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As filed with the Securities and Exchange Commission on March 31, 1998
Registration Statement No. 333 - 47619
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
AMENDMENT NO. 1
TO
FORM S-3
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
----------------------------
DELAWARE 06-1276882
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
680 Washington Blvd.
Suite 1100
Stamford, CT 06901
(203) 324-7635
------------------------------
GARY A. JOHNSON
President and Chief Executive Officer
680 Washington Blvd.
Suite 1100
Stamford, CT
(203) 324-7635
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
Copy to:
Thomas L. Barrette, Jr., Esq.
HALE AND DORR LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
Approximate date of commencement of proposed sale to public: From time
to time after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [__]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registrations statement number of the earlier
effective registration statement for the same offering. [__]
If this Form is a post-effective statement amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [__]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [__]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to completion dated March 31, 1998
500,825 Shares
MEMBERWORKS INCORPORATED
Common Stock
--------------------------
The 500,825 shares (the "Shares") of Common Stock of MemberWorks
Incorporated, a Delaware corporation ("MemberWorks" or the "Company"), offered
by this Prospectus were issued in connection with the merger of a wholly-owned
subsidiary of MemberWorks with and into Coverdell & Company, Inc., a Georgia
corporation ("Coverdell"), which was consummated on April 2, 1998 (the
"Merger"). The Shares may be sold from time to time by or on behalf of certain
former stockholders of Coverdell (the "Selling Shareholders") who are described
in this Prospectus under "Selling Shareholders." As part of the Merger, the
Company has agreed to register the Shares under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has also agreed to use its best
efforts to cause the registration statement covering the Shares to remain
effective until June 30, 1998, provided the Company is then making available
"current public information" within the meaning of Rule 144(c) under the
Securities Act (and if such information is not then being made available by the
Company, then until the first date thereafter that the Company is making such
information available). The Company will not receive any of the proceeds from
the sale of the Shares by the Selling Shareholders. See "Use of Proceeds."
The Selling Shareholders may from time to time sell the shares covered
by this Prospectus on the Nasdaq National Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at the time of sale or at negotiated prices. See "Plan of
Distribution." The shares are quoted on the Nasdaq National Market under the
symbol "MBRS".
The Company will bear all out-of-pocket expenses incurred in connection
with the registration of the Shares, including, without limitation, all
registration and filing fees imposed by the Securities and Exchange Commission
(the "Commission"), the National Association of Securities Dealers ("NASD") and
blue sky laws, printing expenses, transfer agents' and registrars' fees, and the
reasonable fees and disbursements of the Company's outside counsel and
independent accountants, but excluding underwriting discounts and commissions
and transfer or other taxes and other costs and expenses incident to the
offering and sale of the shares to the public which shall be borne by the
Selling Shareholders.
The shares offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 8 hereof.
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--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is , 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials also may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, the Company is required to file electronic
versions of these materials 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. The shares of the Company are
traded on the Nasdaq National Market. Reports and other information concerning
the Company may be inspected at the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto, as certain items are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the Company
and the Shares offered hereby, reference is made to such Registration Statement
and the exhibits and schedules thereto, which may be inspected without charge at
the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of which may be obtained from the Commission at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997;
(2) The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended September 30, 1997 and December 31, 1997; and
(3) The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A and any amendments or reports filed for the
purpose of updating such description.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
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reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents incorporated by reference into this Prospectus
(without exhibits to such documents other than exhibits specifically
incorporated by reference into such documents). Requests for such copies should
be directed to: the Chief Financial Officer of the Company, 680 Washington
Blvd., Suite 1100, Stamford, Connecticut 06901, (203) 324-7635.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. 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 its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
SELECTED FINANCIAL INFORMATION
The selected consolidated statements of operations data for each of the
years ended June 30, 1993, 1994, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements incorporated herein by reference and
for the three months ended September 30, 1996 and 1997 set forth below are
derived from the unaudited consolidated financial statements of the Company
incorporated herein by reference. The earnings (loss) per share data has been
restated for all periods presented in accordance with the Statement of
Financial Accounting Standards No. 128, "Earnings per Share".
