<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
APRIL 2, 1998
Date of Report (Date of
earliest event reported)
MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 0-21527 06-1276882
(State of Incorporation) (Commission File Number) (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)
<PAGE> 2
MEMBERWORKS INCORPORATED
Item 2. Acquisition or disposition of assets.
On April 2, 1998, pursuant to an Agreement and Plan of Reorganization dated as
of March 4, 1998, as amended by the First Amendment thereto dated March 10, 1998
(the "Coverdell Reorganization Agreement"), MemberWorks Incorporated, (the
"Registrant"), a Delaware Corporation, consummated a merger (the "Coverdell
Merger") whereby MW Acquisition Corp., a Georgia corporation and wholly owned
subsidiary of the Registrant ("Coverdell Merger Sub"), was merged with and into
Coverdell & Company, Inc., a Georgia corporation ("Coverdell"), with Coverdell
surviving the Coverdell Merger as a wholly owned subsidiary of the Registrant.
Coverdell was a privately-held direct marketer of life, accident and health
insurance products to customers of banks, financial institutions and other
organizations.
In the Coverdell Merger, which has been accounted for as a purchase for
accounting purposes, 732,011 shares of the common stock of Coverdell ("Coverdell
Common Stock"), $0.01 par value, issued and outstanding immediately prior to the
effective time of the Coverdell Merger (the "Coverdell Effective Time") were
exchanged for (i) $3.0 million in cash, financed with the Registrant's internal
cash; and (ii) 447,729 shares of common stock of the Registrant (having an
aggregate market value of approximately $13.6 million based on the closing price
of the Registrant's common stock on April 1, 1998 as quoted on the NASDAQ
National Market, of which 12,881 shares are restricted). In addition, each
option to purchase shares of Coverdell Common Stock outstanding immediately
prior to the Coverdell Effective Time was canceled and, in lieu thereof, the
Registrant has issued to each holder of each such canceled option a substitute
option to acquire, on substantially the same terms and subject to substantially
the same conditions as were applicable under the canceled option, the same
number of shares of Registrant Common Stock as the holder of each such option
would have been entitled to receive in the Coverdell Merger had such holder
exercised such canceled option in full immediately prior to the Coverdell
Effective Time.
The consideration received by holders of Coverdell Common Stock in the Coverdell
Merger and the other material terms of the Coverdell Reorganization Agreement
and related transaction documents were determined by arms'-length negotiation
between the Registrant and Coverdell.
Item 7. Financial statements and exhibits.
(a) Financial Statements of Coverdell & Company, Inc.:
Report of Independent Accountants
Balance Sheet as of December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Stockholders' Equity for the year ended
December 31, 1997
Statement of Cash Flows for the year ended December 31, 1997
Notes to Financial Statements
(b) Pro Forma Financial Information.:
Unaudited Pro Forma Consolidated Condensed Balance Sheet as of December
31, 1997
Unaudited Pro Forma Consolidated Condensed Statement of Operations for
the six months ended December 31, 1997
Unaudited Pro Forma Consolidated Condensed Statement of Operations for
the year ended June 30, 1997
Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements
<PAGE> 3
(c) Exhibits.
2.1* Agreement and Plan of Reorganization By and Among MemberWorks Incorporated,
MW Acquisition Corp., Coverdell & Company, Inc. and Certain Stockholders of
Coverdell & Company, Inc. Dated as of March 4, 1998.
2.2* First Amendment to Agreement and Plan of Reorganization By and Among
MemberWorks Incorporated, MW Acquisition Corp., Coverdell & Company, Inc. and
Certain Stockholders of Coverdell & Company, Inc. Dated as of March 10, 1998.
23.1 Consent of Coopers & Lybrand L.L.P.
* Previously filed with the Commission with initial Form 8-K on April 17, 1998.
<PAGE> 4
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, hereunto duly authorized.
MEMBERWORKS INCORPORATED
(Registrant)
Date: June 17, 1998 By: /s/ Gary A. Johnson
------------------------------
Gary A. Johnson, President,
Chief Executive Officer and Director
<PAGE> 5
COVERDELL & COMPANY, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT ACCOUNTANTS
Coverdell & Company, Inc.
