<PAGE>
As filed with the Securities and Exchange Commission on July 26, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SYNAPSE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware 5963 06-1310649
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization) -------------
4 High Ridge Park
Stamford, CT 06905-1325
(203) 595-8255
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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Michael R. Loeb
Chairman, President and Chief Executive Officer
SYNAPSE GROUP, INC.
4 High Ridge Park
Stamford, CT 06905-1325
(203) 595-8255
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
JOHN A. BURGESS, ESQ. MICHAEL W. BLAIR, ESQ.
JOHN H. CHORY, ESQ. DEBEVOISE & PLIMPTON
HALE AND DORR LLP 875 3rd Avenue
60 State Street New York, NY 10022
Boston, MA 02109 Telephone: (212) 909-6000
Telephone: (617) 526-6000 Telecopy: (212) 909-6836
Telecopy: (617) 526-5000
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Amount of
Title of each class of Offering Price Registration Fee
securities to be registered (1) (2)
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<S> <C> <C>
Common Stock, $.001 par value per share... $50,000,000 $13,200
</TABLE>
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of
1933, as amended.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum aggregate offering price.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated July 26, 2000
PROSPECTUS
Shares
(LOGO)
Common Stock
-----------
This is Synapse Group, Inc.'s initial public offering of common stock. We
are selling all of the shares. The underwriters will offer shares.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "SYNS."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 10 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.................................. $ $
Underwriting Discount.................................. $ $
Proceeds, before expenses, to Synapse Group............ $ $
</TABLE>
The underwriters may also purchase up to an additional shares at the
public offering price, less the underwriting discount, within 30 days from the
date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch & Co.
Allen & Company Incorporated
Banc of America Securities LLC
Wit SoundView
-----------
The date of this prospectus is , 2000
<PAGE>
Description of graphical material on inside front cover:
Photograph of computer keyboard, credit card, smiling woman and dollar sign
with the following caption:
"Today's Leading Independent Marketer of Subscription Services in the U.S."
with the following bullets:
Market Leadership
Consistent Growth
Recurring Revenues
Patent Protected
Technology Driven
Synapse Group, Inc.
with the following statement:
"Synapse Group, Inc.
The leading independent multi-channel provider of proprietary customer
acquisition and management services for publishers of consumer magazines in the
U.S."
Description of graphical material on inside of gatefold:
Multiple photographs of people, circuits, telephone keys and credit cards
with the following text:
"The Leading Independent Marketer of Subscription Services in the U.S.
1991 Breaking New Ground
Synapse Group, Inc. is founded. New territory is explored when
subscriptions are marketed in previously under-leveraged channels such as credit
card statements.
1995 Building Relationships
We develop Miles for Magazines Programs to market subscriptions through
major airlines. This provides a new opportunity for both customers and partner
airlines to benefit from loyalty programs.
1996 The Marketing Breakthrough
We introduce our multi-publisher continuous service system, a way of
marketing magazine subscriptions. This new process is awarded business method
patent protection in 2000.
1997 Bigger and Better Than Ever
<PAGE>
We introduce Magazine Direct, which taps into America's favorite catalog
brands and markets magazines to targeted consumers.
1998 Magazineoutlet.com
After a 3 year online relationship with a leading ISP provider, we launch
Magazineoutlet.com.
2000 Internet Growth
Leveraging the successful marketing model once again, SynapseConnect
introduces this value as a customer generator and brand builder through multi-
channel Internet marketing initiatives."
The statement: "Our Internet Marketing Innovations" with an arrow pointing
to reproductions of websites for freebizmag.com and magazineoutlet.com.
A picture of our logo and the statement "Today's Independent Marketing
Leader of Consumer Magazines in the U.S."
A list of the principal divisions and subsidiaries of Synapse Group, Inc.:
CAP Systems
Cardlink
Freebizmag.com
Magazine Direct, Inc.
Magazineoutlet.com
MDSC Corporation
NewSub Magazine Services, LLC
SynapseConnect, Inc.
Synapse Services, Inc.
Synapse Solutions, Inc.
The statement: "The leading independent multi-channel provider of
proprietary customer acquisition and management services for publishers of
consumer magazines in the U.S."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Forward-Looking Statements............................................... 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 27
Selected Consolidated Financial Data..................................... 28
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 31
Business................................................................. 43
Management............................................................... 57
Related Party Transactions and Relationships............................. 68
Principal Stockholders................................................... 73
Description of Capital Stock............................................. 78
Shares Eligible for Future Sale.......................................... 84
Underwriting............................................................. 86
Legal Matters............................................................ 89
Experts.................................................................. 90
Change In Auditors....................................................... 90
Where You Can Find Additional Information................................ 90
Index to Financial Statements............................................ F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and our common stock being sold in this offering and
our consolidated financial statements and the accompanying notes appearing
elsewhere in this prospectus. You should read the entire prospectus carefully,
especially the risks of investing in our common stock discussed under "Risk
Factors."
Our Business
Synapse Group is the leading independent multi-channel provider of
proprietary customer acquisition and management services for publishers of
consumer magazines in the United States. Founded in 1991 by Michael Loeb, a
publishing executive, and Jay Walker, the founder of priceline.com Incorporated
and Walker Digital LLC, we pioneered and patented a unique subscription system
that we believe greatly improves circulation economics and customer retention
levels for publishers. We recently entered into a multi-year strategic
marketing agreement with Time Inc., the largest magazine publisher in the U.S.,
an indirect subsidiary of which purchased approximately 23% of our outstanding
capital stock, on an as-converted basis.
One of the key innovations of our business model is our multi-publisher
"continuous service" subscription system, which replaces traditional fixed-term
subscriptions with more enduring, open-ended subscriptions that continue
uninterrupted until cancelled by the consumer. With our system, publishers no
longer need to rely on the inefficient renewal process, which involves mailing
repetitive and costly renewal notices simply to retain existing customers, and
customers no longer need to take repeated action simply to maintain service. As
a direct result, customer retention rates are significantly higher and renewal
costs are lower. Given the advantages of our continuous service system, we
expect a portion of the large existing base of fixed-term subscribers to
migrate to our continuous service system.
Another key innovation of our business model is our multi-channel
networks of affinity marketing partnerships through which we source new
customers. We market through relationships with credit card issuers, consumer
catalog companies, commercial airlines with frequent flier programs and
Internet businesses. Affinity marketing partners include some of the most
recognized brands in the U.S., including Citibank, N.A., First USA Bank, N.A.,
Spiegel, Victoria's Secret Catalogue, LLC, American Airlines, Inc., United Air
Lines, Inc., America Online, Inc. and priceline.com. We believe the superior
customer experience created by our continuous service system enables our
affinity marketing partners to generate revenue from the broad-based demand for
magazines within their customer bases while increasing customer interaction and
building loyalty.
Our success in acquiring large and increasing numbers of customers with
high renewal rates has created a substantial base of recurring revenues. The
economic advantages of our model allow us to present enriched offers to
prospective customers and provide a higher level of customer care than is
commonly available. Strong acceptance of our services by magazine publishers,
affinity partners and consumers has created rapid growth in our revenues and
market share and has enabled us to become the largest independent source of
subscribers for publishers of consumer magazines. In addition, we have
diversified our product offerings by providing our services for publishers of
business and trade magazines, and we have expanded our business through
numerous Internet initiatives. We believe these efforts will allow us to
increase both the number of marketing platforms we offer and the size of our
customer base.
We currently have agreements to market over 600 consumer magazine titles,
including most of the 100 largest titles, and over 250 business and trade
publications. For the year ended December 31, 1998, we sold approximately 10.5
million net magazine subscriptions, which represented a market share of 3.5%.
For the year ended December 31, 1999, we sold approximately 15.0 million net
magazine subscriptions. Comparative industry data for 1999 is not yet
available. We generated net magazine revenues of $109.9 million for the year
ended December 31, 1998 and $196.0 million for the year ended December 31,
1999. We generated total pro forma net revenues of $213.4 million for the year
ended December 31, 1999.
3
<PAGE>
Our Strategy
Our goal is to extend our position as the leading provider of
subscription acquisition and customer relationship management services for
publishers of consumer magazines in the U.S. and to expand both the number and
type of knowledge products we market and the channels through which we acquire
subscribers. We intend to pursue the following strategies:
. Expand existing channels with new marketing platforms and new affinity
marketing partner relationships;
. Develop new channels, with an emphasis on the Internet;
. Broaden our product range;
. Enable publishers and consumers to convert their existing fixed-term
subscriptions into continuous service subscriptions; and
. Further develop our intellectual property.
Internet Strategy
We have expanded our business through numerous Internet initiatives,
which we expect will allow us to significantly increase both the number of
marketing platforms we offer and the size of our customer base. We believe that
the fundamental innovations of our business model, namely our continuous
service system and our networks of affinity marketing partners, provide a
strong foundation on which to establish a diversified Internet presence. We
plan to continue to create marketing programs that use magazines and other
knowledge products to help our partners create more activity and value from
their customer bases and traffic. Current magazine-based marketing platforms
include our own magazine e-commerce site; private-label magazine stores on
partner sites; a cross-sell platform that enables our affinity marketing
partners to sell subscriptions to consumers as they purchase other products; a
private-label loyalty points program to stimulate and reward desired customer
actions; and a system for readers to locate, qualify for and subscribe to
business and trade publications. We are also developing our Internet-based
Magazine ManagerSM service to permit publishers and consumers to convert their
fixed-term subscriptions into continuous service subscriptions and to
centralize the management of all their subscription needs on one website.
Time Inc. Transaction
In June 2000, we sold 3,125,000 shares of our Series C preferred stock to
NSSI Holdings Inc., an indirect subsidiary of Time Inc. On the same date, Jay
Walker sold 6,875,000 shares of our Class A common stock and Class B common
stock held by him to NSSI Holdings. As of June 30, 2000, NSSI Holdings holds
approximately 21% of our common stock and 100% of our Series C preferred stock,
or approximately 23% of our issued and outstanding capital stock, on an as-
converted basis.
We also entered into a separate strategic marketing agreement under which
we obtained authorization to sell specific premier Time publications, including
People Weekly, Sports Illustrated and Time magazines, over the next four years.
During the term of this agreement, we guaranteed that we will generate certain
subscription volumes for the Time publications specified in the agreement which
are offered on inbound telephone calls to our affinity marketing partners.
Additionally, with certain exceptions, Time and its subsidiaries will not
operate programs which would offer magazine subscriptions on inbound telephone
calls to catalog call centers, or authorize others to operate such programs,
through June 30, 2004.
4
<PAGE>
Corporate Information and History
We were organized as a Connecticut corporation in June 1991 under the
name "NewSub Services, Inc." In December 1999, we reincorporated in Delaware
under the name "Synapse Group, Inc." by merging into a wholly owned Delaware
subsidiary. When we refer to ourselves or Synapse Group, these references
include the predecessor Connecticut corporation.
Our executive offices are located at Four High Ridge Park, Stamford,
Connecticut 06905-1325. Our telephone number is (203) 595-8255. Our website
address is www.synapsegroupinc.com. The information on our website is not
incorporated by reference into this document and should not be considered to be
a part of this document. Our website address is included in this document as an
inactive textual reference only.
Synapse, the Synapse logo, Magazine Direct(R), Magazine Manager, Magazine
Outlet, magazineoutlet.com, freebizmag, freebizmag.com, SynapseConnect and
Synapse Solutions are service marks belonging to Synapse or for which we have
applied for registration. Other trademarks or service marks appearing in this
prospectus are the property of their respective holders.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered....................... shares
Stock to be outstanding after the offering:
Common stock(a)......................... shares
Series A convertible preferred stock: 2,591,178.24 shares
Series B convertible preferred stock: 5,000,000.00 shares
Series C convertible preferred stock: 3,125,000.00 shares
--------------------
Total preferred stock: 10,716,178.24 shares
Use of proceeds............................ Repayment of existing
indebtedness, working capital and
other general corporate purposes,
including investment in our
technology and new marketing
platforms. See "Use of Proceeds"
on page 24.
Risk factors............................... See "Risk Factors" for a
discussion of factors you should
carefully consider before deciding
to invest in shares of our common
stock.
Proposed Nasdaq National Market symbol..... SYNS
</TABLE>
-------
(a) Excludes 9,958,664 shares of common stock we have reserved for issuance
under our 1997 Stock Option Plan, 1999 Stock Option Plan and 2000 Stock
Incentive Plan; and 2,499,999 shares of common stock issuable upon
exercise of outstanding warrants.
Except where otherwise indicated, all information in this prospectus:
. reflects the conversion of each outstanding share of our Class B
common stock into one share of our Class A common stock, which will
occur automatically upon the completion of this offering;
. assumes the filing, as of the closing of the offering, of our amended
and restated certificate of incorporation, which will redesignate our
Class A common stock as common stock, and the adoption of our amended
and restated by-laws;
. assumes that our outstanding preferred stock will not be converted
into common stock prior to or upon the closing of this offering;
. assumes that, when and if our preferred stock is converted into common
stock, each share of preferred stock will convert into one share of
common stock, based on the conversion ratio in effect on June 30,
2000; and
. assumes the underwriters do not exercise their options to purchase
additional shares in the offering to cover over-allotments, if any.
Under our charter, our outstanding preferred stock will be automatically
converted into common stock upon the closing of this offering only if the price
of the common stock sold in this offering is at least $11.58 per share in order
for the Series A preferred stock to be converted, or $12.00 per share in order
for the Series B and Series C preferred stock to be converted, and the
aggregate gross proceeds payable to us from this offering are at least $20
million. If either of these conditions is not met, the preferred stock will
remain issued and outstanding after the closing of this offering, unless
converted at the option of the preferred stockholders.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary financial data for our business. We
operated as a subchapter S corporation from our inception until March 1998. In
1998, we converted to a C corporation. You should read this information
together with our financial statements and the related notes appearing at the
end of this prospectus and the information under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------------------- -----------------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
Consolidated Statements 1997 1998 1999(a) 1999(b) 1999 2000 2000(b)
of Operations Data: ---------- ---------- ---------- ----------- ---------- ---------- -----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Magazine revenues(c).... $ 77,113 $ 109,878 $ 195,956 $195,956 $ 32,724 $ 56,937 $56,937
Merchandise & other
revenues(d)............ 100,516 100,884 81,489 17,409 14,190 23,646 5,993
---------- ---------- ---------- -------- ---------- ---------- -------
Net revenues........... 177,629 210,762 277,445 213,365 46,914 80,583 62,930
Product, marketing,
operation and general &
administrative
expenses(e)............ 199,697 236,338 246,325 176,804 43,185 74,168 57,971
---------- ---------- ---------- -------- ---------- ---------- -------
(22,068) (25,576) 31,120 36,561 3,729 6,415 4,959
Depreciation &
amortization........... 891 1,594 4,172 4,172 687 1,720 1,720
Interest (expense)
income................. 129 (4,240) (5,241) 518 (1,048) (658) 127
Income tax provision.... 278 1 22 22 -- -- --
---------- ---------- ---------- -------- ---------- ---------- -------
Net income (loss)
before extraordinary
item.................. (23,108) (31,411) 21,685 32,885 1,994 4,037 3,366
Extraordinary item(f)... -- -- -- -- -- (959) (959)
---------- ---------- ---------- -------- ---------- ---------- -------
Net income (loss)...... $ (23,108) $ (31,411) $ 21,685 $ 32,885 $ 1,994 $ 3,078 $ 2,407
========== ========== ========== ======== ========== ========== =======
Net income (loss) per
common share before
extraordinary item
Basic.................. $ (0.71) $ (0.97) $ 0.67 $ $ 0.06 $ 0.12 $
Diluted................ $ (0.71) $ (0.97) $ 0.56 $ $ 0.06 $ 0.10 $
Extraordinary item per
common share
Basic.................. $ -- $ -- $ -- $ $ -- $ (0.03) $
Diluted................ $ -- $ -- $ -- $ $ -- $ (0.02) $
Net income (loss) per
common share
Basic.................. $ (0.71) $ (0.97) $ 0.67 $ $ 0.06 $ 0.09 $
Diluted................ $ (0.71) $ (0.97) $ 0.56 $ $ 0.06 $ 0.08 $
Weighted average common
shares used in
computing per share
amounts
Basic.................. 32,390,000 32,390,000 32,390,000 32,390,000 32,697,000
Diluted................ 32,390,000 32,390,000 38,874,000 35,575,000 40,256,000
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------------------------------- ----------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
1997 1998 1999 1999(b) 1999 2000 2000(b)
Other Data: ---------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net subscriptions(g).... 8,321 10,469 15,036 15,036 3,246 4,675 4,675
EBITDA(h) $ (22,068) $ (25,576) $ 31,120 $ 36,561 $ 3,729 $ 6,415 $ 4,959
</TABLE>
(footnotes on following page)
7
<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------
As
Actual Adjusted (i)
------- ------------
<S> <C> <C>
Cash and cash equivalents............................ $ 808
Working capital deficiency........................... (35,515)
Total assets......................................... 190,869
Stockholders' loans and capital lease obligation,
long-term portion................................... 27,652
Total stockholders' deficiency....................... (44,774)
</TABLE>
--------
(a) A customer's right to cancel a subscription and obtain a refund of all or a
portion of the subscription price depends on the terms of the subscription
offer made to the customer. A subscription offer made before November 1,
1998, referred to as a full refund offer, allowed a subscriber to obtain a
full refund of the subscription price if the subscriber cancelled the
subscription at any time during the subscription period. We recognize
revenues from full refund subscriptions at the conclusion of the
subscription period.
Effective November 1, 1998, we began to market a substantial portion of our
subscription offers as pro rata refund offers, which allow the subscriber
to obtain a full refund before the end of the grace period, which typically
lasts from two to six months. After the grace period ends, the subscriber
is entitled to only a pro rata refund upon cancellation equal to the amount
of the purchase price relating to the undelivered portion of the
subscription. We currently are converting a majority of our outstanding
renewals of full refund offers into pro rata refund offers. We defer
revenues from pro rata refund offers until the end of the grace period. At
the end of the grace period, we recognize that portion of revenues
associated with the grace period, and we recognize the remainder of the
revenues ratably over the remaining period of the subscription.
As a result of this change in our offers, our operating results for the
year ended December 31, 1999 include a one-time benefit to revenues and net
income from full refund offers made in 1998 and pro rata refund offers made
in 1999. This is due to the recognition in 1999 of revenues from both the
completion of the initial period of 1998 full refund offers and a portion
of the 1999 pro rata refund offers which, if they had been made as full
refund offers, would have been recognized in fiscal 2000. In addition, $47
million of magazine solicitation costs associated with 1999 pro rata refund
offers were deferred at December 31, 1999. These costs would have been
expensed in 1999 if the offers had been made as full refund offers. If all
of our subscription offers made in 1999 had remained full refund offers,
our net revenues and net income in the year ended December 31, 1999 would
have been lower by approximately $64 million and $111 million.
(b) Pro forma as adjusted gives effect to the following:
(i) In January 2000, we entered into an agreement with two parties to form
Gift Services, LLC, a Delaware limited liability company in which we have a
49% ownership interest. Concurrently, we entered into a sales
representative agreement with Gift Services, which was subsequently amended
on April 1, 2000, in which we agreed to solicit orders for all products
marketed, promoted, distributed and/or sold by Gift Services. The pro forma
information reflects the impact of forming Gift Services on our operations
as if the transaction had taken place on January 1, 1999. The unaudited pro
forma information is presented for informational purposes only and does not
purport to represent what our results of operations would actually have
been if the transactions had occurred at the beginning of the period
indicated, or to project our results of operations at any future date or
for any future period. See Note 13 to the Consolidated Financial Statements
in this prospectus.
(ii) The elimination of interest expense on our debt which is assumed to be
repaid from the proceeds of this offering as of the beginning of the
periods presented.
8
<PAGE>
(c) Magazine revenues are comprised of pro rata and full refund offer revenues
and commissions earned from publishers for acquiring customers.
(d) Merchandise and other revenues are comprised of gift, phonecard and other
non-magazine businesses. The unaudited pro forma amounts for the fiscal
year ending December 31, 1999 include $10.8 million of commission revenues
relating to Gift Services and for the three months ended March 31, 2000
include $3.6 million of commission revenues relating to Gift Services.
(e) Product, marketing, operation and general and administrative expenses
include subchapter S corporation distributions to stockholders of $2.8
million for 1995, $8.0 million for 1996, $16.6 million for 1997 and $2.5
million for the portion of 1998 when we operated as an S corporation.
Effective March 1998, we became a C corporation.
(f) Extraordinary item represents the write-off of the remaining deferred
financing costs related to our March 1998 credit facility, which was
satisfied on January 12, 2000.
(g) Net subscriptions represent total new and renewal subscriptions fulfilled
in a calendar year for all magazine offers, less the estimated
cancellations based on historical cancellation rates by offer.
(h) EBITDA means the income (loss) we would have shown if we did not take into
consideration our net interest (expense) income, income tax expense and
depreciation and amortization. EBITDA is not a measurement in accordance
with generally accepted accounting principles, and you should not consider
it to be an alternative to, or more meaningful than, operating income or
loss, net income or loss or cash flows as defined by generally accepted
accounting principles or as a measure of our profitability or liquidity.
EBITDA may not be comparable to EBITDA or similarly titled measures
reported by other companies. However, we believe EBITDA serves as an
important operating measurement when evaluating our financial performance.
(i) The as adjusted balance sheet data reflects the sale of common shares in
this offering at an assumed price of $ per share and the application of
the assumed net proceeds of the offering.
9
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Synapse Group. As a stockholder of Synapse Group, you may be
exposed to the risks inherent in our business. The performance of your shares
will reflect the performance of our business relative to, among other things,
the competition and industry, general economic and market conditions. The
factors discussed below may harm our business, financial condition and results
of operations. The value of your investment may increase or decline and could
result in a loss. You should carefully consider the following risk factors as
well as other information contained in this prospectus before deciding to
invest in shares of our common stock.
Risks Related to Our Business
We have a history of losses and may incur future losses.
Our accumulated deficit as of March 31, 2000 was $108.1 million. Our
business was not profitable in 1997 and 1998, and we may incur losses in the
future. Although our net revenues have grown in recent quarters, if our net
revenues grow slower than we anticipate, or if our operating expenses exceed
our expectations and cannot be adjusted in a timely manner, our business,
results of operations, financial condition and prospects would be materially
and adversely affected. To support our current and future lines of business, we
plan to upgrade and expand our proprietary systems and infrastructure and
continue to build the technical staff necessary to do significant business on
the Internet. We also intend to increase our expenditures relating to marketing
and product development activities. The timing of our investments and expansion
could cause material fluctuations in our results of operations. We may incur
losses in the future and may not be able to sustain or increase profitability
on a quarterly or annual basis. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We depend on our key affinity marketing partners.
We rely heavily on our affinity marketing partner relationships. These
relationships are complex and require a great deal of effort and coordination
to operate successfully. If we fail to maintain these relationships, if our
affinity marketing partners do not perform to our expectations or if we do not
perform to their expectations, our ability to sell subscriptions, to market
additional services and to generate new revenues may be impaired.
Our relationships with our two largest affinity marketing partners
together accounted for approximately 28% of our total gross magazine revenues
in 1998 and 25% of our total gross magazine revenues in 1999. Any failure by
one or more of these affinity marketing partners to allow us to offer magazine
subscriptions or merchandise to their customers could have a material adverse
effect on our results of operations and financial condition. We cannot be
certain that our existing partners will continue to offer magazine
subscriptions or merchandise through their channels. Some of our agreements
with our affinity marketing partners are based on short term, oral agreements.
In addition, our agreements:
. typically give our affinity marketing partners influence in
determining the timing and presentation of our subscription offers;
. typically do not require our affinity marketing partners to meet
minimum subscription volume targets;
. may not require our affinity marketing partners to deal exclusively
with us in the offer of magazine subscriptions; and
. generally, can be terminated upon relatively short notice.
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If our affinity marketing partners change the methods in which they
conduct their business, our business could be affected. For example, as credit
card issuers move from issuing bills on paper to allowing card members to view
and pay their charges over the Internet, our traditional methods for
interacting with potential magazine subscribers will disappear. If we are
unable to respond to these changes by creating new methods of offering
subscriptions which are as effective as the methods we are currently using, our
ability to generate revenues will be impaired.
We depend on a limited number of publishers to supply us with a substantial
number of the magazines we sell.
The two largest publishers of the magazines we sell together accounted
for approximately 30% of our gross magazine subscriptions by value in 1998 and
31% of our gross magazine subscriptions by value in 1999. If either of these
publishers stops offering us magazines on economically beneficial terms, we may
not be able to offer customers competitive prices on their subscriptions. If
either of these publishers fails to provide us with magazines, we will not be
able to offer those particular magazines to consumers. Either of these events
could have a material adverse effect on our financial condition and results of
operations. Similarly, if any of the other publishers with whom we do business
decided not to allow us to offer subscriptions for magazines on favorable
terms, it could have a material adverse effect on our financial condition and
results of operations.
To be competitive, we must continue to develop new and enhanced magazine
subscription offers and promotions, and our failure to do so may adversely
affect our prospects.
Our market is characterized by frequent introductions of new magazine
subscription offers and promotions, and new and rapidly evolving marketing
channels. Our revenue growth depends upon our ability to generate magazine
orders by developing and introducing a variety of new and compelling magazine
subscription offers and promotions through new and innovative marketing
channels. If we fail to offer, or experience material delays in introducing,
new magazine subscription offers and promotions, customers could forgo
purchasing or renewing magazine subscriptions from us or our competitors could
introduce new programs before we do. In addition, the introduction or
announcement of new programs by us or by others could render existing programs
uncompetitive or obsolete. Our offers and promotions must also keep pace with
technological developments. We cannot be certain that we will be successful in
developing and marketing on a timely and cost-effective basis future services
or service enhancements, or that we will be able to offer new services that
respond to technological advances. We could incur substantial costs if we need
to modify our promotions or infrastructure to adapt to such changes.
If the Internet does not grow as an advertising, marketing and sales medium,
our growth would be hampered and our business impaired.
To address the demands of the market, we are applying our existing
marketing strategies to the Internet and developing new strategies which are
tailored to the Internet. Our future revenues and business prospects depend in
part on a significant increase in the use of the Internet as an advertising,
marketing and sales medium. Internet advertising and marketing is new and
rapidly evolving, and it cannot yet be compared with traditional advertising
media or marketing programs to gauge its effectiveness. As a result, demand for
and market acceptance of Internet advertising and marketing programs are
uncertain. Further, the Internet is still emerging as a significant channel for
selling goods and services to consumers. The adoption of Internet advertising
and marketing, particularly by entities that have historically relied upon more
traditional methods, requires the acceptance of a new way of advertising and
marketing. Our customers may find Internet advertising and marketing to be less
effective for meeting their magazine subscription needs than other methods of
advertising and marketing. If we are unable to execute our Internet strategy or
if consumers do not accept the Internet as a marketing channel, our growth
would be hampered and our business impaired.
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Contractual guarantees we have granted Time may become materially
disadvantageous to us.
Under the June 2000 marketing agreement with Time, we have guaranteed
that we will generate certain minimum subscription volumes for a four year
period for specific Time publications on inbound telephone calls to our
affinity marketing partners. We have made specific guarantees with respect to
certain magazine titles on an individual and/or a group basis. If we fail to
meet any of the guaranteed amounts, after the application against any shortfall
of certain excess subscription volume from other magazines, and certain
reductions of guaranteed amounts in the event our total subscription volume on
inbound telephone calls is below certain specified levels, we will be required
to pay Time a fee for each subscription that we fail to generate. If we were to
sell none of the specified Time publications during the first year of the
agreement, the fee would be approximately $13 million. This annual amount
increases in subsequent years under the marketing agreement. In addition, Time
has the right to terminate the agreement if we fail to reach at least 60% of
the annual aggregate guaranteed amount. Either of these consequences could have
a material adverse effect on our business, financial condition and results of
operations.
Our relationship with Time may have negative consequences.
Our contractual and equity relationship with Time may have negative
consequences. The fact that we now have a closer relationship with Time may
hamper our efforts to establish potentially beneficial relationships with other
publishers in the future. It may also harm our existing relationships with
other publishers. In addition, the contractual relationship with Time is not
exclusive except with respect to the marketing channel of inbound telephone
calls to certain catalog companies. For channels not covered by our
relationship, Time may enter into arrangements with our competitors and thus
compete against us. Time has interests in or is a shareholder of selected
companies with which we compete, including American Family Publishers and
enews.com, inc.
New or existing competitors could enter our marketing channels and drive up our
costs.
New or existing competitors could enter our marketing channels and create
their own relationships with our affinity marketing partners. Some of our
affinity marketing agreements are oral, and our affinity marketing agreements
generally have short terms. Although we believe we have good relationships with
our affinity marketing partners and the advantage of having entered these
channels first, competitors could enter the channels in which we currently
operate. There is also no assurance that one or more of our affinity marketing
partners would not try to compete with us and offer magazines directly to their
customers. Increased competition could drive up the prices we must pay for
available assets, including available advertising space in credit card billing
envelopes and capacity at catalog company call centers, thereby impairing our
business.
We have recently begun to develop our Magazine Manager service, and it is
uncertain whether it will achieve widespread customer acceptance.
We are developing our Internet-based Magazine Manager service to permit
consumers to centralize the management of all their subscription needs on one
website. We have not yet realized any revenues from sales of this service.
While we expect to implement this service on a commercial basis in late 2001,
we may encounter delays or difficulties in this commercial introduction. We
cannot assure you that our Magazine Manager service will achieve widespread
customer acceptance, and any failure to do so would harm our potential for
growth.
If we fail to protect our intellectual property rights, or if our intellectual
property rights prove inadequate, our business and prospects could be
materially and adversely affected.
We seek to protect our proprietary rights through a combination of
patent, copyright, trade secret and trademark law and confidentiality
agreements. Any inability to protect or any inadequacy of our intellectual
property or other proprietary rights could seriously harm our business since it
could enable competitors to copy important features of our business.
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We currently hold a United States business method patent covering various
aspects of our continuous service subscription system. The patent does not
prevent magazine publishers from offering continuous service subscriptions
directly to consumers, nor does it prevent others from marketing continuous
service subscriptions based on billing methods other than automatic billing of
consumers' credit cards. Either or both of these possibilities may nullify the
competitive advantage of the patent. Moreover, although the patenting of
business methods has been upheld by the federal courts, business method patents
remain controversial. Our business method patent therefore may be more likely
than more traditional patents to be the subject of a court challenge or a
request for re-examination by the United States Patent and Trademark Office. We
have also filed applications for additional patents directed to various aspects
of our current and future systems and business methods. We cannot assure you
that any of these applications for patent protection will be approved. The
United States Patent and Trademark Office announced in March 2000 that it will
be introducing a second layer of review for business method patent
applications, and it is possible that this heightened scrutiny may make it more
difficult for us to obtain patent protection for our business methods.
We also have filed numerous applications in the United States to register
various service marks used in our business. We cannot assure you, however, that
any of our applications for registration will be approved.
We also cannot assure you that our patent or service mark rights will not
be successfully challenged by others or invalidated. We also cannot assure you
that we will be able to prevent misappropriation of our technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
The legal protections we have obtained under patent, copyright, trade
secret and trademark law afford us only limited protection. It is possible that
our competitors may gain access to our intellectual property, which may result
in the loss of our competitive advantages. Furthermore, we would like to offer
our services internationally, and the laws of many countries do not protect our
proprietary rights as well as the laws of the United States.
Litigation may be necessary to enforce our intellectual property rights,
to protect our trade secrets and to determine the validity and scope of our
proprietary rights and the proprietary rights of others. Any litigation could
result in substantial costs and diversion of resources with no assurance of
success and could seriously harm our business and operating results. In
addition, we cannot assure you that we do not infringe any intellectual
property rights of third parties. Any intellectual property infringement claim
asserted against us could result in significant liability, the inability to use
key rights and technologies and the invalidation of our own proprietary rights.
Regardless of the outcome, any litigation could be time-consuming, expensive,
and distracting of management's time and attention.
We have registered the Internet domain names magazineoutlet.com,
freebizmag.com and magazinemanager.com, the core domain names used in our
business, as well as various other domain names related to our business. The
regulation of domain names in the United States and in foreign countries is
subject to change. As a result, we may not be able to acquire or maintain
domain names in all of the countries in which we wish to conduct business.
Unanticipated increases in paper or printing costs, postage or telephone rates
could increase our costs.
Credit card issuers and airlines require us to pay for the promotional
inserts and direct mail which are mailed to their customers. If the cost of
postage, paper or printing increases, our cost of doing business could
increase. Similarly, we sometimes pay for all or a portion of the incoming
telephone calls to our catalog partners' call centers if the customer service
representative markets our subscription offers during the call. An increase in
telecommunication costs could increase our costs and impair our business.
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Increased cancellation rates, lower renewal rates or additional requests for
refunds under our service guarantee would impair our profits.
The profitability of each of our programs depends on recurring revenues
resulting from sustained subscription renewals. We experience a higher
percentage of cancellations during the initial subscription period as compared
to renewal periods. While our continuous service system results in generally
higher renewal rates than other subscription sellers achieve, we cannot be
certain that our past performance will accurately predict our future results.
If cancellation rates of magazine subscriptions were to exceed the projected
rate which we factor into our business plans, or if renewal rates decrease, we
would generate less revenues and might be unable to generate profits. Renewal
rates are influenced by several factors, many of which are outside of our
control, including changing subscriber preferences, competitive price
pressures, general economic conditions, customer satisfaction and credit
cardholder turnover.
We also offer a service guarantee that allows consumers to demand a full
or partial refund of the subscription price. The terms of our refund policy are
contained in our subscription offers. In addition, requests for refunds of
subscription prices by a significant number of our customers could have a
material adverse effect on our financial condition and results of operations.
Our growth is placing a significant strain on our resources.
We have experienced significant growth. This growth has placed, and the
anticipated future growth in our operations will continue to place, a
significant strain on our operational, systems and employee resources. As a
result, we will have to implement new operational and financial systems,
procedures and controls. In order to manage our planned growth, we will need to
maintain our product development program, expand our marketing capabilities and
develop our technology and operational personnel. In addition, we will need to
adapt our financial planning, accounting systems, information systems and
management structures to accommodate this growth, if it occurs. If we are
unable to manage our growth effectively, our financial condition and results of
operations could be materially adversely affected.
We may be liable if our magazine subscribers' personal information, or the
confidential information of our marketing partners and publisher clients, is
used inappropriately.
In order for us to continue to be successful, our clients must trust that
we will maintain the confidence and security of their customers' personal
information. If employees or third parties were able to penetrate our network
security, they could misappropriate our subscribers' personal information or
credit card information or our marketing partners' or publisher clients'
confidential information, including marketing data, sales data and contact
information. A breach of security could adversely affect our reputation, and we
could be subject to liability arising from claims related to, among other
things, unauthorized purchases with credit card information, impersonation or
other similar fraud claims or other misuse of personal information, such as for
unauthorized marketing purposes. While we have recently established an
information technology security office, it will take some time for this office
to identify and resolve all threats to our security. If our security systems
are breached, we could lose the trust of, and business from, our affinity
marketing partners.
If our computer systems produce inaccurate information about new or renewal
subscriptions, or if we lose the services of third party providers and
suppliers who design and manage such systems and provide other services, we may
experience customer or partner dissatisfaction, which could result in customer
or partner loss and exposure to lawsuits.
Our success, and in particular our ability to receive and fulfill
subscription orders and provide quality customer service, depends on the
efficient and uninterrupted operation of our computer systems and on complex
software which third parties have created and continue to enhance for us.
Although we are in the process of creating an information technology function
within Synapse Group, we are currently dependent upon
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external suppliers for most of our systems development and technology
operations. While our personnel typically create the business specification for
new technology, supply project management oversight, coordinate implementation
activities and test the finished system, we rely upon external technical
organizations to provide all the project management, technical design,
application development and on-going production operations. In many cases, we
rely on a single supplier to provide a particular service. For example, we
contract with third parties to provide key entry, merchant processing services,
telemarketing, and customer service support. We cannot assure you that if we
lose the services of such third party providers and vendors that we will be
able to perform that work ourselves. Our future operating results will
therefore depend, in part, upon our ability to retain the services of these
third party providers and vendors at an acceptable cost. We cannot assure you
that these third party providers and vendors will not terminate their
relationships with us or seek higher fees, which could have a material adverse
effect on our business, results of operations and financial condition. The loss
of the services of, or an increase in the fees we pay to, these third party
providers and vendors could adversely affect our business.
In addition, we currently have no back-up systems for many of the
software systems which run our e-commerce and other production applications. If
our suppliers do not provide high quality services and systems in a timely
manner, our business will be severely disrupted until we are able to qualify
and switch to other suppliers. Also, any failure in our non-redundant software
systems could hurt our business.
System interruptions may also result from fire, power loss, water damage,
telecommunications failures, vandalism and other malicious acts and problems
related to our equipment. Software programs also frequently contain defects,
particularly when first introduced or when new versions are released, which can
adversely affect performance or result in inaccurate data. We may not discover
software defects that affect our new or current services or enhancements until
after the software is deployed, even though the software is tested prior to
release. Any errors could result in delays in the introduction or acceptance of
new offers and promotions, diversion of resources, loss of revenue and damage
to our reputation. For example, inaccurate information could cause our
customers to over-pay or under-pay for their magazines subscriptions or cause
us to over-pay or under-pay our publisher clients their portion of subscription
prices. Software defects or inaccurate data may also provide us with an
inaccurate basis on which to renew, terminate or alter our customer's magazine
subscriptions and may lead to customer and public dissatisfaction with our
services. As a result, we could be held liable for any damages incurred by our
customers or our publisher clients, which could harm our relationships with
those customers and publisher clients.
We have not documented nor tested a disaster recovery/business continuity plan
for any of our computer systems.
We maintain redirection, also known as fail-over, capability for our
magazine and merchandise transaction processing systems. In the event of an
unrecoverable failure on the magazine or merchandise production systems, we
would manually reroute the data feeds to the backup system. Although this plan
works theoretically and the equipment capabilities are in place, the plan has
never been tested. Additionally, the plan has not been completely documented
with procedures established and responsibilities assigned. An inability to
redirect our transaction systems, redistribute production activities or
relocate key personnel in a timely manner could have a material adverse effect
on our business and operating results.
We are dependent on key personnel to operate our business effectively.
Our future success may depend on the continued service and performance of
our senior management and other key personnel, particularly Michael Loeb, our
Chairman, President and Chief Executive Officer, and our other executive
officers. In addition, we have recently hired Douglas Alpuche as our new Chief
Financial Officer and, in order to grow, we must attract other highly skilled,
creative employees. Our future operating results will depend, in part, upon our
ability to retain the services of these individuals. We cannot assure you that
key personnel will not leave Synapse Group or compete with us, which could have
a material adverse
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effect on our business, results of operations and financial condition. The loss
of the services of any of our executive officers or other key employees could
adversely affect our business. Our senior management may not perform
effectively as individuals or work together as a team. In addition, competition
for employees in our industry and geographic area is intense.
We may be unable to realize certain tax benefits as a result of this offering.
Because of our sale of shares from this offering and our prior equity
issuances in 2000, we may experience an "ownership change," generally defined
as a greater than 50% change in ownership, for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended. As a result, our ability to offset
future taxable income with net operating loss carryforwards, as well as tax
credits, may be limited and certain of our tax attributes, including net
operating loss carryforwards, may be reduced, but not eliminated. We may incur
losses in the future and may not be able to sustain or increase profitability
sufficiently to realize these tax attributes.
As we expand our business internationally, we may need to adapt our products
and services and we may become subject to foreign government regulation and
taxation, currency issues, difficulties in managing foreign operations and
foreign political economic instability.
We may decide in the future to expand into foreign markets. There can be
no assurance as to whether or when any such expansion will be implemented. In
order to successfully expand internationally, we must establish foreign
operations, hire additional personnel and modify our technology systems, which
will require a significant amount of financial resources and the attention of
our management, which could materially adversely affect our business. In
addition, we do not currently offer the magazine titles necessary to conduct
operations in many foreign markets. We will be unlikely to be able to penetrate
such markets unless we gain such titles through relationships with
international publishers. International sales and operations are subject to
numerous risks, including unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, difficulties in protecting intellectual property
rights, longer payment cycles, problems in collecting accounts receivable,
fluctuations in currency exchange rates, implementation of foreign exchange
controls and potentially adverse tax consequences. One or more of such factors
could have a material adverse effect on any future international operations
and, consequently, on our business, financial condition and results of
operations. See "Business--Strategy."
If we acquire or make strategic investments in other businesses and acquire or
license technology and other assets, we may have difficulty integrating these
businesses or generating an acceptable return from acquisitions.
While we have no present intention to acquire other businesses, we may
acquire or make strategic investments in businesses and acquire or license
technology and other assets. We cannot assure you that acquisition or licensing
opportunities will be available on terms acceptable to us or at all. These
acquisitions will involve risks, including: inability to raise the required
capital; inability to compete successfully for available acquisition
candidates; difficulty in assimilating the acquired assets, operations and
personnel; disruption of our ongoing business; distraction of our management
from other responsibilities; and lack of the necessary experience to enter new
markets.
