<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
JULY 27, 1999
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.)
9 West Broad Street
Stamford, Connecticut 06902
- --------------------------------------- -------------------
(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 July 27, 1999, pursuant to an Agreement and Plan of Merger dated as of April
27, 1998, as amended June 30, 1999 ("the CIC Merger Agreement"), MemberWorks
Incorporated (the "Registrant"), a Delaware Corporation, exercised its right to
increase its ownership percentage ("CIC Merger") in ConsumerInfo.Com, Inc.
("CIC"), a California Corporation, from 19% to 100%, for cash consideration of
$15,885,000. The Registrant previously invested a total of $1,600,000 in CIC
during the third quarter of fiscal 1998. Accordingly, effective July 27, 1999,
the Registrant will begin accounting for the CIC transaction under the
consolidation method of accounting, rather than the cost method of accounting as
previously applied. The source of funds for the cash consideration was the
Registrant's outstanding cash balances. CIC was a privately held Internet
marketing company and online provider of value-added membership programs.
The consideration received by holders of CIC Stock in the CIC Merger and the
other material terms of the CIC Merger Agreement and related transaction
documents were determined by arms-length negotiations between the Registrant and
CIC.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of ConsumerInfo.Com, Inc.:
Report of Independent Accountants
Balance Sheets as of June 30, 1999 and 1998
Statements of Operations for the years ended June 30, 1999 and 1998
Statements of Changes in Shareholders' Equity for the years ended June 30,
1999 and 1998
Statements of Cash Flows for the years ended June 30, 1999 and 1998
Notes to Financial Statements
(b) Pro Forma Financial Information:
Unaudited Pro Forma Consolidated Condensed Balance Sheet as of June 30,
1999
Unaudited Pro Forma Consolidated Condensed Statement of Operations for the
year ended June 30, 1999
Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
(c) Exhibits
The following exhibits are included as part of this report:
2.1* Agreement and Plan of Merger among MemberWorks Incorporated, CIC
Merger, Inc., and ConsumerInfo.Com, Inc. dated as of April 27, 1998.
2.2* First Amendment to Agreement and Plan of Merger among MemberWorks
Incorporated, CIC Merger, Inc., and ConsumerInfo.Com, Inc. dated as of
June 30, 1999.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1* Press release of Registrant, dated July 27, 1999.
* Previously filed with the Commission with the initial Form 8-K on August 11,
1999
<PAGE> 3
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: October 12, 1999 By: /s/ Gary A. Johnson
-------------------
Gary A. Johnson, President and
Chief Executive Officer
<PAGE> 4
CONSUMERINFO.COM, INC.
INDEX
<TABLE>
<S> <C>
Report of Independent Accountants F-1
Balance Sheets as of June 30, 1999 and 1998 F-2
Statements of Operations for the years ended June 30, 1999 and 1998 F-3
Statements of Shareholders' Equity for the years ended June 30, 1999 and 1998 F-4
Statements of Cash Flows for the years ended June 30, 1999 and 1998 F-5
Notes to Financial Statements F-6
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of ConsumerInfo.Com, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of ConsumerInfo.Com, Inc. at June 30,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Costa Mesa, California
October 6, 1999
F-1
<PAGE> 6
CONSUMERINFO.COM, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 243 $ 764
Accounts receivable 17 47
Prepaid membership materials 16 46
Prepaid expenses and other current assets 96 67
Deferred membership related charges 292 151
Deposits 163 65
Related party receivables 367 74
------------- ------------
Total current assets 1,194 1,214
Fixed assets, net 292 120
------------- ------------
Total assets $ 1,486 $ 1,334
============= ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,649 $ 941
Accrued liabilities 326 198
Deferred membership fees 2,735 958
Related party payables 29 4
------------- ------------
Total current liabilities 4,739 2,101
Related party obligations 880 -
------------- ------------
Total liabilities 5,619 2,101
------------- ------------
Commitments (Note 4)
Mandatorily redeemable preferred stock (Note 6) 3,550 3,504
Shareholders' equity:
Common stock, $0.001 par value - 4,000 shares
authorized; 100 shares issued and outstanding - -
Additional paid in capital 176 176
Deferred compensation (44) (46)
Accumulated deficit (7,815) (4,401)
------------- ------------
Total shareholders' deficit (7,683) (4,271)