<TABLE>
<CAPTION>
Year Ended June 30, Three Months Ended September 30,
----------------------------------------------- --------------------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data) (in thousands, except per share data)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from membership fees $17,269 $25,830 $ 41,547 $57,012 $79,174 $17,196 $24,553
Total expenses 21,527 31,846 52,279 62,259 83,032 18,794 24,206
------- ------- -------- ------- ------- ------- -------
Net (loss) income ($4,258) ($6,016) ($10,732) ($5,247) ($3,858) ($1,598) $ 347
======= ======= ======== ======= ======= ======= =======
Basic (loss) earnings per share
and diluted (loss) earnings
per share ($ 0.45) ($ 0.64) ($ 1.14) ($ 0.49) ($ 0.35) ($ 0.14) $ 0.02
======= ======= ======== ======= ======= ======= =======
Weighted average common shares
outstanding 9,420 9,768 9,953 11,956 13,901 12,146 14,736
Weighted average common shares
and common equivalent shares
outstanding for dilutive
calculation 9,420 9,768 9,953 11,956 13,901 12,146 16,182
</TABLE>
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THE COMPANY
The following summary is qualified by the more detailed information
appearing elsewhere in this prospectus or incorporated herein by reference.
Certain of the information contained in this prospectus or incorporated herein
by reference, including information with respect to the Company's plans and
strategies for its business, are forward-looking statements. For a discussion of
important factors that could cause actual results to differ materially from
these forward-looking statements, see "Risk Factors."
The Company believes, based on its senior management's 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 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 these programs. In return for
providing the Company with customer lists, the Company's clients receive royalty
payments. Clients also benefit because the programs are designed and managed to
strengthen the relationship between clients and their customers. The Company
offers its programs to increasingly sophisticated consumers seeking economy,
efficiency and convenience in their purchase 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. 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 primarily marketed to credit card holders
through arrangements with its client organizations including banks, retailers,
major oil companies and other credit card issuers.
The Company's nine membership service programs, which combined had
approximately 2.3 million members as of December 31, 1997, 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 $107 per year during fiscal 1997. The Company can
create customized service programs for clients based on elements of its standard
programs. Currently, the Company markets the following nine programs.
- - Health Trends(R) 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.
- - The Countrywide Dental Program(R) ("CDP") consists of a network of
independent dentists in 47 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.
- - The Countrywide Dental and Health Program(sm) 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, hearing aids and chiropractic
benefits.
- - Travel Arrangements(sm) is a comprehensive discount travel program that
offers substantial savings and convenience on a broad range of
business, leisure, and vacation travel services.
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- - Connections(sm) 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.
- - Leisure Advantage(sm) provides discounts on many types of sports and
athletic merchandise, apparel, and services.
- - MoneyMaster(sm) 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.
- - Home PC Link(sm) 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.
- - Essentials(sm) offers fitness, fashion and beauty services for men and
women, through discounts on clothing, haircuts, health clubs and
nutrition counseling.
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
average approximately 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.
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The Company believes that it was the first membership company to
introduce aggregated discount services in the areas of health, sports, fashion
and beauty, 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.
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.
The Company is also actively developing new distribution channels.
MemberLink(sm) is an arrangement where inbound callers to a client, meeting
certain criteria, are offered the Company's membership service programs by a
client's service representative or by a MemberWorks membership service
representative through a call transfer.
On the date of this Prospectus, the Company will have completed its
merger with Coverdell & Company, Inc. ("Coverdell"), pursuant to which
Coverdell, a leading direct marketer of life, accident and health insurance
products to checking account customers of large financial institutions, became a
wholly-owned subsidiary of the Company. Under the terms of the agreement,
Coverdell's stockholders received approximately 500,825 shares of the Company's
Common Stock and three million dollars in cash in exchange for all outstanding
shares of Coverdell. The acquisition of Coverdell will be accounted
for as a purchase under the purchase method of accounting.
