MEMBERWORKS INC, 424B1, 1996-10-21

MEMBERWORKS INC
424B1, 1996-10-21
BUSINESS SERVICES, NEC

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<PAGE> 1
Pursuant to Rule 424(b)(1)
Registration No. 333-10541

MEMBERWORKS 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. 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.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......................... $17.00 $1.19 $15.81 $15.81
- -------------------------------------------------------------------------------------------------------
Total(2)........................... $45,900,000 $3,213,000 $37,944,000 $4,743,000
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</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 $52,785,000, $3,694,950 and
$11,146,050, 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 October 23, 1996.

ROBERTSON, STEPHENS & COMPANY

HAMBRECHT & QUIST

PAINEWEBBER INCORPORATED

The date of this Prospectus is October 18, 1996
<PAGE> 2

THE MEMBERWORKS SOLUTION

The Company's membership service programs create a synergistic relationship
among members, vendors, clients and the Company.

In this place appears a graphic depicting the exchange of economic and other
value between the Company and its members, service providers and clients. In
exchange for fees, the Company provides its members value-added membership
service programs. In exchange for marketing support, the Company's service
providers provide it with program support. In exchange for customer lists, the
Company pays royalties to its clients.

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.

<PAGE> 3

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 NOVEMBER 12, 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
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<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.............................................................................. 27
Management............................................................................ 40
Certain Transactions.................................................................. 48
Principal and Selling Stockholders.................................................... 49
Description of Capital Stock.......................................................... 51
Shares Eligible for Future Sale....................................................... 54
Underwriting.......................................................................... 56
Legal Matters......................................................................... 57
Experts............................................................................... 57
Additional Information................................................................ 57
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> 4

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") believes, based
on its senior management's extensive knowledge of the industry and its
relationships with major credit card issuers in banking, oil and retail, that it
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 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. Currently, the Company has 38
credit card issuer clients to whom it is obligated to pay royalties, including
12 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> 5

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.
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)........................................................ 12,741
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(3) AS ADJUSTED(3)(4)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 4,312 $ 4,312 $38,877
Working capital (deficit)............................... (18,977) (18,977) 15,588
Total assets............................................ 41,927 41,927 76,492
Long-term obligations................................... 1,089 1,089 1,089
Redeemable preferred stock.............................. 20,487 1,949 --
Total stockholders' equity (deficit).................... (36,332) (17,794) 18,720
</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 $8.00 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 at an initial public offering price of $17.00, 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, 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> 6

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
the following key clients: approximately 35.2% from customer lists provided by
Sears, Roebuck and Co. ("Sears"), 15.6% from Associates Credit Card Services,
Inc. ("Associates") and 10.5% from Capital One Financial Corp. ("Capital One").
These and other client relationships are pursuant to contracts which may be
terminated by the client upon 30 to 90 days' notice without cause and 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
Associates, representing approximately 15.6% of the Company's revenues for the
year ended June 30, 1996, is under renewal negotiations, and there can be no
assurance that Associates will renew such agreement on favorable terms, if at
all. If the agreement is terminated, the Company will have the right to continue
to provide membership services directly to the client's individual account
holders, provided that the Company continues to pay royalties to the client, but
may not resolicit those members upon such members' cancellation or non-renewal
of the membership. 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.

6
<PAGE> 7

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, 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

7
<PAGE> 8

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 producing 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 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."

8
<PAGE> 9

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 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. The Company does not believe, however, that recent
increases in consumer credit card indebtedness and increased consumer defaults
on credit card obligations have had a material adverse affect 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

9
<PAGE> 10

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. The Company has not established a definitive timetable
for its international expansion, but is currently engaged in discussions with
clients concerning offering membership service programs in Canada and in Mexico.
There can be no assurance as to whether or when such programs will be
implemented. 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, 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

10
<PAGE> 11

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 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

11
<PAGE> 12

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 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 was 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 (April 17, 1997),
approximately 9,576,370 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 2,265,909 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

12
<PAGE> 13

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 (April 17, 1997), 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 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

13
<PAGE> 14

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."

