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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File No. 0-21527
MEMBERWORKS INCORPORATED
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1276882
- ---------------------------- ------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
9 West Broad Street;
Stamford, Connecticut 06902
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(203) 324-7635
---------------------------------
(Registrant's telephone number,
including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's capital stock:
15,471,402 shares of Common Stock, $0.01 par value as of October 29, 1999.
- --------------------------------------------------------------------------
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MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30,
and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Certain Factors That May Affect Future Results 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
--------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,181 $ 50,939
Accounts receivable 11,479 11,717
Prepaid membership materials 3,908 4,177
Prepaid expenses 2,436 2,313
Membership solicitation and other deferred costs 82,923 78,010
--------------- -------------
Total current assets 138,927 147,156
Fixed assets, net 21,168 18,858
Intangible and other assets 62,950 43,813
--------------- -------------
Total assets $ 223,045 $ 209,827
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 58 $ 72
Accounts payable 28,089 29,729
Accrued liabilities 47,406 40,702
Deferred membership fees 115,426 109,031
--------------- -------------
Total current liabilities 190,979 179,534
Long-term obligations 4 6
--------------- -------------
Total liabilities 190,983 179,540
--------------- -------------
Shareholders' equity:
Preferred stock, $0.01 par value --
1,000 shares authorized; no shares issued - -
Common stock, $0.01 par value --
40,000 shares authorized; 15,948 shares issued
(15,909 shares at June 30, 1999) 159 159
Capital in excess of par value 77,346 76,999
Deferred compensation (393) (511)
Accumulated deficit (35,708) (38,042)
Accumulated other comprehensive loss (8) (14)
Treasury stock, 518 shares at cost (488 shares at June 30, 1999) (9,334) (8,304)
--------------- -------------
Total shareholders' equity 32,062 30,287
--------------- -------------
Total liabilities and shareholders' equity $ 223,045 $ 209,827
=============== =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues $ 71,658 $ 44,453
Expenses:
Operating 12,996 8,236
Marketing 40,660 26,407
General and administrative 15,915 8,955
Other income, net principally interest (359) (434)
---------------- ----------------
Total expenses 69,212 43,164
---------------- ----------------
Income before equity in loss of affiliate 2,446 1,289
Equity in loss of affiliate (Note 5) (112) (810)
---------------- ----------------
Income before income taxes 2,334 479
Provision for income taxes - -
---------------- ----------------
Net income before cumulative effect of accounting change 2,334 479
Cumulative effect of accounting change - (3,367)
---------------- ----------------
Net income (loss) $ 2,334 $ (2,888)
================ ================
Basic earnings (loss) per share:
Income before income taxes and cumulative effect of
accounting change $ 0.15 $ 0.03
Cumulative effect of accounting change - (0.22)
---------------- ----------------
Basic earnings (loss) per share $ 0.15 $ (0.19)
================ ================
Diluted earnings (loss) per share:
Income before income taxes and cumulative effect of
accounting change $ 0.13 $ 0.03
Cumulative effect of accounting change - (0.20)
---------------- ----------------
Diluted earnings (loss) per share $ 0.13 $ (0.17)
================ ================
Weighted average common shares used in earnings (loss) per share
calculations:
Basic 15,432 15,303
================ ================
Diluted 17,454 16,801
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the three months ended
September 30,
------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,334 $ (2,888)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of accounting change - 3,367
Equity in loss of affiliate 112 810
Membership solicitation and other deferred costs (43,368) (28,056)
Amortization of membership solicitation
and other deferred costs 38,454 24,003
Deferred membership fees 3,602 7,713
Depreciation and amortization 2,435 1,150
Other 118 117
Change in assets and liabilities:
Accounts receivable 309 (1,992)
Prepaid membership materials 284 (470)
Prepaid expenses 129 (378)
Other assets (379) (213)
Accounts payable (3,094) (4,649)
Accrued liabilities 6,032 5,101
---------------- -----------------
Net cash provided by operating activities 6,968 3,615
---------------- -----------------
INVESTING ACTIVITIES
Acquisition of fixed assets (3,244) (4,096)
Business combinations, net of cash acquired
and other investments (15,790) -
---------------- -----------------
Net cash used in investing activities (19,034) (4,096)
---------------- -----------------
FINANCING ACTIVITIES
Net proceeds from issuance of stock and warrants 348 369
Treasury stock purchases (1,030) (818)
Payments of long-term obligations (16) (188)
---------------- -----------------
Net cash used in financing activities (698) (637)
---------------- -----------------
Effect of exchange rate changes on cash and cash equivalents 6 -
---------------- -----------------
Net decrease in cash and cash equivalents (12,758) (1,118)
Cash and cash equivalents at beginning of period 50,939 35,933
---------------- -----------------
Cash and cash equivalents at end of period $ 38,181 $ 34,815