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements:
Report of Independent Accountants 1
Balance Sheet as of December 31, 1997 2
Statement of Operations 3
for the year ended December 31, 1997
Statement of Changes in Stockholders' Equity 4
for the year ended December 31, 1997
Statement of Cash Flows 5
for the year ended December 31, 1997
Notes to Financial Statements 6-11
</TABLE>
<PAGE> 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Coverdell & Company, Inc.
We have audited the accompanying balance sheet of Coverdell & Company, Inc. as
of December 31, 1997, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence for the
supporting amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coverdell & Company, Inc. as of
December 31, 1997, and the result of its operations and cash flows for the year
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand, L.L.P.
- - -----------------------------
Atlanta, Georgia
February 13, 1998
- 1 -
<PAGE> 7
COVERDELL & COMPANY, INC.
BALANCE SHEET as of December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 2,324,582
Short-term investments 49,000
Accounts receivable 909,493
Income taxes receivable 32,906
Prepaid marketing expenses 316,029
Membership solicitation costs 1,347,210
-----------
Total current assets 4,979,220
Furniture and equipment, net of accumulated depreciation 438,015
Notes receivable from officers 890,531
-----------
Total assets $ 6,307,766
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 944,105
Net remittances due to carriers and clients 3,376,743
Deferred income taxes 80,019
-----------
Total current liabilities 4,400,867
Deferred income taxes 46,979
-----------
Total liabilities 4,447,846
-----------
Commitments and contingencies (Notes 3 and 10)
Stockholders' equity:
Class A common stock, par value $0.01 per share,
authorized 10,000,000 shares; issued and outstanding
762,719 shares 7,627
Class B common stock, par value $2 per share,
authorized 2 shares, no issued or outstanding shares --
Preferred stock, par value $1.00 per share, authorized
5,000,000 shares, no issued or outstanding shares --
Additional paid-in capital 1,144,981
Retained earnings 997,011
Less: Note receivable from ESOP (215,067)
Treasury stock at cost, 30,708 shares (57,987)
Notes receivable from officers for sale of
common stock shares (16,645)
-----------
Total stockholders' equity 1,859,920
-----------
Total liabilities and stockholders' equity $ 6,307,766
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE> 8
COVERDELL & COMPANY, INC.
STATEMENT OF OPERATIONS for the year ended December 31, 1997
<TABLE>
<S> <C>
Revenues 13,973,604
Expenses:
Operating 5,957,355
Production 1,265,100
Solicitation 7,406,795
------------
14,629,250
------------
Loss from operations (655,646)
Other income (expense):
Interest expense (19,531)
Gain on sale of land and building 143,533
Other income 192,444
------------
Loss before income tax (339,200)
Income tax benefit 145,326
------------
Net loss $ (193,874)
============
</TABLE>
The accompanying notes are an integral part of these financial statements
- 3 -
<PAGE> 9
COVERDELL & COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Class A Class A Preferred
Shares Amount Stock
--------- --------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1996 688,473 $6,885 --
Net loss
Reduction in note receivable
from ESOP
Common stock issued 74,246 742
------- ------ -----
Balance as of December 31, 1997 762,719 $7,627 --
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Retained Treasury
Capital Earnings Stock
----------- ---------- --------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 677,973 $1,190,885 $(57,987)
Net loss (193,874)
Reduction in note receivable
from ESOP
Common stock issued 467,008
----------- ---------- --------
Balance as of December 31, 1997 $ 1,144,981 $ 997,011 $(57,987)
=========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Note Note
Receivable Receivable
From From
ESOP Officers Total
--------- -------- ----------
<S> <C> <C> <C>
Balance as of December 31, 1996 $(295,130) $(16,645) $1,505,981
Net loss (193,874)
Reduction in note receivable
from ESOP 80,063 80,063
Common stock issued 467,750
--------- -------- ----------
Balance as of December 31, 1997 $(215,067) $(16,645) $1,859,920
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 10
COVERDELL & COMPANY
STATEMENT OF CASH FLOWS
for the year ended December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (193,874)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 159,070
Gain on sale of land and building (143,533)
Issuance of common stock in exchange for reduction in
long-term incentive 467,500