------------- ------------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity $ 1,486 $ 1,334
============= ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-2
<PAGE> 7
CONSUMERINFO.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 5,156 $ 1,518
Expenses:
Operating 2,321 1,183
Marketing 4,694 1,830
General and administrative 1,469 1,185
Other expense, net 40 6
------------ ------------
Total expenses 8,524 4,204
------------ ------------
Loss before income taxes (3,368) (2,686)
Provision for income taxes - -
------------ ------------
Net loss $ (3,368) $ (2,686)
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE> 8
CONSUMERINFO.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Accumulated
------------ ---------- -------- -----------
Shares Amount Paid in Capital Compensation Deficit Total
------ ------ --------------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 100 $ - $ 89 $ - $ (1,669) $ (1,580)
Accretion of Series A preferred stock (46) (46)
Proceeds from warrants 33 33
Stock based compensation 54 (54) -
Amortization of deferred compensation 8 8
Net loss (2,686) (2,686)
---------- --------- --------------- -------------- ------------- ------------
Balance - June 30, 1998 100 - 176 (46) (4,401) (4,271)
Accretion of Series A preferred stock (46) (46)
Amortization of deferred compensation 2 2
Net loss (3,368) (3,368)
---------- --------- --------------- -------------- ------------- ------------
Balance - June 30, 1999 100 $ - $ 176 $ (44) $ (7,815) $ (7,683)
========== ========= =============== ============== ============= ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE> 9
CONSUMERINFO.COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,368) $ (2,686)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred membership related charges (1,127) (463)
Amortization of deferred membership
related charges 986 331
Deferred membership fees 1,777 796
Depreciation and amortization 58 30
Stock based compensation 2 8
Changes in assets and liabilities:
Accounts receivable 30 (40)
Prepaid membership materials 30 5
Prepaid expenses (29) (58)
Deposits (98) (46)
Related party receivables (293) -
Accounts payable 708 851
Accrued liabilities 128 128
Related party payables 29 -
------------ ------------
Net cash used in operating activities (1,167) (1,144)
------------ ------------
INVESTING ACTIVITIES
Acquisition of fixed assets (230) (28)
------------ ------------
Net cash used in investing activities (230) (28)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock and
warrants - 1,960
Proceeds from issuance of related party obligations 880 -
Proceeds from issuance of debt 50 -
Payments of related party long-term obligations (4) (67)
Payments of debt (50) -
------------ ------------
Net cash provided by financing activities 876 1,893
------------ ------------
Net (decrease) increase in cash
and cash equivalents (521) 721
Cash and cash equivalents at beginning of year 764 43
------------ ------------
Cash and cash equivalents at end of year $ 243 $ 764
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE> 10
NOTE 1--NATURE OF BUSINESS
ConsumerInfo.Com, Inc. (the "Company") is an online provider of consumer credit
reports and credit monitoring membership service programs. Credit monitoring
membership service programs offer consumers, primarily in the United States,
unlimited access to their personal credit information as reported by the leading
credit bureaus as well as credit related information which may be used to gain
and maintain a positive credit rating and prevent fraud.
On July 27, 1999, the Company was purchased by MemberWorks Incorporated
("MemberWorks"), a Delaware Corporation. MemberWorks had held a 19% ownership
interest in the Company since May 1998. (See Notes 9 and 10). The financial
statements of the Company have been prepared under the assumption that it will
continue as a going concern. Since inception, the Company has incurred
significant losses, has a significant working capital deficiency and has not
generated positive cash flows from operations. The Company has incurred net
losses of $3,368,000 and $2,686,000 for the years ended June 30, 1999 and 1998,
respectively. Total shareholders deficit is $7,683,000 and $4,271,000 as of June
30, 1999 and 1998, respectively. The Company is dependent on financial support
from MemberWorks to support its ongoing viability. MemberWorks has
unconditionally committed to provide financial support to sustain the operations
of the Company through at least October 2000.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Fair value of financial instruments
All current assets and liabilities are carried at cost, which approximates fair
value because of the short term maturity of those instruments.