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RISK FACTORS
From time to time, information provided by the Company or statements
made by its employees may contain forward-looking information. The Company's
actual future results may differ materially from those projections or
suggestions made in such forward-looking information as a result of various
potential risks and uncertainties, including, but not limited to, the factors
discussed below.
HISTORY OF LOSSES
The Company has historically incurred significant operating losses. As
of December 31, 1997, the Company had an accumulated deficit of approximately
$42.3 million. For fiscal years 1997 and 1996, the Company incurred net losses
of approximately $3.9 million and $5.2 million, respectively. 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 maintain profitability in the future.
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. There can be no assurance that the Company will continue to obtain such
approvals.
Approximately 44.5% of the Company's revenues for the year ended June
30, 1997 was attributable to members solicited from the customer lists provided
by two key clients. 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.
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.
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FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of customer orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; the availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected revenues for a given quarter are not
achieved. There also can be no assurance that future acquisitions, such as the
acquisition of Coverdell, and others, 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.
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. 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 Cendant Corporation ("Cendant"). 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 Cendant, 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.
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
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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.
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.
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 1997. 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.
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 $79.2
million in fiscal 1997. In addition, the number of employees increased from 76
to approximately 500 during the same period. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
its work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations,
and the failure to support the Company's operations effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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
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direct marketing tool may decrease as a result of increased consumer resistance
to telemarketing in general.
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.
RELIANCE ON COMPUTER AND COMMUNICATIONS SYSTEMS; TECHNOLOGY RISKS
The Company's business is highly dependent on its computer and
telecommunications systems and any temporary or permanent loss of either system,
for whatever reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
technologies on which the Company is dependent to compete effectively and meet
its clients' needs are rapidly evolving and in many instances are characterized
by short product life cycles or innovation. As a result, the company is
dependent on ongoing, significant investment in advanced computer and
telecommunications technology, including automated call distributors and digital
switches, and its ability to anticipate and adapt to technological shifts. There
can be no assurance that the Company will be successful in anticipating or
adapting to technological changes or in selecting and developing new and
enhanced technology on a timely basis.
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.
-11-
<PAGE> 14
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 access
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.
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
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.
YEAR 2000 ISSUES
The Company has analyzed its computer hardware and software in
connection with dating problems that may arise with dates in the year 2000 or
after and has taken action to resolve issues identified. The Company has
determined that resolving issues related to this problem should not have a
material impact on its financial or operating performance.
POSSIBLE VOLATILITY OF STOCK 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 Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of the Company's Common Stock in
the public market following this merger could adversely affect the market price
of the Company's Common Stock received by Coverdell Shareholders. Upon closing
of the Merger, based upon the number of shares of the
-12-
<PAGE> 15
Company's Common Stock outstanding at December 31, 1997, assuming no exercise
after December 31, 1997 of outstanding stock options, and the issuance of
500,825 shares of the Company's Common Stock in connection with the Merger,
there will be 15,201,692 shares of Common Stock of the Company outstanding. It
is a condition to the closing of the Merger that Mr. Paul Coverdell is satisfied
that the Coverdell family will be able to sell substantially all of the
Company's shares delivered to them at the bid price at the close of the trading
day immediately preceding the closing date of the Merger. The Coverdell Family
currently intends to sell those shares as soon as practicable. These sales, as
well as the expectation of such sales, could adversely affect the market price
for the Company's Common Stock. Sales of the Company Common Stock by other
Coverdell Shareholders, or the expectation thereof may have an additional
adverse effect on such market price.
CONTROL BY DIRECTORS AND OFFICERS
Upon completion of the Merger, the Company's officers and directors and
their affiliates will beneficially own approximately 46% of the Company's
outstanding Common Stock, assuming 500,825 shares are issued in connection with
the Merger. These stockholders, 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.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Charter")
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Charter provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least two-thirds of the
shares of capital stock of the Company entitled to vote. In addition, shares of
the Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Preferred Stock that may be issued in the
future. The Company has no present plans to issue any shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions, and other provisions of the Charter, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests.
