<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-21527
MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1276882
(State of Incorporation) (I.R.S. Employer
Identification No.)
680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT 06901
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (203) 324-7635
INDICATE BY CHECKMARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES /X/ NO / /
THE NUMBER OF SHARES OUTSTANDING OF EACH THE REGISTRANT'S CLASSES OF CAPITAL
STOCK: 14,664,292 SHARES OF COMMON STOCK, $0.01 PAR VALUE AS OF JANUARY 31,
1997.
<PAGE> 2
MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996. 3
Condensed Consolidated Statements of Operations for the three
month periods ended December 31, 1996 and 1995. 4
Condensed Consolidated Statements of Operations for the six
month periods ended December 31, 1996 and 1995. 5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended December 31, 1996 and 1995. 6
Notes to Condensed Consolidated Financial Statements. 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
Certain Factors That May Affect Future Results 12 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE> 3
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,926 $ 4,312
Accounts receivable 5,377 6,439
Prepaid membership materials 1,418 1,065
Prepaid expenses 326 204
Membership solicitation and other deferred costs 28,726 25,686
-------- --------
Total current assets 71,773 37,706
Fixed assets, net 5,559 3,261
Other assets 356 960
-------- --------
$ 77,688 $ 41,927
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 401 $ 675
Current maturities of capital lease obligations 316 316
Accounts payable 9,912 10,433
Accrued liabilities 15,992 14,631
Deferred membership fees 35,113 30,628
-------- --------
Total current liabilities 61,734 56,683
Long-term capital lease obligations 332 456
Notes payable 446 633
-------- --------
Total liabilities 62,512 57,772
Redeemable preferred stock -- 20,487
-------- --------
Total liabilities and redeemable preferred stock 62,512 78,259
-------- --------
Stockholders' equity:
Class A common stock, $0.01 par value -- 8,000,000 shares authorized; no
shares issued
(5,598,870 shares at June 30, 1996) -- 56
Common stock, $.01 par value -- 32,000,000
shares authorized;14,838,122 shares issued
(258,235 shares at June 30, 1996) 148 3
Capital in excess of par value 59,347 3,602
Deferred compensation (1,678) (1,400)
Accumulated deficit (42,368) (38,320)
Treasury stock, 173,830 shares at cost (273) (273)
-------- --------
Total stockholders' equity (deficit) 15,176 (36,332)
-------- --------
$ 77,688 $ 41,927
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Revenues
Membership fees $ 18,424 $ 14,089
Expenses
Operating 4,026 2,893
Marketing 11,936 9,626
General and administrative 4,132 3,229
Other income, net principally interest (200) (18)
-------- --------
Total expenses 19,894 15,730
-------- --------
Loss before income taxes (1,470) (1,641)
Provision for income taxes -- --
-------- --------
Net loss $ (1,470) $ (1,641)
======== ========
Net loss per share (note 2) $ (0.14) $ (0.13)
======== ========
Weighted average common and common equivalent shares outstanding
(note 2) 14,128 12,741
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six months ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Revenues
Membership fees $ 35,620 $ 26,768
Expenses
Operating 7,803 5,381
Marketing 23,160 18,753
General and administrative 7,933 5,289
Other (income) expense, net principally interest (208) 282
-------- --------
Total expenses 38,688 29,705
-------- --------
Loss before income taxes (3,068) (2,937)
Provision for income taxes -- --
-------- --------
Net loss $ (3,068) $ (2,937)
======== ========
Net loss per share (note 2) $ (0.31) $ (0.24)
======== ========
Weighted average common and common equivalent shares outstanding
(note 2) 13,137 12,741
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------
1996 1995
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,068) $ (2,937)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Membership solicitation and other deferred costs (29,225) (21,908)
Amortization of membership solicitation and other deferred costs 26,184 21,187
Deferred membership fees 4,485 3,185
Depreciation and amortization 577 448
Other 190 443
Change in assets and liabilities affecting operating cash flows:
Accounts receivable 1,062 (1,206)
Prepaid membership materials (353) (243)
Prepaid expenses (122) (236)
Other assets (14) (162)
Accounts payable (521) 539
Accrued liabilities 1,361 1,054
-------- --------
Net cash provided by operating activities 556 164
-------- --------
INVESTING ACTIVITIES