Concentration of supplier risk
During 1999 and 1998, the Company purchased products from two suppliers that
represented 10% or more of total purchases. These suppliers represented 48% and
32% of total purchases, respectively, in 1999 and 54% and 28% of total
purchases, respectively, in 1998.
Fixed assets
Fixed assets and purchased software are carried at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated productive lives of the assets. The estimated useful lives of computer
equipment and software is five years and furniture and fixtures is seven years.
Maintenance and repair expenditures are charged to operations as incurred.
Revenue recognition
Membership fees are billed primarily through credit cards. An allowance for
cancellations is established based on the Company's most recent actual
cancellation experience and is updated regularly. Deferred membership fees are
recorded, net of estimated cancellations, when the trial period has elapsed and
are amortized as revenues on a straight-line basis over the remainder of the
membership period, generally twelve months. Membership cancellations are charged
to the allowance for cancellations on a current basis. During the first six
months of an initial annual membership term or renewal term, a member may cancel
his or her membership in the program for a pro-rata refund based on the
remaining portion of the membership period. Accrued liabilities set forth in the
accompanying balance sheets as of June 30, 1999 and 1998 include an allowance
for membership cancellations of $231,000 and $117,000, respectively.
F-6
<PAGE> 11
Deferred membership related charges
Deferred charges consist of commissions and transaction processing fees which
relate to the deferred revenue streams. The deferred charges are amortized
ratably to income over the membership period.
Advertising
The Company expenses advertising costs the first time the advertisement is
published or broadcasted. Marketing expenses include advertising costs of
$4,517,000 and $1,762,000 in 1999 and 1998, respectively.
Cash and cash equivalents
The Company considers highly liquid investment instruments with terms of three
months or less at the time of acquisition to be cash equivalents.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". The Company reviews its
long-lived assets for events or changes in circumstances which indicate that
their carrying value may not be recoverable. As of June 30, 1999 and 1998, no
impairment has been indicated.
Stock-based compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and its related interpretations.
Comprehensive income
The Company has adopted the provisions of SFAS 130, "Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components for general-purpose financial
statements. Comprehensive income is defined as net income plus all revenues,
expenses, gains and losses from non-owner sources that are excluded from net
income in accordance with generally accepted accounting principles. For all
periods presented, there were no material differences between comprehensive and
net income.
New accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which is effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use. The adoption of SOP 98-1 is not expected
to materially impact the presentation and disclosure in the Company's financial
statements.
F-7
<PAGE> 12
NOTE 3--FIXED ASSETS
Fixed assets are comprised of the following at June 30, (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computer software and equipment $ 337 $ 145
Furniture and fixtures 69 31
------------ -----------
406 176
Accumulated depreciation (114) (56)
------------ -----------
$ 292 $ 120
============ ===========
</TABLE>
Depreciation expense was $58,000 and $30,000 for the years ended June 30, 1999
and 1998, respectively.
NOTE 4--COMMITMENTS
Commitments
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Rent expense under operating leases was $125,000 and $77,000
for the fiscal years ended June 30, 1999 and 1998, respectively.
The future minimum lease payments under operating leases as of June 30, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000 $ 164
2001 159
2002 167
2003 74
2004 -
Thereafter -
-------------
Total minimum lease payments $ 564
=============
</TABLE>
NOTE 5--INCOME TAXES
There was no current or deferred provision for income taxes for the years ended
June 30, 1999 and 1998. No current provision was required because tax losses
were incurred in those years. Deferred tax assets and liabilities result from
differences in the basis of assets and liabilities for tax and financial
statement purposes. The tax effects of the basis differences and net operating
loss carry forwards and the valuation allowance established in accordance with
SFAS 109 are summarized below as of June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Benefit of net operating loss carry forward $ 1,802 $ 1,257
Deferred membership fees 1,121 393
Allowance for membership cancellations 95 48
Other deferred tax assets 90 37
Other deferred tax liabilities (144) (71)
------------- -------------
Total deferred tax assets 2,964 1,664
Less: Valuation allowance (2,964) (1,664)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
F-8
<PAGE> 13
The valuation allowance for deferred tax assets as of July 1, 1997 was $643,000.