We may not successfully overcome problems encountered in connection with
potential acquisitions or licensing arrangements. In addition, acquisitions
could materially impair our operating results, causing us to incur additional
debt, or requiring us to amortize acquisition expenses and acquired assets.
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We cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all, which could adversely affect our ability to
continue operations and grow our business. Any such additional financing may
dilute or otherwise adversely affect our stockholders.
Although we do not currently anticipate needing to raise additional funds
within 12 months after this offering, we may need to raise additional funds at
some time in the future. Our past operating losses and our expectation of
significant operating and capital expenditures makes it difficult to predict
whether our future financial condition, revenues and results of operations will
be sufficient to obtain financing on reasonable terms or at all. Because we
were not in compliance as of December 31, 1998 and throughout 1999 with the
financial covenants and ratios of a credit facility we had entered into in
March 1998, we might have some difficulty obtaining financing on acceptable
terms, despite having repaid all outstanding balances on that credit facility
on January 12, 2000. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to fund our planned expansion, develop or
acquire new or enhanced products and services, respond to competitive
pressures, promote our brand name, or acquire complementary technologies or
services.
If we raise additional funds by issuing equity securities, stockholders
may experience dilution of their ownership interest. Moreover, we could issue
preferred stock that has rights senior to those of our common stock. If we
raise funds by issuing debt securities, such securities would have rights,
preferences and privileges senior to holders of common stock and our lenders
may place limitations on our operations.
Risks Related to Our Industry
Our industry is highly competitive and a failure to compete effectively will
adversely affect our operating results.
Our industry is highly competitive, and we compete, directly and
indirectly, with companies that provide magazines, newspapers, journals, books
and other knowledge products to consumers, including large, well-established
news and information providers such as Dow Jones and Knight Ridder; magazine
subscription agents such as Publishers Clearing House, American Family
Publishers, an affiliate of publisher Time, one of our principal stockholders,
and Quality School Plan, a subsidiary of The Reader's Digest Association, Inc.;
and major consumer-oriented online book sellers and magazine retailers such as
enews.com and USAPubs.com. We also compete with magazine subscription agents
such as Publisher's Clearing House, American Family Publishers and Quality
School Plan for authorizations from magazine publishers to sell subscriptions.
We also compete against the direct marketing efforts and subscriber acquisition
programs of the magazine publishers themselves, among which are Time, Hearst,
Conde Nast, Meredith and Ziff Davis. Furthermore, because we offer our products
through distribution channels made possible by arrangements with third parties,
we compete with other vendors for agreements with those third parties providing
access to those channels. We expect that competition from new and existing
companies will intensify. We also could face competition from membership
service programs, which could choose to compete with us either directly or
indirectly through affiliations with e-commerce and/or retail companies. We
will attempt to compete based upon the quality of our services and the
deepening of our relationship with our marketing partners and publisher
clients. Many of our existing competitors, as well as potential new
competitors, have longer operating histories, greater name recognition and
greater financial, technical and marketing resources than we do. This may allow
them to devote greater resources than we can to the development and promotion
of products and services, including marketing and strategic alliances, allowing
them to achieve greater brand awareness than we could. If we are unable to
compete successfully, our business, operating results and financial condition
will be materially and adversely affected.
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If magazine advertising declines significantly, demand for our services could
be reduced.
Advertising generates a significant portion of magazine publishers'
revenue. Advertising rates for each magazine are determined largely by rate
bases, which are a function of the magazine's circulation and reader
demographics. Publishers therefore contract with third parties to market their
magazines in order to attract more subscribers, which allows publishers to
charge higher advertising rates. Advertisers, however, have a choice of a wide
array of forms of advertising which compete with magazine advertising,
including television, Internet, billboards and radio. If advertising rates were
to drop significantly or advertisers were to purchase significantly less
magazine advertising, the incentive for publishers to use our services to
increase their subscription bases could decrease and our business could be
impaired.
Our magazine subscription sale business is subject to sales tax uncertainties.
Although some states currently impose sales or other similar taxes on the
sale of magazine subscriptions, many others do not. However, if more states
enact laws taxing magazine sales, or if states with magazine sales taxes
increase their rates, our costs could increase and our business and prospects
could suffer.
Our Internet business is subject to sales tax uncertainties.
A number of proposals have been made at state and local levels that could
impose taxes on the sale of products and services through the Internet or on
the income derived from such sales. Currently we are not obligated to collect
sales or use tax on subscriptions sold over the Internet in the states in which
we do not have sufficient nexus. Our Internet activity may require the
remittance of sales or use tax in those states in which we do have nexus and
which impose a sales tax on subscription sales. While the requirement to
collect sales and use tax under these circumstances does not currently impose a
material adverse risk on our financial condition or results of operations,
changes to these tax laws could impact our business.
Changes in the Audit Bureau of Circulations' circulation qualification
standards could require us to alter our marketing strategies.
The Audit Bureau of Circulations agreed in 1991 to allow publishers,
under certain circumstances, to count subscriptions paid for with frequent
flyer miles or other reward currencies to count as paid magazine subscriptions
when determining circulation rate bases. Since 1995, we have been offering
magazine subscriptions to members of frequent flyer and similar retention
reward programs. If the Audit Bureau of Circulations were to change its
circulation qualification standards regarding the redemption of frequent flyer
miles or other reward currencies to count as paid magazine subscriptions, our
ability to sell subscriptions in exchange for frequent flyer miles or other
reward currencies could be materially adversely affected.
Government regulation related to the marketing of subscriptions and gifts to
consumers could add significant additional costs to our business.
Laws and regulations directly applicable to marketing and consumer
protection are becoming more prevalent. For example, federal and state
authorities have been investigating various companies' use of personal
information and magazine subscription agents' sweepstakes practices. In
addition, each of the fifty states and the federal government has laws
regulating telemarketing, sweepstakes promotions and advertising to consumers
which vary from state to state. While we review our advertising copy to ensure
that it complies with applicable laws, there is no guarantee that federal or
state authorities will not find that our marketing efforts do not comply with
these laws. In addition, we could incur additional expenses if new regulations
regarding the use of personal information are introduced. Also, if any of these
laws significantly regulate our offer structures, marketing continuous service
subscriptions could be impacted and our business and prospects may suffer
materially.
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From time to time, consumer advocates have threatened to bring industry-
wide lawsuits which could encompass us. We, along with magazine subscription
marketers and publishers, have received correspondence challenging lowest price
claims made by certain agents and publishers. Although we have been proactive
in revising our offers to clarify their terms, we could still be included as
defendants if a class action suit were brought against the members of the
industry. Regardless of the outcome, any litigation could be time-consuming and
expensive and distract management's time and attention.
Extensive government regulation and legal uncertainties related to doing
business on the Internet could limit our sales or add significant additional
costs to our business.
Laws and regulations directly applicable to Internet communications,
commerce, marketing and data protection are becoming more prevalent. If any of
these laws hinders the growth in use of the Internet generally or decreases the
acceptance of the Internet as a medium of communications, commerce and
marketing, our business and prospects may suffer materially. The United States
Congress has enacted Internet laws regarding children's privacy, copyrights and
taxation. Other laws and regulations may be adopted covering issues such as
user privacy, marketing activities, pricing, content, taxation and quality of
products and services. The governments of some states and foreign countries
have begun to regulate our transactions and levy sales or other taxes relating
to our activities and will likely continue to do so. The laws governing the
Internet remain largely unsettled, even in areas where legislation has been
enacted. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising and marketing services. In addition, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business over the
Internet.
Changes in laws relating to consumer privacy and potentially heightened
scrutiny of our services could harm our business.
There has been increasing public debate about the collection,
distribution and use of information about consumers. Although this debate has
primarily focused on information collected through the Internet, many of the
issues apply to data gathered through other media. We interact with consumers
through our various direct marketing efforts, both online and offline. We
recognize the potential value of our customer information asset to third party
marketers. We are currently developing a comprehensive privacy policy and,
until one is fully defined and promulgated, we have no plans to rent or sell
information about our customers to third parties. We have also recently
designated a privacy administrator to provide management oversight for all uses
of customer information, and we are developing a comprehensive privacy policy.
However, as a consequence of government regulation or evolving standards of
consumer privacy protection, we may be required to make changes to our
marketing media and platforms in ways that could diminish the effectiveness of
our marketing efforts, which could harm our business.
Internet security concerns could hinder e-commerce.
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications over
the Internet. Any well-publicized compromise of security could deter people
from using the Internet or using it to conduct transactions that involve
transmitting confidential information. We may incur significant costs to
protect against the threat of security breaches or to alleviate problems caused
by such breaches.
The sale of our products involves product liability risks.
We sell merchandise directly to consumers and also solicit gift orders on
behalf of Gift Services, a joint venture in which we hold a 49% ownership
interest. Regardless of the structure of our gift businesses, like any
distributor of products we face an inherent risk of exposure to product
liability claims if the use of our products results in illness or injury. From
time to time, we have received complaints from consumers about
19
<PAGE>
products that we have offered. If we do not have adequate insurance or
contractual indemnification, product liability claims could have a material
adverse effect on our business.
Risks Related to the Offering
Our outstanding preferred stock may not convert into common stock as a result
of this offering; holders of our preferred stock have rights senior to the
rights you would have as a holder of common stock.
Our outstanding preferred stock will be automatically converted into
common stock upon the closing of this offering only if the price of the common
stock sold in this offering is at least $11.58 per share in order for the
Series A preferred stock to be converted, or $12.00 per share in order for the
Series B and Series C preferred stock to be converted and the aggregate gross
proceeds payable to us from this offering is at least $20 million. If these
conditions are not met, the preferred stock will remain issued and outstanding
after the closing of this offering and holders of preferred stock will continue
to have the rights described in our certificate of incorporation. The preferred
stock ranks senior to the common stock, and holders of preferred stock enjoy a
variety of protections which are not available to holders of common stock,
including:
. Upon a voluntary or involuntary liquidation, dissolution or winding
up of Synapse Group, holders of preferred stock are entitled to be
paid a liquidation preference of the per share price of the preferred
stock plus any declared but unpaid dividends before holders of common
stock are paid. If our assets at the time of a liquidation,
dissolution or winding up are not sufficient to pay the preferences
of all of the outstanding preferred stock, those assets will be
distributed to the holders of the preferred stock on a pro rata
basis, and holders of common stock will receive nothing. If our
assets are sufficient to pay the liquidation preferences of all of
the outstanding preferred stock, holders of common stock will receive
a distribution of such assets only after the liquidation preference
has been paid.
. Upon the occurrence of certain significant transactions, such as a
merger or tender offer where 50% or more of our shares are acquired
or a sale of our assets, holders of a majority of the outstanding
shares of each series of preferred stock may elect to have all
outstanding shares of that series of preferred stock automatically
converted into a payment equal to the liquidation preference for that
series.
. The conversion price of the Series A preferred stock is subject to a
so-called "weighted average" adjustment if we issue new securities,
other than certain specified securities, for less than the conversion
price of the Series A preferred stock. In this case, the conversion
price of the Series A preferred stock would be adjusted downward to
reflect the relative amount of new securities issued and the amount
by which the purchase price of those new securities is less than the
Series A preferred stock conversion price.
. The conversion price of the Series B and Series C preferred stock is
subject to a so-called "full ratchet" adjustment if we issue new
securities, other than certain specified securities, for less than
the conversion price of the Series B and Series C preferred stock. In
this case, the conversion price of the Series B and Series C
preferred stock would be adjusted downward to equal the purchase
price of those new securities.
. If on or before January 12, 2001, we have not either closed this
offering, or sold or merged Synapse Group, at a valuation of Synapse
Group of at least $425 million without giving effect to this
offering, the Series B and Series C preferred stock conversion prices
would be reduced to $6.50 per share. For an initial public offering,
the valuation is calculated by multiplying the mid-point of the
anticipated price range per share of common stock, as set forth in
the most recently circulated "red-herring" prospectus, by the total
number of shares of common stock outstanding on a fully-diluted basis
prior to this offering. The number of shares of common stock
outstanding on a fully-diluted basis reflects the total number of
shares of our Class A common stock issued and outstanding, plus the
total number of shares of our Class A common stock that are issuable
upon exercise or conversion of all securities which are ultimately
convertible into shares of
20
<PAGE>
common stock which are "in the money" on that date. For a merger, the
valuation is calculated by multiplying the net per share price paid
by the acquiror for each share of common stock by the total number of
shares of common stock outstanding on a fully-diluted basis
immediately prior to the transaction. The net per share price is
calculated by dividing the aggregate dollar amount paid to our
stockholders as consideration in the merger by the number of shares
of common stock outstanding on a fully-diluted basis. For a sale, the
valuation equals the aggregate proceeds received by the holders of
our common stock.
. So long as the holder of our Series C preferred stock and/or any
affiliate owns at least 3% of our outstanding common stock, as
measured on a fully diluted basis, such stockholder will have the
right to designate a representative to be nominated as a management
nominee to our board of directors. If such stockholder does not
designate a nominee or its nominee is not elected to our board of
directors, it may instead appoint an observer to attend meetings of
our board of directors.
. Holders of preferred stock are entitled to notice of certain other
significant events, including the declaration of a dividend and the
merger or sale of Synapse Group.
We expect our operating results to fluctuate, and the price of our common stock
could fall if quarterly results are lower than the expectations of securities
analysts or stockholders.
We believe that quarter-to-quarter comparisons of our operating results
are not necessarily meaningful. You should not rely on the results of one
quarter as an indication of our future performance. If our quarterly operating
results fall below the expectations of securities analysts or stockholders, the
price of our common stock could fall. We have experienced significant
fluctuation in our quarterly operating results and may continue to experience
significant fluctuation. Factors that may cause these fluctuations include:
changes in the timing and structure of our subscription offers; changes in
market demand for magazine subscriptions; increased competition; growth in and
timing of new magazine subscriptions; changes in the regulatory environment;
and changes in accounting standards.
Our stock price may be extremely volatile, which may prevent you from reselling
your shares at or above the initial public offering price.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between the underwriters and us. The market price of the common
stock after this offering may vary from the initial public offering price.
Fluctuations in market price and volume are particularly common among
securities of companies with an Internet strategy. As a result, you may not be
able to resell your shares at or above the initial offering price. The market
price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:
. actual or anticipated fluctuations in our operating results;
. our announcements of significant contracts, affinity marketing
partnerships, joint ventures, acquisitions or new marketing channels;
. failure to complete significant sales;
. additions or departures of key personnel;
. future sales of common stock;
. automatic adjustments to the conversion ratio of one or more series
of our preferred stock if we issue common stock or any securities
that are convertible into common stock for a price less than the
conversion price for that series of preferred stock, or if we fail to
close this offering, or a sale or merger of Synapse Group, by January
12, 2001 at a company valuation of at least $425 million without
giving effect to this offering;
. changes in financial estimates by securities analysts;
. investors' perceptions; and
21
<PAGE>
. market volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
Investors will experience immediate and substantial dilution in the book value
of their investment.
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution. The price that you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due in large part to the fact that our earlier
investors paid substantially less than the public offering price when they
purchased their shares. You will experience additional dilution upon the
exercise of outstanding options and warrants to purchase common stock or those
which we will issue. Dilution will also occur if the conversion ratio of one or
more series of our preferred stock automatically adjust due to our issuance of
common stock or any securities that are convertible into common stock for a
price less than the conversion price for that series of preferred stock or due
to our failure to close this offering, or a sale or merger of Synapse Group, by
January 12, 2001 at a company valuation of at least $425 million without giving
effect to this offering. See "Dilution" for further information regarding the
dilution in the net tangible book value of the shares purchased in this
offering.
Future sales of our common stock by existing stockholders may lower our stock
price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock within a short period of time
after this offering could depress the market price of our common stock and
could impair our ability to raise capital through the sales of additional
equity securities. See "Shares Eligible for Future Sale" for additional details
on the number of shares which may be sold in the public market.
Our existing stockholders will be able to control all matters requiring
stockholder approval and could delay or prevent someone from acquiring or
merging with us on terms favored by a majority of our independent stockholders.
On completion of this offering, our executive officers, directors,
principal stockholders and their affiliates will beneficially own approximately
% of our outstanding common stock, % of our Series A preferred stock, % of
our Series B preferred stock, and % of our Series C preferred stock, or
approximately of the aggregate voting power of Synapse Group. As a result,
these stockholders will be able to exercise control over our operations and all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This could delay or prevent a
third party from acquiring or merging with us. This could have a negative
effect on the market price of our common stock and prevent our stockholders
from realizing a premium over the market prices for their shares of common
stock.
Our charter and by-laws and provisions of Delaware law could discourage an
acquisition of our company that would benefit our stockholders.
Our certificate of incorporation and by-laws and certain provisions of
Delaware corporate law could make it more difficult for a third party to
acquire control of us, even if a change in control would benefit our
stockholders. These provisions could have the effect of delaying, deterring or
preventing a change in the control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale of our company, or could otherwise discourage a potential
acquirer from attempting to obtain control of us, which in turn could
materially adversely affect the market price of our common stock.
22
<PAGE>
We will have broad discretion in using the proceeds from this offering.
We are bound by the terms of a credit agreement with Arena Capital
Investment Fund, LP to use a portion of the proceeds of this offering to repay
a $25 million note held by Arena Capital Investment Fund. We have not
identified specific uses for the remaining proceeds from this offering, and we
will have broad discretion in how we use them independent of what the
stockholders might believe is best for our company. Our management can spend
most of the proceeds from this offering in ways with which the stockholders
might not agree. You will not have the opportunity to evaluate the economic,
financial or other information on which we base our decision on how to use the
proceeds. We cannot assure you that the proceeds will be invested to yield a
favorable return.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements include, among other things:
. our anticipated growth strategies;
. our intention to introduce new products and services; and
. anticipated trends in our businesses, including trends in the market
for membership programs.
In some cases, you can identify forward-looking statements by words such
as "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," or similar words.
The forward-looking statements included in the prospectus are subject to
risks, uncertainties and assumptions about us. While we believe that it is
important to communicate our future expectations to our investors, our actual
results of operations may differ materially from the forward-looking statements
as a result of, among other things, the risk factors described under "Risk
Factors." We undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this prospectus might not occur.
23
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $ million, after deducting estimated
underwriting discounts and commissions and offering expenses payable by us. If
the over-allotment option is exercised in full, we estimate that our net
proceeds will be approximately $ million.
The principal purposes of the offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We expect to use the net proceeds from this offering for the repayment of
our existing indebtedness, as well as working capital and other general
corporate purposes, including investment in our technology and new marketing
platforms.
We will repay a $25 million term loan which we received from Jay Walker,
one of our directors and stockholders, on January 12, 2000. We borrowed the
full $25 million of the new facility on that date, which we have used for
working capital and other general corporate purposes. On February 1, 2000, the
rights and obligations of Mr. Walker under this new facility were assigned to
Arena Capital Investment Fund, LP, a Delaware limited partnership. This loan,
which matures on April 7, 2001, requires that we make interest payments every
90 days. The loan bears interest initially at the 3 month LIBOR rate, which as
of June 30, 2000 was 6.77%, plus 275 basis points per annum. The rate will
increase by an additional 200 basis points if the loan is not repaid by October
1, 2000, and additional increases of 25 basis points for each three month
period thereafter that the loan remains outstanding, up to a cap of an
additional 100 basis points. In addition, on October 1, 2000 we are required to
pay a cash rollover fee equal to 2% of the principal outstanding on that date.
While the loan remains outstanding we must obtain Arena Capital Investment
Fund's consent in order to:
. make capital expenditures in excess of $20 million per year;
. incur certain types of indebtedness and liens or make certain types
of investments;
. effect certain types of fundamental changes, such as a merger,
consolidation, liquidation, dissolution or acquisition of assets; or
. declare or pay dividends or make any other distribution to common or
preferred stockholders other than dividends payable solely in common
stock.
On March 20, 2000, Arena SG Holdings, LLC, an affiliate of Arena Capital
Investment Fund, purchased from Mr. Walker 1,250,000 shares of the Company's
Class B common stock for $8.00 per share and an option to purchase an
additional 625,000 of the Company's Class B common stock for an exercise price
of $8.00 per share.
See "Related Party Transactions and Relationships" for more information
about these transactions. Although we may use a portion of the net proceeds to
acquire businesses, products or technologies that are complementary to our
business, we have no specific acquisitions planned. Until we use the net
proceeds of the offering, we plan to invest the net proceeds in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
In March 1998, we paid a special dividend totaling approximately $30
million to our stockholders. We do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all future earnings, if any,
for use in the operation of our business. While the loan facility with Arena
Capital Investment Fund remains outstanding we may not, without its consent,
declare or pay dividends or make any other distribution to common or preferred
stockholders, other than dividends payable solely in common stock.
24
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis, giving effect to the conversion of all of our
outstanding Class B common stock outstanding as of that date into
voting common stock; and
. on a pro forma as adjusted basis, giving effect to the foregoing as
well as our receipt of the net proceeds from the issuance and sale of
the shares of common stock in this offering, after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us, and the application of the assumed net
proceeds of this offering.
The outstanding share information excludes:
. 4,620,477 shares of common stock issuable upon exercise of options
outstanding as of that date with a weighted average exercise price of
$7.88 per share;
. 5,338,187 shares of common stock reserved for future issuance under
our 1997 Stock Option Plan, 1999 Stock Option Plan and 2000 Stock
Incentive Plan; and
. 2,499,999 shares of common stock issuable upon exercise of
outstanding warrants to purchase shares of Class A common stock at an
exercise price of $8.00 per share.
. 3,125,000 shares of Series C preferred stock sold to NSSI Holdings,
an indirect subsidiary of Time Inc., in June 2000 for $8.00 per
share.
. 62,500 shares of Class B common stock sold to a director in June 2000
for $8.00 per share.
You should read this table along with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and the related notes to them and the other financial
information in this prospectus.
25
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
--------- --------- ---------
(in thousands, except share
data)
<S> <C> <C> <C>
Debt, excluding current portion............... $ 27,652 $ 27,652 $
Stockholders' equity (deficiency):
Preferred stock, $.001 par value; 10,000,000
shares authorized; 7,591,178.24 shares
issued and outstanding, actual, pro forma
and pro forma as adjusted:
Series A convertible preferred stock,
$.001 par value; 2,600,000 shares
authorized, 2,591,178.24 shares issued
and outstanding, actual; 2,591,178.24
issued and outstanding, pro forma and pro
forma as adjusted........................ -- --
Series B convertible preferred stock,
$.001 par value; 5,000,000 shares
authorized, 5,000,000 shares issued and
outstanding, actual; 5,000,000 issued and
outstanding, pro forma and pro forma as
adjusted................................. 5 5
Undesignated; 2,400,000 shares authorized
at $.001 par value, no shares issued and
outstanding.............................. -- --
--------- --------- ---------
Total Preferred Stock..................... 5 5
Common stock, $.001 par value; 92,000,000
shares authorized, 32,739,728 issued and
outstanding, actual and pro forma;
shares authorized, issued and
outstanding, pro forma as adjusted......... -- --
Class A common stock, $.001 par value;
56,000,000 shares authorized, 7,368,000
shares issued and outstanding, actual;
none authorized, issued and outstanding,
pro forma and pro forma as adjusted...... -- --
Class B common stock, $.001 par value;
36,000,000 shares authorized, 25,371,728
shares issued and outstanding, actual;
none authorized, issued and outstanding,
pro forma and pro forma as adjusted...... -- --
--------- --------- ---------
Total Common Stock........................ -- --
Additional paid-in capital.................. 63,689 63,689
Deferred compensation....................... (374) (374) (374)
Accumulated deficit......................... (108,094) (108,094) (108,094)
--------- --------- ---------
Total stockholders' equity (deficit)........ (44,774) (44,774)
--------- --------- ---------
Total capitalization.................... $ (17,122) $ (17,122) $
========= ========= =========
</TABLE>
26
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000, was
approximately $ , or $ per share of common stock. Pro forma net tangible
book value per share is the amount of our total net tangible assets less the
amount of our total liabilities, divided by the pro forma number of shares of
common stock outstanding as of that date. Net tangible book value dilution per
share to new investors is the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma net tangible
book value per share immediately following this offering. After giving effect
to the issuance and sale of the shares of common stock in this offering at
an assumed initial public offering price of $ per share, and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value at March 31,
2000 would have been approximately $ million, or $ per share. This
represents an immediate increase in pro forma net tangible book value of $
per share to our existing stockholders and an immediate dilution of $ per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share at March 31, 2000...... $
Increase per share attributable to new investors...................
Pro forma net tangible book value per share after this offering......
Dilution per share to new investors.................................. $
</TABLE>
The following sets forth at March 31, 2000:
. the number of shares of our common stock, assuming the conversion of
all outstanding shares of our preferred stock into common stock,
purchased by existing stockholders, the total consideration and the
average price per share paid to us for these shares;
. the number of shares of our common stock purchased by new investors,
the total consideration and the price per share paid by them for these
shares; and
. the percentage of shares of our common stock purchased by the existing
stockholders, assuming the conversion of all outstanding shares of our
preferred stock into common stock, and the percentage of shares of our
common stock purchased by new investors and the percentage of
consideration paid to us for these shares.
<TABLE>
<CAPTION>
Total Average
Shares Purchased Consideration Price
--------------------- -------------- Per
Number Percent Amount Percent Share
------------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 40,330,906.24 % $ % $
New investors......................
------------- ----- ---- ----- ----
Total............................ 100.0% $ 100.0%
===== =====
</TABLE>
The table above assumes that none of the stock options or warrants
outstanding at the closing of this offering will be exercised. As of March 31,
2000, 4,620,477 shares of common stock were issuable upon the exercise of
outstanding stock options, with a weighted average exercise price of $7.88 per
share, and 2,499,999 shares of common stock were issuable upon the exercise of
outstanding warrants, with a weighted average exercise price of $8.00 per
share. To the extent these stock options and warrants are exercised, new
investors will experience further dilution. To the extent all of the options
and warrants outstanding as of March 31, 2000 had been exercised as of March
31, 2000, pro forma net tangible book value per share after this offering
would be $ and total dilution per share to new investors would be $ .
If the underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will decrease to , or %
of the total shares outstanding, and the number of shares held by new
investors will increase to , or % of the total shares outstanding.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statements of operations data for the years
ended December 31, 1995 and 1996, and the selected consolidated balance sheet
data as of December 31, 1995 and 1996 and March 31, 1999, set forth below, are
derived from our unaudited consolidated financial statements, which are not
included in this prospectus. The selected consolidated balance sheet data as of
December 31, 1997, set forth below, are derived from our audited consolidated
balance sheet as of that date, which is not included in this prospectus. The
selected consolidated statements of operations data for the years ended
December 31, 1997, 1998 and 1999, and the selected consolidated balance sheet
data as of December 31, 1998 and 1999, set forth below, are derived from our
audited consolidated financial statements, which are included elsewhere in this
prospectus. The selected consolidated statements of operations data for the
three months ended March 31, 1999 and 2000, and the selected consolidated
balance sheet data as of March 31, 2000, set forth below, are derived from our
unaudited consolidated financial statements, which are included elsewhere in
this prospectus. We operated as a subchapter S corporation from our inception
until March 1998. In March 1998, we converted to a C corporation. Our selected
consolidated financial information is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------------------------------------- -----------------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
1995 1996 1997 1998 1999(a) 1999(b) 1999 2000 2000(b)
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Consolidated
Statements of
Operations Data: (In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Magazine
revenues(c)..... $ 34,346 $ 24,222 $ 77,113 $ 109,878 $ 195,956 $195,956 $ 32,724 $ 56,937 $56,937
Merchandise &
other
revenues(d)..... 7,686 28,793 100,516 100,884 81,489 17,409 14,190 23,646 5,993
---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------
Net revenues.... 42,032 53,015 177,629 210,762 277,445 213,365 46,914 80,583 62,930
Product,
marketing,
operation and
general &
administrative
expenses(e)..... 39,869 100,668 199,697 236,338 246,325 176,804 43,185 74,168 57,971
---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------
2,163 (47,653) (22,068) (25,576) 31,120 36,561 3,729 6,415 4,959
Depreciation &
amortization.... 189 359 891 1,594 4,172 4,172 687 1,720 1,720
Interest
(expense)
income.......... 73 79 129 (4,240) (5,241) 518 (1,048) (658) 127
Income tax
provision....... 250 -- 278 1 22 22 -- -- --
---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------
Net income
(loss) before
extraordinary
item........... 1,797 (47,933) (23,108) (31,411) 21,685 32,885 1,994 4,037 3,366
Extraordinary
item(f)......... -- -- -- -- -- -- -- (959) (959)
---------- ---------- ---------- ---------- ---------- -------- ---------- ---------- -------
Net income
(loss)......... $ 1,797 $ (47,933) $ (23,108) $ (31,411) $ 21,685 $ 32,885 $ 1,994 $ 3,078 $ 2,407
========== ========== ========== ========== ========== ======== ========== ========== =======
Net income (loss)
per common share
before
extraordinary
item
Basic........... $ 0.06 $ (1.48) $ (0.71) $ (0.97) $ 0.67 $ $ 0.06 $ 0.12 $
Diluted......... $ 0.06 $ (1.48) $ (0.71) $ (0.97) $ 0.56 $ $ 0.06 $ 0.10 $
Extraordinary
item per common
share
Basic........... $ -- $ -- $ -- $ -- $ -- $ $ -- $ (0.03) $
Diluted......... $ -- $ -- $ -- $ -- $ -- $ $ -- $ (0.02) $
Net income (loss)
per common share
Basic........... $ 0.06 $ (1.48) $ (0.71) $ (0.97) $ 0.67 $ $ 0.06 $ 0.09 $
Diluted......... $ 0.06 $ (1.48) $ (0.71) $ (0.97) $ 0.56 $ $ 0.06 $ 0.08 $
Weighted average
common shares
used in
computing per
share amounts
Basic........... 32,390,000 32,390,000 32,390,000 32,390,000 32,390,000 32,390,000 32,697,000
Diluted......... 32,390,000 32,390,000 32,390,000 32,390,000 38,874,000 35,575,000 40,256,000
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------------------------------------- -----------------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
1995 1996 1997 1998 1999 1999(b) 1999 2000 2000(b)
Other Data: ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
subscriptions(g).. 2,557 5,950 8,321 10,469 15,036 15,036 3,246 4,675 4,675
EBITDA(h)........ $ 2,163 $ (47,653) $ (22,068) $ (25,576) $ 31,120 $ 36,561 $ 3,729 $ 6,415 $ 4,959
</TABLE>
(footnotes on following page)
28
<PAGE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of December 31, As of March 31, 2000
------------------------------------------- ---------------------
As
1995 1996 1997 1998 1999 Actual Adjusted(i)
------ ------- ------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $2,436 $2,383 $802 $154 $1,407 $ 808
Working capital
deficiency............. (1,602) (50,757) (76,629) (123,661) (94,393) (35,515)
Total assets............ 10,259 43,679 93,353 120,865 182,204 190,869
Stockholders' loans and
capital lease
obligation, long-term
portion................ -- -- -- -- 13,929 27,652
Total stockholders'
deficiency............. (318) (48,251) (71,359) (112,293) (90,148) (44,774)
</TABLE>
(a) A customer's right to cancel a subscription and obtain a refund of all or a
portion of the subscription price depends on the terms of the subscription
offer made to the customer. A subscription offer made before November 1,
1998, referred to as a full refund offer, allowed a subscriber to obtain a
full refund of the subscription price if the subscriber cancelled the
subscription at any time during the subscription period. We recognize
revenues from full refund subscriptions at the conclusion of the
subscription period.
Effective November 1, 1998, we began to market a substantial portion of our
subscription offers as pro rata refund offers, which allow the subscriber to
obtain a full refund before the end of the grace period, which typically
lasts from two to six months. After the grace period ends, the subscriber is
entitled to only a pro rata refund upon cancellation equal to the amount of
the purchase price relating to the undelivered portion of the subscription.
We currently are converting a majority of our outstanding renewals of full
refund offers into pro rata refund offers. We defer revenues from pro rata
refund offers until the end of the grace period. At the end of the grace
period, we recognize that portion of revenues associated with the grace
period, and we recognize the remainder of the revenues ratably over the
remaining period of the subscription.
As a result of this change in our offers, our operating results for the year
ended December 31, 1999 include a one-time benefit to revenues and net
income from full refund offers made in 1998 and pro rata refund offers made
in 1999. This is due to the recognition in 1999 of revenues from both the
completion of the initial period of 1998 full refund offers and a portion of
the 1999 pro rata refund offers which, if they had been made as full refund
offers, would have been recognized in fiscal 2000. In addition, $47 million
of magazine solicitation costs associated with 1999 pro rata refund offers
were deferred at December 31, 1999. These costs would have been expensed in
1999 if the offers had been made as full refund offers. If all of our
subscription offers made in 1999 had remained full refund offers, our net
revenues and net income in the year ended December 31, 1999 would have been
lower by approximately $64 million and $111 million.
(b) Pro forma as adjusted gives effect to the following:
(i) In January 2000, we entered into an agreement with two parties to form
Gift Services, a Delaware limited liability company in which we have a 49%
ownership interest. Concurrently, we entered into a sales representative
agreement with Gift Services, which was subsequently amended in April 2000,
in which we agreed to solicit orders for all products marketed, promoted,
distributed and/or sold by Gift Services. The pro forma information reflects
the impact of forming Gift Services on our operations as if the transaction
had taken place on January 1, 1999. The unaudited pro forma information is
presented for informational purposes only and does not purport to represent
what our results of operations would actually have been if the transactions
had occurred at the beginning of the period indicated, or to project our
results of operations at any future date or for any future period. See Note
13 to the Consolidated Financial Statements in this prospectus.
(ii) The elimination of interest expense on our debt which is assumed to be
repaid from the proceeds of this offering as of the beginning of the periods
presented.
29
<PAGE>
(c) Magazine revenues are comprised of pro rata and full refund offer revenues
and commissions earned from publishers for acquiring customers.
(d) Merchandise and other revenues are comprised of gift, phonecard and other
non-magazine businesses. The unaudited pro forma amounts for the fiscal
year ending December 31, 1999 include $10.8 million of commission revenues
relating to Gift Services and for the three months ended March 31, 2000
include $3.6 million of commission revenues relating to Gift Services.
(e) Product, marketing, operation and general and administrative expenses
include subchapter S corporation distributions to stockholders of $2.8
million for 1995, $8.0 million for 1996, $16.6 million for 1997 and $2.5
million for the portion of 1998 when we operated as an S corporation.
Effective March 1998, we became a C corporation.
(f) Extraordinary item represents the write-off of the remaining deferred
financing costs related to our March 1998 credit facility, which was
satisfied on January 12, 2000.
(g) Net subscriptions represent total new and renewal subscriptions fulfilled
in a calendar year for all magazine offers, less the estimated
cancellations based on historical cancellation rates by offer.
(h) EBITDA means the income (loss) we would have shown if we did not take into
consideration our net interest (expense) income, income tax expense and
depreciation and amortization. EBITDA is not a measurement in accordance
with generally accepted accounting principles, and you should not consider
it to be an alternative to, or more meaningful than, operating income or
loss, net income or loss or cash flows as defined by generally accepted
accounting principles or as a measure of our profitability or liquidity.
EBITDA may not be comparable to EBITDA or similarly titled measures
reported by other companies. However, we believe EBITDA serves as an
important operating measurement when evaluating our financial performance.
(i) The as adjusted balance sheet data reflects the sale of common shares in
this offering at an assumed price of $ per share and the application of
the assumed net proceeds of the offering.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and Consolidated Financial Statements and the related Notes
appearing elsewhere in this prospectus. This prospectus contains forward-
looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors that include, but are not limited to, those set
forth under "Risk Factors" and elsewhere in this prospectus.
Overview
Synapse Group is the leading independent multi-channel provider of
proprietary customer acquisition and management services for publishers of
consumer magazines in the United States. Founded in 1991 by Michael Loeb, a
publishing executive, and Jay Walker, the founder of priceline.com and Walker
Digital, we provide valuable services to publishers in driving magazine
circulation and increasing the value of magazine customer relationships. We
recently entered into a multi-year strategic marketing agreement with Time
Inc., the largest magazine publisher in the United States, an indirect
subsidiary of which purchased approximately 23% of our outstanding capital
stock, on an as-converted basis.
We pioneered and patented a unique subscription system that we believe
greatly improves circulation economics and customer retention levels for
publishers. Our multi-publisher continuous service subscription system, which
replaces traditional fixed-term subscriptions with more enduring and more
customer-friendly, open-ended subscriptions, is one of the key innovations of
our business model. Another innovation is our multi-channel networks of
affinity marketing partnerships through which we source new customers. We
believe that our marketing programs and the superior customer experience
created by our continuous service model enable our affinity marketing partners
to generate revenue, increase customer interaction and build loyalty by
leveraging the broad-based demand for magazines in their customer bases.
Revenue Recognition
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance in the recognition, presentation and
disclosure of revenues in the financial statements. We have presented our
consolidated financial statements in accordance with SAB No. 101 for all
periods presented.
Magazine Revenues
Magazine revenues are derived primarily from subscriptions sold to
customers and billed to their credit cards on an annual or semi-annual basis
and, to a lesser extent, from commissions earned from publishers for acquiring
customers.
A customer's right to cancel a subscription and obtain a refund of all or
a portion of the subscription price depends on the terms of the subscription
offer made to the customer. A subscription offer made before November 1, 1998,
referred to as a full refund offer, allowed a subscriber to obtain a full
refund of the subscription price if the subscriber cancelled the subscription
at any time during the subscription period. A subscriber who renewed a full
refund offer had the right to receive a full refund of the renewal subscription
price at any time during the subscription period. We recognize revenues from
full refund subscriptions at the conclusion of the subscription period.
Effective November 1, 1998, we began to market a substantial portion of
our subscription offers as pro rata refund offers, which allow the subscriber
to obtain a full refund before the end of the grace period, which
31
<PAGE>
typically lasts from two to six months. After the grace period ends, the
subscriber is entitled to only a pro rata refund upon cancellation equal to
the amount of the purchase price relating to the undelivered portion of the
subscription. We currently are converting a majority of our outstanding
renewals of full refund offers into pro rata refund offers. We defer revenues
from pro rata refund offers until the end of the grace period. At the end of
the grace period, we recognize that portion of revenues associated with the
grace period, and we recognize the remainder of the revenues ratably over the
remaining period of the subscription.
Some of our full refund and pro rata refund offers also offer an initial
free trial period, prior to the grace period, during which the subscriber
receives free copies of a magazine as an incentive to continue his or her
subscription. Once the free trial period ends, the subscriber pays the
subscription price, and the subscription is accounted for as either a full
refund or pro rata refund offer, as applicable.
Magazine subscription revenues attributable to airline frequent flyer
programs and other reward currency programs relate to commissions earned from
publishers for acquiring customers and are recognized as earned from
publishers.
Merchandise and Other Revenues
Merchandise and other revenues are derived from our gift, phonecard and
other non-magazine businesses, and are recognized upon shipment of the
product.
Expense Recognition
Product and marketing expenses consist primarily of magazine and
merchandise product costs, solicitation costs and commissions. Operation
expenses consist primarily of customer service, data entry, order processing
and payment processing costs.
Magazine solicitation costs, including printing, postage and mailing
costs, and commissions paid to marketing partners are direct response
advertising costs. We amortize direct response marketing costs over the
subscription period, unless they are associated with full refund offers, in
which case we expense them as incurred. In offers with free trial periods, we
defer such costs until after the free trial period, and any grace period, has
elapsed. In pro rata refund offers, we defer the expenses until the end of the
grace period. Upon completion of the grace period, the expenses associated
with the grace period are recognized immediately, and the remainder of the
related expenses are recognized ratably over the remaining subscription
period.
We make payments to publishers for magazine costs prior to billing the
subscriber. These magazine costs are refundable to us on a pro rata basis
should the subscriber cancel the subscription and are recorded as publisher
prepayments and amortized over the subscription period. In the case of airline
frequent flyer program subscriptions and other reward currency programs we are
not required to make payments to publishers.
We expense merchandise product and marketing costs at the time the
related revenues are recognized.
We expense all operations costs as incurred, with the exception of
refundable magazine payment processing costs, which we amortize over the
subscription period.
32
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, various
financial data expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
---------------------- --------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues:
Magazine............................ 43 % 52 % 71 % 70 % 71 %
Merchandise and other............... 57 48 29 30 29
---- ---- ---- ---- ----
Net revenues...................... 100 100 100 100 100
Product & marketing expenses.......... 80 86 62 61 68
Operation expenses.................... 13 13 13 16 11
---- ---- ---- ---- ----
7 1 25 23 21
General & administrative expenses..... 19 13 14 16 13
Depreciation & amortization........... 1 1 1 1 2
---- ---- ---- ---- ----
Operating income (loss)............... (13) (13) 10 6 6
Interest (expense) income............. -- (2) (2) (2) (1)
Income tax provision.................. -- -- -- -- --
---- ---- ---- ---- ----
Net income (loss) before extraordinary
item................................. (13) (15) 8 4 5
Extraordinary item.................... -- -- -- -- (1)
---- ---- ---- ---- ----
Net income (loss)..................... (13)% (15)% 8 % 4 % 4 %
==== ==== ==== ==== ====
</TABLE>
Three Months Ended March 31, 2000 Compared to March 31, 1999
Net Revenues
Net revenues increased 72% to $80.6 million for the three months ended
March 31, 2000 from $46.9 million for the three months ended March 31, 1999.
