<PAGE> 1
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 DECEMBER 31, 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: 14,898,493
shares of Common Stock, $0.01 par value as of February 2, 2000.
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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 December 31,
and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 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 9
Certain Factors That May Affect Future Results 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 29,792 $ 50,939
Accounts receivable 15,597 11,717
Prepaid membership materials 4,117 4,177
Prepaid expenses 4,045 2,313
Membership solicitation and other deferred costs 94,629 78,010
--------- ---------
Total current assets 148,180 147,156
Fixed assets, net 23,592 18,858
Intangible and other assets 62,228 43,813
--------- ---------
Total assets $ 234,000 $ 209,827
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 46 $ 72
Accounts payable 27,384 29,729
Accrued liabilities 57,218 40,702
Deferred membership fees 132,561 109,031
--------- ---------
Total current liabilities 217,209 179,534
Long-term obligations -- 6
--------- ---------
Total liabilities 217,209 179,540
--------- ---------
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; 16,130 shares issued
(15,909 shares at June 30, 1999) 161 159
Capital in excess of par value 77,927 76,999
Deferred compensation (277) (511)
Accumulated deficit (32,700) (38,042)
Accumulated other comprehensive gain (loss) 7 (14)
Treasury stock, 1,215 shares at cost (488 shares at June 30, 1999) (28,327) (8,304)
--------- ---------
Total shareholders' equity 16,791 30,287
--------- ---------
Total liabilities and shareholders' equity $ 234,000 $ 209,827
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 4
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 78,908 $ 50,128 $ 150,566 $ 94,581
Expenses:
Operating 14,201 10,023 27,197 18,259
Marketing 45,851 29,314 86,511 55,721
General and administrative 16,148 9,563 32,063 18,518
Other income, net principally interest (300) (420) (659) (854)
--------- --------- --------- ---------
Total expenses 75,900 48,480 145,112 91,644
--------- --------- --------- ---------
Income before equity in loss of affiliate 3,008 1,648 5,454 2,937
Equity in loss of affiliate (Note 5) -- (577) (112) (1,387)
--------- --------- --------- ---------
Income before income taxes 3,008 1,071 5,342 1,550
Provision for income taxes -- -- -- --
--------- --------- --------- ---------
Net income before cumulative effect of accounting change 3,008 1,071 5,342 1,550
Cumulative effect of accounting change -- -- -- (3,367)
--------- --------- --------- ---------
Net income (loss) $ 3,008 $ 1,071 $ 5,342 $ (1,817)
========= ========= ========= =========
Basic earnings (loss) per share:
Income before cumulative effect of accounting change $ 0.20 $ 0.07 $ 0.35 $ 0.10
Cumulative effect of accounting change -- -- -- (0.22)
--------- --------- --------- ---------
Basic earnings (loss) per share $ 0.20 $ 0.07 $ 0.35 $ (0.12)
========= ========= ========= =========
Diluted earnings (loss) per share:
Income before cumulative effect of accounting change $ 0.18 $ 0.06 $ 0.31 $ 0.09
Cumulative effect of accounting change -- -- -- (0.20)
--------- --------- --------- ---------
Diluted earnings (loss) per share $ 0.18 $ 0.06 $ 0.31 $ (0.11)
========= ========= ========= =========
Weighted average common shares used in earnings (loss) per
share calculations:
Basic 15,287 15,357 15,359 15,330
========= ========= ========= =========
Diluted 16,982 16,913 17,132 16,861
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
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MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 5,342 $ (1,817)
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 1,387
Membership solicitation and other deferred costs (98,708) (62,434)
Amortization of membership solicitation and other deferred costs 82,377 50,497
Deferred membership fees 20,738 21,695
Depreciation and amortization 5,352 2,459
Other 234 234
Change in assets and liabilities:
Accounts receivable (3,810) (2,794)
Prepaid membership materials 74 (1,090)
Prepaid expenses (1,481) (488)
Other assets (84) (727)
Accounts payable (4,859) (1,182)
Accrued liabilities 15,845 9,482
-------- --------
Net cash provided by operating activities 21,132 18,589
-------- --------
INVESTING ACTIVITIES
Acquisition of fixed assets (7,167) (6,414)
Business combinations, net of cash acquired and other investments (16,010) --
-------- --------
Net cash used in investing activities (23,177) (6,414)
-------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of stock and warrants 932 515
Treasury stock purchases (20,023) (1,380)
Payments of long-term obligations (32) (310)
-------- --------
Net cash used in financing activities (19,123) (1,175)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 21 --
-------- --------
Net (decrease) increase in cash and cash equivalents (21,147) 11,000
Cash and cash equivalents at beginning of period 50,939 35,933
-------- --------
Cash and cash equivalents at end of period $ 29,792 $ 46,933
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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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 six month
periods ended December 31, 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 Six months ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Net income before cumulative effect of accounting change $ 3,008 $ 1,071 $ 5,342 $ 1,550
Cumulative effect of accounting change -- -- -- (3,367)
-------- -------- -------- --------
Net income (loss) available to common shareholders $ 3,008 $ 1,071 $ 5,342 $ (1,817)
======== ======== ======== ========
Denominator for basic earnings (loss) per share:
Weighted average number of common shares outstanding - basic 15,287 15,357 15,359 15,330
Effect of dilutive securities:
Options and warrants 1,695 1,556 1,773 1,531
-------- -------- -------- --------
Weighted average number of common shares outstanding - diluted 16,982 16,913 17,132 16,861
======== ======== ======== ========
Basic earnings (loss) per share $ 0.20 $ 0.07 $ 0.35 $ (0.12)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.18 $ 0.06 $ 0.31 $ (0.11)
======== ======== ======== ========
</TABLE>
NOTE 3 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of December 31, 1999 and June 30, 1999 include an allowance for
membership cancellations of $28,627,000 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.
