market for the Common Stock as of June 30, 1996.
Accordingly, these values have been calculated on the basis of the fair
market value of the Company's Common Stock of $4.17 at June 30, 1996, as
determined by the Company's Board of Directors, minus the applicable per
share exercise price.
(3) Of these shares, 14,400 are subject to an option which was granted pursuant
to an agreement with the Company, whereby the Company will grant Mr. Walker
an option to purchase 14,400 shares of Common Stock for each new client,
from a selected list of certain prospective large clients, he obtains for
the Company prior to December 31, 1996. This option has an exercise price of
$2.78 per share. See footnote (1) to the table appearing in "-- Summary of
Cash and Other Compensation."
STOCK PLANS
Amended 1990 Stock Option Plan
The Company's Amended 1990 Employee Incentive Stock Option Plan ("Amended
1990 Stock Option Plan") was adopted by the Board of Directors and approved by
the Company's stockholders in August 1990. The Amended 1990 Stock Option Plan
provides for the grant of (i) "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees and officers of the Company, and (ii) non-qualified stock options to
employees, consultants, directors and officers of the Company. Up to 1,296,000
shares of Common Stock are authorized for issuance under the Amended 1990 Stock
Option Plan. On August 13, 1996, the Board of Directors voted that, effective
upon the closing of this offering, no further options may be granted or issued
under the Amended 1990 Stock Option Plan.
Options granted under the Amended 1990 Stock Option Plan are not
transferable by the optionholder except by will or by laws of descent and
distribution. Generally, no incentive stock option may be exercised by an
optionee under the Amended 1990 Stock Option Plan following termination of
employment. Options granted under the Amended 1990 Stock Option Plan expire not
more than ten years after the date of grant, except that options granted on or
before December 31, 1995 expire on the eighth anniversary of the date of grant.
Options granted under the Amended 1990 Stock Option Plan generally vest 25% on
the one-year anniversary of the date of grant, and an additional 25% each year
thereafter. Options to purchase 1,191,902 shares have been granted and are
unexercised to date under the Amended 1990 Stock Option Plan.
43
<PAGE> 45
1995 Executive Officers' Stock Option Plan
In August 1995, the Company's Board of Directors approved the 1995
Executive Officers' Stock Option Plan (the "Executive Officers' Plan"), which
provides for the grant of options to purchase up to an aggregate of 360,000
Shares of Common Stock of the Company to executive officers of the Company. The
Executive Officers' Plan is administered by the Compensation Committee of the
Board of Directors.
Under the Executive Officers' Plan, each executive officer of the Company
is eligible to receive an option to purchase shares of Common Stock. The
exercise price per share for all options granted under the Executive Officers'
Plan must equal the fair market value of the Common Stock on the date of grant.
The Executive Officers' Plan does not provide for any specific period over which
granted options vest. The term of each option is ten years from the date of
grant. In addition, the Executive Officers' Plan authorizes the Compensation
Committee to grant additional options to the Company's executive officers and to
determine the terms applicable to such options. Options may not be assigned or
transferred except by will or by the laws of descent and distribution and are
exercisable to the extent vested only while the optionee is serving as an
executive officer of the Company or within one year after the optionee ceases to
serve as an executive officer of the Company. Options to purchase 252,000 shares
have been granted and are unexercised to date under the Executive Officers'
Plan.
1995 Non-Employee Directors' Stock Option Plan
In August 1995, the Company's Board of Directors adopted the 1995
Non-Employee Director Stock Option Plan (the "Director Plan"), which provides
for the grant of options to purchase a maximum of 180,000 shares of Common Stock
of the Company to non-employee directors of the Company. The Director Plan is
administered by the Compensation Committee of the Board of Directors.
Under the Director Plan, each director of the Company who is not also an
employee or officer of the Company is eligible to receive an option to purchase
shares of Common Stock on the date such person is first elected to the Board of
Directors. The exercise price per share for all options granted under the
Director Plan will be equal to the fair market value of the Common Stock on the
date of grant. The options granted to a director are exercisable in four equal
annual installments, beginning on the first anniversary of the grant date,
provided that the optionee remains a director at such time. The term of each
option is ten years from the date of grant. In addition, the Director Plan
authorizes the Compensation Committee to grant additional options to
non-employee directors and to determine the terms applicable to such options.
Options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable to the extent vested only while the
optionee is serving as a director of the Company and within one year after the
optionee ceases to serve as a director of the Company. Options to purchase
144,000 shares have been granted to date under the Director Plan.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
No options have been granted under the 1996 Stock Option Plan. The 1996 Stock
Option Plan authorizes the issuance of up to a total of 1.8 million shares of
Common Stock pursuant to the grant to employees of "incentive stock options"
within the meaning of the Code, and the grant of non-qualified stock options to
employees, consultants, officers or directors of the Company.
The 1996 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, which has the authority to select the optionees and
determine the terms of the options granted, including (i) the number of shares
subject to each option, (ii) option exercise terms, (iii) the
44
<PAGE> 46
exercise price of the option, (which in the case of an incentive stock option
cannot be less than the fair market value of the Common Stock on the date of
grant), (iv) the duration of the option, and (v) the time, manner and form of
payment upon exercise of an option. An option is not transferable by the
optionholder except by will or by laws of descent and distribution. Generally,
no incentive stock option may be exercised by an optionee more than three months
following termination of employment, unless termination is due to death or
disability, in which case the option is exercisable for a maximum of one year
after such termination.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
The Purchase Plan authorizes the issuance of up to a total of 360,000 shares of
Common Stock to participating employees.
All employees of the Company, including directors of the Company who are
employees, and who have been employed for more than 12 months are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock of
the Company or any subsidiary are not eligible to participate.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount to be deducted by the Company from
such pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the Purchase
Plan, the option price is an amount equal to 85% of the fair market value per
share of the Common Stock on either the first day or the last day of the
Offering Period, whichever is lower. An employee may purchase, in any one
Offering Period, a number of shares the aggregate purchase price of which is up
to 10% of the employee's compensation for the immediately preceding six month
period divided by 85% of the market value of a share of Common Stock on the
commencement date of the Offering Period. The Compensation Committee may, in its
discretion, choose an Offering Period of 12 months or less for each of the
Offerings and choose a different Offering Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, all decisions relating to executive compensation were
made by the Compensation Committee, of which Messrs. Clearman and Ellison were
members. Neither of these individuals has served at any time as an officer or
employee of the Company. For a description of the transactions between the
Company and members of the Compensation Committee and entities affiliated with
such members, see "Certain Transactions." No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
45
<PAGE> 47
CERTAIN TRANSACTIONS
Since June 30, 1993, the Company has issued and sold, in private placement
transactions, shares of Class A Common Stock and Preferred Stock and warrants to
purchase Common Stock to the Company's executive officers, directors and
principal stockholders as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF CLASS A
SERIES F SERIES H CLASS A COMMON STOCK
INVESTOR(1) PREFERRED STOCK(2) PREFERRED STOCK(3) COMMON STOCK(2) WARRANTS
- ------------------------------------ ------------------ ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Geocapital II, L.P. (4)............. 4,794 -- 34,516 7,020(5)
Marc S. Tesler(6)................... -- 73,189 -- 27,280(7)
Entities Affiliated with
Chancellor........................ 20,071 75,433 144,511 57,513(8)
Entities Affiliated with Abbott
Capital........................... 13,493 -- 97,149 19,756(9)
</TABLE>
- ---------------
(1) Shares held by all affiliated persons and entities have been aggregated. See
"Principal and Selling Stockholders" for more detail on shares held by these
purchasers.
(2) On March 30, 1994 the Company sold a total of 38,358 shares of Series F
Preferred Stock and 276,177 shares of Class A Common Stock for an aggregate
purchase price of $1 million. The shares of Series F Preferred Stock will be
redeemed by the Company upon closing this offering at $26.07 per share, plus
accrued and unpaid dividends thereon. Approximately $24,700, $103,500 and
$69,600 of dividends have accrued as of June 30, 1996 on shares of Series F
Preferred Stock owned by Geocapital, and entities advised by Chancellor
Capital Management Inc. and Abbott Capital Management, L.P., respectively.
(3) The per share purchase price for Series H Preferred Stock was $40.99.
(4) Stephen J. Clearman, a general partner of Geocapital II, L.P., is a director
of the Company. Alec L. Ellison, a Managing Director of Broadview Associates
LLC, which is an affiliate of Geocapital II, L.P., is a director of the
Company.
(5) These warrants have an exercise price of $3.56 per share.
(6) Reflects shares owned by Technology Crossover Ventures, L.P. and Technology
Crossover Ventures, C.V. (together, "Technology Crossover Ventures"). Marc
S. Tesler, an affiliate of Technology Crossover Ventures, is a director of
the Company.
(7) These warrants have an exercise price of $0.0014 per share.
(8) Of the 57,513 warrants, 29,390 are exercisable at $3.56 per share and 28,123
are exercisable at $0.0014 per share.
(9) These warrants have an exercise price of $3.56 per share.
On December 31, 1990, the Company issued promissory notes to two of its
founders, Gary A. Johnson and Thomas St. Denis, both in the amount of $133,333
and bearing interest payable monthly at the rate of 12% percent per annum. The
notes mature and all outstanding principal is payable in full on February 28,
1997. Currently, the Company's credit agreement with a third-party lender
requires that the entire principal amount of the notes remain outstanding.
For a description of option grants to certain executive officers of the
Company, see "Management -- Executive Compensation."
The Company believes that the terms of the foregoing transactions were no
less favorable to the Company than could have been obtained from unaffiliated
third parties. The Company intends to adopt a policy, effective following the
consummation of this offering, that all material transactions between the
Company and its officers, directors and other affiliates must (i) be approved by
a majority of the members of the Company's Board of Directors and by a majority
of the disinterested members of the Company's Board of Directors, and (ii) be on
terms that are no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
46
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors and Named
Executive Officers, (iii) each of the Selling Stockholders and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF OFFERING(1)(2)
--------------------- SHARES -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- -------------------------------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Chancellor Capital Management, Inc.(3).......... 1,884,124 15.4% 49,616 1,834,508 12.6%
1166 Avenue of the Americas
New York, NY 10036
Geocapital II, L.P.(4).......................... 2,779,452 22.9% -- 2,779,452 19.1%
One Bridge Plaza
Fort Lee, NJ 07024
Gary A. Johnson(5).............................. 1,647,000 13.5% 62,500 1,584,500 10.9%
Thomas St. Denis................................ 1,620,000 13.3% 93,750 1,526,250 10.5%
Dennis P. Walker(6)............................. 1,625,400 13.4% 62,500 1,562,900 10.7%
Abbott Capital Management, L.P.(7).............. 882,590 7.3% 23,863 858,727 5.9%
1330 Avenue of the Americas, Suite 2800
New York, NY 10019
Stephen J. Clearman(4)(8)....................... 2,779,452 22.9% -- 2,779,452 19.1%
Alec L. Ellison(4)(9)........................... 2,779,452 22.9% -- 2,779,452 19.1%
Marc S. Tesler(10).............................. 554,240 4.6% -- 554,240 3.8%
Steven H. Levenherz(11)......................... 114,307 * -- 114,307 *
David Schachne(12).............................. 117,000 1.0% -- 117,000 *
Other Selling Stockholders
Brown Brothers Harriman & Co.(13)............... 146,426 1.2% 3,533 142,893 *
Private Equity Holdings, L.P.................... 93,816 * 2,264 91,552 *
Permal Private Equity Holdings, L.P............. 81,835 * 1,974 79,861 *
All executive officers and directors, as a group
(9 persons)(4)(5)(6)(8)(9)(10)(11)(12).......... 6,837,400 55.1% 125,000 6,712,400 45.3%
</TABLE>
- ------------
* Less than 1%.
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, shares of Common Stock subject to options
or warrants exercisable within 60 days after June 30, 1996 are deemed to be
outstanding for computing the percentage of the person or entity holding
such options or warrants but are not deemed outstanding for computing
percentage of any other person or entity. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity.
(2) Assumes no exercise of the Underwriters' over-allotment option. If such
option is exercised in full, Chancellor Capital Management, Inc.
("Chancellor") would sell an additional 163,875 shares, and Chancellor
would then hold 1,670,634 shares (11.1%); Thomas St. Denis would sell an
additional 136,339 shares, and Mr. St. Denis would then hold 1,389,911
shares (9.3%); Abbott Capital Management, L.P. ("Abbott") would sell an
additional 76,709 shares, and Abbott would
47
<PAGE> 49
then hold 782,018 shares (5.2%); Brown Brothers Harriman & Co. ("BBH")
would sell an additional 12,765 shares, and BBH would then hold 130,128
shares (*); Private Equity Holdings, L.P. ("PEH") would sell an additional
8,178 shares, and PEH would then hold 83,374 shares (*); Permal Private
Equity Holdings, L.P. ("Permal") would sell an additional 7,134 shares, and
Permal would then hold 72,727 shares (*).
(3) Chancellor is the investment manager for various fiduciary client accounts,
with full voting and investment, including dispositive, powers. Such client
accounts and their respective share ownership are as follows: Howe & Co. as
nominee for Northern Trust as trustee of Burnett Pension Trust; Howe & Co.
as nominee for Northern Trust as trustee of Burnett Profit Sharing Trust;
Focus & Co. for the benefit of Baxter Healthcare Corp.; Hank & Co. for the
account of Citiventures Private Participation Ltd. II; Pitt & Co. for the
account of GTE Pension Plan; and Parag Saxena. Each of the accounts owns
27,828; 36,396; 82,583; 1,350,266; 327,312; and 2,224 shares of Common
Stock, respectively. Also includes an aggregate of 57,513 shares of Common
Stock issuable upon the exercise of outstanding warrants held by such
accounts that are presently exercisable.
