SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
Commission File No. 0-21527
MEMBERWORKS INCORPORATED
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1276882
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(State of Incorporation) (I.R.S. Employer Identification No.)
9 West Broad Street;
Stamford, Connecticut 06902
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(Address of principal executive offices) (Zip Code)
(203) 324-7635
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(Registrant's telephone number,
including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------- -----
The number of shares outstanding of the Registrant's capital stock:
14,279,333 shares of Common Stock, $0.01 par value as of January 31, 2002.
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MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31,
and June 30, 2001 2
Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Forward Looking Statements 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
1
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
2001 2001
-------------- -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 47,300 $ 22,736
Marketable securities 3,201 -
Accounts receivable 12,758 20,446
Prepaid membership materials 4,191 3,903
Prepaid expenses 4,195 5,857
Membership solicitation and other deferred costs 135,223 154,059
------------ -----------
Total current assets 206,868 207,001
Fixed assets, net 34,584 39,687
Goodwill, net 42,039 84,814
Intangible assets, net 8,875 14,283
Other assets 2,126 2,676
------------ -----------
Total assets $ 294,492 $ 348,461
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term obligations $ 651 $ 516
Accounts payable 37,459 49,505
Accrued liabilities 58,715 64,634
Due to related parties - 2,028
Deferred membership fees 208,273 243,024
------------ -----------
Total current liabilities 305,098 359,707
Long-term liabilities 4,826 3,057
------------ -----------
Total liabilities 309,924 362,764
Minority interest - 6,505
Mandatorily redeemable convertible preferred securities of subsidiary - 5,157
Shareholders' deficit:
Preferred stock, $0.01 par value - 1,000 shares
authorized; no shares issued - -
Common stock, $0.01 par value - 40,000 shares authorized;
17,437 shares issued (17,308 shares at June 30, 2001) 174 173
Capital in excess of par value 108,894 107,835
Accumulated deficit (54,912) (80,196)
Accumulated other comprehensive loss (621) (370)
Treasury stock, 3,059 shares at cost (1,920 shares at June 30, 2001) (68,967) (53,407)
------------ -----------
Total shareholders' deficit (15,432) (25,965)
------------ -----------
Total liabilities and shareholders' deficit $ 294,492 $ 348,461
============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
2
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $ 102,684 $ 117,616 $ 221,648 $ 215,415
Expenses:
Operating 19,508 21,711 40,576 41,950
Marketing 57,444 76,637 134,234 137,891
General and administrative 18,570 23,997 41,579 47,627
Restructuring and other charges (Note 4) 6,893 - 6,893 -
Amortization of intangible assets 440 2,827 1,115 5,083
------------ ------------ ------------ -----------
Operating loss (171) (7,556) (2,749) (17,136)
Gain on sale of subsidiary (Note 5) - - 65,608 -
Net loss on investment (Note 5) (9,043) (2,401) (31,339) (2,172)
Other income (expense), net 54 (242) (36) (150)
------------ ------------ ------------ -----------
(Loss) income before equity in affiliate and minority interest (9,160) (10,199) 31,484 (19,458)
Equity in income of affiliate - - - 83
Minority interest (Note 6) - 2,932 450 4,950
------------ ------------ ------------ -----------
(Loss) income before income taxes (9,160) (7,267) 31,934 (14,425)
Provision for income taxes - - 743 -
------------ ------------ ------------ -----------
(Loss) income before cumulative effect of accounting change (9,160) (7,267) 31,191 (14,425)
Cumulative effect of accounting change (Note 2) - - (5,907) (25,730)
------------ ------------ ------------ -----------
Net (loss) income $ (9,160) $ (7,267) $ 25,284 $ (40,155)
============ ============ ============ ===========
Basic (loss) earnings per share:
(Loss) income before cumulative effect of accounting change $ (0.62) $ (0.48) $ 2.07 $ (0.95)
Cumulative effect of accounting change - - (0.39) (1.70)
------------ ------------ ------------ -----------
Basic (loss) earnings per share $ (0.62) $ (0.48) $ 1.68 $ (2.66)
============ ============ ============ ===========
Diluted (loss) earnings per share:
(Loss) income before cumulative effect of accounting change $ (0.62) $ (0.48) $ 2.01 $ (0.95)
Cumulative effect of accounting change -- -- (0.38) (1.70)
------------ ------------ ------------ -----------
Diluted (loss) earnings per share $ (0.62) $ (0.48) $ 1.63 $ (2.66)
============ ============ ============ ===========
Weighted average common shares used in (loss) earnings per share
calculations:
Basic 14,789 15,274 15,084 15,124
============ ============ ============ ===========
Diluted 14,789 15,274 15,505 15,124
============ ============ ============ ===========
The accompanying notes are an integral part of
these consolidated financial statements.