-13-
<PAGE> 16
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of shares by
the Selling Shareholders.
SELLING SHAREHOLDERS
The Selling Shareholders hold Shares which were issued by the Company
in the Merger. If all Shares offered by the Selling Shareholders are sold, the
Selling Shareholders will no longer own any Shares. The Selling Shareholders
have not held any positions or offices with, been employed by, or otherwise had
a material relationship with the Company within the last three years.
<TABLE>
<CAPTION>
Number of
Name of Selling Shares Beneficially Shares
SHAREHOLDER OWNED PRIOR TO THE OFFERING BEING OFFERED
<S> <C> <C>
Paul D. Coverdell 226,383 226,383
Paul D. Coverdell and Vonis W. 56,589 56,589
Coverdell, Trustees of the Residual
Trust created under the will of Eldon
Paul Coverdell
Coverdell & Company, Inc. 401(K) 46,637 46,637
Wealth Accumulation Plan
John J. Scroggin and Jeff B. Miller as 32,800 32,800
Co-Trustees of the Milner Family
Irrevocable Trust
Nancy Coverdell 21,763 21,763
Todd S. Nicholson 18,970 18,970
Michael D. Levison 46,423 46,423
Advest for the Benefit of Michael D. 1,474 1,474
Levison
Michael L. Owens 24,269 24,269
Michael L. Owens, Trustee F/B/O 1,105 1,105
Executive Management, Inc. Profit
Sharing Plan Trust
Betty R. Milner 6,013 6,013
Howard Palmer 4,100 4,100
Sexias G. Milner 2,296 2,296
John Horn 1,349 1,349
</TABLE>
-14-
<PAGE> 17
<TABLE>
<CAPTION>
Number of
Name of Selling Shares Beneficially Shares
SHAREHOLDER OWNED PRIOR TO THE OFFERING BEING OFFERED
<S> <C> <C>
Martin Blane Clark 1,026 1,026
Angela Dawn Clark 1,026 1,026
Patricia Michelle Fritts 1,026 1,026
William Allen Fritts 1,026 1,026
Charles Schwab 951 951
Custodian FBO David A. Webber
Daniel J. Locke 885 885
S. Jarvin Levison 737 737
First National Bank of Onaga 674 674
Custodian FBO, Thomas Atkins
John E. Bohan 674 674
First National Bank of Onaga 674 674
Custodian FBO, Roy Cail, IRA
Draft Company 674 674
Warren G. Malkerson 674 674
First National Bank of Onaga 337 337
Custodian FBO, Philip L. Hanson
Ford J. Nicholson 270 270
</TABLE>
PLAN OF DISTRIBUTION
The shares covered hereby may be offered and sold from time to time by
the Selling Shareholders. The Selling Shareholders will act independently of the
Company in making decisions with respect to the timing, manner and size of each
sale, but may act together with other Selling Shareholders. Such sales may be
made in the over-the-counter market or otherwise, at prices related to the then
current market price or in negotiated transactions, including pursuant to an
underwritten offering or one or more of the following methods: (a) purchases by
a broker-dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (b) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (c) block trades in
which the broker-dealer so engaged will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction. In effecting sales, broker-dealers engaged by the Selling
Shareholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or discounts from the Selling Shareholders in amounts
to be negotiated immediately prior to the sale. The Company will indemnify the
Selling Shareholders against certain liabilities, including liabilities under
the Securities Act.
In offering the shares covered hereby, the Selling Shareholders and any
broker-dealers and any other participating broker-dealers who execute sales for
the Selling Shareholders may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales, and any profits realized by
the Selling Shareholders and the compensation of such broker-dealer may be
deemed to be underwriting discounts and commissions.