(4) Consists of 2,644,344 and 128,088 shares of Common Stock and 6,688 and 331
shares issuable upon the exercise of presently exercisable warrants held of
record by Geocapital II, L.P. and Bernard Goldstein, respectively, both of
which are part of an affiliated group of entities and individuals referred
to, collectively, as Geocapital.
(5) Includes 27,000 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.
Includes 54,000 shares held in trust for the benefit of Mr. Johnson's
children; Mr. Johnson disclaims beneficial ownership of such shares.
(6) Includes 5,400 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.
Includes an aggregate of 180,000 shares held in trust for the benefit of
Mr. Walker's children; Mr. Walker disclaims beneficial ownership of such
shares.
(7) Includes 19,756 shares issuable upon the exercise of warrants presently
exercisable.
(8) Mr. Clearman is a general partner of Geocapital II, L.P., and as such may
be deemed to be the beneficial owner of shares held by Geocapital. Mr.
Clearman disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest in Geocapital.
(9) Mr. Ellison is a Managing Director of Broadview Associates LLC, an
affiliate of Geocapital II, L.P., and as such may be deemed to be the
beneficial owner of shares held by Geocapital. Mr. Ellison disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in Geocapital.
(10) Consists of an aggregate of 526,960 shares of Common Stock and 27,280
shares issuable upon the exercise of warrants held of record by Technology
Crossover Ventures, L.P. and Technology Crossover Ventures, C.V., of which
Mr. Tesler is an affiliate. As a result, Mr. Tesler may be deemed to be the
beneficial owner of such shares. Mr. Tesler disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest in such
entities.
(11) Represents 114,307 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.
(12) Includes 84,600 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.
(13) Includes 142,893 shares issuable upon the exercise of warrants presently
exercisable.
48
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.01 par value per
share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share.
COMMON STOCK
As of June 30, 1996, there were 12,150,177 shares of Common Stock and
Preferred Stock convertible into Common Stock outstanding held by 40
stockholders of record. Based upon the number of shares outstanding as of June
30, 1996, assuming no exercise after June 30, 1996 of outstanding stock options
and warrants and giving effect to the issuance of the 2,400,000 shares of Common
Stock offered by the Company hereby, there will be 14,550,177 shares of Common
Stock outstanding upon the closing of this offering. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock. Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in this
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
WARRANTS
As of June 30, 1996, the Company had issued warrants to purchase an
aggregate of 384,287 shares of Class A Common Stock with the following per share
exercise prices: 56,167 at $3.56; 142,893 at $2.05; and 185,227 at $0.0014.
These warrants expire at various dates between March 1999 and August 2000.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue such shares of Preferred
Stock in one or more series. Each such series of Preferred Stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors. The Company has
no present plans to issue any shares of Preferred Stock. It is not possible to
state the effect of the authorization and issuance of any series of Preferred
Stock upon the rights of holders of Common Stock until the Board of Directors
determines the specific terms, rights and preferences of such a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock or impairing the liquidation rights of such shares without further
action by holders of Common Stock. In addition, under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities or the removal of incumbent
management, which could thereby depress the market price of the Company's Common
Stock.
49
<PAGE> 51
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Restated Certificate of Incorporation (the "Charter")
provides for the division of the Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms. See
"Management -- Executive Officers and Directors." In addition, the Charter
provides that directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of capital stock of the corporation
entitled to vote. Under the Charter, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Charter also provides that after the closing of this Offering, any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. The Charter further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Restated By-laws, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Charter requires the affirmative vote of
the holders of at least 75% of the shares of capital stock of the Company issued
and outstanding and entitled to vote to amend or repeal any of the foregoing
Charter provisions. The Restated By-laws also may be amended or repealed by a
majority vote of the Board of Directors subject to any limitations set forth in
the Restated By-laws. The 75% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders.
REGISTRATION RIGHTS
Following this offering, the holders (the "Holders") of approximately
9,253,584 shares of Common Stock and warrants to purchase approximately 384,287
shares of Common Stock or their assignees (collectively, the "Registrable
Securities"), will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of an
agreement between the
50
<PAGE> 52
Company and the Holders, in the event the Company intends to register any of its
securities under the Securities Act the Holders shall be entitled to include
Registrable Securities in such registration. However, the managing underwriter
of any such offering may, under certain circumstances, exclude some or all of
such registrable Securities from such registration. The Holders also are
entitled, subject to certain conditions and limitations, to demand the Company
to register some or all of their Registrable Securities under the Securities
Act, provided that such demand may not be exercised more than once in any
twelve-month period or more than twice in the aggregate. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. If the Holders, by exercising their
demand registration rights, cause a large number of securities to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. Moreover, if the Company were to
include in a Company initiated registration shares held by the Holders pursuant
to exercise of their piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise additional capital.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon closing of this offering, based upon the number of shares outstanding
at June 30, 1996 and assuming no exercise after June 30, 1996 of outstanding
stock options or warrants, there will be 14,550,177 shares of Common Stock of
the Company outstanding. Of these shares, the 2,700,000 shares offered hereby
(3,105,000 shares of the Underwriter's over-allotment option is exercised in
full) and 4,046 shares will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by Affiliates. The
remaining 11,846,131 shares of Common Stock are deemed "restricted securities"
as that term is defined in Rule 144. Of the restricted securities, 11,838,745
shares of Common Stock are subject to certain lock-up agreements (the "Lock-Up
Agreements"). See "Underwriting."
Approximately 3,852 shares of Common Stock, which are not subject to the
Lock-Up Agreements, will be eligible for sale in the public market in accordance
with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. Upon expiration of the Lock-Up Agreements 181 days
after the date of this Prospectus, approximately 7,764,552 additional shares of
Common Stock will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. The remaining 4,077,727 shares
will be eligible for sale thereafter upon expiration of their respective holding
periods under Rule 144. In addition, as of June 30, 1996, there were outstanding
stock options to purchase 1,277,762 shares, and on July 1, 1996, additional
stock options to purchase 310,140 shares were granted. Of such shares subject to
outstanding stock options: (i) 90 days following the date of this Prospectus,
27,000 shares subject to exercisable stock options, if exercised, will be
eligible for sale pursuant to Rule 701; (ii) upon expiration of the Lock-Up
Agreements 181 days after the date of this Prospectus, 465,120 additional shares
subject to exercisable stock options, if exercised, will be eligible for sale
pursuant to Rule 701; and (iii) the remaining shares subject to stock options
will be eligible for sale thereafter upon vesting and exercise. Such shares may
also be sold pursuant to an effective registration statement, if any, under the
Securities Act, registering such shares for resale. As of June 30, 1996, there
were outstanding warrants to purchase 384,287 shares of Common Stock. Of these
warrants, warrants to purchase 128,166 shares contain net exercise provisions.
Accordingly, any shares issued upon net exercise will be eligible for sale upon
expiration of the Lock-Up Agreements, subject to the requirements of to Rule
144. The 256,121 shares issuable upon exercise of the remaining warrants, which
do not contain net exercise provisions, will be eligible for sale upon
expiration of their respective holding periods under Rule 144 from the date of
their respective exercise.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least two
years from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 145,502 shares immediately after this offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least three years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the Amended 1990 Stock Option Plan, the Executive Officers' Plan and the
Director Plan) are also restricted securities and, beginning 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
may be sold by
52
<PAGE> 54
stockholders other than Affiliates of the Company subject only to the manner of
sale provisions of Rule 144 and by Affiliates under Rule 144 without compliance
with its two-year holding period requirement.
The Company intends to file registration statements on Form S-8 under the
Act to register approximately 3,996,000 shares of Common Stock issuable under
the 1996 Stock Option Plan and the Purchase Plan. The registration statements
are expected to be filed approximately 90 days after the effective date of the
Registration Statement of which this Prospectus is a part and will be effective
upon filing. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to Affiliates and the Lock-Up Agreements noted above.
Prior to the offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. In addition, after this offering, the holders of
approximately 9,253,584 shares of Common Stock and warrants to purchase an
aggregate of 384,287 shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights." If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for the Company's Common Stock. If the
Company were to include shares in a Company-initiated registration pursuant to
the exercise of piggyback registration rights, sales of such shares may have an
adverse effect on the Company's ability to raise additional capital.
53
<PAGE> 55
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and PaineWebber
Incorporated (the "Representatives"), have severally agreed with the Company and
the Selling Stockholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the numbers of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Robertson, Stephens & Company LLC.................................
Hambrecht & Quist LLC.............................................
PaineWebber Incorporated..........................................
---------
Total................................................... 2,700,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share, of which $ may be reallowed to other
dealers. After the initial public offering, the offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of this Prospectus.
The Selling Stockholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 405,000 additional shares of Common Stock, at the same price per
share as the Company and Selling Stockholders will receive for the 2,700,000
shares that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 2,700,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the 2,700,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
Each officer and director of the Company, and certain other persons that
beneficially own or have dispositive power over substantially all of the shares
of the Company's Common Stock, have agreed with the Representatives for a period
of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to
certain exceptions, not of offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock, or
any securities convertible into or exchangeable for shares of Common Stock now
owned or hereafter acquired directly by such holders or with respect to which
they have or hereafter acquire the power of disposition, without the prior
written consent of Robertson, Stephens & Company LLC. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without prior written consent of Robertson, Stephens & Company LLC, subject to
certain exceptions, issue, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock, any
54
<PAGE> 56
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the Company's sales of shares in this offering, the issuance of
Common Stock upon the exercise of outstanding options and the Company's issuance
of options and stock under the Amended 1990 Stock Option Plan, the 1995
Executive Officers' Stock Option Plan, the 1995 Non-Employee Directors' Stock
Option Plan and the 1996 Stock Option Plan.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock is being determined through negotiations among the Company, the
Selling Stockholders and the Representatives. Among the factors considered in
such negotiations are prevailing market conditions, certain financial
information of the Company, market valuations of other companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Certain venture funds affiliated with Robertson, Stephens & Company LLC
beneficially owned 585,439 shares of Common Stock and warrants to purchase 2,275
shares of Common Stock as of June 30, 1996.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1996
and 1995, and for each of the three years in the period ended June 30, 1996
included in this Prospectus, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
55
<PAGE> 57
MEMBERWORKS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995.............................. F-3
Consolidated Statements of Operations for each of the years in the three-year period
ended June 30, 1996................................................................. F-4
Consolidated Statements of Stockholders' Equity for each of the years in the
three-year period ended June 30, 1996............................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended June 30, 1996................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MemberWorks Incorporated
The Common Stock split described in Note 15 to the financial statements has
not been consummated as of September 13, 1996. When it has been consummated, we
will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of MemberWorks Incorporated and its subsidiaries at June 30, 1995
and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards 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 the opinion expressed above."