At June 30, 1999, the Company had federal net operating loss carry forwards of
$4,596,000 expiring at various dates from December 31, 2010 to December 31,
2018. The Company also has state net operating loss carry forwards expiring at
various dates through December 31, 2003 available to reduce future state taxable
income. The Company's ability to use these losses to offset future taxable
income is subject to limitations under the Internal Revenue Code and applicable
state tax code due to the change in the Company's ownership (see Note 10).
The income tax benefit differs from the amount computed by applying the
statutory federal income tax rate to the net loss as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998
---- ----
<S> <C> <C>
Federal statutory benefit (35%) (35%)
State income tax benefit, net of federal statutory benefit (6%) (6%)
Valuation allowance 41% 41%
-------------- ---------------
- -
============== ===============
</TABLE>
NOTE 6--MANDATORILY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Total
----------------- ----------------- ----------------- ---------------- -----
Shares Amounts Shares Amounts Shares Amounts Shares Amounts Shares Amounts
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 228 $ 327 132 $ 1,094 - $ - - $ - 360 $ 1,421
Issuance of Series B
preferred stock 13 84 13 84
Issuance of Series C
preferred stock 500 500 500 500
Issuance of Series D
preferred stock 253 1,615 253 1,615
Preferred stock
issuance costs (162) (162)
Accretion of Series A
preferred stock 46 46
----------------------------------------------------------------------------------------------------
Balance - June 30, 1998 228 373 145 1,178 500 500 253 1,453 1,126 3,504
Accretion of Series A
preferred stock 46 46
----------------------------------------------------------------------------------------------------
Balance - June 30, 1999 228 $ 419 145 $ 1,178 500 $ 500 253 $1,453 1,126 $ 3,550
====================================================================================================
</TABLE>
The liquidation value of the preferred stock was $3,788,000 and $3,834,000 at
June 30, 1999 and 1998, respectively.
The rights, preferences and terms of each series of outstanding mandatorily
redeemable preferred stock follow:
Redemption
Series A preferred stock is redeemable at the option of the Board of Directors
of the Company on November 30, 2000 at a redemption value (subject to adjustment
for dilution) of $1.00 per share plus all accrued and unpaid dividends. Series
B, C and D preferred stock are not redeemable at either the option of the holder
or the Board of Directors (except for liquidation rights explained below).
All Series A, B, C and D preferred stock are mandatorily redeemable in the event
of any liquidation, dissolution or winding up of the Company, which event
includes the acquisition of the Company by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation) or a sale of all or substantially
all of the assets of the corporation.
F-9
<PAGE> 14
Dividends
The holders of Series C and D preferred stock are entitled to receive
non-cumulative dividends of $0.08 per share per year and $0.51 per share per
year, respectively, if and when declared by the Company's Board of Directors.
The holders of Series B preferred stock are entitled to receive non-cumulative
dividends of $0.72 per share per year, if and when declared by the Company's
Board of Directors, subject to the prior and superior rights of Series C and D
preferred stock. The holders of Series A preferred stock are entitled to receive
cumulative dividends of $0.20 per share per year. The Series A dividends shall
accrue on each issued and outstanding share of Series A preferred stock from its
date of initial issuance through the fifth anniversary of such issuance and
shall accrue from day to day, whether or not earned or declared by the Company's
Board of Directors. As of June 30, 1999 and 1998, cumulative dividends accrued
and unpaid were $192,000 and $147,000, respectively and have been accreted to
the carrying value of mandatorily redeemable preferred stock on the balance
sheet.
Liquidation
Upon liquidation, dissolution or winding up of the Company, the holders of
preferred stock are to be paid out in the following manner: the holders of
Series C and D preferred stock are entitled to receive the applicable
liquidation value of $1.00 and $6.38 per share, respectively, plus all declared
but unpaid dividends on such shares prior to any distribution to holders of
Series A and B preferred stock. The holders of Series B preferred stock are
entitled to receive the applicable liquidation value of $9.00 per share plus all
declared but unpaid dividends on such shares prior to any distribution to
holders of Series A preferred stock. The holders of Series A preferred stock are
entitled to receive the applicable liquidation value of $1.00 per share plus any
unpaid dividends prior to any distribution to holders of common stock. If any
assets are remaining, the holders of common stock are entitled to receive $1.00
per share.