Magazine revenues increased 74% to $56.9 million for the three months ended
March 31, 2000 from $32.7 million for the three months ended March 31, 1999.
Merchandise and other revenues increased 67% to $23.7 million for three months
ended March 31, 2000 from $14.2 million for the three months ended March 31,
1999.
New magazine revenues increased 34% to $37.5 million for the three months
ended March 31, 2000 from $27.9 million for the three months ended March 31,
1999. Renewal magazine revenues increased 304% to $19.4 million for the three
months ended March 31, 2000 from $4.8 million for the three months ended
March 31, 1999. The increase in new magazine revenues was due to the growth of
our catalog channel, offset in part by lower sales in our credit card channel.
The increase in renewal magazine revenues was due primarily to the continued
growth of our renewal subscription base.
Merchandise and other revenues increased 67% to $23.7 million for the
three months ended March 31, 2000 from $14.2 million for the three months ended
March 31, 1999 due in part to two high volume campaigns from the fourth quarter
of 1999, which generated high response levels and significant net revenues for
the three months ended March 31, 2000. In addition, at the end of 1999, a
significant amount of shipments were not fulfilled due to inventory shortages,
which resulted in the shipments being fulfilled, and the related net revenues
being recognized, during the three months ended March 31, 2000.
Product and Marketing Expenses
Product and marketing expenses increased 93% to $55.2 million for the
three months ended March 31, 2000 from $28.6 million for the three months ended
March 31, 1999. As a percentage of net revenues, product
33
<PAGE>
and marketing expenses grew to 68% of net revenues for the three months ended
March 31, 2000 from 61% for the three months ended March 31, 1999.
Magazine product and marketing expenses increased 151% to $39.9 million
for the three months ended March 31, 2000 from $15.9 million for the three
months ended March 31, 1999. Approximately $12 million of this increase was due
to the change in offer structure which occurred in November 1998. As a result
of this change, the costs associated with full refund revenues recognized in
the first quarter of 1999 were expensed as incurred in 1998. The remainder of
the increase was attributable to higher product expenses related to renewal
subscriptions and higher commission expenses associated with increased revenues
related to our catalog channels.
Merchandise and other product and marketing expenses increased 20% to
$15.3 million for the three months ended March 31, 2000 from $12.7 million for
the three months ended March 31, 1999. The increase was due to the growth in
net revenues, partially offset by reductions in product costs and commissions
paid to marketing partners.
Operation Expenses
Operation expenses increased 19% for the three months ended March 31,
2000 to $8.7 million from $7.3 million for the three months ended March 31,
1999. As a percentage of net revenues, operation expenses decreased to 11% for
the three months ended March 31, 2000 compared to 16% for the three months
ended March 31, 1999. This percentage decrease was due to increased renewal
magazine revenues as a percentage of net revenues. Renewal magazine
subscriptions require less customer service effort which reduced the expenses
as a percentage of net revenues.
General and Administrative Expenses
General and administrative expenses were comprised of personnel costs,
professional fees, travel and entertainment costs, occupancy costs and other
overhead costs. General and administrative expenses increased 41% to $10.3
million for the three months ended March 31, 2000 from $7.3 million for the
three months ended March 31, 1999. The increase was primarily due to staffing
increases as well as increased costs related to the development of our Internet
channel. As a percentage of net revenues, general and administrative expenses
decreased to 13% for the three months ended March 31, 2000 from 16% for the
three months ended March 31, 1999.
Depreciation and Amortization
Depreciation and amortization increased 147% to $1.7 million for the
three months ended March 31, 2000 from $687,000 for the three months ended
March 31, 1999. This increase was due to a significant investment in computer
equipment and software associated with the growth of our business.
Interest
Interest expense decreased 34% to $658,000 for the three months ended
March 31, 2000 from $1.0 million for the three months ended March 31, 1999 due
to lower average outstanding debt. On January 12, 2000 we repaid an outstanding
credit facility through the issuance of equity and the establishment of a $25
million credit facility with a stockholder.
Income Tax Provision
At March 31, 1999 and March 31, 2000, we incurred a net operating loss
for income tax purposes and therefore did not provide federal or state income
taxes.
34
<PAGE>
Extraordinary Item
During the three months ended March 31, 2000, we repaid our prior credit
facility and wrote-off the remainder of the related loan origination fee of
$959,000.
Year Ended December 31, 1999 Compared to December 31, 1998
1999 Effect From Changes in Offer Structure
As a result of the transition on November 1, 1998 from primarily full
refund to primarily pro rata refund offers, operating results for the year
ended December 31, 1999 included a one-time benefit to net revenues and
operating income. This is due to the recognition in 1999 of revenues from both
the completion of the initial period of 1998 full refund offers and a portion
of the 1999 pro rata refund offers which, if they had been made as full refund
offers, would have been recognized in fiscal 2000. In addition, $47 million of
magazine solicitation costs associated with 1999 pro rata refund offers were
deferred at December 31, 1999. These costs would have been expensed in 1999 if
the offers had been made as full refund offers. If all of our subscription
offers made in 1999 had remained full refund offers, our net revenues and net
income in the year ended December 31, 1999 would have been lower by
approximately $64 million and $111 million.
The following unaudited pro forma information has been derived from our
statements of operations for the year ended December 31, 1999 and reflects the
effect of assuming all offers made in 1999 were on a full refund basis. The
unaudited pro forma information is presented for informational purposes only
and is not intended to be indicative of results of operations that actually
would have resulted if the offers had been made under a full refund basis.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------
Pro Forma
Actual Adjustments Pro Forma
-------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Net revenues................................... $277,445 $ (64,000) $213,445
Product, marketing and operation expenses...... 208,676 47,000 255,676
Operating income (loss)........................ 26,948 (111,000) (84,052)
Net income (loss).............................. 21,685 (111,000) (89,315)
</TABLE>
Gift Services, LLC Transaction
In January 2000, we entered into an agreement with two parties to form
Gift Services, a Delaware limited liability company in which we have a 49%
ownership interest. Concurrently, we entered into a sales representative
agreement with Gift Services, which was subsequently amended on April 1, 2000,
in which we agreed to solicit orders for all products marketed, promoted,
distributed and/or sold by Gift Services.
The following unaudited pro forma information is presented as if the Gift
Services transaction had occurred on January 1, 1999. The unaudited pro forma
information is presented for informational purposes only and does not purport
to represent what our results of operations would actually have been if the
transaction had occurred at the beginning of the period indicated nor to
project our results of operations at any future date or for any future period.
35
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------------
Pro Forma Pro Forma Pro
Actual Adjustments(a) Adjustments(b) Forma
-------- -------------- -------------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net revenues.................. $277,445 $(74,880) $10,800 $213,365
Product and marketing
expenses..................... 172,526 (60,382) 112,144
Operation expenses............ 36,150 (9,139) 27,011
Operating income.............. 26,948 (5,359) 10,800 32,389
Net income.................... 21,685 (5,359) 10,800 27,126
</TABLE>
--------
(a) Represents the exclusion of the revenues and expenses associated with our
merchandise business.
(b) Represents the commission revenue based upon the contractual commission
rate applied to 1999 merchandise shipments adjusted for (1) a modification
reducing the cost of merchandise purchases based upon per unit rates
detailed in the Supply Agreement between Gift Services and Aspen Marketing,
Inc. and (2) the reduction of commission revenues based upon the 1999
economic performance of the merchandise business which would be
accomplished in accordance with the agreement via a prospective adjustment
of the commission rate each quarter.
We expect that the impact of the change in our offer structure on
November 1, 1998 on our 1999 consolidated financial statements combined with
the formation of Gift Services on January 4, 2000 will result in net revenues
for the year ending December 31, 2000 being lower than our net revenues for the
year ended December 31, 1999 of approximately $277.4 million. Additionally, we
expect that the impact of the change in our offer structure in late 1998 and
the additional allocation of resources to our business development initiatives
to grow additional innovative marketing solutions will cause our results for
the year ending December 31, 2000 to be significantly below our net income of
approximately $21.7 million for the year ended December 31, 1999 and may result
in a loss for the year ending December 31, 2000.
Net Revenues
Net revenues increased 32% to $277.4 million in 1999 from $210.8 million
in 1998. Total magazine revenues increased 78% to $196.0 million in 1999 from
$109.9 million in 1998. This was partially offset by merchandise and other
revenues which decreased 19% to $81.4 million in 1999 from $100.9 million in
1998.
New magazine revenues increased 75% to $166.5 million in 1999 from $95.1
million in 1998, while renewal magazine revenues increased 99% to $29.5 million
in 1999 from $14.8 million in 1998. The increase in new magazine revenues was
due primarily to the conversion of a majority of our new offers from full
refund offers to pro rata refund offers and the introduction of new marketing
channels in late 1998. As discussed above, in late 1998, we began to modify our
offers to a pro rata refund basis from a full refund basis. This resulted in a
one-time benefit to 1999 revenues of approximately $64 million. The increase in
renewal magazine revenues was due primarily to the continued growth of our
renewal subscription base.
Merchandise and other revenues decreased 19% to $81.4 million in 1999
from $100.9 million in 1998 due primarily to a strategic reduction in the
frequency of promotional mailings and mail quantities.
Product and Marketing Expenses
Product and marketing expenses decreased 4% to $172.5 million in 1999
from $180.0 million in 1998. As a percentage of net revenues, product and
marketing expenses improved to 62% of net revenues in 1999 from 86% in 1998.
Magazine product and marketing expenses increased 8% to $105.6 million in
1999 from $97.5 million in 1998. As a percentage of magazine revenues, magazine
product and marketing expenses decreased to 54% in 1999 from 89% in 1998.
Because we modified our offer structure from full refund offers to pro rata
refund offers in 1998, our marketing expenses were recognized ratably over the
subscription period after the end of the
36
<PAGE>
grace period for a majority of our 1999 offers. In 1998, these expenses were
expensed as incurred. In 1999, these expenses would have increased $47 million
to $152.6 million and product and marketing expenses would have increased to
116% of net pro forma magazine revenues if we had not changed this offer
structure. In addition, in 1999, our product and marketing expenses as a
percentage of net revenues decreased as a result of a higher renewal revenue
base, which incurs minimal marketing costs.
Merchandise and other product and marketing expenses decreased 19% to
$66.9 million in 1999 from $82.5 million in 1998. This decrease was due
primarily to a strategic reduction in the frequency of promotional mailings and
mail quantities.
Operation Expenses
Operation expenses increased 28% in 1999 to $36.2 million compared to
$28.2 million in 1998. This increase was primarily due to higher costs
associated with customer service, order processing and payment processing
resulting from increased new magazine subscription volumes. The impact of the
increase was partially offset by operating efficiencies resulting from
investment in our transaction processing systems. As a percentage of net
revenues, operation expenses were 13% in 1999 and 1998.
General and Administrative Expenses
General and administrative expenses increased 34% to $37.6 million in
1999 from $28.1 million in 1998. The increase in 1999 expenses was primarily
due to staffing increases and increased costs related to the development of our
catalog and Internet channels. General and administrative expenses in 1999
included a compensation charge of $3.5 million to a director for consulting
services and in 1998 included subchapter S corporation distributions to
stockholders of $2.5 million for the portion of the period during which we were
a subchapter S corporation. As a percentage of net revenues, general and
administrative expenses remained relatively consistent at 14% in 1999 and 13%
in 1998.
Depreciation and Amortization
Depreciation and amortization increased 163% to $4.2 million in 1999 from
$1.6 million in 1998. This was primarily due to the significant investment in
computer equipment and software associated with the growth of our business.
Interest
Interest expense increased 24% to $5.2 million in 1999 from $4.2 million
in 1998. The increase is primarily due to higher average outstanding debt and
effective interest rates in 1999 versus 1998.
Income Tax Provision
At December 31, 1999 and 1998, we incurred a net operating loss for
income tax purposes and therefore did not provide federal or state income taxes
except for an immaterial amount. At December 31, 1999, we had net operating
loss carryforwards of $89.4 million which were available to offset future
taxable income through 2019. In 1998 we applied for permission to change our
method of accounting related to deferred charges. The net operating losses
indicated above assume that the change in accounting method will be granted by
the Internal Revenue Service. If the change in accounting method is not
granted, we will have $39.4 million of net operating loss carryforwards at
December 31, 1999. Income taxes are recognized only for the period of time we
were a C corporation. Prior to our conversion to a C corporation, earnings were
taxed at the stockholder level in accordance with S corporation taxation.
We were an S corporation for a portion of 1998. If we were considered a C
corporation for the portion of 1998, we would have had a loss for both
financial statement and tax purposes; therefore, our tax provision for the
period would remain the same as presented.
37
<PAGE>
Year Ended December 31, 1998 Compared to December 31, 1997
Net Revenues
Net revenues increased 19% to $210.8 million in 1998 from $177.6 million
in 1997. Magazine revenues increased 43% to $109.9 million in 1998 from $77.1
million in 1997. Merchandise and other revenues remained relatively consistent
at $100.9 million in 1998 and $100.5 million in 1997.
New magazine revenues increased 23% to $95.1 million in 1998 from $77.1
million in 1997, while renewal magazine revenues increased to $14.8 million in
1998 from $0 in 1997. The increase in new magazine revenues was due primarily
to a growth in new subscriptions generated from an increase in insertion
volume. The increase in renewal magazine revenues was due to the first year
growth of our renewal subscription base related to the introduction of our
continuous service model in 1996.
Product and Marketing Expenses
Product and marketing expenses increased 26% to $180.0 million in 1998
from $142.5 million in 1997. As a percentage of net revenues, product and
marketing expenses increased to 86% of net revenues in 1998 from 80% of net
revenues in 1997.
Magazine product and marketing expenses increased 18% to $97.5 million in
1998 from $82.4 million in 1997. These increases were primarily due to the
increase in product costs resulting from the revenue growth and increased
volume of offers mailed. Additionally, we began to aggressively market through
our catalog channel which required extensive marketing expenses but contributed
minimal revenues in 1998.
Merchandise and other product and marketing expenses increased 37% to
$82.5 million in 1998 from $60.1 million in 1997. This increase was primarily
related to marketing expenses, as 1998 product expenses remained at 1997
levels. In 1998, the volume of merchandise offers mailed grew, which increased
costs without yielding any meaningful increase in net revenues, due to response
rate deterioration related to a number of unsuccessful new product lines.
Operation Expenses
Operation expenses increased 21% to $28.2 million in 1998 from $23.3
million in 1997. This increase was primarily due to higher customer service and
payment processing costs related to the increase in magazine subscription
volumes. In addition, we began to migrate to a new processing system while
maintaining our existing third party system. As a percentage of net revenues,
operation expenses were 13% in 1998 and 1997.
General and Administrative Expenses
General and administrative expenses decreased 17% to $28.1 million in
1998 from $33.8 million in 1997. Included in these amounts were subchapter S
corporation distributions to stockholders of $2.5 million for 1998 and $16.6
million for 1997. Excluding these distributions, 1998 general and
administrative expenses increased 49% to $25.6 million versus $17.2 million in
1997. This was due to staffing increases and personnel related costs. As a
percentage of net revenues, general and administrative expenses decreased to
13% in 1998 from 19% in 1997. Excluding the distributions noted above, general
and administrative expenses increased to 12% of net revenues in 1998 from 10%
in 1997.
Depreciation and Amortization
Depreciation and amortization increased 80% to $1.6 million in 1998 from
$891,000 in 1997. This was primarily due to investments in our computer
equipment and software associated with the growth of our business.
38
<PAGE>
Interest
Interest expense increased to $4.2 million in 1998 from $129,000 of
interest income in 1997. In March 1998, we entered into an agreement with a
syndicate of banks that provided for a term loan of $50 million and a $20
million line of credit.
Income Tax Provision
At December 31, 1998, we incurred a net operating loss for income tax
purposes and therefore did not provide federal or state income taxes. We had
net operating loss carryforwards which were available to offset future taxable
income through 2018. In 1998 we applied for permission to change our method of
accounting related to deferred charges. Income taxes are recognized only for
the period of time we were a C corporation. Prior to our conversion to a C
corporation in March 1998, earnings were taxed at the stockholder level in
accordance with S corporation taxation. We were an S corporation for a portion
of 1998 and all of 1997 and years prior. If we were considered a C corporation
for 1997 and a portion of 1998, we would have had a loss for both financial
statement and tax purposes, therefore, our tax provision for these periods
would remain the same as presented.
Quarterly Results of Operations
We believe that quarter-to-quarter comparisons of our operating results
are not necessarily meaningful. You should not rely on the results of one
quarter as an indication of our future performance. If our quarterly operating
results fall below the expectations of securities analysts or stockholders, the
price of our common stock could fall. We have experienced significant
fluctuations in our quarterly operating results and may continue to experience
significant fluctuations. Factors that may cause these fluctuations include:
changes in the timing and structure of our subscription offers; changes in
market demand for magazine subscriptions; increased competition; growth in and
timing of new magazine subscriptions; and changes in the regulatory
environment.
Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31,
2000 of $6.2 million was due to an increase in accounts receivable of $7.8
million, an increase in deferred charges of $6.0 million, a decrease in
accounts payable and accrued expenses of $2.0 million and a decrease in
deferred revenue of $1.0 million. These results were partially offset by net
income of $3.1 million, non-cash stock option compensation expense of $0.3
million, a reduction in inventory of $3.0 million, a reduction in prepaid
expenses and other assets of $2.5 million and depreciation and amortization of
$1.7 million. Cash provided by operating activities for the year ended December
31, 1999 of $8.5 million was due to net income of $21.7 million, depreciation
and amortization of $4.2 million, non-cash stock option compensation expense of
$0.5 million, a decrease in accounts receivable of $7.8 million, a decrease in
inventories of $0.6 million, an increase in accounts payable and accrued
expenses of $24.9 million and an increase in deferred revenue of $10.2 million.
These results were partially offset by an increase in prepaid expenses and
other assets of $13.3 million and a decrease in deferred charges of $48.1
million.
Cash used in investing activities of $2.6 million for the three months
ended March 31, 2000, and $11.0 million for the year ended December 31, 1999
was for the purchase of property, plant and equipment, primarily computer
equipment and software. We are, and have been, building an infrastructure that
can handle our rapidly growing business and is able to adapt to new offers and
products. We anticipate increasing capital purchases in 2000 and future years
to facilitate the growth in our business.
Cash provided by financing activities of $8.2 million for the three
months ended March 31, 2000 resulted from an equity issuance and credit
facility on January 12, 2000, partially offset by the repayment of
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our prior credit facility. Cash provided by financing activities of $3.7
million for 1999 resulted from net borrowings on the prior credit facility and
stockholder's loans.
We currently have both negative working capital and an accumulated
deficit due to our history of losses. We intend to use existing cash balances,
the net proceeds of this offering and funds generated from operations to meet
our future cash requirements. We believe that as the percentage attributable to
renewal magazine revenues increases, such increases will help to generate net
cash from operating activities, thereby minimizing our need for financing from
outside sources. Through March 31, 2000, we spent $2.6 million, primarily for
computer equipment and software, and anticipate spending an additional $15
million to $17 million for the remainder of the year. We believe that our cash
balances, funds generated from operations, funds from this offering and
available borrowings will be sufficient to meet our operating capital
requirements for at least the next twelve months. However, there can be no
assurance that we will not require additional financing within this time frame
or that such additional financing, if needed, will be available on terms
acceptable to us, if at all.
Prior Credit Facility
In March 1998, we entered into an agreement with a syndicate of banks for
a term loan of $50 million and a $20 million line of credit. We were not in
compliance with the financial covenants and ratios of this credit facility as
of December 31, 1998 and throughout 1999. We repaid all outstanding balances on
this credit facility on January 12, 2000.
Equity Issuance
On January 12, 2000, we issued 3,465,000 shares of our Series B preferred
stock at $8.00 per share and warrants to acquire 1,732,499 shares of Class A
common stock for the purchase price of $.00128 per warrant to current
stockholders and other parties. In addition, $12.0 million of our indebtedness
and $280,000 of interest payable to one of our stockholders was converted into
1,535,000 shares of Series B preferred stock and warrants to acquire 767,500
shares of Class A common stock at the same prices as discussed above. We used
$27.7 million of the proceeds of the offering together with borrowings under a
new credit facility described below to repay the outstanding amounts and
related expenses under the prior credit facility.
On January 19, 2000, we issued 350,000 shares of our Class B common stock
to a former director in partial payment of a consulting fee. We had entered
into a Consulting Agreement with the director, dated as of December 31, 1999,
which provided that he would be paid a fee for consulting services provided
from 1996 through 1999. The $3.5 million fee was to be paid in cash on the
earlier of January 31, 2001 or within 90 days of this offering. On January 19,
2000, we amended the Consulting Agreement to provide that the fee would instead
be the combination of $1.3 million in cash and 350,000 shares of our Class B
common stock. The stock was delivered after the amendment was signed.
In June 2000, we sold 3,125,000 shares of our Series C preferred stock to
NSSI Holdings, an indirect subsidiary of Time Inc. On the same date, Jay Walker
sold 6,875,000 shares of our Class A common stock and Class B common stock held
by him to NSSI Holdings. As of June 30, 2000, NSSI Holdings holds approximately
21% of our common stock and 100% of our Series C preferred stock, or
approximately 23% of our issued and outstanding capital stock, on an as-
converted basis.
Credit Facility
On January 12, 2000, we entered into a $25 million credit facility with a
stockholder, Jay Walker. On February 1, 2000, the rights and obligations of Mr.
Walker under this facility were assigned to Arena Capital Investment Fund. This
loan, which matures on April 7, 2001, requires that we make interest payments
every 90 days. The loan bears interest initially at the 3 month LIBOR rate,
which as of June 15, 2000 was 6.78%, plus
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275 basis points per annum. The rate will increase by an additional 200 basis
points if the loan is not repaid by October 1, 2000 and by additional increases
of 25 basis points for each three month period thereafter that the loan remains
outstanding, up to a cap of an additional 100 basis points. In addition, on
October 1, 2000 we are required to pay a cash rollover fee equal to 2%, of the
principal outstanding on that date. On March 20, 2000 Arena SG Holdings, an
affiliate of Arena Capital Investment Fund, purchased from Mr. Walker 1,250,000
shares of the Company's Class B common stock for $8.00 per share and an option
to purchase an additional 625,000 of the Company's Class B common stock for an
exercise price of $8.00 per share.
The loan includes a mandatory prepayment feature from the proceeds of any
public or private offering of our debt or equity securities. In May 2000, Arena
Capital Investment Fund waived its rights under the credit facility to require
us to prepay the loan from the proceeds of our sales of stock to NSSI Holdings
and to a director.
Under the terms of this credit facility, we are required to issue Arena
Capital Investment Fund warrants to purchase 0.75% of our fully-diluted equity
securities at an exercise price of $0.01 per share on each of January 1, 2001
and April 1, 2001, if any obligations remain outstanding under the facility.
The warrants will be exercisable for ten years from their dates of issuance and
will have anti-dilution provisions, tag along rights, and demand and piggy-back
registration rights on the terms requested by Arena Capital Investment Fund.
We used the proceeds of the new credit facility together with the
proceeds from the sale of the Series B preferred stock and warrants described
above to repay the outstanding amounts under the prior credit facility. As of
June 30, 2000, $25 million was outstanding under this credit facility with
Arena Capital Investment Fund. We are required to use the net proceeds from
this offering for the repayment of this outstanding indebtedness.
Revolving Promissory Note
On January 12, 2000, we entered into a $10 million revolving promissory
note with Michael Loeb, our Chairman, President and Chief Executive Officer and
a stockholder. The note, which expires on April 7, 2001, has an interest rate
of 1% above the base rate, as defined, and interest is payable on January 1,
April 1, July 1 and October 1 of each calendar year. The note becomes
immediately due and payable upon the occurrence of an event of default of the
Credit Facility, as discussed above. As of June 30, 2000, there was no
outstanding balance under this revolving note.
Market Risks
We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments, primarily
U.S. Government obligations, certificates of deposits and interest-bearing
money market accounts. We do not currently expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
Recent Accounting Standards
In 1999, we adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." These statements modified
and expanded our stockholders' deficit and segment disclosures and had no
impact on our results of operations, financial condition and cash flow. Our
comprehensive net income (loss) is equal to its net income (loss) for fiscal
years 1997, 1998 and 1999. Management evaluates our operating results through
magazine and merchandise segments and have presented segment data as required.
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In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. In 1999, the FASB approved SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000. We have not yet determined the impact on
the consolidated financial statements of the adoption of this pronouncement, if
any. However, we believe there will be no impact, because we do not believe we
engage in any derivative instruments or hedging activities.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This statement requires that certain
internal use software costs be capitalized once certain criteria are met. We
adopted SOP 98-1 in 1998.
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BUSINESS
Overview
Synapse Group is the leading independent multi-channel provider of
proprietary customer acquisition and management services for publishers of
consumer magazines in the United States. Founded in 1991 by Michael Loeb, a
publishing executive, and Jay Walker, the founder of priceline.com and Walker
Digital, we provide valuable services to publishers in driving magazine
circulation and increasing the value of magazine customer relationships. We
recently entered into a multi-year strategic marketing agreement with Time
Inc., the largest magazine publisher in the United States, an indirect
subsidiary of which purchased approximately 23% of our outstanding capital
stock, on an as-converted basis.
We pioneered and patented a unique subscription system that we believe
greatly improves circulation economics and customer retention levels for
publishers. Our multi-publisher continuous service subscription system, which
replaces traditional fixed-term subscriptions with more enduring and more
customer-friendly, open-ended subscriptions, is one of the key innovations of
our business model. Another innovation is our multi-channel networks of
affinity marketing partnerships through which we source new customers. We
believe that our marketing programs and the superior customer experience
created by our continuous service model enable our affinity marketing partners
to generate revenue, increase customer interaction and build loyalty by
leveraging the broad-based demand for magazines in their customer bases.
Our continuous service subscription system effects a fundamental shift in
the relationship between publishers and consumers. Unlike traditional
subscriptions which have a fixed expiration date, our continuous service
subscriptions continue uninterrupted until cancelled by the consumer. The
system is a substantial improvement over the inefficient renewal process that
publishers have relied on, which involves mailing repetitive and costly renewal
notices simply to retain existing customers. With our system, customers no
longer need to take repeated action simply to maintain service. As a direct
result, customer retention rates are significantly higher and renewal costs are
lower. Given the advantages of our continuous service system, we expect a
portion of the large base of existing fixed-term subscribers to migrate to our
service. We believe this is a significant opportunity to increase our revenues.
Our success in acquiring large and increasing numbers of customers with
high renewal rates has created a substantial base of recurring revenues. The
economic advantages of our model allow us to present enriched offers to
prospective customers and provide a higher level of customer care than is
commonly available. Strong acceptance of our services by magazine publishers,
affinity partners and consumers has created rapid growth in our revenues and
market share and has enabled us to become the largest independent source of
subscribers for publishers of consumer magazines. We have expanded our business
through numerous Internet initiatives, which we believe will allow us to
significantly increase both the number of marketing platforms we offer and the
size of our customer base. In addition, we have diversified our product
offerings by providing our services for publishers of business and trade
magazines, as well as newspapers and other periodic knowledge products.
Our distribution channels are built upon networks of affinity marketing
partners, including some of the most recognized brands in the United States. We
enable our affinity marketing partners to use magazines as a marketing tool to
add value to their customer relationships. We have developed numerous non-
traditional channels by taking advantage of new technologies and new media
opportunities. Our distribution channels comprise:
. Credit Card Issuers--We market consumer magazines and other knowledge
products and merchandise to the customers of credit card issuers by
utilizing extra postage weight in credit card billing statements and
through direct mail programs. Our marketing affiliates in this
channel include 14 of the 20 largest U.S. credit card issuers, as
measured by 1998 receivables, such as
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Capital One Services, Inc., Chase Manhattan Bank USA, N.A., Citibank,
First USA and MBNA America Bank, N.A., and leading private-label card
issuers such as Macy's. We market magazines and other knowledge
products to these clients under the name NewSub Magazine Services LLC
in this channel.
. Consumer Catalog Companies--We market consumer magazines and
newspapers to customers of catalog companies at the time those
customers order merchandise over the telephone. Our marketing
partners in this channel include 29 of the leading consumer catalog
companies such as JCPenney Telemarketing, Inc., Brylane, Inc.,
Newport News, Inc., Spiegel and Victoria's Secret. We market under
the name Magazine Direct(R) in this channel.
. Airline Frequent Flyer Programs--We market consumer magazines and
other knowledge products to members of leading commercial airline
frequent flyer programs by allowing members to redeem their mileage
for subscriptions. Our partners in this channel include eight of the
ten largest U.S. national carriers, including American Airlines,
United Air Lines and Continental Airlines, Inc, and the UK-based
British Airways Plc. We market under the name CAP Systems in this
channel.
. Internet Businesses--We have developed multiple Internet-based
marketing platforms that build on the strength of our off-line
marketing model and help Internet marketers create more value from
their website traffic. We believe that our continuous service
subscription system is ideally suited for convenience-seeking
Internet consumers. Some of our clients in the Internet are
priceline.com, Microsoft, Priceline WebHouse Club, Inc., PlasmaNet
Inc.'s FreeLotto and America Online. We market under multiple names
on the Internet.
As of June 2000, we have agreements to market over 600 consumer magazine
titles, including most of the 100 largest titles, and over 250 business and
trade publications. For the year ended December 31, 1998, we sold
approximately 10.5 million net magazine subscriptions, which represented a
market share of 3.5%. For the year ended December 31, 1999, we sold
approximately 15.0 million net magazine subscriptions. Comparative industry
data for 1999 is not yet available. We generated net magazine revenues of
$109.9 million for the year ended December 31, 1998 and $196.0 million for the
year ended December 31, 1999. Pro forma net revenues for the year ended
December 31, 1999 were $213.4 million.
Time Inc. Transaction
In June 2000, we sold 3,125,000 shares of our Series C preferred stock
to NSSI Holdings, an indirect subsidiary of Time Inc. On the same date, Jay
Walker sold 6,875,000 shares of our Class A common stock and Class B common
stock held by him to NSSI Holdings. As of June 30, 2000, NSSI Holdings holds
approximately 21% of our common stock and 100% of our Series C preferred
stock, or approximately 23% of our issued and outstanding capital stock, on an
as-converted basis.
We also entered into a separate strategic marketing agreement under
which we obtained authorization to sell specific premier Time publications,
including People Weekly, Sports Illustrated and Time magazines, over the next
four years. During the term of this agreement, we guaranteed that we will
generate certain subscription volumes for the Time publications specified in
the agreement which are offered on inbound telephone calls to our affinity
marketing partners. Additionally, with certain exceptions, Time and its
subsidiaries have agreed that they will not operate programs which would offer
magazine subscriptions on inbound telephone calls to catalog call centers, or
authorize others to operate such programs, through June 30, 2004.
Industry Overview
U.S. Consumer Magazine Market. The U.S. consumer magazine industry is a
$23.7 billion industry that is popular and pervasive among consumers and
advertisers and intensely competitive among publishers. The Magazine
Publishers of America, the industry association for the consumer magazine
business, reports that
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over 80% of U.S. households buy at least one magazine title every year, by
subscription or at the newsstand, and each household buys on average six
magazine titles each year. Consumers rely on magazines for information and
entertainment in categories of broad national interest as well as narrow
special interests, and publishers have responded with titles covering a broad
array of consumer interests. The opportunity to reach large groups of consumers
as well as highly targeted consumer groups has proven attractive to
advertisers. In 1998, magazine publishers generated approximately 29% of their
revenue from subscriptions, 13% from newsstand sales and the remaining 58% from
advertisers.
<TABLE>
<CAPTION>
Compound
Annual Growth
Rate
1993 1998 1993-1998
------------- ------------- -------------
<S> <C> <C> <C>
Total Revenue (a)
Circulation...................... $ 8.3 billion $ 9.9 billion 3.5%
Advertising...................... 7.6 billion 13.8 billion 12.6
------------- ------------- ----
Total.............................. $15.9 billion $23.7 billion 8.2
============= ============= ====
Proportion of Total Revenue
Circulation...................... 52.3% 41.8%
Advertising...................... 47.7% 58.2%
Circulation per Issue (a)
Subscriptions.................... 295 million 303 million 0.5
Single Copy...................... 69 million 64 million (1.5)
Titles Published (b)............... 3,500 4,500 5.2
</TABLE>
--------
(a) Magazine Publishers of America
(b) John Harrington of Harrington Associates, LLC
A magazine's advertising rates are set by reference to its level of
circulation, known as the rate base. If circulation numbers fall below the
promised rate base for a determined period, the magazine publisher generally
agrees to compensate the advertiser for the shortfall. Circulation levels that
exceed rate base, on the other hand, do not result in a retroactive increase in
a magazine's ad rates. As a result, magazine publishers place a high value on a
stable subscriber base.
Circulation revenue is comprised of subscription and newsstand sales. In
1998, publishers generated $6.8 billion in subscription sales through a
combination of in-house and third party sources, with the remaining $3.1
billion coming from newsstand sales. The economics of publisher-sold versus
third party-sold subscriptions are quite different for the publisher. CircTrack
1999, an industry study published by Capell-Jones Associates, reports that
publishers lose an average of $14.39 on every new subscription order generated
through direct mail. In contrast, third party sellers of magazines typically
retain 80-90% of the initial subscription price and remit the balance to the
publisher. The lower cost of third party-sold subscriptions creates significant
publisher reliance on third party customer acquisition. According to the
publisher of Capell's Circulation Report, third party sellers supplied 51% of
all new consumer magazine subscriptions in the U.S. in 1999.
Third party subscription sellers are compensated for generating new
subscribers, but typically do not share in any renewal revenues. Publishers
typically attempt to renew subscribers directly, keeping 100% of all renewal
subscription revenues. Given the importance of high renewal rates to a stable
and profitable subscriber base, publishers have a strong financial motivation
to retain existing subscribers at the end of their subscription periods.
Nonetheless, traditional customer retention tools depend heavily on costly,
inefficient and repetitive renewal notices mailed broadly to a publisher's
subscriber base. The limitations of this approach are reflected in the
industry's low renewal rates. According to CircTrack 1999, publishers lose on
average 70% of subscribers at the end of the initial subscription period, which
creates significant churn in the subscriber base. Publishers face continued
significant marketing expenses to replace lost subscribers and maintain the
promised rate base.
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Other Knowledge Products. Other knowledge products include business and
trade publications and newspapers. The factors that influence revenues for each
of these products are different.
Business and Trade Publications. Publishers of business and trade
publications generate revenue from advertising and in many cases little or no
revenue from circulation, because subscriptions are often free for qualifying
subscribers. In 1998 there were approximately 120 million subscriptions to
almost 1,900 trade publications whose circulation is audited by BPA
International, the auditing entity for business media. Since advertisers
require trade publishers to provide evidence that their readers are likely
prospects for their products and services, publishers require subscribers to
qualify for free subscriptions by answering specific questions about their
employment. The current subscriber qualification process, which is managed by
each title separately, relies on a cumbersome, paper-based questionnaire to
determine reader eligibility and makes the traditional multi-title third party
seller model impractical. Instead, trade publishers generally seek new
subscribers through expensive direct mail and telemarketing-based solicitations
of their own. Trade publishers are required to regularly re-qualify their
readers to provide the necessary assurances to their advertisers.
Newspapers. Like the consumer magazine industry, the newspaper
industry is very competitive. Total U.S. newspaper circulation per issue
averaged 116.2 million in 1998, of which approximately 18.2 million were single
copy newsstand sales, and the average U.S. household purchased at least one
newspaper subscription. There are approximately 2,400 different morning,
evening and Sunday newspapers published in the U.S. competing for advertising
and circulation revenue. According to the Veronis, Suhler & Associates
Communications Industry Forecast, the U.S. newspaper market, as measured by
advertising and circulation revenue, increased at a compound annual rate of
5.9% from 1993 to 1998. The same source indicates that total newspaper industry
revenue in 1998 was $60.0 billion, of which $49.3 billion was generated from
advertising.
The economics of the newspaper publishing industry are similar to
the consumer magazine industry as newspaper publishers generate most of their
revenue from advertising. As with magazines, advertisers and newspaper
publishers agree on advertising rates prior to publication, and publishers
promise advertisers a circulation rate base of each newspaper issue. Newspaper
publishers also incur substantial costs to achieve, maintain and grow their
rate base. However, newspaper publishers generally bill their subscribers on a
monthly basis, do not use third party sellers to generate subscriptions and do
not offer fixed term subscriptions.
Our Solution
We have developed a business model which enables us to provide publishers
of consumer magazines and other knowledge products with innovative solutions
for their subscriber acquisition and retention needs. Key innovations of this
business model are our continuous service subscription system and our networks
of affinity marketing partnerships.
Continuous Service Subscription System. In 1996, we began to offer
continuous service subscriptions to magazine publishers. Under our continuous
service system, the consumer pays the initial magazine subscription charge with
a credit card and renewal charges are automatically billed to that credit card
with no further action by the consumer required. Such a continuous service
subscription is therefore a more enduring open-ended subscription similar to
arrangements consumers have with Internet service providers.
Under the traditional fixed-term subscription model, a consumer purchases
an initial subscription for a fixed term and may renew the subscription only by
responding to a solicitation from the publisher. According to CircTrack 1999,
publishers mail an average of 8.3 renewal notices to each subscriber in an
effort to renew subscriptions. This renewal process therefore depends on the
delivery to the consumer of multiple renewal notices, the completion of a
renewal notice by the consumer, the successful return of the completed form to
the publisher and, in most cases, the subsequent delivery of a bill to the
consumer and satisfactory payment by the
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consumer of the subscription price. This traditional, five-step mail-based
renewal process is expensive, inefficient and inconvenient, and has not been
as successful as our continuous service system in generating high renewal
rates, as evidenced by the industry average first-time net renewal rate of 30%
for 1998.
As a result of the superior economics we achieve by aggregating multiple
subscriptions and managing the customer relationship through multiple renewal
terms, we are able to provide a wide range of customer services, including
centralized changes of address, resolution of delivery problems, renewals and
ordering back issues not available from more traditional subscription
providers. In addition, we provide customers with multiple ways to contact us
for service, such as email, 24 hour-a-day toll free telephone lines or by
mail.
Affinity Marketing Partnerships. We have established strategic
relationships with four groups of affinity marketing partners, namely credit
card issuers, consumer catalog companies, commercial airlines with frequent
flyer programs and a broad range of Internet companies. Our affinity marketing
model is based on the following three principles:
. Leverage the Brand Equity of the Partner. We use the brand
recognition and endorsement of our partners to market subscriptions
to our partners' customers. This gives our subscription offers added
credibility and relevance to the consumer and improves the likelihood
of a purchase response.
. Monetize the Existing Assets of the Partner. To reduce our costs and
improve response rates, we use our marketing partners' available
assets to distribute our promotional offers and, very often, to
capture customer orders. For example, we reach prospective customers
by taking advantage of the unused weight below the postage minimum in
credit card billing statements, unused frequent flyer miles, or the
unused capacity of a catalog company's call center operators.
Consumers are generally able to place their subscription orders
together with their responses to the host marketers, such as in
credit card payment envelopes or during catalog orders. This gives
consumers a convenient and easy way to accept our offers, thereby
increasing consumers' response rates.
. Leverage Partner Credit Card Transactions. To improve response rates
when a credit card is required for payment, we present our
promotional offer at a time when the consumer is already engaged in a
credit card transaction with our marketing partner. This eliminates
the need for the consumer to separately find and provide his credit
card account number, thereby removing an important barrier to the
sale.
Benefits. The combination of our continuous service system and affinity
marketing partners enables us to provide several benefits to publishers,
affinity marketing partners and subscribers:
. We provide publishers a superior and cost effective method of
acquiring and retaining subscribers. Our continuous service system
retains customers at significantly higher levels than the publishers'
own systems. According to CircTrack 1999, the average net retention
rate for the first renewal period from all channels for the 135
magazines surveyed was 30%; the comparable rate through our
continuous service system is over 60%. This improvement makes our
continuous service system attractive to publishers given their strong
incentives to obtain predictable and high renewal rates. Further,
because we collect recurring revenues for the lifetime of the
subscription relationship, we can invest more in customer acquisition
and customer care, which gives us significant competitive advantages.
. We help our affinity marketing partners earn revenue and increase
customer loyalty at little incremental cost to them. Through our
demonstrated track record and reputation in the industry, our
partners permit us to market to their customers using their brand.
Our partners use our promotional offers to reward valued customers,
improve customer loyalty, extend their brands and generate
commissions.
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. We provide consumers with a simple, convenient source for their
magazine subscription purchasing and service needs. Often, we give
consumers an initial free subscription period to evaluate the
magazine before they have to pay for it. Continuous service
subscriptions eliminate repeated renewal notices and the need to mail
a separate check to each publisher. We also provide subscribers with
a package of customer services that are not available from
traditional magazine sellers.
