-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TRQs3ooheRpw9GHE2G4Va0/HLSPgqGTDIGw8+JxkKePQuo2K79QRLG2zAvJ2QKyI J5fk1jo/PeDTqRC8Cliw4w== 0000950123-96-004628.txt : 19960928 0000950123-96-004628.hdr.sgml : 19960928 ACCESSION NUMBER: 0000950123-96-004628 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960821 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEMBERWORKS INC CENTRAL INDEX KEY: 0001020996 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-10541 FILM NUMBER: 96618591 BUSINESS ADDRESS: STREET 1: 680 WASHINGTON BLVD., SUITE 1100 CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033247635 S-1 1 FORM S-1 / MEMBERWORKS INCORPORATED 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- MEMBERWORKS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------------- DELAWARE 7389 06-1276882 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
--------------------- 680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT 06901 (203) 324-7635 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------------- GARY A. JOHNSON PRESIDENT AND CHIEF EXECUTIVE OFFICER MEMBERWORKS INCORPORATED 680 WASHINGTON BLVD., SUITE 1100 STAMFORD, CONNECTICUT 06901 (203) 324-7635 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------------- COPIES TO: MARK G. BORDEN, ESQ. ALAN K. AUSTIN, ESQ. THOMAS L. BARRETTE, JR., ESQ. STEVEN V. BERNARD, ESQ. HALE AND DORR DAVID S. KIM, ESQ. 60 STATE STREET WILSON SONSINI GOODRICH & ROSATI BOSTON, MASSACHUSETTS 02109 PROFESSIONAL CORPORATION (617) 526-6000 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304 (415) 493-9300
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value per share............ $60,000,000 $20,690 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 21, 1996 LOGO SHARES COMMON STOCK Of the shares of Common Stock offered hereby, shares are being sold by MemberWorks Incorporated ("MemberWorks" or the "Company") and shares are being sold by certain Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the method of determining the initial public offering price. ------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS - ------------------------------------------------------------------------------------------------------- Per Share.......................... $ $ $ $ - ------------------------------------------------------------------------------------------------------- Total(2)........................... $ $ $ $ - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $900,000. (2) The Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. ------------------------ The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1996. ------------------------ ROBERTSON, STEPHENS & COMPANY HAMBRECHT & QUIST PAINEWEBBER INCORPORATED The date of this Prospectus is , 1996 3 THE COMPANY'S MEMBERSHIP SERVICE PROGRAMS CREATE A SYNERGISTIC RELATIONSHIP AMONG MEMBERS, VENDORS, CLIENTS AND THE COMPANY. [CHART] In this place appears a graphic depicting the exchange of economic and other value between the Company and its members, service providers and clients. In exchange for fees, the Company provides its members value-added membership service programs. In exchange for marketing support, the Company's service providers provide it with program support. In exchange for customer lists, the Company pays royalties to its clients. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary............................................................................... 4 Risk Factors.......................................................................... 6 Use of Proceeds....................................................................... 14 Dividend Policy....................................................................... 14 Capitalization........................................................................ 15 Dilution.............................................................................. 16 Selected Consolidated Financial Information........................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 18 Business.............................................................................. 25 Management............................................................................ 37 Certain Transactions.................................................................. 45 Principal and Selling Stockholders.................................................... 46 Description of Capital Stock.......................................................... 48 Shares Eligible for Future Sale....................................................... 51 Underwriting.......................................................................... 53 Legal Matters......................................................................... 54 Experts............................................................................... 54 Additional Information................................................................ 54 Index to Consolidated Financial Statements............................................ F-1
------------------------ The Company intends to furnish its stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by its independent accountants, and with quarterly reports for the first three quarters of each fiscal year containing unaudited consolidated financial information. Countrywide Dental Program and HealthTrends are registered trademarks of the Company. Connections, Your source for entertainment values; Countrywide Dental and Health Program; Home PC Link; MoneyMaster; Official Sports Connection; and Travel Arrangements are trademarks of the Company. This Prospectus also includes trademarks and registered trademarks of other companies. The Company was incorporated in Delaware on July 12, 1989. The Company's principal executive offices are located at 680 Washington Blvd., Suite 1100, Stamford, Connecticut 06901 and its telephone number is (203) 324-7635. In August 1996, the Company changed its name from CardMember Publishing Corporation to MemberWorks Incorporated. