<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, 1997
Commission File No. 0-21527
MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
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)
(203) 324-7635
(Registrant's telephone number,
including area code)
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 the Registrant's capital stock:
14,796,017 shares of Common Stock, $0.01 par value as of January 31, 1998.
<PAGE> 2
MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997. 3
Condensed Consolidated Statements of Operations for the three and six
month periods ended December 31, 1997 and 1996. 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended December 31, 1997 and 1996. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Certain Factors That May Affect Future Results 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 10
Item 4. Submission of matters to a vote of security holders 10
Item 6. Exhibits and Reports on Form 8-K 10
2
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------- ------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 41,073 $ 40,758
Accounts receivable 4,998 3,193
Prepaid membership materials 1,955 1,678
Prepaid expenses 675 284
Membership solicitation and other deferred costs 37,923 31,773
------------ -----------
Total current assets 86,624 77,686
Fixed assets, net 7,367 6,377
Other assets 299 360
------------ -----------
$ 94,290 $ 84,423
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 673 $ 724
Accounts payable 14,186 13,854
Accrued liabilities 17,300 13,904
Deferred membership fees 48,637 41,473
----------- -----------
Total current liabilities 80,796 69,955
Long-term obligations 141 438
----------- -----------
Total liabilities 80,937 70,393
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value --
40,000 shares authorized; 15,025 shares issued
(14,942 shares at June 30, 1997) 150 149
Capital in excess of par value 59,707 59,472
Deferred compensation (1,212) (1,445)
Accumulated deficit (42,338) (43,158)
Treasury stock, 324 shares at cost (221 shares at June 30, 1997) (2,954) (988)
----------- -----------
Total shareholders' equity 13,353 14,030
----------- -----------
$ 94,290 $ 84,423
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues from membership fees $ 27,317 $ 18,424 $ 51,870 $ 35,620
Expenses:
Operating 5,759 4,026 10,846 7,803
Marketing 16,252 11,936 30,908 23,160
General and administrative 5,262 4,132 10,123 7,933
Other income, net principally interest (429) (200) (827) (208)
----------- ----------- ----------- -----------
Total expenses 26,844 19,894 51,050 38,688
----------- ----------- ----------- -----------
Income (loss) before income taxes 473 (1,470) 820 (3,068)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net income (loss) $ 473 $ (1,470) $ 820 $ (3,068)
=========== =========== =========== ===========
Earnings per share (note 2):
Basic $ 0.03 $ (0.14) $ 0.06 $ (0.31)
============ =========== ============ ===========
Diluted $ 0.03 $ (0.14) $ 0.05 $ (0.31)
============ =========== ============ ===========
Shares used in EPS calculations:
Basic 14,721 14,128 14,728 13,137
=========== =========== =========== ===========
Diluted 16,176 14,128 16,179 13,137
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
---------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 820 $ (3,068)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Membership solicitation and other deferred costs (40,045) (29,225)
Amortization of membership solicitation and other deferred costs 33,895 26,184
Deferred membership fees 7,164 4,485
Depreciation and amortization 776 577
Other 280 190
Change in assets and liabilities affecting operating cash flows:
Accounts receivable (1,805) 1,062
Prepaid membership materials (277) (353)
Prepaid expenses (391) (122)
Other assets 12 (14)
Accounts payable 332 (521)
Accrued liabilities 3,396 1,361
----------- -----------
Net cash provided by operating activities 4,157 556
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets (1,749) (2,256)
----------- -----------
Net cash used in investing activities (1,749) (2,256)
----------- -----------
FINANCING ACTIVITIES
Payments of long-term obligations (348) (585)
Treasury stock purchases (1,966) -
Proceeds from issuance of Common Stock 221 36,448
Redemption of preferred stock - (2,549)
----------- -----------
Net cash (used in) provided by financing activities (2,093) 33,314
----------- -----------
Net increase in cash and cash equivalents 315 31,614
Cash and cash equivalents at beginning of period 40,758 4,312
----------- -----------
Cash and cash equivalents at end of period $ 41,073 $ 35,926
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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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, such statements 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 and six month
periods ended December 31, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ended June 30, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K with respect to the fiscal year ended
June 30, 1997.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted earnings per share amounts are determined in accordance with
the provisions of FASB Statement No. 128 "Earnings per Share" (FAS 128). The
adoption of the provisions of FAS 128 did not have a significant impact on prior
period earnings per share calculations. Basic and diluted earnings per share are
calculated as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 473 $ (1,470) $ 820 $ (3,068)
Preferred stock dividends and accretion - (578) - (980)
----------- ----------- ----------- -----------
Income (loss) available to common shareholders $ 473 $ (2,048) $ 820 $ (4,048)
============ =========== = ============ ===========
Weighted average shares for basic EPS 14,721 14,128 14,728 13,137
Effect of dilutive stock options and warrants 1,455 - 1,451 -
------------ ----------- ------------ -----------
Weighted average shares for diluted EPS 16,176 14,128 16,179 13,137
=========== =========== =========== ===========
Basic earnings per share $ 0.03 $ (0.14) $ 0.06 $ (0.31)
============ =========== ============ ===========
Diluted earnings per share $ 0.03 $ (0.14) $ 0.05 $ (0.31)
============ =========== ============ ===========
</TABLE>
NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of June 30, 1997 and December 31, 1997 include an allowance for
membership cancellations of $11,401,000 and $14,864,000, respectively.
