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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 MARCH 31, 2000
Commission File No. 0-21527
MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
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<S> <C>
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)
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(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: 16,225,481
shares of Common Stock, $0.01 par value as of May 3, 2000.
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MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q
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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999 2
Condensed Consolidated Statements of Operations for the three
and nine months ended March 31, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Certain Factors That May Affect Future Results 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,199 $ 50,939
Marketable securities 20,767 --
Accounts receivable 16,522 11,717
Prepaid membership materials 4,598 4,177
Prepaid expenses 5,202 2,313
Membership solicitation and other deferred costs 112,573 78,010
--------- ---------
Total current assets 181,861 147,156
Fixed assets, net 26,905 18,858
Intangible and other assets 80,762 43,813
--------- ---------
Total assets $ 289,528 $ 209,827
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 30 $ 72
Accounts payable 33,934 29,729
Accrued liabilities 59,976 40,702
Due to related parties 1,791 --
Deferred membership fees 148,662 109,031
--------- ---------
Total current liabilities 244,393 179,534
Long-term obligations -- 6
--------- ---------
Total liabilities 244,393 179,540
--------- ---------
Minority interest 10,962 --
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; 16,398 shares issued
(15,909 shares at June 30, 1999) 164 159
Capital in excess of par value 86,063 76,999
Deferred compensation (160) (511)
Accumulated deficit (13,871) (38,042)
Accumulated other comprehensive gain (loss) 6 (14)
Treasury stock, 1,412 shares at cost
(488 shares at June 30, 1999) (38,029) (8,304)
--------- ---------
Total shareholders' equity 34,173 30,287
--------- ---------
Total liabilities and shareholders' equity $ 289,528 $ 209,827
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
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<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 85,129 $ 56,436 $ 235,695 $ 151,017
Expenses:
Operating 16,069 11,525 43,266 29,784
Marketing 50,279 33,154 136,790 88,875
General and administrative 16,858 9,655 46,291 27,143
Amortization of goodwill and other intangibles 1,693 513 4,323 1,543
Gain on sale of investment (Note 7) (47,475) -- (47,475) --
Realized loss on investment (Note 7) 29,414 -- 29,414 --
Other income, net (206) (591) (865) (1,445)
--------- --------- --------- ---------
Total expenses 66,632 54,256 211,744 145,900
--------- --------- --------- ---------
Income before equity in affiliate and minority interest 18,497 2,180 23,951 5,117
Equity in income (loss) of affiliate (Note 5) 130 (512) 18 (1,899)
Minority interest (Note 6) 403 -- 403 --
--------- --------- --------- ---------
Income before income taxes 19,030 1,668 24,372 3,218
Provision for income taxes (201) -- (201) --
--------- --------- --------- ---------
Net income before cumulative effect of accounting change 18,829 1,668 24,171 3,218
Cumulative effect of accounting change (Note 4) -- -- -- (3,367)
--------- --------- --------- ---------
Net income (loss) $ 18,829 $ 1,668 $ 24,171 $ (149)
========= ========= ========= =========
Basic earnings (loss) per share:
Income before cumulative effect of accounting change $ 1.26 $ 0.11 $ 1.59 $ 0.21
Cumulative effect of accounting change -- -- -- (0.22)
--------- --------- --------- ---------
Basic earnings (loss) per share $ 1.26 $ 0.11 $ 1.59 $ (0.01)
========= ========= ========= =========
Diluted earnings (loss) per share:
Income before cumulative effect of accounting change $ 1.10 $ 0.10 $ 1.41 $ 0.19
Cumulative effect of accounting change -- -- -- (0.20)
--------- --------- --------- ---------
Diluted earnings (loss) per share $ 1.10 $ 0.10 $ 1.41 $ (0.01)
========= ========= ========= =========
Weighted average common shares used in earnings (loss)
per share calculations:
Basic 14,976 15,369 15,235 15,343
========= ========= ========= =========
Diluted 17,173 17,299 17,149 17,007
