UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
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.)
680 Washington Boulevard
Stamford, Connecticut 06901
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(Address of principal executive offices) (Zip Code)
(203) 324-7635
(Registrant's telephone number,
including area code)
Indicate by check mark 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
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's class of
common stock as of the latest practicable date:
12,752,047 shares of Common Stock, $0.01 par value as of October 25, 2002.
EXPLANATORY NOTE
As previously announced, the Company is filing this amendment to Form 10-Q
to restate its condensed consolidated financial statements (as more fully
discussed in Note 2 of the Notes to the Condensed Consolidated Financial
Statements) for the three months ended September 30, 2002. This amendment
corrects the Company's first quarter 2003 financial statements to reflect the
impact of accounting for the tax effect of disqualifying dispositions as a
credit to capital in excess of par value in accordance with Statement of
Financial Accounting Standards No.109. This amendment has no impact on cash
flow, cash to be paid for taxes or pre-tax income.
This Form 10-Q/A amends and restates Items 1 and 2 of Part I of the original
Form 10-Q only for the effects of the restatement, and no other information
included in the original Form 10-Q is amended hereby.
MEMBERWORKS INCORPORATED
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002
and June 30, 2002 2
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Forward Looking Statements 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21
1
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, June 30,
2002 2002
-------------- -------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 66,522 $ 51,185
Marketable securities - 912
Accounts receivable 9,225 9,831
Prepaid membership materials 2,415 2,061
Prepaid expenses 3,897 4,325
Membership solicitation and other deferred costs 118,361 129,085
-------------- -------------
Total current assets 200,420 197,399
Fixed assets, net 29,510 31,420
Goodwill 42,039 42,039
Intangible assets, net 7,656 8,049
Other assets 2,334 1,910
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Total assets $ 281,959 $ 280,817
============== =============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations $ 286 $ 1,070
Accounts payable 32,519 32,769
Accrued liabilities 56,217 57,709
Deferred membership fees 199,299 206,272
Deferred income taxes 1,824 -
-------------- -------------
Total current liabilities 290,145 297,820
Long-term liabilities 3,365 3,627
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Total liabilities 293,510 301,447
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; 17,500 shares issued (17,493 shares
at June 30, 2002) 175 175
Capital in excess of par value 115,111 109,254
Accumulated deficit (30,049) (42,185)
Accumulated other comprehensive loss (458) (373)
-------------- -------------
Total shareholders' equity before treasury stock 84,779 66,871
Treasury stock, 4,675 shares at cost (4,139 shares at June 30, 2002) (96,330) (87,501)
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Total shareholders' deficit (11,551) (20,630)
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Total liabilities and shareholders' deficit $ 281,959 $ 280,817
============== =============
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)
For the three months ended
September 30,
-----------------------------------
2002 2001
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Revenues $ 105,004 $ 118,964
Expenses:
Operating 18,074 21,068
Marketing 65,549 76,790
General and administrative 18,863 23,009
Amortization of intangible assets 393 675
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Operating income (loss) 2,125 (2,578)
Settlement of investment related litigation (Note 5) 19,148 -
(Loss) gain on sale of subsidiary (Note 4) (959) 65,608
Net loss on investment (Note 4) (206) (22,296)
Other income (expense), net 119 (90)
------------- -------------
Income before minority interest 20,227 40,644
Minority interest - 450
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Income before income taxes 20,227 41,094
Provision for income taxes (8,091) (743)
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Income before cumulative effect of accounting change 12,136 40,351
Cumulative effect of accounting change (Note 3) - (5,907)
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Net income $ 12,136 $ 34,444
============= =============
Basic earnings per share:
Income before cumulative effect of accounting change $ 0.92 $ 2.62
Cumulative effect of accounting change - (0.38)
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Basic earnings per share $ 0.92 $ 2.24
============= =============
Diluted earnings per share:
Income before cumulative effect of accounting change $ 0.89 $ 2.51
Cumulative effect of accounting change - (0.37)
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Diluted earnings per share $ 0.89 $ 2.14
============= =============
Weighted average common shares used in earnings per share calculations:
Basic 13,164 15,379
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Diluted 13,669 16,077
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
3
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the three months ended
September 30,
---------------------------------
2002 2001
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Operating activities
Net income $ 12,136 $ 34,444
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Revenues before deferral 98,114 105,496
Marketing costs before deferral (54,909) (70,386)
Revenues recognized (105,004) (118,964)
Marketing costs expensed 65,549 76,790
Depreciation and amortization 3,129 3,428
Tax benefit from employee stock plans 5,851 -
Deferred income taxes 1,824 -
Gain on settlement (19,148) -
Net loss (gain) on sale of subsidiary 959 (65,608)
Net loss on investment 206 22,296
Minority interest - (450)
Cumulative effect of accounting change - 5,907
Other 362 42
Change in assets and liabilities:
Accounts receivable 1,103 4,053
Prepaid membership materials (354) (638)
Prepaid expenses 428 61
Other assets (425) 23
Related party payables - 12
Accounts payable (280) (748)
Accrued liabilities (1,544) (8,483)
-------------- -------------
Net cash provided by (used in) operating activities 7,997 (12,725)
-------------- -------------
Investing activities
Acquisition of fixed assets (1,321) (1,890)
Settlement of investment related litigation 19,148 -
(Purchase price adjustments) proceeds from sale of subsidiary, net of
cash sold (750) 45,997
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Net cash provided by investing activities 17,077 44,107
-------------- -------------
Financing activities
Net proceeds from issuance of stock and warrants 21 886
Treasury stock purchases (8,869) (7,330)
Payments of long-term obligations (849) (191)
-------------- -------------
Net cash used in financing activities (9,697) (6,635)
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Effect of exchange rate changes on cash and cash equivalents (40) (132)
-------------- -------------
Net increase in cash and cash equivalents 15,337 24,615
Cash and cash equivalents at beginning of period 51,185 22,736
-------------- -------------
Cash and cash equivalents at end of period $ 66,522 $ 47,351
============== =============
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. The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management of the Company to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Operating results for the three months ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2003. 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, 2002.