Acquisition of fixed assets (2,256) (716)
Investment in and advances to joint venture -- (32)
-------- --------
Net cash used in investing activities (2,256) (748)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of note payable -- 420
Payments of notes payable (461) (6,969)
Payments of capital lease obligations (124) (78)
Proceeds from issuance of Common Stock and warrants 36,439 1
Proceeds from the exercise of options and warrants 9 --
Proceeds from issuance of preferred stock -- 12,887
Redemption of preferred stock (2,549) (4,000)
Preferred stock dividends -- (402)
-------- --------
Net cash provided by financing activities 33,314 1,859
-------- --------
Net increase in cash and cash equivalents 31,614 1,275
Cash and cash equivalents at beginning of period 4,312 5,323
-------- --------
Cash and cash equivalents at end of period $ 35,926 $ 6,598
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1997. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1, with respect to the fiscal year
ended June 30, 1996.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is determined by dividing net loss, after preferred stock
dividends and accretion, by the weighted average number of common shares
outstanding during the period plus, when their effect is dilutive, common stock
equivalents.
1995 per share information represents pro forma earnings per share amounts. Pro
forma earnings per share is determined by dividing net loss, after adding back
preferred stock dividends paid when applicable, by the weighted average number
of common stock and common stock equivalents outstanding during the period.
Common stock equivalents include stock options, warrants and preferred stock
which was converted into common stock upon the closing of the initial public
offering of the Company's Common Stock. Refer to Note 4 - Stockholders' Equity.
The pro forma 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 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 the Series E and F Preferred Stock.
Supplementary earnings per share information for the six months ended December
31, 1996 and the three months ended December 31, 1996 is ($0.27) and ($0.14),
respectively. The net loss used in the calculation of supplementary earnings per
share is ($3,605) and ($1,980) for the six and three month periods ended
December 31, 1996, respectively. The net loss excludes accretion related to the
Series A, B, C, D and H Preferred Stock and preferred stock dividends on Series
E and F Preferred Stock as the conversion and redemption of these securities is
assumed to have occurred at the beginning of each respective period. The
weighted average shares used in the calculation of supplementary earnings per
share includes the number of shares of common stock whose proceeds were to be
used to retire the Series E and F Preferred Stock as outstanding for the
entire period.
NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
The allowance for membership cancellations set forth in the accompanying
condensed consolidated balance sheets as of June 30, 1996 and December 31, 1996
was $10,117,000 and $12,666,000, respectively.
7
<PAGE> 8
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 4 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended December 31, 1996 were
as follows (in thousands, except share data):
<TABLE>
<CAPTION>
Additional
Class A Common Stock Common Stock Paid Accumulated Deferred Treasury
Shares Amount Shares Amount in Capital Deficit Compensation Stock Total
--------- ------ ---------- ------ ---------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June
30, 1996 5,598,870 $56 258,235 $ 3 $ 3,602 $(38,320) $(1,400) $(273) $(36,332)
Issuance of
Common Stock 2,400,000 24 36,415 36,439
Conversion of
Class A common
stock into
Common Stock (5,598,870) (56) 5,598,870 56 --
Exercise of
warrants and
options 117,649 1 8 9
Preferred stock:
Accretion of
discount (53) (53)
Accretion to
redemption
value (364) (364)
Accumulated
dividends (54) (54)
Conversion of
preferred
stock into
Common Stock 6,463,368 64 18,853 18,917
Redemption of
preferred
stock (509) (509)
Deferred
compensation 469 (278) 191
Net loss (3,068) (3,068)
--------- --- ---------- ---- ------- -------- ------- ----- --------
-- $-- 14,838,122 $148 $59,347 $(42,368) $(1,678) $(273) $ 15,176
========= === ========== ==== ======= ======== ======= ===== ========
</TABLE>
8
<PAGE> 9
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
On August 15, 1996, the Company amended its certificate of incorporation to
increase the authorized number of shares of capital 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 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.