After such liquidation as described in the preceding paragraph, from any assets
remaining the holders of Series A and C preferred stock and common stock are
entitled to receive $5.20 per share. If after this round any assets are
remaining, the holders of Series A, B and C preferred stock and common stock are
entitled to receive $6.38 per share. If after this round any assets are
remaining, the assets are paid out based upon the number of common shares held
by each series assuming full conversion to common.
In the event that the Company's assets to be distributed among the holders of
Series A, B, C and D preferred stock were insufficient during any round of
liquidation, the assets would be distributed ratably to such holders in that
round based upon the number of common shares held by each series assuming full
conversion to common.
Voting
The holders of Series A, B, C and D preferred stock are entitled to one vote for
each whole share of common stock held, assuming full conversion to common, on
all matters submitted to the stockholders.
Conversion
Series A, B, C and D preferred stock are convertible, at the option of the
holder, at any time into common stock at a conversion price per share (subject
to adjustment for dilution) of $1.00, $5.20, $1.00 and $6.38, respectively.
Series A, B, C and D preferred stock is automatically converted into common
stock at the then effective conversion price in the event of a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1
under the Securities Act of 1933, as amended, of not less than $25.00 per share
and $10,000,000 in the aggregate. In addition, Series A preferred stock is
automatically converted by written consent or agreement of the holders of
sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of
Series A.
Other
As discussed in Note 7, warrants to acquire 49,000 shares of Series B preferred
stock at $9.00 per share were issued in conjunction with the issuance of Series
B preferred stock.
As discussed in Note 10, in July 1999, MemberWorks, a Delaware Corporation,
exercised its right to increase its ownership percentage in the Company from 19%
to 100% for a cash consideration of $15,885,000. Accordingly, each share of
Series A, B and C preferred stock and Series B warrants issued
F-10
<PAGE> 15
and outstanding immediately prior to the acquisition were converted into and
represent the right to receive an aggregate cash consideration of $15,885,000
(less certain fees) immediately following the acquisition.
NOTE 7--STOCK OPTIONS AND WARRANTS
Stock Compensation Plans
At June 30, 1999, the Company had two stock-based compensation plans which are
described below. The Company applies APB 25 and related interpretations in
accounting for its plans. Had compensation cost for the Company's stock based
compensation plans been determined based on the fair value at the grant dates
for awards under these plans consistent with the method of SFAS No. 123
"Accounting for Stock-Based Compensation", the Company's 1999 and 1998 pro forma
net loss would have been $3,381,000 and $2,704,000, respectively.
As of June 30, 1998, the Company recorded deferred compensation related to
options granted to employees in the total amount of $54,000, representing the
difference between the estimated fair value of the stock, as determined by an
independent valuation, and the exercise price of the options at the date of
grant. No options were granted in 1999. Of this amount, $8,000 and $2,000 had
been amortized in 1999 and 1998, respectively. The Company amortizes deferred
compensation over the vesting period of the underlying option.
Under these stock option plans, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for the year ended June 30, 1998:
dividend yield and volatility of 0%; risk free interest rate of 5.1% and
expected life of 2.2 years.
The weighted average fair value of options granted at market value during fiscal
1998 was $1.07.
The Company's 1996 Stock Incentive Plan (the "Incentive Plan") provides for the
grant of Series B preferred stock incentive stock options to employees and
non-statutory stock options to non-employees, consultants and members of the
Board of Directors. Under the Incentive Plan, the Board of Directors can
determine the date on which options can vest and become exercisable as well as
the term of the options granted. The vesting period is from 0-6 years. The
number of shares of Series B preferred stock which may be issued under the
Incentive Plan may not exceed 49,115 shares. Under the Incentive Plan, options
generally become exercisable immediately and expire at the earlier of
termination of employment or ten years from the date of grant.