Change in deferred income taxes (91,412)
Changes in assets and liabilities:
Increase in accounts receivables (32,125)
Increase in prepaid marketing expenses and
membership solicitation costs (1,475,222)
Increase in accounts payable and accrued expenses 588,275
Decrease in income taxes payable 64,583
Increase in net remittances due to carriers and clients 413,409
-----------
Net cash used in operating activities (243,329)
-----------
Cash flows from investing activities:
Sale of short-term investments 1,020,848
Capital expenditures (328,100)
-----------
Net cash provided by investing activities 692,748
-----------
Cash flows from financing activities:
Note receivable from ESOP 80,063
Repayments of long-term debt (604,254)
Increase in notes receivable from officers (501,775)
Proceeds from sale of land and building 685,407
-----------
Net cash used in financing activities (340,559)
-----------
Net increase in cash 108,860
Cash at beginning of year 2,215,722
-----------
Cash at end of year $ 2,324,582
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 19,531
===========
Income taxes refunded $ (118,501)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 11
COVERDELL & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
The Company markets a varied line of insurance, annuity and other
financial products and membership services to the customers of banks,
financial institutions and other organizations. The Company also
provides administrative services related to the issuance of these
products. These products and services are marketed primarily through
direct mail and telemarketing.
The Company provides marketing services to banks for the marketing of
credit cards to fraternity groups.
PREPAID MARKETING EXPENSES
Prepaid marketing expenses relate to direct response marketing programs
for certain insurance and credit card programs, which are borne
entirely by the Company, primarily costs of printing brochures and
telemarketing. The Company amortizes these costs over the period of the
marketing campaign, normally twelve months following the month of
marketing.
MEMBERSHIP FEES AND MEMBERSHIP SOLICITATION COSTS
Membership fees are recognized monthly as received. Membership
solicitation costs are deferred and amortized to operations on a
straight-line basis over twelve months. These costs, which relate
directly to membership solicitations are considered direct response
advertising and include mailings, solicitation kits, and telemarketing.
Substantially all of these costs are incurred for services performed by
outside sources. It is expected that membership fees over the life of
each program will exceed the membership solicitation costs of obtaining
new members; however, if they did not, an appropriate adjustment would
be made to the extent of any impairment.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is determined
over the estimated useful lives of the furniture and equipment using
principally the double declining balance and straight-line methods.
Equipment recorded under capital leases is amortized on a basis
consistent with other fixed assets over the estimated useful lives of
the equipment. Capitalized software costs are amortized on the
straight-line method over three years.
Maintenance and repairs are charged to expense when incurred and major
improvements are capitalized. Gain or loss on the retirement of
furniture and equipment is recognized in the statement of operations
when incurred.
- 6 -
<PAGE> 12
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMMISSIONS INCOME
Commissions income on sales of insurance policies is recognized as
related policy premiums are collected.
PRODUCTION FEES AND EXPENSES
Pursuant to agreements with several of the Company's carriers and
clients, the Company provides services related to program design,
production and mail solicitation which are recoverable from the
carriers and clients. Production fee revenues and expenses are recorded
as provided and incurred.
INCOME TAXES
The Company provides income tax expense in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes". Under the asset and liability
method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. RESTRICTED CASH AND SHORT-TERM INVESTMENTS:
Cash balances totaling $1,175,817 at December 31, 1997 are held in
fiduciary accounts and are restricted to the payment of premiums
included in net remittances due to carriers and clients. At December
31, 1997, net remittances due carriers exceeded restricted cash by
$1,709,000.
Short-term investments at December 31, 1997 consist of a certificate of
deposit held by the Arizona State Department of Insurance.