Effective October 18, 1996, the Company sold 2,400,000 shares of its Common
Stock at $17.00 per share in an initial public offering. Net proceeds of the
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, aggregated approximately $36,439,000. Approximately
$2,549,000 of the proceeds of the offering were used to redeem all outstanding
shares of Series E and Series F Preferred Stock. The remaining $33,890,000 was
retained for general corporate purposes including acquisition of new members,
program development, capital expenditures and working capital.
Consummation of this initial public offering resulted in the automatic
conversion of Series A, B, C, D, and H Preferred Stock into Common Stock.
Concurrent with the closing of the initial public offering, the Company settled
litigation with a former executive and co-founder of the Company pursuant to the
terms of an agreement dated September 13, 1996, and paid the former executive
$165,000, representing severance, bonus and legal expenses.
NOTE 5 - STOCK OPTIONS AND WARRANTS
The Company has granted 43,200 options to purchase Common Stock during the six
month period ended December 31, 1996 pursuant to an agreement with an executive
officer. 14,400 options were granted on each of the following dates based upon
the achievement of certain performance goals: October 9, 1996, November 22, 1996
and December 30, 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 connection
with these grants, the Company will recognize compensation expense of $469,000
over the four-year vesting period.
Concurrent with the closing of the public offering, 3,533 shares of Common Stock
were issued pursuant to the exercise of a warrant by a selling stockholder.
On November 22, 1996, warrants to acquire 113,227 shares of Common Stock at
$0.0014 per share were exercised.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 VS. THREE MONTHS ENDED DECEMBER 31, 1995
REVENUES. Revenues increased 31% to $18.4 million for the quarter ended
December 31, 1996 from $14.1 million for the quarter ended December 31, 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 1.7 million
members at December 31, 1996 from 1.3 million members at December 31, 1995. 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 new programs
introduced in fiscal 1996. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees. Revenues from renewals increased to $8.0 million in 1996 from $5.5 million
in 1995. As a percentage of individual membership revenues, these amounts
represented 44% in 1996 and 40% in 1995.
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
39% to $4.0 million in 1996 from $2.9 million in 1995. As a percentage of
revenues, operating expenses increased to 21.9% in 1996 from 20.5% in 1995.
These increases were primarily due to the Company opening a new membership
service facility in Houston, Texas which commenced operations during the June
1996 quarter.
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 24% to $11.9 million in
1996 from $9.6 million in 1995. The increase was due primarily to increased
solicitation costs and increased royalty expense associated with the larger
membership base. As a percentage of revenues, marketing expenses decreased to
64.8% in 1996 from 68.3% in 1995. The decrease was due to an increase in
renewal revenues as a percentage of total revenues and the favorable effect of
an increase in the weighted average program fee.
In addition to marketing expenses, the Company also monitors overall
membership solicitation and other deferred costs, which are amortized ratably
over the membership period. These costs increased 41% to $15.1 million in 1996
from $10.7 million in 1995 primarily due to increased marketing efforts incurred
to expand the membership base.
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 28% to $4.1 million in
1996 from $3.2 million in 1995. The increase was attributable to the cost
incurred for additional personnel in all areas and related facilities costs. The
additional personnel were necessary to support the Company's growth and
expansion. As a percentage of revenues, general and administrative expenses
decreased to 22.4% in 1966 from 22.9% in 1995.
OTHER (INCOME) EXPENSE, NET. Other (income) expense, net is primarily
composed of interest income from cash and cash equivalents, partially offset by
financing charges relating to notes payable, equipment leases and other debt.