Price Waterhouse LLP
Stamford, Connecticut
September 13, 1996
F-2
<PAGE> 59
MEMBERWORKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
-------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 5,323 $ 4,312
Accounts receivable................................. 1,365 6,439
Membership solicitations in process................. 2,252 3,474
Prepaid membership materials........................ 332 1,065
Prepaid expenses.................................... 90 204
-------- --------
Total current assets........................ 9,362 15,494
Fixed assets, net..................................... 1,782 3,261
Other assets.......................................... 252 960
-------- --------
$ 11,396 $ 19,715
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... $ 297 $ 675 PRO
Current maturities of capital lease obligations..... 205 316 FORMA AT
Accounts payable.................................... 7,879 10,433 JUNE 30,
Accrued liabilities................................. 9,129 14,631 1996
-------- -------- ----------
Total current liabilities................... 17,510 26,055 (UNAUDITED)
Deferred membership income, net....................... 5,262 8,416 (NOTE 16)
Long-term capital lease obligations................... 392 456
Notes payable......................................... 7,673 633
-------- --------
Total liabilities........................... 30,837 35,560
Redeemable preferred stock............................ 10,926 20,487 $ --
-------- --------
Total liabilities and redeemable preferred
stock..................................... 41,763 56,047
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Class A common stock, $.01 par value -- 12,810,060
shares (10,542,175 shares in 1995) authorized;
5,598,870 shares issued and outstanding.......... 56 56 --
Class B common stock, $.01 par value -- 14,819,889
shares (11,522,404 shares in 1995) authorized;
258,235 shares (257,875 shares in 1995) issued
and outstanding.................................. 3 3 123
Capital in excess of par value...................... 1,686 2,202 20,676
Accumulated deficit................................. (31,839) (38,320) (38,857)
Treasury stock, 173,830 shares at cost.............. (273) (273) (273)
-------- -------- -----------
Total stockholders' equity (deficit)........ (30,367) (36,332) $(18,331)
=========
-------- --------
$ 11,396 $ 19,715
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE> 60
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Revenues
Membership fees................................................ $25,830 $ 41,547 $57,012
Expenses
Operating...................................................... 5,354 9,702 11,623
Marketing...................................................... 20,188 32,799 38,410
General and administrative..................................... 5,592 8,885 11,916
Interest expense, net.......................................... 712 893 310
------- -------- -------
Total expenses................................................... 31,846 52,279 62,259
------- -------- -------
Loss before income taxes......................................... (6,016) (10,732) (5,247)
Provision for income taxes....................................... -- -- --
------- -------- -------
Net loss......................................................... $(6,016) $(10,732) $(5,247)
======= ======== =======
Unaudited pro forma net loss per share........................... $ (0.42)
=======
Unaudited pro forma weighted average shares outstanding.......... 12,798
=======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE> 61
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CLASS A CLASS B CAPITAL IN
------------------ ----------------- EXCESS OF ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT STOCK TOTAL
---------- ------ -------- ------ ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- June 30, 1993... 5,322,693 $ 53 177,876 $ 2 $1,027 $ (13,819) $(12,737)
For the year ended
June 30, 1994:
Issuance of common
stock.................... 276,177 3 3,600 -- 511 514
Preferred stock:
Accretion of discount.... (90) (90)
Accretion to redemption
value................. (193) (193)
Accumulated dividends.... (105) (105)
Net loss................... (6,016) (6,016)
------- -- ------ --- ------ -------- ---- --------
Balance -- June 30, 1994... 5,598,870 56 181,476 2 1,538 (20,223) (18,627)
For the year ended
June 30, 1995:
Issuance of common
stock.................... 76,399 1 64 65
Issuance of warrants....... -- --
Acquisition of treasury
stock.................... 84 $ (273) (189)
Preferred stock:
Accretion of discount.... (163) (163)
Accretion to redemption
value................. (297) (297)
Accumulated dividends.... (424) (424)
Net loss................... (10,732) (10,732)
------- -- ------ --- ------ -------- ---- --------
Balance -- June 30, 1995... 5,598,870 56 257,875 3 1,686 (31,839) (273) (30,367)
For the year ended
June 30, 1996:
Issuance of common
stock.................... 360 -- 1 1
Issuance of warrants....... 515 515
Preferred stock:
Accretion of discount.... (219) (219)
Accretion to redemption
value................. (648) (648)
Accumulated dividends.... (367) (367)
Net loss................. (5,247) (5,247)
------- -- ------ --- ------ -------- ---- --------
Balance -- June 30, 1996... 5,598,870 $ 56 258,235 $ 3 $2,202 $ (38,320) $ (273) $(36,332)
======= == ====== === ====== ======== ==== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE> 62
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $ (6,016) $(10,732) $ (5,247)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Membership solicitation costs......................... (28,600) (40,120) (46,979)
Amortization of membership solicitation costs......... 22,053 36,092 43,097
Deferred membership fees.............................. 6,866 6,569 7,036
Depreciation and amortization......................... 337 536 708
Loss on sale of fixed assets.......................... -- -- 38
Write-off of discontinued product line assets......... -- 659 --
Share of joint venture's losses....................... 28 52 51
Write-off of deferred debt issuance costs............. -- -- 103
Preferred stock redemption cost....................... -- -- 315
Change in assets and liabilities affecting operating cash
flows:
Accounts receivable...................................... 71 659 (5,074)
Membership solicitations in process...................... (1,199) (58) (1,222)
Prepaid membership materials............................. (139) 30 (733)
Prepaid expenses......................................... (73) 20 (114)
Other assets............................................. (323) (40) (252)
Accounts payable......................................... 3,653 476 2,729
Accrued liabilities...................................... 3,980 2,381 5,545
-------- -------- --------
Net cash provided by (used in) operating activities........ 638 (3,476) 1
-------- -------- --------
INVESTING ACTIVITIES
Acquisition of fixed assets.............................. (744) (519) (1,740)
Deposit on equipment..................................... -- -- (539)
Proceeds from sale of fixed assets....................... -- -- 15
Investment in and advances to joint venture.............. (31) (98) (48)
-------- -------- --------
Net cash used in investing activities...................... (775) (617) (2,312)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of stock and warrants......... 1,005 4,012 12,887
Redemption of preferred stock............................ -- -- (4,000)
Purchase of treasury stock............................... -- -- (175)
Preferred stock dividends................................ -- -- (402)
Proceeds from issuance of notes payable.................. 1,000 6,860 502
Debt issuance costs...................................... -- (273) (117)
Payments of notes payable................................ (206) (3,603) (7,164)
Payments of capital lease obligations.................... (113) (146) (231)
-------- -------- --------
Net cash provided by financing activities.................. 1,686 6,850 1,300
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 1,549 2,757 (1,011)
Cash and cash equivalents at beginning of year............. 1,017 2,566 5,323
-------- -------- --------
Cash and cash equivalents at end of year................... $ 2,566 $ 5,323 $ 4,312
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE> 63
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS
MemberWorks Incorporated (the "Company") is a leading provider of
innovative membership service programs. The Company 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 intended to enhance the existing
relationships between businesses and consumers.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation -- consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Use of estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Fair value of financial instruments and concentration of credit risk
All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments. The recorded
amounts of the Company's long-term debt also approximate fair value. See Note 10
for disclosure of the estimated fair value of the redeemable preferred stock.
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable from
financial and other card holder based institutions (clients of the Company)
whose card holders constitute the Company's membership base. These entities
include major banks, financial institutions, large oil companies and retailers
located in the United States.
Fixed assets
Fixed assets and capital leases are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the lesser of the estimated productive lives
of the assets or the terms of the related leases, and range from three to ten
years. Maintenance and repair expenditures are charged to operations as
incurred.
Revenue recognition
Membership fees are billed through clients of the Company to credit card
holders. Deferred membership fees are recorded, net of estimated cancellations,
when the trial period has elapsed. Deferred membership fees are amortized as
membership fees on a straight-line basis, over the remainder of the membership
period, generally twelve months.
Accounts receivable includes $3,624,000 of unbilled receivables as of June
30, 1996 (none at June 30, 1995), which were billed and collected subsequent to
the balance sheet date, and arise in certain instances when the Company elects
to bill subsequent to, rather than upon, acceptance of membership.
F-7
<PAGE> 64
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Membership service programs sponsored by three clients of the Company
accounted for 35.2%, 15.6% and 10.5%, respectively, of membership fees for the
fiscal year ended June 30, 1996.
Membership solicitation costs
In accordance with the provisions of Statement of Position 93-7, "Reporting
on Advertising Costs," membership solicitation costs are deferred and charged to
operations as membership fees are recognized. Membership solicitation costs
relate directly to membership solicitations (direct response advertising costs),
and include telemarketing costs, royalties paid to clients, kits, printing,
postage and mailings. Membership solicitation costs are amortized ratably over
the corresponding period in which revenues are recognized. Membership
solicitation costs incurred to obtain a new member generally are less than the
initial membership fee. However, if membership solicitation costs were to exceed
the membership fee, an adjustment would be made to the extent of any impairment.
Included in current assets in the accompanying consolidated balance sheets
at June 30, 1996 and 1995 are costs pertaining to membership solicitation
programs that were in process at year-end. These costs are accumulated over a
one month solicitation period and are transferred to deferred membership
solicitation costs when the membership begins.
Earnings per Share
Unaudited pro forma net loss per share is determined by dividing net loss,
after adding back preferred stock dividends paid, by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include stock options, warrants and preferred
stock which will be converted into common stock upon the closing of the initial
public offering of the Company's common stock.
The weighted average number of shares has been adjusted to reflect as
outstanding all common stock and common stock equivalents issued during the
twelve-month period preceding the anticipated initial public offering of the
Company's common stock using the treasury stock method, as well as the number of
shares which would be necessary in order to redeem Series E and F preferred
stock.
Cash and cash equivalents
The Company considers highly liquid investment instruments with terms of
three months or less at the time of acquisition to be cash equivalents.
Income taxes
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The effect of
adopting FAS 109 was immaterial.
Impairment of long-lived assets
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (FAS 121). The Company adopted FAS 121, with no effect on
operations, in fiscal 1996.
F-8
<PAGE> 65
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-based compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted, except as noted in Note 12. In fiscal
1997, the Company intends to adopt the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
NOTE 3 -- DEFERRED MEMBERSHIP INCOME, NET
Deferred membership income, net as of June 30 is comprised of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred membership fees....................................... $ 23,592 $ 30,628
Deferred membership solicitation costs......................... (18,330) (22,212)
------ --------
Deferred membership income, net................................ $ 5,262 $ 8,416
====== ========
</TABLE>
Amortization of deferred membership solicitation costs amounted to
$22,053,000, $36,092,000 and $43,097,000 for the years ended June 30, 1994, 1995
and 1996, respectively. Allowance for membership cancellations set forth in the
accompanying consolidated balance sheets as of June 30, 1995 and 1996 were
$6,765,000 and $10,117,000, respectively.
Deferred membership income, net is classified as a non-current liability as
working capital will not be required as the amount represents deferred future
income.
NOTE 4 -- IMPAQ
On May 18, 1992, the Company issued 173,830 shares of Class B common stock
valued at $273,000 in exchange for the net assets of IMPAQ Publishing
Corporation. During December 1994, the Company discontinued Impaq's domestic
discount coupon book business and recorded a charge of $659,000 to operations,
primarily to write off unamortized goodwill of $166,000 and other assets of
$461,000. Effective June 30, 1995, the Company returned Impaq's domestic
discount coupon book operations, cash of $175,000 and net fixed assets of
$14,000 to Impaq's former owner in exchange for the aforementioned originally
issued shares of Class B common stock. There was no gain or loss on this
transaction.
Fiscal 1994 and 1995 consolidated results include Impaq revenues of
$333,000 and $556,000 and operating losses of $643,000 and $1,639,000
respectively, including in 1995 the $659,000 charge discussed above.
NOTE 5 -- JOINT VENTURE
On November 1, 1993, the Company and a United Kingdom (UK) venture partner
completed the formation of R.S.V.P. Publishing Ltd. (R.S.V.P.), a corporate
joint venture based in the UK. The business of R.S.V.P. is to develop and market
a coupon book program and other enhancement services in the UK, Europe and
elsewhere. The financial position and results of operations of the venture are
immaterial.
The Company's net investment in and advances to the venture of $177,000
have been reduced to $46,000 as of June 30, 1996 by its recorded share of the
venture's losses under the equity method of accounting of $28,000, $52,000,
$51,000 for the years ended June 30, 1994, 1995, 1996, respectively.
F-9
<PAGE> 66
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- FIXED ASSETS
Fixed assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Computer and office equipment............................. $2,447 $ 3,955
Furniture and fixtures.................................... 267 709
Leasehold improvements.................................... 11 113
------- ------
2,725 4,777
Accumulated depreciation and amortization................. (943) (1,516)
------- ------
$1,782 $ 3,261
======= ======
</TABLE>
NOTE 7 -- NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Bank Credit Agreement...................................... $6,850 $ 10
Stockholder notes payable.................................. 267 267
Equipment term loans....................................... 853 1,031
------ ------
7,970 1,308
Less current maturities.................................... 297 675
------ ------
Long-term notes payable.................................... $7,673 $ 633
====== ======
</TABLE>
On September 9, 1994, the Company entered into a $7,000,000 Bank Credit
Agreement extending to February 28, 1997. In conjunction with the Bank Credit
Agreement, the Company issued a warrant to acquire 144,000 shares of Class A
common stock at an exercise price of $2.08 per share, subject to adjustment for
dilution. The warrant is exercisable at any time prior to December 31, 1999. The
Company amended the Bank Credit Agreement as of September 28, 1995 and paid down
the outstanding balance to $10,000 with a portion of the proceeds from issuance
of Series H convertible preferred stock. Interest on borrowings under the Bank
Credit Agreement was at the bank's prime rate plus 3.5%, and there was a 1.0%
per annum commitment fee on the total facility.
Effective April 9, 1996, the Bank Credit Agreement was amended and restated
to allow borrowings up to $3,000,000 through February 28, 1997. Borrowings under
the amended and restated facility accrue interest at 1.5% per annum plus the
higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. A commitment fee is charged based on the total
facility at the rate of 1% per annum. The credit agreement is secured by all of
the Company's assets, including the stock of its subsidiaries. In addition, the
founders of the Company have guaranteed the borrowings under the credit
agreement and have pledged their stock ownership in the Company as collateral.
The Company has 12.0% notes totaling $267,000 payable to two Class A common
stockholders. Pursuant to the terms of the Bank Credit Agreement, the
stockholder notes are subordinate to the Bank Credit Agreement and their
maturity was extended to February 28, 1997.
The Company has several equipment term loans extending to September 2001,
secured by certain computer equipment. Interest is at rates of 7.5% to 11.6%,
and principal is repayable monthly. The aggregate amount of payments related to
the equipment term loans is $398,000 in 1997, $436,000 in 1998, $190,000 in
1999, $5,000 in 2000 and $2,000 in 2001.
F-10
<PAGE> 67
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 30, 1994, the Company issued $1,000,000 of 10% convertible notes
due September 30, 1994 with warrants attached. The warrants are exercisable at
any time prior to March 30, 1999, and allow the holders to acquire up to 55,238
shares of Class A common stock based on an exercise price of $3.62, subject to
adjustment for dilution. The notes were paid on the due date.
Interest expense in 1994, 1995 and 1996, as shown in the statement of
operations, is net of interest income of $10,000, $125,000 and $305,000,
respectively.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
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. Rent expense under operating leases was $409,000, $491,000, and
$733,000 for the fiscal years ended June 30, 1994, 1995 and 1996, respectively.
During 1994, 1995 and 1996, the Company entered into capital leases of
certain computer equipment totaling $110,000, $68,000 and $406,000,
respectively, of capitalized cost. Lease amortization for the years ended June
30, 1994, 1995 and 1996 was $171,000, $163,000 and $194,000, respectively, and
is included in depreciation and amortization expense.
The future minimum lease payments under capital leases (including present
value of net minimum lease payments) and operating leases as of June 30, 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------------------------------------------------------------- ------- ---------
<S> <C> <C>
1997............................................................. $ 316 $ 936
1998............................................................. 316 988
1999............................................................. 197 952
2000............................................................. 56 947
2001............................................................. 9 631
Thereafter....................................................... -- 3,140
------- ---------
Total minimum lease payments..................................... 894 $ 7,594
========
Less -- Amount representing interest............................. 122
-------
Present value of net minimum lease payments including current
maturities of $316 with interest rates ranging from 6.9% to
10.4%.......................................................... $ 772
=====
</TABLE>
The Company deposited $539,000 on certain telephone equipment which has a
purchase price of $725,000. The deposit is included in other assets at June 30,
1996. The equipment is installed at the Company's facilities and, upon
acceptance by the Company, a lease will be executed and the deposit refunded by
the lessor.