3
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended
December 31,
--------------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 25,284 $ (40,155)
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Cumulative effect of accounting change 5,907 25,730
Gain on sale of subsidiary (65,608) --
Net loss on investment 31,339 2,172
Restructuring and other charges 1,585 --
Minority interest (450) (4,950)
Equity in income of affiliate -- (83)
Revenues before deferral 206,697 233,866
Revenues recognized (221,648) (215,415)
Marketing costs before deferral (125,446) (146,432)
Marketing costs expensed 134,234 137,891
Depreciation and amortization 6,677 9,375
Other 688 968
Changes in assets and liabilities:
Accounts receivable 6,358 (1,588)
Prepaid membership materials (1,173) (1,135)
Prepaid expenses (2,087) (3,275)
Other assets 32 1,252
Related party payables 12 91
Accounts payable (6,241) (265)
Accrued liabilities and other 455 13,924
--------- ---------
Net cash (used in) provided by operating activities (3,385) 11,971
--------- ---------
INVESTING ACTIVITIES
Acquisition of fixed assets (2,999) (7,993)
Proceeds from sale of subsidiary, net of cash sold 45,997 --
Business combinations, net of cash acquired -- (2,826)
--------- ---------
Net cash provided by (used in) investing activities 42,998 (10,819)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of stock and warrants 1,196 6,123
Net borrowings from credit facility -- (485)
Treasury stock purchases (15,665) (5,129)
Payments of long-term obligations (359) (188)
--------- ---------
Net cash (used in) provided by financing activities (14,828) 321
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (221) (36)
--------- ---------
Net increase in cash and cash equivalents 24,564 1,437
Cash and cash equivalents at beginning of period 22,736 30,169
--------- ---------
Cash and cash equivalents at end of period $ 47,300 $ 31,606
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
4
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, such
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2002. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K with
respect to the fiscal year ended June 30, 2001.
Certain reclassifications have been made to prior period financial statements to
conform to the current presentation of the financial statements.
NOTE 2 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Adoption of SFAS 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
for fiscal years beginning after December 15, 2001. Early adoption is permitted
for entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been previously issued. The Company
adopted SFAS 142 effective July 1, 2001. SFAS 142 addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets. The Company
determined that there was an impairment of goodwill of $5,907,000 at one of its
reporting units due to the change in methodology of calculating impairment under
SFAS 142 and recent downward trends in the operations of the reporting unit (see
Note 8). This amount was recorded as a cumulative effect of accounting change in
the statement of operations in the fiscal quarter ended September 30, 2001.
5
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following pro forma net income and earnings per share have been prepared
assuming SFAS 142 was adopted as of July 1, 2000. Pro forma balances have been
adjusted to exclude goodwill amortization expense which is no longer recorded
under the provisions of SFAS 142 (in thousands, except per share data).
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------- -----------
Net (loss) income from continuing operations:
Reported net (loss) income from continuing operations $ (9,160) $ (7,267) $ 31,191 $ (14,425)
Indefinite lived intangible asset amortization -- 2,006 -- 3,649
------------ ------------ ------------- -----------
Adjusted net (loss) income from continuing operations $ (9,160) $ (5,261) $ 31,191 $ (10,776)
============ ============ ============= ===========
Basic (loss) earnings per share:
Reported (loss) earnings per share $ (0.62) $ (0.48) $ 2.07 $ (0.95)
Indefinite lived intangible asset amortization -- 0.13 -- 0.24
------------ ------------ ------------- -----------
Adjusted (loss) earnings per share $ (0.62) $ (0.34) $ 2.07 $ (0.71)
============ ============ ============= ===========
Diluted (loss) earnings per share:
Reported (loss) earnings per share $ (0.62) $ (0.48) $ 2.01 $ (0.95)
Indefinite lived intangible asset amortization -- 0.13 -- 0.24
------------ ------------ ------------- -----------
Adjusted (loss) earnings per share $ (0.62) $ (0.34) $ 2.01 $ (0.71)
============ ============ ============= ===========
Adoption of SAB 101
The Company adopted Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101") as of July 1, 2000. SAB 101 establishes the
Security and Exchange Commission's (the "Staff") preference that membership fees
should not be recognized in earnings prior to the expiration of refund
privileges. Effective July 1, 2000, the Company changed its method of accounting
for membership fee revenue to comply with the Staff's preferred method as
outlined in SAB 101. Membership fees, and the related direct costs associated
with acquiring the underlying memberships, are no longer recognized on a
pro-rata basis over the corresponding membership period, but instead are
recognized in earnings upon the expiration of membership refund privileges. The
cumulative effect of this change in accounting principle as of July 1, 2000 of
$25,730,000 was recorded in the fiscal quarter ended September 30, 2000. The
membership fees, net of estimated refunds and associated direct costs, which
were deferred as part of the cumulative effect adjustment at July 1, 2000 were
recognized in earnings during fiscal year 2001 as the underlying refund
privileges expired. During the three and six months ended December 31, 2000, the
Company recognized $22,142,000 and $53,877,000, respectively, of revenue which
was included as a component of the cumulative effect of accounting change booked
July 1, 2000.