NOTE 2 - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated financial statements
for the quarter ended September 30, 2002, the Company determined that it had not
properly recorded the tax impact of releasing the valuation allowance related to
disqualifying dispositions as a credit to capital in excess of par value in
accordance with Statement of Financial Accounting Standards No. 109.
Accordingly, the Company revised its first quarter 2003 results to reflect the
proper accounting treatment. As a result, these results reflect an effective tax
rate of 40% rather than 12% as previously reported. This amendment has no impact
on cash flow, cash to be paid for taxes or pre-tax income. The following chart
summarizes the impact of this restatement on the September 30, 2002 results:
As Previously Reported As Revised
September 30, 2002 September 30, 2002
----------------------- ------------------
Accrued liabilities $ 55,929 $ 56,217
Deferred income taxes $ 2,286 $ 1,824
Capital in excess of par $ 109,260 $ 115,111
Accumulated deficit $ (24,372) $ (30,049)
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Comprehensive income $ 17,728 $ 12,051
Provision for income taxes $ 2,414 $ 8,091
Net income $ 17,813 $ 12,136
Basic earnings per share $ 1.35 $ 0.92
Diluted earnings per share $ 1.30 $ 0.89
NOTE 3 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Adoption of SFAS 142
The Company adopted Financial Accounting Standards Board Statement ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), effective July 1,
2001. 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 at July 1, 2001, 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 concurrent with 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 for the three months
ended September 30, 2001.
5
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - GAIN ON SALE OF SUBSIDIARY/LOSS ON INVESTMENT
During the quarter ended September 30, 2001, the Company sold its investment in
iPlace, Inc. for $50,111,000 in cash and 1,601,000 shares of Homestore.com, Inc.
stock. The Company reported a gain of $65,608,000 on the sale. During the
quarter ended September 30, 2002, the Company settled with Homestore.com, Inc.
all issues pending related to amounts held in escrow in connection with the
sale. The Company reported a net loss of $959,000 related to the settlement.
During fiscal 2002, the investment in Homestore.com, Inc. 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, Inc. to its fair value
and recognized a loss of $22,296,000 in the quarter ended September 30, 2002.
In addition, the Company sold all of its Homestore.com, Inc. common stock during
the quarter ended September 30, 2002. The Company recognized a loss of $206,000
in connection with this sale.
NOTE 5- SETTLEMENT OF INVESTMENT RELATED LITIGATION
During the quarter ended September 30, 2002, MemberWorks, along with certain of
the other former shareholders of iPlace, Inc., settled their lawsuit against
Homestore.com, Inc. The total settlement amount in favor of the plaintiffs was
$23,000,000 of which MemberWorks received $19,148,000.
NOTE 6 - INCOME TAX EXPENSE
Income tax expense as a percentage of pre-tax income was approximately 40% for
the three months ended September 30, 2002. The effective tax rate is higher than
the U.S. federal statutory rate for the quarter ended September 30, 2002
primarily due to state taxes and other non-deductible items. During the quarter
ended September 30, 2001, the Company recorded a provision for alternative
minimum taxes of approximately $743,000 in connection with the gain on the sale
of iPlace, Inc. This provision for alternative minimum taxes was later reversed
in the June 2002 quarter due to a change in the tax laws.
In prior years, the Company recorded a full valuation allowance against deferred
tax assets from net operating losses attributable to disqualifying dispositions.