Options outstanding as of June 30, 1999 and 1998 under the Incentive Plan were
49,000, with an exercise price of $9.00. During fiscal 1998, 17,000 options were
granted with an exercise price of $9.00. As of June 30, 1999 and 1998, 49,000
options were exercisable with an average remaining life of 7.0 years.
During February 1998, the Company's Board of Directors approved the 1998 Stock
Plan (the "1998 Plan") which provides for the grant of Common Stock incentive
stock options to employees and non-statutory stock options to consultants and
members of the Board of Directors. Under the 1998 Plan, the Board of Directors
can determine the date on which options can vest and become exercisable as well
as the term of the options granted. The vesting period is from 0-6 years. The
number of shares of Common Stock which may be issued under the 1998 Plan may not
exceed 52,460. Under the 1998 Plan, options generally become exercisable
immediately and expire at the earlier of termination of employment or ten years
from the date of grant.
Options outstanding as of June 30, 1999 and 1998 under the 1998 Plan were
52,000, with an exercise price of $0.10. During fiscal 1998, 52,000 options were
granted with an exercise price of $0.10. As of June 30, 1999 and 1998, 52,000
options were exercisable with an average remaining life of 8.7 years.
Warrants
As of June 30, 1999, the Company had outstanding warrants to purchase an
aggregate of 49,000 shares of Series B preferred stock at $9.00 per share. These
warrants expire May 30, 2000.
F-11
<PAGE> 16
In connection with the purchase of the Company by MemberWorks in July 1999, all
options and warrants outstanding immediately prior to the acquisition were
exercised. (See Note 10)
NOTE 8--STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Cash paid during the period for interest $ 3 $ 5
Cash paid during the period for income taxes 1 2
Supplemental schedule of noncash investing and financing activities:
Dividends accreted on Series A preferred stock $ 46 $ 46
Conversion of trade accounts payable to notes payable - 71
Issuance of note receivable for preferred stock - 74
Conversion of trade accounts payable to preferred stock - 36
</TABLE>
NOTE 9 - RELATED PARTIES
In May 1998, MemberWorks invested in the Company by purchasing 253,000 shares of
Series D preferred stock for $1,600,000, representing a 19% interest in the
Company.
Also in May 1998, MemberWorks executed an agreement with the Company, subject to
approval by the Company's shareholders, whereby MemberWorks received the right
to purchase (the "Purchase Option") all of the outstanding common and preferred
shares, and securities convertible into common and preferred shares, directly
from the holders of such securities. MemberWorks was required to provide notice
of exercise to the Company before June 1, 1999, but no earlier than May 1, 1999
if they wished to exercise the purchase option, otherwise it expired. In July
1999, the Company's shareholders approved the merger and MemberWorks exercised
the purchase option for $15,885,000 in cash (see Note 10).
During the fiscal year ended June 30, 1999, the Company had transactions in the
normal course of business with MemberWorks. The Company purchases products from
MemberWorks and sells them through the Company's web sites. In addition, the
Company sells products to MemberWorks. MemberWorks owned 19% of the Company at
June 30, 1999. Sales and expenses related to MemberWorks included in the
statement of operations for the year ended June 30, 1999 are $476,000 and
$77,000, respectively. Accounts receivable from and accounts payable to
MemberWorks as of June 30, 1999 are $554,000 and $261,000, respectively. In
addition, the Company has a line of credit with MemberWorks as of June 30, 1999
for $880,000. The line of credit bears interest at a rate of 6% per annum and is
not due until at least June 30, 2000. The interest payable related to this note
is included in accrued liabilities and is $29,000 as of June 30, 1999. There was
no such activity during 1998.
During the fiscal years ended June 30, 1999 and 1998, the Company had
transactions in the normal course of business with First American CREDCO. The
Company purchases credit products from First American CREDCO and sells them
through the Company's web sites. First American CREDCO was an investor of the
Company at June 30, 1999 and 1998. Expenses related to First American CREDCO
included in the statements of operations for the years ended June 30, 1999 and
1998 are $395,000 and $311,000, respectively. During fiscal 1998, the Company
converted $71,000 of trade accounts payable to First American CREDCO to a
current note payable. As of June 30, 1999 and 1998 the current note payable was
$0 and $4,000, respectively. The note payable had an interest rate of 12% per
annum and was due July 1999. In addition, during the fiscal year ended June 30,
1998, the Company issued preferred stock to First American CREDCO in lieu of
payment of trade receivables in the amount of $36,000.