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 of $15.72 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> 15

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 (after deducting underwriting discounts and
commissions and estimated offering expenses) will be approximately $37.0
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. Of the
approximately $34.5 million of net proceeds available to it after redemption of
the Series E and Series F Preferred Stock, the Company anticipates that, over
the next two fiscal years, approximately $15.0 million will be expended on new
program development and capital expenditures such as computer and
telecommunications equipment, software and other like property, and the
remainder of the proceeds will be allocated, first, to fund, if necessary, the
anticipated continuation of the Company's net losses in this period and future
periods, and second, the remaining balance, if any, to fund additional capital
expenditures for the acquisition of businesses, services and technologies that
are complementary to those of the Company, or for other corporate purposes. 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> 16

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 the
initial public offering price of $17.00 per share, after deducting the
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>
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.......................... 3,602 22,076 59,103
Deferred compensation............................... (1,400) (1,400) (1,400)
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) 18,720
-------- -------- --------
Total capitalization (deficit)................. $ (14,756) $ (14,756) $ 19,809
======== ======== ========
</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 $8.00 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> 17

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 (at the initial public offering price of
$17.00 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
$18,592,000, or $1.28 per share. This represents an immediate increase in pro
forma net tangible book value of $2.80 per share to existing stockholders and an
immediate dilution of $15.72 per share to new investors purchasing shares in
this offering. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.................. $17.00
Pro forma deficit in net tangible book value per share
as of June 30, 1996................................. $ (1.52)
Increase per share attributable to new investors....... 2.80
--------
Pro forma net tangible book value per share after
offering............................................... 1.28
-------
-
Dilution per share to new investors...................... $15.72
========
</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 31.5% $ 1.55
New investors(1)................. 2,400,000 16.5 40,800,000 68.5 $ 17.00
------- --- -------- ---
Total.................. 14,550,177 100.0% $59,580,943 100.0%
======= === ======== ===
</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 $8.00 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> 18

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......................... 12,741
=======
</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)............. (2,860) (4,605) (11,065) (13,410) (18,977)
Total assets.......................... 11,206 13,545 23,823 29,726 41,927
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> 19

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, 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. Wholesale programs substantially reduce the cost for
the Company to acquire new members, which results in higher profit margins for
the Company. Accordingly, the Company provides membership in the service program
for fees which are less than the Company's standard individual membership fees
for the program. Notwithstanding the lower fees, in the Company's limited
experience, wholesale programs are generally more profitable than individual
member programs. 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, although some memberships are available on a monthly basis. The
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. If the Company refunds a
membership fee, the Company is entitled to receive a refund of the royalty paid
in connection with that membership fee. Annual memberships are renewed
automatically and continue in effect unless canceled by the member. Of the
members of the Company's programs who did not cancel in their initial year, such
members, on average, have been members for more than two years. Revenues are
presented net of expected cancellations. Cancellations represented 46.2% of
gross revenues accrued in 1996, 47.5% in 1995 and 43.7% in 1994. Cancellation
percentages are calculated by dividing all amounts refunded to canceling members
in the applicable fiscal year by all revenues accrued with respect to that
fiscal year, without regard to whether such revenues have been fully recognized
in that year.

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, as well as the cost of royalties, printing and

19
<PAGE> 20

mailing of membership materials, are amortized ratably over the same period.
Annual membership fees for a particular program may vary based on the results of
the Company's market testing of the customer groups of various clients.

In June 1996, the Company recorded unearned compensation of $1.4 million in
conjunction with the grant of options to purchase 360,000 shares of Common
Stock. The non-cash compensation expense for the options will be recognized
quarterly over four years, beginning with the quarter ended September 30, 1996.

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 percentage of the Company's individual membership revenues from
renewing members increased from approximately 35.9% in 1994 to approximately
41.4% in 1996. The Company has focused its resources on developing, introducing
and expanding innovative new programs, which reflects the Company's strategy of
diversifying its revenue base. Primarily as a result of this effort, the Company
has experienced net losses since its inception. The Company expects these net
losses to continue at least through its current fiscal year.

The Company routinely reviews all renewal rates and has not seen any
material change over the last fiscal year in the average renewal rate. Renewal
rates are calculated by dividing the total number of renewing members not
requesting a refund during their renewal year by the total number of members up
for renewal. Based on the Company's analysis of members who began memberships
during the period from fiscal 1990 through fiscal 1994, on average, through
fiscal 1996, approximately half of the members who did not cancel in their first
year renewed for a second year and did not cancel during that year. Of that
smaller, renewing group, a slightly higher percentage chose to renew again after
the second year of membership and did not cancel during that year. In subsequent
years, the proportion of renewing members relative to total members in a program
continued to increase. MemberWorks believes that pricing, innovative programs
and effective marketing are necessary to attract members to programs both on
program introduction and in subsequent years. If more members are attracted to a
program initially, there are more members available to renew from year-to-year.
Renewal rates, however, 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.

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.