A portion of the valuation allowance associated with the deferred tax assets
from net operating losses attributable to disqualifying dispositions was
reversed to equity during the quarter ended September 30, 2002. Future reversals
of the valuation allowance associated with net operating losses attributable to
disqualifying dispositions will be recorded in equity and will not provide an
income tax benefit for financial statement reporting purposes.
6
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 - EARNINGS PER SHARE
Basic and diluted earnings per share amounts are determined in accordance with
the provisions of SFAS No. 128, "Earnings Per Share." The following table sets
forth the reconciliation of the numerators and denominators in the computation
of basic and diluted earnings per share (in thousands, except per share data):
Three months ended
September 30,
-----------------------
2002 2001
---------- ----------
Numerator for basic and diluted earnings per share:
Net income before cumulative effect of accounting change $ 12,136 $ 40,351
Cumulative effect of accounting change - (5,907)
---------- ----------
Net income $ 12,136 $ 34,444
========== ==========
Denominator for basic earnings per share:
Weighted average number of common shares outstanding- basic 13,164 15,379
Effect of dilutive securities:
Options 505 698
---------- ----------
Weighted average number of common shares outstanding- diluted 13,669 16,077
========== ==========
Basic earnings per share $ 0.92 $ 2.24
========== ==========
Diluted earnings per share $ 0.89 $ 2.14
========== ==========
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
The diluted earnings per share calculation excludes the effect of potentially
dilutive shares when their effect is antidilutive. At September 30, 2002 and
2001 the Company had 3,331,000 and 2,027,000 shares, respectively, of
potentially dilutive stock options outstanding that are not included in the
calculation as they are antidilutive.
NOTE 8 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months Ended
September 30,
--------------------------
2002 2001
----------- -----------
Net income $ 12,136 $ 34,444
Foreign currency translation loss (85) (164)
----------- -----------
Comprehensive income $ 12,051 $ 34,280
=========== ===========
7
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
As of September 30, 2002 As of June 30, 2002
----------------------------------- ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------- ----------------- ------------------ -----------------
Amortized intangible assets:
Membership and Client Relationships $ 13,195 $ (5,827) $ 13,195 $ (5,466)
Non-Compete Agreements 238 (238) 238 (238)
Other 950 (662) 950 (630)
----------------- ----------------- ------------------ -----------------
Total amortized intangible assets $ 14,383 $ (6,727) $ 14,383 $ (6,334)
================= ================= ================== =================
Unamortized intangible assets:
Goodwill $ 42,039 $ 42,039
The future intangible amortization expense for the next five years is estimated
to be as follows (in thousands):
Fiscal Year:
2003 $ 1,393
2004 1,045
2005 840
2006 695
2007 554
Goodwill was tested for impairment during the quarter ended September 30, 2002
as required by SFAS 142. The Company has concluded that none of its goodwill is
impaired. Fair value was estimated using discounted cash flow methodologies. In
addition, the Company reassessed the useful lives of its indefinite intangible
assets and determined that the lives were appropriate. The Company will test the
goodwill of each of its reporting units annually or more frequently if
impairment indicators exist.
NOTE 10 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities set forth in the accompanying condensed consolidated balance
sheets as of September 30, 2002 and June 30, 2002 include an allowance for
membership cancellations of $22,382,000 and $23,753,000, respectively.
NOTE 11 - RESTRUCTURING CHARGES
On October 11, 2001, the Company announced the implementation of several cost
saving initiatives due to a slowdown in consumer response rates and increased
economic uncertainty in both the U.S. and abroad. This restructuring program
included 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 charges of $6,893,000 during the quarter ended December 31, 2001.
The major components of the restructuring charges and the remaining accrual
balances as of September 30, 2002 are as follows (in thousands):
Total Non-cash Cash Charges Liability
Charges Charges to date to date Balance
-------------- ----------------- --------------- --------------
Workforce reduction $ 2,214 $ - $ 1,966 $ 248
Lease obligations 3,094 - 1,300 1,794
Asset disposals 1,585 1,585 - -
-------------- ----------------- --------------- --------------
Total $ 6,893 $ 1,585 $ 3,266 $ 2,042
============== ================= =============== ==============
8
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 - 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 including, but not
limited to, various suits, including previously disclosed suits in the 2002
Annual Report filed on Form 10-K, brought against the Company by individual
consumers seeking monetary and/or injunctive relief relating to the marketing of
the Company's programs. 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. Management does not believe that there will
be any material effect on the results of operations as a result of its
outstanding litigation proceedings.
In March 2002, the Company and other plaintiffs filed suit against
Homestore.com, Inc. in United States District Court for the District of
Connecticut. The action was transferred to the United States District Court for
the Central District of California. The suit, which sought injunctive and other
relief, alleged securities fraud, negligent misrepresentation, breach of
contract and other grounds in connection with the Company's sale of its interest
in iPlace, Inc. In response to plaintiffs' preliminary motions, the court
ordered Homestore.com, Inc. to place $58,000,000 in a constructive trust pending
resolution of the lawsuit or further order of the court. During the quarter
ended September 30, 2002, MemberWorks, along with certain of the other former
shareholders of iPlace, Inc., settled their lawsuit against Homestore.com, Inc.