6
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 - EARNINGS PER SHARE
Basic and diluted (loss) earnings per share amounts are determined in accordance
with the provisions of FASB Statement No. 128 "Earnings Per Share". The
following table sets forth the reconciliation of the numerators and denominators
in the computation of basic and diluted (loss) earnings per share (in thousands,
except per share data):
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator for basic and diluted (loss) earnings per share:
Net (loss) income before cumulative effect of accounting change $ (9,160) $ (7,267) $ 31,191 $(14,425)
Cumulative effect of accounting change -- -- (5,907) (25,730)
-------- -------- -------- --------
Net (loss) income $ (9,160) $ (7,267) $ 25,284 $(40,155)
======== ======== ======== ========
Denominator for basic (loss) earnings per share:
Weighted average number of common shares outstanding - basic 14,789 15,274 15,084 15,124
Effect of dilutive securities:
Options -- -- 421 --
-------- -------- -------- --------
Weighted average number of common shares outstanding - diluted 14,789 15,274 15,505 15,124
-------- -------- -------- --------
Basic (loss) earnings per share $ (0.62) $ (0.48) $ 1.68 $ (2.66)
======== ======== ======== ========
Diluted (loss) earnings per share $ (0.62) $ (0.48) $ 1.63 $ (2.66)
======== ======== ======== ========
The diluted (loss) earnings per common share calculation excludes the effect of
potentially dilutive shares when their effect is antidilutive. For the three and
six months ended December 31, 2001, the Company had 4,553,000 and 3,479,000,
respectively, of potentially dilutive stock options outstanding that are not
included in the calculation as they are antidilutive. For the three and six
months ended December 31, 2000, the Company had 3,075,000 and 3,041,000,
respectively, of potentially dilutive stock options outstanding that are not
included in the calculation as they are antidilutive.
NOTE 4 - RESTRUCTURING AND OTHER CHARGES
On October 11, 2001, the Company announced the implementation of several cost
saving initiatives due to a recent slowdown in consumer response rates and
increased economic uncertainty in both the U.S. and abroad. This restructuring
program includes a workforce reduction, the closing of the Company's United
Kingdom operations and the downsizing of the operational infrastructure
throughout the Company.
As a result of the restructuring program, the Company recorded restructuring and
other charges of $6,893,000 which are included in the operating loss for the
three months ended December 31, 2001.
7
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The major components of the restructuring and other charges and the remaining
accrual balances as of December 31, 2001 are as follows (in thousands):
Total Non-cash Cash Charges Liability
Charges Charges to date to date Balance
------------ ------------ ------------- ------------
Workforce reduction $ 2,214 $ - $ 1,098 $ 1,116
Lease obligations 3,094 - 152 2,942
Asset disposals 1,585 1,585 - -
------------ ------------ ------------- ------------
Total $ 6,893 $ 1,585 $ 1,250 $ 4,058
============ ============ ============= ============
Workforce Reduction
As part of the restructuring plan announced on October 11, 2001, the Company
reduced its workforce by approximately 190 regular employees, consisting of
membership service representatives and other professional personnel. As of
December 31, 2001, all 190 employees have been terminated.
Lease Obligations and Asset Write-Downs
In connection with the closing of the United Kingdom offices and the downsizing
of the Company's infrastructure, the Company recorded $73,000 for lease
terminations, $3,021,000 for non-cancelable lease obligations and $1,585,000 for
asset disposals and write-downs related to the closing of our United Kingdom
operations.
NOTE 5 - GAIN ON SALE OF SUBSIDIARY/LOSS ON INVESTMENT
In August 2001, the Company sold its investment in and advances to iPlace, Inc.
in exchange for $50,111,000 in cash, including $3,703,000 held in escrow, and
1,601,000 shares of Homestore.com common stock, including 451,000 shares held in
escrow. The fair value of the Homestore.com common stock as of the date of sale
was $34,540,000. The Homestore.com common stock received is unregistered. Once
the Homestore.com stock is registered, MemberWorks may only sell 1/12th of the
shares in any calendar month. In connection with this sale, the Company
recognized a gain of $65,608,000.
Subsequently, the investment in Homestore.com declined in value and management
determined that the decline was other than temporary. As a result, the Company
wrote down its investment in Homestore.com to its fair value and recognized a
loss of $22,296,000 in the first fiscal quarter of 2002 and a loss of $9,043,000
in the second fiscal quarter of 2002. As of December 31, 2001, the Company's
investment in Homestore.com is valued at $3,201,000.
NOTE 6 - MINORITY INTEREST
Prior to the sale of iPlace, Inc. in August 2001, the Company was the majority
shareholder of iPlace, Inc. with an approximate 58% ownership share. Minority
interest in the statement of operations for the six months ended December 31,
2001 represents approximately 42% of iPlace's losses incurred from July 1, 2001
through the date of the sale.