Our Strategy
Our goal is to extend our position as the leading independent multi-
channel provider of proprietary customer acquisition and management services
for publishers of consumer magazines in the U.S. and to expand both the number
and type of knowledge products we market and the channels through which we
acquire subscribers. We intend to pursue the following strategies:
. Expand Existing Channels with New Marketing Platforms and New
Affinity Marketing Partner Relationships. We have successfully built
our business by using the existing communication channels of our
affinity marketing partners to market our services to their
customers. We believe our partners have additional available customer
communications that will be effective in carrying our marketing
offers and acquiring new customers. In particular, we believe the
technology and experience we have gained from marketing through the
call centers of catalog companies can be applied to the customer
service call centers of credit card issuers. Finally, while we have
relationships with 29 of the leading consumer catalog companies, we
intend to focus on growing the number of catalog companies with whom
we partner to acquire subscribers.
. Develop New Channels, with an Emphasis on the Internet. We are also
evaluating new channels through which to market subscriptions and new
networks of marketing partners. We intend to develop channels that
provide us with attractive opportunities to acquire substantial
volumes of new subscribers and feed them into our continuous service
system to generate recurring revenues. In particular, we believe our
innovative business model can be successfully applied to the Internet
in many ways. As discussed below in further detail under "--Internet
Strategy", we already have a multi-platform presence on the Internet.
Our magazine-based marketing platforms help Internet partners to
create more value from their customer bases and traffic by
stimulating and rewarding desired customer behaviors and creating
commission revenues. We intend to focus on building new channels that
leverage our business model and that provide long-term benefits to
our partners and a profitable source of new subscribers for our
publishers.
. Broaden Our Product Range. We plan to expand the range of knowledge
products we sell and we plan to introduce new products to our
channels to maintain variety in our promotions. While our focus until
now has been on consumer magazines, we plan to apply our business
model broadly to business publications and newspapers in both print
and electronic formats. While newspaper and trade magazine publishers
have historically not used third party sellers to generate
subscriptions, we intend to market to them the benefits of our
continuous service system and encourage them to outsource to us the
management of the subscription acquisition and retention process.
From time to time, we expect to introduce other products, such as
membership clubs, as a strategy to broaden our relationships with key
affinity partners.
. Enable Publishers and Consumers to Convert Their Existing Fixed-Term
Subscriptions into Continuous Service Subscriptions. While we have
traditionally focused on acquiring new subscribers for publishers and
renewing these subscriptions, publishers have a significant base of
subscribers who renew their magazines using the traditional method.
We estimate that of the 303 million annual magazine subscriptions
sold in the United States in 1998, over 90% were traditional fixed-
term subscriptions. As a result of the significant efficiency and
convenience of our continuous service system, we expect many existing
fixed term subscribers to migrate to our
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system. We are developing our Internet-based Magazine Manager service
to permit publishers and consumers to convert their fixed-term
subscriptions into continuous service subscriptions and to centralize
the management of all their subscription needs on one website.
. Further Develop Our Intellectual Property. We intend to further
develop our proprietary intellectual property, technology and systems
to strengthen our competitive advantages. We have a history of
innovations: we own the patent covering aspects of our continuous
service system and have several other patent applications pending. We
are also exploring opportunities to create value through licensing
our intellectual property.
Internet Strategy
We currently market on the Internet in a variety of ways and are
extending our business model to take advantage of additional Internet
opportunities. We believe the Internet's potential as a marketing medium is
significantly greater than that of traditional marketing media because it is
cheaper, faster and more interactive and gives marketers real-time feedback on
the effectiveness of their campaigns. This allows marketers to adjust campaigns
quickly and at relatively low incremental cost. We believe that the fundamental
innovations of our business model, namely our continuous service system and our
networks of affinity marketing partners, provide a strong foundation on which
to establish a diversified Internet presence. We plan to continue to create
marketing programs that use magazines and other knowledge products to help our
partners create more activity and value from their customer bases and traffic.
We began marketing consumer magazine subscriptions on the Internet in
1996 when we signed an agreement with America Online to offer subscriptions to
its members. We have since developed many Internet applications through our
Internet subsidiary, SynapseConnect, Inc. We currently market or intend to
market knowledge products on the Internet using the following platforms:
. Integrated Partner Platforms. Building upon the strength of our off-
line marketing model, we use the Internet to offer magazines as
marketing tools to help our partners create more value from their
website traffic. This requires that we integrate the presentation of
our subscription offer prominently into the customer's core path on
the website. In January 1999 we launched a campaign with
priceline.com, a buyer-driven e-commerce company, to acquire
subscribers at the time priceline.com's consumers submit an offer for
airline tickets or other products and services. We enable a customer
to increase the monetary value of his offer at no additional cost by
accepting a trial magazine subscription. Consumers thus improve the
chance that their offers will be accepted, and priceline.com can
generate more purchase transactions as well as commission revenues.
Based on the success of this approach, we believe there is a
significant opportunity to offer magazine subscriptions as integral
parts of other e-commerce transactions.
. e-commerce. In September 1999, we launched magazineoutlet.com,
allowing consumers to purchase more than 20,000 consumer,
professional and trade publications online. We offer professional and
trade magazines through a strategic partnership with RoweCom Inc. We
intend to generate site traffic through a range of marketing
initiatives, however, we believe that only a relatively small
proportion of our sales will be generated from this electronic store.
This site is designed not only as an "e-tail" store but also as a
private-label store for affiliates. We currently support affiliate
marketers with links to magazineoutlet.com and we plan to add new
affiliates. Affiliates receive a turnkey, private-label e-commerce
program offering opportunities to generate incremental revenue and
extend their brand identity. Current affiliate marketers include
Microsoft and WebTV Networks Inc.
. Private-Label Points Programs. In January 2000, we introduced a
private-label, loyalty points program which allows online marketers
to stimulate and reward desired consumer behavior.
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Consumers who engage in qualifying behavior, such as registering
online, making purchases or completing online surveys, receive points
that can be redeemed immediately for consumer magazine subscriptions.
After the magazine term which was purchased with points, the
subscription is automatically renewed and billed on the consumer's
credit card through our continuous service system and we generate
revenue until the customer cancels. We currently have loyalty points
programs with Microsoft, FreeLotto, Half.com, Inc. and Tiger Direct,
Inc.
. Cross-Sell Platform. Our Internet Magazine Cross-Sell (IMX) platform
is the Internet equivalent of our catalog business. This platform
enables our partners to cross-sell magazine subscriptions to
consumers as they purchase other products and services online. We
expect to deploy this platform to our current catalog partners that
have an e-commerce presence as well as to new e-commerce partners.
Using this platform, partners can create additional revenue, reward
the purchase, and reinforce the affinity that drove the purchase. The
offer is made with the partner brand using a technology platform
built, hosted and served by SynapseConnectSM.
. Publisher Infrastructure Services (customer acquisition). We have
agreements with leading publishers to provide our continuous service
system infrastructure to support publishers' online subscriber
acquisition efforts. Consumers responding to an online subscription
offer from participating publishers will receive a web-based order
form served and hosted by SynapseConnect. Clients include Maxim,
MotorTrend, Ski Magazine and Truck Trend Magazine.
. Publisher Infrastructure Services (customer retention). We believe
the Internet provides an ideal medium for publishers to convert their
existing base of subscribers from fixed-term subscriptions to our
continuous service system. To support publisher efforts in this area,
we intend to provide centralized services that allow consumers to
access and manage their entire existing magazine portfolio online.
Using publisher-supplied data, our Magazine Manager service will
allow consumers to manage their existing fixed-term subscriptions.
Consumers can then eliminate future renewal notices and invoices by
converting existing subscriptions into continuous service
subscriptions billed to a credit card. In addition to the added
convenience of a maintenance-free subscription, Magazine Manager will
give customers a powerful set of tools that allow them to add new
knowledge products, delete others, change addresses, request back
issues, give gift subscriptions and write letters to the editor.
. Business and Trade Publications and Other New Knowledge Products. To
access the trade publications market, in May 2000 we launched
freebizmag.com, the first outsourced subscription acquisition and
management service for publishers of trade publications. We believe
that freebizmag.com improves the way trade publishers acquire new
subscribers. Unlike consumer magazines, trade publications are
available at no cost but only to qualified consumers. The current
qualification process, which is managed by each title separately,
relies upon a cumbersome paper questionnaire to determine reader
eligibility. By contrast, freebizmag.com collects each reader's
qualifications on a universal online survey and then determines which
magazines the consumer is qualified to receive. freebizmag.com also
contacts the consumer prior to the expiration of his subscriptions to
re-qualify his eligibility via email. This multi-title, consumer-
driven approach is more efficient than the traditional single title,
publisher-driven method. Publishers pay us for each customer we
acquire and re-qualify. We currently have agreements to market over
250 business and trade publications. We are currently marketing
freebizmag.com with the following clients: American Airlines,
Continental Airlines' OnePass, Microsoft's bCentral and Center for
Enterprise Education's ASBDC.net.
. e-fundraising. Magazines are frequently sold by students to raise
money for school programs and by members of other organizations for
fund raising purposes. In 1999 alone, approximately 13 million
subscriptions were sold for such purposes. To access this
marketplace, we have partnered with companies that create electronic
networks of school communities. Through our partners' online content
and tools, we will provide students with an e-fundraising capability
that can be deployed year-round entirely by electronic mail. An e-
fundraising solution eliminates the
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safety concerns and geographical limitations of traditional door-to-
door student fundraising. We have reached agreements with two
partners to date, HiFusion, Inc. and ZapMe! Corporation, Inc., and we
expect to create relationships with other companies in this
marketplace as well. We expect to launch our e-fundraising platform
late in 2000.
We intend to focus significant resources on extending our leadership in
traditional channels to the Internet. We plan to apply the strengths of our
business model in generating significant volumes of new subscriptions with
high renewal rates to the Internet.
Our Publisher Clients
We have sales agreements with nearly all major U.S. consumer magazine
publishers and currently offer over 600 titles, including most of the 100
largest consumer magazines based on individual net paid subscriptions in the
first half of 1999, as listed in Advertising Age's "Top Magazines by
Circulation" report. We obtain publisher authorizations for the magazines that
we offer twice a year. The terms of an authorization from a publisher cover
the period during which we can offer subscriptions, pricing, the estimated
number of subscriptions to be generated and the percentage of each
subscription which we receive from the consumer that we remit to the
publisher. While the terms of our authorizations are generally consistent with
those of the magazine publishing industry and other subscription agents for
the first subscription period, under our continuous service system we also
generate recurring revenue from subscription renewals. When we acquire a
subscription, we collect the subscription price through the consumer's credit
card and pay a portion to the publisher with the subscription details.
Our Distribution Channels
We market in the following channels:
<TABLE>
<CAPTION>
Credit Card Consumer Airline Frequent
Issuers Catalogs Flyer Programs Internet
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Media Platform: . An insert in . In-bound . Direct mail . Various online
the billing customer phone and email-
statement calls based
promotions
. Direct mail
. In-bound
customer phone
calls
Products . Consumer . Consumer . Consumer . Consumer
Offered: magazines and magazines magazines magazines and
other . Membership other
knowledge clubs knowledge
products products
. Merchandise . Merchandise
Promotional . Free trial . Free trial . Unused miles . Loyalty points
Offers: subscription subscription for . Free trial
. Loyalty points subscriptions subscription
. Sweepstakes
Is Continuous . Yes . Yes . No . Yes
Service System
Offered?
Asset Utilized: . Extra postage . Capacity in . Unused miles . Website traffic
weight in call centers . Client brand . Client brand
billing equity equity
statement
. Capacity in . Client brand
call centers equity
. Client brand
equity
Significant . Capital One, . Brylane, . American . FreeLotto,
Clients: Chase JCPenney, Airlines, Microsoft,
Manhattan Newport News Continental priceline.com,
Bank, First and Victoria's Airlines, RoweCom and
USA and MBNA Secret Trans World Priceline
Airlines, WebHouse Club
Inc., United
Airlines and
US Airways
</TABLE>
Credit Card Issuers
Magazines and Other Knowledge Products. Credit card holders are a
desirable marketing segment because, on average, each American adult owns one
or more credit cards. According to the Nilson Report, in
1998 credit card issuers mailed approximately 582 million credit card
statements each month in the United
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States. In 1996, we began offering continuous service subscriptions to credit
card customers by including our offers inside credit card billing statements
and by way of direct mail. Because of the low weight of credit card billing
statements, issuers can insert additional pieces in their billing statements
without incurring extra postage. We utilize this available weight for our
marketing offers.
We believe that our marketing offers help strengthen cardholder
interaction with credit card issuers and build cardholder loyalty, which
benefits issuers by reducing cardholder attrition. Issuers also benefit
financially by earning revenue from the subscription sales. Credit card issuers
tend to be very selective in approving in-statement promotions not only because
there is a limited amount of available weight in billing statements but also
because they are attaching their brand name to the promotion being offered.
We have agreements with 14 of the 20 largest U.S. credit card companies,
including Capital One, Chase Manhattan Bank, Citibank, First USA and MBNA, as
well as leading private-label retail and gas card issuers including Macy's. Our
account managers or brokers negotiate the principal business terms with each
credit card issuer, such as the type of insert or attachment, the time period
during which our offers are made, the number of insertions and pricing. When we
use an offer attached to the return envelope, we reimburse our partner for the
cost of the return envelope and pay the partner a fixed fee and/or a commission
based on subscription sales. We also selectively market our partners' customers
using direct mail.
We have agreements with what we believe are the two largest in-statement
media brokerage firms under which each has agreed that it will not work with
any other magazine subscription agent to distribute marketing materials in
credit card statements for a period ending December 2001. These contracts are
renewable at the discretion of both parties for successive one-year terms. In
1999, we inserted over 800 million promotions in credit card statements.
Loyalty Marketing Gift Products. In 1995, we introduced a loyalty
marketing program that provided our credit card partners a turnkey customer
reward program which offers cardholders their choice of gift items for a small
fee. The program was developed as both a lead generator for magazine
subscription sales and as a means to allow our partners to strengthen
cardholder loyalty. Additionally, this program allowed us to utilize more
insertion opportunities inside the credit card billing statements, thereby
strengthening our position in the credit card channel. Response from our
partners and their customers was so strong that in 1996 we expanded both the
program and the selection of gift merchandise.
In January 2000 we entered into a sales representative agreement, which
was subsequently amended in April 2000, with Gift Services, a Delaware limited
liability company in which we and the supplier of the goods each have a 49%
ownership interest. The agreement appointed us as Gift Services' exclusive
authorized sales representative. As an independent contractor, we now run the
loyalty gift program on Gift Services' behalf and earn a commission for each
gift item sold. In addition to acting as Gift Services' exclusive authorized
sales representative, we also sell certain other products directly to
consumers.
Consumer Catalog Companies
In 1998, we introduced the Magazine Direct(R) program to give our catalog
company partners a program to offer continuous service subscriptions. We are
able to utilize the extra capacity that is available in our catalog partners'
in-bound call centers. We train our partners' customer service representatives
to offer magazines that cover a subject corresponding to the merchandise that
the customer is purchasing. For example, the call center operator offers a
subscription to Golf Digest and two or three other related magazine titles to a
customer purchasing merchandise from a golf catalog. The operator offers the
customer a two-month free trial subscription as a reward for being a valued
customer. When the trial period ends, the subscription converts to an open-
ended subscription billed to the credit card used in the merchandise
transaction.
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We believe that because catalog companies and magazine publishers both
cater to specific groups of customers, an opportunity for cross-selling exists.
Our partners generally have some extra capacity in their in-bound call centers
in which a cross-selling offer can be made. We believe that it is easier to
sell a magazine subscription when the customer is already making a purchase on
a credit card than it would be to sell a magazine subscription with a "cold
call."
Magazine Direct has agreements with 29 catalog companies, including
JCPenney, Brylane, Newport News, Spiegel and Victoria's Secret. We pay our
catalog partners a combination of their incremental costs in making our offers
and a commission based upon subscription sales.
Airline Frequent Flyer Programs
In 1995, we formed CAP Systems to develop affinity marketing programs for
the sale of magazine subscriptions to members of frequent flyer and similar
reward programs. This program became possible when the Audit Bureau of
Circulations agreed in 1991 to allow publishers, under certain circumstances,
to count subscriptions paid for with frequent flyer miles as paid subscriptions
when determining circulation rate bases. We generally deliver offers to
consumers through direct mail and present them as rewards for being valued
members of the frequent flyer program. Members are given the chance to redeem
frequent flyer miles for traditional print and electronic magazine
subscriptions. Because airlines typically do not rent their frequent flyer
lists, through CAP Systems we gain access to potential subscribers through a
channel that would have otherwise been unavailable.
The airlines benefit because they can offer members additional products
that help them build and maintain member loyalty. In addition, the airlines
receive promotional space inside our direct mail packages for their use.
We have affinity marketing programs with the frequent flyer programs of
eight of the ten largest U.S. national carriers, including American Airlines,
Continental Airlines and United Airlines, and the UK-based British Airways.
Publishers consider frequent flyers to be highly desirable subscribers because
of their attractive demographics.
Transactional Database
Through our promotions, we have compiled customer databases containing
records of approximately 76.7 million transactions involving 38.5 million U.S.
households. We use this information, with the consent of our affinity partners
where required, to identify potential re-marketing opportunities within our
current customer base. These marketing programs typically offer current
customers the opportunity to purchase additional magazines in the categories of
interest demonstrated by prior purchases.
We recognize the potential value of our customer information asset to
third party marketers. We are currently developing a comprehensive privacy
policy and, until one is fully defined and promulgated, we have no plans to
rent or sell information about our customers to third parties. We have recently
designated a privacy administrator to provide management oversight for all uses
of customer information.
Systems Infrastructure and Order Processing
We have built a proprietary and secure computer system to store our
inventory of consumer names, addresses and subscription information. We
generally create the business functional specifications for new technology,
supply project management oversight, coordinate implementation activities and
test the finished system internally. We outsource the project management,
technical design, application development and on-going operations of our
software systems.
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Using an extranet methodology, we link to vendors who manage non-
strategic, outsourced functions, such as the key entry of subscription
information, inbound telemarketing and customer service support. Customers
contact us through a toll-free telephone number, through the U.S. mail or via
the Internet. Prior to billing most new and renewal subscriptions, we mail or
e-mail a notification reminding consumers of the coming credit card charge
amount. The charge itself is described on a customer's billing statement by the
magazine name or the word "NSS*magazines" or "Magazine Sub," along with our
toll-free customer service telephone number to allow the customer to contact us
easily. Our customer service vendors access our system to address customers'
questions, and we retain control of their activities, which allows us to direct
traffic to particular vendors, limit the distribution of confidential
information, provide training to control how customer service representatives
handle incoming calls and measure representative performance.
We also outsource the key entry of order information. In 1999, our data
processing vendor fulfilled almost 50 million subscription and merchandise
units. Many orders for these units contain handwritten names, addresses, credit
card numbers and sometimes e-mail addresses. Order information is entered into
our database manually or electronically. With paper-based orders, we contract
with third party vendors to input this information and transmit it to us. Our
clients may also take orders and transmit the data to us electronically. On the
Internet, customers may enter their orders directly on our website or those of
our affiliates. These orders are then batch processed into the main transaction
database.
Once an order is entered, it is separated by title and fulfilled by
sending the subscription request to the designated service bureau for each
publisher. Each magazine has varying fulfillment rules and times. We send
orders through the credit card payment processing systems on a daily basis as
specified in the offering to the consumer. For charges on most of the major
credit cards, funds are deposited in our account within two business days of
processing. We collect the entire amount of the subscription price, less a
standard credit card association interchange fee and a payment processing fee,
and send a portion of the price to the publisher with the subscription
fulfillment data. No credit card data or other information such as email
addresses is passed to the publisher.
We plan to invest significant resources in upgrading our system within
the next two years. Our primary data processing facility, located in Wakefield,
Massachusetts, is operated by a third party vendor. We have a backup facility
at our headquarters in Stamford, Connecticut. Our two facilities have built in
redundancy. They are located in different power grids and have uninterruptable
power supply backup. The Stamford facility also has direct power generation
facilities.
Competition
We compete against the direct marketing efforts and subscriber
acquisition programs of the magazine publishers themselves, such as Time, one
of our principal stockholders, Hearst, Conde Nast, Meredith and Ziff Davis. We
also compete with third party magazine subscription sellers such as Publishers
Clearing House, American Family Publishers, an affiliate of publisher Time, and
Quality School Plan, a subsidiary of The Reader's Digest Association, for
authorizations from magazine publishers to sell subscriptions. Competitors also
include large, well-established news and information providers such as Dow
Jones and Knight Ridder. Additionally, we compete with consumer-oriented online
book sellers and magazine retailers, such as enews.com and USAPubs.com.
Furthermore, because we offer our products through distribution channels
made possible by arrangements with third parties, we compete with other vendors
for agreements with those third parties providing access to those channels. For
example, although we believe we are the largest user of in-statement media in
credit card statements and we have affinity marketing agreements with most
credit card issuers providing us access to their credit card statements, other
direct marketing companies as well as the credit card issuers themselves want
to use the remaining space available in the statements for other promotional
offers and
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customer communications. Our ability to market products is dependent upon
maintaining access to such statements and other distribution channels such as
frequent flyer statements and catalog order-taking centers.
Intellectual Property
We rely on United States and international laws, where available and
appropriate, to protect our intellectual property rights through patents,
trademarks, trade secrets and copyrights. In addition, we use nondisclosure
agreements with our employees and marketing partners and assignment agreements
with our employees, where applicable, to protect our proprietary rights. We
have also licensed intellectual property rights where appropriate. However,
this combination of laws and contractual restrictions may not be sufficient to
prevent misappropriation of our technology or deter others from developing
similar systems or technologies.
We own issued United States Patent No. 6,014,641, which is a business
method patent directed to various aspects of our continuous service system. The
patent does not prevent magazine publishers from offering continuous service
subscriptions directly to consumers, nor does it prevent others from marketing
continuous service subscriptions based on billing methods other than automatic
billing of consumers' credit cards. Either or both of these possibilities may
nullify the competitive advantage of the patent. We also have several pending
United States patent applications directed to various aspects of our current
and future systems and business methods. In addition, we have also licensed, on
a non-exclusive, perpetual basis, United States Patent No. 6,006,205, which is
a business method patent, and two pending United States patent applications for
business methods from Walker Digital. These licensed rights are directed to
various credit card billing methods and systems.
It is possible, however, that our patent rights could be successfully
challenged by one or more third parties, which could result in our loss of the
right to prevent others from exploiting our technology; our pending patent
applications may not result in the issuance of patents; and current and future
competitors could devise new methods of competing with our business that are
not covered by our issued, licensed or pending patent rights.
We pursue the registration of our trademarks and service marks in the
U.S., and have applied for the registration of certain of our service marks. We
have been granted a service mark registration for the mark "Magazine Direct."
We also have applied for registration for the service marks "Synapse" and the
Synapse logo, "Magazine Manager," "Magazine Outlet," "magazineoutlet.com,"
"FreeBizMag," "FreeBizMag.com," "SynapseConnect" and "Synapse Solutions." We
have not sought service mark or copyright protection outside of the United
States, and effective protection may not be available in every country in which
our products and services are made available online. An opposition was filed in
the United States Patent and Trademark Office against one of our service mark
applications. We have withdrawn this application.
Government Regulation
Our marketing and sales activities are subject to the laws of the federal
government and the fifty states, each of which regulates advertising to
consumers, telemarketing, sweepstakes promotions and the use of personal
information. Our in-house counsel, supported by outside counsel, is responsible
for reviewing advertising copy to ensure that we comply with all applicable
laws. We also monitor proposed changes in the laws affecting our business.
Despite our efforts, it is possible that attorneys general could find that our
marketing efforts do not comply with current law and bring suit. In July 1998,
we entered into a consent order in California under which we agreed that we
would comply with relevant California law relating to making offers involving
gift merchandise. We believe our marketing efforts are in compliance with those
California laws.
Employees
As of June 30, 2000, we had 246 full-time and 13 part-time employees.
None of our employees are represented by a labor union, and we consider our
labor relations to be good.
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Properties
Our executive, administrative and operating offices are located in
approximately 51,000 square feet of leased office space located in Stamford,
Connecticut.
Legal Proceedings
We are not currently a party to any material legal proceedings. We may
from time to time become a party to various legal proceedings arising in the
ordinary course of business. Any such proceeding against us, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
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MANAGEMENT
Our Executive Officers and Directors
Our directors and executive officers, their ages as of July 20, 2000, and
their respective positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael R. Loeb......... 45 Chairman of the Board, President and Chief Executive Officer
Douglas J. Alpuche...... 36 Executive Vice President, Chief Financial Officer
Jonathan E. Ellenthal... 35 Executive Vice President, Business Development
Richard I. Vogel........ 35 Executive Vice President, Sales & Partnership Marketing
John F. Rovegno......... 41 Executive Vice President, Operations
Jonathan A. Siegel...... 42 Vice President, Corporate General Counsel and Secretary
Jay S. Walker........... 44 Director
Richard S. Braddock
(1).................... 58 Director
William E. Ford (2)..... 39 Director
N.J. Nicholas, Jr. (1)
(2).................... 60 Director
Nancy B. Peretsman (1).. 46 Director
</TABLE>
--------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Michael R. Loeb co-founded our company with Jay Walker in 1991. He has
been President of Synapse Group since 1991, Chief Executive Officer since
December 1997 and Chairman of our board of directors since April 2000. Mr. Loeb
has been a director of Synapse Group since March 1993. He is also President,
Chairman, Chief Executive Officer and Chief Operating Officer of our NewSub
Magazine Services LLC, SynapseConnect, Inc., Magazine Direct, Inc. and Synapse
Solutions, Inc. subsidiaries, Chairman, Chief Executive Officer and Chief
Operating Officer of our Synapse Services, Inc. subsidiary, and Chairman and
Chief Executive Officer of our MDSC Corporation subsidiary. He has an extensive
background in magazine publishing circulation. During an eight-year career at
Time, he held a number of positions, including Consumer Marketing Director for
Sports Illustrated, where he was responsible for significantly increasing the
magazine's circulation, and Vice President, Consumer Marketing of Entertainment
Weekly, which he helped launch. At Time, he also helped introduce SI for Kids.
Mr. Loeb was responsible for starting the direct response division of Deutsch
agency immediately prior to the founding of our company. Mr. Loeb is a director
of Edgewater Technology, Inc., a provider of information technology,
professional consulting and solutions services, and Gift Services.
Douglas J. Alpuche became our Executive Vice President, Chief Financial
Officer in February 2000. He heads our finance, planning and administration
organization. He is also Executive Vice President, Chief Financial Officer of
each of our subsidiaries. From June 1999 to February 2000, Mr. Alpuche held the
position of Assistant Corporate Controller, Corporate Finance at The Reader's
Digest Association, where he was responsible for the U.S. accounting
operations. From September 1995 to May 1999, he was Senior Vice President and
Chief Financial Officer for Delcal Enterprises and Argo International
Corporation. He was Vice President of Financial Control in the Emerging Markets
Sales and Trading group at Morgan Guaranty Trust from May 1994 to September
1995. Mr. Alpuche was employed by Arthur Andersen LLP from September 1986 to
May 1994, serving most recently as an Experience Manager.
Jonathan E. Ellenthal became our Executive Vice President, Business
Development in May 1999. He heads the organization that is responsible for
creating new sales channels for our products, with an emphasis on Internet-
based selling platforms and new ways to sell magazines in our current channels.
He formerly held the positions of Vice President of Business Development, from
July 1998 to May 1999, and Vice President of our Magazine Group, which he
assumed when the position was created in September 1997. Mr. Ellenthal
originally
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joined Synapse Group in June 1995 as Director for National Accounts to assume
responsibility for our sales and client management group from Mr. Walker. Prior
to coming to Synapse Group, he was Executive Vice President for Cooperative
Marketing Concepts.
Richard I. Vogel has been our Executive Vice President, Sales &
Partnership Marketing since May 1999. He is currently responsible for our
subscription acquisition and retention activities through the credit card,
catalog and airline channels. He became Vice President of Sales in October 1997
and was General Manager of our CAP Systems airline program from July 1994 to
September 1997. Mr. Vogel is also President of our MDSC Corporation subsidiary.
Mr. Vogel previously worked for Michael Loeb at Time as part of the launch team
for Entertainment Weekly.
John F. Rovegno has served as our Executive Vice President of Operations
since May 1999 and was Vice President of Operations from January 1997 through
May 1999. He is responsible for our technology and customer care groups. From
October 1994 until January 1997, Mr. Rovegno was our General Manager for
Operations and helped launch our merchandise business. He joined Synapse Group
in April 1992 as Director of Account Services. Prior to joining us, Mr. Rovegno
was one of the first employees of CUC International, Inc., a fee-based
membership services company, where he managed several of their operational
areas.
Jonathan A. Siegel joined us in September 1999 as Vice President and
Corporate General Counsel. He was appointed Secretary of Synapse Group in
November 1999 and holds the same position in each of our subsidiaries. From
June 1998 until September 1999, Mr. Siegel was a legal consultant for LeFebure
Corporation, a manufacturer of security systems, and other clients. He held the
position of Vice President, General Counsel and Secretary of LeFebure from
August 1995 to June 1998. From May 1994 to August 1995, Mr. Siegel was
Executive Vice President, General Counsel and Secretary, as well as a director,
of Brandt, Inc., a producer of currency handling equipment and software, which
was sold to LeFebure in August 1995.
Jay S. Walker co-founded our company with Michael Loeb in 1991. He has
been a director of Synapse Group since its founding and was Chairman of our
board of directors from August 1991 until April 2000. Mr. Walker also founded
priceline.com, a buyer-driven e-commerce company, and has served as the Vice
Chairman of its board of directors since August 1998. He had served as Chairman
and Chief Executive Officer of priceline.com from its inception in July 1997
through August 1998. Mr. Walker is an entrepreneur and has been actively
engaged in the start-up of new enterprises for more than 15 years. He also
serves as the Chairman of Walker Digital, a company he founded in September
1994 which develops and patents proprietary marketing ideas.
Richard S. Braddock has served as a director since February 1999 and has
been a member of the Audit Committee since that time. He is Chairman of
priceline.com, a position he has held since August 1998. From August 1998 until
May 2000, Mr. Braddock also served as the Chief Executive Officer of
priceline.com. From December 1997 to January 1999, Mr. Braddock served as the
non-executive Chairman of True North Communications Inc., an advertising
company. From September 1996 to August 1997, he served as special advisor to
General Atlantic Partners. Mr. Braddock was a principal of Clayton, Dubilier &
Rice, a private equity fund, from June 1994 through September 1995. He served
as Chief Executive Officer of Medco Containment Services during 1993. From 1973
to 1992, Mr. Braddock held a variety of positions at Citicorp and its principal
subsidiary, Citibank, N.A., including President and Chief Operating Officer. He
also serves as a director of Amtec, Inc., a semiconductor equipment
manufacturer; Eastman Kodak Company, an imaging products company; E*Trade
Group, Inc., a provider of online investing services; and Cadbury Schweppes
plc, a global beverage and confectionery manufacturer. Mr. Braddock also serves
as a director of Lincoln Center for the Performing Arts and Walker Digital, and
as a trustee of the Cancer Research Institute.
William E. Ford has served as a director since March 1998 and has been a
member of the Compensation Committee since February 1999. Mr. Ford is a
managing member of General Atlantic Partners, LLC, a private equity investment
firm focused exclusively on Internet and information technology investments on
a global basis. He has been with General Atlantic, or its predecessor, since
July 1991. Mr. Ford is also a
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director of priceline.com; E*Trade Group; Tickets.com, Inc., a provider of
entertainment tickets, event information and related products and services;
LHS Group Inc., a billing solutions software company; Prime Response, Inc., a
provider of enterprise customer relationship management software; Eclipsys
Corporation, a provider of clinical, financial and administrative software
solutions to the health care industry; and several private information
technology companies.
N.J. Nicholas, Jr. has served as a director since February 1999 and has
been a member of the Compensation Committee since that time. Since June 1992,
Mr. Nicholas has been a private investor. Mr. Nicholas is also a director of
priceline.com; Boston Scientific Corporation, a manufacturer of medical
devices; Xerox Corporation, a document company; and DB Capital Partners, Inc.,
a private equity firm. From June 1997 until June 1999, he was a director of BT
Capital Partners, Inc., the predecessor to DB Capital Partners. Mr. Nicholas
was co-Chief Executive Officer of Time Warner Inc. from 1990 until 1992 and
President of Time Inc. from 1986 until 1990.
Nancy B. Peretsman has served as a director since April 1999. She has
been a Managing Director and Executive Vice President of Allen & Company
Incorporated, an investment bank, since June 1995. Prior to joining Allen &
Company, Ms. Peretsman headed the worldwide media investment banking practice
at Salomon Brothers Inc. Ms. Peretsman serves on the board of priceline.com
and Charter Communications, Inc., an operator of cable television systems.
Each executive officer serves at the discretion of our board of directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of our directors or executive officers.
Mr. Ford was initially elected a director pursuant to a Stockholders
Agreement dated March 9, 1998.
Pursuant to a Second Amended and Restated Stockholders Agreement dated
June 23, 2000, the stockholders who are parties to the agreement agreed to
take all actions necessary to ensure that the number of members of our board
of directors is not less than three and not greater than eight. So long as
General Atlantic Partners and its affiliates own at least 3% of our
outstanding common stock, as measured on a fully diluted basis, these
stockholders agree to elect one individual designated by General Atlantic
Partners to our board of directors. The initial designee of General Atlantic
Partners is Mr. Ford. So long as NSSI Holdings and/or any affiliate owns at
least 3% of our outstanding common stock, as measured on a fully diluted
basis, these stockholders agree to elect one individual designated by NSSI
Holdings to our board of directors. At any time during which no designee of
NSSI Holdings is acting as a director, NSSI Holdings may instead appoint an
observer to attend meetings of our board of directors.
As of June 23, 2000, NSSI Holdings appointed Don Logan as its board
observer. Mr. Logan is Chairman and Chief Executive Officer of Time. He was
named Chief Executive Officer in August 1994 and assumed the additional title
of Chairman in July 1997. He had been serving as Time's President and Chief
Operating Officer since June 1992. Time is a wholly owned subsidiary of Time
Warner Inc. Prior to 1992, Mr. Logan was Chairman and Chief Executive Officer
of Southern Progress Corporation, a wholly-owned subsidiary of Time. Mr. Logan
serves as a director of First Health Group Corp., a managed care organization.
Upon termination of the Second Amended and Restated Stockholders
Agreement on the closing of this offering, NSSI Holdings will have similar
rights to designate a board member or an observer which survive the closing of
this offering, pursuant to the Stock Purchase Agreement dated May 17, 2000.
Under the Stock Purchase Agreement, for as long as NSSI Holdings and/or any
affiliate owns at least 3% of our outstanding common stock, as measured on a
fully diluted basis, NSSI Holdings will have the right to designate a
representative to be nominated as a management nominee to our board of
directors. If NSSI Holdings does not designate a nominee or its nominee is not
elected to our board of directors, it may instead appoint an observer to
attend meetings of our board of directors and receive all written materials
made available to directors.
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<PAGE>
See "Related Party Transactions and Relationships" and "Principal
Stockholders" for certain information concerning our directors and executive
officers.
Election of Directors
Following this offering, our board of directors will be divided into
three classes, each of whose members will serve for a staggered three-year
term. Messrs. Ford and Walker will serve in the class whose term expires in
2001; Ms. Peretsman and Mr. Nicholas will serve in the class whose term expires
in 2002; and Messrs. Braddock and Loeb will serve in the class whose term
expires in 2003. Upon the expiration of the term of a class of directors,
directors in such class will be elected for three-year terms at the annual
meeting of stockholders in the year in which such term expires. This
classification of our board of directors may have the effect of delaying or
preventing changes in control or management of Synapse Group.
Compensation of Directors
We do not pay our directors for serving on our board but we do reimburse
directors for reasonable out-of-pocket travel expenses incurred in attending
meetings of the board of directors. In 1999, we issued to each of Messrs.
Braddock, Ford and Nicholas and Ms. Peretsman options to purchase 35,000 shares
of our Class B common stock at a per share exercise price of $8.00 under our
1999 Stock Option Plan. These options vest over three years at the rate of one-
third of the shares on each anniversary of the grant. In January 1999, we also
issued to Mr. Loeb options to purchase a total of 1,000,000 shares of our Class
B common stock under our 1997 Stock Option Plan and our 1999 Stock Option Plan.
The per share exercise price is $8.00 for 333,333 of these shares, of which
250,000 shares vested in January 2000 and the remaining shares will vest in
January 2001. The per share exercise price is $12.00 for 333,334 of the shares,
of which half will vest in January 2001 and half will vest in January 2002. The
per share exercise price is $16.00 for the remaining 333,333 of the shares, of
which 83,333 shares will vest in January 2002 and 250,000 shares will vest in
January 2003. We may, in our discretion, grant stock options and other equity
awards to our directors from time to time pursuant to our 1997 Stock Option
Plan, our 1999 Stock Option Plan or our 2000 Stock Incentive Plan. For more
information on these plans, see "--Benefit Plans--1997 Stock Option Plan," "--
Benefit Plans--1999 Stock Option Plan" or "--Benefit Plans--2000 Stock
Incentive Plan." Ms. Peretsman is not bound by the non-competition provision in
the Option Shareholders Agreement described in "--Benefit Plans--1999 Stock
Option Plan."
Board Committees
Our board of directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. Ford and
Nicholas, reviews executive salaries, administers our bonus, incentive
compensation and stock plans, and approves the salaries and other benefits of
our executive officers. In addition, the Compensation Committee consults with
our management regarding our other benefit plans and compensation policies and
practices.
The Audit Committee, which consists of Messrs. Nicholas and Braddock and
Ms. Peretsman, reviews the professional services provided by our independent
accountants, the independence of such accountants from our management, our
annual financial statements and our system of internal accounting controls. The
Audit Committee also reviews such other matters with respect to our accounting,
auditing and financial reporting practices and procedures as it may find
appropriate or may be brought to its attention.
Compensation Committee Interlocks and Insider Participation
Our board of directors created a compensation committee in February 1999.
The committee consists of two non-employee directors, currently Messrs. Ford
and Nicholas, and is responsible for administering our
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stock option plans and any other plans for compensation in cash or in kind to
our employees or officers. During much of 1999, our entire board of directors
authorized grants of options under our stock option plans, including the
issuance of grants to some of our directors, and amendments to the terms and
conditions of certain grants. The entire board also approved the terms of an
employment contract for Mr. Loeb. In November 1999 and April 2000, the
compensation committee ratified all options granted to date. See "Related Party
Transactions and Relationships" for additional disclosure about our board
members' interaction with Synapse Group.
Executive Compensation
The following table summarizes the compensation paid to our President and
our other three most highly compensated executive officers in 1999 and one
additional executive officer who was among the four most highly compensated
executive officers in 1999 but who was not serving as an executive officer at
December 31, 1999, whom we identify as "named executive officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
----------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation(2)
--------------------------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Michael R. Loeb, Chairman,
President and Chief Executive
Officer....................... $250,000 $200,000 1,000,000 $8,948(3)
Jonathan E. Ellenthal,
Executive Vice President,
Business Development.......... 165,000 99,000 100,000 5,936(4)
Richard I. Vogel, Executive
Vice President, Sales &
Partnership Marketing......... 165,000 99,000 110,000 5,936(5)
John F. Rovegno, Executive Vice
President, Operations......... 150,000 60,000 45,000 5,404(6)
Kevin Manion, former Chief
Financial Officer, Secretary
and Treasurer(1).............. 200,000 -- 55,000 176(7)
</TABLE>
--------
(1) Mr. Manion was Chief Financial Officer, Secretary and Treasurer until
October 27, 1999. His employment terminated on December 31, 1999, and his
unexercised options terminated on the same date.
(2) Reflects profit sharing contributions allocated to the named executive
officers' accounts under our 401(k) Plan for the 1999 plan year. Such
contributions were allocated to the accounts on March 15, 2000. See "--
Benefit Plans--401(k) Plan" for more information.
(3) Represents $8,750 allocated to Mr. Loeb's 401(k) account and $198 of life
insurance premiums paid by us.
(4) Represents $5,775 allocated to Mr. Ellenthal's 401(k) account and $161 of
life insurance premiums paid by us.
(5) Represents $5,775 allocated to Mr. Vogel's 401(k) account and $161 of life
insurance premiums paid by us.
(6) Represents $5,250 allocated to Mr. Rovegno's 401(k) account and $154 of
life insurance premiums paid by us.
(7) Represents life insurance premiums paid by us.
Employment Agreements, Termination of Employment and Change of Control
Arrangements
In February 1999, our board of directors approved the following terms of
an employment agreement with Michael Loeb. The agreement is subject to more
formal documentation, which is being prepared. The
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<PAGE>
agreement will be in effect for five years, with automatic renewals for periods
of a year, unless the agreement is otherwise terminated. Under the terms of the
agreement, Mr. Loeb's base salary is set at $250,000, and he has the
opportunity to receive a bonus of up to 100% of his base salary based on his
performance and the achievement of certain corporate objectives. Mr. Loeb also
has the use of a company car. If the board of directors removes him for any
reason other than for "cause" or because of a change in control of Synapse
Group, Mr. Loeb is entitled to three years' of his then-current base salary and
a prorated bonus for the year in which the removal occurs. In addition, his
options continue to vest for those years except that 100% of his options vest
immediately if he is removed pursuant to a change in control. Mr. Loeb would
then also be prevented from competing with or soliciting employees from Synapse
Group for a period of three years after his removal.