The total settlement amount in favor of the plaintiffs was $23,000,000, of which
MemberWorks received $19,148,000.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"),
which is effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs in a
Restructuring)." MemberWorks does not believe that the adoption of SFAS 146 will
have a material impact on the Company's financial statements.
9
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs.
Membership service programs offer selected products and services from a variety
of vendors for an annual fee or a monthly fee. Membership service programs
intend to enhance existing relationships between businesses and consumers.
MemberWorks derives its revenues principally from annually renewable membership
fees. The Company generally 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 paid to clients, 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that are important to the
Company's financial condition and results and involve subjective or complex
judgments on the part of management, often as a result of the need to make
estimates. The following areas all require the use of judgments and estimates:
membership cancellation rates, deferred marketing costs, valuation of intangible
assets, estimation of remaining useful lives of intangible assets, estimation of
the effective tax rate and valuation of deferred tax assets. Estimates in each
of these areas are based on historical experience and various assumptions that
MemberWorks believes are appropriate. Actual results may differ from these
estimates. MemberWorks believes the following represent the critical accounting
policies of the Company as contemplated by Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure about Critical Accounting Policies." For
a summary of all of the Company's significant accounting policies, see Note 2 of
the Notes to the consolidated financial statements of the Company's 2002 Annual
Report filed on Form 10-K.
Revenue recognition
Membership fees are billed through clients of the Company primarily through
credit cards. During an initial annual membership term or renewal term, a member
may cancel his or her membership in the program, either for a complete refund of
the membership fee for that period or a prorata refund based on the remaining
portion of the membership period depending upon the terms of the membership
program. Deferred membership fees are recorded, net of estimated cancellations,
after the trial period has expired, and are amortized as revenues from
membership fees upon the expiration of membership refund privileges. Revenue
from members who are charged on a monthly payment program is recognized, net of
estimated cancellations, as the membership fees are billed. An allowance for
cancellations is established based on management's estimates and is updated
regularly. In determining the estimate of allowance for cancellations,
management analyzes historical cancellation experience, current economic trends
and changes in customer demand for the Company's products. Actual membership
cancellations are charged against the allowance for cancellations on a current
basis. If actual cancellations differ from the estimate, the results of
operations would be impacted. Accrued liabilities set forth in the accompanying
consolidated balance sheets as of September 30, 2002 and June 30, 2001 include
an allowance for membership cancellations of $22.4 million and $23.8 million,
respectively.
Membership solicitation and other deferred costs
Membership solicitation costs include marketing and direct mail costs related
directly to membership solicitation (i.e., direct response advertising costs).
In accordance with the American Institute of Certified Public Accountants
Statement of Position 93-7, "Reporting on Advertising Costs," direct response
advertising costs are deferred and charged to operations as revenues from
membership fees are recognized. Other deferred costs consist of royalties paid
to clients, which relate to the same revenue streams as the direct response
advertising costs and are also charged to income over the membership period.
Total membership solicitation costs incurred to obtain a new member generally
are less than the estimated total membership fees. However, if total membership
solicitation costs were to exceed total estimated membership fees, an adjustment
would be made to the extent of any impairment.
10
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Valuation of goodwill and other intangibles
MemberWorks reviews the carrying value of its goodwill and other intangible
assets, and assesses the remaining useful lives of its intangible assets, in
accordance with Financial Accounting Standards Board ("FASB") Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). The Company reviews the
carrying value of its goodwill and other intangible assets by comparing such
amounts to their fair values. MemberWorks is required to perform this comparison
at least annually or more frequently if circumstances indicate possible
impairment. When determining fair value, the Company utilizes various
assumptions, including projections of future cash flows. A change in these
underlying assumptions will cause a change in the results of the tests and, as
such, could cause fair value to be less than the carrying amounts. In such an
event, MemberWorks would then be required to record a corresponding charge,
which would impact earnings. Goodwill at July 1, 2002 and 2001, was tested for
impairment during the quarters ended September 30, 2002 and 2001, respectively.
The Company has concluded that none of its goodwill was impaired as of July 1,
2002. As of July 1, 2001, the Company determined that 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 concurrent with downward
trends in the operations of the reporting unit (see Note 3 to the Condensed
Consolidated Financial Statements). This amount was recorded as a cumulative
effect of accounting change in the statement of operations in the fiscal quarter
ended September 30, 2001.