================ =================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, such statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2000. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K with respect to the fiscal year ended June
30, 1999.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted earnings per share amounts are determined in accordance with
the provisions of FASB Statement No. 128 "Earnings Per Share". The following
table sets forth the reconciliation of the numerators and denominators in the
computation of basic and diluted earnings per share (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
1999 1998
------------ --------------
<S> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Net income before income taxes and cumulative effect
of accounting change $ 2,334 $ 479
Cumulative effect of accounting change - (3,367)
------------ --------------
Net income (loss) available to common shareholders $ 2,334 $ (2,888)
============ ==============
Denominator for basic earnings (loss) per share:
Weighted average number of common shares outstanding- basic 15,432 15,303
Effect of dilutive securities:
Options and warrants 2,022 1,498
------------ --------------
Weighted average number of common shares outstanding- diluted 17,454 16,801
============ ==============
Basic earnings (loss) per share $ 0.15 $ (0.19)
============ ==============
Diluted earnings (loss) per share $ 0.13 $ (0.17)
============ ==============
</TABLE>
NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of September 30, 1999 and June 30, 1999 include an allowance for
membership cancellations of $26,716,000 and $24,811,000, respectively.
NOTE 4 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective July 1, 1998, the Company changed its method of accounting for
printing and mailing membership materials. Historically, the Company had
accounted for the costs of printing and mailing of membership materials by
amortizing these costs ratably over the membership period as revenue was
recognized. Effective July 1, 1998, the Company started expensing these costs
upon the mailing of membership materials. The cumulative effect of this change
in accounting principle as of July 1, 1998 of $3.4 million was recorded in the
first fiscal quarter ended September 30, 1998 as a reduction of membership
solicitation and other deferred costs and net income.
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MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 - BUSINESS COMBINATIONS
On July 27, 1999, the Company increased its ownership percentage in
ConsumerInfo.Com, Inc. ("CIC"), a California Corporation, from 19% to 100%,
for cash consideration of $15,885,000. Prior to that date, the Company
had properly accounted for its 19% investment under the cost method of
accounting. In accordance with generally accepted accounting principles, the
Company has adjusted its prior period financial results to record
its 19% investment in CIC as if it had been accounted for under the equity
method of accounting. The effect of the restatement for the first quarter of
fiscal 1999 was to decrease net income before the cumulative effect of
accounting change by $810,000 or $0.05 per diluted share and increase the
opening accumulated deficit by $638,000. For the fiscal years ended June 30,
1999 and 1998, the effect of the restatement was to decrease net income by
$1,912,000 or $0.11 per diluted share and $638,000 or $0.04 per diluted share,
respectively. The effect of the restatement on the June 30, 1999 balance sheet
was to reduce intangible and other assets by $2,550,000.
Pro Forma Results
The following unaudited pro forma results of operations for the three months
ended September 30, 1999 and 1998 have been prepared assuming the CIC
acquisition had occurred as of July 1, 1999 for the quarter ended September 30,
1999 and as of July 1, 1998 for the quarter ended September 30, 1998. These pro
forma results are not necessarily indicative of the results of future operations
or of results that would have occurred had the acquisition been consummated as
of that date (in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
9/30/99 9/30/98
------- -------
<S> <C> <C>
Revenues $ 72,199 $ 45,258
Net income (loss) before cumulative effect of accounting change 1,799 (222)
Basic earnings (loss) before cumulative effect of accounting change per share $ 0.12 $ (0.01)
Diluted earnings (loss) before cumulative effect of accounting change per share 0.10 (0.01)
</TABLE>
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors intended to enhance existing relationships between businesses and
consumers. The Company derives its revenues principally from annually renewable
membership fees. The Company receives full payment of annual fees at or near the
beginning of the membership period, but recognizes revenue ratably over the
membership period. Similarly, the costs associated with soliciting each new
member, as well as the cost of royalties, are amortized ratably over the same
period. Profitability and cash flow generated from renewal memberships exceed
that of new memberships due to the absence of solicitation costs associated with
new member procurement.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Revenues increased 61% to $71.7 million for the quarter ended
September 30, 1999 from $44.5 million for the quarter ended September 30, 1998
due to an increase in the Company's membership base and an increase in the
weighted average program fee. The Company's membership base increased to
approximately 5.5 million members at September 30, 1999 from 3.9 million members
at September 30, 1998. The increase in the Company's membership base was due to
increased demand for the Company's existing programs, new programs introduced in
fiscal 1999 and members acquired through the Company's business acquisitions.