Under the terms of the Second Amended and Restated Stockholders
Agreement, Mr. Loeb may not compete with or solicit employees from us during
the time that he is an employee or director of Synapse Group and for an
additional period of either one or two years, depending on the cause of the
termination of his relationships with Synapse Group.
We entered into an employment agreement with Douglas Alpuche in February
2000. The agreement is subject to more formal documentation, which is being
prepared. In addition to an annual salary of $200,000 plus benefits, Mr.
Alpuche has the opportunity to achieve an incentive bonus of up to $100,000
each year, prorated to 11/12ths in 2000. He also was granted options to
purchase 100,000 shares of our common stock at an exercise price of $8.00 per
share. These options vest over four years at the rate of one-fourth of the
shares on January 1 of each year from 2001 through 2004. In each of 2001 and
2002, Mr. Alpuche may also receive grants of options to purchase 50,000
additional shares if his performance is satisfactory to the Chief Executive
Officer. These options will vest at the rate of 12,500 shares on each
anniversary of the grant. If Mr. Alpuche's employment is terminated other than
for cause, vesting of his options is accelerated according to a specified
formula. "Cause" is defined as a material breach of his employment agreement,
misconduct involving misappropriation or dishonesty or criminal conduct,
failure to perform the reasonable and customary duties of a chief financial
officer as assigned to him by our board of directors, President and Chief
Executive Officer or other officers senior to him.
We entered into an employment agreement with Richard Vogel in July 1994,
which was amended in March 2000. Mr. Vogel is entitled to a bonus every year if
Mr. Loeb deems his performance adequate. Either Synapse Group or Mr. Vogel may
terminate the employment relationship upon 90 days notice at any time for any
reason or no reason. If Synapse Group terminates Mr. Vogel's employment without
cause, Synapse Group will negotiate in good faith a severance benefit
arrangement.
We entered into an employment agreement with Jonathan Siegel in September
1999, which was amended in March 2000. Mr. Siegel is entitled to participate in
Synapse Group's Vice President's Bonus Plan, providing for an annual incentive
bonus of 25% of his base salary upon our attainment of targeted revenue and
EBITDA goals. We indemnify Mr. Siegel to the fullest extent permitted or
required by the Delaware General Corporation Law against any and all liability,
and we agreed to advance any and all reasonable expenses, incurred by Mr.
Siegel in any proceeding to which he is a party because he is or was an officer
of Synapse Group, its successors or any entity under common control with
Synapse Group. If Mr. Siegel's employment is terminated after September 27,
2000 other than for cause, we are obligated to pay Mr. Siegel his salary and
benefits accrued through the termination date, his then current salary and
benefits for a period of six months and a pro rata portion of any bonus for the
year in which termination occurs. "Cause" is defined as his breach of any
material agreement with Synapse Group or his misconduct involving
misappropriation or dishonesty.
We entered into an employment agreement with Kevin Manion in July 1998.
His employment agreement terminated on October 27, 1999, when we entered into a
Settlement Agreement with him. Under the terms of the Settlement Agreement, Mr.
Manion's employment with Synapse Group terminated on December 31, 1999. We
agreed to pay Mr. Manion certain monthly payments through April 15, 2000,
totaling $55,000,
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and, effective January 3, 2000, we forgave all unpaid principal and interest
under a Commercial Promissory Note, dated May 4, 1999, which had an original
principal of $150,000. We also paid his costs for the continuation of his
medical and dental care coverage pursuant to the Consolidated Omnibus Budget
Reconciliation Act, also known as COBRA, through June 1, 2000. Mr. Manion
agreed to be available for a total of up to 16 hours, through June 1, 2000, to
help our new chief financial officer. Mr. Manion agreed that, until December
20, 2000, he will not be an officer, director, consultant, employee or owner
of, or otherwise render services to or have an ownership or capital interest
in, any organization that competes in the United States with any business which
Synapse Group conducted between July 20, 1998 through March 31, 2000, except
for a passive investment of less than five percent of the outstanding shares of
a publicly traded corporation. Until December 20, 2000, Mr. Manion also cannot
solicit, offer employment to or encourage any of our employees, consultants or
agents to leave to work for Mr. Manion or any entity that he or his employer
controls.
Each of our named executive officers signed a Option Shareholders
Agreement when he received his stock options, except Mr. Alpuche, whose
documents are pending. See "--Benefit Plans--1997 Stock Option Plan," "--
Benefit Plans--1999 Stock Option Plan" or "--Benefit Plans--2000 Stock
Incentive Plan."
Option Grants During 1999
The following table shows information about our grants of options to
purchase our common stock made to the named executive officers during 1999. We
have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Potential Realizable
Value
Individual Grants at Assumed Annual
-------------------------------------------------------------- Rates
Number of Percent of of Stock Price
Securities Total Options Market Appreciation for
Underlying Granted to Exercise or Price at Option Term (4)
Options Employees in Base Price Grant Date Expiration ----------------------
Name Granted (1) Fiscal Year (2) Per Share Per Share Date (3) 5% 10%
---- ----------- --------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Loeb......... 333,333(5) 12.93% $8.00 $8.00 1/4/09 $1,677,051 $4,249,976
333,334(6) 12.93 12.00 8.00 1/4/09 343,720 2,916,652
333,333(7) 12.93 16.00 8.00 1/4/09 (989,613) 1,583,312
Jonathan E. Ellenthal... 25,000 0.97 8.00 8.00 1/4/09 125,779 318,748
75,000 2.91 8.00 8.00 5/4/09 377,337 956,245
Richard I. Vogel........ 50,000 1.94 8.00 8.00 1/4/09 251,558 637,497
60,000 2.33 8.00 8.00 5/4/09 301,869 764,996
John F. Rovegno......... 25,000 0.97 8.00 8.00 1/4/09 125,779 318,748
20,000 0.78 8.00 8.00 5/4/09 100,623 254,999
Kevin Manion(8)......... 55,000 2.13 8.00 8.00 5/4/09 276,714 701,247
</TABLE>
--------
(1) All options were granted under our 1997 Stock Option Plan or our 1999 Stock
Option Plan. Unless otherwise indicated below, these options become
exercisable at a rate of 25% annually over four years from the date of
grant.
(2) Based on options to purchase 2,578,250 shares of our common stock granted
to employees in 1999.
(3) The options have ten-year terms, subject to earlier termination upon death,
disability or termination of employment.
(footnotes continued on following page)
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<PAGE>
(4) The potential realizable values have been calculated on the basis of the
fair market value at December 31, 1999 of $8.00 per share, as determined
by our board of directors. We recommend caution in interpreting the
financial significance of the figures representing the potential
realizable value of the stock options. They are calculated by multiplying
the number of options granted by the difference between a future
hypothetical stock price and the option exercise price and are shown
pursuant to rules of the SEC. They assume the fair value of common stock
appreciates 5% or 10% each year, compounded annually, for ten years, the
term of each option. They are not intended to forecast possible future
appreciation, if any, of our stock price or to establish a present value
of options. Also, if appreciation does occur at the 5% or 10% per year
rate, the amounts shown would not be realized by the recipients until the
year 2009. Depending on inflation rates, these amounts may be worth
significantly less in 2009, in real terms, than their value today.
(5) On January 4, 2000, options to purchase 250,000 shares of our common stock
vested; the remaining shares will vest on January 4, 2001.
(6) Half of these shares will vest on January 4, 2001, while the rest will
vest on January 4, 2002.
(7) On January 4, 2002, options to purchase 83,333 shares of our common stock
will vest; the remaining shares will vest on January 4, 2003.
(8) All options issued to Mr. Manion terminated on December 31, 1999.
No compensation intended to serve as incentive for performance to occur
over a period longer than one year was paid pursuant to a long-term incentive
plan during the last year to any of the named executive officers.
Year-End Option Values
The following table shows information about unexercised options held by
each of the named executive officers on December 31, 1999. None of these stock
options were exercisable during 1999. There was no public trading market for
our common stock as of December 31, 1999. Accordingly, the fair market value on
December 31, 1999 is based on the initial public offering price of $ per
share.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options at
December 31, 1999 (1) December 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael R. Loeb............. -- 1,000,000 $ -- $
Jonathan E. Ellenthal....... -- 257,540 --
Richard I. Vogel............ -- 268,301 --
John F. Rovegno............. -- 165,318 --
Kevin Manion(2)............. -- 315,000 --
</TABLE>
--------
(1) No options held by named executive officers were exercisable at December
31, 1999.
(2) All options issued to Mr. Manion terminated on December 31, 1999.
Benefit Plans
1997 Stock Option Plan. Our 1997 Stock Option Plan was adopted by our
board of directors in December 1997. The plan provides for the issuance of up
to 2,608,272 shares of our Class B common stock for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue
Code, nonstatutory stock options and other stock-based awards to our officers,
employees, directors and consultants.
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<PAGE>
Under present law, however, since we did not seek stockholder approval of the
plan, we may not grant incentive stock options. If an award is cancelled,
surrendered, exchanged or terminated, any unissued shares subject to the award
become available for future grants.
We generally make each grant subject to an Option Shareholders Agreement.
Under the terms of the agreement, we have a right of first refusal if the
option holder wishes to transfer any unregistered shares, or rights to acquire
shares, held by the option holder. If our board of directors approves a change
in control, as defined in the agreement, or if an employee option holder's
employment terminates, we have the option to purchase for their fair market
value any unregistered shares or rights to acquire shares. During the time that
the option holder is an employee or director of, or a consultant to, Synapse
Group, and for one year thereafter, the option holder will not be an officer,
director, consultant, employee or owner of, or otherwise render services to or
have an ownership or capital interest in, any organization or other enterprise
which conducts a credit card marketing business or other business in the United
States competitive with that carried on by Synapse Group during that time
period, except for a passive investment of less than five percent of the
outstanding shares of a publicly traded corporation. The option holders are
also required to keep Synapse Group's proprietary information confidential. All
provisions, except the non-competition and confidentiality provisions,
terminate upon the expiration of a period of time, not to exceed 180 days,
after the date we commence this offering, during which we require that the
option holder may not exercise, sell or distribute any unregistered shares.
As of June 30, 2000, shares of nonstatutory stock options to purchase an
aggregate of 2,581,977 shares of Class B common stock at a weighted average
exercise price of $6.65 per share were outstanding under the plan.
The board of directors has authorized the Compensation Committee to
administer the 1997 Stock Option Plan. The Compensation Committee selects the
recipients of awards and determines:
. the type of awards to grant;
. the number of shares of common stock covered by awards and the terms,
conditions, restrictions and performance criteria relating to any
award;
. the extent to which, if any, and the circumstances under which, if
any, an award may be settled, cancelled, forfeited, exchanged or
surrendered; and
. any adjustments to performance goals in recognition of unusual or
non-recurring events affecting Synapse Group or its financial
statements.
The Compensation Committee may also:
. accelerate the date on which any option granted under the 1997 Stock
Option Plan becomes exercisable;
. waive or amend the operation of provisions of the 1997 Stock Option
Plan respecting exercise after termination of employment or otherwise
adjust any of the terms of an option;
. waive any condition imposed by the 1997 Stock Option Plan with
respect to any award; and
. specify whether the option is subject to a reload feature, which
provides that the holder of the option shall be granted a new
nonstatutory stock option for the number of shares exercised by the
option holder.
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Unless the applicable written agreement between Synapse Group and the
recipient of the award provides otherwise, an option becomes exercisable as to
100% of the shares it covers on the fourth anniversary of the date of grant and
no option becomes exercisable prior to the first anniversary of the date of
grant. An option may be exercised for all or any portion of the shares as to
which it is exercisable, provided that no partial exercise of an option may be
for an aggregate exercise price of less than $1,000.
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by our
board of directors in February 1999. The plan provides for the issuance of up
to 2,350,392 shares of our Class B common stock.
As of June 30, 2000, shares of nonstatutory stock options to purchase an
aggregate of 1,990,000 shares of Class B common stock at a weighted average
exercise price of $9.47 per share were outstanding under the plan.
We generally make each grant subject to an Option Shareholders Agreement
whose terms are generally identical to those described in "--1997 Stock Option
Plan."
Under the terms of their option agreements, as of June 30, 2000, holders
of outstanding options granted to purchase an aggregate of 149,500 shares of
our common stock at an exercise price of $8.00 per share have a put option. If
we have not closed this offering prior to January 1, 2001, each holder of such
an option has the right to require us to purchase the option at a net price of
$5.00 per share, representing a purchase price of $13.00 per share, minus the
exercise price of $8.00 per share. This put option must be exercised between
January 2, 2001 and January 31, 2001.
Other than these differences, the terms of the 1999 Stock Option Plan are
identical to those of the 1997 Stock Option Plan.
2000 Stock Incentive Plan. Our 2000 Stock Incentive Plan was adopted by
our board of directors and our stockholders in April 2000. The plan provides
for the issuance of up to 5,000,000 shares of our Class B common stock for the
grant of incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code, nonstatutory stock options, restricted stock awards and
other stock-based awards to our officers, employees, directors, consultants and
advisors. If an award is cancelled, surrendered, exchanged or terminated, any
unissued shares subject to the award become available for future grants. If we
were to merge or consolidate with another company, the plan requires that our
board of directors provide that all outstanding stock options be assumed by the
successor corporation or that equivalent options of the successor corporation
be substituted for options outstanding under our plan. If the successor
corporation does not agree to assume or substitute for options outstanding
under our plan, our board of directors will provide that all unexercised
options become exercisable in full prior to the acquisition or, if the
acquisition provides for a cash payment for each outstanding share of our
stock, that each holder of outstanding options will receive a cash payment for
the amount by which the acquisition price exceeds the option exercise price.
Generally, one quarter of the shares granted under any option under this
plan vests on each of the first, second, third and fourth anniversaries of the
date the option was granted.
Our standard stock option agreements require that anyone holding an
option under the 2000 Stock Incentive Plan agree not to sell or otherwise
dispose of any shares of common stock held by the option holder for 180 days
after the registration statement for this offering becomes effective.
We generally make each grant subject to an Option Shareholders Agreement
whose terms are generally identical to those described in "--1997 Stock Option
Plan."
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As of June 30, 2000, shares of nonstatutory stock options to purchase an
aggregate of 1,372,500 shares of Class B common stock at a weighted average
exercise price of $8.00 per share were outstanding under the plan.
The board of directors has authorized the Compensation Committee to
administer the 2000 Stock Incentive Plan. The Compensation Committee selects
the recipients of awards and determines:
. the type of awards to grant;
. the number of shares of common stock covered by awards and the terms,
conditions and restrictions relating to any award;
. the extent to which, if any, and the circumstances under which, if
any, an award may be forfeited; and
. adopt, amend and repeal any administrative rules, guidelines and
practices relating to the plan as it deems advisable.
401(k) Plan. Our employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. The plan became effective January 1,
1994. Our employees become eligible after three months of employment and are
automatically 100% vested. Our employees may make contributions based on a
percentage of their salaries. The maximum employee contribution is 15% of their
gross compensation excluding bonuses, up to the statutorily prescribed annual
limit. We may make matching or additional contributions to the 401(k) plan in
amounts to be determined annually by our board of directors. In 1999, our
discretionary profit sharing contribution to the plan was $409,000.
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RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
We have entered into the following transactions with certain of our
executive officers, directors and principal stockholders:
Series B Preferred Stock and Class A Warrant Sales
On January 12, 2000, we sold 5,000,000 shares of our Series B preferred
stock for $8.00 per share and warrants to purchase 2,499,999 shares of our
Class A common stock for $.00128 per warrant, to a number of individuals and
entities. The warrants may be exercised through January 12, 2007 to purchase
our Class A common stock for $8.00 per share. The following purchasers of these
shares and warrants are our executive officers, directors, principal
stockholders, or a member of their immediate family:
<TABLE>
<CAPTION>
Total
Series B Total Series B Warrants to Purchase Warrant
Preferred Preferred Stock the Following Shares of Purchase
Name Stock Purchase Price Class A Common Stock Price
---- --------- --------------- ----------------------- ---------
<S> <C> <C> <C> <C>
General Atlantic
Partners, LLC(1)....... 1,562,500 $12,500,000.00 781,250 $1,000.00
Michael R. Loeb(2)...... 1,535,000 12,280,000.00 767,500 982.40
Campana Limited
Partnership(3)......... 400,000 3,200,000.00 200,000 256.00
Marshall R. Loeb and
Elizabeth Peggy
Loeb(4)................ 400,000 3,200,000.00 200,000 256.00
Gore Creek Trust(5)..... 250,000 2,000,000.00 125,000 160.00
Nancy Peretsman(6)...... 31,250 250,000.00 15,625 20.00
</TABLE>
--------
(1) Includes 1,289,861 shares purchased by General Atlantic Partners 60, L.P.,
272,639 shares purchased by GAP Coinvestment Partners II, L.P., warrants
to purchase 644,930 shares purchased by General Atlantic Partners 60 and
warrants to purchase 136,320 shares purchased by GAP Coinvestment Partners
II. The general partner of General Atlantic Partners 60 is General
Atlantic Partners, which, along with its affiliates, owns more than 5% of
our common stock. The managing members of General Atlantic Partners are
also the general partners of GAP Coinvestment Partners II. William E.
Ford, one of our directors, is a managing member of General Atlantic
Partners and a general partner of GAP Coinvestment Partners II. Mr. Ford
disclaims beneficial ownership of all these securities except to the
extent of his pecuniary interest therein.
(2) Excludes shares and warrants purchased by Marshall R. Loeb and Elizabeth
Peggy Loeb, Mr. Loeb's parents, of which Mr. Loeb disclaims beneficial
ownership. Mr. Loeb is our Chairman, President and Chief Executive Officer
and a director and one of our principal stockholders.
(3) Stuart Bell is president of BF Partners, LLC, the general partner of
Campana Limited Partnership. Mr. Bell was a director of Synapse Group from
February 1999 through May 25, 2000.
(4) Marshall R. Loeb and Elizabeth Peggy Loeb are the parents of Michael Loeb,
our Chairman, President and Chief Executive Officer, and a director and
one of our principal stockholders. These shares and warrants have since
been transferred into Grantor Retained Annuity Trusts set up by Mr. and
Mrs. Loeb.
(5) The wife and children of N.J. Nicholas, Jr., one of our directors, are the
beneficiaries of the Gore Creek Trust, in which Mr. Nicholas disclaims
beneficial ownership. These figures exclude shares and warrants purchased
by GAP Coinvestment Partners II, of which the Gore Creek Trust is a
limited partner, in which Mr. Nicholas disclaims beneficial ownership
except to the extent of his pecuniary interest in that entity.
(6) Ms. Peretsman is one of our directors. These figures exclude shares and
warrants purchased by Allen & Company, her employer, in which she
disclaims beneficial ownership except to the extent of her indirect
pecuniary interest in that entity.
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<PAGE>
Option Grants to Directors
We issued to each of Messrs. Braddock, Ford and Nicholas in February 1999
and to Ms. Peretsman in April 1999 options to purchase 35,000 shares of our
Class B common stock at a per share exercise price of $8.00 under our 1999
Stock Option Plan. These options vest over three years at the rate of one-third
of the shares on each anniversary of the grant. For more information on these
plans, see "Management--Benefit Plans--1997 Stock Option Plan" or "--Benefit
Plans--1999 Stock Option Plan." Ms. Peretsman is not bound by the non-
competition provision in the Option Shareholders Agreement described in
"Management--Benefit Plans--1997 Stock Option Plan."
Loeb Loans and Conversion to Series B Preferred Stock
Between August 1998 and December 1999, Michael Loeb, our Chairman,
President and Chief Executive Officer and a director and one of our principal
stockholders, made several loans to Synapse Group, aggregating $13 million in
principal.
On January 12, 2000, we entered into a Loan Exchange Agreement with Mr.
Loeb, whereby we agreed $12.0 million of the total outstanding principal and
$280,000 of the total outstanding interest and any penalties would be satisfied
in full, and the applicable notes would be cancelled, in exchange and as
consideration for our issuance of 1,535,000 shares of Series B preferred stock
to Mr. Loeb, pursuant to the Stock and Warrant Purchase Agreement, also dated
January 12, 2000. The remaining $1.0 million in principal and $493,000 in
outstanding interest was repaid to Mr. Loeb on January 12, 2000 and was
immediately reborrowed as part of the principal under the $10 million loan from
Mr. Loeb described under "--Walker Credit Facility and Affiliate Loan and
Purchase of Stock by Lender."
Also under the Stock and Warrant Purchase Agreement, Mr. Loeb paid us
$982.40 to purchase a warrant to purchase 767,500 shares of our Class A common
stock.
Walker Credit Facility and Affiliate Loan and Purchase of Stock by Lender
In January 2000, we entered into a term loan facility with Mr. Walker.
This new facility, which matures on April 7, 2001, provides for a term loan of
up to $25 million, which requires payments of interest alone every 90 days. We
borrowed the full $25 million of the new facility on January 12, 2000 in
connection with the repayment of our prior credit facility with NationsBank,
N.A. The obligations outstanding under the new facility bears interest
initially at the 3 month LIBOR rate, which as of June 30, 2000 was 6.77%, plus
275 basis points per annum, but the rate shall increase by an additional 200
basis points if the loan is not repaid by October 1, 2000, and additional
increases of 25 basis points for each three month period thereafter that the
loan remains outstanding, up to a cap of an additional 100 basis points. Our
subsidiaries are not parties to, nor are they liable for, the loan.
The new facility is unsecured, but required the payment of a $250,000
commitment fee to the lender and requires an additional fee payment, payable on
October 1, 2000, equal to 2.0% of the outstanding balance on that date. In
addition, the new facility requires us to issue the lender warrants to purchase
0.75% of our fully-diluted equity securities, at an exercise price of $0.01 per
share, on each of January 1, 2001 and April 1, 2001, if any obligations remain
outstanding under the new facility. The new credit facility does not contain
any financial covenants.
On February 1, 2000, Mr. Walker assigned his rights and obligations under
this facility to Arena Capital Investment Fund. On March 20, 2000, Arena SG
Holdings, an affiliate of Arena Capital Investment Fund, purchased from Mr.
Walker 1,250,000 shares of our Class B common stock for $8.00 per share and an
option to purchase an additional 625,000 shares of our Class B common stock for
an exercise price of $8.00 per share.
69
<PAGE>
In connection with the repayment of the NationsBank credit facility, we
also entered into a $10 million revolving promissory note with Mr. Loeb,
pursuant to which we can obtain advances prior to the maturity date. The
obligations outstanding under the new note are unsecured, accrue interest at
the per annum rate of the prime rate, which as of June 30, 2000 was 9.5%, plus
100 basis points, and become due and payable on April 7, 2001. As of June 30,
2000, there was no outstanding balance under this revolving note.
Business Relationship with priceline.com
In January, 1999 we launched a campaign with priceline.com to acquire
subscribers at the time priceline.com's consumers submit an offer for airline
tickets or other services. The priceline.com customer can increase the monetary
value of his offer at no additional cost by accepting a trial magazine
subscription. We pay priceline.com a fee for each new customer acquired through
this channel. We cannot yet estimate the amount of this aggregate fee in year
ending December 2000, although we expect that it will represent less than five
percent of our or priceline.com's consolidated gross revenues for 1999.
In December 1999, we entered into an agreement with Priceline WebHouse
Club, an independent licensee of priceline.com. We offer to customers of
Priceline WebHouse Club trial subscriptions for magazines and we pay Priceline
WebHouse Club a fee for each new customer acquired through this channel. We
cannot yet estimate the amount of this transaction for the year ending December
2000, although we expect that it will represent less than five percent of our
or priceline's consolidated gross revenues for 1999.
Jay Walker, one of our founders and a director, is Vice Chairman of
priceline.com and owns more than ten percent of the outstanding shares of
common stock of priceline.com. William E. Ford, also one of our directors, is a
director of priceline.com and a Managing Member of General Atlantic Partners.
Partnerships affiliated with General Atlantic Partners own more than ten
percent of the outstanding shares of common stock of priceline.com. Richard S.
Braddock, one of our directors, is the Chairman and Chief Executive Officer of
priceline.com. Nancy B. Peretsman and N.J. Nicholas, Jr., members of our board
of directors, are directors of priceline.com. Marshall Loeb, father of our
Chairman, President and Chief Executive Officer Michael Loeb, is a director of
priceline.com.
Business Relationship with Edgewater
In June 1999, we entered into an agreement with Edgewater Technology,
Inc. Under this agreement, Edgewater provides us with a number of information
technology services. We paid them approximately $9 million for services in the
year ended December 1999. In March 2000, Michael Loeb became a director of
Edgewater Technology.
Consulting Agreement with a Former Director
We entered into a Consulting Agreement with Stuart Bell, a former
director, dated as of December 31, 1999, which provided that he would be paid a
fee for consulting services provided from 1996 through 1999. The fee was
$3,453,400 and was to be paid in cash on the earlier of January 31, 2001 or
within 90 days of this offering. On January 19, 2000, we amended the Consulting
Agreement to provide that the fee would instead be the combination of
$1,314,900 and 350,000 shares of our Class B common stock. The stock was
delivered after January 19, and the cash will be paid in accordance with the
agreement.
Forgiveness of Loan
Under the terms of an Employment Agreement, dated July 20, 1998, with
Kevin Manion, our former chief financial officer, we loaned Mr. Manion
$150,000, at an interest rate of 8% per year. Mr. Manion executed a Commercial
Promissory Note, dated May 4, 1999, which provided that he would be required to
repay $50,000 per year, starting March 15, 2002. Under the terms of a
Settlement Agreement, dated October 27,
70
<PAGE>
1999, between us and Mr. Manion following the termination of his employment, we
forgave the unpaid principal and interest under the Commercial Promissory Note
effective on January 3, 2000.
Relationship with Industry Analysts
Veronis, Suhler & Associates, Inc. provides analyses of the
communications, media, publishing, broadcasting, interactive digital media and
information industries. We have referred to their studies in this prospectus.
John J. Veronis, the chairman and co-chief executive of Veronis, Suhler &
Associates, and John S. Suhler, president and co-chief executive of Veronis,
Suhler & Associates, were our stockholders from December 1, 1993 through March
9, 1998. Lawrence M. Crutcher, the managing director of Veronis, Suhler &
Associates, was one of our stockholders from December 1, 1993 through September
26, 1997, when he transferred his shares to the Crutcher Family Trust. The
Crutcher Family Trust sold its shares on March 9, 1998.
Sale of Stock to Director
In June 2000, we sold 62,500 shares of our Class B common stock to
Richard S. Braddock, one of our directors, for $8.00 per share. At that time we
granted Mr. Braddock certain registration rights with respect to those shares.
Series C Preferred Stock Sale
In June 2000, we sold 3,125,000 shares of our Series C preferred stock to
NSSI Holdings, an indirect subsidiary of Time, for $8.00 per share. On the same
date, Jay Walker sold 6,875,000 shares of our Class A common stock and Class B
common stock held by him to NSSI Holdings for $8.00 per share. In addition, we
entered into an agreement which allocates between us and Mr. Walker the
indemnification obligations owed to NSSI Holdings and its affiliates for losses
arising from breaches of certain representations and warranties made in the
stock purchase agreement we entered into with NSSI Holdings.
Under the terms of the Second Amended and Restated Stockholders Agreement
dated June 23, 2000, between the closing of this offering and June 30, 2002,
NSSI Holdings and its affiliates have agreed that they will not hold more than
the greater of 30% of our issued and outstanding common stock or that
proportion of our issued and outstanding common stock held by NSSI Holdings
upon the closing of this offering. This restriction automatically terminates
once one or more stockholders who are parties to the agreement sell to an
unaffiliated third party an aggregate of 30% of our issued and outstanding
common stock within any six month period. The restriction also automatically
terminates if we receive and accept a binding written offer from NSSI Holdings
to acquire all of our issued and outstanding stock or assets and such
acquisition is consummated within 90 days of the date of the offer letter. In
addition, our board of directors may, in its sole discretion, waive this
restriction.
Also under the terms of the Second Amended and Restated Stockholders
Agreement, while NSSI Holdings is bound by the restriction described in the
previous paragraph, Mr. Loeb and his affiliates must give NSSI Holdings seven
business days notice of any proposed sale of an aggregate of 3% of our issued
and outstanding common stock within any six month period. In addition, Mr. Loeb
and his affiliates must give NSSI Holdings seven business days notice of any
proposed sale or multiple sales of an aggregate of 5% of our issued and
outstanding common stock and NSSI Holdings will have the right to negotiate
with Mr. Loeb and his affiliates and, if they agree on terms, to purchase the
shares proposed for sale.
The Second Amended and Restated Stockholders Agreement also requires
General Atlantic Partners and its affiliates to give NSSI Holdings five
business days notice of any proposed sale or multiple sales, with certain
exceptions, of an aggregate of 5% of our issued and outstanding common stock
and NSSI Holdings will have the right to negotiate with General Atlantic
Partners and its affiliates and, if they agree on terms, to purchase the shares
proposed for sale.
71
<PAGE>
In addition, under the Second Amended and Restated Stockholders
Agreement, for as long as NSSI Holdings and its affiliates own at least 3% of
our outstanding common stock, as measured on a fully diluted basis, NSSI
Holdings will have the right to designate a representative to be nominated as a
management nominee to our board of directors. If NSSI Holdings does not
designate a nominee or its nominee is not elected to our board of directors, it
may instead appoint an observer to attend meetings of our board of directors.
Upon the termination of the Second Amended and Restated Stockholders
Agreement on the closing of this offering, NSSI Holdings will have similar
rights to designate a board member or an observer which survive the closing of
this offering, pursuant to the Stock Purchase Agreement dated May 17, 2000.
Under the Stock Purchase Agreement, for as long as NSSI Holdings and/or any
affiliate owns at least 3% of our outstanding common stock, as measured on a
fully diluted basis, NSSI Holdings will have the right to designate a
representative to be nominated as a management nominee to our board of
directors. If NSSI Holdings does not designate a nominee or its nominee is not
elected to our board of directors, it may instead appoint an observer to attend
meetings of our board of directors and receive all written materials made
available to directors.
Business Relationship With Time
In June 2000, we entered into an agreement with Time under which we
obtained authorization to sell specific premier Time publications, including
People Weekly, Sports Illustrated and Time magazines, over the next four years.
During the term of this agreement, we guaranteed that we will generate certain
minimum subscription volumes for the Time publications specified in the
agreement which are offered on inbound telephone calls to our affinity
marketing partners. We have made specific guarantees with respect to certain
magazine titles on an individual and/or group basis. If we fail to meet any of
the guaranteed amounts, after the application against any shortfall of certain
excess subscription volume from other magazines and certain reductions of
guaranteed amounts in the event our total subscription volume on inbound
telephone calls is below certain specified levels, we will be required to pay
Time a fee for each subscription that we fail to generate. If we were to sell
none of the specified Time publications during the first year of the agreement,
the fee would be approximately $13 million. This annual amount increases in
subsequent years under the agreement. In addition, Time has the right to
terminate the agreement if we fail to reach at least 60% of any annual
aggregate guaranteed amounts. Additionally, with certain exceptions, Time and
its subsidiaries have agreed that they will not operate programs which would
offer magazine subscriptions on inbound telephone calls to catalog call centers
through June 30, 2004. The agreement contains a covenant that prohibits us from
selling subscriptions to Time publications on the Internet without Time's
specific prior written consent.
Business Relationship with Allen & Company
Allen & Company provided investment banking services to us in connection
with the transaction with NSSI Holdings and Time, for which they received a fee
of $750,000. We and Jay Walker also agreed to indemnify Allen & Company for
losses arising from the engagement, except for losses finally judged to have
resulted from Allen & Company's bad faith or gross negligence. Allen & Company
is a stockholder in Synapse Group and one of the underwriters of this offering.
Nancy Peretsman, one of our directors, is a Managing Director and Executive
Vice President of Allen & Company.
Loan to Gift Services
In March 2000, we agreed to lend up to $2.5 million to Gift Services
pursuant to the terms of a revolving promissory note issued by Gift Services.
As of June 2000, there was no balance outstanding on this note.
Policy on Future Transactions
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions, including loans between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of our board of directors, including a majority of the
independent and disinterested non-executive directors, and will continue to be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of any class of our stock as of June 30, 2000, and as adjusted to
reflect the sale of the shares offered hereby, by:
. each stockholder known by us to be the beneficial owner of more than
5% of any class of our stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, the address for each stockholder listed is in
care of Synapse Group, Inc., 4 High Ridge Park, Stamford, CT 06905-1325. Except
as otherwise indicated, to our knowledge, each of the persons named in this
table has sole voting power, or shares sole power with his or her spouse, with
respect to all the shares indicated.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to shares. For purposes of calculating the percentage beneficially
owned after the offering, the number of shares deemed outstanding includes: (a)
all shares deemed to be outstanding before the offering and (b) shares
being sold in the offering, assuming no exercise of the underwriters' over-
allotment option.
In computing the number of shares beneficially owned by a person and the
percentage ownership by that person, shares of common stock which that person
could purchase by exercising outstanding common stock options prior to August
29, 2000, are deemed outstanding. These shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.
73
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred
Common Stock (1) Stock Stock Stock
------------------------- ------------ ------------ ------------
Percent
Amount and Beneficially Percent
Nature of Owned Before Beneficially Percent Percent Percent
Name of Beneficial the Owned After Beneficially Beneficially Beneficially
Beneficial Owner Title of Class Ownership Offering (1) the Offering Owned (2) Owned (3) Owned (4)
---------------- -------------------- ------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Loeb Common Stock (6) 14,773,556.00 43.68% %
Series A 2,591,178.24 100.00%
Preferred Stock (7)
Series B 1,535,000.00 30.70%
Preferred Stock (8)
NSSI Holdings Common Stock 6,875,000.00 20.96
Inc. (9)
Series C 3,125,000.00 100.00%
Preferred Stock
William E. Ford Common Stock (10) 5,880,521.00 17.50
Series A 2,591,178.24 100.00
Preferred Stock (11)
Series B 1,562,500.00 31.25
Preferred Stock (12)
Entities Common Stock (13) 5,868,854.00 17.48
affiliated with
General Atlantic
Partners, LLC
Series A 2,591,178.24 100.00
Preferred Stock (14)
Series B 1,562,500.00 31.25
Preferred Stock (15)
Jay S. Walker Common Stock (16) 3,757,760.42 11.46
Series A 2,591,178.24 100.00
Preferred Stock (17)
The Loeb Family Common Stock 2,700,000.00 8.23
Limited
Partnership (18)
Campana Limited Common Stock (19) 550,000.00 1.67
Partnership
Series B 400,000.00 8.00
Preferred Stock (20)
Arena SG Common Stock (21) 1,875,000.00 5.72
Holdings, LLC
N.J. Nicholas, Common Stock (22) 136,667.00 *
Jr.
Series B 250,000.00 5.00
Preferred Stock (23)
Gore Creek Trust Common Stock (24) 125,000.00 *
Series B 250,000.00 5.00
Preferred Stock (25)
Nancy B. Common Stock (26) 74,167.00 *
Peretsman
Series B 125,000.00 2.50
Preferred Stock (27)
Richard S. Common Stock (28) 74,167.00 * *
Braddock
Richard I. Vogel Common Stock (29) 106,651.00 * *
Jonathan E. Common Stock (30) 103,770.00 * *
Ellenthal
John F. Rovegno Common Stock (31) 71,409.00 * *
Kevin Manion Common Stock (32) 34,979.58 * *
Executive Common Stock (33) 25,018,648.00 71.23
officers and
directors as a
group (12
persons,
including one
former executive
officer)
Series A 2,591,178.24 100.00
Preferred Stock
Series B 3,472,500.00 69.45
Preferred Stock
<CAPTION>
Aggregate
Voting Power (5)
-------------------------
Percent Percent
Beneficially Beneficially
Name of Owned Before Owned After
Beneficial Owner the Offering the Offering
---------------- ------------ ------------
<S> <C> <C>
Michael R. Loeb 42.44% %
NSSI Holdings 22.98
Inc. (9)
William E. Ford 22.64
Entities 22.62
affiliated with
General Atlantic
Partners, LLC
Jay S. Walker 14.59
The Loeb Family 6.20
Limited
Partnership (18)
Campana Limited 2.17
Partnership
Arena SG 4.31
Holdings, LLC
N.J. Nicholas, *
Jr.
Gore Creek Trust *
Nancy B. *
Peretsman
Richard S. * *
Braddock
Richard I. Vogel * *
Jonathan E. * *
Ellenthal
John F. Rovegno * *
Kevin Manion * *
Executive 67.81
officers and
directors as a
group (12
persons,
including one
former executive
officer)
</TABLE>
(footnotes on following page)
74
<PAGE>
--------
* Less than 1%.
(1) Based on 32,802,228 shares outstanding as of June 30, 2000.
(2) Based on 2,591,178.24 shares outstanding as of June 30, 2000.
(3) Based on 5,000,000 shares outstanding as of June 30, 2000.
(4) Based on 3,125,000 shares outstanding as of June 30, 2000.
(5) Reflects that each outstanding share of preferred stock has one vote based
on the conversion ratios in effect on June 30, 2000.
(6) Excludes 200,000 shares issuable upon exercise of warrants held by Grantor
Retained Annuity Trusts set up by Marshall R. Loeb and Elizabeth Peggy
Loeb, Mr. Loeb's parents. Also excludes 655,752 shares held by Margaret
Loeb, Mr. Loeb's sister. Includes 8,928,014 shares owned and 767,500
shares issuable upon exercise of warrants held by Mr. Loeb. Also includes
250,000 shares issuable upon the exercise of options exercisable within 60
days after June 30, 2000. Includes 2,128,042 shares held in trust for Mr.
Loeb's children of which Mr. Loeb disclaims beneficial ownership. Includes
2,700,000 shares held by The Loeb Family Limited Partnership, of which Mr.
Loeb is a general partner. Excludes shares, determined by a formula
based on the valuation of Synapse Group upon the closing of its initial
public offering, which Mr. Loeb and certain trusts which benefit his
children have the right to purchase from Mr. Walker within 30 days after
the closing of this offering, pursuant to a Stock Option Agreement dated
as of September 1, 1998. Excludes shares which Margaret Loeb has the
right to purchase from Mr. Walker pursuant to the Stock Option Agreement.
(7) Represents 2,093,064.60 shares held by General Atlantic Partners 49, L.P.
and 498,113.64 shares held by GAP Coinvestment Partners, L.P. over which
Mr. Loeb shares voting power with Mr. Walker under the terms of an Amended
and Restated Stockholders Agreement dated January 12, 2000. Such voting
power terminates on the earlier of the closing of this offering or
September 9, 2000.
(8) Represents shares owned directly by Mr. Loeb.
(9) All shares are held directly by NSSI Holdings Inc. Its address is c/o Time
Inc., 1271 Avenue of the Americas, New York, NY 10020.
(10) Includes 4,167,267.12 shares held by General Atlantic Partners 46,
warrants to purchase 644,930 shares held by General Atlantic Partners 60,
920,336.88 shares held by GAP Coinvestment Partners and warrants to
purchase 136,320 shares held by GAP Coinvestment Partners II. Mr. Ford,
one of our directors, is a managing member of General Atlantic Partners
and a general partner of each of GAP Coinvestment Partners and GAP
Coinvestment Partners II. General Atlantic Partners is the general partner
of General Atlantic Partners 46 and General Atlantic Partners 60. The
managing members of General Atlantic Partners are also the general
partners of each of GAP Coinvestment Partners and GAP Coinvestment
Partners II. Mr. Ford disclaims beneficial ownership of all these
securities except to the extent of his pecuniary interest therein. Also
includes 11,667 shares issuable to Mr. Ford upon the exercise of options
exercisable within 60 days after June 30, 2000. Mr. Ford's address is c/o
General Atlantic Service Corporation, 3 Pickwick Plaza, Greenwich, CT
06830.
(11) Represents 2,093,064.60 shares held by General Atlantic Partners 49 and
498,113.64 shares held by GAP Coinvestment Partners. Mr. Ford, one of our
directors, is a managing member of General Atlantic Partners and a general
partner of GAP Coinvestment Partners. General Atlantic Partners is the
general partner of General Atlantic Partners 49. The managing members of
General Atlantic Partners are also the general partners of GAP
Coinvestment Partners. Mr. Ford disclaims beneficial ownership of all
these securities except to the extent of his pecuniary interest therein.
(12) Represents 1,289,861 shares held by General Atlantic Partners 60 and
272,639 shares held by GAP Coinvestment Partners II. Mr. Ford, one of our
directors, is a managing member of General Atlantic Partners and a general
partner of GAP Coinvestment Partners II. General Atlantic Partners is the
general partner of General Atlantic Partners 60. The managing members of
General Atlantic Partners are also the general partners of GAP
Coinvestment Partners II. Mr. Ford disclaims beneficial ownership of all
these securities except to the extent of his pecuniary interest therein.
(footnotes continued on following page)
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<PAGE>
(13) Represents 4,167,267.12 shares held by General Atlantic Partners 46,
warrants to purchase 644,930 shares held by General Atlantic Partners 60,
920,336.88 shares held by GAP Coinvestment Partners and warrants to
purchase 136,320 shares held by GAP Coinvestment Partners II. Mr. Ford,
one of our directors, is a managing member of General Atlantic Partners
and a general partner of each of GAP Coinvestment Partners and GAP
Coinvestment Partners II. General Atlantic Partners is the general partner
of General Atlantic Partners 46 and General Atlantic Partners 60. The
managing members of General Atlantic Partners are also the general
partners of each of GAP Coinvestment Partners and GAP Coinvestment
Partners II. Mr. Ford disclaims beneficial ownership of all these
securities except to the extent of his pecuniary interest therein. The
address of each of these entities is c/o General Atlantic Service
Corporation, 3 Pickwick Plaza, Greenwich, CT 06830.