- 7 -
<PAGE> 13
3. LEASE COMMITMENTS:
Lease commitments are primarily for office space and equipment under
noncancelable operating lease agreements which expire at various dates
through 2002. Rental expense amounted to approximately $80,000 in 1997.
The approximate minimum rental commitments under noncancelable leases
at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 206,126
1999 $ 205,380
2000 $ 205,380
2001 $ 205,380
2002 $ 154,035
</TABLE>
4. FURNITURE AND EQUIPMENT:
Furniture and equipment is comprised as follows at December 31, 1997:
<TABLE>
<S> <C>
Furniture and equipment $ 967,585
Less: accumulated depreciation (529,570)
-----------
Furniture and equipment, net $ 438,015
===========
</TABLE>
In May 1997, the Company sold all of its land, land improvements and
building for cash, resulting in a gain of $143,533. Proceeds from the
sale were used to settle all outstanding mortgage debt.
5. INCOME TAXES:
A summary of the benefit for income taxes consists of the following for
the year ended December 31, 1997:
<TABLE>
<S> <C>
Current benefit $ (53,914)
Deferred benefit (91,412)
-----------
$ (145,326)
===========
</TABLE>
The actual consolidated benefit for income taxes differs from the
amount computed using the Federal statutory income tax rate of 34% as
shown below for the year ended December 31, 1997:
<TABLE>
<S> <C>
Benefit at statutory Federal income
tax rate of 34% $ (115,328)
State income taxes, net of federal effect (13,434)
Revision to prior year estimates (21,008)
Other 4,444
-----------
$ (145,326)
===========
</TABLE>
- 8 -
<PAGE> 14
5. INCOME TAXES, CONTINUED:
Tax effects of temporary differences and carryforwards which give rise
to a significant portion of deferred tax assets and liabilities are as
follows at December 31, 1997:
<TABLE>
<S> <C>
Deferred marketing costs $ (595,103)
Net operating loss carryforwards 515,084
-----------
Current deferred tax liability (80,019)
-----------
Compensation related (332,322)
Book versus tax basis of depreciable assets (9,584)
Net operating loss carryforwards 294,927
-----------
Noncurrent deferred tax liability (46,979)
-----------
$ (126,998)
===========
</TABLE>
At December 31, 1997, the Company had a Federal income tax net
operating loss carryforward of $2,000,000 expiring in 2012.
6. LONG-TERM DEBT:
Long-term debt consisting of mortgage debt secured by real estate was
paid in full upon sale of the real estate.
The Company has a $1,500,000 bank line of credit bearing interest at
the prime rate. The Company's accounts receivable, intangible assets
and furniture and equipment are collateral to the line. This line of
credit is personally guaranteed by the major stockholder of the
Company. Also, the Company is required to maintain and comply with
certain financial ratios and covenants. There were no borrowings
against the line at December 31, 1997.
Included in the line of credit are requirements for maintenance of
minimum net worth to total liabilities, minimum funded debt to cash
flow as well as a limit on capitalized marketing expense. Also, the
Company is required to maintain a minimum level of accounts receivable.
The Company has remained in compliance with these requirements.
7. NOTES RECEIVABLE FROM OFFICERS:
Notes receivable from officers for sale of common stock shares, in the
amount of $16,645 bears interest at a rate of 6.35% and is
collateralized by 9,247 issued shares under a pledge agreement. The
principal balance and accrued interest is due December 31, 1998.
Notes receivable from officers, approximately $890,000 at December 31,
1997, bear no interest and are due on December 31, 1999.
- 9 -
<PAGE> 15
8. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) employee benefit plan. All full-time employees
of Coverdell & Company, Inc. over the age of 18 with more than six
months of service are eligible. The Company, at its discretion, can
match employees' contributions up to 6% of compensation. The plan has a
five-year vesting schedule. The Company did not contribute to the plan
in 1997.
The Company has an Employee Stock Ownership Plan (ESOP). The Company
may, at its discretion, contribute a variable amount to the ESOP. In
1997, the Company contributed $80,000 to the ESOP. Approximately
$112,000 has been accrued by the Company as of December 31, 1997, and
it is anticipated that this contribution will be made in 1998.