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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<CAPTION>
Nine months ended March 31,
-------------------------
2000 1999
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OPERATING ACTIVITIES
Net income (loss) $ 24,171 $ (149)
Adjustments to reconcile net income (loss) to net cash
provided by Operating activities:
Cumulative effect of accounting change -- 3,367
Equity in (income) loss of affiliate (18) 1,899
Minority interest (403) --
Membership solicitation and other deferred costs (164,143) (106,325)
Amortization of membership solicitation and other
deferred costs 129,868 81,070
Deferred membership fees 36,721 42,515
Depreciation and amortization 8,705 3,824
Net gain on investment (18,061) --
Other 353 351
Change in assets and liabilities:
Accounts receivable (4,354) (2,158)
Prepaid membership materials (406) (1,161)
Prepaid expenses (2,618) (1,584)
Other assets (939) (581)
Accounts payable 1,365 (277)
Accrued liabilities 18,283 13,043
--------- ---------
Net cash provided by operating activities 28,524 33,834
--------- ---------
INVESTING ACTIVITIES
Acquisition of fixed assets (11,863) (8,567)
Business combinations, net of cash acquired and other
investments (18,714) (895)
--------- ---------
Net cash used in investing activities (30,577) (9,462)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of stock and warrants 3,066 939
Treasury stock purchases (29,725) (2,438)
Payments of long-term obligations (48) (354)
--------- ---------
Net cash used in financing activities (26,707) (1,853)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 20 --
--------- ---------
Net (decrease) increase in cash and cash equivalents (28,740) 22,519
Cash and cash equivalents at beginning of period 50,939 35,933
--------- ---------
Cash and cash equivalents at end of period $ 22,199 $ 58,452
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, such statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended March 31, 2000 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):
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<CAPTION>
Three months ended Nine months ended
March 31, March 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Net income before cumulative effect of accounting change $ 18,829 $ 1,668 $ 24,171 $ 3,218
Cumulative effect of accounting change -- -- -- (3,367)
-------- -------- -------- --------
Net income (loss) available to common shareholders $ 18,829 $ 1,668 $ 24,171 $ (149)
======== ======== ======== ========
Denominator for basic earnings (loss) per share:
Weighted average number of common shares outstanding -
basic 14,976 15,369 15,235 15,343
Effect of dilutive securities:
Options and warrants 2,197 1,930 1,914 1,664
-------- -------- -------- --------
Weighted average number of common shares outstanding -
diluted 17,173 17,299 17,149 17,007
======== ======== ======== ========
Basic earnings (loss) per share $ 1.26 $ 0.11 $ 1.59 $ (0.01)
======== ======== ======== ========
Diluted earnings (loss) per share $ 1.10 $ 0.10 $ 1.41 $ (0.01)
======== ======== ======== ========
</TABLE>
NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of March 31, 2000 and June 30, 1999 include an allowance for
membership cancellations of $29,845,000 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
fiscal quarter ended September 30, 1998 as a reduction of membership
solicitation and other deferred costs and net income.
5
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MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 - BUSINESS COMBINATIONS
On February 23, 2000, ConsumerInfo.com ("CIC"), a wholly-owned subsidiary of
MemberWorks, merged with eNeighborhoods, a leading provider of home resale and
neighborhood data on the Internet. The new entity was renamed iPlace, Inc.
MemberWorks is the majority shareholder with an approximate 65% ownership share.
The former eNeighborhoods' shareholders hold the remaining 35% ownership share.
The value of iPlace stock issued to eNeighborhoods shareholders is $17,350,000.
The transaction was accounted for as a purchase of eNeighborhoods by CIC with
the purchase price allocated to the assets acquired and liabilities assumed
based upon a preliminary valuation at the date of acquisition. The results of
eNeighborhoods' operations are included in the consolidated financial
statements from the date of acquisition.