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY MemberWorks Incorporated ("MemberWorks" or the "Company") is a leading designer and provider of innovative membership service programs. The Company addresses the needs of organizations seeking to leverage the expertise of an outside provider in offering these programs. MemberWorks offers its programs to increasingly sophisticated consumers seeking economy, efficiency and convenience in their purchase of products and services. For participating vendors, the programs provide the opportunity to reach a large number of demographically attractive members at minimal incremental marketing cost. As of June 30, 1996, the Company had approximately 40 client organizations and approximately 1.5 million members. The Company currently offers eight membership programs in broad lifestyle areas such as health, dental, travel, entertainment, sports, financial, and computers and software. The Company offers memberships primarily on an individual basis. Individual memberships are marketed by the Company to consumers listed in databases provided to it by clients. The Company analyzes these client lists to identify likely members utilizing a sophisticated, proprietary membership database system. Individual members pay fees directly to the Company, while the Company incurs the marketing costs to solicit these members and pays royalties to the clients on membership fees. The Company solicits members for its programs primarily through third-party telemarketers and to a lesser extent direct mail campaigns. Some of the Company's individual memberships are available at retail stores and on-line through the World Wide Web. Recently, the Company also began to offer memberships on a wholesale basis. Wholesale memberships incorporate elements from the Company's eight membership programs and are sold to client organizations who then market them to their consumers. The Company distributes its programs almost exclusively through credit card issuers. Currently, the Company has 36 credit card issuer clients to whom it pays royalties, including 10 of the top 20 issuers of bank credit cards, such as Household Credit Services, Inc. and Capital One Financial Corp., four of the top five issuers of oil company credit cards, such as Shell Oil Company and Texaco Credit Card Services, and the leading issuer of retail company credit cards, Sears, Roebuck and Co. The Company has developed a consultative product development process which it believes has allowed it to respond quickly and effectively to market demand for new products. The Company believes it was the first membership services company to introduce aggregated discount services in health, sports, financial and, most recently, through Home PC Link, personal computers and software. The Company also believes that its programs are innovative with respect to the variety and quality of particular services, discounts and other features which those programs offer. To achieve its objective of becoming the leading provider of innovative membership programs, the Company intends to continue to develop innovative service programs for broad markets, expand existing and develop new distribution channels, maintain and build its renewal membership base, offer premium quality services, develop and use innovative technical solutions, leverage and develop multiple vendor partners, and pursue international opportunities. 4 6 THE OFFERING Common Stock offered by the Company....................... shares Common Stock offered by the Selling Stockholders.......... shares Common Stock outstanding after the offering............... shares(1) Use of Proceeds........................................... Redemption of redeemable preferred stock and general corporate purposes, including the acquisition of new members, program development, capital expenditures and working capital. Proposed Nasdaq National Market symbol.................... MBRS
SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
YEAR ENDED JUNE 30, ------------------------------- 1994 1995 1996 ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues................................................................ $25,830 $41,547 $57,012 Total expenses.......................................................... 31,846 52,279 62,259 Net loss................................................................ (6,016) (10,732) (5,247) Pro forma net loss per share(2)......................................... $ (2.94) Pro forma weighted average common and common equivalent shares outstanding(2)........................................................ 1,839
JUNE 30, 1996 ----------------------------------------------- PRO PRO FORMA ACTUAL FORMA(3) AS ADJUSTED(3)(4) -------- ------------ ----------------- BALANCE SHEET DATA: Cash and cash equivalents............................... $ 4,312 $ 4,312 $ Working capital (deficit)............................... (10,561) (10,561) Total assets............................................ 19,715 19,715 Deferred membership income, net......................... 8,416 8,416 Long-term obligations................................... 1,089 1,089 Redeemable preferred stock.............................. 20,487 1,949 Total stockholders' equity (deficit).................... (36,332) (17,794)