6
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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 three and six months ended December 31, 1998
was to decrease net income before the cumulative effect of accounting change by
$577,000 or $0.03 per diluted share, and $1,387,000 or $0.08 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 six
months ended December 31, 1999 and 1998 have been prepared assuming the CIC
acquisition had occurred as of July 1, 1999 for the three and six months ended
December 31, 1999 and as of July 1, 1998 for the three and six months ended
December 31, 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>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 78,908 $ 51,116 $ 151,107 $ 96,374
Net income (loss) before cumulative effect of accounting change 3,008 (97) 4,807 (319)
Basic earnings (loss) before cumulative effect of accounting
change per share $ 0.20 $ (0.01) $ 0.31 $ (0.02)
Diluted earnings (loss) before cumulative effect of accounting
change per share 0.18 (0.01) 0.28 (0.02)
</TABLE>
NOTE 6 - 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 $30 to $33 million. The cumulative effect
of the change, 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 June 30, 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.
7
<PAGE> 8
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 six month periods ended
December 31, 1999 would have been to increase revenues by $13.1 million and
$15.4 million, respectively, and increase net income before cumulative effect
of the change in accounting by $8.0 million or $0.47 per diluted share, and
$10.7 million or $0.63 per diluted share, respectively. The amounts for the
three and six 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.
8
<PAGE> 9
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 DECEMBER 31, 1999 VS. THREE MONTHS ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 57% to $78.9 million for the quarter ended December
31, 1999 from $50.1 million for the quarter ended December 31, 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
5.8 million members at December 31, 1999 from 4.4 million members at December
31, 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 $29.7 million in 1999 from $22.3 million in 1998. As a
percentage of individual membership revenues, these amounts represented 41% in
1999 and 47% in 1998. The decreased ratio was due to the rapid growth in new
members added during fiscal 1999.
OPERATING EXPENSES. Operating expenses increased 42% to $14.2 million in 1999
from $10.0 million in 1998 due to the servicing requirements of the larger
membership. As a percentage of revenues, operating expenses decreased to 18.0%
in 1999 from 20.0% in 1998 due to improved leverage of costs over the larger
membership base because the Company's call centers operated at capacity. The
Company expects to open a new call center in the March 2000 quarter which will
increase the expense ratio.
MARKETING EXPENSES. Marketing expenses increased 56% to $45.9 million in 1999
from $29.3 million in 1998 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses decreased to
58.1% in 1999 from 58.5% in 1998 primarily due to the shift in revenue mix
towards more efficient marketing methods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 69% to $16.1 million in 1999 from $9.6 million in 1998. As a
percentage of revenues, general and administrative expenses increased to 20.5%
in 1999 from 19.1% 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 19.2% in 1999 versus 19.1% in 1998.
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.
9
<PAGE> 10
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 decreased 29% to $0.3 million in
1999 from $0.4 million in 1998 due to the Company's decreased cash position .
The Company's cash position decreased to $29.8 million in December 1999 from
$46.9 million in December 1998 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 was not required to record a provision
for income taxes for the three months ended December 31, 1999 and 1998 due to
tax losses realized in those periods.
SIX MONTHS ENDED DECEMBER 31, 1999 VS. SIX MONTHS ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 59% to $150.6 million for the six months ended
December 31, 1999 from $94.6 million for the six months ended December 31, 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 5.8 million members at December 31, 1999 from 4.4 million members
at December 31, 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 $57.2 million in 1999 from $41.0 million in 1998. As a
percentage of individual membership revenues, these amounts represented 41% in
1999 and 46% in 1998. The decreased ratio was due to the rapid growth in new
members added during fiscal 1999.