8
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 - COMPREHENSIVE INCOME
The components of comprehensive (loss) income are as follows (in thousands):
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net (loss) income $ (9,160) $ (7,267) $ 25,284 $(40,155)
Unrealized loss on marketable securities -- -- -- (532)
Reclassification adjustment for losses included in net
loss -- 532 -- 532
Foreign currency translation (loss) gain (87) 106 (251) 22
-------- -------- -------- --------
Comprehensive (loss) income $ (9,247) $ (6,629) $ 25,033 $(40,133)
======== ======== ======== ========
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
As of December 31, 2001 As of June 30, 2001
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Membership and Client Relationships $ 13,194 $ (4,726) $ 17,465 $ (5,642)
Non-Compete Agreements 238 (216) 3,009 (999)
Other 950 (565) 950 (500)
-------------- ------------ ------------- -----------
Total amortized intangible assets $ 14,382 $ (5,507) $ 21,424 $ (7,141)
============== ============ ============= ===========
Unamortized intangible assets:
Goodwill $ 42,039 $ 84,814
The gross carrying amount and accumulated amortization of amortized intangible
assets at December 31, 2001 decreased from June 30, 2001 due to the sale of
iPlace.
The total intangible amortization expense reflected in the statement of
operations for the three and six months ended December 31, 2001 is $440,000 and
$1,115,000, respectively. The future intangible amortization expense for the
next five fiscal years is estimated to be as follows (in thousands):
Fiscal Year:
2002 $ 1,172
2003 697
2004 419
2005 275
2006 183
The changes in the carrying amount of goodwill for the six months ended December
31, 2001 are as follows (in thousands):
Balance as of July 1, 2001 $ 84,814
Goodwill disposed during the first quarter due to sale of
subsidiary (36,868)
Impairment losses recorded in first quarter (5,907)
-------------
Balance as of December 31, 2001 $ 42,039
=============
9
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Goodwill was tested for impairment in the quarter ending September 30, 2001 in
connection with the adoption of SFAS 142. Due to the slow down in the business
of one of the Company's reporting units, future cash flows for this reporting
unit are expected to decline over the next few years. During the quarter ended
September 30, 2001, an impairment loss of $5,907,000 was recorded to write down
the goodwill related to this reporting unit to fair value. The impairment loss
was calculated utilizing the methodology set forth in SFAS 142. As prescribed by
SFAS 142, this write down is reflected in the statement of operations as a
cumulative effect of accounting change. The fair value of this subsidiary was
estimated by conducting a discounted cash flow analysis of the subsidiary's
future cash flows.
NOTE 9 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of December 31, 2001 and June 30, 2001 include an allowance for
membership cancellations of $25,892,000 and $30,004,000, respectively.
NOTE 10 - LEGAL PROCEEDINGS
Except as set forth below, in management's opinion, there are no significant
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their properties are subject. The Company is involved in other
lawsuits and claims generally incidental to its business. In addition, from time
to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.
In January 2001, an action was instituted by plaintiff Brandy L. Ritt against
the Company and other defendants in the Court of Common Pleas in Cuyahoga
County, Ohio. The suit, which seeks unspecified monetary damages, alleges that
the Company and the other defendants violated various provisions of Ohio's
consumer protection laws in connection with the marketing of certain membership
programs offered by the Company. The plaintiff's motion to have the suit
certified as a class action was denied on February 6, 2002. The Company believes
that the claims asserted against it are unfounded and the Company will
vigorously defend its interests against this suit.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The court has not ruled on the motion. The Company
believes that the claims asserted against Coverdell are unfounded and the
Company and Coverdell will vigorously defend their interests against this suit.
In June 2001, actions were instituted by plaintiffs Judith Jeselskis and Marcia
Walters against the Company and other defendants in Circuit Court of the Tenth
Judicial District, Highlands County Civil Division, Florida, and Circuit Court
of the Sixth Judicial Circuit, Pinellas County Civil Division, Florida,
respectively. The suits, which seek unspecified monetary damages, allege that
the Company and the other defendants violated the Florida Deceptive and Unfair
Trade Practices Act, in connection with the marketing of certain membership
programs offered by the Company. While the respective complaints include claims
that the suits should be certified as class actions, the plaintiffs have not
filed motions for class certification. The Company believes that the allegations
made in this lawsuit are unfounded and the Company will vigorously defend its
interests against the suits.
10
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In July 2001, an action was instituted by Alan Stone against the Company and
other defendants in Superior Court of the State of California, County of Orange.
The suit, which seeks unspecified monetary damages, alleges that the Company and
the other defendants violated California business practices law. While the
complaint includes a claim that the suit should be certified as a class action,
the plaintiff has not filed a motion for class certification. The Company
believes that the allegations made in this lawsuit are unfounded and the Company
will vigorously defend its interests against this suit.
11
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors intended to enhance existing relationships between businesses and
consumers. The Company derives its revenues principally from annually renewable
membership fees. The Company receives full payment of annual fees at or near the
beginning of the membership period, but recognizes revenue as the member's
refund privilege expires. Similarly, the costs associated with soliciting each
new member, as well as the cost of royalties, are recognized as the related
revenue is recognized. Profitability and cash flow generated from renewal
memberships exceed that of new memberships due to the absence of solicitation
costs associated with new member procurement.