- --------------- (1) Based on the number of shares of Common Stock outstanding as of June 30, 1996. Excludes 177,467 shares of Common Stock issuable pursuant to stock options outstanding at June 30, 1996 (of which options to purchase 52,525 shares were exercisable) at a weighted average exercise price of $18.89 per share, and 53,864 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 1996 (all of which warrants were exercisable) at a weighted average exercise price of $9.29 per share. See "Capitalization," "Management -- Stock Plans," "Certain Transactions" and "Principal and Selling Stockholders." Also excludes 18,000 shares of Common Stock issuable upon exercise of options that may be granted to an executive officer of the Company upon achievement of certain performance goals prior to December 31, 1996. All such options will be exercisable at an exercise price of $20.00 per share and will vest ratably over a four-year period. See "Management -- Executive Compensation." (2) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the computation of pro forma net loss per share and the shares used in computing pro forma net loss per share. (3) Gives effect to the conversion of all outstanding shares of the Company's Class A Common Stock and Series A, Series B, Series C, Series D and Series H Preferred Stock into an aggregate of 1,675,311 shares of Common Stock. (4) As adjusted to give effect to the sale of shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $ per share, and the application of the estimated net proceeds therefrom, including the redemption of all outstanding shares of the Company's Series E and Series F Preferred Stock upon the closing of this offering. See "Use of Proceeds." Except as otherwise indicated, all information in this Prospectus (i) reflects the conversion of all outstanding shares of the Company's Class B Common Stock into an aggregate of 11,723 shares of Common Stock, effected in August 1996; (ii) reflects the conversion of all outstanding shares of the Company's Class A Common Stock and Series A, Series B, Series C, Series D and Series H Preferred Stock into an aggregate of 1,675,311 shares of Common Stock upon the closing of this offering; (iii) reflects the redemption of all outstanding shares of the Company's Series E and Series F Preferred Stock upon the closing of this offering; and (iv) assumes no exercise of the Underwriters' over-allotment option. The Company's fiscal year ends on June 30 of each year. 5 7 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth in the following risk factors and elsewhere in this Prospectus. HISTORY OF LOSSES The Company has incurred significant operating losses since its inception. As of June 30, 1996, the Company had an accumulated deficit of approximately $38.3 million. For fiscal years 1996 and 1995, the Company incurred net losses of approximately $5.2 million and $10.7 million, respectively. Because of on-going costs in connection with obtaining new members, the Company expects to continue to incur operating and net losses at least through fiscal 1997. Although the Company has experienced revenue growth in recent periods, such growth rates may not be sustainable and are not indicative of future operating results. There can be no assurance that the Company will achieve or maintain profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON CLIENTS; CLIENT CONCENTRATION The Company obtains substantially all of the information necessary to the Company's marketing efforts from customer lists supplied by its clients. Clients provide the lists to the Company for use in marketing a single, specific program which has been pre-approved by the client. As a result, the Company's ability to market a new program to an existing customer base or an existing program to a new customer base is dependent on first obtaining approval from a client. Approximately 61.3% of the Company's revenues for the year ended June 30, 1996 was attributable to members solicited from the customer lists provided by three key clients, including approximately 35.2% from customer lists provided by Sears, Roebuck and Co. ("Sears"). These and other client relationships are pursuant to contracts which may be terminated by the client upon 30 to 90 days' notice without penalty. Upon such termination, the Company generally has the right to continue its relationship with the client's customers that have become program members for a specified period to substantially the same extent as prior to the termination, but may not resolicit those members upon such members' cancellation or non-renewal of the membership. Approximately 75% of the revenue attributable to Sears for the year ended June 30, 1996 was generated pursuant to a contract which also provides that, upon termination of the agreement for default, Sears may prohibit the Company from renewing memberships and otherwise cause the Company to terminate its relationship with existing members. Events that constitute default include events outside the control of the Company, including acts and omissions by the Company's third-party vendors. There can be no assurance that one or more of the Company's key or other clients will not terminate its relationship with the Company or that clients will provide additional customer lists to the Company for use in further marketing new or existing membership programs. In addition, the Company's agreement with one of its key clients expires in September 1996, and there can be no assurance that the client will renew such agreement on favorable terms, if at all. Termination or expiration of a key client relationship could have a material adverse effect on the future revenues from existing programs of which such client's customers are members and on the Company's ability to further market new or existing programs through such client. Approximately 25% of the revenue attributable to Sears for the year ended June 30, 1996 was generated pursuant to a contract which grants Sears the option, exercisable at any time, to assume the obligations of the Company under a specified membership program in exchange for a fee or commission per member. The agreement provides that the fee or commission shall be negotiated by the Company and Sears, or otherwise be subject to binding arbitration. There can be no assurance that, 6 8 upon exercise of such option, the Company would receive, as a result of negotiation, arbitration or otherwise, revenue or net income commensurate with the amount which the Company would receive if the option were not exercised. Failure to receive a commensurate amount, and the loss of the ability to market to the members of the program