Income tax provision
MemberWorks estimates current tax provisions or benefits based on a projected
effective tax rate for the fiscal year ended June 30, 2003 using the most
currently available information and forecasts. The projected effective tax rate
is updated for actual results and estimates when they become known. In addition,
MemberWorks assesses the realization of deferred tax assets considering various
assumptions, including estimates of future taxable income and ongoing tax
strategies. A change in these underlying assumptions would impact the results of
operations.
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. THREE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES. Revenues decreased 12% to $105.0 million for the quarter ended
September 30, 2002 from $119.0 million for the quarter ended September 30, 2001.
The decrease in revenues is due to the effect of the sale of iPlace, Inc., the
controlled slow down in new member marketing implemented in the beginning of
fiscal 2002 and the closing of the United Kingdom operations. This controlled
slow down was due to decreased response rates. Excluding revenues for the
quarter ended September 30, 2001 of $9.4 million related to iPlace, Inc.,
revenues were $105.0 million and $109.6 million during the quarter ended
September 30, 2002 and 2001, respectively, and would have decreased 4%. As a
percentage of total revenues, annual renewal revenues were 46% in 2002 and 48%
in 2001. The decrease in annual renewal revenues as a percentage of total
revenues is due to the increase in revenue from monthly members. Revenue from
members who are charged on a monthly payment program increased to $16.3 million
during the quarter ended September 30, 2002 from $7.7 million during the quarter
ended September 30, 2001.
11
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES BEFORE DEFERRAL. Revenues before deferral, which are revenues
before the application of Staff Accounting Bulletin 101, "Revenue Recognition"
("SAB 101"), are an important measure of the Company's performance during the
reporting period because they represent the actual membership fees billed during
the current reporting period less an allowance for cancellations. The Company's
management utilizes revenues before deferral to measure the Company's current
performance. In contrast, revenue, as recognized under SAB 101, represents the
membership fees billed in prior periods less an allowance for cancellations that
have been amortized and recognized as the refund privileges expire. Revenues
before deferral decreased 7% to $98.1 million for the quarter ended September
30, 2002 from $105.5 million for the quarter ended September 30, 2001. Revenues
before deferral decreased compared to the prior year due to the effect of the
sale of iPlace, Inc. and the closing of the United Kingdom operations. Excluding
revenue from iPlace, Inc. of $11.0 million and the United Kingdom of $1.2
million from the prior year, revenue before deferral increased 5%. This increase
was due to an increase in the average program price point. The Company's
membership base decreased to approximately 6.3 million members at September 30,
2002 from 6.8 million members at September 30, 2001 due to the controlled slow
down implemented in the beginning of fiscal 2002. As a percentage of total
revenues before deferral, annual renewal revenues were 48% in 2002 and 50% in
2001. The decrease in annual renewal revenues as a percentage of total revenues
is due to the increase in revenue from monthly members. Revenue from members who
are charged on a monthly payment program increased to $16.3 million for the
quarter ended September 30, 2002 from $7.7 million for the quarter ended
September 30, 2001.
The following information provides a reconciliation of revenues before deferral
to revenues reported for the quarter ended September 30:
2003 2002
------------- --------------
Revenues before deferral $ 98,114 $ 105,496
Deferred membership fees at beginning of period 206,275 243,024
Deferred membership fees at end of period (199,299) (209,797)
Sale of iPlace, Inc. - (19,784)
Effect of changes in foreign exchange rates (86) 25
------------- --------------
Revenues reported $ 105,004 $ 118,964
============= ==============
OPERATING EXPENSES. Operating expenses consist of member service call
center costs, membership benefit costs and membership kit costs. Operating
expenses decreased 14% to $18.1 million for the quarter ended September 30, 2002
from $21.1 million for the quarter ended September 30, 2001 primarily due to the
sale of iPlace, Inc. As a percentage of revenues operating expenses decreased to
17.2% for the quarter ended September 30, 2002 from 17.7% for the quarter ended
September 30, 2001. Operating expenses decreased as a percentage of revenues
primarily due to the sale of iPlace, Inc., which had higher operating costs as a
percentage of revenue.
MARKETING EXPENSES. Marketing expenses consist of direct solicitation costs
incurred to obtain new members and royalties paid to clients, which are
generally amortized in the same manner as the related revenue. Marketing
expenses decreased 15% to $65.5 million for the quarter ended September 30, 2002
from $76.8 million for the quarter ended September 30, 2001 primarily due to the
effect of the controlled slowdown in new member marketing implemented in the
beginning of fiscal 2002 and the effect of the sale of iPlace, Inc. As a
percentage of revenue, marketing expenses decreased to 62.4% in 2002 from 64.5%
in 2001 primarily due to a lower level of non-deferrable marketing expense in
2002.