20
<PAGE> 21

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.
Revenues from renewals increased to $23.3 million in 1996 from $15.0 million in
1995. As a percentage of individual membership revenues, these amounts
represented 41.4% in 1996 and 37.1% in 1995.

Revenue attributable to members solicited through Sears, Capital One and
Associates 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 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

21
<PAGE> 22

increase in the weighted average program fee and an increase in renewal revenues
as a percentage of total revenues.

In addition to marketing expenses, the Company also monitors overall
membership solicitation and other deferred costs. Those costs include both
marketing expenses and costs associated with the production and distribution of
membership information kits, and are amortized ratably over the membership
period. Membership solicitation and other deferred 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. In addition, the Company expects general and
administrative expense to be increased during the next four fiscal years as the
Company recognizes non-cash compensation expense for options granted in June
1996.

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.
Revenues from renewals increased to $15.0 million in 1995 from $9.1 million in
1994. As a percentage of individual membership revenues, these amounts
represented 37.1% in 1995 and 35.9% in 1994.

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

22
<PAGE> 23

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 and other deferred 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.

<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 )
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

23
<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>
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 producing 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.

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

24
<PAGE> 25

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
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 currently has both negative working capital and an accumulated
deficit due to its history of losses. Because of ongoing costs in connection
with obtaining new members, the Company expects to incur operating and net
losses at least through fiscal 1997. The Company intends to use its existing
cash balances, the net proceeds of this offering, funds generated from
operations and borrowings available under the Company's bank credit agreement to
address its cash requirements during the anticipated continuation of its net
losses. The Company believes that as its percentage of revenues attributable to
renewal members increases, such increase will help to generate net cash from
operating activities, and thereby minimize its need for financing from outside
sources. The Company

25
<PAGE> 26

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. Of
the approximately $34.5 million of net proceeds available to it after redemption
of the Series E and Series F Preferred Stock, the Company anticipates that, over
the next two fiscal years, approximately $15.0 million will be expended on new
program development and capital expenditures such as computer and
telecommunications equipment, software and other like property, and the
remainder of the proceeds will be allocated, first, to fund, if necessary, the
anticipated continuation of the Company's net losses in this period and future
periods, and second, the remaining balance, if any, to fund additional capital
expenditures for the acquisition of businesses, services and technologies that
are complementary to those of the Company, or for other corporate purposes.

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."

26
<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 believes, based on its senior management's extensive knowledge
of the industry and its relationships with major credit card issuers in banking,
oil and retail, that it 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. The Company believes that
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.

27
<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. In addition, the Company intends to seek to sell more service programs
on a wholesale basis. 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.

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<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 individual membership revenues from renewing members
increased from approximately 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 or
annually depending on the program, ranged from approximately $40 per year to
approximately $95 per year during fiscal 1996.

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<PAGE> 30

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. Trial memberships are generally for a period of 30
days and there are no conditions with respect to the ability of the consumer to
terminate a trial membership. The Company does not record any revenue with
respect to trial memberships.

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.
Wholesale programs substantially reduce the cost for the Company to acquire new
members, which results in higher profit margins for the Company. Accordingly,
the Company provides membership in the service program for fees which are less
than the Company's standard fees for the program. To date, substantially all of
the Company's revenues have been from individual memberships.

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 gain access and marketing exposure to the Company's
membership base and, pursuant to contractual arrangements with the Company,
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. For example, the
Company pays the travel agency which provides services to its members a fee
based on the number of active members in the program, pays magazine publishers a
discounted price for magazines included as benefits in various programs and pays
fees to the service which responds to health program inquiries based on the
number of active members in that program. The aggregate of all such fees paid by
the Company in fiscal 1996 was not material.

The Company's contracts with its vendors are generally for a one year term,
with subsequent one year renewal terms at the option of the Company. Vendors may
cancel contracts with the Company but, in most cases, only for cause and subject
to notice provisions to provide the Company time to locate a substitute vendor.
Most vendor contracts are non-exclusive, but have requirements that the vendors
maintain the confidentiality of the terms of the contract.

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.

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<PAGE> 35

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. 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

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 38 credit card issuer clients to whom it
is obligated to pay royalties, including 12 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

35
<PAGE> 36

several of the Company's membership service programs are also available through
home pages on the World Wide Web.

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
the following key clients: approximately 35.2% from customer lists provided by
Sears, 15.6% from Associates and 10.5% from Capital One. These and other client
relationships are pursuant to contracts which may be terminated by the client
upon 30 to 90 days' notice without cause and 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 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. In
addition, the Company's agreement with Associates, representing approximately
15.6% of the Company's revenues for the year ended June 30, 1996, is under
renewal negotiations, and there can be no assurance that Associates will renew
such agreement on favorable terms, if at all. If the agreement is terminated,
the Company will have the right to continue to provide membership services
directly to the client's individual account holders, provided that the Company
continues to pay royalties to the client, but may not resolicit those members
upon such members' cancellation or non-renewal of the memberships.