In June 1995, a co-founder of the Company filed a complaint against the
Company and certain of its executive officers alleging various claims arising
out of his termination in October 1994 as Executive Vice President and Chief
Operating Officer of the Company. The former officer alleges wrongful
termination, breach of fiduciary duty, fraudulent inducement and certain other
claims arising out of alleged accounting irregularities in fiscal 1994. The
complaint claims an unspecified amount of compensatory and punitive damages and
certain other costs. The Company has moved to strike the complaint, and the
Company's motion is being considered by the court. If the motion to strike the
complaint is not allowed, the Company intends to contest the claims alleged in
the complaint vigorously, and intends to assert counter claims. At present, it
is not possible to predict the ultimate outcome or the range of possible loss,
if any, resulting from the resolution of this matter.
F-11
<PAGE> 68
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- INCOME TAXES
There was no current or deferred provision for income taxes for the years
ended June 30, 1994, 1995 and 1996. No current provision was required because
tax losses were incurred in those years.
Deferred tax assets and liabilities result from differences in the basis of
assets and liabilities for tax and financial statement purposes. The tax effects
of the basis differences and net operating loss carryforwards, and the valuation
allowance established in accordance with FAS 109, are summarized below as of
June 30, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Allowance for membership cancellations.......................... $ 2,304 $ 3,361
Deferred membership income, net................................. 14 713
Other deferred tax assets....................................... 435 562
Benefit of net operating loss carryforward...................... 6,947 6,963
-------- -------
Total deferred tax assets............................. 9,700 11,599
Less: Valuation allowance....................................... (9,700) (11,599)
-------- -------
Net deferred tax asset................................ $ -- $ --
======== =======
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1994 was
$6,003,000. The net change in the valuation allowance for the years ended June
30, 1995 and 1996 were increases of $3,697,000 and $1,899,000, respectively.
At June 30, 1996, the Company had federal net operating loss carryforwards
of $17,705,000. The Company's ability to use these losses to offset future
taxable income would be subject to limitations under the Internal Revenue Code
if certain changes in the Company's ownership occur. The tax basis net operating
loss carry forwards expire as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
--------------------------------------------------- -------
<S> <C>
2005............................................... $ 1,950
2006............................................... 2,673
2007............................................... 2,702
2008............................................... 1,757
2009............................................... 3,176
2010............................................... 5,009
2011............................................... 438
-------
$17,705
=======
</TABLE>
The Company also has state net operating loss carryforwards expiring at
various dates through June 30, 2001 available to reduce future state taxable
income.
F-12
<PAGE> 69
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- REDEEMABLE PREFERRED STOCK
The following table presents the authorized and outstanding shares of
preferred stock which must be redeemed other than at the Company's option, and
recorded values as of June 30, 1996 and 1995 (in thousands except share data):
<TABLE>
<CAPTION>
AT JUNE 30, 1996 RECORDED VALUES
------------------------ GROSS AT JUNE 30,
FISCAL YEAR AUTHORIZED OUTSTANDING PROCEEDS -----------------
ISSUE OF ISSUANCE SHARES SHARES RECEIVED 1995 1996
--------------------------- ----------- ---------- ----------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Series A................... 1990 225,000 225,000 $ 750 $ 1,208 $ 1,490
Series B................... 1991 218,818 218,818 $ 2,000 2,173 2,422
Series C................... 1992 88,339 88,339 $ 1,000 1,029 1,117
Series D................... 1992 48,383 48,383 $ 750 750 780
Series E................... 1993 42,178 42,178 $ 1,000 877 1,072
Series F................... 1994 38,358 38,358 $ 1,000 684 877
Series G................... 1995 -- -- $ 4,000 4,205 --
Series H................... 1996 317,150 317,150 $ 13,000 -- 12,729
------- -------
$10,926 $20,487
======= =======
</TABLE>
Series A, B, C, D and H preferred stock are convertible at any time into
Class A common stock at a conversion price per share (subject to adjustment for
dilution) of $3.33, $9.14, $11.32, $15.50 and $40.99, respectively, and
automatically convert into Class B common stock at the then effective conversion
price in the event of a qualified public offering.
These series of preferred stock are redeemable at the holder's option, on
or after July 31, 2001, at a redemption value equal to the greater of the then
fair market value or the conversion price per share. The Series A, B, C, D and H
preferred stock were recorded at fair value at the date of issuance. The
difference between recorded fair value and redemption value in the year 2001 is
being accreted using the interest method. The fair value of the Company's Class
B common stock, which value was greater than the conversion price per share for
the Series A, B, C, and D preferred stock at June 30, 1996 and 1995, is
accordingly being used as the redemption value for purposes of calculating
accretion.
As discussed in Note 12, warrants to acquire 72,000 shares of Class A
common stock at $0.0014 per share were issued in conjunction with the issuance
of Series H preferred stock. As a result, the recorded value of the Series H
preferred stock was $12,800,000, reflecting a $200,000 discount attributable to
the warrants, which is being accreted through the exercise date using the
interest method. Additionally, the Company paid $114,000 of issuance costs in
connection with this offering, which was recorded as a reduction in net
proceeds, and is being accreted to the redemption date.
The holders of Series A, B, C, D and H preferred stock are entitled to vote
(on a common stock equivalent basis) on all matters submitted to the
stockholders.
Series E and F shares are mandatorily redeemable on April 30, 1998 and
April 30, 1999, respectively, at $23.71 and $26.07 per share, respectively, plus
all accumulated and unpaid dividends. The Company may be required to redeem all
or any portion of Series E and F upon change in ownership or in the event of a
qualified public offering at the redemption value per share plus all accumulated
and unpaid dividends. If redeemed at the option of the Company, the redemption
premium on Series E and F is 4% and 6%, respectively, through April 30, 1997 and
declines annually thereafter by 2% through the respective mandatory redemption
date. These series of preferred stock accrue dividends at a rate of 8% per
annum, compounded daily. At June 30, 1996 accumulated and unpaid dividends were
$288,000 and $198,000 on Series E and F preferred stock, respectively.
F-13
<PAGE> 70
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As further discussed in Note 11, Class A common stock was issued in
conjunction with the issuance of the Series E and F preferred stock. As a
result, the Series E and F redeemable preferred stock was recorded at discounts
of $522,000 and $491,000, respectively. The discounts recognized are being
accreted through the required redemption dates using the interest method.
On September 28, 1994, the Company issued 40,000 of new Series G preferred
stock with attached warrants to acquire 288,000 shares of Class A common stock
for a total of $4,000,000. Preferred dividends on Series G preferred stock is 8%
per annum, payable quarterly in kind.
On August 3, 1995, the Company redeemed 40,000 shares of issued and
outstanding Series G preferred stock and redeemed attached warrants to acquire
288,000 shares of Class A common stock of the Company issued September 28, 1994
for $4,000,000, and also paid the investor a preferred dividend in the amount of
$402,000. Additionally, the Company substituted 113,227 warrants to acquire
Class A common stock, exercisable at $0.0014 per share, in exchange for the
288,000 warrants previously redeemed. As a result the substituted warrants
issued were accounted for at fair value of $315,000 and recorded as a charge to
operations as a cost of redeeming the preferred stock.
Upon liquidation, dissolution or winding up of the Company, the holders of
Series E and F preferred stock are entitled to receive the applicable
liquidation value plus all accrued and unpaid dividends, prior to any
distribution to holders of Series A, B, C, D or H preferred stock or common
stock. Holders of Series A, B, C, D and H preferred are entitled to receive the
applicable liquidation value plus accrued, declared and unpaid dividends, if
any. If, in the event of liquidation, dissolution or winding up of the Company,
the Company's assets to be distributed among the holders of Series A, B, C, D,
and H preferred were insufficient, then the assets would be distributed ratably
to such holders based upon the aggregate applicable amounts that are owed.
The holders of Series A, B, C, D and H preferred stock are entitled to
receive non-cumulative dividends if and when declared by the Company's Board of
Directors, subject to the prior and superior rights of Series E and F preferred
stock. The Company may not pay or declare a dividend to the holders of these
Series if at the time of or immediately following the dividend the Company has
failed to pay the full amount of dividends accrued on the Series E and F
preferred stock or to declare any dividend or make any distribution upon any
common stock.
The redemption requirements for all issues of redeemable preferred stock
for the five years following June 30, 1996 are as follows: $0 in 1997,
$1,491,000 in 1998, $1,503,000 in 1999, and $0 in 2000 and 2001.
The recorded value of the Company's redeemable preferred stock at June 30,
1996 was $20,487,000. In accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Market Value of
Financial Instruments," the Company estimates that fair value of the redeemable
preferred stock at June 30, 1996 was approximately $23,500,000. Estimated fair
value at June 30, 1996 was calculated based on the higher of the redemption
value of the redeemable preferred stock or the then fair value of the Company's
common stock, plus accumulated dividends, discounted to present value at an
appropriate rate of interest. This estimate is not necessarily indicative of the
amount the holders could realize in a current market exchange.
NOTE 11 -- COMMON STOCK
Class A common stock and Class B common stock are entitled to one vote per
share on all matters voted on by the stockholders. Shares of Class A common
stock are convertible on a share for share basis into shares of Class B common
stock at the option of the holder and automatically convert upon the closing of
a qualified public offering. Class A common stock has preference rights over
Class B common stock in case of a liquidation, dissolution or winding up of the
Company.
F-14
<PAGE> 71
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends may be declared on Class A and B common stock subject to the
prior and superior rights of the preferred stock. The Company's Board of
Directors may not declare or pay a dividend to the holders of Class A or B
common stock, other than in the form of shares of common stock, unless the Board
simultaneously declares a dividend payable to the holders of Series A, B, C, D
and H preferred stock at the same rate (on an as-converted basis).
In March 1994, 276,177 shares of Class A common stock were issued for
proceeds of $2,761, an amount equal to par value. These shares were issued in
connection with the Series F preferred stock offerings, and have been recorded
at fair value of $508,000 (see Note 10).
In May 1993, 303,681 shares of Class A common stock were issued for
proceeds of $3,036, an amount equal to par value. These shares were issued in
connection with the Series E preferred stock offerings, and have been recorded
at fair value of $478,000 (see Note 10).
NOTE 12 -- STOCK OPTIONS AND WARRANTS
Under the Amended 1990 Employee Incentive Stock Option Plan, the Board is
authorized to grant 1,296,000 incentive stock options, entitling certain
employees and officers to acquire shares of Class B common stock at a price per
share equal to fair market value at the date of grant. Options become
exercisable over a four year period and expire at the earlier of termination of
employment or eight years from date of grant (ten years for grants after
December 31, 1995). As of June 30, 1996 there were 329,832 options available for
grant.
During 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1995 Executive Officers' Stock Option Plan and the
1995 Non-Employee Directors' Stock Option Plan under which the Board is
authorized to grant 360,000 and 180,000 options, respectively, to acquire shares
of Class B common stock at a price per share equal to or greater than fair
market value at the date of grant. Under the Executive Officers' Stock Option
Plan, the Board can determine the date on which options vest and become
exercisable. Options become exercisable over a four year period under the
Non-Employee Directors' Stock Option Plan. As of June 30, 1996 there were
108,000 and 36,000 shares available for grant under the Executive Officers'
Stock Option Plan and the Non-Employee Directors' Stock Option Plan,
respectively.
F-15
<PAGE> 72
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information with respect to shares under option under the plans is as
follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE OUTSTANDING EXERCISABLE
--------------- ----------- -----------
<S> <C> <C> <C>
Balance -- June 30, 1993........................... $0.46 - $1.57 440,402 85,946
Granted.......................................... $1.84 190,440
Became exercisable............................... $0.46 - $1.57 110,102
Exercised........................................ $1.57 (3,600) (3,600)
Canceled......................................... $1.57 - $1.84 (19,800) (1,800)
--------------- ----------- -----------
Balance -- June 30, 1994........................... $0.46 - $1.84 607,442 190,648
Granted.......................................... $2.08 219,600
Became exercisable............................... $0.46 - $1.84 139,716
Exercised........................................ $0.46 - $1.84 (76,400) (76,400)
Canceled......................................... $1.27 - $2.08 (98,920) (6,228)
--------------- ----------- -----------
Balance -- June 30, 1995........................... $0.46 - $2.08 651,722 247,736
Granted.......................................... $2.78 - $4.17 674,640
Became exercisable............................... $1.27 - $2.78 139,983
Exercised........................................ $2.08 (360) (360)
Canceled......................................... $1.84 - $2.78 (48,240) (9,179)
--------------- ----------- -----------
Balance -- June 30, 1996........................... $0.46 - $4.17 1,277,762 378,180
============== ========= =========
</TABLE>
On March 30, 1994, a warrant was issued to acquire 55,238 shares of Class A
common stock at an exercise price of $3.62 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to March 30,
1999.
On September 9, 1994, the Company issued a warrant in conjunction with the
Bank Credit Agreement to acquire 144,000 shares of Class A common stock at an
exercise price of $2.08 per share, subject to adjustment for dilution when
issued. The warrant is exercisable at any time prior to December 31, 1999.
As discussed in Note 10, warrants to acquire 72,000 shares of Class A
common stock were issued in conjunction with the Series H preferred stock
offering. Each warrant is exercisable at $0.0014 per share for a period of five
years from the issuance date. The warrants have been recorded at a fair value of
$200,000.
The Company has an agreement with an executive officer, whereby the Company
is required to grant options to purchase up to 144,000 shares of Class B common
stock to the executive for achievement of certain performance goals.
Specifically, the Company will grant an option to purchase 14,400 shares of
Class B common stock for each new client, from a selected list of certain
prospective large clients, he obtains for the Company prior to December 31,
1996. These options have a stated exercise price of $2.78 per share and vest
ratably over a four year period from date of grant. In 1996, the executive was
granted an option to purchase 14,400 shares of Class B common stock pursuant to
this agreement. Compensation expense in 1996 related to this grant was $3,000,
measured based on the excess of the fair value of the common stock of the
Company on the date of grant over the grant price. Compensation charges related
to future grants, if any, will be measured in the same manner and recognized
over the vesting period.