(14) Represents 2,093,064.60 shares held by General Atlantic Partners 49 and
498,113.64 shares held by GAP Coinvestment Partners. Mr. Ford, one of our
directors, is a managing member of General Atlantic Partners and a general
partner of GAP Coinvestment Partners. General Atlantic Partners is the
general partner of General Atlantic Partners 49. The managing members of
General Atlantic Partners are also the general partners of GAP
Coinvestment Partners. Mr. Ford disclaims beneficial ownership of all
these securities except to the extent of his pecuniary interest therein.
(15) Represents 1,289,861 shares held by General Atlantic Partners 60 and
272,639 shares held by GAP Coinvestment Partners II. Mr. Ford, one of our
directors, is a managing member of General Atlantic Partners and a general
partner of GAP Coinvestment Partners II. General Atlantic Partners is the
general partner of General Atlantic Partners 60. The managing members of
General Atlantic Partners are also the general partners of GAP
Coinvestment Partners II. Mr. Ford disclaims beneficial ownership of all
these securities except to the extent of his pecuniary interest therein.
(16) Includes 1,724,192.42 shares held directly by Mr. Walker and 1,480,968
shares held by the Jay Walker Irrevocable Credit Trust. Also includes
552,600 shares held by Andre Jaeckle which Mr. Walker has an option to
purchase under the terms of the Walker and Jaeckle Shareholder Agreement
dated as of August 1, 1994 between Mr. Walker, Mr. Jaeckle and NewSub
Services, the predecessor to Synapse Group. Mr. Walker's address is c/o
JSW Resources, One High Ridge Park, Stamford, CT 06905.
(17) Represents 2,093,064.60 shares held by General Atlantic Partners 49 and
498,113.64 shares held by GAP Coinvestment Partners, over which Mr. Walker
shares voting power with Michael Loeb under the terms of an Amended and
Restated Stockholders Agreement dated January 12, 2000. Such voting power
terminates on the earlier of the closing of this offering or September 9,
2000.
(18) Mr. Loeb is a general partner of The Loeb Family Limited Partnership,
whose address is c/o Harry E. Peden III, Esq., Whitman Breed Abbott &
Morgan LLP, 100 Field Point Road, Greenwich, CT 06830.
(19) Represents 350,000 shares held directly and 200,000 shares issuable upon
exercise of warrants held by Campana Limited Partnership. Campana Limited
Partnership's address is c/o Stuart Bell, Webloyalty.com, 101 Merrit 7,
Norwalk, CT 06851.
(20) All shares are held directly by Campana Limited Partnership.
(21) Includes 1,250,000 shares held directly by Arena SG Holdings. Also
includes 625,000 shares held by Mr. Walker which Arena SG Holdings has an
option to purchase from Mr. Walker. Arena SG Holdings' address is c/o
Arena Capital Investment Fund, LP, 540 Madison Avenue, 25th Floor, New
York, New York 10022.
(22) Includes 125,000 shares issuable upon exercise of warrants held by Gore
Creek Trust for the benefit of the wife and children of Mr. Nicholas. Mr.
Nicholas disclaims beneficial ownership of any holdings of the Gore Creek
Trust. Also includes 11,667 shares issuable upon the exercise of options
held by Mr. Nicholas exercisable within 60 days after June 30, 2000. Mr.
Nicholas' address is 45 West 67 Street, Suite 19F, New York, MY 10023.
(23) Represents 250,000 shares owned by Gore Creek Trust for the benefit of the
wife and children of Mr. Nicholas. Mr. Nicholas disclaims beneficial
ownership of any holdings of the Gore Creek Trust.
(24) Represents 125,000 shares issuable upon exercise of warrants held by Gore
Creek Trust for the benefit of the wife and children of Mr. Nicholas. Mr.
Nicholas disclaims beneficial ownership of any holdings of the Gore Creek
Trust. Core Creek Trust's address is c/o The Bollard Group, One Joy
Street, Boston, MA 02108.
(footnotes continued on following page)
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(25) Represents 250,000 shares owned by Gore Creek Trust for the benefit of the
wife and children of Mr. Nicholas. Mr. Nicholas disclaims beneficial
ownership of any holdings of the Gore Creek Trust.
(26) Includes 15,625 shares issuable upon exercise of warrants held by Ms.
Peretsman and 11,667 shares issuable upon the exercise of options
exercisable within 60 days after June 30, 2000. Also includes 46,875
shares issuable upon exercise of warrants held by Allen & Company, of
which Ms. Peretsman is a Managing Director and Executive Vice President.
Ms. Peretsman expressly disclaims beneficial ownership of any holdings of
Allen & Company except to the extent of her indirect pecuniary interest in
Allen & Company. Ms. Peretsman's address is c/o Allen & Company
Incorporated, 711 Fifth Avenue, 9th Floor, New York, NY 10022.
(27) Includes 31,250 shares owned directly by Ms. Peretsman. Also includes
93,750 shares owned by Allen & Company, of which Ms. Peretsman is a
Managing Director and Executive Vice President. Ms. Peretsman expressly
disclaims beneficial ownership of any holdings of Allen & Company except
to the extent of her indirect pecuniary interest in Allen & Company.
(28) Represents 62,500 shares owned directly by Mr. Braddock and 11,667 shares
issuable upon the exercise of options exercisable within 60 days after
June 30, 2000. Mr. Braddock's address is c/o priceline.com Incorporated,
800 Connecticut, Norwalk, CT 06854.
(29) Represents 27,500 shares issuable upon the exercise of options exercisable
within 60 days after June 30, 2000 and 79,151 shares issuable upon the
exercise of options which vest upon the closing of the offering.
(30) Represents 25,000 shares issuable upon the exercise of options exercisable
within 60 days after June 30, 2000 and 78,770 shares issuable upon the
exercise of options which vest upon the closing of the offering.
(31) Represents 11,250 shares issuable upon the exercise of options exercisable
within 60 days after June 30, 2000 and 60,159 shares issuable upon the
exercise of options which vest upon the closing of the offering.
(32) Mr. Manion's address is 4 Minuteman Hill, Westport, CT 06880.
(33) Includes 22,698,900 shares outstanding, 1,736,250 shares issuable upon
exercise of warrants, 365,418 shares issuable upon the exercise of options
exercisable within 60 days after June 30, 2000 and 218,080 shares issuable
upon the exercise of options which vest upon the closing of the offering,
all of which are attributable to our directors and executive officers.
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DESCRIPTION OF CAPITAL STOCK
General
After this offering, our authorized capital stock will consist of
million shares of common stock, $.001 par value per share, and million
shares of preferred stock, $.001 par value per share, of which 2,600,000 shares
are Series A convertible preferred stock, 5,000,000 shares are Series B
convertible preferred stock and 3,125,000 shares are Series C convertible
preferred stock. As of June 30, 2000, there were outstanding:
. 7,368,000 shares of Class A voting common stock held by five
stockholders of record;
. 25,434,228 shares of Class B non-voting common stock held by 21
stockholders of record;
. 2,591,178.24 shares of Series A convertible preferred stock held by
two stockholders of record;
. 5,000,000 shares of Series B convertible preferred stock held by 21
stockholders of record;
. 3,125,000 shares of Series C convertible preferred stock held by one
stockholder of record;
. options to purchase an aggregate of 5,944,477 shares of Class B non-
voting common stock; and
. warrants to purchase an aggregate of 2,499,999 shares of Class A
voting common stock.
Upon the closing of the offering, all outstanding shares of Class B non-
voting common stock will convert into 25,434,228 shares of common stock with
voting rights. Our outstanding preferred stock will be automatically converted
into common stock upon the closing of this offering only if the price of the
common stock sold in this offering is at least $11.58 per share in order for
the Series A preferred stock to be converted, or $12.00 per share for the
Series B and Series C preferred stock to be converted, and the aggregate gross
proceeds payable to us from this offering is at least $20 million. Otherwise,
all outstanding shares of our preferred stock will remain outstanding unless
and until the holders of any shares of preferred stock elect to convert their
shares into common stock. The following is a summary of the material features
of our capital stock. The summary is not intended to be complete and is
qualified by reference to the provisions of applicable law, to our restated
certificate of incorporation and our by-laws and to our amended and restated
certificate of incorporation and amended and restated by-laws to be effective
after the closing of the offering, filed as exhibits to the registration
statement of which this prospectus is a part.
Common Stock
Of the million shares of common stock authorized, 58 million shares
are currently designated as Class A common and 37 million shares are designated
as Class B common. Class A common has voting privileges, while Class B common
does not. Each share of Class B common will automatically convert into one
share of Class A common stock upon the earlier of the date when we commence the
offering or June 30, 2001. Therefore, upon the commencement of the offering,
million shares of common stock will be authorized, all of which will have
voting rights.
Under both our current restated certificate of incorporation, taking into
account Delaware corporate law, and our amended and restated certificate of
incorporation, which will be effective after the closing of the offering,
holders of our common stock will be entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors will be able to elect all of the
directors standing for election at any time after the closing of this offering.
Holders of common stock will be entitled to receive their proportionate share
of any dividends declared by the board of directors, subject to any
preferential dividend rights of any outstanding preferred stock. Upon the
liquidation, dissolution or winding up of Synapse Group, holders of common
stock will be entitled to receive proportionately our net assets available
after the
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payment of all debts and other liabilities and subject to the prior rights of
holders of any then outstanding preferred stock. Holders of common stock will
have no preemptive, subscription, redemption or conversion rights. No sinking
fund provisions apply to our common stock. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
Preferred Stock
Generally. Holders of our outstanding convertible preferred stock have
certain rights under both our current restated certificate of incorporation and
our amended and restated certificate of incorporation, which describe the terms
of the preferred stock, and under various agreements between these stockholders
and us, which provide, among other things, for restrictions on the transfer of
shares, rights to purchase a portion of new stock issuances and the granting to
certain stockholders the right to designate a representative to our board of
directors. As discussed more fully below, our outstanding preferred stock will
be automatically converted into common stock upon the closing of this offering
if the price of the common stock sold in this offering is at least $11.58 per
share for the Series A preferred stock to be converted, or $12.00 per share for
the Series B and Series C preferred stock to be converted, and the aggregate
gross proceeds payable to us from this offering is at least $20 million. If
both of these conditions are met, we will amend and restate our certificate of
incorporation to remove these preferred stock terms. If these conditions are
not met, the preferred stock will remain issued and outstanding after the
closing of this offering. However, in both cases, the stockholder agreements
will automatically terminate upon the closing of this offering, except for
certain provisions which will continue to be effective with respect to certain
of our stockholders.
Of the million shares of preferred stock authorized, 2.6 million
shares are currently designated as Series A preferred stock, 5.0 million shares
are currently designated as Series B preferred stock, 3.125 million shares are
currently designated as Series C preferred stock and the rest are undesignated.
Because of the expected price range for this offering, we expect that those
shares of Series A, Series B and Series C preferred stock which were
outstanding at the closing of this offering will remain outstanding unless and
until the holders of those shares decide to convert the shares into common
stock.
Terms of Outstanding Preferred Stock. Each share of outstanding preferred
stock is entitled to that number of votes equal to the number of whole shares
of common stock into which it is convertible. The preferred stock votes with
the common stock on all matters except as otherwise required by law.
Holders of preferred stock are entitled to a dividend at least equal to
the product of any dividend amount set aside for or paid on the common stock
during that fiscal year and the number of shares of common stock into which
such preferred stock is convertible.
In addition, upon a voluntary or involuntary liquidation, dissolution or
winding up of Synapse Group, holders of preferred stock are entitled to be paid
before holders of common stock. In these circumstances, holders of preferred
stock are entitled to receive a liquidation preference of the per share price
of such preferred stock plus any declared but unpaid dividends on such shares.
The per share price of the Series A preferred stock is $7.72 per share, and the
per share price of the Series B and Series C preferred stock is $8.00 per
share. If our assets at the time of such voluntary or involuntary liquidation,
dissolution or winding up are not sufficient to pay the liquidation preferences
of all of the outstanding preferred stock, those assets will be distributed to
the holders of the preferred stock on a pro rata basis, and holders of common
stock will receive no distribution. If our assets are sufficient to pay the
liquidation preferences of all of the outstanding preferred stock, upon payment
of such liquidation preference, any remaining assets will be distributed to the
holders of the common stock.
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The preferred stock is not redeemable.
Preferred stock may be converted into common stock at any time upon a
holder's request. A holder of preferred stock who converts such preferred stock
is entitled to that number of shares of common stock equal to the product of
the number of shares of preferred stock being converted multiplied by the
quotient of the liquidation preference of such preferred stock divided by its
conversion price, which is one-to-one as of June 30, 2000.
Upon the occurrence of certain significant transactions, holders of a
majority of the outstanding shares of each series of preferred stock may elect
to have all outstanding shares of that series of preferred stock automatically
converted into a payment equal to the liquidation preference for that series.
Such liquidation preference will be paid, to the extent funds are legally
available, in the form of the consideration received by the holders of the
common stock in such transaction. These significant transactions are defined as
the merger or consolidation of Synapse Group into another entity, the merger or
consolidation of another entity into Synapse Group, or a tender offer or other
business combination transaction involving Synapse Group, which results in the
stockholders of Synapse Group prior to such merger, consolidation, tender offer
or other transaction not retaining at least a majority of the voting power of
the surviving entity, or the voluntary sale, conveyance, exchange or transfer
to another entity of all or substantially all of the assets of Synapse Group.
If holders of a majority of each series of preferred stock waive their right to
this automatic conversion payment, Synapse Group must deliver to each holder a
written statement stating that the holder has the right to convert its shares
into the kind and amount of shares of stock or other securities, property or
cash to be delivered in such transaction to a holder of the number of shares of
common stock into which such preferred stock could have been converted, and we
must provide that the agreement relating to such significant transaction
describes this right.
Shares of each series of preferred stock will be automatically converted,
at the applicable conversion prices, into common stock upon the closing of this
offering if the price of the common stock sold in this offering is at least
$11.58 per share for the Series A preferred stock to be converted, or $12.00
per share for the Series B and Series C preferred stock to be converted, and
the aggregate gross proceeds payable to us is at least $20 million. This means
that, assuming the satisfaction of the second condition, if the common stock
being sold in this offering is sold for at least $11.58 per share, the Series A
preferred stock will automatically be converted into common stock, and if the
common stock being sold in this offering is sold for at least $12.00 per share,
the Series B and C preferred stock, as well as the Series A preferred stock,
would automatically be converted into common stock.
The conversion price of each series of preferred stock is determined by
dividing the original purchase price of such series, which was $7.72 per share
for the Series A preferred stock and $8.00 per share for the Series B and C
preferred stock, by the then-effective conversion price for such series. The
conversion price for each series of preferred stock is subject to adjustment
upon any stock dividend, note, distribution or rights to subscribe for
additional securities paid or given to holders of the common stock or upon any
subdivision, combination, or reclassification of the common stock.
In addition, the conversion price is subject to other adjustments. The
conversion price of the Series A preferred stock is subject to a "weighted
average" adjustment if we issue new securities, other than certain specified
securities, for less than the conversion price of the Series A preferred stock.
In this case, the conversion price of the Series A preferred stock would be
adjusted downward to reflect the relative amount of new securities issued and
the amount by which the purchase price of those new securities is less than the
Series A preferred stock conversion price. By contrast, the conversion price of
the Series B and C preferred stock is subject to a "full ratchet" adjustment if
we issue new securities, other than certain specified securities, for less than
the conversion price of the Series B and C preferred stock. In this case, the
conversion price of the Series B and C preferred stock would be adjusted
downward to equal the purchase price of those new securities.
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In addition, if on or before January 12, 2001 we have not either closed
this offering or sold or merged Synapse based upon a valuation of Synapse of at
least $425 million, the Series B and C preferred stock conversion prices would
be reduced to $6.50 per share. For an initial public offering, this valuation
is calculated by multiplying the mid-point of the anticipated price range per
share of common stock, as set forth in the most recently circulated "red-
herring" prospectus by the total number of shares of common stock outstanding
on a fully-diluted basis prior to this offering. The number of shares of common
stock outstanding on a fully-diluted basis reflects the total number of shares
of our Class A common stock issued and outstanding, plus the total number of
shares of our Class A common stock that are issuable upon exercise or
conversion of all securities which are ultimately convertible into shares of
common stock which are "in the money" on that date. For a merger, the valuation
is calculated by multiplying the net per share price paid by the acquiror for
each share of common stock by the total number of shares of common stock
outstanding on a fully-diluted basis immediately prior to the transaction. The
net per share price is calculated by dividing the aggregate dollar amount paid
to our stockholders as consideration in the merger by the number of shares of
common stock outstanding on a fully-diluted basis. For a sale, the valuation
equals the aggregate proceeds received by the holders of our common stock.
In the event of any capital reorganization, reclassification or other
change in our common stock, we must give holders of preferred stock prior
written notice stating that such holders may convert their preferred stock into
a security with substantially similar terms as the preferred stock. In
addition, holders of preferred stock are entitled to notice of certain other
significant events, including the declaration of a dividend and the merger or
sale of Synapse Group.
Future Issuances of Preferred Stock. Under our amended and restated
certificate of incorporation, which will be effective after the closing of this
offering, our board of directors will be authorized to issue up to million
shares of preferred stock in one or more new series without stockholder
approval. The board will have discretion to determine the rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences of each
new series of preferred stock.
The purpose of authorizing the board of directors to issue preferred
stock and determine its rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The board's ability
to issue preferred stock will provide desirable flexibility in connection with
possible acquisitions and other corporate purposes. However, this ability may
make it more difficult for a third party to acquire, or may discourage a third
party from acquiring, a majority of our outstanding voting stock.
The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock. We have no
present plans to issue any shares of preferred stock.
Warrants
At June 30, 2000, we had warrants outstanding to purchase an aggregate of
2,499,999 shares of our Class A common stock at an exercise price of $8.00 per
share. The exercise price may be adjusted downward if on or before January 12,
2001, we have not closed this offering or sold or merged Synapse Group, based
upon a valuation of Synapse Group of at least $425 million. These warrants may
be exercised at any time up to January 12, 2007. Holders of these warrants are
entitled to registration rights with respect to the shares of common stock
issuable upon exercise of the warrants. See "Shares Eligible for Future Sale--
Registration Rights."
Under the terms of a credit facility which we entered into with Jay
Walker in January 2000 and which Mr. Walker assigned to Arena Capital
Investment Fund in February 2000, we are required to issue Arena Capital
Investment Fund warrants to purchase 0.75% of our fully-diluted equity
securities at an exercise price of $0.01 per share on each of January 1, 2001
and April 1, 2001, if any obligations remain outstanding under the facility.
The warrants will be exercisable for ten years from their dates of issuance and
will have anti-dilution provisions, tag along rights, and demand and piggy-back
registration rights on the terms requested by Arena Capital Investment Fund.
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Delaware Law and Our Charter and By-law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years did own, 15% or more of
the corporation's voting stock.
Our amended and restated certificate of incorporation and our amended and
restated by-laws, which will be effective on the closing of this offering,
provide:
. that our board of directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
. that our directors may be removed only for cause by the vote of the
holders of at least 75% of the shares of our capital stock entitled
to vote; and
. that any vacancy on our board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may
only be filled by vote of a majority of the directors then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could make it more difficult for
a third party to acquire, or discourage a third party from acquiring, Synapse
Group.
Our amended and restated certificate of incorporation and our amended and
restated by-laws, which will be effective on the closing of this offering, also
provide that, after the closing of this offering:
. Any action required or permitted to be taken by the stockholders at
an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before such meeting and may not be
taken by written action in lieu of a meeting; and
. Special meetings of the stockholders may only be called by the
Chairman of the board of directors, the President, or by the board of
directors. Our by-laws will also provide that, in order for any
matter to be considered "properly brought" before a meeting, a
stockholder must comply with requirements regarding advance notice to
us.
These provisions could delay until the next stockholders' meeting actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because such person or entity, even
if it acquired a majority of our outstanding voting securities, would be able
to take action as a stockholder only at a duly called stockholders' meeting,
and not by written consent.
Delaware law provides that the vote of a majority of the shares entitled
to vote on any matter is required to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation
or by-laws, as the case may be, requires a greater percentage. Our amended and
restated certificate of incorporation, which will be effective on the closing
of this offering, will require the affirmative vote of the holders of at least
75% of the shares of our capital stock entitled to vote, and the majority of
each class or series of preferred stock, to amend or repeal any of the
foregoing provisions of our certificate of incorporation. Generally, our
amended and restated by-laws, which will be effective on the closing of this
offering, may be amended or repealed by a majority vote of the board of
directors or the holders of a majority
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of the shares of our capital stock issued and outstanding and entitled to vote.
Changes to our by-laws regarding special meetings of stockholders, written
actions of stockholders in lieu of a meeting, and the election, removal and
classification of members of the board of directors require the affirmative
vote of the holders of at least 75% of the shares of our capital stock entitled
to vote, and the majority of each class or series of preferred stock. The
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any additional series of
preferred stock that might be then outstanding.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation, which will be
effective on the closing of this offering, provides that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law. This indemnification covers all expenses and liabilities
reasonably incurred in connection with their services for or on behalf of us.
In addition, our amended and restated certificate of incorporation provides
that our directors will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they violated their duty
of loyalty to us or our stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, based on the number of shares outstanding as of June
30, 2000, we will have shares of common stock outstanding, assuming no
exercise of outstanding options and warrants and 10,716,178.24 shares of
preferred stock outstanding. If the underwriters exercise their over-allotment
option in full, we will have shares of common stock outstanding. All of the
shares we sell in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates, as that term is defined in Rule 144 under the Securities
Act, may generally be sold in compliance with the limitations of Rule 144
described below. The remaining 32,802,228 shares of common stock and
10,716,178.24 shares of preferred stock are "restricted securities" under Rule
144. Generally, restricted securities that have been owned for at least two
years may be sold immediately after the completion of this offering, and
restricted securities that have been owned for at least one year may be sold 90
days after the completion of this offering.
Sales of Restricted Shares
In general, under Rule 144, stockholders, including our affiliates, who
have beneficially owned shares for at least one year are entitled to sell,
within any three month period, a number of such shares that does not exceed the
greater of one percent of the then outstanding shares of our common stock or
the average weekly trading volume in our common stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, our
affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
common stock that are not restricted securities.
Under Rule 144(k), a stockholder who is not an affiliate and has not been
an affiliate for at least three months prior to the sale and who has
beneficially owned shares for at least two years may sell such shares without
compliance with the above requirements. In meeting the holding periods
described above, a holder can include the holding periods of a prior owner who
was not an affiliate. The holding periods described above do not begin to run
until the full purchase price or other consideration is paid by the
stockholder.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions of Rule 144. Any employee, officer or
director of or consultant to Synapse Group who purchased his or her shares
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may
sell their shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144.
Stock Options
At June 30, 2000, approximately 920,347 shares of common stock were
issuable pursuant to vested options granted under our 1997 Stock Option Plan,
1999 Stock Option Plan and 2000 Stock Incentive Plan, of which approximately
are subject to lock-up agreements with the underwriters.
We intend to file one or more registration statements on Form S-8 under
the Securities Act within 180 days after the date of this prospectus to
register up to 9,958,664 shares of our common stock issuable under our 1997
Stock Option Plan, 1999 Stock Option Plan and 2000 Stock Incentive Plan,
including the 5,944,477 shares of common stock subject to outstanding options
as of June 30, 2000. We expect these registration statements will become
effective upon filing.
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Lock-up Agreements
Synapse Group, our executive officers and directors and all existing
stockholders have entered into lock-up agreements with the underwriters. These
stockholders have agreed that they will not sell or transfer shares of our
capital stock for 180 days after the date of this prospectus without the prior
written consent of Merrill Lynch. In addition, for a period of 180 days from
the date of this prospectus, except as required by law, we have agreed not to
offer, sell, transfer or otherwise dispose of any shares of capital stock, or
any securities convertible into or exchangeable for capital stock, without the
prior written consent of Merrill Lynch except that we may, without such
consent, grant options and sell shares pursuant to our stock option plans.
Registration Rights
We have granted registration rights to a majority of the holders of our
common stock, who hold an aggregate of 31,431,780 shares as of June 30, 2000,
and to all current holders of our preferred stock. At any time after the
closing of this offering, the General Atlantic stockholders and NSSI Holdings
can require us to file a registration statement under the Securities Act at our
expense. We are only obligated to file one registration statement for the
General Atlantic stockholders and one for NSSI Holdings. All other stockholders
with registration rights are entitled to notice of such registration and are
entitled to include shares of their common stock in that registration
statement. In certain circumstances, we may direct that the demanded
registration be delayed for up to four months.
In addition, once we become eligible to make filings on Form S-3, the
General Atlantic stockholders or NSSI Holdings can require us, on up to two
occasions in any 12 month period, to file a registration statement on Form S-3
at our expense. The other stockholders with registration rights are entitled to
notice of such registrations and are entitled to include their shares in those
registration statements. We may reduce the number of shares offered in these
registrations if so advised by the underwriter for the offerings.
If we make any future public offerings of our stock, other than in
connection with an employee benefit plan, merger or acquisition, all
stockholders with registration rights have the right to include their shares in
the registration statements covering such offerings. We may reduce the number
of shares offered in any such offering if so advised by the underwriter for the
offering.
85
<PAGE>
UNDERWRITING
We intend to offer the shares through the underwriters. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Allen & Company Incorporated, Banc of
America Securities LLC and Wit SoundView Corporation are acting as
representatives of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement between us and the underwriters,
we have agreed to sell to the underwriters, and the underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Allen & Company Incorporated.....................................
Banc of America Securities LLC...................................
Wit SoundView Corporation........................................
---
Total.......................................................
===
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters propose
initially to offer the shares to the public at the initial public offering
price on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a discount not in excess of $ per share to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Synapse Group. The information assumes
either no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price................................... $ $ $
Underwriting discount................................... $ $ $
Proceeds, before expenses, to Synapse Group............. $ $ $
</TABLE>
86
<PAGE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by Synapse Group.
Over-allotment Options
We have granted options to the underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise these options for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
these options, each will be obligated, subject to conditions contained in the
purchase agreements, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares offered by this prospectus for sale to
some of our directors, officers, employees, business associates and related
persons. If these persons purchase reserved shares, this will reduce the number
of shares available for sale to the general public. Any reserved shares that
are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for 180
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any of our capital stock;
. sell any option or contract to purchase any of our capital stock;
. purchase any option or contract to sell any of our capital stock;
. grant any option, right or warrant for the sale of any of our capital
stock;
. lend or otherwise dispose of or transfer any of our capital stock;
. request or demand that we file a registration statement related to
the of our capital stock; or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any of our capital
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to our capital stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
Nasdaq National Market Listing
We expect the shares to be approved for quotation on the Nasdaq National
Market under the symbol "SYNS."
87
<PAGE>
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among us and the representatives. In addition to prevailing market
conditions, the factors to be considered in determining the initial public
offering price are:
. the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the over-
allotment option described above. Purchases of the common stock to stabilize
its price or to reduce a short position may cause the price of the common stock
to be higher than it might be in the absence of such purchases.
The representatives may also impose a penalty bid on underwriters. This
means that if the representatives purchase shares in the open market to reduce
the underwriter's short position or to stabilize the price of such shares, they
may reclaim the amount of the selling concession from the underwriters who sold
those shares. The imposition of a penalty bid may also affect the price of the
shares in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
88
<PAGE>
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions. See all "Related Party Transactions and
Relationships--Business Relationship with Allen & Company" for information on
investment banking services provided to us by Allen & Company.
Nancy Peretsman, one of our directors, has been a Managing Director and
Executive Vice President of Allen & Company, one of the underwriters, since
June 1995. There is no arrangement whereby Allen & Company has the right to
designate or nominate a member of our board of directors.
On January 12, 2000, we sold shares of our Series B preferred stock and
warrants to purchase shares of our Class A common stock in a private placement.
In this private placement, Allen & Company purchased 93,750 shares of our
Series B preferred stock at $8.00 per share and warrants to purchase 46,875
shares of our Class A common stock at an exercise price of $8.00 per share at
$.00128 per warrant, and Ms. Peretsman purchased 31,250 shares of our Series B
preferred stock at $8.00 per share and warrants to purchase 15,625 shares of
our Class A common stock at an exercise price of $8.00 per share at $.00128 per
warrant. Allen & Company and Ms. Peretsman purchased these shares and warrants
on the same terms as the other investors in the private placement.
We used the proceeds of a credit facility we obtained from Jay Walker on
January 12, 2000 and the proceeds from the sale of our Series B preferred stock
to repay and terminate our prior credit facility from Bank of America, N.A.,
formerly known as NationsBank, N.A. Bank of America, N.A. is an affiliate of
Banc of America Securities LLC, one of the underwriters.
Electronic Prospectus
Merrill Lynch will be facilitating Internet distribution for the offering
to some of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to the offering is not a part of this
prospectus.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit SoundView Corporation's affiliate, Wit Capital
Corporation. In addition, other dealers purchasing shares from Wit SoundView
Corporation in this offering have agreed to make a prospectus in electronic
format available on websites maintained by each of these dealers. Other than
the prospectus in electronic format, the information on Wit Capital's website
and any information contained on any other website maintained by Wit Capital or
by these dealers is not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved and/or endorsed by us
or any underwriter in its capacity as underwriter and should not be relied upon
by investors.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Debevoise & Plimpton, New York, New York.
89
<PAGE>
EXPERTS
Our financial statements as of December 31, 1998 and 1999 and our
financial statements and financial statement schedule for each of the three
years in the period ended December 31, 1999 included in this prospectus and
elsewhere included in the registration statement have been so included in
reliance on the reports of Arthur Andersen LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
CHANGE IN AUDITORS
In March 1998, we decided to replace Deloitte & Touche LLP as our
independent accountants. In October 1998, our board of directors approved the
appointment of Arthur Andersen LLP as our independent accountants.
During our two most recent fiscal years preceding this change of
accountants, Deloitte & Touche's report on our financial statements did not
contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. During our
two most recent fiscal years, there were no disagreements between Deloitte &
Touche and Synapse Group on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information that we believe is material to an
investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about us,
our common stock and this offering, including the full texts of the exhibits,
some of which have been summarized in this prospectus. The registration
statement is available for inspection and copying at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains a website that contains the
registration statement. The address of the SEC's website is www.sec.gov.
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
90
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND MARCH 31, 2000
(UNAUDITED)............................................................. F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH
31, 1999 and MARCH 31, 2000 (UNAUDITED)................................. F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS
ENDED MARCH 31, 2000 (UNAUDITED)........................................ F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND MARCH 31, 2000 (UNAUDITED)................................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)................... F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-15
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999............. F-16
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1997, 1998 AND 1999..................................................... F-17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED
DECEMBER 31, 1997, 1998 AND 1999........................................ F-18
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997, 1998 AND 1999..................................................... F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-20
</TABLE>
F-1
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 1,407 $ 808
Accounts receivable, net............................. 45,021 52,772
Prepaid expenses..................................... 15,168 19,573
Publisher prepayments................................ 30,702 27,859
Deferred charges..................................... 64,537 70,542
Inventories, net..................................... 2,981 --
Other current assets................................. 4,214 922
--------- ---------
Total current assets............................... 164,030 172,476
PROPERTY AND EQUIPMENT, net............................ 16,887 17,816
OTHER NONCURRENT ASSETS................................ 1,287 577
--------- ---------
Total assets....................................... $ 182,204 $ 190,869
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable..................................... $ 36,943 $ 29,625
Accrued expenses..................................... 56,876 60,098
Loan payable......................................... 45,333 --
Current portion of capital lease obligation.......... 115 115
Deferred revenue..................................... 119,156 118,153
--------- ---------
Total current liabilities.......................... 258,423 207,991
STOCKHOLDERS' LOANS.................................... 13,742 27,493
CAPITAL LEASE OBLIGATION............................... 187 159
--------- ---------
Total liabilities.................................. 272,352 235,643
--------- ---------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' DEFICIENCY:
Capital stock........................................ -- 5
Deferred compensation................................ -- (374)
Additional paid-in capital........................... 21,024 63,689
Accumulated deficit.................................. (111,172) (108,094)
--------- ---------
Total stockholders' deficiency..................... (90,148) (44,774)
--------- ---------
Total liabilities and stockholders' deficiency..... $ 182,204 $ 190,869
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(000's omitted, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 2000
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUES......................................... $ 46,914 $ 80,583
PRODUCT AND MARKETING EXPENSES....................... 28,616 55,202
OPERATION EXPENSES................................... 7,292 8,713
---------- ----------
11,006 16,668
GENERAL AND ADMINISTRATIVE EXPENSES.................. 7,277 10,253
DEPRECIATION AND AMORTIZATION........................ 687 1,720
---------- ----------
Operating income ................................ 3,042 4,695
INTEREST EXPENSE, net of interest income of $68 and
$127, respectively.................................. (1,048) (658)
---------- ----------
Income before income tax and extraordinary item.. 1,994 4,037
INCOME TAX PROVISION................................. -- --
---------- ----------
Net income before extraordinary item............. $ 1,994 $ 4,037
EXTRAORDINARY ITEM................................... -- (959)
---------- ----------
Net income....................................... $ 1,994 $ 3,078
========== ==========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary item................... $ 0.06 $ 0.12
Extraordinary item................................. -- (0.03)
Net income....................................... 0.06 0.09
DILUTED NET INCOME PER COMMON SHARE:
Income before extraordinary item................... $ 0.06 $ 0.10
Extraordinary item................................. -- (0.02)
Net income....................................... 0.06 0.08
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic.............................................. 32,390,000 32,697,000
Diluted............................................ 35,575,000 40,256,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
(000's omitted, except share data)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------------------- ---------------------------------
Class A Class B Class A Class B Additional
---------------- ----------------- ---------------- ---------------- Deferred Paid In Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Compensation Capital Deficit
--------- ------ ---------- ------ --------- ------ --------- ------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1999........ 7,368,000 $ -- 25,021,728 $ -- 2,591,178 $ -- -- $ -- $ -- $21,024 $(111,172)
Net income...... -- -- -- -- -- -- -- -- -- -- 3,078
Issuance of
preferred
stock, net..... -- -- -- -- -- -- 3,465,000 3 -- 27,529 --
Issuance of
preferred stock
in exchange for
stockholder's
loan........... -- -- -- -- -- -- 1,535,000 2 -- 12,278 --
Issuance of
common stock in
connection with
amended
consulting
agreement...... -- -- 350,000 -- -- -- -- -- -- 2,138 --
Deferred
compensation... -- -- -- -- -- -- -- -- (432) 432 --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- 58 -- --
Stock
compensation... -- -- -- -- -- -- -- -- -- 288 --
--------- ----- ---------- ----- --------- ----- --------- ----- ----- ------- ---------
BALANCE, March
31, 2000........ 7,368,000 $ -- 25,371,728 $ -- 2,591,178 $ -- 5,000,000 $ 5 $(374) $63,689 $(108,094)
========= ===== ========== ===== ========= ===== ========= ===== ===== ======= =========
<CAPTION>
Total
---------
<S> <C>
BALANCE, December
31, 1999........ $(90,148)
Net income...... 3,078
Issuance of
preferred
stock, net..... 27,532
Issuance of
preferred stock
in exchange for
stockholder's
loan........... 12,280
Issuance of
common stock in
connection with
amended
consulting
agreement...... 2,138
Deferred
compensation... --
Amortization of
deferred
compensation... 58
Stock
compensation... 288
---------
BALANCE, March
31, 2000........ $(44,774)
=========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 2000
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,994 $ 3,078
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Income and expenses not affecting operating
cash flows--
Depreciation and amortization................ 687 1,720
Compensation expense......................... 75 346
Extraordinary item........................... -- 959
Changes in operating assets and liabilities--
Accounts receivable.......................... 5,790 (7,751)
Inventories.................................. (1,808) 2,981
Prepaid expenses............................. (7,166) (4,405)
Publisher prepayments........................ 5,213 2,843
Deferred charges............................. (25,400) (6,005)
Other current assets......................... (1,042) 3,292
Other noncurrent assets...................... 75 (249)
Accounts payable............................. (6,570) (7,318)
Accrued expenses............................. 8,352 5,360
Deferred revenue............................. 24,512 (1,003)
-------- --------
Total adjustments.......................... 2,718 (9,230)
-------- --------
Net cash provided by (used in) operating
activities................................ 4,712 (6,152)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (2,703) (2,649)
-------- --------
Cash used in investing activities.......... (2,703) (2,649)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on loan payable....................... 3,000 --
Repayments on loan payable....................... (2,000) (45,333)
Borrowings on stockholders' loans................ 101 27,493
Repayments on stockholders' loans................ (28) (1,462)
Proceeds from issuance of preferred stock, net... -- 27,532
Repayments of capital lease obligations.......... -- (28)
-------- --------
Net cash provided by financing activities.. 1,073 8,202
-------- --------
Increase (decrease) in cash and cash
equivalents............................... 3,082 (599)
CASH AND CASH EQUIVALENTS, beginning of period..... 154 1,407
-------- --------
CASH AND CASH EQUIVALENTS, end of period........... $ 3,236 $ 808
======== ========
CASH PAID DURING THE YEAR IN RESPECT OF:
Interest......................................... $ 1,133 $ 31
NONCASH FINANCING ACTIVITY:
Equity issuance to reduce stockholder's loan..... -- $ 12,280
Equity issuance to reduce consultant obligation.. -- 2,138
</TABLE>
The accompanying notes form an integral part of these statements.
F-5
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(000's omitted, except share data)
1. Description of Business
Synapse Group, Inc., a Delaware corporation ("Synapse" and together with
its wholly owned subsidiaries, the "Company") was incorporated in Connecticut
in 1991 as NewSub Services, Inc. ("NewSub"). In March 1998, NewSub converted
from an S Corporation to a C Corporation. During 1999, NewSub reincorporated in
Delaware by merging with a wholly owned subsidiary, Synapse.
The principal products offered by the Company are magazine subscriptions
and merchandise items. The Company designs and manages innovative marketing
programs for bank, oil and major retail credit card issuers, catalog companies,
airlines and magazine publishers. The Company has created a continuous service
subscription model for offering and marketing magazine subscriptions to its
customers, which provides uninterrupted service to the consumer. This model
provides the Company and its marketing partners with an enhanced customer
retention program and a recurring revenue stream.
2. Interim Financial Data
The accompanying consolidated financial statements as of and for the
three months ended March 31, 1999 and 2000 are unaudited. In the opinion of
management, these interim statements have been prepared on the same basis as
the audited financial statements of the Company as of December 31, 1999 and for
the year then ended, and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the results of
the interim periods. The financial and other data disclosed in the notes to
financial statements for these periods are also unaudited. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for any future periods.
3. Net Income Per Common Share
Basic net income per common share ("Basic EPS") is computed by dividing
net income less preferred stock dividends, if any, by the weighted average
number of common shares outstanding during the year. Diluted net income per
common share ("Diluted EPS") is computed in the same manner except that the
weighted average number of common shares outstanding assumes the exercise and
conversion of dilutive common share equivalents. The following represents a
reconciliation from basic to diluted income per share.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Unaudited)
<S> <C> <C> <C>
Basic EPS:
Income before extraordinary item
available to common stockholders........ $1,994 32,390,000 $0.06
Effect of Dilutive Securities:
Stock options............................ 594,000
Convertible preferred stock.............. 2,591,000
Diluted EPS:
Income before extraordinary item
available to common stockholders plus
assumed conversions..................... $1,994 35,575,000 $0.06
</TABLE>
F-6
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Unaudited)
<S> <C> <C> <C>
Basic EPS:
Income before extraordinary item
available to common stockholders........ $4,037 32,697,000 $0.12
Effect of Dilutive Securities:
Stock options............................ 572,000
Convertible preferred stock.............. 6,987,000
Diluted EPS:
Income before extraordinary item
available to common stockholders plus
assumed conversions..................... $4,037 40,256,000 $0.10
</TABLE>
Stock options and warrants to purchase 2,969,000 and 6,205,749 shares
were outstanding during the three months ended March 31, 1999 and 2000,
respectively, but were not included in the computation of Diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
4. Stock Option Plans
In 1997 and 1999, the Board of Directors implemented nonqualified stock
option plans (the "1997 Plan" and the "1999 Plan," respectively). Under the
1997 and 1999 Plans, options may be granted to individual officers, other
employees, consultants and directors at a price not less than fair market value
at the date of grant. Options generally vest over a four-year period and expire
in ten years unless a change in ownership control occurs. Certain options under
these plans vest at the date of an initial public offering. The 1997 and 1999
Plans provide for the grant by the Company of options to purchase 2,608,272 and
2,350,392 shares of Class B common stock, respectively.
Option activity for the three months ended March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Shares Subject Weighted Average
to Options Exercise Price
-------------- ----------------
<S> <C> <C>
Balance outstanding, December 31, 1999.......... 4,344,750 $7.86
Granted....................................... 300,500 8.00
Canceled...................................... (24,773) 6.94
---------
Balance outstanding, March 31, 2000............. 4,620,477 7.88
=========
</TABLE>
There are 338,187 options available for future grant at March 31, 2000.