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.

GOVERNMENT REGULATION

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<PAGE> 37

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.

COMPETITION

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

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<PAGE> 38

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 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..................................... 26,600 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.

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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.
The Company has notified the other party of its position, but has not received a
response to that notification.

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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.

40
<PAGE> 41

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.

41
<PAGE> 42

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.

42
<PAGE> 43

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.

43
<PAGE> 44

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.

<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."

44
<PAGE> 45

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 $ -- $ 563,760
Dennis P. Walker(3)........................... -- 36,000 -- 187,920
David Schachne................................ 64,800 46,800 420,675 272,285
Steven H. Levenherz........................... 108,907 57,895 700,030 346,096
</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 $8.00 at June 30, 1996, 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.

45
<PAGE> 46

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

46
<PAGE> 47

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.

47
<PAGE> 48

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.

48
<PAGE> 49

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(6)............................. 1,620,000 13.3% 93,750 1,526,250 10.5%
Dennis P. Walker(7)............................. 1,625,400 13.4% 62,500 1,562,900 10.7%
Abbott Capital Management, L.P.(8).............. 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)(9)....................... 2,779,452 22.9% -- 2,779,452 19.1%
Alec L. Ellison(4)(10).......................... 2,779,452 22.9% -- 2,779,452 19.1%
Marc S. Tesler(11).............................. 554,240 4.6% -- 554,240 3.8%
Steven H. Levenherz(12)......................... 114,307 * -- 114,307 *
David Schachne(13).............................. 117,000 1.0% -- 117,000 *
Other Selling Stockholders
Brown Brothers Harriman & Co.(14)............... 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)(7)(9)(10)(11)(12)(13)......... 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

49
<PAGE> 50

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 an aggregate of 485,000 shares held in trust for the benefit of
Mr. St. Denis's family, and 900,000 shares held by the Bear Family
Partnership, Ltd. ("Bear"). Mr. St. Denis is a general partner of Bear, and
thus may be deemed to be a beneficial owner of such shares. Mr. St. Denis
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest in Bear.

(7) 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.

(8) Includes 19,756 shares issuable upon the exercise of warrants presently
exercisable.

(9) 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.

(10) 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.

(11) 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.

(12) Represents 114,307 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.

(13) Includes 84,600 shares issuable upon the exercise of outstanding options
presently exercisable or exercisable within 60 days after June 30, 1996.

(14) Includes 142,893 shares issuable upon the exercise of warrants presently
exercisable.

50
<PAGE> 51

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 outstanding 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.

51
<PAGE> 52

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

52
<PAGE> 53

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.

53
<PAGE> 54

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 (April 17, 1997), approximately 9,576,370
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 2,265,909 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 (April 17,
1997), 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

54
<PAGE> 55

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 2,200,000 shares of Common Stock issuable under
the Executive Officers' Plan, the Director Plan, 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.

55
<PAGE> 56

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................................. 904,000
Hambrecht & Quist LLC............................................. 678,000
PaineWebber Incorporated.......................................... 678,000
Arnhold and S. Bleichroeder, Inc.................................. 120,000
William Blair & Company, L.L.C.................................... 120,000
Unterberg Harris.................................................. 120,000
Auerbach Pollak & Richardson Inc.................................. 80,000
---------
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 $0.69 per share, of which $0.10 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

56
<PAGE> 57

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 was determined through negotiations among the Company, the Selling
Stockholders and the Representatives. Among the factors considered in such
negotiations were 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.

57
<PAGE> 58

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<PAGE> 59

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> 60

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
MemberWorks Incorporated

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
July 25, 1996, except as to Note 15,
which is as of September 25, 1996

F-2
<PAGE> 61

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
Prepaid membership materials........................ 332 1,065
Prepaid expenses.................................... 90 204
Membership solicitation and other deferred costs.... 20,582 25,686
-------- --------
Total current assets........................ 27,692 37,706
Fixed assets, net..................................... 1,782 3,261
Other assets.......................................... 252 960
-------- --------
$ 29,726 $ 41,927
======== ========
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
Deferred membership fees............................ 23,592 30,628
-------- --------
Total current liabilities................... 41,102 56,683 (UNAUDITED)
Long-term capital lease obligations................... 392 456
----------
Notes payable......................................... 7,673 633
-------- --------
Total liabilities........................... 49,167 57,772
Redeemable preferred stock............................ 10,926 20,487 $ --
-------- --------
Total liabilities and redeemable preferred
stock..................................... 60,093 78,259
-------- --------
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; pro forma: 12,320,474 shares
issued and outstanding........................... 3 3 123
Capital in excess of par value...................... 1,686 3,602 22,076
Deferred compensation............................... -- (1,400) (1,400)
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)
=========
-------- --------
$ 29,726 $ 41,927
======== ========
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-3
<PAGE> 62