F-16
<PAGE> 73
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- EMPLOYEE BENEFIT PLAN
Effective April 1, 1996 the Company adopted a 401(k) profit sharing plan.
Employees of the Company are eligible to contribute to the plan once they have
completed one year of service and attained age 18. Employees may contribute up
to 15% of their compensation subject to certain limitations. The Company may
elect to make matching contributions or profit sharing contributions to the
plan. There were no Company contributions made for the year ended June 30, 1996.
NOTE 14 -- STATEMENT OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................... $728 $896 $493
==== ==== ====
Cash paid during the period for income taxes................ $ -- $ -- $ 45
==== ==== ====
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligation related to acquisition of fixed
assets................................................... $110 $ 68 $406
==== ==== ====
Dividends accumulated on Series E, F and G preferred
stock.................................................... $105 $424 $212
==== ==== ====
Accretion of discount on Series E, F, G and H preferred
stock.................................................... $ 90 $163 $219
==== ==== ====
Accretion to redemption value on Series A, B, C, and D
preferred stock.......................................... $193 $297 $648
==== ==== ====
Issuance of warrants........................................ $ -- $ -- $200
==== ==== ====
</TABLE>
NOTE 15 -- SUBSEQUENT EVENTS
On July 1, 1996, the Company granted 310,140 employee stock options with an
exercise price of $4.17 per share.
On August 13, 1996, the Board of Directors approved a corporate name change
from CardMember Publishing Corporation to MemberWorks Incorporated.
On August 15, 1996, the Company amended its certificate of incorporation to
increase the authorized number of shares of stock to 41,000,000. A total of
32,000,000 shares were designated as Common Stock, par value $0.01, 8,000,000
shares were designated as Class A common stock, par value $0.01 and 1,000,000
shares were designated as Preferred Stock, par value $0.01.
On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class A common stock into Common Stock upon
the closing of the Company's initial public offering and the elimination of
Class A common stock.
On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class B common stock into Common Stock.
On August 13, 1996, the Board of Directors authorized the officers of the
Company to negotiate the terms of a proposed public offering of Common Stock of
the Company. In addition, the officers were authorized and directed to cause to
be prepared, executed and filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended, a Registration
Statement on Form S-1, including a preliminary prospectus included therein and
all exhibits thereto and any amendments or supplements thereto, relating to the
registration.
F-17
<PAGE> 74
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 13, 1996, the Company adopted an employee stock purchase plan
(the "1996 Employee Stock Purchase Plan"). The plan will be implemented with an
initial offering period commencing on the effective date of the offering. The
plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, at a price
equal to 85% of the price of the Common Stock of the Company reported by Nasdaq
at the commencement date of the Offering Period.
On August 13, 1996, the Board of Directors approved the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan"), which becomes effective upon
the closing of the Company's initial public offering. The 1996 Stock Option Plan
authorizes the issuance of shares of Common Stock pursuant to the grant to
employees of incentive stock options and the grant of non-qualified stock
options to employees, consultants, officers or directors of the Company.
The aggregate number of shares of Common Stock of the Company reserved for
both the 1996 Employee Stock Purchase Plan and the 1996 Stock Option Plan is
2,160,000.
On August 13, 1996, the Board of Directors approved an amendment to the
Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock Option
Plan"). The Amended 1990 Stock Option Plan provides for the grant of "incentive
stock options" to employees and officers of the Company and non-qualified stock
options to employees, consultants, directors and officers of the Company. The
Company is authorized to grant up to 1,296,000 shares under the Amended 1990
Stock Option Plan. The Board of Directors also voted that no further options may
be granted under the Amended 1990 Stock Option Plan effective upon the closing
of the initial public offering.
On September 11, 1996, the Board of Directors approved a 7.2 for 1 stock
split of the Company's Common Stock.
On September 13, 1996, a co-founder of the Company and the Company entered
into an agreement conditionally settling the litigation (described in Note 8)
and all related matters, with such agreement to become final and its operative
terms to be implemented at the time of the closing with respect to the Company's
proposed public offering. Either party can resume the litigation if no such
closing has occurred prior to December 31, 1996. The Company is required to pay
the co-founder $165,000, representing severance, bonus and legal expenses.
NOTE 16 -- PRO FORMA STOCKHOLDERS' EQUITY DATA AS OF JUNE 30, 1996 (UNAUDITED)
The accompanying pro forma stockholders' equity data as of June 30, 1996
gives effect to the automatic conversion of all Series A, B, C, D and H
convertible preferred stock into Common Stock and the redemption of Series E and
F redeemable preferred stock for approximately $2,500,000 from application of a
portion of the proceeds of the Company's initial public offering described in
Note 15.
F-18
<PAGE> 75
Memberworks Service Programs and Distribution Channels Chart Here
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee................................................... $ 20,690
NASD Filing Fee........................................................ 6,500
Nasdaq National Market Listing Fee..................................... 6,500
Blue Sky Fees and Expenses............................................. 20,000
Transfer Agent and Registrar Fees...................................... 10,000
Accounting Fees and Expenses........................................... 275,000
Legal Fees and Expenses................................................ 275,000
Printing and Mailing Expenses.......................................... 150,000
Miscellaneous.......................................................... 136,310
----------
Total........................................................ $ 900,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article Ninth of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
II-1
<PAGE> 77
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article Ninth of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under the Underwriting Agreement, the Underwriters are obligated, under
certain circumstances, to indemnify directors and officers of the Registrant
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 30, 1994, the Registrant sold an aggregate of 38,358 shares of
Class A Common Stock and 38,358 shares of Series F Preferred Stock to accredited
investors for an aggregate purchase price of $1 million pursuant to Regulation D
of the Commission promulgated under the Securities Act ("Regulation D"). On
September 28, 1994, the Registrant sold an aggregate of 40,000 shares of Series
G Preferred Stock and warrants to acquire the same number of shares of Class A
Common Stock to accredited investors for an aggregate purchase price of $4
million pursuant to Regulation D. Effective August 3, 1995, all 40,000 shares of
Series G Preferred Stock and warrants acquired were redeemed by the Registrant
for an aggregate redemption amount of $4,000,400, plus a preferred dividend of
$401,611. Additionally, the Registrant substituted 15,726 warrants to acquire
Class A Common Stock, exercisable at $0.01 per share, for the warrants redeemed
by the Registrant. On August 3, August 15 and September 21, 1995, the Registrant
sold an aggregate of 317,150 shares of Series H Convertible Preferred Stock to
accredited investors for an aggregate purchase price of $12,999,979 pursuant to
Regulation D.
On March 30, 1994, the Registrant issued a warrant to acquire 7,672 shares
of Class A Common Stock at an exercise of $26.07 per share, subject to
adjustment for dilution. On September 9, 1994, the Company issued a warrant in
conjunction with the Bank Credit Agreement to acquire 20,000 shares of Class A
Common Stock at an exercise price of $15.00 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to December
31, 1999. In connection with the redemption of 40,000 shares of Series G
Preferred Stock and attached warrants to acquire 40,000 shares of Series A
Preferred Stock, the Registrant issued warrants to acquire 15,726 shares of
Class A Common Stock, exercisable at $0.01 per share.
II-2
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Corporate Separation, dated August 9, 1995, between the
Registrant, Impaq Marketing Corporation, Impaq Publishing Corp. and Daniel
Klabunde.
*3.1 Restated Certificate of Incorporation of the Registrant.
**3.2 Amendment to Restated Certificate of Incorporation of the Registrant effecting the
stock split.
**3.3 Restated Certificate of Incorporation of the Registrant, to be filed upon closing
of this offering.
*3.4 Restated By-laws of the Registrant.
**4 Specimen Certificate for shares of Common Stock, $0.01 par value, of the
Registrant.
*4.2 Amended and Restated Stockholders' Agreement, dated as of December 28, 1990, by and
among the Registrant and each of the signatories thereto, as amended.
*4.3 Amended and Restated Registration Rights Agreement, dated as of September 9, 1994
between the Registrant and Brown Brothers Harriman & Co.
*4.4 Registration Rights Agreement, dated September 20, 1995 among the Registrant and
the Stockholders set forth on Schedule I thereto.
**5 Opinion of Hale and Dorr with respect to the validity of the securities being
offered.
*10.1 Amended Employee Incentive Stock Option Plan.
*10.2 1995 Executive Officers' Stock Option Plan.
*10.3 1995 Non-Employee Directors' Stock Option Plan.
**10.4 1996 Stock Option Plan.
**10.5 1996 Employee Stock Purchase Plan.
*10.6 401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
*10.7 Term Lease Master Agreement between IBM Credit Corporation and the Registrant,
dated as of November 26, 1991.
*10.8 Master Lease Agreement between Bankers Leasing Association, Inc. and the
Registrant, dated as of May 7, 1996.
*10.9 Promissory Note between Thomas St. Denis and the Registrant, dated September 9,
1994.
*10.10 Promissory Note between Gary Johnson and the Registrant, dated September 9, 1994.
*10.11 Amended and Restated Credit Agreement, dated as of April 8, 1996 among the
Registrant, the lender parties thereto and Brown Brothers Harriman & Co.
*10.12 Warrant Agreement dated as of September 9, 1994, between the Registrant and Brown
Brothers Harriman & Co.
*10.13 Form of Warrant for the Purchase of Class A Common Stock, dated March 30, 1994.
*10.14 Form of Stock Subscription Warrant, dated as of July 31, 1995.
*10.15 Form of Stock Subscription Warrant with Voting Rights, dated August 3, 1995
*10.16 Form of Stock Subscription Warrant, dated August 15, 1995.
*10.17 Shareholder Guarantee made as of September 9, 1994 by Gary Johnson, Thomas St.
Denis and Dennis Walker in favor of the lenders named in the Credit Agreement and
Brown Brothers Harriman & Co.
*10.18 Shareholder Pledge Agreement, dated as of September 9, 1994, among Gary Johnson,
Thomas St. Denis and Dennis Walker and Brown Brothers Harriman & Co.
*10.19 Consulting Agreement, dated as of January 1, 1996, by and between the Registrant,
Giga Information Group, Inc. and Neill Brownstein.
</TABLE>
II-3
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
*+10.20 Agreement dated as of October 7, 1994 by and between Sears, Roebuck and Co. and the
Registrant.
*+10.21 License Agreement, dated August 1, 1990, by and between the Registrant and Sears
Roebuck and Co.
*10.22 Lease Agreement between Stamford Towers Limited Partnership and the Registrant,
dated January 15, 1996.
*10.23 Business Property Lease between V and R Joint Venture and the Registrant, dated
October 4, 1995.
*10.24 Arena Tower II Lease Agreement by and between Arena Tower II Corporation and the
Registrant, dated February 12, 1996, as amended.
11 Computation of unaudited pro forma net loss per share.
**21 Subsidiaries of the Registrant.
**23.1 Consent of Hale and Dorr (included in Exhibit 5).
23.2 Consent of Price Waterhouse LLP.
*24 Power of Attorney (included on page II-5).
*27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to
II-4
<PAGE> 80
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Stamford, State of Connecticut, on this 13th day of September, 1996.
MemberWorks Incorporated
By: /s/ GARY A. JOHNSON
--------------------------------------
Gary A. Johnson
President, Chief Executive
Officer and Director
SIGNATURES
Pursuant to the requirements of the Securities act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<C> <S> <C>
/s/ GARY A. JOHNSON President, Chief Executive September 13, 1996
- ------------------------------------- Officer and Director (Principal
Gary A. Johnson Executive Officer)
* Executive Vice President and September 13, 1996
- ------------------------------------- Director
Dennis P. Walker
* Chief Financial Officer September 13, 1996
- ------------------------------------- (Principal Financial and
James B. Duffy Accounting Officer)
* Director September 13, 1996
- -------------------------------------
Stephen J. Clearman
* Director September 13, 1996
- -------------------------------------
Alec L. Ellison
* Director September 13, 1996
- -------------------------------------
Michael R. O'Brien
* Director September 13, 1996
- -------------------------------------
Marc S. Tesler
*By: /s/ GARY A. JOHNSON
- -------------------------------------
Gary A. Johnson
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 82
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ---------- ----------------------------- ----------- -------------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES -- DESCRIBE -- DESCRIBE END OF PERIOD
- -------------------------------- ---------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
Allowance for cancellations..... $6,765,000 $ 61,264,000(A) $57,912,000(B) $10,117,000
Valuation allowance for deferred
tax assets.................... 9,700,000 $1,899,000 11,599,000
YEAR ENDED JUNE 30, 1995:
Allowance for cancellations..... 5,101,000 46,667,000(A) 45,003,000(B) 6,765,000
Valuation allowance for deferred
tax assets.................... 6,003,000 3,697,000 9,700,000
YEAR ENDED JUNE 30, 1994:
Allowance for cancellations..... 2,650,000 29,753,000(A) 27,302,000(B) 5,101,000
Valuation allowance for deferred
tax assets.................... 4,235,000 1,768,000 6,003,000
</TABLE>
- ---------------
(A) Charged to balance sheet account "Deferred membership income, net"
(B) Charges for refunds upon membership cancellations.
S-1
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- ------- --------------------------------------------------------------------- -----------
<C> <S> <C>
1 Form of Underwriting Agreement. .....................................
*2.1 Agreement and Plan of Corporate Separation, dated August 9, 1995,
between the Registrant, Impaq Marketing Corporation, Impaq Publishing
Corp. and Daniel Klabunde. ..........................................
*3.1 Restated Certificate of Incorporation of the Registrant. ............
**3.2 Amendment to Restated Certificate of Incorporation of the Registrant
effecting the stock split. ..........................................
**3.3 Restated Certificate of Incorporation of the Registrant, to be filed
upon closing of this offering. ......................................
*3.4 Restated By-laws of the Registrant. .................................
**4 Specimen Certificate for shares of Common Stock, $0.01 par value, of
the Registrant. .....................................................
*4.2 Amended and Restated Stockholders' Agreement, dated as of December
28, 1990, by and among the Registrant and each of the signatories
thereto, as amended. ................................................