If deferred compensation had been determined under SFAS No. 123,
"Accounting for Stock-Based Compensation," using the Black-Scholes method with
the following weighted average assumptions used for grants for the three months
ended March 31, 2000: (1) expected life of the options of five years, (2)
dividend yield of 0%, (3) expected volatility of 0% and (4) risk-free interest
rate of 5.7%, the Company's net income for the three months ended March 31,
2000 would have decreased by $290.
F-7
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
The following table summarizes information with respect to stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- -----------------------------
Number of Number of
Options Weighted Average Options Weighted
Posted Outstanding at Remaining Years Exercisable at Average
Exercise Price March 31, 2000 Contractual Life March 31, 2000 Exercise Price
-------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
$3.00 914,727 6.8 196,656 $3.00
8.00 3,039,083 8.7 235,500 8.00
12.00 333,334 8.8 -- 12.00
16.00 333,333 8.8 -- 16.00
</TABLE>
As of March 31, 2000, there were 432,156 options, which were outstanding
and exercisable and which were originally granted to certain employees and
became fully vested and exercisable pursuant to termination agreements. For the
three months ended March 31, 2000, the Company has recorded approximately $346
of compensation expense related to these options. The compensation expense has
been determined using the Black-Scholes method using the same assumptions noted
above and the relevant stock price except for 75,000 options granted to a non-
employee for future services. Compensation expense for the 75,000 options was
determined based upon the following weighted average assumptions: (1) expected
life of the options of ten years, (2) dividend yield of 0%, (3) expected
volability of 55% and (4) risk-free interest rate of 5.7%. As of March 31,
2000, the Company has recorded $432 of deferred compensation and amortized $58
based upon the amount of options earned.
5. Extraordinary Item
The Company recorded an extraordinary loss of $959 related to the write-
off of the remaining deferred financing costs resulting from the transactions
discussed in Notes 6 and 7.
6. Debt and Revolving Credit Facility
All of the Company's outstanding debt obligations and their
classification on the balance sheets, with the exception of the capital lease
obligations, as of December 31, 1999, have been satisfied as a result of the
transactions discussed below and in Note 7.
Debt outstanding consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Term loan........................................... $27,000 $ --
Line of credit...................................... 18,333 --
Stockholders' loans................................. 13,742 27,493
Capital lease obligations........................... 302 274
------- -------
59,377 27,767
Less--Current portion............................... 45,448 115
------- -------
Total long-term................................... $13,929 $27,652
======= =======
</TABLE>
F-8
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
On January 12, 2000, the Company entered into a $25,000 Credit Facility
with a shareholder, Jay Walker, which matures on April 7, 2001. On February 1,
2000, the rights and obligations of Mr. Walker under this facility were
assigned to Arena Capital Investment Fund, LP, a Delaware limited partnership.
On March 20, 2000, Arena SG Holdings, LLC, an affiliate of Arena Capital
Investment Fund, LP, purchased from Mr. Walker 1,250,000 shares of the
Company's Class B Common Stock for $8.00 per share and an option to purchase an
additional 625,000 of the Company's Class B Common Stock for an exercise price
of $8.00 per share. The loan has an initial interest rate of LIBOR plus 275
basis points. The rate increases by 200 basis points on October 1, 2000 and
shall further increase an additional 25 basis points each three-month period
thereafter until the loan is paid in full. The aggregate amount of the
increases cannot exceed 300 basis points. The loan also has a mandatory
prepayment feature from a public or private offering of debt or equity
securities by the Company and provides for the issuance to the lender of
warrants representing 0.75% of the fully diluted equity of the Company in the
event that the loan remains outstanding on each of January 1, 2001 and April 1,
2001. These warrants are exercisable at a price of $0.01 per share for a period
of ten years from their respective dates of issuance, respectively. The Company
received a waiver in May 2000 related to the mandatory prepayment feature as it
relates to the equity transactions detailed in Note 12. There is a capital
expenditure covenant associated with the loan whereby the Company is prohibited
from making or incurring capital expenditures, for any fiscal year the Credit
Facility is outstanding, in excess of $20,000. The Company incurred
approximately $250 of loan fees in connection with the closing and on October
1, 2000 must pay a fee equal to 2% of the amount outstanding on such date. The
Company used the proceeds of the Credit Facility together with the proceeds
from the sale of Series B Preferred Stock and Warrants discussed in Note 7 to
repay the outstanding amounts under the prior credit facility.
On January 12, 2000, the Company entered into a $10,000 revolving
promissory note with a shareholder which expires on April 7, 2001. The note has
an interest rate of 1% above the base rate, as defined, and interest is payable
on January 1, April 1, July 1 and October 1 of each calendar year. The note
becomes immediately due and payable upon the occurrence of an event of default
of the Credit Facility, as discussed above. The amount outstanding at March 31,
2000 was $2,493. There are no fees, costs or covenants associated with the
note.
7. Capital Stock
The Company's capital stock consists of the following (reflects the
merger and reincorporation transaction discussed below):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Common stock:
Class A; 50,000,000 and 56,000,000 shares authorized
at $.001 par, respectively, 7,368,000 shares issued
and outstanding.................................... $ -- $ --
Class B; 30,000,000 and 36,000,000 shares authorized
at $.001 par, respectively, 25,021,728 and
25,371,728 shares issued and outstanding,
respectively....................................... -- --
</TABLE>
F-9
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Preferred stock:
Series A; 2,600,000 shares authorized at $.001 par,
2,591,178 shares issued and outstanding............ -- --
Series B; 5,000,000 shares authorized at $.001 par,
0 and 5,000,000 shares issued and outstanding,
respectively....................................... -- 5
Undesignated; 7,400,000 and 2,400,000 shares,
respectively authorized at $.001 par, no shares
issued and outstanding............................. -- --
---- ---
-- $ 5
==== ===
</TABLE>
On December 22, 1999, NewSub reincorporated in Delaware by merging into a
wholly owned Delaware subsidiary, Synapse. Upon consummation of the merger,
Synapse was authorized to issue 90,000,000 shares of capital stock, 50,000,000
of which are Class A voting Common Stock, $0.001 par value per share;
30,000,000 of which are Class B nonvoting Common Stock, $0.001 par value per
share; and 10,000,000 shares of Preferred Stock, $0.001 par value per share. Of
the Preferred Stock, 2,600,000 was designated Series A Preferred Stock, and the
remainder was undesignated preferred stock.
In the merger, each issued and outstanding share of NewSub's Class A and
Class B Common Stock was converted into 3,684 shares of Synapse's Class A and
Class B Common Stock, respectively. In addition, each issued and outstanding
share of NewSub's Series A Preferred Stock was converted into 3,684 shares of
Synapse's Series A Preferred Stock.
On January 12, 2000, the Company issued 3,465,000 shares of Series B
Preferred Stock at $8.00 per share and warrants to acquire 1,732,499 shares of
Class A Common Stock at $0.00128 per warrant ("Warrants") to current
shareholders and other parties. Each share of Series B Preferred Stock is
convertible, subject to adjustment, into one share of Class A Common Stock.
Also, $12,000 of the Company's indebtedness and $280 of interest payable to one
of its shareholders was converted into 1,535,000 shares of Series B Preferred
Stock and Warrants to acquire 767,500 shares of Class A Common Stock at the
same prices as discussed above. The Company used $27,720 of the proceeds of the
offering together with borrowings under the Credit Facility discussed in Note 6
to repay the outstanding amounts and related expenses under the prior credit
facility.
On March 20, 2000, the Company filed an amendment to its Certificate of
Incorporation increasing its authorized capital stock to 102,000,000 shares,
consisting of 56,000,000 shares of Class A Common Stock, 36,000,000 shares of
Class B Common Stock and 10,000,000 shares of Preferred Stock, of which
2,600,000 are shares of Series A Preferred Stock and 5,000,000 are shares of
Series B Preferred Stock.
8. Amendment to Consulting Agreement
On January 19, 2000, the Company amended its agreement with a director
for consulting services. Under the amendment, the Company is required to
satisfy a prior obligation of $3,453 to the director for services rendered
through a $1,315 cash payment and issuance of 350,000 shares of the Company's
Class B Common Stock. The cash payment is due on the earlier of January 2001 or
within 90 days of an initial public offering.
F-10
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
9. Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available and which is evaluated
regularly by the Company's chief operating decision maker, or decision-making
group, in deciding how to allocate resources and assess performance.
The Company's activities fall within two operating segments: the
Merchandise Division and the Magazine Division. The Merchandise Division sells
gift products and the Magazine Division sells magazine subscriptions. Each
operating segment is a strategic business unit that is managed separately. In
addition, the Company does not allocate corporate general and administrative,
depreciation and interest expense to the operating segments. Corporate
operating expense consists primarily of general and administrative,
depreciation and interest expense. Corporate identifiable assets consists
primarily of cash and cash equivalents, property and equipment, certain prepaid
expenses, and certain other current and long-term assets. The following table
sets forth segment information:
<TABLE>
<CAPTION>
March 31, March 31,
1999 2000
--------- ---------
<S> <C> <C>
Net revenues:
Merchandise and other.................................... $14,190 $ 23,646
Magazines................................................ 32,724 56,937
------- --------
Consolidated............................................. $46,914 $ 80,583
======= ========
Operating income (loss):
Merchandise and other.................................... $(1,101) $ 5,901
Magazines................................................ 9,985 8,794
Corporate................................................ (5,842) (10,000)
------- --------
Consolidated............................................. $ 3,042 $ 4,695
======= ========
Net income (loss):
Merchandise and other.................................... $(1,101) $ 5,901
Magazines................................................ 9,985 8,794
Corporate................................................ (6,890) (11,617)
------- --------
Consolidated............................................. $ 1,994 $ 3,078
======= ========
Depreciation and amortization:
Corporate................................................ $ 687 $ 1,720
------- --------
Consolidated............................................. $ 687 $ 1,720
======= ========
Capital expenditures:
Corporate................................................ $ 2,703 $ 2,649
------- --------
Consolidated............................................. $ 2,703 $ 2,649
======= ========
</TABLE>
F-11
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
<TABLE>
<CAPTION>
December 31, March
1999 31, 2000
------------ --------
<S> <C> <C>
Identifiable assets:
Merchandise and other................................... $ 11,785 $ 11,511
Magazines............................................... 152,291 161,298
Corporate............................................... 18,128 18,060
-------- --------
Consolidated............................................ $182,204 $190,869
======== ========
</TABLE>
10. Pro Forma Information (Unaudited)
Gift Services, LLC
In January 2000, the Company entered into an agreement with two parties
to form Gift Services, LLC, a Delaware limited liability company ("GSL"), in
which the Company has a 49% ownership interest. Concurrently, the Company
entered into a sales representative agreement with GSL, which was subsequently
amended, whereby the Company agreed to solicit orders for all products
marketed, promoted, distributed and/or sold by GSL.
Under the amended agreement, GSL is required to pay the Company
commissions for each product sold. The Company records revenues upon GSL's
shipment of the product. The Company recorded $655 in commission revenue for
the three months ended March 31, 2000, which is included in net revenues in the
accompanying consolidated financial statements. The Company's 49% interest in
GSL is accounted for as an equity investment and the Company has no
responsibility to satisfy the losses of GSL greater than its insignificant
initial investment.
In March 2000, the Company entered into a $2,500 revolving promissory
note with GSL. There were no balances outstanding related to this note as of
March 31, 2000.
The Company has recorded a receivable of $1,157 at March 31, 2000 related
to commissions owed from and payments made on behalf of GSL. These amounts are
included in accounts receivable.
The following unaudited pro forma information is based upon the Company's
financial statements as adjusted for the transaction discussed above and has
been prepared as if the transaction had occurred on January 1, 1999. The
unaudited pro forma information is presented for informational purposes only
and does not purport to represent what the Company's results of operations
would actually have been if the transactions had occurred at the beginning of
the period indicated, nor to project the Company's results of operations at any
future date or for any future period.
F-12
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
The unaudited pro forma statements of operations would be as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Actual Adjustments (a) Adjustments (b) Pro Forma
------- --------------- --------------- ---------
Unaudited
<S> <C> <C> <C> <C>
Net revenues............. $80,583 $(21,216) $3,563 $62,930
Product and marketing
expenses................ 55,202 (14,297) -- 40,905
Operation expenses....... 8,713 (1,900) -- 6,813
Operating income......... 4,695 (5,019) 3,563 3,239
Net income............... 3,078 (5,019) 3,563 1,622
</TABLE>
--------
(a) Represents the exclusion of the revenues and expenses associated with the
Company's merchandise business.
(b) Represents the commission revenue based upon the contractual commission
rate applied to 2000 merchandise shipments adjusted for (1) a modification
reducing the cost of merchandise purchases based upon per unit rates
detailed in the Supply Agreement between GSL and a third party supplier and
(2) the reduction of commission revenues based upon the 2000 economic
performance of the merchandise business which would be accomplished in
accordance with the agreement via a prospective adjustment of the
commission rate each quarter.
11. Related Party Transactions
Due to/from Affiliate
As of March 31, 2000, the Company owned approximately $2,307, for
commissions on magazine sales by various companies. A current Company
stockholder and director is co-founder and a member of the board of directors
of these companies. These amounts are included in accrued expenses.
Due to Related Party
As of March 31, 2000, the Company owed approximately $1,782 for
information technology services to the subsidiary of a company of which the
Company's president and chief executive officer became a director in March
2000. These amounts are included in accounts payable and accrued expenses. In
addition, $2,831 was paid to this subsidiary during the three months ended
March 31, 2000.
12. Subsequent Events
Capital Stock Amendment
In June 2000, the Company filed another amendment to its Certificate of
Incorporation increasing its authorized capital stock to 107,000,000 shares,
consisting of 58,000,000 shares of Class A common stock, 37,000,000 shares of
Class B Common Stock and 12,000,000 shares of preferred stock, of which
2,600,000 are shares of Series A Preferred Stock, 5,000,000 are shares of
Series B Preferred Stock and 3,125,000 are shares of Series C Preferred Stock.
The Series C Preferred Stock has substantially similar rights to the Series B
Preferred Stock.
F-13
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three Months Ended March 31, 1999 and 2000 (Unaudited)
(000's omitted, except share data)
Stock Option Plan
In April 2000, the Board of Directors implemented a non-qualified stock
option plan (the "2000 Plan"). Under the 2000 Plan, options may be granted to
individual officers, other employees, consultants and directors at a price not
less than fair value at the date of the grant. Options generally vest over a
four-year period and expire in ten years unless a change in ownership control
occurs. The 2000 Plan provides for the grant by the Company of options to
purchase 5,000,000 shares of its Class B Common Stock. On April 3, 2000, the
Company issued stock options under the 2000 plan to purchase 1,380,500 shares
of Class B Common Stock at an exercise price of $8.00 per share.
Time Inc. Transactions
In June 2000, the Company sold 3,125,000 shares of its Series C Preferred
Stock to NSSI Holdings Inc., an indirect subsidiary of Time Inc., for $8.00 per
share. The Company paid $750 in investment banking service fees to a
stockholder in connection with this sale of preferred stock.
In June 2000, the Company entered into a separate strategic marketing
agreement with Time under which the Company obtained authorization to sell
specific premier Time publications over the next four years. During the term of
this agreement, the Company guaranteed that it will generate certain
subscription volumes for the Time publications specified in the agreement which
are offered on inbound telephone calls to its affinity marketing partners. In
the event these minimum subscription volumes are not achieved, the Company may
be required to make payments to NSSI Holdings Inc. as defined in the agreement.
Additionally, with certain exceptions, Time and its subsidiaries will not
operate programs which would offer magazine subscriptions on inbound telephone
calls to catalog call centers, or authorize others to operate such programs,
through June 30, 2004.
Equity Issuance
In June 2000, the Company sold 62,500 shares of its Class B Common Stock
to a director for $8.00 per share.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Synapse Group, Inc.:
We have audited the accompanying consolidated balance sheets of Synapse
Group, Inc., formerly NewSub Services, Inc., (a Delaware corporation) and
subsidiaries (the "Company") as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
upon our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Synapse
Group, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 2, 2000 (except with respect to
the matters discussed in Notes 13 and 14, as to
which the dates are March 28 and 20, 2000, respectively)
F-15
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(000's omitted)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 154 $ 1,407
Accounts receivable, net................................ 52,771 45,021
Prepaid expenses........................................ 18,441 15,168
Publisher prepayments................................... 16,896 30,702
Deferred charges........................................ 16,406 64,537
Inventories............................................. 3,594 2,981
Other current assets.................................... 1,235 4,214
--------- ---------
Total current assets.................................. 109,497 164,030
PROPERTY AND EQUIPMENT, net............................... 9,803 16,887
OTHER NONCURRENT ASSETS................................... 1,565 1,287
--------- ---------
Total assets.......................................... $ 120,865 $ 182,204
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable........................................ $ 28,237 $ 36,943
Accrued expenses........................................ 40,637 56,876
Loan payable............................................ 50,333 45,333
Current portion of stockholder's loan................... 5,044 --
Current portion of capital lease obligation............. -- 115
Deferred revenue........................................ 108,907 119,156
--------- ---------
Total current liabilities............................. 233,158 258,423
STOCKHOLDER'S LOAN........................................ -- 13,742
CAPITAL LEASE OBLIGATION.................................. -- 187
--------- ---------
Total liabilities..................................... 233,158 272,352
--------- ---------
CONTINGENCIES AND COMMITMENTS.............................
STOCKHOLDERS' DEFICIENCY:
Capital stock........................................... -- --
Additional paid-in capital.............................. 20,564 21,024
Accumulated deficit..................................... (132,857) (111,172)
--------- ---------
Total stockholders' deficiency........................ (112,293) (90,148)
--------- ---------
Total liabilities and stockholders' deficiency........ $ 120,865 $ 182,204
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(000's omitted, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
NET REVENUES.............................. $ 177,629 $ 210,762 $ 277,445
PRODUCT AND MARKETING EXPENSES............ 142,532 180,009 172,526
OPERATION EXPENSES........................ 23,344 28,224 36,150
---------- ---------- ----------
11,753 2,529 68,769
GENERAL AND ADMINISTRATIVE EXPENSES....... 33,821 28,105 37,649
DEPRECIATION AND AMORTIZATION............. 891 1,594 4,172
---------- ---------- ----------
Operating income (loss)................. (22,959) (27,170) 26,948
INTEREST (EXPENSE) INCOME, net of interest
income of $300, $235 and $306,
respectively............................. 129 (4,240) (5,241)
---------- ---------- ----------
Income (loss) before income taxes
provision.............................. (22,830) (31,410) 21,707
INCOME TAX PROVISION...................... 278 1 22
---------- ---------- ----------
Net income (loss)....................... $ (23,108) $ (31,411) $ 21,685
========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic................................... $ (0.71) $ (0.97) $ 0.67
Diluted................................. (0.71) (0.97) 0.56
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING PER SHARE AMOUNTS:
Basic................................... 32,390,000 32,390,000 32,390,000
Diluted................................. 32,390,000 32,390,000 38,874,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(000's omitted, except share data)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------------------- ------------------------------
Class A Class B Class A Class B Additional
---------------- ----------------- ---------------- ------------- Paid In Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
--------- ------ ---------- ------ --------- ------ ------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1996......... 7,368,000 $ -- 25,021,728 $ -- -- $ -- -- $ -- $ 87 $ (48,338) $ (48,251)
Net loss......... -- -- -- -- -- -- -- -- -- (23,108) (23,108)
--------- ----- ---------- ----- --------- ----- --- ----- ------- --------- ---------
BALANCE, December
31, 1997......... 7,368,000 -- 25,021,728 -- -- -- -- -- 87 (71,446) (71,359)
Net loss......... -- -- -- -- -- -- -- -- -- (31,411) (31,411)
Stock
compensation.... -- -- -- -- -- -- -- -- 477 -- 477
Dividends paid... -- -- -- -- -- -- -- -- -- (30,000) (30,000)
Issuance of
preferred
stock........... -- -- -- -- 2,591,178 -- -- -- 20,000 -- 20,000
--------- ----- ---------- ----- --------- ----- --- ----- ------- --------- ---------
BALANCE, December
31, 1998......... 7,368,000 -- 25,021,728 -- 2,591,178 -- -- -- 20,564 (132,857) (112,293)
Net income....... -- -- -- -- -- -- -- -- -- 21,685 21,685
Stock
compensation.... -- -- -- -- -- -- -- -- 460 -- 460
--------- ----- ---------- ----- --------- ----- --- ----- ------- --------- ---------
BALANCE, December
31, 1999......... 7,368,000 $ -- 25,021,728 $ -- 2,591,178 $ -- -- $ -- $21,024 $(111,172) $ (90,148)
========= ===== ========== ===== ========= ===== === ===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(000's omitted)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $(23,108) $(31,411) $ 21,685
-------- -------- --------
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities--
Income and expenses not affecting operating
cash flows--
Depreciation and amortization.............. 891 1,594 4,172
Compensation expense....................... -- 477 460
Changes in operating assets and liabilities--
Accounts receivable........................ (38,139) 8,418 7,750
Inventories................................ (2,532) 3,419 613
Prepaid expenses........................... (276) (17,822) 3,273
Publisher prepayments...................... (2,741) (14,155) (13,806)
Deferred charges........................... (3,686) (2,248) (48,131)
Other current assets....................... 145 (935) (2,979)
Other noncurrent assets.................... (1,263) (248) 278
Accounts payable........................... 6,788 (70) 8,706
Accrued expenses........................... 16,545 13,333 16,239
Deferred revenue........................... 36,123 15,442 10,249
-------- -------- --------
Total adjustments........................ 11,855 7,205 (13,176)
-------- -------- --------
Net cash provided by (used in) operating
activities.............................. (11,253) (24,206) 8,509
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (3,653) (6,183) (10,954)
-------- -------- --------
Cash used in investing activities........ (3,653) (6,183) (10,954)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on loan payable..................... 7,635 50,333 3,000
Repayments on loan payable..................... -- (7,635) (8,000)
Borrowings on stockholder's loan............... 12,100 5,135 8,865
Repayments on stockholder's loan............... (6,409) (8,093) (167)
Dividends paid................................. -- (30,000) --
Proceeds from issuance of preferred stock...... -- 20,000 --
-------- -------- --------
Net cash provided by financing
activities.............................. 13,326 29,740 3,698
-------- -------- --------
Increase (decrease) in cash and cash
equivalents............................. (1,580) (649) 1,253
CASH AND CASH EQUIVALENTS, beginning of year..... 2,383 803 154
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year........... $ 803 $ 154 $ 1,407
======== ======== ========
CASH PAID DURING THE YEAR IN RESPECT OF:
Interest....................................... $ 378 $ 3,823 $ 5,759
Income taxes................................... 21 1,419 22
NONCASH FINANCING ACTIVITY:
Equipment acquired under capital lease
obligations................................... -- -- 385
</TABLE>
The accompanying notes form an integral part of these statements.
F-19
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
1. Description of Business
Synapse Group, Inc., a Delaware corporation ("Synapse" and together with
its wholly owned subsidiaries, the "Company") was incorporated in 1991 as
NewSub Services, Inc. ("NewSub"). In March 1998, NewSub converted from an S
Corporation to a C Corporation. During 1999, NewSub reincorporated in Delaware
by merging with a wholly owned subsidiary, Synapse (Note 9).
The principal products offered by the Company are magazine subscriptions
and merchandise items. The Company designs and manages innovative marketing
programs for bank, oil and major retail credit card issuers, catalog companies,
airlines and magazine publishers. The Company has created a continuous service
subscription model for offering and marketing magazine subscriptions to its
customers, which provides uninterrupted service to the consumer. This model
provides the Company and its marketing partners with an enhanced customer
retention program and a recurring revenue stream.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts
of Synapse and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in these financial statements.
Although these estimates are based on management's knowledge of current events
and actions the Company may undertake in the future, actual results could
differ from those estimates.
Recent Accounting Standards
In 1999, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." These
statements modified and expanded the Company's stockholders' deficit and
segment disclosures and had no impact on the Company's results of operations,
financial condition and cash flow. The Company's comprehensive net income
(loss) is equal to its net income (loss) for fiscal years 1997, 1998 and 1999.
Management evaluates its operating results through magazine and merchandise
segments and has presented segment data as required. See Note 12 for further
detail regarding segmented information.
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. In 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000. The Company has not yet determined the
impact on the financial statements of the adoption of this pronouncement, if
any.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of
F-20
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Computer Software Developed or Obtained for Internal Use." This statement
requires that certain internal-use software costs be capitalized once certain
criteria are met. The Company adopted SOP 98-1 in 1998 and maintains $8,624
(net of accumulated depreciation) of internal use software as of December 31,
1999. Capitalized computer software costs are included in Property and
Equipment (Note 4).
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance in the recognition, presentation and
disclosure of revenue in the financial statements. The Company has presented
its financial statements in accordance with such bulletin for all periods
presented.
Cash and Cash Equivalents
The Company considers highly liquid investment instruments with terms of three
months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consists of amounts owed to the Company from
publishers and consumers. Accounts receivable-publisher relates primarily to
amounts owed from magazine publishers for magazine subscription sales
associated with the Company's airline frequent flier and other rewards
programs. Accounts receivable-consumer relates primarily to amounts billed to
consumer's credit cards for magazine subscription and merchandise items sales.
The magazine subscriptions are billed annually or semiannually, depending on
the terms of the offer. The Company records a reserve for bad debts on certain
magazine receivables and a reserve for merchandise returns based upon
historical experience.
Inventories
Inventories consist of merchandise items. Inventories are valued at the
lower of cost or market using the specific identification method. The Company
evaluates the need for an obsolescence reserve on an ongoing basis. Inventory
cost in excess of net realizable value is also included in the obsolescence
reserve. The Company has established reserves of $759 and $217 at December 31,
1998 and 1999, respectively.
Depreciation and Amortization
Property and equipment are stated at cost. Computer software, computer
equipment, and furniture and fixtures are depreciated on a straight-line basis
over the estimated useful lives of the assets (3 to 7 years). Leasehold
improvements are amortized over the shorter of the term of the lease or the
useful life of the improvement.
Deferred Financing Costs
Deferred financing costs are amortized over the life of the related
financing (Note 8). The amount of deferred financing costs, included in other
noncurrent assets, on the accompanying balance sheets were $1,263 and $959 at
December 31, 1998 and 1999, net of accumulated amortization of $254 and $558,
respectively. As a result of the financing transactions discussed in Notes 13
and 14, the Company will record, in the first quarter of fiscal 2000, an
extraordinary charge of approximately $959 related to the writeoff of such
costs.
F-21
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Concentration of Credit Risk
In 1997, 1998 and 1999, the Company generated 32%, 28% and 25%,
respectively, of gross magazine revenues from two of its marketing partners.
In 1997, 1998 and 1999, the Company generated 22%, 30% and 31%,
respectively, of its gross magazine subscriptions by value from two of its
publishing partners.
Credit risk represents the accounting loss that would be recognized at
the reporting date if marketing partners failed completely to perform as
contracted. Management believes the likelihood of incurring any other material
losses other than those recorded in the financial statements due to credit risk
is remote.
Reserve for Refunds
A reserve for refunds is established based on refund information
associated with the Company's historical campaign experience. The reserve for
refunds is included in accrued expenses on the accompanying balance sheets.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
term loan and line of credit debt approximate fair value due to the short-term
maturity of these instruments. The carrying amount of the stockholder loan
approximates fair value.
Stock-Based Compensation
Compensation cost is recognized for stock-based compensation using the
intrinsic value method. Under this method, compensation cost is recorded when
the fair value of the stock at the grant date exceeds the amount the employee
must pay to acquire the stock. The Company's policy is to grant stock options
at no less than the fair market value at the date of grant.
Accounting for Impairment of Long-Lived Assets
The Company evaluates recoverability of its long-lived assets in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets Being Disposed Of." In evaluating
recoverability, the Company estimates the future cash flows expected to result
from the asset and its eventual disposition. If the sum of future undiscounted
cash flows is less than the carrying amount of the asset, an impairment loss is
recognized. No such loss was recognized in the accompanying financial
statements. The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
F-22
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Revenue Recognition/Deferred Revenue
Magazine Revenues
Magazine revenues are derived primarily from subscriptions sold to
customers and billed to their credit cards on an annual or semi-annual basis
and, to a lesser extent, from commissions earned from publishers for acquiring
customers.
A customer's right to cancel a subscription and obtain a refund of all or
a portion of the subscription price depends on the terms of the subscription
offer made to the customer. A subscription offer made before November 1, 1998,
referred to as a full refund offer, allowed a subscriber to obtain a full
refund of the subscription price if the subscriber cancelled the subscription
at any time during the subscription period. A subscriber who renewed a full
refund offer had the right to receive a full refund of the renewal subscription
price at any time during the subscription period. The Company recognizes
revenues from full refund subscriptions at the conclusion of the subscription
period.
Effective November 1, 1998, the Company began to market a substantial
portion of its subscription offers as pro rata refund offers, which allow the
subscriber to obtain a full refund before the end of the grace period, which
typically lasts from two to six months. After the grace period ends, the
subscriber is entitled to only a pro rata refund upon cancellation equal to the
amount of the purchase price relating to the undelivered portion of the
subscription.
The Company is converting a majority of its outstanding renewals of full
refund offers into pro rata refund offers. The Company defers revenues from pro
rata refund offers until the end of the grace period. At the end of the grace
period, the Company recognizes that portion of revenues associated with the
grace period, and recognizes the remainder of the revenues ratably over the
remaining term of the subscription.
Some of the Company's full refund and pro rata refund offers also offer
an initial free trial period, prior to the grace period, during which the
subscriber receives free copies of a magazine as an incentive to continue his
or her subscription. Once the free trial period ends, the subscriber pays the
subscription price, and the subscription is accounted for as either a full
refund or pro rata refund offer, as applicable.
Magazine subscription revenues attributable to airline frequent flyer
programs and other reward currency programs relate to commissions earned from
publishers for acquiring customers and are recognized as earned from
publishers.
Magazine subscription revenues recorded in the accompanying income
statements were $77,113, $109,878 and $195,956 for the fiscal years ended
December 31, 1997, 1998 and 1999, respectively.
1999 Effect From Changes in Offer Structure
As a result of the transition on November 1, 1998 from primarily full
refund to primarily pro rata refund offers, operating results for the year
ended December 31, 1999 included a one-time benefit to net revenues and net
income from full refund offers made in 1998 and pro rata refund offers made in
1999. This is due to the recognition in 1999 of revenues from both the
completion of the initial period of 1998 full refund offers and a portion of
the 1999 pro rata refund offers which, if they had been made as full refund
offers,
F-23
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
would have been recognized in fiscal 2000. In addition, $47 million of magazine
solicitation costs associated with 1999 pro rata refund offers were deferred at
December 31, 1999. These costs would have been expensed in 1999 if the offers
were made as full refund offers. If all of the subscription offers made in 1999
had remained full refund offers, net revenues and net income for the year ended
December 31, 1999 would have been lower by approximately $64,000 and $111,000,
respectively.
The following unaudited pro forma information has been derived from the
Company's statements of operations for the year ended December 31, 1999 and
reflects the effect of assuming all offers made in 1999 were on a full refund
basis.
The unaudited pro forma information is presented for informational
purposes only and is not intended to be indicative of results of operations
that would have resulted if the offers had been made under a full refund basis.
<TABLE>
<CAPTION>
Pro Forma
Actual Adjustments Pro Forma
-------- ----------- ---------
(Unaudited)
<S> <C> <C> <C>
Net revenues................................ $277,445 $ (64,000) $213,445
Product, marketing and operation expenses... 208,676 47,000 255,676
Operating income (loss)..................... 26,948 (111,000) (84,052)
Net income (loss)........................... 21,685 (111,000) (89,315)
</TABLE>
Deferred Revenue
Deferred revenue for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Balance, beginning of year............................. $ 93,465 $ 108,907
Magazine revenue recognized.......................... (109,878) (195,956)
Magazine billings, net of estimated refunds.......... 125,320 206,205
--------- ---------
Balance, end of year................................... $ 108,907 $ 119,156
========= =========
</TABLE>
Deferred revenue is included in current liabilities in the accompanying
consolidated balance sheets as the revenues will by recognized in the
subsequent twelve-month period.
Merchandise and Other Revenues
Merchandise and other revenues are derived from our gift, phonecard, and
other non-magazine businesses and are recognized upon shipment of the product.
Merchandise and other revenues recorded in the accompanying consolidated
statements of operations were $100,516, $100,884 and $81,489 for the fiscal
years ended December 31, 1997, 1998 and 1999, respectively.
Expense Recognition/Deferred Charges
Product and marketing expenses consist primarily of magazine and
merchandise product costs, solicitation costs and commissions. Operation
expenses consist primarily of customer service, data entry, order processing
and payment processing costs.
F-24
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Magazine solicitation costs, including printing, postage and mailing
costs, and commissions paid to marketing partners are direct response
advertising costs. In accordance with Statement of Position 93-7, "Reporting on
Advertising Costs," direct response marketing costs are amortized over the
subscription period, unless they are associated with full refund offers which
are expensed as incurred. In offers with free trial periods, such costs are
deferred until after the free trial period, and any grace period, has elapsed.
In pro rata refund offers, the expenses are deferred until the end of the grace
period. Upon completion of the grace period, the expenses associated with the
grace period are recognized immediately, and the remainder of the related
expenses are recognized ratably over the remaining subscription period.
The Company makes payments to publishers for magazine costs prior to
billing the subscriber. These magazine costs are refundable on a pro rata basis
should the subscriber cancel the subscription and are recorded as publisher
prepayments and amortized over the subscription period. In the case of airline
frequent flyer program subscriptions and other reward currency programs the
Company is not required to make payments to the publishers.
The Company expenses merchandise product and marketing costs at the time
the related revenues are recognized.
The Company expenses all operation costs as incurred, with the exception
of refundable magazine payment processing costs, which are amortized over the
subscription period.
Income Taxes
The Company provides for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the tax consequences on future
years of temporary differences of revenue and expense items for financial
statement and income tax purposes. Valuation allowances are provided against
assets which are not likely to be realized.
Income taxes are recognized only for the period of time the Company is a
C corporation. Prior to the Company's conversion to a C corporation, earnings
of the Company were taxed at the shareholder level in accordance with S
corporation taxation.
The Company was an S corporation for a portion of 1998, all of 1997 and
for years prior. If the Company were considered a C corporation for 1997 and a
portion of 1998, the Company would have a loss for both financial statement and
tax purposes, therefore, the Company's tax provision for these periods would
remain the same as presented.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share ("Basic EPS") is computed by
dividing net income (loss), less preferred stock dividends, if any, by the
weighted average number of common shares outstanding during the year. Diluted
net income (loss) per common share ("Diluted EPS") is computed in the same
manner except that the weighted average number of common shares outstanding
assumes the exercise and conversion of dilutive common share equivalents.
F-25
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
3. Accounts Receivable
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accounts receivable:
Publisher............................................... $ 8,268 $ 6,924
Consumer................................................ 44,675 39,725
------- -------
52,943 46,649
Allowance for doubtful accounts and merchandise returns... (172) (1,628)
------- -------
Accounts receivable, net................................ $52,771 $45,021
======= =======
</TABLE>
4. Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Computer software.......................................... $ 5,774 $13,695
Computer equipment......................................... 4,258 6,589
Furniture and fixtures..................................... 2,333 2,699
Leasehold improvements..................................... 619 1,257
------- -------
12,984 24,240
Accumulated depreciation and amortization.................. (3,181) (7,353)
------- -------
Net property and equipment............................... $ 9,803 $16,887
======= =======
</TABLE>
5. Accrued Expenses
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Media costs................................................. $13,602 $20,365
Marketing costs............................................. 13,465 12,537
Reserve for refunds......................................... 9,118 9,096
Compensation and other employee benefits.................... 2,152 6,611
Operations.................................................. 1,740 4,614
Other....................................................... 560 3,653
------- -------
$40,637 $56,876
======= =======
</TABLE>
F-26
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Reserve for refund activity for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Balance, beginning of year............................... $ 8,699 $ 9,118
Estimated refunds...................................... 37,232 87,122
Refunds paid........................................... (36,813) (87,144)
-------- --------
Balance, end of year..................................... $ 9,118 $ 9,096
======== ========
</TABLE>
6. Employee Compensation Plans
Stock Option Plans
In 1997 and 1999, the Board of Directors implemented nonqualified stock
option plans (the "1997 Plan" and the "1999 Plan," respectively). Under the
1997 and 1999 Plans, options may be granted to individual officers, other
employees, consultants and directors at a price not less than fair market value
at the date of grant. Options generally vest over a four-year period and expire
in ten years unless a change in ownership control occurs. Certain options under
these plans vest at the date of an initial public offering. The 1997 and 1999
Plans provide for the grant by the Company of options to purchase 2,608,272 and
2,350,392 shares of Class B common stock, respectively.
Option activity for the years ended December 31, 1997, 1998 and 1999 is
as follows (all references to number of shares in this note reflect the merger
and reincorporation transaction discussed in Note 9):
<TABLE>
<CAPTION>
Weighted
Shares Subject Average
to Options Exercise Price
-------------- --------------
<S> <C> <C>
Balance outstanding, December 31, 1996
Granted...................................... 981,093 $3.00
Canceled..................................... (5,310) 3.00
---------
Balance outstanding, December 31, 1997......... 975,783 3.00
Granted...................................... 1,403,000 8.00
Canceled..................................... (53,049) 6.02
---------
Balance outstanding, December 31, 1998......... 2,325,734 5.95
Granted...................................... 2,578,250 9.55
Canceled..................................... (559,234) 7.69
---------
Balance outstanding, December 31, 1999......... 4,344,750 7.86
=========
</TABLE>
There are 613,914 options available for future grant at December 31,
1999.
If deferred compensation had been determined under SFAS No. 123,
"Accounting for Stock-Based Compensation," using the Black-Scholes method with
the following weighted average assumptions used for grants for the fiscal years
1997 through 1999: (1) expected life of the options of five years, (2) dividend
yield of 0%, (3) expected volatility of 0% and (4) risk-free interest rate of
5.7%, the Company's net loss for 1997 and 1998 years would have increased by
approximately $100 and $700, respectively, and the Company's net income for
1999 would have decreased by $1,100.
F-27
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- --------------------------
Number of Number of
Options Options Weighted
Outstanding at Weighted Average Exercisable at Average
Exercise December 31, Remaining Years December 31, Exercise
Price 1999 Contractual Life 1999 Price
-------- -------------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
$3.00 920,000 7.1 188,686 $3.00
8.00 2,758,083 8.8 200,250 8.00
12.00 333,334 9.0 -- 12.00
16.00 333,333 9.0 -- 16.00
</TABLE>
As of December 31, 1999, there were 388,936 options, which were
outstanding and exercisable and which were originally granted to certain
employees and became fully vested and exercisable pursuant to termination
agreements. For the years ended December 31, 1998 and 1999, the Company has
recorded approximately $477 and $460, respectively, of compensation expense
related to these options. The compensation expense has been determined using
the Black-Scholes method using the same assumptions noted above and the
relevant stock price.
With respect to 162,000 options granted to employees on May 4, 1999, if
the Company has not sold common stock in an Initial Public Offering prior to
January 1, 2001, the optionees have the right to require the Company to
purchase the options at $5.00 per option. This put option is only exercisable
from January 2, 2001 to January 31, 2001. The Company has recorded
approximately $317 of compensation expense related to these options.
401(k) Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan, which was
effective January 1, 1994. Under the plan, participants are allowed to make
contributions based on a percentage of their salaries. An employee becomes
eligible after three months of employment and is automatically 100% vested. The
maximum employee contribution is 15% of their gross compensation excluding
bonuses not to exceed government statutory limits.
The Company's discretionary profit sharing contribution to the plan was
$302 and $303 in 1997 and 1998, respectively. The Company recorded
approximately $407 in fiscal 1999 related to the profit sharing contribution
expected to be funded in fiscal 2000.
7. Income Taxes
At December 31, 1999, the Company incurred a net operating loss for
income tax purposes and therefore, did not provide federal or state income
taxes except for a minimal amount. The Company has net operating loss
carryforwards of $89,400 which are available to offset future taxable income
through 2019. In 1998 the Company applied for permission to change its method
of accounting related to deferred charges. The
F-28
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
net operating losses indicated above assumes that the change in accounting
method will be granted by the Internal Revenue Service. If the change in
accounting method is not granted, the Company will have $39,400 of net
operating loss carryforwards.
The Company has net deferred tax assets of $18,500, which have been fully
reserved for as of December 31, 1999 due to the history of the Company's
losses. The net deferred asset consist principally of net operating loss
carryforwards of $35,800, other deferred tax assets of $9,700 and deferred tax
liabilities of $27,000, both arising from temporary differences. These deferred
assets and liabilities have been determined assuming that the Internal Revenue
Service will grant the accounting method change applied for in 1998. If the
change in method is not granted, net deferred tax assets would be $23,500, and
would include net operating carryforwards of $15,800, other deferred tax assets
of $8,700 and other deferred tax liabilities of $1,000.
The difference between the Company's federal statutory tax rate of 35%,
as well as its state and local tax rates, net of federal tax benefit, when
compared to its effective tax rate is principally comprised of a valuation
allowance.