THREE MONTHS ENDED DECEMBER 31, 2001 VS. THREE MONTHS ENDED DECEMBER 31, 2000
REVENUES. Revenues decreased 13% to $102.7 million for the quarter ended
December 31, 2001 from $117.6 million for the quarter ended December 31, 2000
due to the effect of the timing of amortization of revenues deferred in prior
periods and the effect of the sale of iPlace, Inc. Revenues before deferral
decreased 16% to $101.2 million for the quarter ended December 31, 2001 from
$120.5 million for the quarter ended December 31, 2000 due to the effect of the
sale of iPlace and a decrease in the net members during the quarter. The
Company's membership base decreased to approximately 6.5 million members at
December 31, 2001 from 7.8 million members at December 31, 2000. The decrease in
the Company's membership base was due to a lower level of new member marketing,
the sale of iPlace and the closing of the United Kingdom operations. As a
percentage of total revenues, renewal revenues were 56% in 2001 and 46% in 2000.
As a percentage of total revenues before deferrals, renewal revenues were 56% in
2001 and 45% in 2000.
OPERATING EXPENSES. Operating expenses decreased 10% to $19.5 million in 2001
from $21.7 million in 2000 primarily due to the effect of the sale of iPlace,
Inc. As a percentage of revenues before deferral, operating expenses increased
to 19.3% in 2001 from 18.0% in 2000 primarily due to the effect of lower
revenues reported this quarter.
MARKETING EXPENSES. Marketing expenses decreased 25% to $57.4 million in 2001
from $76.6 million in 2000 and, as a percent of revenue, decreased to 55.9% in
2001 from 65.2% in 2000. These decreases were due to the effect of a lower level
of new member marketing and the sale of iPlace, Inc. The lower level of new
member marketing resulted in an increase in the ratio of renewal member revenues
to total revenues. Marketing expenses related to renewal revenues are typically
lower than expenses related to new member revenues. Expenses related to new
member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates.
Marketing expenses before deferral decreased 25% to $55.1 million in 2001 from
$73.7 million in 2000 and, as a percent of revenues, decreased to 54.4% in 2001
from 61.2% in 2000. These decreases were due to the effect of a lower level of
new member marketing and the sale of iPlace, Inc.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 23% to $18.6 million in 2001 from $24.0 million in 2000 primarily due
to the effect of the sale of iPlace, Inc. As a percentage of revenues before
deferral, general and administrative expenses decreased to 18.3% in 2001 from
19.9% in 2000 due to the sale of iPlace, Inc. and cost saving initiatives
related to the restructuring.
12
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESTRUCTURING AND OTHER CHARGES. In October 2001, the Company implemented
certain cost saving initiatives due to a recent slowdown in consumer response
rates and increased economic uncertainty in both the U.S. and abroad. This
restructuring program includes a workforce reduction of approximately 190
employees, the closing of the Company's United Kingdom operations and the
downsizing of the operational infrastructure throughout the Company. As a result
of this restructuring program, the Company recorded restructuring and other
charges of $6.9 million during the second quarter ending December 31, 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $0.4 million in 2001 from $2.8 million in 2000 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets. Excluding the amortization of indefinite lived intangible
assets in 2000, amortization of goodwill and other intangibles would have been
$0.8 million.
OTHER INCOME/EXPENSE, NET. Other income/expense, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other income was $0.1 million in
2001 compared to expense of $0.2 million in 2000 due to the increase in the
Company's cash balance. In addition, the Company had no borrowings under its
line of credit during the quarter.
PROVISION FOR INCOME TAXES. The Company was not required to record a provision
for income taxes for the three months ended December 31, 2001 and 2000 due to
tax losses realized in those periods.
SIX MONTHS ENDED DECEMBER 31, 2001 VS. SIX MONTHS ENDED DECEMBER 31, 2000
REVENUES. Revenues increased 3% to $221.6 million for the six months ended
December 31, 2001 from $215.4 million for the six months ended December 31, 2000
primarily due to the effect of the timing of amortization of revenues deferred
in prior periods. Revenues before deferral decreased 12% to $206.7 million for
the six months ended December 31, 2001 from $233.9 million for the six months
ended December 31, 2000. The Company's membership base decreased to
approximately 6.5 million members at December 31, 2001 from 7.8 million members
at December 31, 2000 due to a lower level of new member marketing, the sale of
iPlace, Inc. and the closing of the United Kingdom operations. As a percentage
of total revenues, renewal revenues were 54% in 2001 and 45% in 2000. As a
percentage of total revenues before deferrals, renewal revenues were 56% in 2001
and 45% in 2000.
OPERATING EXPENSES. Operating expenses decreased 3% to $40.6 million in 2001
from $42.0 million in 2000 primarily due to the sale of iPlace, Inc. As a
percentage of revenues before deferral, operating expenses increased to 19.6% in
2001 from 17.9% in 2000 primarily due to the effect of lower revenues reported
in 2001.