*4.3 Amended and Restated Registration Rights Agreement, dated as of
September 20, 1995 between the Registrant and Brown Brothers Harriman
& Co. ...............................................................
*4.4 Registration Rights Agreement, dated September 28, 1994 among the
Registrant and the Stockholders set forth on Schedule I thereto. ....
**5 Opinion of Hale and Dorr with respect to the validity of the
securities being offered. ...........................................
*10.1 Amended Employee Incentive Stock Option Plan. .......................
*10.2 1995 Executive Officers' Stock Option Plan. .........................
*10.3 1995 Non-Employee Directors' Stock Option Plan. .....................
**10.4 1996 Stock Option Plan. .............................................
**10.5 1996 Employee Stock Purchase Plan. ..................................
*10.6 401(k) Profit Sharing Plan of the Registrant, dated April 1,
1996. ...............................................................
*10.7 Term Lease Master Agreement between IBM Credit Corporation and the
Registrant, dated as of November 26, 1991. ..........................
*10.8 Master Lease Agreement between Bankers Leasing Association, Inc. and
the Registrant, dated as of May 7, 1996. ............................
*10.9 Promissory Note between Thomas St. Denis and the Registrant, dated
September 9, 1994. ..................................................
*10.10 Promissory Note between Gary Johnson and the Registrant, dated
September 9, 1994. ..................................................
*10.11 Amended and Restated Credit Agreement, dated as of April 8, 1996
among the Registrant, the lender parties thereto and Brown Brothers
Harriman & Co. ......................................................
*10.12 Warrant Agreement dated as of September 9, 1994, between the
Registrant and Brown Brothers Harriman & Co. ........................
*10.13 Form of Warrant for the Purchase of Class A Common Stock, dated March
30, 1994. ...........................................................
*10.14 Form of Stock Subscription Warrant, dated as of July 31, 1995. ......
*10.15 Form of Stock Subscription Warrant with Voting Rights, dated August
3, 1995. ............................................................
*10.16 Form of Stock Subscription Warrant, dated August 15, 1995. ..........
*10.17 Shareholder Guarantee made as of September 9, 1994 by Gary Johnson,
Thomas St. Denis and Dennis Walker in favor of the lenders named in
the Credit Agreement and Brown Brothers Harriman & Co. ..............
*10.18 Shareholder Pledge Agreement, dated as of September 9, 1994, among
Gary Johnson, Thomas St. Denis and Dennis Walker and Brown Brothers
Harriman & Co. ......................................................
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- ------- --------------------------------------------------------------------- -----------
<C> <S> <C>
*10.19 Consulting Agreement, dated as of January 1, 1996, by and between the
Registrant, Giga Information Group, Inc. and Neill Brownstein. ......
*+10.20 Agreement dated as of October 7, 1994 by and between Sears, Roebuck
and Co. and the Registrant. .........................................
*+10.21 License Agreement, dated August 1, 1990, by and between the
Registrant and Sears Roebuck and Co. ................................
*10.22 Lease Agreement between Stamford Towers Limited Partnership and the
Registrant, dated January 15, 1996. .................................
*10.23 Business Property Lease between V and R Joint Venture and the
Registrant, dated October 4, 1995. ..................................
*10.24 Arena Tower II Lease Agreement by and between Arena Tower II
Corporation and the Registrant, dated February 12, 1996, as
amended. ............................................................
11 Computation of unaudited pro forma net loss per share. ..............
**21 Subsidiaries of the Registrant. .....................................
**23.1 Consent of Hale and Dorr (included in Exhibit 5). ...................
23.2 Consent of Price Waterhouse LLP. ....................................
*24 Power of Attorney. ..................................................
27 Financial Data Schedule. ............................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE> 1
Exhibit 1
DRAFT DATED 9/6/96
____________ SHARES(1)
MEMBERWORKS INCORPORATED
COMMON STOCK
UNDERWRITING AGREEMENT
September __, 1996
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
PAINEWEBBER INCORPORATED
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
MemberWorks Incorporated, a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule B hereto (hereafter
called the "Selling Stockholders") address you as the Representatives of each
of the persons, firms and corporations listed in Schedule A hereto (herein
collectively called the "Underwriters") and hereby confirm their respective
agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
_________ shares of its authorized and unissued common stock, $.01 par value
per share, to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, propose to sell an aggregate of ________ shares of
the Company's authorized and outstanding common stock, $.01 par value per
share, to the several Underwriters. The _________ shares of common stock, $.01
par value per share, of the Company to be sold by the Company are hereinafter
called the "Company Shares" and the _________ shares of common stock, $.01 par
value per share, to be sold by the Selling Stockholders are hereinafter called
the "Selling Stockholder Shares." The Company Shares and the Selling
Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." Certain Selling Stockholders also propose to grant, severally and not
jointly, to the Underwriters an option to purchase up to ________ additional
shares of the Company's common stock, $.01 par value per share, (the "Option
Shares"), as provided in Section 7 hereof. As used in this Agreement, the term
"Shares" shall include the Firm Shares and the Option Shares. All shares of
common stock, $.01 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Stockholders.
I. Each of the Company, Gary A. Johnson and Dennis
Walker, jointly and severally, represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
- --------------------
(1) Plus an option to purchase up to _________ additional shares from the
Selling Stockholders of the Company to cover over-allotments.
<PAGE> 2
(a) A registration statement on Form S-1 (File
No. 333-10541) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act and has
been filed with the Commission; such amendments to such registration statement,
such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared
and filed with the Commission; and the Company will file such additional
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements as may hereafter be
required. Copies of such registration statement and amendments, of each
related prospectus subject to completion (the "Preliminary Prospectuses") and
of any abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations have been delivered to you.
If the registration statement relating to the Shares
has been declared effective under the Act by the Commission, the Company will
prepare and promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or
(7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to the registration statement (including a final form of prospectus).
If the registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and
promptly file an amendment to the registration statement, including a final
form of prospectus, or, if Robertson, Stephens & Company LLC, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations. The term "Registration Statement" as used in this Agreement shall
mean such registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434
of the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any abbreviated registration statement pursuant to
Rule 462(b) of the Rules and Regulations relating thereto after the effective
date of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated registration
statement) such registration statement as so amended, together with any such
abbreviated registration statement. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares as included in such
Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of
the Registration Statement at the time it became effective pursuant to Rule
430A(b) of the Rules and Regulations); provided, however, that if in reliance
on Rule 434 of the Rules and Regulations and with the consent of Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, the Company
shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or
(c), as applicable, prior to the time that a confirmation is sent or given for
purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the
"prospectus subject to completion" (as defined in Rule 434(g) of the Rules and
Regulations) last provided to the Underwriters by the Company and circulated by
the Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately
preceding sentence (whether or not such revised prospectus is required to be
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations), the term "Prospectus" shall refer to such revised prospectus from
and after the time it is first provided to the Underwriters for such use. If
in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for
-2-
<PAGE> 3
purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up
to and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the Registration
Statement, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (iii) the Prospectus, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties contained in
this subparagraph (b) shall apply to information contained in or omitted from
the Registration Statement or Prospectus, or any amendment or supplement
thereto, in reliance upon, and in conformity with, written information relating
to any Underwriter furnished to the Company by such Underwriter specifically
for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation with full
power and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Prospectus; the Company
owns all of the outstanding capital stock of its subsidiaries free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest;
each of the Company and its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; no proceeding has
been instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
each of the Company and its subsidiaries is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders
and permits from state, federal and other regulatory authorities that are
material to the conduct of its business, all of which are valid and in full
force and effect; neither the Company nor any of its subsidiaries is in
violation of its respective charter or bylaws or in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound; and neither the
Company nor any of its subsidiaries is in material violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over their respective properties of
which it has knowledge. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than Impact
Marketing Corporation and Countrywide Dental Inc.
(d) The Company has full legal right, power and
authority to enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating
-3-
<PAGE> 4
to or affecting creditors' rights generally or by general equitable principles;
the performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a material breach or violation of any of
the terms and provisions of, or constitute a default under, (i) any bond,
debenture, note or other evidence of indebtedness, or under any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries
is a party or by which it or any of its subsidiaries or their respective
properties may be bound, (ii) the charter or bylaws of the Company or any of
its subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or under state or other
securities or Blue Sky laws, all of which requirements have been satisfied in
all material respects.
(e) Except as and to the extent set forth in the
Prospectus and the Registration Statement under the caption "Business-Legal
Proceedings," there is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company,
any of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its subsidiaries of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the
Act or the Rules and Regulations which have not been accurately described in
all material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of
the Company (including the Selling Stockholder Shares) have been duly
authorized and validly issued and are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); the Company Shares
have been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company against payment
therefor in accordance with the terms of this Agreement, will be duly and
validly issued and fully paid and nonassessable, and will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right, right of
first refusal or other similar right of stockholders exists with respect to any
of the Company Shares or the issuance and sale thereof other than those that
have been expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of the
transactions contemplated on or before the Closing Date. No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale or transfer of the Shares except
as may be required under the Act or under state or other securities or Blue Sky
laws. All issued and outstanding shares of capital stock of each subsidiary of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares and are owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto, included in
the Prospectus, neither the Company nor any subsidiary has
-4-
<PAGE> 5
outstanding any options to purchase, or any preemptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) Price Waterhouse LLP, which has examined the
consolidated financial statements of the Company, together with the related
schedules and notes, as of June 30, 1996 and 1995 and for each of the years in
the three (3) years ended June 30, 1996 filed with the Commission as a part of
the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company and its subsidiaries at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus, there
has not been (i) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (ii) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration
Statement and Prospectus, (i) each of the Company and its subsidiaries has good
and marketable title to all properties and assets described in the Registration
Statement and Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (ii) the agreements to which
the Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company
and its subsidiaries has valid and enforceable leases for all properties
described in the Registration Statement and Prospectus as leased by it, except
as the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and
-5-
<PAGE> 6
Prospectus, the Company owns or leases all such properties as are necessary to
its operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes shown thereon as due, and there is no tax deficiency
that has been or, to the best of the Company's knowledge, might be asserted
against the Company or any of its subsidiaries that might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise; and all tax liabilities are adequately provided for on the
books of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain
insurance with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for; and neither the Company nor any such subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(l) To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists
or is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its vendors that might be expected to
result in a material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise. No collective bargaining agreement
exists with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns
or possesses adequate rights to use all patents, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names and copyrights
which are necessary to conduct its businesses as described in the Registration
Statement and Prospectus; the expiration of any patents, patent rights, trade
secrets, trademarks, service marks, trade names or copyrights would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted rights of
the Company by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or copyrights;
and neither the Company nor any of its subsidiaries has received any notice of,
nor has any knowledge of, any infringement of or conflict with asserted rights
of others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(n) The Common Stock has been approved for
quotation on The Nasdaq National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it is not and
will not become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
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(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(q) Neither the Company nor any of its
subsidiaries has at any time during the last five (5) years (i) made any
unlawful contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company,
each Selling Stockholder and each beneficial owner of 1,000 or more shares of
Common Stock has agreed in writing that such person will not, for a period of
180 days after the date of the Prospectus (the "Lock-up Period"), offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to (collectively, a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to affiliates of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or (iii)
with the prior written consent of Robertson, Stephens & Company LLC. The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from the
Securities. Furthermore, such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided
to counsel for the Underwriters true, accurate and complete copies of all of
the agreements pursuant to which its officers, directors and stockholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Robertson, Stephens & Company LLC.
(t) Except as set forth in the Registration
Statement and Prospectus, (i) the Company and each of its subsidiaries is in
compliance with all rules, laws and regulations relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Laws") which are applicable to its business, (ii)
neither the Company nor any of its subsidiaries has received notice from any
governmental authority or third party of an asserted claim under Environmental
Laws, which claim is required to be disclosed in the Registration Statement and
the Prospectus and is not so disclosed, (iii) neither the Company nor any of
its subsidiaries will be required to make future material capital expenditures
to comply with Environmental Laws and (iv) no property which is owned, leased
or occupied by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or local
law.
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<PAGE> 8
(u) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(v) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(w) The Company has complied with all provisions
of Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly,
represents and warrants to and agrees with each Underwriter and the Company
that:
(a) Such Selling Stockholder now has and on the
Closing Date, and on any later date on which Option Shares are purchased, will
have valid marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this Agreement;
and upon delivery of such Shares hereunder and payment of the purchase price as
herein contemplated, each of the Underwriters will obtain valid marketable
title to the Shares purchased by it from such Selling Stockholder, free and
clear of any pledge, lien, security interest pertaining to such Selling
Stockholder or such Selling Stockholder's property, encumbrance, claim or
equitable interest, including any liability for estate or inheritance taxes, or
any liability to or claims of any creditor, devisee, legatee or beneficiary of
such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized
(if applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing Gary A. Johnson, Steven H. Levenherz and James B. Duffy as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody
Agreement") with ______________________________, as custodian (the "Custodian");
each of the Power of Attorney and the Custody Agreement constitutes a valid and
binding agreement on the part of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; and each of such Selling Stockholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement and the certificate
referred to in Section 6(h) hereof on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the several Underwriters to such
Selling Stockholder as provided in Section 3 hereof, to authorize the delivery
of the Selling Stockholder Shares and the Option Shares to be sold by such
Selling Stockholder under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares or a stock
power or powers with respect thereto, to accept payment therefor, and otherwise
to act on behalf of such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling Stockholder of
the Power of Attorney and the Custody Agreement, the execution and delivery by
or on behalf of such Selling Stockholder of this Agreement and the sale and
delivery of the Selling Stockholder Shares and the Option Shares to be sold by
such Selling Stockholder under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and
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<PAGE> 9
are in full force and effect; such Selling Stockholder, if other than a natural
person, has been duly organized and is validly existing in good standing under
the laws of the jurisdiction of its organization as the type of entity that it
purports to be; and such Selling Stockholder has full legal right, power and
authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such Selling Stockholder or with respect to which such
Selling Stockholder has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a
distribution to affiliates of such Selling Stockholder, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the Selling Stockholder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from the Securities. Such Selling Stockholder also agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the securities held by such Selling
Stockholder except in compliance with this restriction.