On July 27, 1999, the Company increased its ownership percentage in 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
three and nine months ended March 31, 1999 was to decrease net income before the
cumulative effect of accounting change by $512,000 or $0.03 per diluted share,
and $1,899,000 or $0.11 per diluted share, respectively, 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 and nine
months ended March 31, 2000 and 1999 have been prepared assuming the CIC
acquisition had occurred as of July 1, 1999 for the three and nine months ended
March 31, 2000 and as of July 1, 1998 for the three and nine months ended March
31, 1999. 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).
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 85,129 $ 57,744 $ 236,236 $ 154,118
Net income (loss) before cumulative effect of
accounting change 18,829 715 23,636 396
Basic earnings (loss) before cumulative effect of
accounting change per share $ 1.26 $ 0.05 $ 1.55 $ 0.03
Diluted earnings (loss) before cumulative effect of
accounting change per share 1.10 0.04 1.38 0.02
</TABLE>
NOTE 6 - MINORITY INTEREST
As discussed in Note 5, iPlace, Inc. was formed on February 23, 2000 through the
merger of CIC, a wholly-owned subsidiary of MemberWorks, and eNeighborhoods.
Minority interest represents 35% of iPlace's losses for the period from February
23, 2000 to March 31, 2000.
NOTE 7 - GAIN ON SALE OF INVESTMENT
In February 2000, the Company sold its equity interest in AwardTrack, Inc. in
exchange for stock in 24/7 Media. In connection with this sale, the Company
recognized a gain of $47.5 million. Subsequently, the investment in 24/7
declined in value and management determined that the decline was other than
temporary. As a result, the Company's net gain on the sale of 24/7 was offset by
a write down of its investment in 24/7 of $29.4 million.
6
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MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
The Securities and Exchange Commission staff (the "Staff") issued "Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements" ("SAB
101") in December 1999. SAB 101 establishes the Staff's preference that
membership fees should not be recognized in earnings prior to the expiration of
refund privileges.
Notwithstanding the Staff's preference described above, it is also stated in SAB
101 that the Staff will not object to the recognition of refundable membership
fees, net of estimated refunds, as earned revenue over the membership period
(the Company's historical method) in limited circumstances where all of certain
criteria set forth in SAB 101 have been met.
The Company has decided to voluntarily adopt the full deferral method of
accounting for membership fee revenue for all of the Company's membership
programs having full refund privileges effective July 1, 2000. Consequently,
membership fees having full refund privileges, and the related direct costs
associated with acquiring the underlying memberships, will no longer be
recognized on a prorata basis over the corresponding membership periods, but
instead will be recognized in earnings upon the expiration of membership refund
privileges.
The amount of the one-time non cash charge to be recorded as of July 1, 2000 is
currently estimated to be $27 to $30 million. The decrease in the Company's
estimate at March 31, 2000 from the estimate at December 31, 1999 is due to a
change in the mix of business from full money back to prorata refund
memberships. The cumulative effect of the change at July 1, 2000, representing
the deferral of previously recognized membership fees net of estimated refunds
and associated direct costs, will depend upon the mix of programs and the
amounts of deferred revenues and costs associated with full refund memberships
at July 1, 2000. The membership fees, net of estimated refunds and associated
direct costs, which will be deferred as part of the cumulative effect adjustment
at July 1, 2000 will be recognized in earnings during fiscal year 2001 as the
underlying refund privileges expire.
If SAB 101 had been adopted effective July 1, 1999, the cumulative effect of the
accounting change would have been a one-time non cash charge of $38.4 million.
The impact of the change on the three and nine month periods ended March 31,
2000 would have been to increase revenues by $10.3 million and $26.7 million,
respectively, and increase net income before cumulative effect of the change in
accounting by $6.2 million or $0.36 per diluted share, and $16.5 million or
$0.96 per diluted share, respectively. The amounts for the three and nine month
periods include a portion of the membership fees, net of estimated refunds, and
associated direct costs previously recognized in fiscal 1999 earnings.