Other income, net of $200,000 was reported in 1996 compared to $18,000 reported
in 1995. The increase in other income, net was due to the increase in cash and
cash equivalents resulting from the proceeds of the initial public offering
completed on October 23, 1996. The Company invests in short-term,
investment-grade, interest bearing securities, and 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 was not required to record a
provision for income taxes for the quarters ended December 31, 1996 and 1995 due
to its net operating losses.
10
<PAGE> 11
SIX MONTHS ENDED DECEMBER 31, 1996 VS. SIX MONTHS ENDED DECEMBER 31, 1995
REVENUES. Revenues increased 33% to $35.6 million for the six months
ended December 31, 1996 from $26.8 million for the six months ended December 31,
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 1.7
million members at December 31, 1996 from 1.3 million members at December 31,
1995. 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 new
programs introduced in fiscal 1996. The increase in the weighted average program
fee was due to an increase in the percentage of members enrolled in programs
with higher fees. Revenues from renewals increased to $15.4 million in 1996 from
$10.6 million in 1995. As a percentage of individual membership revenues, these
amounts represented 44% in 1996 and 40% in 1995.
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
45% to $7.8 million in 1996 from $5.4 million in 1995. As a percentage of
revenues, operating expenses increased to 21.9% in 1996 from 20.1% in 1995.
These increases were primarily due to the new membership service facility in
Houston, Texas which commenced operations during the June 1996 quarter.
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 24% to $23.2 in 1996 from
$18.8 million in 1995. The increase was due primarily to increased solicitation
costs and increased royalty expense associated with the larger membership base.
As a percentage of revenues, marketing expenses decreased to 65.0% in 1996 from
70.1% in 1995. The decrease was due to the favorable effect of an 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, which are amortized ratably
over the membership period. These costs increased 33% to $29.2 million in 1996
from $21.9 million in 1995 primarily due to increased marketing efforts incurred
to expand the membership base.
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 50% to $7.9 million in
1996 from $5.3 million in 1995. As a percentage of revenues, general and
administrative expenses increased to 22.3% in 1996 from 19.8% in 1995. The
increase was attributable to the cost incurred for additional personnel in all
areas and related facilities costs. The additional personnel were necessary to
support the Company's growth and expansion.
OTHER (INCOME) EXPENSE, NET. Other (income) expense, net is primarily
composed of interest income from cash and cash equivalents, partially offset by
financing charges relating to notes payable, equipment leases and other debt.
Net interest income of $208,000 was reported in 1996 compared to net interest
expense of $282,000 reported in 1995. Interest income increased due to the
increase in cash and cash equivalents resulting from the proceeds of the initial
public offering completed on October 23, 1996. In addition, interest expense
decreased due to the reduction of notes payable in September 1995. The Company
invests in short-term, investment-grade, interest bearing securities, and 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 was not required to record a
provision for income taxes for the six month periods ended December 31, 1996 and
1995 due to its net operating losses.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded operations primarily through
private sales of securities. The Company sold 2,400,000 shares of its Common
Stock in an initial public offering on October 18, 1996. Net proceeds of the
offering (after deducting underwriting discounts and commissions and estimated
offering expenses) approximated $36.4 million. Approximately $2.5 million of the
net proceeds was utilized to redeem all outstanding shares of Series E and
Series F Preferred Stock on October 23, 1996.
Net cash provided by operating activities was $556,000 and $164,000 for
the six months ended December 31, 1996 and 1995, respectively. These results
were attributable to the Company's strategy to use substantially all of its cash
generated from operating activities to fund costs required to increase its
membership base. The Company's capital expenditures were $2,256,000 in 1996 and
$716,000 in 1995. The increased expenditures were primarily related to an
upgrade of the Company's mainframe computer system and the Company's new
membership services facility opened in the June 1996 quarter.
On January 24, 1997, the Company's Board of Directors authorized the
repurchase, as conditions warrant, of up to 150,000 shares of the Company's
Common Stock. The repurchased shares will be used to provide Common Stock
required for exercises of options granted by the Company under its employee
stock option plans.