MARKETING EXPENSES. Marketing expenses decreased 3% to $134.2 million in 2001
from $137.9 million in 2000 and, as a percent of revenue, decreased to 60.6% in
2001 from 64.0% in 2000. These decreases were due to the effect of a lower level
of new member marketing and the sale of iPlace, Inc. The lower level of new
member marketing resulted in an increase in the ratio of renewal member revenues
to total revenues. Marketing expenses related to renewal revenues are typically
lower than expenses related to new member revenues. Expenses related to new
member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates.
Marketing expenses before deferral decreased 14% to $125.4 million in 2001 from
$146.4 million in 2000 and, as a percent of revenues, decreased to 60.7% in 2001
from 62.6% in 2000. These decreases were due to the effect of a lower level of
new member marketing and the sale of iPlace, Inc.
13
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 13% to $41.6 million in 2001 from $47.6 million in 2000 primarily due
to the effect of the sale of iPlace, Inc. As a percentage of revenues before
deferral, general and administrative expenses decreased to 20.1% in 2001 from
20.4% in 2000 primarily due to the effect of the sale of iPlace, Inc. and cost
saving initiatives related to the restructuring.
RESTRUCTURING AND OTHER CHARGES. In October 2001, the Company implemented
certain cost saving initiatives due to a recent slowdown in consumer response
rates and increased economic uncertainty in both the U.S. and abroad. This
restructuring program includes a workforce reduction of approximately 190
employees, the closing of the Company's United Kingdom operations and the
downsizing of the operational infrastructure throughout the Company. As a result
of this restructuring program, the Company recorded restructuring and other
charges of $6.9 million during the second quarter ending December 31, 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $1.1 million in 2001 from $5.1 million in 2000 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets. Excluding the amortization of indefinite lived intangible
assets in 2000, amortization of goodwill and other intangibles would have been
$1.4 million.
OTHER EXPENSE/INCOME, NET. Other expense/income, net is primarily composed of
interest income from cash and cash equivalents and interest expense on the
Company's borrowings under its line of credit. Other expense decreased to less
than $0.1 million in 2001 from expense of $0.2 million in 2000 due to the
increase in the Company's cash balance. In addition, the Company had no
borrowings under its line of credit during the six months ended December 31,
2001.
PROVISION FOR INCOME TAXES. In connection with the gain on the sale of iPlace,
the Company recorded a provision for alternative minimum taxes of approximately
$0.7 million. The Company was not required to record a provision for income
taxes for the six months ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow before changes in assets and liabilities was negative $0.7
million for the six months ended December 31, 2001 compared to positive $3.0
million in 2000. The decrease in operating cash flow before changes in assets
and liabilities was primarily due to a decrease in revenues before deferral, net
of marketing costs before deferral, and the costs incurred related to the
restructuring. The decrease was partially offset by decreased losses incurred
related to iPlace, Inc. and the United Kingdom. Revenues before deferral
decreased 12% to $206.7 million for the six months ended December 31, 2001 from
$233.9 million for the six months ended December 31, 2000. The Company's
membership base decreased to approximately 6.5 million members at December 31,
2001 from 7.8 million members at December 31, 2000 due to a slow down in new
member marketing, the sale of iPlace, Inc. and the closing of the United Kingdom
operations. Marketing expenses before deferral decreased 14% to $125.4 million
in 2001 from $146.4 million in 2000 and, as a percent of revenues, decreased to
60.7% in 2001 from 62.6% in 2000. These decreases were due to the effect of a
lower level of new member marketing and the sale of iPlace, Inc. The lower level
of new member marketing resulted in an increase in the ratio of renewal member
revenues to total revenues. Marketing expenses related to renewal revenues are
typically lower than expenses related to new member revenues. Expenses related
to new member marketing, as a percent of new member revenues, increased in 2001
compared to 2000 primarily due to a decrease in consumer response rates. Changes
in assets and liabilities decreased cash by $2.6 million for 2001 and increased
cash by $9.0 million in 2000. In total, cash used in operations was $3.4 million
for the six months ended December 31, 2001 compared to cash provided by
operations of $12.0 million in 2000.
14
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net cash provided by investing activities was $43.0 million in 2001 compared to
cash used in investing activities of $10.8 million in 2000. Net cash provided by
investing activities reflected the receipt of $46.0 million in net proceeds from
the sale of iPlace, Inc. Capital expenditures were $3.0 million in 2001 and $8.0
million in 2000.
Net cash used in financing activities was $14.8 million in 2001 versus net cash
provided by financing activities of $0.3 million in 2000. The increase in cash
used in financing activities was due to an increase in the number of treasury
shares acquired under the Company's stock repurchase program. The Company
purchased 1,142,000 shares for $15.7 million in 2001 and 181,000 shares for $5.1
million in 2000. On October 25, 2001, the Board of Directors authorized an
additional 1 million shares to be purchased under the buyback program. As of
December 31, 2001, the Company had 556,000 shares available for repurchase under
its buyback program. On January 24, 2002, the Board of Directors authorized an
additional 1 million shares to be purchased under the buyback program.