This change in accounting for the recognition of membership fees in income will
have no impact on the Company's cash flows or on the value of the underlying
memberships.
NOTE 9 - SUBSEQUENT EVENT
On April 30, 2000, iPlace, Inc., a majority-owned subsidiary of MemberWorks,
acquired all of the issued and outstanding common stock of Qspace, Inc. in
exchange for iPlace stock valued at approximately $12.6 million. Qspace is a
leading online provider of credit and personal finance information. The
acquisition will be accounted for under the purchase method of accounting during
the quarter ended June 30, 2000.
7
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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 MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased 51% to $85.1 million for the quarter ended March
31, 2000 from $56.4 million for the quarter ended March 31, 1999 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
6.2 million members at March 31, 2000 from 5.0 million members at March 31,
1999. 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 $32.9 million in 2000 from $23.5 million in 1999. As a percentage of
individual membership revenues, these amounts represented 42% in 2000 and 43% in
1999. The decreased ratio was due to the rapid growth in new members added.
OPERATING EXPENSES. Operating expenses increased 39% to $16.1 million in 2000
from $11.5 million in 1999 due to the servicing requirements of the larger
membership base. As a percentage of revenues, operating expenses decreased to
18.9% in 2000 from 20.4% in 1999 due to improved leverage of costs over the
larger membership base because the Company's call centers operated at capacity.
MARKETING EXPENSES. Marketing expenses increased 52% to $50.3 million in 2000
from $33.2 million in 1999 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses increased to
59.1% in 2000 from 58.7% in 1999 primarily due to increased costs incurred
during the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 75% to $16.9 million in 2000 from $9.7 million in 1999. As a
percentage of revenues, general and administrative expenses increased to 19.8%
in 2000 from 17.1% in 1999. 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 2000 compared to 1999 due to higher staff related expenses and
occupancy costs incurred. In addition, expenses increased as a percentage of
revenues due to the Company's efforts to expand its online marketing of
membership programs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
increased to $1.7 million in 2000 from $0.5 million in 1999 due to the
acquisition of four additional businesses since March 31, 1999.
8
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAIN ON SALE OF INVESMENT, NET. In February 2000, the Company sold its equity
interest in AwardTrack, Inc. in exchange for stock in 24/7 Media. In connection
with this sale, the Company recognized a gain of $47.5 million. Subsequently,
the investment in 24/7 declined in value during the quarter ended March 31, 2000
and management determined that the decline was other than temporary. As a
result, the Company's net gain on the sale was offset by a write down of its
investment in 24/7 of $29.4 million.
OTHER INCOME, NET. Other income decreased to $0.2 million in 2000 from $0.6
million in 1999 due to a decrease in the Company's cash position. The Company's
cash position decreased to $22.2 million in March 2000 from $58.5 million in
March 1999 primarily due to increased spending related to acquisitions and the
Company's share repurchase program. The Company invests in short-term,
investment-grade, interest-bearing securities. 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's tax provision was offset by a release
of its valuation reserve after utilizing net operating loss carryforwards during
the period to eliminate current taxable income. However, this resulted in a
provision for alternative minimum taxes of $0.2 million for the three months
ended March 31, 2000. The Company was not required to record a provision for
income taxes for the three months ended March 31, 1999 due to tax losses
realized.
NINE MONTHS ENDED MARCH 31, 2000 VS. NINE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased 56% to $235.7 million for the nine months ended
March 31, 2000 from $151.0 million for the nine months ended March 31, 1999 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
6.2 million members at March 31, 2000 from 5.0 million members at March 31,
1999. 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 $90.1 million in 2000 from $64.6 million in 1999. As a percentage of
individual membership revenues, these amounts represented 41% in 2000 and 45% in
1999. The decreased ratio was due to the rapid growth in new members added
during fiscal 2000.
OPERATING EXPENSES. Operating expenses increased 45% to $43.3 million in 2000
from $29.8 million in 1999 due to the servicing requirements of the larger
membership base. As a percentage of revenues, operating expenses decreased to
18.4% in 2000 from 19.7% in 1999.