Working capital at December 31, 1996 was $10.0 million compared to
negative working capital of $19.0 million at June 30, 1996. This improvement
reflects the receipt of net proceeds from the initial public offering.
Because of ongoing costs in connection with soliciting new members, the Company
expects to incur operating and net losses at least through fiscal 1997. The
Company believes that the net proceeds from the initial public offering,
together with its existing cash balances and funds generated from operations
will be sufficient to meet its funding requirements for at least the next 18
months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve
risks and uncertainties, including the statements in Liquidity and Capital
Resources regarding expectations of future losses and the adequacy of funds to
meet funding requirements. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. A number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, the Company's history of losses, the Company's
ability to retain existing clients and attract new clients, the Company's
dependence on membership renewals, intense competition, the Company's continuing
ability to develop new programs which generate consumer interest, and general
economic factors.
The Company has incurred significant operating losses since its
inception. 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.
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. 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. 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.
12
<PAGE> 13
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS (CONT'D)
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. 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.
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. 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.
13
<PAGE> 14
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 4 to the condensed consolidated financial
statements.
Item 2. Changes in Securities
Refer to Note 4 to the condensed consolidated financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Statement re: Computation of Per
Share Earnings (Unaudited)
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Company during the quarter ended December
31, 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
MEMBERWORKS INCORPORATED
(Registrant)
Date: February 14, 1997 By: /s/ Gary A. Johnson
--------------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: February 14, 1997 By: /s/ James B. Duffy
--------------------------------------
James B. Duffy, Senior Vice President,
Chief Financial Officer
</TABLE>
15
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MEMBERWORKS INCORPORATED
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1996
------------------ ----------------
<S> <C> <C>
Net loss $ (1,470) $ (3,068)
Preferred stock dividends and accretion (578) (980)
-------- --------
Net loss attributable to common stock $ (2,048) $ (4,048)
======== ========
Weighted average number of common shares outstanding 14,128 13,137
======== ========
Net loss per share $ (0.14) $ (0.31)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1996
------------------ ----------------
<S> <C> <C>
Net loss $ (1,470) $ (3,068)
Preferred stock dividends and accretion (510) (537)
======== ========
$ (1,980) $ (3,605)
======== ========
Weighted Average number of common shares outstanding 14,008 13,077
Assumed redemption of Series E and F preferred stock as of the
beginning of the period 149 146
======== ========
Weighted average number of common shares outstanding as adjusted 14,157 13,223
======== ========
Supplementary net loss per share $ (0.14) $ (0.27)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1995 1995
------------------ ----------------
<S> <C> <C>
Net loss $ (1,641) $ (2,938)
Preferred stock dividends -- (154)
-------- --------
Net loss attributable to common stock $ (1,641) $ (3,092)
======== ========
Weighted average number of shares of Class A common stock
and Common Stock outstanding 5,683 5,683
Automatic conversion of Series A, B, C, D and H
preferred stock and redemption of Series E and F preferred stock 6,610 6,610
Stock options granted one year prior to filing 448 448
-------- --------
Weighted average number of common shares outstanding as adjusted 12,741 12,741
======== ========
Pro forma net loss per share $ (0.13) $ (0.24)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,926,000
<SECURITIES> 0
<RECEIVABLES> 5,377,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71,773,000
<PP&E> 7,571,000
<DEPRECIATION> 2,012,000
<TOTAL-ASSETS> 77,688,000
<CURRENT-LIABILITIES> 61,734,000
<BONDS> 0
0
0
<COMMON> 148,000
<OTHER-SE> 15,028,000
<TOTAL-LIABILITY-AND-EQUITY> 77,688,000
<SALES> 0
<TOTAL-REVENUES> 35,620,000
<CGS> 0
<TOTAL-COSTS> 38,896,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (208,000)
<INCOME-PRETAX> (3,068,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,068,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,068,000)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> 0
</TABLE>