As of December 31, 2001, the Company had cash and cash equivalents of $47.3
million. In addition, the Company has a $28 million bank credit facility which
bears interest at the higher of the base commercial lending rate for the bank or
the Federal Funds Rate plus 0.5% per annum. There were no borrowings outstanding
under this bank credit facility as of December 31, 2001. The available bank
credit facility is temporarily limited to the sum of the compensating balance
and eligible securities on deposit with the bank. Such limitations may be
imposed and removed based on certain financial covenants. The bank credit
facility requires MemberWorks to maintain a compensating balance of $10.0
million in addition to certain financial covenants. The Company believes that
existing cash balances, together with its available bank credit facility, will
be sufficient to meet its funding requirements for at least the next twelve
months.
In August 2001, the Company received 1.6 million shares of Homestore.com common
stock at a market value of $34.5 million. The Homestore.com common stock
received is unregistered. Once the Homestore.com stock is registered,
MemberWorks may only sell 1/12th of the shares in any calendar month. During the
six months ended December 31, 2001, the Company wrote down its investment in
Homestore.com to its fair value as of December 31, 2001 and recognized a loss of
$31.3 million. Accordingly, the net gain on the sale of iPlace Inc. was $34.3
million.
The Company did not have any material commitments for capital expenditures as of
December 31, 2001. The Company intends to utilize cash generated from operations
and its funds available under its credit facility to fulfill any capital
expenditure requirements for the remainder of fiscal 2002.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" ("SFAS 141"), which is effective for business
combinations initiated after June 30, 2001. SFAS 141 eliminates the pooling of
interest method of accounting for business combinations and requires that all
business combinations occurring on or after July 1, 2001 are accounted for under
the purchase method. The Company has evaluated the impact of SFAS 141 and
believes that it will not have a material impact on its financial statements.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which is effective for fiscal years beginning after
December 15, 2001. Early adoption is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been previously issued. The Company adopted SFAS 142
effective July 1, 2001. SFAS 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
the financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but rather tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives.
15
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to the
amortization period or residual values of other intangible assets. The Company
determined there was an impairment of goodwill of $5.9 million at one of its
reporting units due to the change in methodology of calculating impairment under
SFAS 142 and recent downward trends in the operations of the reporting unit.
This amount was recorded as a cumulative effect of accounting change in the
statement of operations in the fiscal quarter ended September 30, 2001.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which is effective for fiscal years
beginning after June 15, 2002. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The adoption of SFAS 143 will
not have a material impact on the Company's financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." The adoption of SFAS 144 will not have a material
impact on Company's financial statements.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about the
industry in which MemberWorks operates and the Company's management's beliefs
and assumptions. These forward-looking statements are made pursuant to safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance and are
based on a number of assumptions and estimates that are inherently subject to
significant risks and uncertainties, many of which are beyond our control,
cannot be foreseen and reflect future business decisions that are subject to
change. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. Among the many
factors that could cause actual results to differ materially from the
forward-looking statements are:
- The Company's ability to integrate into the Company's management and
operations and operate successfully acquired businesses;
- Changes in the marketing techniques of credit card issuers;
- Unanticipated cancellation or termination of marketing agreements and
the extent to which we can continue successful development and
marketing of new products and services;
- The Company's ability to develop and implement operational and
financial systems to manage rapidly growing operations;
- The Company's ability to obtain financing on acceptable terms to
finance the Company's growth strategy and to operate within the
limitations imposed by financing arrangements;
- Further changes in the already competitive environment for the
Company's products or competitors' responses to the Company's
strategies;
- Changes in the growth rate of the overall U.S. economy, or the
international economies where MemberWorks does business, such that
consumer spending and related consumer debt are impacted;
- Additional government regulation of the Company's industry; and
- New accounting pronouncements
16
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MemberWorks cautions that such factors are not exclusive. All of the
forward-looking statements made in this Quarterly Report on Form 10-Q are
qualified by these cautionary statements and readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. Except as required under the Federal
Exchange Commission, MemberWorks does not have any intention or obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
17
MEMBERWORKS INCORPORATED
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate
The Company has a $28.0 million bank credit facility which bears interest at the
higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. There were no borrowings outstanding under this bank
credit facility as of December 31, 2001. Management believes that an increase in
the commercial lending rate or the Federal Funds rate would not be material to
the Company's financial position or its results of operations. If the Company is
not able to renew its existing credit facility agreement, which matures on
April 1, 2002, it is possible that any replacement lending facility obtained
by the Company may be more sensitive to interest rate changes. The Company does
not currently hedge interest rates with respect to its outstanding debt.
Foreign Currency
The Company has international sales and facilities in the United Kingdom and
Canada and therefore, is subject to foreign currency rate exposure.