MARKETING EXPENSES. Marketing expenses increased 54% to $136.8 million in 2000
from $88.9 million in 1999 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses decreased to
58.0% in 2000 from 58.9% in 1999 primarily due to the shift in revenue mix
towards more efficient marketing methods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 71% to $46.3 million in 2000 from $27.1 million in 1999. As a
percentage of revenues, general and administrative expenses increased to 19.6%
in 2000 from 18.0% in 1999. 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 2000 compared to 1999 due to higher staff related expenses and
occupancy costs incurred. In addition, expenses increased as a percentage of
revenues due to the Company's efforts to expand its online marketing of
membership programs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
increased to $4.3 million in 2000 from $1.5 million in 1999 due to the
acquisition of four additional businesses since March 31, 1999.
9
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAIN ON SALE OF INVESMENT, NET. In February 2000, the Company sold its equity
interest in AwardTrack, Inc. in exchange for stock in 24/7 Media. In connection
with this sale, the Company recognized a gain of $47.5 million. Subsequently,
the investment in 24/7 declined in value during the quarter ended March 31, 2000
and management determined that the decline was other than temporary. As a
result, the Company's net gain on the sale was offset by a write down of its
investment in 24/7 of $29.4 million.
OTHER INCOME, NET. Other income increased to $0.9 million in 2000 from $1.4
million in 1999 due to a decrease in the Company's cash position. The Company's
cash position decreased to $22.2 million in March 2000 from $58.5 million in
March 1999 primarily due to increased spending related to acquisitions and the
Company's share repurchase program. 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's tax provision was offset by a release
of its valuation reserve after utilizing net operating loss carryforwards during
the period to eliminate current taxable income. However, this resulted in a
provision for alternative minimum taxes of $0.2 million for the nine months
ended March 31, 2000. The Company was not required to record a provision for
income taxes for the nine months ended March 31, 1999 due to tax losses
realized.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations decreased to $28.5 million for the nine months ended
March 31, 2000 compared to $33.8 million in 1999 primarily due to higher
membership solicitation costs which increased 54% to $164.1 million in 2000 from
$106.3 million in 1999. Higher marketing and general and administrative costs
were incurred while consumer privacy requirements were being reviewed by the
Company's bank client partners. Changes in working capital items contributed
$11.3 million to operating cash flow in 2000 versus $7.3 million in 1999 due
primarily to an increase in accrued liabilities.
Net cash used in investing activities was $30.6 million in 2000 versus $9.5
million in 1999. In July 1999, the Company acquired the remaining 81% of
ConsumerInfo.Com for $15.9 million in cash. The Company's capital expenditures
increased to $11.9 million in 2000 from $8.7 million in 1999 primarily due to
the costs related to opening a new operations facility in Omaha, NE and a new
call center in Canada which the Company expects to open during the June 2000
quarter.
Net cash used in financing activities was $26.7 million in 2000 and $1.9 million
in 1999. The increase was due to treasury shares acquired under the Company's
stock repurchase program. On November 17, 1999, the Company's board of directors
approved a one million share repurchase program. On April 20, 2000, the
Company's board of directors approved an additional one million share repurchase
program. The Company purchased 924,000 shares during the nine months ended March
31, 2000 and 81,000 shares during the nine months ended March 31, 1999.
As of March 31, 2000, the Company had cash and cash equivalents of $22.2
million. In addition, the Company has a $20 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 0.25% per annum. There were no borrowings under this
line of credit during the nine months ended March 31, 2000. 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.
10
<PAGE> 12
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
For over a year, the Company has disclosed in its public reporting that the
Securities and Exchange Commission staff (the "Staff") planned to issue guidance
on revenue recognition and that such guidance could have a material impact on
the way the Company has historically recognized revenue. The Staff issued "Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements" ("SAB
101") in December 1999. SAB 101 establishes the Staff's preference that
membership fees should not be recognized in earnings prior to the expiration of
refund privileges.