6
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors intended to enhance its existing relationships between businesses and
consumers. The Company derives its revenues principally from annually renewable
membership fees. The Company receives full payment of annual fees at or near the
beginning of the membership period, but recognizes revenue ratably over the
membership period. Similarly, the costs associated with soliciting each new
member, as well as the cost of royalties, printing and mailing of membership
materials are amortized ratably over the same period. Profitability and cash
flow generated from renewal memberships exceed that of new memberships due to
the absence of solicitation costs associated with new member procurement.
THREE MONTHS ENDED DECEMBER 31, 1997 VS. THREE MONTHS ENDED DECEMBER 31, 1996
REVENUES. Revenues increased 48% to $27.3 million for the quarter ended
December 31, 1997 from $18.4 million for the quarter ended December 31, 1996 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 approximately
2.3 million members at December 31, 1997 from 1.7 million members at December
31, 1996. The increase in the Company's membership base was due to an increase
in the members enrolled in existing programs and the roll-out of our new program
introduced in fiscal 1997. 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 $10.9 million in 1997 from $8.0
million in 1996. As a percentage of individual membership revenues, these
amounts represented 42% in 1997 and 44% in 1996.
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
43% to $5.8 million in 1997 from $4.0 million in 1996 due to the servicing
requirements of the larger membership base of the Company. As a percentage of
revenues, operating expenses decreased to 21.1% in 1997 from 21.9% in 1996.
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 36% to $16.3 million in 1997
from $11.9 million in 1996. 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
59.5% in 1997 from 64.8% in 1996. The decrease was due to the favorable effect
of an increase in the weighted average program fee, improved member retention
rates and an increase in revenues generated from wholesale arrangements. In
addition to marketing expenses, the Company also monitors the spending for
membership solicitation and other deferred costs, which are amortized ratably
over the membership period. These costs increased 48% to $22.4 million in 1997
from $15.1 million in 1996 primarily due to increased marketing efforts incurred
to grow 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 27% to $5.3 million in
1997 from $4.1 million in 1996. This increase was attributable to the costs
incurred for additional personnel in all areas and related facilities costs. As
a percentage of revenues, general and administrative expenses decreased to 19.3%
from 22.4%. The decrease in this percentage is due principally to revenues
increasing at a greater rate than general and administrative expenses.
7
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME, NET. Other income, net is primarily composed of interest
income from cash and cash equivalents, partially offset by financing charges
relating to notes payable and equipment leases. Other income of $429,000 was
reported in 1997 compared to $200,000 reported in 1996. This increase was due to
interest earned on higher average cash and cash equivalent balances outstanding
during 1997 compared to 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 quarter ended December 31, 1997 due to the
availability of accumulated net operating losses from prior years to offset
current period income.
SIX MONTHS ENDED DECEMBER 31, 1997 VS. SIX MONTHS ENDED DECEMBER 31, 1996
REVENUES. Revenues increased 46% to $51.9 million for the six months
ended December 31, 1997 from $35.6 million for the six months ended December 31,
1996 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
approximately 2.3 million members at December 31, 1997 from 1.7 million members
at December 31, 1996. The increase in the Company's membership base was due to
an increase in the members enrolled in existing programs and the roll-out of our
new program introduced in fiscal 1997. 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 $20.6 million in
1997 from $15.4 million in 1996. As a percentage of individual membership
revenues, these amounts represented 42% in 1997 and 44% in 1996.
OPERATING EXPENSES. Operating expenses increased 39% to $10.8 million
in 1997 from $7.8 million in 1996 due to the servicing requirements of the
larger membership base of the Company. As a percentage of revenues, operating
expenses decreased to 20.9% in 1997 from 21.9% in 1996.
MARKETING EXPENSES. Marketing expenses increased 34% to $30.9 million
in 1997 from $23.2 million in 1996. 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
59.6% in 1997 from 65.0% in 1996. The decrease was due to the favorable effect
of an increase in the weighted average program fee, improved member retention
rates and an increase in revenues generated from wholesale arrangements. 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 37% to $40.0 million in 1997 from $29.2
million in 1996 primarily due to increased marketing efforts incurred to expand
the membership base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 28% to $10.1 million in 1997 from $7.9 million in 1996. 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 19.5% in 1997 from 22.3% in 1996. The
decrease in this percentage is due principally to revenues increasing at a
greater rate than general and administrative expenses.