Employees do not contribute to the ESOP. Shares of the Company are held
by the ESOP and allocated to the employees' individual accounts as
those shares vest.
9. RELATED PARTY TRANSACTIONS:
During 1997, the Company paid fees to its major shareholder of $184,500
for his guarantee on long-term debt and the line of credit and for use
of his state insurance licenses in a number of states.
10. LONG-TERM INCENTIVE PLAN:
The Company maintains a long-term incentive compensation plan for
certain key executives. The Plan provides the opportunity for the
executives to earn "Additional Compensation" based on increases in the
value of the Company, as determined by an agreed-upon formula. Any
Additional Compensation under the Plan becomes payable only upon the
occurrence of specified events: (1) the death of the employee; (2) the
total disability of the employee; (3) termination of the employee
(voluntary or involuntary without cause); or (4) upon the sale or
substantial change in ownership of the Company. The payment of any
amounts under the Plan is contingent upon future cash flows to the
Company and the performance of consulting services during time periods
approximating the scheduled payout period under the Plan. The Company
maintains insurance on the executives sufficient to substantially fund
potential future payments under the Plan in the event of death or
disability.
During 1997, senior management agreed to exchange $1,000,000 of
long-term incentive and 74,246 Class A common shares available under
the Company's stock option plan for 74,246 shares of newly issued Class
A common stock. The Company recognized a charge for compensation
expense for the fair value of the stock issued as determined by an
independent appraiser in the amount of $467,500.
At December 31, 1997, the aggregate amount that could become payable in
the future upon the occurrence of the specified events is approximately
$2,400,000.
- 10 -
<PAGE> 16
11. STOCK OPTIONS:
Prior to 1995, the Company granted stock options to certain senior
executives for the purchase of an aggregate of 202,388 shares of its
common stock. After the exchange of 74,246 shares under options as part
of the reduction in the long-term incentive plan as discussed in Note
10, there were 128,142 shares available for purchase under options at
December 31, 1997. The options are exercisable until March 2012 at an
exercise price based on the then current value of the Company (as
determined by an agreed-upon formula), plus $500,000. No options were
exercised in 1997.
12. COMMON STOCK:
The Class B Common Stock can only be issued to Paul D. Coverdell, who
currently owns or controls 54% of the issued and outstanding Class A
Common Stock. The Class B Common Stock provides voting rights
sufficient for the current majority shareholders to maintain a minimum
50.1% voting control when combined with the Class A Common Stock. The
Class B Common Stock has no dividend or distribution rights other than
redemption at par value. The Company has granted Paul D. Coverdell an
option to acquire all of the Class B Common Stock at par value.
- 11 -
<PAGE> 17
MEMBERWORKS INCORPORATED
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited pro forma consolidated condensed financial statements
and related notes are presented in accordance with Securities and Exchange
Commission (the "Commission") rules and regulations to illustrate the pro forma
effect of the acquisition by MemberWorks Incorporated (the "Company" or the
"Registrant") of all of the outstanding common stock of Coverdell and Company,
Inc. ("Coverdell") under the purchase method of accounting. Coverdell was a
privately-held direct marketer of life, accident and health insurance products
to customers of banks, financial institutions and other organizations.
The unaudited pro forma consolidated condensed balance sheet is based on the
assumption that the acquisition was completed on December 31, 1997. The
unaudited pro forma consolidated condensed statement of operations for the six
months ended December 31,1997 and the year ended June 30, 1997 is presented as
if the acquisition had occurred on July 1, 1996.
Pro forma data are based on assumptions and include adjustments as explained in
the notes to the unaudited pro forma consolidated condensed financial
statements. The pro forma data are not necessarily indicative of the financial
results that would have occurred had the transaction been effective on July 1,
1996 or as of December 31, 1997, and should not be viewed as indicative of
operations in future periods. The unaudited pro forma consolidated condensed
financial statements should be read in conjunction with the notes thereto; 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, the
Company's quarterly reports on Form 10-Q, with respect to the quarters ended
September 30, 1997 and December 31, 1997, which have been previously filed with
the Commission; and the audited financial statements and related notes of
Coverdell for the year ended December 31, 1997 included in Item 7(a) of this
form 8-K.