Notwithstanding the Staff's preference described above, it is also stated in SAB
101 that the Staff will not object to the recognition of refundable membership
fees, net of estimated refunds, as earned revenue over the membership period
(the Company's historical method) in limited circumstances where all of certain
criteria set forth in SAB 101 have been met.
Nevertheless, in light of the SEC staff's preference expressed in SAB 101, the
Company has decided to voluntarily adopt, in fiscal 2001, the full deferral
method of accounting for membership fee revenue for all of the Company's
membership programs having full refund privileges. Consequently, membership fees
having full refund privileges, and the related direct costs associated with
acquiring the underlying memberships, will no longer be recognized on a prorata
basis over the corresponding membership periods, but instead will be recognized
in earnings upon the expiration of membership refund privileges.
As permitted by SAB 101, the Company has elected to adopt this change in
accounting effective July 1, 2000. The amount of the one-time non cash charge to
be recorded as of July 1, 2000 is currently estimated to be $27 to $30 million.
The decrease in the Company's estimate at March 31, 2000 from the estimate at
December 31, 1999 is due to a change in the mix of business from full money back
to prorata refund memberships. The cumulative effect of the change at July 1,
2000, representing the deferral of previously recognized membership fees net of
estimated refunds and associated direct costs, will depend upon the mix of
programs and the amounts of deferred revenues and costs associated with full
refund memberships at July 1, 2000. The membership fees, net of estimated
refunds and associated direct costs, which will be deferred as part of the
cumulative effect adjustment at July 1, 2000 will be recognized in earnings
during fiscal year 2001 as the underlying refund privileges expire.
If SAB 101 had been adopted effective July 1, 1999, the cumulative effect of the
accounting change would have been a one-time non cash charge of $38.4 million.
The impact of the change on the three and nine month periods ended March 31,
2000 would have been to increase revenues by $10.3 million and $26.7 million,
respectively, and increase net income before cumulative effect of the change in
accounting by $6.2 million or $0.36 per diluted share and $16.5 million or $0.96
per diluted share, respectively. The amounts for the three and nine month
periods include a portion of the membership fees, net of estimated refunds, and
associated direct costs previously recognized in fiscal 1999 earnings.
This change in accounting for the recognition of membership fees in income will
have no impact on the Company's cash flows or on the value of the underlying
memberships.
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.
11
<PAGE> 13
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 18, 2000, the Company announced that it had reached a settlement with
the Minnesota Attorney General's office, stemming from a complaint filed in the
State of Minnesota in June 1999 and subsequently amended in April 2000. In
connection with the settlement, the Company agreed to pay the State of Minnesota
$75,000 and to make certain modifications to its marketing and collateral
materials. The settlement did not have a material effect on the Company's
results of operations.
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
None
12
<PAGE> 14
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: May 15, 2000 By: /s/ Gary A. Johnson
-----------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
May 15, 2000 By: /s/ James B. Duffy
-----------------------------
James B. Duffy, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 22,199
<SECURITIES> 20,767
<RECEIVABLES> 16,522
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 181,861
<PP&E> 26,905
<DEPRECIATION> 0
<TOTAL-ASSETS> 289,528
<CURRENT-LIABILITIES> 244,393
<BONDS> 0
0
0
<COMMON> 164
<OTHER-SE> 34,009
<TOTAL-LIABILITY-AND-EQUITY> 289,528
<SALES> 0
<TOTAL-REVENUES> 235,695
<CGS> 0
<TOTAL-COSTS> 212,609<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (865)
<INCOME-PRETAX> 24,372<F1>
<INCOME-TAX> 201
<INCOME-CONTINUING> 24,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,171
<EPS-BASIC> 1.59
<EPS-DILUTED> 1.41
<FN>
<F1>Includes equity in income of affiliate of $18 and minority interest of $403
<F2>Includes gain on investment, net of $18,061.
</FN>
</TABLE>