12
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING COSTS BEFORE DEFERRAL. Marketing costs before deferral, which are
marketing costs before the application of SAB 101, are an important measure of
the Company's performance during the reporting period because they represent the
actual marketing costs incurred during the current reporting period. The
Company's management utilizes marketing costs before deferral to measure the
Company's current performance. In contrast, marketing expenses, as recognized
under SAB 101, represent the marketing costs incurred in prior periods that have
been amortized and recognized in the same manner as the related revenues.
Marketing costs before deferral decreased 22% to $54.9 million for the
quarter ended September 30, 2002 from $70.4 million for the quarter ended
September 30, 2001. As a percentage of revenues before deferral, marketing
costs before deferral decreased to 56.0% in 2002 from 66.7% in 2001. These
decreases were due to an improvement in new and renewal member marketing expense
ratios driven by the combination of price increases and marketing efficiencies
as well as the effect of the sale of iPlace, Inc.
The following information provides a reconciliation of marketing costs before
deferral to marketing expense reported for the quarter ended September 30:
2003 2002
------------- --------------
Marketing costs before deferral $ 54,909 $ 70,386
Membership solicitation and other deferred costs at beginning of period 129,085 154,059
Membership solicitation and other deferred costs at end of period (118,361) (137,651)
Sale of iPlace, Inc. - (10,003)
Effect of changes in foreign exchange rates (84) (1)
------------- --------------
Marketing expenses reported $ 65,549 $ 76,790
============= ==============
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily include personnel-related costs, occupancy costs and other overhead
costs. General and administrative expenses decreased 18% to $18.9 million for
the quarter ended September 30, 2002 from $23.0 million for the quarter ended
September 30, 2001 and as a percentage of revenues decreased to 18.0% in 2002
from 19.3% in 2001. These decreases were primarily due to the sale of iPlace,
Inc., the closing of the United Kingdom operations and cost savings initiatives
implemented in the beginning of the quarter ended December 31, 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Intangible amortization
decreased to $0.4 million during the quarter ended September 30, 2002 from $0.7
million for the quarter ended September 30, 2001 due to the effect of the sale
of iPlace, Inc.
SETTLEMENT OF INVESTMENT RELATED LITIGATION. During the quarter ended September
30, 2002, MemberWorks, along with certain of the other former shareholders of
iPlace, Inc., settled their lawsuit against Homestore.com, Inc. The total
settlement amount in favor of the plaintiffs was $23.0 million of which
MemberWorks received $19.1 million.
GAIN ON SALE OF SUBSIDIARY. During the quarter ended September 30, 2001, the
Company sold its investment in iPlace, Inc. for $50.1 million in cash and 1.6
million shares of Homestore.com, Inc. stock. The Company reported a gain of
$65.6 million on the sale. During the quarter ended September 30, 2002, the
Company settled with Homestore.com, Inc. all issues pending related to amounts
held in escrow in connection with the sale. The Company reported a net loss of
$1.0 million related to the settlement.
NET LOSS ON INVESTMENT. During the quarter ended September 30, 2001, the Company
reported a loss of $22.3 million reflecting the write-down of the Company's
investment in Homestore.com, Inc. common stock to its fair market value. During
the quarter ended September 30, 2002, the Company sold all of its Homestore.com,
Inc. common stock and recognized a loss of $0.2 million.
13
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 during the period. Other income
was $0.1 million for the quarter ended September 30, 2002 versus other expense
of $0.1 million for the quarter ended September 30, 2001. The increase in other
income is due to an increased cash balance during the September 30, 2002
quarter.
PROVISION FOR INCOME TAXES. During the quarter ended September 30, 2002, the
Company recorded a tax provision of $8.1 million based on an effective tax rate
of approximately 40%. The effective tax rate is higher than the U.S. federal
statutory rate for the quarter ended September 30, 2002 primarily due to state
taxes and other non-deductible items. During the quarter ended September 30,
2001, the Company recorded a provision for alternative minimum taxes of
approximately $0.7 million in connection with the gain on the sale of iPlace,
Inc. This provision for alternative minimum taxes was later reversed in the June
2002 quarter due to a change in the tax laws.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.0 million for the quarter ended
September 30, 2002 versus cash used in operating activities of $12.7 million for
the quarter ended September 30, 2001. Net cash provided by operating activities
is comprised of operating cash flow before changes in assets and liabilities and
changes in assets and liabilities.
Operating cash flow before changes in assets and liabilities is a measure of the
Company's operating performance during the period based on revenues before
deferral and marketing expenses before deferral. The following information
provides a reconciliation of operating cash flow before changes in assets and
liabilities to net cash provided by operating activities:
2002 2001
---------------- ---------------
Operating cash flow before changes in assets and liabilities $ 9,069 $ (7,005)
Changes in assets and liabilities (1,072) (5,720)
---------------- ---------------
Net cash provided by operating activities $ 7,997 $ (12,725)
================ ===============
Operating cash flow before changes in assets and liabilities was a positive $9.1
million for the quarter ended September 30, 2002 compared to a negative $7.0
million for the quarter ended September 30, 2001. The increase in operating cash
flow before changes in assets and liabilities was primarily due to a decrease in
marketing costs before deferral as a percentage of revenue before deferral, as
well as the cost saving initiatives related to the restructuring plan.