OPERATING EXPENSES. Operating expenses increased 49% to $27.2 million in 1999
from $18.3 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 19.3% in 1998.
MARKETING EXPENSES. Marketing expenses increased 55% to $86.5 million in 1999
from $55.7 million in 1998 due to increased expenses required to grow the
membership base. As a percentage of revenues, marketing expenses decreased to
57.5% in 1999 from 58.9% in 1998 primarily due to the shift in revenue mix
towards more efficient marketing methods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 73% to $32.1 million in 1999 from $18.5 million in 1998. As a
percentage of revenues, general and administrative expenses increased to 21.3%
in 1999 from 19.6% 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 20.1% in 1999 versus 19.6% in 1998.
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.
OTHER INCOME, NET. Other income, net is primarily composed of interest income
from cash and cash equivalents. Other income decreased 23% to $0.7 million in
1999 from $0.9 million in 1998 due to the Company's decreased cash position .
The Company's cash position decreased to $29.8 million in December 1999 from
$46.9 million in December 1998 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.
10
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MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROVISION FOR INCOME TAXES. The Company was not required to record a provision
for income taxes for the six months ended December 31, 1999 and 1998 due to tax
losses realized in those periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased to $21.1 million for the six months ended
December 31, 1999 compared to $18.6 million in 1998 primarily due to changes in
working capital items which increased cash by $5.7 million in 1999 and
by $3.2 million in 1998. Operating cash flow before changes in working capital
was flat in 1999 versus 1998. 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
$5.7 million to operating cash flow in 1999 versus $3.2 million in 1998 due
primarily to an increase in accrued liabilities.
Net cash used in investing activities was $23.2 million in 1999 versus $6.4
million in 1998. 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 $7.2 million in 1999 from $6.4 million in 1998 primarily due to the
costs related to opening a new operations facility in Omaha, NE. The Company
expects to open an additional call center during the March 2000 quarter which
will require continued capital investment.
Net cash used in financing activities was $19.1 million in 1999 and $1.2 million
in 1998. 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. The Company purchased 727,000
shares during the six months ended December 31, 1999 and 51,000 shares during
the six months ended December 31, 1998.
As of December 31, 1999, the Company had cash and cash equivalents of $29.8
million and no 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 six months ended December 31,
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.
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.
11
<PAGE> 12
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $30 to $33 million.
The cumulative effect of the change, 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 June 30, 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 six month periods ended
December 31, 1999 would have been to increase revenues by $13.1 million and
$15.4 million, respectively, and increase net income before cumulative effect
of the change in accounting by $8.0 million or $0.47 per diluted share, and
$10.7 million or $0.63 per diluted share, respectively. The amounts for the
three and six 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.
12
<PAGE> 13
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) MemberWorks Incorporated's 1999 Annual Meeting of Stockholders was held
on November 17, 1999.
b) At the annual meeting the following Class III Directors were elected to
the Board of Directors as follows:
Gary A. Johnson : For - 13,796,356
Against - 22,010
Abstain - 0
Nonvotes - 1,608,115
Dennis P. Walker: For - 13,796,356
Against - 22,010
Abstain - 0
Nonvotes - 1,608,115
Class I Directors, Marc S. Tesler and Alec L. Ellison, and Class II
Directors, Stephen J. Clearman and Michael R. O'Brien, continue to
serve as Directors of the Company.
c) The ratification of PricewaterhouseCoopers LLP as the Company's
independent auditors was also approved at the annual meeting as
follows:
For - 13,796,641
Against - 19,700
Abstain - 2,025
Nonvotes - 1,608,115
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 October 12, 1999, the Company filed on Form 8-K/A 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 and the financial statements of ConsumerInfo.Com.
13
<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.
MEMBERWORKS INCORPORATED
(Registrant)
Date: February 10, 2000 By: /s/ Gary A. Johnson
-----------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
February 10, 2000 By: /s/ James B. Duffy
-----------------------------------
James B. Duffy, Executive Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 29,792
<SECURITIES> 0
<RECEIVABLES> 15,597
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 148,180
<PP&E> 23,592
<DEPRECIATION> 0
<TOTAL-ASSETS> 234,000
<CURRENT-LIABILITIES> 217,209
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 16,630
<TOTAL-LIABILITY-AND-EQUITY> 234,000
<SALES> 0
<TOTAL-REVENUES> 150,566
<CGS> 0
<TOTAL-COSTS> 145,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659
<INCOME-PRETAX> 5,342<F1>
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,342
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.31
<FN>
<F1>Includes Equity in Loss of affiliate of (112)
</FN>
</TABLE>