Other expense in 1999 and 1998, as shown in the statement of operations,
includes related party interest expense of $31,000 and $5,000, respectively.
F-12
<PAGE> 17
During the fiscal year ended June 30, 1998, the Company issued preferred stock
for a note receivable to certain employees in the amount of $74,000. The note
receivable was outstanding as of June 30, 1999 and 1998. The note receivable was
settled in July 1999, and therefore is included in other assets.
NOTE 10- SUBSEQUENT EVENT
On July 27, 1999, the Company was purchased by MemberWorks, a Delaware
Corporation, for a cash payment of $15,885,000. MemberWorks is a leading
provider of innovative membership service programs. On the date of acquisition,
MemberWorks exercised its right to increase its ownership percentage in the
Company from 19% to 100% for cash consideration of $15,885,000. Accordingly,
each share of Series A, B and C preferred stock, Series B warrants and all stock
options issued and outstanding immediately prior to the acquisition were
converted into and represent the right to receive an aggregate cash
consideration of $15,885,000 (less certain fees) immediately following the
acquisition.
F-13
<PAGE> 18
MEMBERWORKS INCORPORATED
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 preferred and common stock of
ConsumerInfo.Com, Inc. ("CIC") under the purchase method of accounting. CIC was
a privately held Internet direct marketing company and online provider of
value-added membership programs.
The unaudited pro forma consolidated condensed balance sheet is based on the
assumption that the acquisition was completed on June 30, 1999. The unaudited
pro forma consolidated condensed statement of operations is based on the
assumption that the acquisition was completed on July 1, 1998.
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,
1998 or June 30, 1999 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 for the fiscal year ended June 30, 1999 and the audited financial
statements and related notes of CIC for the years ended June 30, 1999 and 1998
included in Item 7(a) of this Form 8-K.
1
<PAGE> 19
MEMBERWORKS INCORPORATED
CONSOLIDATED CONDENDSED PRO FORMA BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MemberWorks
June 30, CIC Pro Pro
1999 June 30, 1999 Forma Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 50,939 $ 243 $ (15,738) a,b $ 35,444
Accounts receivable 11,717 384 (367) b,c 11,734
Prepaid membership materials 4,177 16 - 4,193
Prepaid expenses and other current assets 2,313 259 (10) b 2,562
Membership solicitation and
and other deferred costs 78,010 292 - 78,302
--------------- ----------- ----------- ------------
Total current assets 147,156 1,194 (16,115) 132,235
Fixed assets, net 18,858 292 - 19,150
Intangible and other assets 46,363 - 19,511 a,c 65,874
--------------- ----------- ----------- ------------
Total assets $ 212,377 $ 1,486 $ 3,396 $ 217,259
=============== =========== =========== ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 72 $ - $ - $ 72
Accounts payable 29,729 1,649 - 31,378
Accrued liabilities 40,702 355 143 a,b,c 41,200
Deferred membership fees 109,031 2,735 - 111,766
--------------- ----------- ----------- ------------
Total current liabilities 179,534 4,739 143 184,416
Long-term obligations 6 880 (880) c 6
--------------- ----------- ----------- ------------
Total liabilities 179,540 5,619 (737) 184,422
--------------- ----------- ----------- ------------
Mandatorily redeemable preferred stock - 3,550 (3,550) a -
Shareholders' equity:
Common stock 159 - - 159
Capital in excess of par value 76,999 176 (176) a 76,999
Deferred compensation (511) (44) 44 a (511)
Accumulated deficit (35,492) (7,815) 7,815 a,b (35,492)
Accumulated other comprehensive loss (14) - - (14)
Treasury stock (8,304) - - (8,304)
--------------- ----------- ----------- ------------
Total shareholders' equity 32,837 (7,683) 7,683 32,837
--------------- ----------- ----------- ------------
Total liabilities, mandatorily
redeemable preferred stock and
shareholders' equity $ 212,377 $ 1,486 $ 3,396 $ 217,259
=============== =========== =========== ============
</TABLE>
See notes to pro forma consolidated condensed financial statements (unaudited)