Revenues before deferral were $98.1 million for the quarter ended September 30,
2002 versus $105.5 million for the quarter ended September 30, 2001. Revenues
before deferral decreased compared to the prior year due to the effect of the
sale of iPlace, Inc. and the closing of the United Kingdom operations. Excluding
revenue from iPlace, Inc. and the United Kingdom from the prior year, revenue
before deferral increased 5%. This increase was due to an increase in the
average program price point. The Company's membership base was 6.3 million and
6.8 million at September 30, 2002 and 2001, respectively. The decrease in the
membership base was due to a controlled slow down in new member marketing
implemented in the beginning of the 2002 fiscal year.
Marketing expenses before deferral were $54.9 million for the quarter ended
September 30, 2002 versus $70.4 million for the quarter ended September 30,
2001. As a percent of revenues before deferral, marketing expenses before
deferral were 56.0% in 2002 and 66.7% in 2001. These decreases were due to an
improvement in new and renewal member marketing expense ratios driven by the
combination of price increases and marketing efficiencies as well as the effect
of the sale of iPlace, Inc.
14
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Changes in assets and liabilities decreased cash from operating activities by
$1.1 million during the quarter ended September 30, 2002 versus $5.7 million
during the quarter ended September 30, 2001. The negative effect of changes in
assets and liabilities during the quarter ended September 30, 2002 was primarily
due to the timing of the payment of certain expenses.
Net cash provided by investing activities was $17.1 million during the quarter
ended September 30, 2002 versus $44.1 million during the quarter ended September
30, 2001. During the quarter ended September 30, 2002, MemberWorks, along with
certain of the other former shareholders of iPlace, Inc., settled their lawsuit
against Homestore.com, Inc. The total settlement amount in favor of the
plaintiffs was $23.0 million of which MemberWorks received $19.1 million. In
addition, during the quarter ended September 30, 2002, the Company settled with
Homestore.com, Inc. all issues pending related to amounts held in escrow in
connection with the sale. The Company paid $0.8 million from the escrow account
related to the settlement. The net cash provided by investing activities during
the quarter ended September 30, 2001 includes the receipt of $46.0 million in
net proceeds from the sale of iPlace, Inc. in 2001. Capital expenditures were
$1.3 million during the quarter ended September 30, 2002 and $1.9 million during
the quarter ended September 30, 2001.
Net cash used in financing activities was $9.7 million for the quarter ended
September 30, 2002 versus $6.6 million for the quarter ended September 30, 2001
primarily due to the increase in the number of treasury stock shares repurchased
in 2002. The Company purchased 537,000 shares of treasury stock during the
quarter ended September 30, 2002 for $8.9 million and 315,000 shares during the
quarter ended September 30, 2001 for $7.3 million. During the quarter ended
September 30, 2002, the Board of Directors authorized an additional 2.5 million
shares to be repurchased under the buyback program. As of September 30, 2002,
the Company had 2.4 million shares available for repurchase under its buyback
program.
As of September 30, 2002, the Company had cash and cash equivalents of $66.5
million. In addition, the Company has an $18 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. As of September 30, 2002, the
effective interest rate for borrowings was 4.75%. There were no borrowings
outstanding under this bank credit facility as of September 30, 2002. The bank
credit facility has certain financial covenants, including a maximum debt
coverage ratio, a minimum fixed charges coverage ratio, potential restrictions
on additional borrowings and potential restrictions on additional stock
repurchases. 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.
The Company did not have any material commitments for capital expenditures as of
September 30, 2002. The Company intends to utilize cash generated from
operations to fulfill any capital expenditure requirements for the remainder of
fiscal 2003.
COMMITMENTS
The Company is not aware of any factors that are reasonably likely to adversely
affect liquidity trends, other than the risk factors presented in the Forward
Looking Statements in this Form 10-Q/A filing. The Company does not have
off-balance sheet arrangements, non-exchange traded contracts or material
related party transactions.
15
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Future minimum payments of contractual obligations as of September 30, 2002 are
as follows (amounts in thousands):
Payments Due by Period
-------------------------------------------------------------------------------
Less than
Total 1 year 1-3 years 4-5 years After 5 years
-------------- ------------- -------------- -------------- ---------------
Operating leases $ 29,082 $ 6,698 $ 11,347 $ 5,949 $ 5,088
Capital leases 52 50 2 - -
Notes payable - - - - -
Other long-term obligations 458 236 222 - -
-------------- ------------- -------------- -------------- ---------------
Total payments due $ 29,592 $ 6,984 $ 11,571 $ 5,949 $ 5,088
============== ============= ============== ============== ===============
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities that are initiated after December 31, 2002. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)." MemberWorks
does not believe that the adoption of SFAS 146 will have a material impact on
the Company's financial statements.