following exercise of the option, could have a material adverse effect on the Company's business, financial condition and results of operations. Client relationships generally take six months or more to develop and are based in part on professional relationships and the reputation of the Company's management and marketing personnel. As a result, client relationships may be adversely affected by events beyond the Company's control, such as departures of key personnel and alterations in professional relationships, and such clients may not be replaced on a timely basis, if at all. The loss of any client, particularly a key client, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Distribution." DEPENDENCE ON MEMBERSHIP RENEWALS The Company generally incurs losses and negative cash flow during the initial year of an individual membership program, as compared to renewal years, due primarily to higher marketing costs associated with initial member procurement. In addition, the Company experiences a higher percentage of cancellations during the initial membership period as compared to renewal periods. During an initial annual membership term or renewal term, a member may cancel his or her membership in the program, generally for a complete refund of the membership fee for that period. Accordingly, the profitability of each of the Company's programs depends on recurring and sustained membership renewals. Renewal rates are inherently uncertain and are subject to several factors, many of which are outside of the Company's control, including changing member preferences, competitive price pressures, general economic conditions, customer satisfaction and credit card holder turnover. There can be no assurance that a particular program will generate sufficient renewals to become profitable or that memberships, if renewed, will not be canceled. Failure of one or more of the Company's programs to generate recurring and sustained membership renewals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. Factors which affect the Company's financial results include: the timing and cancellation of customer orders; the Company's ability to introduce new programs on a timely basis; the introduction of programs by the Company's competitors; market acceptance of the Company's and its clients' programs; the timing of investments in program development; personnel changes; the demand for membership programs generally; the mix of programs offered by the Company; unanticipated service interruptions; increased costs associated with expansion of operations; the availability of vendors to support offered programs; the rate of renewal by existing members of programs; the level of enthusiasm for health and fitness, travel, entertainment and leisure activities, and other lifestyle elements underlying the Company's programs; and competitive pressures on selling prices. Many of these factors are beyond the Company's control. Because the Company determines its expenditure levels in advance of each quarter, the Company's ability to reduce costs quickly in response to any revenue shortfall is limited, and thus operating results would be adversely affected if projected revenues for a given quarter are not achieved. The Company incurs significant start-up costs in advance of the offering of a new program, including costs associated with hiring and training additional personnel, program development and distributing membership kits. In addition, any delay in the offering of the program, by the Company, its clients or otherwise, or slower than anticipated consumer acceptance of such program, could increase the Company's cost of revenues in a given period. There also can be no assurance that future acquisitions, if any, by the 7 9 Company will not have an adverse effect upon the Company's results of operations, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired business are being integrated into the Company's operations. In addition, the Company is required to grant options to purchase up to 18,000 shares of Common Stock to an executive officer upon achievement of certain performance goals, which options shall be exercisable at an exercise price of $20.00 per share. To the extent that such options are granted, the Company will incur compensation expense ratably over the four-year vesting period in an aggregate amount equal to the number of options granted multiplied by the difference between the exercise price and the trading price of the Company's Common Stock on the date of the grant. The Company's agreement to grant such options terminates on December 31, 1996. Due to the foregoing and other factors, the Company believes that its quarterly revenues, expenses and operating results are likely to vary significantly in the future, that period to period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. It is also likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors, which, in turn, could have a severe adverse effect on the price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTENSE COMPETITION Competition in the membership services market for clients, such as credit card issuers, is intense. Several of the Company's competitors offer membership programs which provide services similar to, or which directly compete with, those provided by the Company. Because contracts between clients and program providers are often exclusive with respect to a particular service, potential clients may be prohibited from contracting with the Company to promote a program if the services provided by the Company's program are similar to, or merely overlap with, the services provided by an existing program of a competitor. Most of the Company's clients provide, either directly or through third parties, programs offered by the Company's competitors, and the Company's agreement with Sears, its principal client, permits Sears to offer its customers programs that directly compete with those offered by the Company. Competition for new members