<PAGE> 18
MEMBERWORKS INCORPORATED
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
MemberWorks Coverdell Acquisition Pro Forma
Historical Pre-acquisition Adjustments Combined
----------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,073 $ 2,325 $ (6,436)(a,b,c) $ 36,962
Accounts receivable 4,998 1,833 (891) (b) 5,940
Prepaid membership materials 1,955 -- -- 1,955
Prepaid expenses 675 365 -- 1,040
Membership solicitation
and other deferred costs 37,923 1,347 -- 39,270
--------- --------- --------- ---------
Total current assets 86,624 5,870 (7,327) 85,167
Fixed assets, net 7,367 438 -- 7,805
Intangible assets -- -- 19,961 (a,b,c) 19,961
Other assets 299 -- -- 299
--------- --------- --------- ---------
$ 94,290 $ 6,308 $ 12,634 $ 113,232
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations $ 673 $ -- $ -- $ 673
Accounts payable 14,186 3,977 -- 18,163
Accrued liabilities 17,300 471 -- (a,c) 17,771
Deferred membership fees 48,637 -- -- 48,637
--------- --------- --------- ---------
Total current liabilities 80,796 4,448 -- 85,244
Long-term obligations 141 -- -- 141
--------- --------- --------- ---------
Total liabilities 80,937 4,448 -- 85,385
--------- --------- --------- ---------
Shareholders' equity:
Common stock 150 8 (4) (a,c) 154
Capital in excess of par value 59,707 912 13,578 (a,b,c) 74,197
Deferred compensation (1,212) -- -- (1,212)
Retained earnings
(accumulated deficit) (42,338) 997 (997) (a,c) (42,338)
Treasury stock (2,954) (57) 57 (a,c) (2,954)
--------- --------- --------- ---------
Total shareholders' equity 13,353 1,860 12,634 27,847
--------- --------- --------- ---------
$ 94,290 $ 6,308 $ 12,634 $ 113,232
========= ========= ========= =========
</TABLE>
See notes to pro forma consolidated condensed financial statements (unaudited).
<PAGE> 19
MEMBERWORKS INCORPORATED
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
MemberWorks Coverdell Acquisition Pro Forma
Historical Pre-acquisition Adjustments Combined
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues from membership fees $ 51,870 $ 6,698 $ -- $ 58,568
Expenses:
Operating 10,846 1,001 -- 11,847
Marketing 30,908 3,909 -- 34,817
General and administrative 10,123 2,341 (467)(d) 11,997
Amortization of intangible assets -- -- 586 (e) 586
Other (income) expense (827) (107) 176 (f) (758)
-------- -------- -------- --------
Total expenses 51,050 7,144 295 58,489
-------- -------- -------- --------
Income (loss) before income taxes 820 (446) (295) 79
Provision (benefit) for income taxes -- (192) 192 (g) --
-------- -------- -------- --------
Net income (loss) $ 820 $ (254) $ (487) $ 79
======== ======== ======== ========
Earnings per share (h):
Basic $ 0.06 $ 0.00
======== ========
Diluted $ 0.05 $ 0.00
======== ========
Shares used in EPS calculations:
Basic 14,728 15,176
======== ========
Diluted 16,179 16,627
======== ========
</TABLE>
See notes to pro forma consolidated condensed financial statements (unaudited).