16
MEMBERWORKS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q/A 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 include statements
that do not relate solely to historical or current facts and can be identified
by the use of words such as "believe," "expect," "estimate," "project,"
"continue" or "anticipate." 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:
- Higher than expected membership cancellations;
- Lower than expected membership renewal rates;
- Changes in the marketing techniques of credit card issuers;
- Increases in the level of commission rates and other compensation
required by marketing partners to actively market with MemberWorks;
- Potential reserve requirements by business partners such as the
Company's payment processors;
- Unanticipated cancellation or termination of marketing agreements and
the extent to which MemberWorks can continue successful development
and marketing of new products and services;
- Unanticipated changes in or termination of the Company's ability to
process membership fees through third parties, including clients,
payment processors and bank card associations;
- The Company's ability to introduce new programs on a timely basis;
- The Company's ability to develop and implement operational and
financial systems to manage rapidly growing operations;
- The Company's ability to recover from a complete or partial system
failure or impairment, other hardware or software related malfunctions
or programming errors;
- 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;
- The Company's ability to integrate acquired businesses into the
Company's management and operations and operate successfully;
- 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 economy where MemberWorks does business, such that
credit availability, interest rates, consumer spending and related
consumer debt are impacted;
- Additional government regulation of the Company's industry; and
- New accounting pronouncements
Many of these factors are beyond MemberWorks' control, and, therefore, its
ability to generate predictable revenue and income growth may be adversely
affected by these factors.
MemberWorks cautions that such factors are not exclusive. All of the
forward-looking statements made in this Quarterly Report on Form 10-Q/A 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/A. Except as required by law,
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
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate
The Company has an $18.0 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 September 30, 2002. 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, 2003, 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 Canada and therefore, is
subject to foreign currency rate exposure. Canadian sales have been denominated
in the Canadian dollar and its functional currency is the local currency. Assets
and liabilities of the Canadian subsidiary are translated into U.S. dollars at
the exchange rate in effect as of the balance sheet date. Income and expense
items are translated at the average exchange rate 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
The Company does not have material exposure to market risk with respect to
investments, as the Company does not hold any marketable securities as of
September 30, 2002. 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.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
The chief executive officer and chief financial officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date
within 90 days of the filing of this quarterly report (the "Evaluation Date")
and have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were effective. The Company's disclosure controls are
designed to ensure that material information relating to MemberWorks and its
consolidated subsidiaries that are required to be disclosed in its reports under
the Exchange Act is accumulated and communicated to the chief executive officer
and chief financial officer.
Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect our controls subsequent to the
Evaluation Date.
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 including, but not
limited to, various suits, including suits previously disclosed in the 2002
Annual Report filed on Form 10-K , brought against the Company by individual
consumers seeking monetary and/or injunctive relief relating to the marketing of
the Company's programs. 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. Management does not believe that there will
be any material effect on the results of operations as a result of its
outstanding litigation proceedings.
In March 2002, the Company and other plaintiffs filed suit against
Homestore.com, Inc. in United States District Court for the District of
Connecticut. The action was transferred to the United States District Court for
the Central District of California. The suit, which sought injunctive and other
relief, alleged securities fraud, negligent misrepresentation, breach of
contract and other grounds in connection with the Company's sale of its interest
in iPlace, Inc. In response to plaintiffs' preliminary motions, the court
ordered Homestore.com, Inc. to place $58.0 million in a constructive trust
pending resolution of the lawsuit or further order of the court. During the
quarter ended September 30, 2002, MemberWorks, along with certain of the other
former shareholders of iPlace, Inc., settled their lawsuit against
Homestore.com, Inc. The total settlement amount in favor of the plaintiffs was
$23.0 million, of which MemberWorks received $19.1 million.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
99.1 Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
by the President, Chief Executive Officer and Director of the Company
99.2 Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
by the Executive Vice President and Chief Financial Officer of the
Company
b) Reports on Form 8-K
None
19
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: May 6, 2003 By: /s/ Gary A. Johnson
--------------------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
May 6, 2003 By: /s/ James B. Duffy
-----------------------------------
James B. Duffy, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
20
CERTIFICATIONS
I, Gary A. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MemberWorks
Incorporated,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 6, 2003 By: /s/ Gary A. Johnson
-----------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
21
CERTIFICATIONS (CONTINUED)
I, James B. Duffy, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MemberWorks
Incorporated,
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 6, 2003 By: /s/ James B. Duffy
-----------------------------------
James B. Duffy, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
22