(e) Certificates in negotiable form for all
Shares to be sold by such Selling Stockholder under this Agreement, together
with a stock power or powers duly endorsed in blank by such Selling
Stockholder, have been placed in custody with the Custodian for the purpose of
effecting delivery hereunder.
(f) This Agreement has been duly authorized by
each Selling Stockholder that is not a natural person and has been duly
executed and delivered by or on behalf of such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder, or any Selling Stockholder Shares
or any Option Shares to be sold by such Selling Stockholder hereunder or any
properties of such Selling Stockholder may be bound, (ii) to the best of such
Selling Stockholders' knowledge, result in any violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
such Selling Stockholder or over the properties of such Selling Stockholder, or
(iii) if such Selling Stockholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed
and will not distribute any prospectus or other offering material in connection
with the offering and sale of the Shares.
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<PAGE> 10
(i) All information furnished by or on behalf of
such Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Shares that is contained in the representations and warranties of
such Selling Stockholder in such Selling Stockholder's Power of Attorney or set
forth in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, and on any later
date on which Option Shares are to be purchased, was or will be, true, correct
and complete, and does not, and at the time the Registration Statement became
or becomes, as the case may be, effective and at all times subsequent thereto
up to and on the Closing Date (hereinafter defined), and on any later date on
which Option Shares are to be purchased, will not, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make such information not misleading.
(j) Such Selling Stockholder will review the
Prospectus and will comply with all agreements and satisfy all conditions on
its part to be complied with or satisfied pursuant to this Agreement on or
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, and will advise one of its Attorneys and
Robertson, Stephens & Company LLC prior to the Closing Date or such later date
on which Option Shares are to be purchased, as the case may be, if any
statement to be made on behalf of such Selling Stockholder in the certificate
contemplated by Section 6(h) would be inaccurate if made as of the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be.
(k) Such Selling Stockholder does not have, or
has waived prior to the date hereof, any preemptive right, co-sale right or
right of first refusal or other similar right to purchase any of the Shares
that are to be sold by the Company or any of the other Selling Stockholders to
the Underwriters pursuant to this Agreement; such Selling Stockholder does not
have, or has waived prior to the date hereof, any registration right or other
similar right to participate in the offering made by the Prospectus, other than
such rights of participation as have been satisfied by the participation of
such Selling Stockholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Stockholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(l) Such Selling Stockholder is not aware
(without having conducted any investigation or inquiry) that any of the
representations and warranties of the Company set forth in Section 2.I. above
is untrue or inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Stockholders, respectively, at a purchase price of $_____ per
share, the respective number of Company Shares as hereinafter set forth and
Selling Stockholder Shares set forth opposite the names of the Company and the
Selling Stockholders in Schedule B hereto. The obligation of each Underwriter
to the Company and to each Selling Stockholder shall be to purchase from the
Company or such Selling Stockholder that number of Company Shares or Selling
Stockholder Shares, as the case may be, which (as nearly as practicable, as
determined by you) is in the same proportion to the number of Company Shares or
Selling Stockholder Shares, as the case may be, set forth opposite the name of
the Company or such Selling Stockholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10) is to the
total number of Firm Shares to be purchased by all the Underwriters under this
Agreement.
The certificates in negotiable form for the Selling Stockholder
Shares have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Stockholder agrees that the certificates for the
Selling Stockholder Shares of such Selling Stockholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Stockholder for such custody, including the Power
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<PAGE> 11
of Attorney is to that extent irrevocable and that the obligations of such
Selling Stockholder hereunder shall not be terminated by any act of such
Selling Stockholder or by operation of law, whether by the death or incapacity
of such Selling Stockholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Stockholder should die or be incapacitated, or if any other such event should
occur, before the delivery of the certificates for the Selling Stockholder
Shares hereunder, the Selling Stockholder Shares to be sold by such Selling
Stockholder shall, except as specifically provided herein or in the Custody
Agreement, be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had
not occurred, regardless of whether the Custodian shall have received notice of
such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
receipt of a wire transfer reference number issued by the Federal Reserve
System evidencing payment of the purchase price therefor by the several
Underwriters by wire transfer of immediately available funds, to an account
specified in writing by the Company with regard to the Shares being purchased
from the Company, and to an account specified in writing by the Custodian for
the respective accounts of the Selling Stockholders with regard to the Shares
being purchased from such Selling Stockholders, at the offices of Hale & Dorr,
60 State Street, Boston, MA 02109 (or at such other place as may be agreed upon
among the Representatives, the Company and the Attorneys), at 7:00 A.M., San
Francisco time (a) on the third (3rd) full business day following the first day
that Shares are traded, (b) if this Agreement is executed and delivered after
1:30 P.M., San Francisco time, the fourth (4th) full business day following the
day that this Agreement is executed and delivered or (c) at such other time and
date not later than seven (7) full business days following the first day that
Shares are traded as the Representatives, the Company and the Attorneys may
determine (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 10 hereof), such time and date of payment
and delivery being herein called the "Closing Date;" provided, however, that if
the Company has not made available to the Representatives copies of the
Prospectus within the time provided in Section 4(d) hereof, the Representatives
may, in their sole discretion, postpone the Closing Date until no later than
two (2) full business days following delivery of copies of the Prospectus to
the Representatives. The certificates for the Firm Shares to be so delivered
will be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for
checking at least one (1) full business day prior to the Closing Date and will
be in such names and denominations as you may request, such request to be made
at least two (2) full business days prior to the Closing Date. If the
Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
offering price of $_____ per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and in the second and seventh paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement,
and you, on behalf of the respective Underwriters, represent and warrant to the
Company and the Selling Stockholders that the statements made therein do not
include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
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<PAGE> 12
4. Further Agreements of the Company. The Company agrees with
the several Underwriters that:
(a) The Company will use its best efforts to
cause the Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the date
the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the Prospectus
has been filed; if the Company omitted information from the Registration
Statement at the time it was originally declared effective in reliance upon
Rule 430A(a) of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed, within the time period prescribed, with the Commission pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to such Registration Statement as originally
declared effective which is declared effective by the Commission; if the
Company files a term sheet pursuant to Rule 434 of the Rules and Regulations,
the Company will provide evidence satisfactory to you that the Prospectus and
term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of
the Rules and Regulations have been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules
and Regulations; if for any reason the filing of the final form of Prospectus
is required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act,
any event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after
it shall receive notice or obtain knowledge, of the issuance of any stop order
by the Commission suspending the effectiveness of the Registration Statement or
of the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use its best efforts to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in
effect for so long as may be required for purposes of the distribution of the
Shares, except that the Company shall not be required in connection therewith
or as a condition thereof to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction in which it is not
otherwise required to be so qualified or to so execute a general consent to
service of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the
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<PAGE> 13
Company will make and file such statements and reports in each year as are or
may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, in no event later than the first (1st) full business
day following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements
to such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request. Notwithstanding the foregoing, if Robertson, Stephens
& Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to
its securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration
Statement, an earnings statement (which will be in reasonable detail but need
not be audited) complying with the provisions of Section 11(a) of the Act and
covering a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the
date hereof, the Company will furnish to its stockholders as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity, and of cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to stockholders, (iv) as soon
as they are available, copies of all reports and financial statements furnished
to or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"), (v) every material press
release and every material news item or article in respect of the Company, its
subsidiaries or its or their affairs which was generally released to
stockholders or prepared by the Company or any of its subsidiaries, and (vi)
any additional information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and such subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from
the sale of the Shares being sold by it in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its Common
Stock.
(i) The Company will comply with the requirements
of Rule 463 of the Rules and Regulations.
(j) If the transactions contemplated hereby are
not consummated by reason of any failure, refusal or inability on the part of
the Company or any Selling Stockholder to perform any agreement on their
respective part to be performed hereunder or to fulfill any condition of the
Underwriters' obligations hereunder, or if the Company shall terminate this
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<PAGE> 14
Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 11(b)(i), the Company will
reimburse the several Underwriters for all out-of-pocket expenses (including
fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Shares.
(k) If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(l) During the Lock-up Period, the Company will
not, without the prior written consent of Robertson, Stephens & Company LLC,
effect the Disposition of, directly or indirectly, any Securities other than
the sale of the Company Shares hereunder and the Company's issuance of options
or Common Stock under the Company's presently authorized Amended 1990 Employee
Incentive Stock Option Plan, 1996 Stock Option Plan, 1995 Executive Officers'
Stock Option Plan and 1995 Non-Employee Directors' Stock Option Plan.
(m) During a period of ninety (90) days from the
effective date of the Registration Statement, the Company will not file a
registration statement registering shares under the Option Plan or other
employee benefit plan.
5. Expenses.
(a) The Company and the Selling Stockholders agree
with each Underwriter that:
(i) The Company and the Selling
Stockholders will pay and bear all costs and expenses in connection with the
preparation, printing and filing of the Registration Statement (including
financial statements, schedules and exhibits), Preliminary Prospectuses and the
Prospectus and any amendments or supplements thereto; the printing of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus,
and any amendments or supplements to any of the foregoing; NASD filing fees and
the cost of qualifying the Shares under the laws of such jurisdictions as you
may designate (including filing fees and fees and disbursements of
Underwriters' Counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company and
the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the
sale of the Shares by the Selling Stockholders will be borne collectively by
the Company and the Selling Stockholders. The provisions of this Section
5(a)(i) are intended to relieve the Underwriters from the payment of the
expenses and costs which the Selling Stockholders and the Company hereby agree
to pay, but shall not affect any agreement which the Selling Stockholders and
the Company may make, or may have made, for the sharing of any of such expenses
and costs. Such agreements shall not impair the obligations of the Company and
the Selling Stockholders hereunder to the several Underwriters.
(ii) In addition to its other
obligations under Section 8(a) hereof, the Company agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation,
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<PAGE> 15
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's obligation
to reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Company together with interest, compounded daily, determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a substantial majority of
the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(iii) In addition to their other
obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(b) hereof relating to such
Selling Stockholder, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of such Selling Stockholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Selling Stockholders, together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(b) In addition to their other obligations under
Section 8(c) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(c) hereof, they will
reimburse the Company and each Selling Stockholder on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and
each such Selling Stockholder for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company and each such Selling Stockholder shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company and each such Selling
Stockholder within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out
of the operation of the interim reimbursement arrangements set forth in
Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any
requested reimbursement payments, the method of determining such amounts and
the basis on which such amounts shall be apportioned among the reimbursing
parties, shall be settled by arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice, then
the party responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 8(a),
8(b) and 8(c) hereof or the obligation to contribute to expenses which is
created by the provisions of Section 8(e) hereof.
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<PAGE> 16
6. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date
and any later date on which Option Shares are to be purchased, as the case may
be, of the representations and warranties of the Company and the Selling
Stockholders herein, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become
effective not later than 2:00 P.M., San Francisco time, on the date following
the date of this Agreement, or such later date and time as shall be consented
to in writing by you; and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
initiated or, to the knowledge of the Company, any Selling Stockholder or any
Underwriter, threatened by the Commission, and any request of the Commission
for additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this Section .
(c) Subsequent to the execution and delivery of
this Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date
and on any later date on which Option Shares are to be purchased, as the case
may be, the following opinion of counsel for the Company and the Selling
Stockholders, dated the Closing Date or such later date on which Option Shares
are to be purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company and each
Significant Subsidiary (as that term is defined in Regulation
S-X of the Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation;
(ii) The Company and each
Significant Subsidiary has the corporate power and authority
to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company and each
Significant Subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or
be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries
considered as one enterprise. To such counsel's knowledge,
the Company does not own or control, directly or indirectly,
any corporation, association or other entity other than Impact
Marketing Corporation and Countrywide Dental Inc.;
(iv) The authorized, issued and
outstanding capital stock of the Company is as set forth in
the Prospectus under the caption "Capitalization" as of the
dates stated
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<PAGE> 17
therein, and the issued and outstanding shares of capital
stock of the Company (including the Selling Stockholder
Shares) have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right;
(v) All issued and outstanding
shares of capital stock of each Significant Subsidiary of the
Company have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right
of first refusal or other similar right and are owned by the
Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) The Firm Shares to be issued by
the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and
will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of
first refusal or other similar right.