Historically, international sales have been denominated in British pounds
sterling and the Canadian dollar. The functional currencies of the Company's
foreign operations are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect as of
the Balance Sheet date. Income and expense items are translated at average
exchange rates for the period. Accumulated net translation adjustments are
recorded in shareholders' equity. Foreign exchange transaction gains and losses
are included in the results of operations, and were not material for all periods
presented. As a result, the Company's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
condition. To the extent the Company incurs expenses that are based on locally
denominated sales volume paid in local currency, the exposure to foreign
exchange risk is reduced. The Company has determined that the impact of a
near-term 10% appreciation or depreciation of the U.S. dollar would have an
insignificant effect on its financial position, results of operations and cash
flows. The Company does not maintain any derivative instruments to mitigate the
exposure to translation and transaction risk. However, this does not preclude
the Company's adoption of specific hedging strategies in the future. MemberWorks
will assess the need to utilize financial instruments to hedge currency
exposures on an ongoing basis.
Fair Value
In August 2001, MemberWorks acquired stock in Homestore.com valued at $34.5
million in exchange for its interest in iPlace, Inc. The carrying value of this
investment is affected by changes in the quoted market prices of Homestore.com
common stock. The investment in Homestore.com declined in value and management
determined that the decline was other than temporary. As a result, the Company
wrote down its investment in Homestore.com to its fair value and recognized a
loss of $31.3 million during the six months ended December 31, 2001. MemberWorks
does not use derivative financial instruments for speculative or trading
purposes. However, this does not preclude the Company's adoption of specific
hedging strategies in the future.
18
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, in management's opinion, there are no significant
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their properties are subject. The Company is involved in other
lawsuits and claims generally incidental to its business. In addition, from time
to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.
In January 2001, an action was instituted by plaintiff Brandy L. Ritt against
the Company and other defendants in the Court of Common Pleas in Cuyahoga
County, Ohio. The suit, which seeks unspecified monetary damages, alleges that
the Company and the other defendants violated various provisions of Ohio's
consumer protection laws in connection with the marketing of certain membership
programs offered by the Company. The plaintiff's motion to have the suit
certified as a class action was denied on February 6, 2002. The Company believes
that the claims asserted against it are unfounded and the Company will
vigorously defend its interests against this suit.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The court has not ruled on the motion. The Company
believes that the claims asserted against Coverdell are unfounded and the
Company and Coverdell will vigorously defend their interests against this suit.
In June 2001, actions were instituted by plaintiffs Judith Jeselskis and Marcia
Walters against the Company and other defendants in Circuit Court of the Tenth
Judicial District, Highlands County Civil Division, Florida, and Circuit Court
of the Sixth Judicial Circuit, Pinellas County Civil Division, Florida,
respectively. The suits, which seek unspecified monetary damages, allege that
the Company and the other defendants violated the Florida Deceptive and Unfair
Trade Practices Act, in connection with the marketing of certain membership
programs offered by the Company. While the respective complaints include claims
that the suits should be certified as class actions, the plaintiffs have not
filed motions for class certification. The Company believes that the allegations
made in this lawsuit are unfounded and the Company will vigorously defend its
interests against the suits.
In July 2001, an action was instituted by Alan Stone against the Company and
other defendants in Superior Court of the State of California, County of Orange.
The suit, which seeks unspecified monetary damages, alleges that the Company and
the other defendants violated California business practices law. While the
complaint includes a claim that the suit should be certified as a class action,
the plaintiff has not filed a motion for class certification. The Company
believes that the allegations made in this lawsuit are unfounded and the Company
will vigorously defend its interests against this suit.
19
MEMBERWORKS INCORPORATED
PART II. OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) MemberWorks Incorporated's 2001 Annual Meeting of Stockholders was held on
November 15, 2001.
b) At the annual meeting the following Class II Directors were elected to the
Board of Directors as follows:
Stephen J. Clearman: For - 14,495,958
Against - 7,161
Abstain - 0
Nonvotes - 719,024
Michael R. O'Brien: For - 14,495,958
Against - 7,161
Abstain - 0
Nonvotes - 719,024
Michael T. McClorey: For - 14,495,958
Against - 7,161
Abstain - 0
Nonvotes - 719,024
Class I Directors, Marc S. Tesler and Alec L. Ellison, and Class III
Directors, Gary A. Johnson and Dennis P. Walker, continue to serve as
Directors of the Company.
c) The ratification of PricewaterhouseCoopers LLP as the Company's independent
auditors was also approved at the annual meeting as follows:
For - 13,677,281
Against - 825,577
Abstain - 261
Nonvotes - 719,024
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
On November 6, 2001, the Company filed a Current Report on Form 8-K/A under
Item 2 "Acquisition or Disposition of Assets" and Item 7 "Financial
Statements and Exhibits" a press release announcing the completion of the
sale of iPlace, Inc. to Homestore.com, Inc. and pro forma financial
statements of the Company.
20
MEMBERWORKS INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEMBERWORKS INCORPORATED
(Registrant)
Date: February 12, 2002 By: /s/ Gary A. Johnson
-----------------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
February 12, 2002 By: /s/ James B. Duffy
-----------------------------------
James B. Duffy, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
21