-15-
<PAGE> 18
The Company has advised the Selling Shareholders that during such time
as they may be engaged in a distribution of shares included herein they are
required to comply with Rules 10b-6 and 10b-7 under the Exchange Act and, in
connection therewith, that they may not engage in any stabilization activity in
connection with the Company's securities, are required to furnish to each
broker-dealer through which shares included herein may be offered copies of this
Prospectus, and may not bid for or purchase any securities of the Company or
attempt to induce any person to purchase any of the Company's securities except
as permitted under the Exchange Act. The Selling Shareholders have agreed to
inform the Company when the distribution of the shares is completed.
Rule 10b-6 under the Exchange Act prohibits, with certain exceptions,
participants in a distribution from bidding for or purchasing, for an account in
which the participant has a beneficial interest, any of the securities that are
the subject of the distribution. Rule 10b-7 governs bids and purchases made in
order to stabilize the price of a security in connection with a distribution of
the security.
This offering will terminate on the earlier of (a) June 30, 1998 or (b)
the date on which all shares offered hereby have been sold by the Selling
Shareholders.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon by Hale
and Dorr LLP.
EXPERTS
The consolidated financial statements incorporated in this Prospectus
by reference to the Company's Annual Report on Form 10-K for the year ended June
30, 1997, have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
-16-
<PAGE> 19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
NATURE OF EXPENSE
SEC Registration Fee............................................... $ 7,895.00
NASDAQ National Market Listing Fee................................. $17,500.00
Legal Fees and Expenses............................................ $20,000.00
Miscellaneous...................................................... $ 7,105.00
TOTAL $52,500.00
Item 15. Indemnification of Directors and Officers.
Except as hereinafter set forth, there is no provision of the Company's
Certificate of Incorporation or any contract, arrangement or statute under which
any director or officer of the Company is insured or indemnified in any manner
against any liability that he may incur in his capacity as such.
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article Ninth of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorney's fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determined that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which
II-1
<PAGE> 20
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article Ninth of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Item 16. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
<S> <C> <C>
4.1* -- Certificate of Incorporation of the Company...........................
4.2* -- By-laws of the Company................................................
4.3* -- Specimen Certificate for Shares of the Company........................
5.1** -- Opinion of Hale and Dorr LLP..........................................
23.1 -- Consent of Price Waterhouse LLP....................................... II-5
23.2** -- Consent of Hale and Dorr (included in Exhibit 5.1)....................
24.1** -- Power of Attorney.....................................................
</TABLE>
- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1 and
incorporated herein by reference (File No. 333-10541)
** Previously filed.
Item 17. Undertakings.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post effective amendment to this Registration Statement to include any
material information with respect to the plan
II-2
<PAGE> 21
of distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the indemnification provisions described herein, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut on the 30th day of
March, 1998.
MemberWorks Incorporated
By: /s/ Gary A. Johnson
---------------------------
Gary A. Johnson
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 30th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Gary A. Johnson President, Chief Executive Officer and Director
- ----------------------------------------- (Principal Executive Officer)
Gary A. Johnson
* Executive Vice President and Director
- -----------------------------------------
Dennis P. Walker
* Senior Vice President and Chief Financial Officer
- ----------------------------------------- (Principal Financial and Accounting Officer)
James B. Duffy
* Director
- -----------------------------------------
Stephen J. Clearman
* Director
- -----------------------------------------
Alec L. Ellison
* Director
- -----------------------------------------
Michael R. O'Brien
* Director
- -----------------------------------------
Marc S. Tesler
*By /s/ Gary A. Johnson
------------------------------------
Gary A. Johnson
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
July 29, 1997, which is referred to in Part IV, Item 14(a)(1) of the 1997 Annual
Report on Form 10-K for the year ended June 30, 1997. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which is referred to in Part IV, Item 14(a)(2) of the 1997 Annual Report on Form
10-K for the year ended June 30, 1997. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
New York, New York
March 30, 1998
II-5