(vii) The Company has the corporate
power and authority to enter into this Agreement and to issue,
sell and deliver to the Underwriters the Shares to be issued
and sold by it hereunder;
(viii) This Agreement has been duly
authorized by all necessary corporate action on the part of
the Company and has been duly executed and delivered by the
Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except
insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights generally or
by general equitable principles;
(ix) The Registration Statement has
become effective under the Act and, to such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened
under the Act;
(x) The Registration Statement and
the Prospectus, and each amendment or supplement thereto
(other than the financial statements (including supporting
schedules) and financial data derived therefrom as to which
such counsel need express no opinion), as of the effective
date of the Registration Statement, complied as to form in all
material respects with the requirements of the Act and the
applicable Rules and Regulations;
(xi) The information in the
Prospectus under the caption "Description of Capital Stock,"
to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair
summary of such matters and conclusions; and the forms of
certificates evidencing the Common Stock and filed as exhibits
to the Registration Statement comply with Delaware law;
(xii) The description in the
Registration Statement and the Prospectus of the charter and
bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Act
and the applicable Rules and Regulations;
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<PAGE> 18
(xiii) To such counsel's knowledge,
there are no agreements, contracts, leases or documents to
which the Company or any of its subsidiaries is a party of a
character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement which are not described
or referred to therein or filed as required;
(xiv) The performance of this
Agreement and the consummation of the transactions herein
contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation
of the charter or bylaws of the Company or any of its
subsidiaries or (b) to such counsel's knowledge, result in a
material breach or violation of any of the terms and provisions
of, or constitute a default under, any bond, debenture, note or
other evidence of indebtedness, or any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or
by which their properties are bound, or any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their
properties or operations;
(xv) No consent, approval,
authorization or order of or qualification with any court,
government or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with
the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act
or such as may be required under state or other securities or
Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge,
there are no legal or governmental proceedings pending or
threatened against the Company or any of its subsidiaries of a
character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xvii) To such counsel's knowledge,
neither the Company nor any of its subsidiaries is presently
(a) in material violation of its respective charter or bylaws,
or (b) in material breach of any applicable statute, rule or
regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their
properties or operations;
(xviii) To such counsel's knowledge,
except as set forth in the Registration Statement and
Prospectus, no holders of Common Stock or other securities of
the Company have registration rights with respect to securities
of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the
Company having rights known to such counsel to registration of
such shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the
Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights;
(xix) Each Selling Stockholder which
is not a natural person has full right, power and authority to
enter into and to perform its obligations under the Power of
Attorney and Custody Agreement to be executed and delivered by
it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of each Selling
Stockholder that
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<PAGE> 19
is not a natural person has been duly authorized by such
Selling Stockholder; the Power of Attorney and Custody
Agreement of each Selling Stockholder has been duly executed
and delivered by or on behalf of such Selling Stockholder; and
the Power of Attorney and Custody Agreement of each Selling
Stockholder constitutes the valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by
general equitable principles;
(xx) Each of the Selling Stockholders
has full right, power and authority to enter into and to
perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such
Selling Stockholder hereunder;
(xxi) This Agreement has been duly
authorized by each Selling Stockholder that is not a natural
person and has been duly executed and delivered by or on behalf
of each Selling Stockholder; and
(xxii) Upon the delivery of and
payment for the Shares as contemplated in this Agreement, each
of the Underwriters will receive valid marketable title to the
Shares purchased by it from such Selling Stockholder, free and
clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. In rendering such opinion, such
counsel may assume that the Underwriters are without notice of
any defect in the title of the Shares being purchased from the
Selling Stockholders.
In addition, such counsel shall state that such
counsel has participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads such counsel to
believe that, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date on
which Option Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or at the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the States of
Massachusetts and Delaware upon opinions of local counsel, and as to questions
of fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
an opinion of Wilson Sonsini Goodrich & Rosati, P.C., in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
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<PAGE> 20
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be, a
letter from Price Waterhouse LLP addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in the letter delivered to you concurrently with the execution of this
Agreement (herein called the "Original Letter"), but carried out to a date not
more than five (5) business days prior to the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts described
in the Original Letter since its date, or to reflect the availability of more
recent financial statements, data or information. The letter shall not disclose
any change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from Price
Waterhouse LLP shall be addressed to or for the use of the Underwriters in form
and substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of June 30, 1996 and 1995
and related consolidated statements of operations, stockholders' equity, and
cash flows for the twelve (12) months ended June 30, 1996, 1995 and 1994 (iii)
state that Price Waterhouse LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Price Waterhouse LLP as
described in SAS 71 on the financial statements for each of the quarters in the
eight-quarter period ended June 30, 1996 (the "Quarterly Financial Statements"),
(iv) state that in the course of such review, nothing came to their attention
that leads them to believe that any material modifications need to be made to
any of the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across the
periods presented and (v) address other matters agreed upon by Price Waterhouse
LLP and you. In addition, you shall have received from Price Waterhouse LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of June 30, 1996, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and the Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and
warranties of the Company in this Agreement are true and
correct, as if made on and as of the Closing Date or any later
date on which Option Shares are to be purchased, as the case
may be, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
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<PAGE> 21
(iii) When the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and
the Prospectus, and any amendments or supplements thereto
contained all material information required to be included
therein by the Act and the Rules and Regulations, and in all
material respects conformed to the requirements of the Act and
the Rules and Regulations, the Registration Statement, and any
amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, the Prospectus, and
any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to
be set forth in an amended or supplemented Prospectus which has
not been so set forth; and
(iv) Subsequent to the respective
dates as of which information is given in the Registration
Statement and Prospectus, there has not been (a) any material
adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b)
any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the
Company and its subsidiaries considered as one enterprise,
incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (d) any change in
the capital stock or outstanding indebtedness of the Company or
any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or (f) any
loss or damage (whether or not insured) to the property of the
Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on
the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(h) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, from the Attorneys for
each Selling Stockholder to the effect that, as of the Closing Date, or any
later date on which Option Shares are to be purchased, as the case may be, they
have not been informed that:
(i) The representations and
warranties made by such Selling Stockholder herein are not true
or correct in any material respect on the Closing Date or on
any later date on which Option Shares are to be purchased, as
the case may be; or
(ii) Such Selling Stockholder has not
complied with any obligation or satisfied any condition which
is required to be performed or satisfied on the part of such
Selling Stockholder at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as the
case may be.
(i) The Company shall have obtained and delivered to
you an agreement from each officer and director of the Company, each Selling
Stockholder and each beneficial owner of 1,000 or more shares of Common Stock in
writing prior to the date hereof that such person will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to affiliates of such person, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior
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written consent of Robertson, Stephens & Company LLC. The foregoing restriction
shall have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would include,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from the Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(j) The Company and the Selling Stockholders shall
have furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person)) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Selling Stockholders hereby grant to the several Underwriters,
for the purpose of covering over-allotments in connection with the distribution
and sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of ________ Option Shares at the purchase price per share for the Firm
Shares set forth in Section 3 hereof. Such option may be exercised by the
Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company and an Attorney. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set forth
in Schedule A hereto), adjusted by the Representatives in such manner as to
avoid fractional shares.
Delivery of definitive certificates for the Option
Shares to be purchased by the several Underwriters pursuant to the exercise of
the option granted by this Section 7 shall be made against receipt of a wire
transfer reference number issued by the Federal Reserve System evidencing
payment of the purchase price therefor by the several Underwriters by wire
transfer of immediately available funds to an account specified in writing by
the Custodian for the respective accounts of the Selling Stockholders. Such
delivery and payment shall take place at the offices of Hale & Dorr, 60 State
Street, Boston, MA 02109 or at such other place as may be agreed upon among the
Representatives and an Attorney (i) on the Closing Date, if written notice of
the exercise of such option is received by an Attorney at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date an Attorney
receives written notice of the exercise of such option, if such notice is
received by an Attorney less than two (2) full business days prior to the
Closing Date.
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<PAGE> 23
The certificates for the Option Shares to be so
delivered will be made available to you at such office or such other location
including, without limitation, in New York City, as you may reasonably request
for checking at least one (1) full business day prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to such date of
payment and delivery. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as
the Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in
Section 7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of the date of
payment and delivery for such Option Shares) to the accuracy of and compliance
with the representations, warranties and agreements of the Company and the
Selling Stockholders herein, to the accuracy of the statements of the Company,
the Selling Stockholders and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, to the conditions set
forth in Section 6 hereof, and to the condition that all proceedings taken at or
prior to the payment date in connection with the sale and transfer of such
Option Shares shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants or agreements of the Company
and the Selling Stockholders or the satisfaction of any of the conditions herein
contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD) under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was
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<PAGE> 24
corrected had not been sent or given to such person within the time required by
the Act and the Rules and Regulations, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not
jointly, agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including, without limitation, in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E or the Bylaws of the NASD) under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities (or actions in respect thereof) arising out of or based upon (i)
any breach of any representation, warranty, agreement or covenant of such
Selling Stockholder herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or such
Underwriter by such Selling Stockholder, directly or through such Selling
Stockholder's representatives, specifically for use in the preparation thereof,
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however,
that the indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly,
agrees to indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities, joint or several, to which
the Company or such Selling Stockholder may become subject under the Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities (or actions in respect thereof) arising out of or based upon (i)
any breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by
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<PAGE> 25
such Underwriter, directly or through you, specifically for use in the
preparation thereof, and agrees to reimburse the Company and each such Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
and each such Selling Stockholder in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Stockholder and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any liabilities
which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party
under this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b), or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made pursuant
to this Section 8 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 8 provides for indemnification in such case, all the parties hereto
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such proportion so
that, except as set forth in Section 8(f) hereof, the Underwriters severally and
not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the initial public offering
price, and the Company and the Selling Stockholders are responsible for the
remaining portion, provided, however, that (i) no Underwriter shall be required
to
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<PAGE> 26
contribute any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount of
damages which such Underwriter has been otherwise required to pay and (ii) no
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. The contribution agreement in this
Section 8(e) shall extend upon the same terms and conditions to, and shall inure
to the benefit of, each person, if any, who controls any Underwriter, the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act and each officer of the Company who signed the Registration Statement and
each director of the Company.
(f) The liability of each Selling Stockholder under
the representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Selling
Stockholder Shares, and Option Shares, if any, sold by such Selling Stockholder
to the Underwriters minus the amount of the underwriting discount paid thereon
to the Underwriters by such Selling Stockholder. The Company and such Selling
Stockholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge
that they are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including, without
limitation, the provisions of this Section 8, and are fully informed regarding
said provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory
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<PAGE> 27
to you, to purchase the Firm Shares which the defaulting Underwriter or
Underwriters so agreed but failed to purchase. If it shall be arranged for the
remaining Underwriters or substituted underwriter or underwriters to take up the
Firm Shares of the defaulting Underwriter or Underwriters as provided in this
Section 10, (i) the Company shall have the right to postpone the time of
delivery for a period of not more than seven (7) full business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall not be liable to any Underwriter (except as provided in
Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter
who shall have failed, otherwise than for some reason permitted under this
Agreement, to purchase the number of Firm Shares agreed by such Underwriter to
be purchased hereunder, which Underwriter shall remain liable to the Company,
the Selling Stockholders and the other Underwriters for damages, if any,
resulting from such default) be liable to the Company or any Selling Stockholder
(except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the
earlier of (i) 6:30 A.M., San Francisco time, on the first full business day
following the effective date of the Registration Statement, or (ii) the time of
the initial public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by letter,
telephone, telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representatives of the several Underwriters, or the Company, may prevent
this Agreement from becoming effective without liability of any party to any
other party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several
Underwriters, shall have the right to terminate this Agreement by giving notice
as hereinafter specified at any time on or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the case
may be, (i) if the Company or any Selling Stockholder shall have failed, refused
or been unable to perform any agreement on its part to be performed, or because
any other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company or any of its subsidiaries shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been
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<PAGE> 28
insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company and the Selling Stockholders shall remain obligated to pay costs and
expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to
any of subparagraphs (ii) through (v) above shall be without liability of any
party to any other party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to MemberWorks Incorporated, 680 Washington
Boulevard, Suite 1100, Stamford CT 06901, telecopier number (203) 969-0812,
Attention: Gary A. Johnson, Chief Executive Officer; if sent to one or more of
the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Gary A. Johnson, Steven H. Levenherz or James B. Duffy as Attorney-in-Fact for
the Selling Stockholders, at MemberWorks Incorporated, 680 Washington Boulevard,
Suite 1100, Stamford CT 06901, telecopier number (203) 969-0812
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and the Selling Stockholders
and their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Stockholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
-28-
<PAGE> 29
If the foregoing correctly sets forth the understanding among
the Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
MEMBERWORKS INCORPORATED
By
------------------------------------------
SELLING STOCKHOLDERS
By
------------------------------------------
Attorney-in-Fact for the Selling
Stockholders named in Schedule B hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
PAINEWEBBER INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By
--------------------------------------------
Authorized Signatory
-29-
<PAGE> 30
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ ---------
<S> <C>
Robertson, Stephens & Company LLC . . . . . . . . . . .
Hambrecht & Quist LLC . . . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . .
=========
</TABLE>
-1-
<PAGE> 31
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company
Shares To
Company Be Sold
------- -------
<S> <C>
MemberWorks Incorporated . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . .
=========
<CAPTION>
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder To Be Sold
--------------------------- ----------
<S> <C>
---------
Total . . . . . . . . . . . . . . . . . . . . . . . .
=========
</TABLE>
-1-
<PAGE> 1
EXHIBIT 11
MEMBERWORKS INCORPORATED
COMPUTATION OF UNAUDITED PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Net loss...................................................................... $ (5,247,000)
Preferred stock dividends..................................................... (154,000)
-------------
Net loss attributable to common stock......................................... $ (5,401,000)
=============
Weighted average number of shares of Class A and Class B common stock
outstanding................................................................. 5,683,176
Automatic conversion of Series A, B, C, D and H preferred stock and redemption
of Series E and F preferred stock........................................... 6,618,743
Stock options granted one year prior to filing................................ 495,624
-------------
Weighted average number of common shares outstanding as adjusted.............. 12,797,543
=============
Unaudited pro forma net loss per share........................................ $ (0.42)
=============
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 13, 1996,
relating to the consolidated financial statements of MemberWorks Incorporated,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended June 30,
1996 listed under Item 16(b) of this Registration Statement when such schedule
is read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included this schedule. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Stamford, Connecticut
September 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,312,000
<SECURITIES> 0
<RECEIVABLES> 6,349,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,494,000
<PP&E> 4,777,000
<DEPRECIATION> 1,516,000
<TOTAL-ASSETS> 19,715,000
<CURRENT-LIABILITIES> 26,055,000
<BONDS> 0
20,487,000
0
<COMMON> 59,000
<OTHER-SE> 36,391,000
<TOTAL-LIABILITY-AND-EQUITY> 19,715,000
<SALES> 0
<TOTAL-REVENUES> 57,012,000
<CGS> 0
<TOTAL-COSTS> 61,949,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,000
<INCOME-PRETAX> (5,247,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,247,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,247,000)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