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.......... 12,741
=======
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-4
<PAGE> 63

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 DEFERRED TREASURY
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT COMPENSATION STOCK TOTAL
---------- ------ -------- ------ ---------- ----------- ------------ -------- --------
<S> <C> <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)
Deferred
compensation......... 1,400 $(1,400) --
Net loss............... (5,247) (5,247)

--------- --- ------ -- ------ -------- ------- ----- --------
Balance -- June 30,
1996................... 5,598,870 $56 258,235 $3 $3,602 $(38,320) $(1,400) $(273) $(36,332)
========= === ====== == ====== ======== ======= ===== ========
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-5
<PAGE> 64

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 and other deferred costs...... (29,799) (40,178) (48,201)
Amortization of membership solicitation and other
deferred 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)
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> 65

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF BUSINESS

MemberWorks Incorporated (the "Company") believes, based on its senior
management's extensive knowledge of the industry and its relationships with
major credit card issuers in banking, oil and retail, that it 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. An allowance for cancellations is established based on the Company's
most recent actual cancellation experience, updated regularly. Deferred
membership fees are recorded, net of estimated cancellations, when the trial
period has elapsed, and are amortized as membership fees on a straight-line
basis, over the remainder of the membership period, generally twelve months.
Membership cancellations are charged to the allowance for cancellations on a
current basis. 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.

F-7
<PAGE> 66

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 and other deferred costs

Membership solicitation costs include telemarketing, printing, postage and
mailing costs related directly to membership solicitation (i.e. direct response
advertising costs). In accordance with Statement of Postion 93-7, "Reporting on
Advertising Costs", direct response advertising costs are deferred and charged
to operations as revenues from membership fees are recognized. Other deferred
costs consist of royalties paid to clients, transaction processing fees, and
members' kit costs, which relate to the same revenue streams as the direct
marketing costs and are also charged to income over the membership period.

Membership solicitation costs incurred to obtain a new member generally are
less than the initial membership fee. However, if membership solicitation costs
were to exceed membership fees, an adjustment would be made to the extent of any
impairment.

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.

F-8
<PAGE> 67

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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." In
fiscal 1997, the Company intends to adopt the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."

NOTE 3 -- MEMBERSHIP SOLICITATION AND OTHER DEFERRED COSTS

Deferred membership fees and membership solicitation and other deferred
costs, included in the accompanying consolidated balance sheet as of June 30 are
comprised of the following (in thousands):

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred membership fees....................................... $ 23,592 $ 30,628
Membership solicitation and other deferred costs............... 18,330 22,212
------ --------
</TABLE>

Amortization of membership solicitation and other deferred 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.

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

F-9
<PAGE> 68

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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.

F-10
<PAGE> 69

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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

F-11
<PAGE> 70

MEMBERWORKS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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> 71

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
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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> 73

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> 74

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.

In connection with a grant of options in June 1996 to purchase 360,000
shares of Class B common stock, the Company will recognize compensation expense
over the four-year vesting period based on the excess of the fair market value
of the Company's stock over the grant price of approximately $1,400,000. Such
future compensation expense is reflected in the balance sheet at June 30, 1996
as a debit to stockholders' equity.

F-16
<PAGE> 75

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 $8.00 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> 76

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 10% 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 which became effective on September 25,
1996.

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
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<PAGE> 78

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<PAGE> 79

MEMBERWORKS(SM) Programs & Distribution Channels

MEMBERWORKS PROGRAMS AND DISTRIBUTION CHANNELS

Large Retail Oil Small Vacation Retail New
Banks Cards Cards Banks Owners Stores Interactive Direct Channels
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health x x x O O

Dental x x x O O O

Dental & Health x x x O O O O

Travel x x X O O O

Entertainment X X X X O O O

Sports X X X O O O

Finance X X O O O

Computers and Software X O O

New Services O O O O

</TABLE>

X = Current Programs.
O = Testing Programs.

<PAGE> 80

[MEMBERWORKS LOGO]