OTHER INCOME, NET. Other income, net of $827,000 was reported in 1997
compared to $208,000 reported in 1996. This increase is due to interest earned
on higher average cash and cash equivalent balances outstanding during 1997
compared to 1996.
PROVISION FOR INCOME TAXES. The Company was not required to record a
provision for income taxes for the six months ended December 31, 1997 due to the
availability of accumulated net operating losses from prior years to offset
current period income.
8
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $4.2 million in
1997 from $0.6 million in 1996 due to improved operating results in 1997
compared to 1996.
The Company's capital expenditures decreased to $1.7 million in 1997
from $2.3 million last year because 1996 capital expenditures included purchases
related to the opening of the Company's Houston, Texas member service facility.
The current level of capital expenditures for 1997 is primarily related to the
expansion of the Company's facilities to support increased personnel and the
expansion of the Company's computer systems.
Net cash used in financing activities was $2.1 million in 1997 compared
to net cash provided by financing activities of $33.3 million in 1996. The cash
used by financing activities in 1997 primarily consists of purchases made under
the Company's stock repurchase program which was authorized by the Company's
Board of Directors in January 1997. The cash provided by financing activities in
1996 was attributable to the Company's completion of its initial public offering
during the December 1996 quarter.
During the quarter ended December 31, 1997 the Company completed the
repurchase program authorized by the Board of Directors in January 1997. On
January 15, 1998, the Company's Board of Directors authorized the repurchase, as
conditions warrant, of up to an additional 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.
Because of ongoing costs in connection with soliciting new members, the
Company expects to continue to utilize net cash generated from operating
activities, if any, to increase the Company's membership base. The Company
believes that existing cash balances together with its available bank credit
facility, will be sufficient to meet its funding requirements for at least the
next twelve months.
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 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 and has reported net income in recent
quarterly periods, such growth rates and favorable results may not be
sustainable and may not be indicative of future operating results. There can be
no assurance that the Company will be able to maintain profitability in the
future.
9
<PAGE> 10
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
Item 2. Changes in Securities
The effective date of the registration statement pursuant to which the Company
conducted the public offering of its Common Stock was October 18, 1996 and the
file number was 333-10541. The Company filed its initial report on Form SR on
January 27, 1997 for the period ended January 18, 1997.
From the effective date of the registration statement filed in connection with
the offering to December 31, 1997, the net proceeds of the offering were used as
follows (in thousands):
<TABLE>
<S> <C>
Purchase and installation of machinery and equipment $ 4,079
Repayment of indebtedness 2,818
Working capital 3,920
----------
$ 10,817
==========
</TABLE>
The remaining $25,583,000 of the proceeds has been invested in short-term,
highly rated money market funds, government securities and commercial paper. Of
the $2,818,000 used to repay indebtedness, $1,855,000 represented direct or
indirect payments to directors, officers, general partners of the issuer or
their associates; to persons owning ten percent or more of any class of equity
securities of the issuer; and to affiliates of the issuer.
Item 4. Submission of matters to a vote of security holders
a) MemberWorks Incorporated's 1997 Annual Meeting of Stockholders was held on
November 20, 1997.
b) At the annual meeting the following Class I Directors were elected to the
Board of Directors as follows: Alec L. Ellison: For - 13,475,792, Withheld -
662,000, Abstain - 6,465, Nonvotes - 596,579; Marc S. Tesler: For - 14,137,792,
Withheld - 0, Abstain - 6,465, Nonvotes - 596,579. Class II Directors, Stephen
J. Clearman and Michael R. O'Brien, and Class III Directors, Gary A. Johnson and
Dennis P. Walker, continue to serve as Directors of the Company.
c) The ratification of Price Waterhouse LLP, as the Company's independent
auditor, was also approved at the annual meeting as follows: For - 13,479,587,
Against - 664,500, Abstain - 170, Nonvotes - 596,579.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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, 1997.
10
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MEMBERWORKS INCORPORATED
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.
MEMBERWORKS INCORPORATED
(Registrant)
Date: February 9, 1998 By: /s/ Gary A.Johnson
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: February 9, 1998 By: /s/ James B.Duffy
James B. Duffy, Senior Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 41,073
<SECURITIES> 0
<RECEIVABLES> 4,998
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,624
<PP&E> 10,825
<DEPRECIATION> 3,458
<TOTAL-ASSETS> 94,290
<CURRENT-LIABILITIES> 80,796
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 13,203
<TOTAL-LIABILITY-AND-EQUITY> 94,290
<SALES> 0
<TOTAL-REVENUES> 51,870
<CGS> 0
<TOTAL-COSTS> 51,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (827)
<INCOME-PRETAX> 820
<INCOME-TAX> 0
<INCOME-CONTINUING> 820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 820
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.05
</TABLE>