During fiscal 1998, the Company paid approximately $1,400 in federal and
state income taxes. At December 31, 1998 and 1999, the Company had
approximately $1,100 and $200, respectively, of refunds due related to such
payments. The balances are included in prepaid expenses on the accompanying
consolidated balance sheets.
8. Debt and Revolving Credit Facility
All of the Company's outstanding debt obligations and their
classification on the balance sheets, with the exception of the capital lease
obligations, as of December 31, 1998 and 1999 discussed below have been
satisfied as a result of the transactions discussed in Note 14.
Debt outstanding consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Term loan................................................. $35,000 $27,000
Line of credit............................................ 15,333 18,333
Stockholder's loan........................................ 5,044 13,742
Capital lease obligations................................. -- 302
------- -------
55,377 59,377
Less--Current portion..................................... 55,377 45,448
------- -------
Total long-term......................................... $ -- $13,929
======= =======
</TABLE>
In March 1998, the Company entered into an agreement with a syndicate of
banks to provide for a term loan of $50,000 and a $20,000 line of credit (the
"Prior Credit Facility"). Subsequent to 1998, the Company was required to pay
$2,000 for each calendar quarter beginning March 1999 through March 2003. There
was a mandatory repayment feature from a public or private offering of equity
securities. The interest rate was 275 basis points above the London Interbank
Rate. The interest rate was adjusted to prime plus 2% in 1999, as a result of
the Company's noncompliance with certain financial ratios (see below). The
effective
F-29
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
interest rate at December 31, 1998 and 1999 was 7.97% and 10.50%, respectively.
All property and company assets, as well as pledged stock of two stockholders
secured this debt instrument. The line of credit had an interest rate of 275
basis points above the London Interbank Rate.
There were certain financial ratios, which the Company had to maintain on
a quarterly basis. The Company was not in compliance with certain of these
ratios as of December 31, 1998 and throughout 1999 (Note 14).
9. Capital Stock
The Company's capital stock consists of the following (reflects the
merger and reincorporation transaction discussed below):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Common stock:
Class A; 50,000,000 shares authorized at $.001 par, 7,368,000
shares issued and outstanding..................................... $ -- $ --
Class B; 30,000,000 shares authorized at $.001 par, 25,021,728
shares issued and outstanding..................................... -- --
Preferred stock:
Series A; 2,600,000 shares authorized at $.001 par, 2,591,178
shares issued and outstanding..................................... -- --
Undesignated; 7,400,000 shares authorized at $.001 par, no shares
issued and outstanding............................................ -- --
---- ----
$ -- $ --
==== ====
</TABLE>
In September 1998, the Company entered into an agreement to issue
2,591,178 shares of Series A preferred stock to General Atlantic (the "Series A
Preferred Stock"), and their affiliates, for $20,000.
The Series A Preferred Stock converts into Class A Common Stock and has
equal rights to the Class A Common Stock with the exception of a preferred
stock liquidation preference, which is equal to the cost basis of the Series A
Preferred Stock. The Series A Preferred Stock has certain anti-dilution
provisions and is automatically converted into common stock upon the closing of
an initial public offering only if the offering price is at least $11.58 per
common share and the aggregate gross proceeds are at least $20 million. As of
September 1998, General Atlantic owned approximately 21.95% of the total
outstanding stock of the Company.
The proceeds from the issuance of the Series A Preferred Stock and the
amounts from the Prior Credit Facility (Note 8) were used primarily to repay
indebtedness related to the Company's previous revolving credit facility and
amounts due to stockholders, as well as pay dividends to stockholders.
On December 22, 1999, NewSub reincorporated in Delaware by merging into a
wholly owned Delaware subsidiary, Synapse. Upon consummation of the merger,
Synapse was authorized to issue 90,000,000 shares of capital stock, 50,000,000
of which are Class A voting Common Stock, $0.001 par value per share;
30,000,000 of which are Class B nonvoting Common Stock, $0.001 par value per
share; and 10,000,000 of which are Preferred Stock, $0.001 par value per share.
Of the Preferred Stock, 2,600,000 was designated Series A Preferred Stock, and
the remainder is undesignated preferred stock.
F-30
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
In the merger, each issued and outstanding share of NewSub's Class A and
Class B Common Stock was converted into 3,684 shares of Synapse's Class A and
Class B Common Stock, respectively. In addition, each issued and outstanding
share of NewSub's Series A Preferred Stock was converted into 3,684 shares of
Synapse's Series A Preferred Stock.
10. Commitments and Contingencies
The Company and its subsidiaries lease office space that is classified as
an operating lease and computer equipment that is classified as a capital
lease. The future minimum rental commitments under these noncancelable leases
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
2000..................................................... $146 $1,331
2001..................................................... 146 1,276
2002..................................................... 62 1,133
2003..................................................... -- 1,147
2004..................................................... -- 1,166
Thereafter................................................. -- 1,166
---- ------
Total minimum lease payments............................. 354 $7,219
Less--Amount representing interest......................... (52)
---- ------
Present value of minimum lease payments.................. $302
==== ======
</TABLE>
Rent expense is recorded on a straight-line basis over the full terms of
the leases and was $394, $780 and $970 for the years ended December 31, 1997,
1998 and 1999, respectively.
The Company has entered into employment agreements with key employees.
The agreements have various terms expiring through 2001. The provisions
included in the agreements vary by employee and define compensation and
termination provisions. If these employment agreements were terminated under
circumstances requiring severance payment, the Company would be required to pay
approximately $900.
11. Related Party Transactions
Due from Employees
The Company periodically makes advances to its employees. These advances
are due based upon the terms of the agreements. The balance outstanding as of
December 31, 1998 and 1999 was $297 and $28, respectively, and is included in
other current and noncurrent assets. Interest is accrued at varying interest
rates.
Stockholder's Loan
A stockholder has made loans to the Company pursuant to notes bearing
interest at 8% per annum. The loans were due on demand. As discussed in Note
14, as a result of these loans being converted to equity, the outstanding
amount at December 31, 1999 has been reflected as long-term debt.
F-31
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Due to/from Affiliate
As of December 31, 1998 and 1999, the Company owed approximately $120 and
$437, respectively, for commissions on magazine sales by various companies. A
current Company stockholder and director is co-founder and a member of the
board of directors of these companies. These amounts are included in accounts
payable and accrued expenses. The Company was owed $277, which is reflected in
accounts receivable, at December 31, 1999 by those companies for merchandise
purchases.
Due to Director
In 1999, the Company entered into a consulting agreement with one of its
directors, whereby the Company is committed to pay a consulting fee of
approximately $3,453, which is reflected in accrued liabilities.
The fee is to be paid no later than January 2001 or, if earlier, within
90 days of an initial public offering (Note 14).
12. Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available and which is evaluated
regularly by the Company's chief operating decision maker, or decision-making
group, in deciding how to allocate resources and assess performance.
F-32
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
The Company's activities fall within two operating segments: the
Merchandise Division and the Magazine Division. The Merchandise Division sells
gift products and the Magazine Division sells magazine subscriptions. Each
operating segment is a strategic business unit that is managed separately. In
addition, the Company does not allocate corporate general and administrative,
depreciation and interest expense to the operating segments. The accounting
policies of the segments are described in Note 1. Corporate operating expense
consists primarily of general and administrative, depreciation and interest
expense. Corporate identifiable assets consists primarily of cash and cash
equivalents, property and equipment, certain prepaid expenses, and certain
other current and long-term assets. The following table sets forth segment
information for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Merchandise and other...................... $100,516 $100,884 $ 81,489
Magazines.................................. 77,113 109,878 195,956
Consolidated............................... $177,629 $210,762 $277,445
Operating income (loss):
Merchandise and other...................... $ 33,665 $ 9,289 $ 3,351
Magazines.................................. (26,814) (13,525) 55,618
Corporate.................................. (29,810) (22,934) (32,021)
Consolidated............................... $(22,959) $(27,170) $ 26,948
Net income (loss):
Merchandise and other...................... $ 33,665 $ 9,289 $ 3,351
Magazines.................................. (26,814) (13,525) 55,618
Corporate.................................. (29,959) (27,175) (37,284)
Consolidated............................... $(23,108) $(31,411) $ 21,685
Identifiable assets:
Merchandise and other...................... $ 25,347 $ 15,754 $ 11,785
Magazines.................................. 61,582 92,679 152,291
Corporate.................................. 6,425 12,432 18,128
Consolidated............................... $ 93,354 $120,865 $182,204
Depreciation and amortization:
Corporate.................................. $ 891 $ 1,594 $ 4,172
Consolidated............................... $ 891 $ 1,594 $ 4,172
Capital expenditures:
Corporate.................................. $ 3,653 $ 6,183 $ 10,954
Consolidated............................... $ 3,653 $ 6,183 $ 10,954
</TABLE>
13. Pro Forma Information (Unaudited)
Gift Services, LLC
In January 2000, the Company entered into an agreement with two other
parties to form Gift Services, LLC, a Delaware limited liability corporation
("GSL"), in which the Company has a 49% ownership interest. Concurrently, the
Company entered into a sales representative agreement, which was subsequently
amended, whereby the Company agreed to solicit orders for all products
marketed, promoted, distributed and/or sold by GSL.
F-33
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Under the amended agreement, GSL is required to pay the Company
commissions for each product sold. The Company will record revenues upon GSL's
shipment of the product. The Company's 49% interest in GSL will be accounted
for as an equity investment.
The following unaudited pro forma information is based upon the Company's
financial statements as adjusted for the transaction discussed above and has
been prepared as if the transaction had occurred on January 1, 1999. The
unaudited pro forma information is presented for informational purposes only
and does not purport to represent what the Company's results of operations
would actually have been if the transactions had occurred at the beginning of
the period indicated, or to project the Company's results of operations at any
future date or for any future period.
The unaudited pro forma statements of operations would be as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro
Actual Adjustments (a) Adjustments (b) Forma
-------- --------------- --------------- --------
<S> <C> <C> <C> <C>
Net revenue............. $277,445 $(74,880) $10,800 $213,365
Product and marketing
expenses............... 172,526 (60,382) -- 112,144
Operation expenses...... 36,150 (9,139) -- 27,011
Operating income........ 26,948 (5,359) 10,800 32,389
Net income.............. 21,685 (5,359) 10,800 27,126
</TABLE>
--------
(a) Represents the exclusion of the revenues and expenses associated with the
Company's merchandise business.
(b) Represents the commission revenue based upon the contractual commission
rate applied to 1999 merchandise shipments adjusted for (1) modification
reducing the cost of merchandise purchases based upon per unit rates
detailed in the Supply Agreement between GSL and a third party supplier and
(2) the reduction of commission revenues based upon the 1999 economic
performance of the merchandise business which would be accomplished in
accordance with the agreement via a prospective adjustment of the
commission rate each quarter.
14. Subsequent Events
Equity Issuance
On January 12, 2000, the Company issued 3,465,000 shares of Series B
Preferred Stock at $8.00 per share and warrants to acquire 1,732,499 shares of
Class A Common Stock at $0.00128 per warrant ("Warrants") to current
shareholders and other parties. Each share of Series B Preferred Stock is
convertible, subject to adjustment, into one share of Class A Common Stock. The
Series B Preferred Stock has certain anti-dilution provisions and is
automatically converted into common stock upon the closing of an initial public
offering only if the offering price is at least $12.00 per common share and the
aggregate gross proceeds are at least $20 million. Also, $12,000 of the
Company's indebtedness and $280 of interest payable to one of its shareholders
was converted into 1,535,000 shares of Series B Preferred Stock and Warrants to
acquire 767,500 shares of Class A Common Stock at the same prices as discussed
above. The Company used $27,720 of the proceeds of the offering together with
borrowings under the Credit Facility discussed below to repay the outstanding
amounts and related expenses under the Prior Credit Facility.
F-34
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
Credit Facility
On January 12, 2000, the Company entered into a $25,000 Credit Facility
with a shareholder, Jay Walker, which matures on April 7, 2001. On February 1,
2000, the rights and obligations of Mr. Walker under this facility were
assigned to Arena Capital Investment Fund, LP, a Delaware limited partnership.
On March 20, 2000, Arena SG Holdings, LLC, an affiliate of Arena Capital
Investment Fund, LP, purchased from Mr. Walker 1,250,000 shares of the
Company's Class B common stock for $8.00 per share and an option to purchase an
additional 625,000 of the Company's Class B common stock for an exercise price
of $8.00 per share. The loan has an initial interest rate of LIBOR plus 275
basis points. The rate increases by 200 basis points on October 1, 2000 and
shall further increase an additional 25 basis points each three-month period
thereafter until the loan is paid in full. The aggregate amount of the
increases cannot exceed 300 basis points. The loan also has a mandatory
prepayment feature from a public or private offering of debt or equity
securities by the Company and provides for the purchase by the lender of
warrants representing 0.75% of the fully diluted equity of the Company in the
event that the loan remains outstanding on each of January 1, 2001 and April 1,
2001. These warrants are exercisable at a price of $0.01 per share for a period
of ten years from their respective dates of issuance, respectively. There is a
capital expenditure covenant associated with the loan whereby the Company is
prohibited from making or incurring capital expenditures, for any fiscal year
the Credit Facility is outstanding, in excess of $20,000. The Company incurred
approximately $250 of loan fees in connection with the closing and on October
1, 2000 must pay a fee equal to 2% of the amount outstanding on such date. The
Company used the proceeds of the Credit Facility together with the proceeds
from the sale of Series B Preferred Stock and Warrants discussed above to repay
the outstanding amounts under the Prior Credit Facility (Note 8).
Revolving Promissory Note
On January 12, 2000, the Company entered into a $10,000 revolving
promissory note with a shareholder which expires on April 7, 2001. The note has
an interest rate of 1% above the base rate, as defined, and interest is payable
on January 1, April 1, July 1 and October 1 of each calendar year. The note
becomes immediately due and payable upon the occurrence of an event of default
of the Credit Facility, as discussed above. There are no fees, costs or
covenants associated with the note.
The following unaudited pro forma information is based upon the Company's
financial statements as adjusted for the transactions discussed above and has
been prepared as if the transactions had occurred on December 31, 1999. The
unaudited pro forma information is presented for informational purposes only
and does not purport to represent what the Company's balance sheet would
actually have been if the transactions had occurred at the beginning of the
period indicated, or to project the Company's results of operations at any
future date or for any future period.
F-35
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
(000's omitted, except share data)
<TABLE>
<CAPTION>
Pro Forma
Actual Adjustments Pro Forma
-------- ----------- ---------
<S> <C> <C> <C>
Cash.................................... $ 1,407 $ 7,390 (a) $ 8,797
Loan payable............................ 45,333 (45,333)(b) --
Long-term debt.......................... -- 25,000 (c) 25,000
Long-term portion of stockholder's
loan................................... 13,742 (12,280)(d) 1,462
Total stockholders' deficiency.......... (90,148) 39,044 (e) (51,104)
</TABLE>
--------
(a) Represents the net cash provided by the January 12, 2000 debt and equity
transactions.
(b) Represents the paydown of the Company's term loan and revolving credit
facility on January 12, 2000.
(c) Represents the $25,000 shareholder credit facility entered into on January
12, 2000.
(d) Represents the conversion of the stockholder's loan to equity on January
12, 2000.
(e) Represents the preferred stock equity issuance on January 12, 2000 and the
write-off of deferred financing fees.
Amendment to Consulting Agreement
On January 19, 2000, the Company amended its agreement with a director
for consulting services. Under the amendment, the Company is required to
satisfy a prior obligation of $3,453 to the director for services rendered
through a $1,315 cash payment and issuance of 350,000 shares of the Company's
Class B Common Stock. The cash payment is due on the earlier of the year
January 2001 or within 90 days of an initial public offering.
Capital Stock Amendment
On March 20, 2000, the Company filed an amendment to its Certificate of
Incorporation increasing its authorized capital stock to 102,000,000 shares,
consisting of 56,000,000 shares of Class A Common Stock, 36,000,000 shares of
Class B Common Stock and 10,000,000 shares of Preferred Stock, of which
2,600,000 are shares of Series A Preferred Stock and 5,000,000 are shares of
Series B Preferred Stock.
F-36
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is an addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Shares
(LOGO)
Common Stock
------------------
P R O S P E C T U S
------------------
Merrill Lynch & Co.
Allen & Company Incorporated
Banc of America Securities LLC
Wit SoundView
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $13,200
NASD filing fee..................................................... 5,500
Nasdaq National Market listing fee.................................. *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue Sky fees and expenses (including legal fees)................... *
Transfer agent and registrar fees and expenses...................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
--------
* The Registrant will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") provides that, except to the extent
that the General Corporation Law of Delaware ("DGCL") prohibits the elimination
or limitation of liability of directors for breaches of fiduciary duty, no
director of the Registrant shall be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability. No
amendment to or repeal of Article SEVENTH shall apply to or have any effect on
the liability or alleged liability of any director of the Registrant for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
Article EIGHTH of the Restated Certificate provides that the Registrant
shall indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Registrant), by reason of the fact that he is or was,
or has agreed to become, a director or officer of the Registrant, or is or was
serving, or has agreed to serve, at the request of the Registrant, as a
director, officer, partner, employee or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged
to have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action,
suit or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Registrant, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Article EIGHTH
further provides that the Registrant shall indemnify any Indemnitee who was or
is a party or is threatened to be made a party to any threatened, pending or
completed
II-1
<PAGE>
action or suit by or in the right of the Registrant to procure a judgment in
its favor by reason of the fact that he is or was, or has agreed to become, a
director or officer of the Registrant, or is or was serving, or has agreed to
serve, at the request of the Registrant, as a director, officer, partner,
employee or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any employee
benefit plan), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees) and, to the
extent permitted by law, amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Court of
Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses (including attorneys' fees) which the Court of Chancery of Delaware
shall deem proper.
Notwithstanding the foregoing, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any such action, suit or
proceeding, or in defense of any claim, issue or matter therein, or on appeal
from any such action, suit or proceeding, he shall be indemnified against all
expenses (including attorneys' fees) actually and reasonably incurred by him or
on his behalf in connection therewith. Without limiting the foregoing, if any
action, suit or proceeding is disposed of, on the merits or otherwise
(including a disposition without prejudice), without (i) the disposition being
adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable
to the Registrant, (iii) a plea of guilty or nolo contendere by the Indemnitee,
(iv) an adjudication that the Indemnitee did not act in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Registrant, and (v) with respect to any criminal proceeding, an
adjudication that the Indemnitee had reasonable cause to believe his conduct
was unlawful, the Indemnitee shall be considered to have been wholly successful
with respect thereto.
In the event that the Registrant does not assume the defense of any
action, suit, proceeding or investigation of which the Registrant receives
notice, any expenses (including attorneys' fees) incurred by an Indemnitee in
defending a civil or criminal action, suit, proceeding or investigation or any
appeal therefrom shall be paid by the Registrant in advance of the final
disposition of such matter; provided, however, that the payment of such
expenses incurred by the Indemnitee in advance of the final disposition of such
matter shall be made only upon receipt of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Registrant; and further provided that no such advancement of expenses
shall be made if it is determined that (i) the Indemnitee did not act in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Registrant, or (ii) with respect to any criminal action
or proceeding, the Indemnitee had reasonable cause to believe his conduct was
unlawful. Such undertaking shall be accepted without reference to the financial
ability of the Indemnitee to make such repayment.
Notwithstanding anything to the contrary in the foregoing, except with
respect to a successful action by the Indemnitee to establish his right to
indemnification, the Registrant shall not indemnify an Indemnitee in connection
with a proceeding (or part thereof) initiated by the Indemnitee unless the
initiation thereof was approved by the Board of Directors of the Registrant.
Notwithstanding anything to the contrary in Article EIGHTH of the Restated
Certificate, the Registrant shall not indemnify an Indemnitee to the extent
such Indemnitee is reimbursed from the proceeds of insurance, and in the event
the Registrant makes any indemnification payments to an Indemnitee and such
Indemnitee is subsequently reimbursed from the proceeds of insurance, such
Indemnitee shall promptly refund such indemnification payments to the
Registrant to the extent of such insurance reimbursement.
No amendment, termination or repeal of Article EIGHTH of the Restated
Certificate or of the relevant provisions of the DGCL or any other applicable
laws shall affect or diminish in any way the rights of any
II-2
<PAGE>
Indemnitee to indemnification under the provisions of Article EIGHTH with
respect to any action, suit, proceeding or investigation arising out of or
relating to any actions, transactions or facts occurring prior to the final
adoption of such amendment, termination or repeal. The indemnification and
advancement of expenses provided by Article EIGHTH of the Restated Certificate
shall not be deemed exclusive of any other rights to which an Indemnitee
seeking indemnification or advancement of expenses may be entitled under any
law (common or statutory), agreement or vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in any other capacity while holding office for the Registrant, and shall
continue as to an Indemnitee who has ceased to be a director or officer, and
shall inure to the benefit of the estate, heirs, executors and administrators
of the Indemnitee. Nothing contained in Article EIGHTH of the Restated
Certificate shall be deemed to prohibit, and the Registrant is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in Article
EIGHTH of the Restated Certificate. In addition, the Registrant may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the Registrant or other
persons serving the Registrant and such rights may be equivalent to, or greater
or less than, those set forth in Article EIGHTH of the Restated Certificate.
The Registrant may purchase and maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Registrant or
another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan) against any expense, liability or loss
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Registrant would have the power to indemnify such person
against such expense, liability or loss under the DGCL.
Section 145 of the DGCL provides that a corporation has the power to
indemnify a director, officer, employee or agent of the corporation and certain
other persons serving at the request of the corporation in related capacities
against amounts paid and expenses incurred in connection with an action or
proceeding to which he is or is threatened to be made a party by reason of such
position, if such person shall have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, in any criminal proceeding, if such person had no reasonable
cause to believe his conduct was unlawful; provided that, in the case of
actions brought by or in the right of the corporation, no indemnification shall
be made with respect to any matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
adjudicating court determines that such indemnification is proper under the
circumstances.
The Underwriting Agreement provides that the Underwriters (as defined
therein) are obligated, under certain circumstances, to indemnify directors,
officers and controlling persons of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). Reference is made to the form of Underwriting Agreement to
be filed as Exhibit 1.1 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
The Registrant has obtained liability insurance for its directors and
officers.
Item 15. Recent Sales of Unregistered Securities.
Since June 30, 1997, the Registrant has issued the following securities
that were not registered under the Securities Act:
II-3
<PAGE>
(a) Issuances of Capital Stock and Warrants.
On September 9, 1998, the Registrant issued and sold an aggregate of
703.36 shares of its Series A preferred stock for an aggregate purchase price
of $20,000,000. In December 1999 these shares were split into an aggregate of
2,591,178.24 shares of Series A preferred stock in a 3,684-for-1 stock split.
On January 12, 2000, the Registrant issued 5,000,000 shares of its
Series B preferred stock for $40,000,000 and issued warrants to purchase
2,499,999 of its Class A common stock, at an exercise price of $8.00 per
share, for $.00128 per warrant for an aggregate purchase price of $3,200.40.
On January 19, 2000, the Registrant issued 350,000 shares of its Class B
common stock in partial consideration of consulting services performed for the
Registrant.
On June 23, 2000, the Registrant issued 3,125,000 shares of its Series C
preferred stock for $25,000,000.
On June 23, 2000, the Registrant issued 62,500 shares of its Class B
common stock for $500,000.
(b) Certain Grants and Exercises of Stock Options.
The Registrant's 1997 Stock Option Plan (the "1997 Plan") was adopted by
its board of directors in December 1997. The Registrant's 1999 Stock Option
Plan (the "1999 Plan") was adopted by its board of directors in February 1999.
The Registrant's 2000 Stock Incentive Plan (the "2000 Plan") was adopted by
its board of directors and its stockholders in April 2000.
As of June 30, 2000, options to purchase an aggregate of 5,944,477
shares of the Registrant's common stock were outstanding under the 1997 Plan,
the 1999 Plan and the 2000 Plan. These options were granted to the
Registrant's employees, directors and consultants at exercise prices ranging
from $3 to $16 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by
an issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Purchase Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed prior to the closing of this offering.
3.3 By-Laws of the Registrant.
3.4* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-Laws of the Registrant
defining the rights of holders of common stock of the Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
5.1* Opinion of Hale and Dorr LLP.
10.1 1997 Stock Option Plan.
10.2 1999 Stock Option Plan.
10.3 2000 Stock Incentive Plan.
10.4 Form of Non-Qualified Stock Option Agreement, pursuant to the 1997
Stock Option Plan.
10.5 Form of Option Shareholders Agreement, pursuant to the 1997 Stock
Option Plan and letter of amendment thereto.
10.6 Form of Non-Qualified Stock Option Agreement, pursuant to the 1999
Stock Option Plan.
10.7 Form of Option Shareholders Agreement, pursuant to the 1999 Stock
Option Plan.
10.8 Form of Nonstatutory Stock Option Agreement, pursuant to the 2000
Stock Incentive Plan.
10.9 Form of Incentive Stock Option Agreement, pursuant to the 2000
Stock Incentive Plan.
10.10 Form of Option Stockholders Agreement pursuant to the 2000 Stock
Incentive Plan.
10.11 Stock Purchase Agreement among the Registrant, Jay S. Walker,
General Atlantic Partners 46, L.P, GAP Coinvestment Partners, L.P.
and the Stockholders named therein, dated March 9, 1998.
10.12 Stock Purchase Agreement among the Registrant, General Atlantic
Partners 49, L.P and GAP Coinvestment Partners, L.P., dated
September 9, 1998.
10.13 Stock and Warrant Purchase Agreement, between the Registrant and
the Purchasers listed therein, dated January 12, 2000.
10.14 Stock Purchase Agreement, among the Registrant and Richard
Braddock, dated May 17, 2000.
10.15 Stock Purchase Agreement, between the Registrant and NSSI Holdings
Inc., dated May 17, 2000.
10.16 Form of Warrant delivered to the Purchasers, as defined in the
Stock and Warrant Purchase Agreement, dated January 12, 2000.
10.17 Shareholder Agreement, among the Registrant and the Shareholders
named therein, dated December 1, 1993.
10.18 Amendment to Shareholders Agreement, among the Registrant and the
Shareholders named therein, dated March 20, 2000.
10.19 Amended and Restated Shareholders Agreement, among the Registrant
and the Shareholders named therein, dated June 23, 2000.
10.20 Walker and Jaeckle Shareholder Agreement, by and among the
Registrant, Jay Walker and Andre Jaeckle, dated August 1, 1994.
10.21 Stock Option Agreement, by and among Jay Walker, Michael Loeb and
the Registrant, dated September 1, 1998.
10.22 Amended and Restated Stockholders Agreement, among the Registrant
and the Stockholders named therein, dated January 12, 2000.
10.23 Amendment No. 1 to Amended and Restated Stockholders Agreement,
among the Registrant and the Shareholders named therein, dated
March 20, 2000.
10.24 Amendment No. 2 and Waiver of Amended and Restated Stockholders
Agreement, among the Registrant and the Shareholders named
therein, dated June 23, 2000.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.25 Second Amended and Restated Stockholders Agreement, among the
Registrant and the Stockholders named therein, dated June 23,
2000.
10.26 Amended and Restated Registration Rights Agreement, among the
Registrant and the Stockholders named therein, dated January 12,
2000.
10.27 Amendment No. 1 to Amended and Restated Registration Rights
Agreement, among the Registrant and the Stockholders named
therein, dated June 23, 2000.
10.28 Second Amended and Restated Registration Rights Agreement, among
the Registrant and the Stockholders named therein, dated June 23,
2000.
10.29 Indemnification Agreement, among the Registrant, Jay Walker and
NSSI Holdings Inc., dated May 17, 2000.
10.30*+ Letter Agreement, between the Registrant and Time Inc., dated June
23, 2000.
10.31 Guarantee signed by Time Inc. regarding Stock Purchase Agreement
between the Registrant and NSSI Holdings Inc.
10.32 Letter Agreement with Allen & Company Incorporated, dated June 6,
2000.
10.33 Consulting Agreement, by and between the Registrant, Campana
Limited Partnership and Stuart Bell, dated as of December 31,
1999, as amended January 19, 2000.
10.34 Employment Agreement between the Registrant and Richard Vogel,
dated July 1, 1994, as amended March 29, 2000.
10.35 Letter Agreement regarding Employment between the Registrant and
Jonathan A. Siegel, dated September 27, 1999, as amended March 29,
2000.
10.36 Employment Agreement between the Registrant and Douglas Alpuche,
dated February 8, 2000.
10.37 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated March 25, 1998.
10.38 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated August 11, 1998.
10.39 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated November 24, 1998.
10.40 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated December 18, 1998.
10.41 Promissory Note, made by the Registrant to Michael Loeb, dated
April 7, 1999.
10.42 Promissory Note, made by the Registrant to Michael Loeb, dated
April 20, 1999.
10.43 Promissory Note, made by the Registrant to Michael Loeb, dated
April 28, 1999.
10.44 Promissory Note, made by the Registrant to Michael Loeb, dated May
25, 1999.
10.45 Promissory Note, made by the Registrant to Michael Loeb, dated
November 12, 1999.
10.46 Promissory Note, made by the Registrant to Michael Loeb, dated
December 30, 1999.
10.47 Loan Exchange Agreement between the Registrant and Michael Loeb,
dated January 12, 2000.
10.48 Revolving Promissory Note made by the Registrant and held by
Michael Loeb, dated January 12, 2000.
10.49 Credit Agreement between the Registrant and Jay Walker, dated
January 12, 2000 (later assigned to Arena Capital Investment Fund,
LP).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.50 Promissory Note Due April 7, 2001 made by the Registrant in favor
of Jay Walker, dated January 12, 2000 (cancelled).
10.51 Promissory Note Due April 7, 2001 made by the Registrant in favor
of Arena Capital Investment Fund, LP, dated February 1, 2000.
10.52 Lease between the Registrant and High Ridge Park Associates, LLC,
for office space at 4 High Ridge Park, Stamford, CT, dated August
30, 1995, as amended December, 1995, October 3, 1996, July 17,
1997 and January 8, 1999.
10.53 Lease between the Registrant and High Ridge Park Associates, LLC,
for office space at 5 High Ridge Park, Stamford, CT, dated April
16, 1998, as amended on February 8, 1999 and October 15, 1999.
10.54 Settlement Agreement and Full Release of All Claims between the
Registrant and Kevin Manion, dated October 27, 1999.
10.55 Sales Representative Agreement between NewSub Special Services,
Inc. (now named Synapse Solutions, Inc.), a subsidiary of the
Registrant, and Gift Services, LLC, dated January 4, 2000, as
amended April 1, 2000.
10.56 Gift Services, LLC Limited Liability Company Agreement between the
Registrant, Aspen Marketing, Inc. and Jeffrey Gilfix, dated
January 4, 2000.
10.57*+ Patent Assignment by and between Walker Asset Management Limited
Partnership and the Registrant, dated September 1, 1999.
10.58*+ Letter Agreement between the Registrant and Webloyalty.com, dated
on or about November 17, 1999.
10.59 Letter Agreement between the Registrant and Priceline WebHouse
Club, Inc., dated December 3, 1999.
10.60 Master Agreement, between the Registrant and Edgewater Technology,
Inc., dated June 1, 1999.
10.61 Revolving Promissory Note from Gift Services, LLC to the
Registrant, dated March 23, 2000.
16.1 Letter Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (see page II-9).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment to be requested.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
II-7
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Restated Certificate, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Stamford, Connecticut,
on this 26th day of July, 2000.
Synapse Group, Inc.
/s/ Michael R. Loeb
By: _________________________________
Michael R. Loeb
Chairman of the Board of
Directors, President
and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
Synapse Group, Inc., hereby severally constitute and appoint Michael R. Loeb,
Douglas J. Alpuche, Jonathan A. Siegel and John H. Chory, and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly, with full powers of substitution and resubstitution, to sign for us and
in our names in the capacities indicated below, the Registration Statement on
Form S-1 filed herewith and any and all pre-effective and post-effective
amendments to said Registration Statement, and any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b), and
generally to do all such things in our names and on our behalf in our
capacities as officers and directors to enable Synapse Group, Inc. to comply
with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any
of them, or their substitute or substitutes, to said Registration Statement and
any and all amendments thereto or to any subsequent Registration Statement for
the same offering which may be filed under Rule 462(b).
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael R. Loeb Chairman of the Board of July 26, 2000
______________________________________ Directors, President and
Michael R. Loeb Chief Executive Officer
(Principal Executive
Officer)
/s/ Douglas J. Alpuche Executive Vice President, July 26, 2000
______________________________________ Chief Financial Officer
Douglas J. Alpuche (Principal Financial and
Accounting Officer)
/s/ Jay S. Walker Director July 26, 2000
______________________________________
Jay S. Walker
/s/ William E. Ford Director July 26, 2000
______________________________________
William E. Ford
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard S. Braddock Director July 26, 2000
______________________________________
Richard S. Braddock
/s/ N.J. Nicholas, Jr. Director July 26, 2000
______________________________________
N. J. Nicholas, Jr.
/s/ Nancy B. Peretsman Director July 26, 2000
______________________________________
Nancy B. Peretsman
</TABLE>
II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Synapse Group, Inc.:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of Synapse Group, Inc. included in this
registration statement and have issued our report thereon dated March 2, 2000.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
_____________________________________
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 2, 2000
II-11
<PAGE>
SYNAPSE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
(000s Omitted)
<TABLE>
<CAPTION>
Additions
------------------------
Balance Charges to Balance
January 1 Costs and Expenses Other Deductions December 31
--------- ------------------ ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $ -- $ -- $ -- $ -- $ --
Year ended December 31,
1998:
Allowance for doubtful
accounts............. -- 172 -- -- 172
Year ended December 31,
1999:
Allowance for doubtful
accounts............. 172 1,456 -- -- 1,628
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Purchase Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed prior to the closing of this offering.
3.3 By-Laws of the Registrant.
3.4* Form of Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-Laws of the Registrant
defining the rights of holders of common stock of the Registrant.
5.1* Opinion of Hale and Dorr LLP.
10.1 1997 Stock Option Plan.
10.2 1999 Stock Option Plan.
10.3 2000 Stock Incentive Plan.
10.4 Form of Non-Qualified Stock Option Agreement, pursuant to the 1997
Stock Option Plan.
10.5 Form of Option Shareholders Agreement, pursuant to the 1997 Stock
Option Plan and letter of amendment thereto.
10.6 Form of Non-Qualified Stock Option Agreement, pursuant to the 1999
Stock Option Plan.
10.7 Form of Option Shareholders Agreement, pursuant to the 1999 Stock
Option Plan.
10.8 Form of Nonstatutory Stock Option Agreement, pursuant to the 2000
Stock Incentive Plan.
10.9 Form of Incentive Stock Option Agreement, pursuant to the 2000
Stock Incentive Plan.
10.10 Form of Option Stockholders Agreement pursuant to the 2000 Stock
Incentive Plan.
10.11 Stock Purchase Agreement among the Registrant, Jay S. Walker,
General Atlantic Partners 46, L.P, GAP Coinvestment Partners, L.P.
and the Stockholders named therein, dated March 9, 1998.
10.12 Stock Purchase Agreement among the Registrant, General Atlantic
Partners 49, L.P and GAP Coinvestment Partners, L.P., dated
September 9, 1998.
10.13 Stock and Warrant Purchase Agreement, between the Registrant and
the Purchasers listed therein, dated January 12, 2000.
10.14 Stock Purchase Agreement, among the Registrant and Richard
Braddock, dated May 17, 2000.
10.15 Stock Purchase Agreement, between the Registrant and NSSI Holdings
Inc., dated May 17, 2000.
10.16 Form of Warrant delivered to the Purchasers, as defined in the
Stock and Warrant Purchase Agreement, dated January 12, 2000.
10.17 Shareholder Agreement, among the Registrant and the Shareholders
named therein, dated December 1, 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.18 Amendment to Shareholders Agreement, among the Registrant and the
Shareholders named therein, dated March 20, 2000.
10.19 Amended and Restated Shareholders Agreement, among the Registrant
and the Shareholders named therein, dated June 23, 2000.
10.20 Walker and Jaeckle Shareholder Agreement, by and among the
Registrant, Jay Walker and Andre Jaeckle, dated August 1, 1994.
10.21 Stock Option Agreement, by and among Jay Walker, Michael Loeb and
the Registrant, dated September 1, 1998.
10.22 Amended and Restated Stockholders Agreement, among the Registrant
and the Stockholders named therein, dated January 12, 2000.
10.23 Amendment No. 1 to Amended and Restated Stockholders Agreement,
among the Registrant and the Shareholders named therein, dated
March 20, 2000.
10.24 Amendment No. 2 and Waiver of Amended and Restated Stockholders
Agreement, among the Registrant and the Shareholders named
therein, dated June 23, 2000.
10.25 Second Amended and Restated Stockholders Agreement, among the
Registrant and the Stockholders named therein, dated June 23,
2000.
10.26 Amended and Restated Registration Rights Agreement, among the
Registrant and the Stockholders named therein, dated January 12,
2000.
10.27 Amendment No. 1 to Amended and Restated Registration Rights
Agreement, among the Registrant and the Stockholders named
therein, dated June 23, 2000.
10.28 Second Amended and Restated Registration Rights Agreement, among
the Registrant and the Stockholders named therein, dated June 23,
2000.
10.29 Indemnification Agreement, among the Registrant, Jay Walker and
NSSI Holdings Inc., dated May 17, 2000.
10.30*+ Letter Agreement, between the Registrant and Time Inc., dated June
23, 2000.
10.31 Guarantee signed by Time Inc. regarding Stock Purchase Agreement
between the Registrant and NSSI Holdings Inc.
10.32 Letter Agreement with Allen & Company Incorporated, dated June 6,
2000.
10.33 Consulting Agreement, by and between the Registrant, Campana
Limited Partnership and Stuart Bell, dated as of December 31,
1999, as amended January 19, 2000.
10.34 Employment Agreement between the Registrant and Richard Vogel,
dated July 1, 1994, as amended March 29, 2000.
10.35 Letter Agreement regarding Employment between the Registrant and
Jonathan A. Siegel, dated September 27, 1999, as amended March 29,
2000.
10.36 Employment Agreement between the Registrant and Douglas Alpuche,
dated February 8, 2000.
10.37 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated March 25, 1998.
10.38 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated August 11, 1998.
10.39 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated November 24, 1998.
10.40 Subordinated Promissory Note, made by the Registrant to Michael
Loeb, dated December 18, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.41 Promissory Note, made by the Registrant to Michael Loeb, dated
April 7, 1999.
10.42 Promissory Note, made by the Registrant to Michael Loeb, dated
April 20, 1999.
10.43 Promissory Note, made by the Registrant to Michael Loeb, dated
April 28, 1999.
10.44 Promissory Note, made by the Registrant to Michael Loeb, dated May
25, 1999.
10.45 Promissory Note, made by the Registrant to Michael Loeb, dated
November 12, 1999.
10.46 Promissory Note, made by the Registrant to Michael Loeb, dated
December 30, 1999.
10.47 Loan Exchange Agreement between the Registrant and Michael Loeb,
dated January 12, 2000.
10.48 Revolving Promissory Note made by the Registrant and held by
Michael Loeb, dated January 12, 2000.
10.49 Credit Agreement between the Registrant and Jay Walker, dated
January 12, 2000 (later assigned to Arena Capital Investment Fund,
LP).
10.50 Promissory Note Due April 7, 2001 made by the Registrant in favor
of Jay Walker, dated January 12, 2000 (cancelled).
10.51 Promissory Note Due April 7, 2001 made by the Registrant in favor
of Arena Capital Investment Fund, LP, dated February 1, 2000.
10.52 Lease between the Registrant and High Ridge Park Associates, LLC,
for office space at 4 High Ridge Park, Stamford, CT, dated August
30, 1995, as amended December, 1995, October 3, 1996, July 17,
1997 and January 8, 1999.
10.53 Lease between the Registrant and High Ridge Park Associates, LLC,
for office space at 5 High Ridge Park, Stamford, CT, dated April
16, 1998, as amended on February 8, 1999 and October 15, 1999.
10.54 Settlement Agreement and Full Release of All Claims between the
Registrant and Kevin Manion, dated October 27, 1999.
10.55 Sales Representative Agreement between NewSub Special Services,
Inc. (now named Synapse Solutions, Inc.), a subsidiary of the
Registrant, and Gift Services, LLC, dated January 4, 2000, as
amended April 1, 2000.
10.56 Gift Services, LLC Limited Liability Company Agreement between the
Registrant, Aspen Marketing, Inc. and Jeffrey Gilfix, dated
January 4, 2000.
10.57*+ Patent Assignment by and between Walker Asset Management Limited
Partnership and the Registrant, dated September 1, 1999.
10.58*+ Letter Agreement between the Registrant and Webloyalty.com, dated
on or about November 17, 1999.
10.59 Letter Agreement between the Registrant and Priceline WebHouse
Club, Inc., dated December 3, 1999.
10.60 Master Agreement, between the Registrant and Edgewater Technology,
Inc., dated June 1, 1999.
10.61 Revolving Promissory Note from Gift Services, LLC to the
Registrant, dated March 23, 2000.
16.1 Letter Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (see page II-9).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment to be requested.