The increase in the weighted average program fee was due to an increase in
program pricing and introduction of new programs with higher fees. Revenues from
renewals increased to $27.5 million in 1999 from $18.8 million in 1998. As a
percentage of individual membership revenues, these amounts represented 42% in
1999 and 45% in 1998. The decreased ratio was due to the rapid growth in new
members added during fiscal 1999.
OPERATING EXPENSES. Operating expenses increased 58% to $13.0 million in 1999
from $8.2 million in 1998 due to the servicing requirements of the larger
membership base. As a percentage of revenues, operating expenses decreased to
18.1% in 1999 from 18.5% in 1998.
MARKETING EXPENSES. Marketing expenses increased 54% to $40.7 million in 1999
from $26.4 million in 1998 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses decreased to
56.7% in 1999 from 59.4% in 1998 primarily due to the shift in revenue mix
towards more efficient marketing methods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 78% to $15.9 million in 1999 from $9.0 million in 1998. As a
percentage of revenues, general and administrative expenses increased to 22.2%
in 1999 from 20.1% in 1998.
General and administrative expenses include goodwill amortization expenses
recorded in connection with business combinations. Excluding the effect of
amortization expense related to the three acquisitions completed since last
year, the expense ratio would have been 20.5%.
Increased legal and other outside professional services expenses were incurred
this year in connection with consumer privacy requirements being reviewed by the
Company's bank client partners. Expenses also increased in 1999 compared to 1998
due to higher staff related expenses and occupancy costs incurred.
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME, NET. Other income, net is primarily composed of interest income
from cash and cash equivalents. Other income of $0.4 million was reported in
1999 and 1998. The Company invests in short-term, investment-grade,
interest-bearing securities, and the amount of interest income fluctuates based
upon the amount of funds available for investment and prevailing interest rates.
PROVISION FOR INCOME TAXES. The Company was not required to record a provision
for income taxes for the three months ended September 30, 1999 and 1998 due to
tax losses realized in those periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased to $7.0 million for the quarter ended
September 30, 1999 compared to $3.6 million in 1998 primarily due to changes in
working capital items which increased cash in 1999 by $3.3 million but decreased
cash in 1998 by $2.6 million. Operating cash flow before changes in working
capital decreased in 1999 versus 1998 primarily due to higher membership
solicitation costs which increased 55% to $43.4 million in 1999. Higher costs
were incurred while consumer privacy requirements were being reviewed by the
Company's bank client partners. Working capital increased in 1999 due to
improvements in accounts receivable collections and the timing of accounts
payable terms.
Net cash used in investing activities was $19.0 million in 1999 versus $4.1
million in 1998. In July 1999, the Company acquired the remaining 81% in
ConsumerInfo.Com for $15.9 million in cash. The Company's capital expenditures
were $3.2 million in 1999 and $4.1 million in 1998.
Net cash used in financing activities was $0.7 million in 1999 and $0.6 million
in 1998 and was related to treasury shares acquired under the Company's stock
repurchase program. The Company purchased 30,000 shares in 1999 and 28,000
shares in 1998.
As of September 30, 1999, the Company has cash and cash equivalents of $38.2
million and virtually no long-term debt. In addition, the Company has a $10
million bank credit facility which bears interest at the higher of the base
commercial lending rate for the bank or the Federal Funds Rate plus 0.5% per
annum. There were no borrowings under this line of credit during the quarter
ended September 30, 1999. The Company believes that existing cash balances
together with its available bank credit facility, will be sufficient to meet its
funding requirements for at least the next twelve months.
YEAR 2000 ISSUES
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. The Company has completed an analysis of its software and hardware to
determine if its systems are Year 2000 compliant. The Company's project to
evaluate, modify and test its systems is substantially complete and involved
communication and testing with all of the Company's clients and vendors. This
testing has involved processing of customer files by both the Company and its
clients and vendors and the results have been positive. Based on the reviews and
analysis performed by the Company and an outside consultant, and since a
majority of its internal information technology systems have been developed or
modified within the last 5 years, the Company believes that the risk of
significant noncompliance of its internal information technology systems is
minimal.