<PAGE> 20
MEMBERWORKS INCORPORATED
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
MemberWorks Coverdell Acquisition Pro Forma
Historical Pre-acquisition Adjustments Combined
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues from membership fees $ 79,174 $ 11,230 $ -- $ 90,404
Expenses:
Operating 16,762 1,493 -- 18,255
Marketing 50,904 6,792 -- 57,696
General and administrative 16,296 3,178 (150) (d) 19,324
Amortization of intangible assets -- -- 1,172 (e) 1,172
Other (income) expense (930) (314) 352 (f) (892)
-------- -------- -------- --------
Total expenses 83,032 11,149 1,374 95,555
-------- -------- -------- --------
Income (loss) before income taxes (3,858) 81 (1,374) (5,151)
Provision (benefit) for income taxes -- 38 (38) (g) --
-------- -------- -------- --------
Net income (loss) $ (3,858) $ 43 $ (1,336) $ (5,151)
======== ======== ======== ========
Earnings per share (h):
Basic & Diluted $ (0.35) $ (0.43)
======== ========
Shares used in EPS calculations:
Basic & Diluted 13,901 14,349
======== ========
</TABLE>
See notes to pro forma consolidated condensed financial statements (unaudited).
<PAGE> 21
MEMBERWORKS INCORPORATED
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed balance sheet is based on the
Company's unaudited balance sheet as of December 31, 1997 and Coverdell's
audited balance sheet as of December 31, 1997, and upon the adjustments
described below. The unaudited pro forma consolidated condensed statement of
operations for the six months ended December 31, 1997 is based on the Company's
unaudited statement of operations for the six months ended December 31, 1997,
Coverdell's unaudited statement of operations for the six months ended December
31, 1997, and upon the adjustments described below. The unaudited pro forma
consolidated condensed statement of operations for the year ended June 30, 1997
is based on the Company's statement of operations for the year ended June 30,
1997, Coverdell's unaudited statement of operations for the year ended June 30,
1997, and upon the adjustments described below.
NOTE 2. PRO FORMA ADJUSTMENTS
The following adjustments have been made to the unaudited pro forma consolidated
condensed balance sheet at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Total
Pro Forma Pro Forma Pro Forma Pro Forma
Adjustment (a) Adjustment (b) Adjustment (c) Adjustments
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ (4,797) $(1,733) $ 94 $(6,436)
Accounts receivable -- (891) -- (891)
Intangible assets 19,541 2,641 (2,221) 19,961
Accrued liabilities 250 -- (250) --
Shareholders' equity 14,494 17 (1,877) 12,634
</TABLE>
(a) Represents the fair market value of common stock, stock options exchanged
and cash consideration and related acquisition costs for the purchase of
Coverdell & Company, Inc. of approximately $19,541.
(b) Represents recognition of and net cash consideration paid to satisfy the
management incentive plan obligation due to Coverdell & Company senior
management upon change in control of Coverdell.
(c) Represents elimination of Coverdell's equity accounts and other
insignificant adjustments to assets and liabilities assumed.
<PAGE> 22
MEMBERWORKS INCORPORATED
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
The following adjustments have been made to the unaudited pro forma consolidated
condensed statements of operations for the six month period ended December 31,
1997 and the year ended June 30, 1997:
(d) Reduction of general and administrative expenses represents elimination of
expenses accrued related to the Coverdell management incentive plan which
would not have occurred had the acquisition been consummated as of July 1,
1996.
(e) Amortization of identifiable intangible assets and goodwill as a result of
the purchase of Coverdell. These intangible assets are primarily amortized
over a twenty year period on a straight-line basis.
(f) The adjustment to other (income) expense eliminates interest income on the
cash paid in conjunction with the acquisition (consideration and
acquisition costs) and the related payment of the Coverdell management
incentive obligation.
(g) Tax provision (benefit) has been adjusted to reflect the net operating loss
position of the combined entity.
(h) Shares used in earnings per share calculations have been adjusted to assume
common stock issued in the transaction was outstanding from July 1, 1996.
<PAGE> 1
Exhibit 23.1
- - ------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
MemberWorks Incorporated on Form S-8 (File Nos. 333-20235, 333-20237, 333-20241
and 333-23161) and on Form S-3 (File No. 333-47619) of our report dated February
13, 1998, on our audit of the financial statements of Coverdell & Company, Inc.
as of and for the year ended December 31, 1997, which report is included in this
Current Report on Form 8-K.
/s/ Coopers & Lybrand, L.L.P.
- - ----------------------------
Atlanta, Georgia
June 15, 1998