2
<PAGE> 20
MEMBERWORKS INCORPORATED
CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MemberWorks CIC Pro Pro
June 30, 1999 June 30, 1999 Forma Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 218,086 $ 5,156 $ (553) e $ 222,689
Expenses:
Operating 43,002 2,321 (553) e 44,770
Marketing 126,814 4,694 - 131,508
General and administrative 42,476 1,469 2,408 d,f 46,353
Other (income) expense, net (2,154) 40 764 g (1,350)
-------------- ------------ -------------- -----------
Total expenses 210,138 8,524 2,619 221,281
Income (loss) before income taxes 7,948 (3,368) (3,172) 1,408
Provision for income taxes - - - -
-------------- ------------ -------------- -----------
Net income (loss) from continuing operations $ 7,948 $ (3,368) $ (3,172) $ 1,408
============== ============ ============== ===========
Basic earning from continuing operations per share $ 0.52 $ 0.09
============== ===========
Diluted earnings from continuing operations per share $ 0.46 $ 0.08
============== ===========
Weighted average common shares used in earnings per
share calculations:
Basic 15,361 15,361
============== ===========
Diluted 17,124 17,124
============== ===========
</TABLE>
See notes to pro forma consolidated condensed financial statements (unaudited)
3
<PAGE> 21
MEMBERWORKS INCORPORATED
NOTES TO CONSOLIDATED CONDENSED PRO FORMA FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed balance sheet is based on the
Company's audited balance sheet as of June 30, 1999, CIC's audited balance sheet
as of June 30, 1999 and upon the adjustments described below. The unaudited pro
forma consolidated condensed statement of operations for the year ended June 30,
1999 is based on the Company's audited statement of operations for the year
ended June 30, 1999, CIC's audited statement of operations for the year ended
June 30, 1999 and upon the adjustments described below.
4
<PAGE> 22
NOTE 2. - PRO FORMA ADJUSTMENTS
The following adjustments have been made to the unaudited pro forma consolidated
condensed balance sheet at June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
TOTAL PRO
PRO FORMA PRO FORMA PRO FORMA FORMA
ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENTS
(a) (b) (c)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ (15,766) $ 28 $ - $ (15,738)
Accounts receivable - (74) (293) (367)
Prepaid expenses and other current
assets - (10) - (10)
Intangible and other assets 20,420 - (909) 19,511
Accrued liabilities 425 40 (322) 143
Long-term obligations - - (880) (880)
Mandatorily redeemable preferred stock (3,550) - - (3,550)
Capital in excess of par value (176) - - (176)
Deferred compensation 44 - - 44
Accumulated deficit 7,911 (96) - 7,815
</TABLE>
(a) Represents the purchase of all outstanding stock and options of CIC by
MemberWorks, the elimination of CIC's equity and the establishment of
goodwill and other intangible assets.
(b) Represents the repayment of CIC shareholder notes and other miscellaneous
merger related transactions.
(c) Represents the elimination of intercompany transactions.
The following adjustments have been made to the unaudited pro forma consolidated
condensed statement of operations for the year ended June 30, 1999:
(d) Represents the payment of bonus contingent upon merger ($107), and the
write-off of deferred compensation ($44).
(e) Represents the elimination of intercompany transactions.
(f) Represents the amortization of identifiable intangible assets and goodwill
as a result of the purchase of CIC. Identifiable intangible assets
represent the value of the acquired member relationships and are being
amortized on an accelerated basis based upon estimated cash flows over 7
years. Goodwill is being amortized on a straight line basis over its
estimated useful life of ten years.
(g) Represents foregone interest income on cash used to complete the
acquisition.
5
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-20235, 333-20237, 333-20241, and 333-23161) and
on Form S-3 (No. 333-77077) of MemberWorks Incorporated of our report dated
October 6, 1999 relating to the financial statements of ConsumerInfo.Com, Inc.,
which appears in this Form 8-K.
PricewaterhouseCoopers LLP
Costa Mesa, California
October 6, 1999
6