The cost of the project has not been material to the Company and has been funded
through operating cash flows. The Company has expensed all costs associated with
this project as incurred.
Although management believes the Company's systems will be Year 2000 compliant,
the Company has developed contingency plans to address any possible system
failures. Because the Company uses multiple vendors to process
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its billing transactions, its external risk is mitigated as vendors may be used
interchangeably. However, there can be no assurance that these, or other
companies on which the Company relies will be timely converted or that any such
failure to convert would not have an adverse effect on the Company's systems and
operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity or financial condition. However, due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's operations, liquidity
or financial conditions.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including the statements in Liquidity and Capital Resources
regarding the adequacy of funds to meet funding requirements. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. A number of uncertainties exist that could affect
the Company's future operating results, including, without limitation, the
Company's history of losses, the Company's ability to retain existing clients
and attract new clients, the Company's dependence on membership renewals,
intense competition, the Company's continuing ability to develop new programs
which generate consumer interest, and general economic factors. The Company has
incurred significant operating losses since its inception. Although the Company
has experienced revenue growth and has reported net income in recent quarterly
periods, such growth rates and favorable results may not be sustainable and may
not be indicative of future operating results. There can be no assurance that
the Company will be able to maintain profitability in the future.
On September 1, 1998, the Company issued a press release that stated it had
contacted the Securities and Exchange Commission ("SEC") to determine whether
the SEC staff's view regarding the timing of revenue recognition for companies
such as MemberWorks Incorporated that sell services has changed in the wake of
Cendant Corporation's agreement (announced on August 27, 1998) with the SEC to
modify its revenue recognition practices. The Company had requested the SEC
staff to comment on and has provided the SEC staff with information
demonstrating the continued appropriateness of its revenue recognition
practices. The Company has consistently followed these practices in accordance
with generally accepted accounting practices and with the concurrence of
PricewaterhouseCoopers LLP, its independent accountants. As a result of this
review and several discussions with the SEC staff, the staff has not objected to
the Company's decision to presently continue to follow its revenue recognition
practices, as described above. The SEC staff did request the Company to change
its method of accounting for printing and mailing of membership materials,
beginning as of July 1, 1998. The Company has recorded the cumulative effect of
this change in accounting principle in the first quarter of fiscal 1999. See
footnote 4 for a description of the change and its financial impact.
On September 28, 1998, the SEC issued a press release and stated the "SEC will
formulate and augment new and existing accounting rules and interpretations
covering revenue recognition, restructuring reserves, materiality, and
disclosure" for all publicly-traded companies. Until such time as the SEC staff
issues such interpretative guidelines, it is unclear what, if any, impact such
interpretative guidance will have on the Company's current accounting practices.
However, the potential changes in accounting practice being considered by the
SEC staff could have a material impact on the manner in which the Company
recognizes revenue. Any such changes would have no effect on reported cash flow
or the economic value of the Company's memberships.
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MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (included in EDGAR copy only)
(b) Reports on Form 8-K
On August 11, 1999, the Company filed on Form 8-K under Item 2
"Acquisition or Disposition of Assets" and Item 7 "Exhibits,"
a press release announcing the purchase of the remaining 81%
of ConsumerInfo.Com ("CIC").
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MEMBERWORKS INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
MEMBERWORKS INCORPORATED
(Registrant)
Date: November 15, 1999 By: /s/ Gary A. Johnson
-------------- ---------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
November 15, 1999 By: /s/ James B. Duffy
- ------------------- ---------------------------------
James B. Duffy, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 38,181
<SECURITIES> 0
<RECEIVABLES> 11,479
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 138,927
<PP&E> 32,621
<DEPRECIATION> (11,453)
<TOTAL-ASSETS> 223,045
<CURRENT-LIABILITIES> 190,979
<BONDS> 4
0
0
<COMMON> 159
<OTHER-SE> 31,903
<TOTAL-LIABILITY-AND-EQUITY> 223,045
<SALES> 0
<TOTAL-REVENUES> 71,658
<CGS> 0
<TOTAL-COSTS> 69,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> 2,334<F1>
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,334
<EPS-BASIC> .15
<EPS-DILUTED> .13
<FN>
<F1>Includes Equity in loss of affiliate of (112)
</FN>
</TABLE>