is also intense, particularly as the market becomes saturated with customers who are already members of competing programs. The Company's principal competitor is CUC International Inc. ("CUC"). The Company's other competitors include large retailers, travel agencies, financial institutions and other organizations which offer benefit programs to their customers. There can be no assurance that the Company's competitors will not increase their emphasis on programs similar to those offered by the Company and more directly compete with the Company, that new competitors will not enter the market, or that other businesses will not themselves introduce competing programs. Many of the Company's current and prospective competitors, including CUC, have substantially larger customer bases and greater financial and other resources than the Company. There can be no assurance that the Company's current or potential competitors will not provide programs comparable or superior to those provided by the Company at lower membership prices or adapt more quickly than the Company to evolving industry trends or changing market requirements. In addition, alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete effectively against current and future competitors. See "Business -- Competition." NEW PROGRAM INTRODUCTIONS The Company's business is substantially dependent on its ability to develop and successfully introduce new programs which generate consumer interest. Failure to introduce new programs in a timely manner could result in the Company's competitors acquiring additional market share for a program in a particular area of consumer interest. In addition, the introduction or announcement of 8 10 new programs by the Company or by others could render existing programs uncompetitive or obsolete, or result in a delay or decrease in orders for existing programs as customers evaluate new programs or select the new programs as an alternative to existing programs. Therefore, the announcement or introduction of new programs by the Company or others, or the failure by the Company to introduce new programs which have broad consumer appeal, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Membership Service Programs" and "-- Competition." DEPENDENCE ON VENDORS AND TELEMARKETERS The Company depends on independent vendors to provide most program products and services to members and on telemarketers to market its programs to prospective members. The vendors and telemarketers operate pursuant to agreements with the Company that may be terminated by the vendor or telemarketer with limited prior notice. There can be no assurance that, in the event a vendor or telemarketer ceases operations, or terminates, breaches or chooses not to renew its agreement with the Company, a replacement vendor or telemarketer could be retained on a timely basis, if at all. In addition, vendors and telemarketers are independent contractors and the level and quality of services provided is outside the control of the Company. Any service interruptions, delays or quality problems could result in customer dissatisfaction and membership cancellations, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." DEPENDENCE ON CREDIT CARD INDUSTRY The Company's future success is dependent in large part on continued demand for the Company's programs from businesses within the industries served by the Company. In particular, programs marketed through the Company's credit card issuer clients accounted for substantially all of the Company's revenues in fiscal 1996. A significant downturn in the credit card industry or a trend in that industry to reduce or eliminate its use of membership programs would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is obligated under the terms of its agreement with credit card issuers and merchant processors under rules promulgated by credit card associations such as Visa International and Master Card to maintain certain standards of commercial conduct with respect to credit card users. Violations of such standards could jeopardize the Company's ability to sell its programs using such credit cards as the medium of commercial exchange, which could have a material adverse effect on Company's business, financial condition and results of operations. See "Business -- Distribution." MANAGEMENT OF GROWTH The Company has recently experienced a period of rapid growth that has placed significant demands on its management and other resources, and continued growth, if any, could continue to place significant demands on such resources. Net sales increased from approximately $9.4 million in fiscal 1992 to $57.0 million in fiscal 1996. In addition, the number of employees increased from 76 to approximately 400 during the same period. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force. There can be no assurance that the Company's personnel, systems, procedures and controls will be adequate to support the Company's operations, and the failure to support the Company's operations effectively could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although the Company has not historically generated significant international revenues, the Company intends to attempt to penetrate international markets. In order to successfully expand internationally, the Company must establish foreign operations and hire additional personnel. This will require significant management attention and financial resources and could materially adversely affect the Company's operating margins. International sales and operations are subject to numerous risks, including unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, difficulties in protecting intellectual 9 11 property rights, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, implementation of foreign exchange controls and potentially adverse tax consequences. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's future international operations and, consequently, on the Company's business, financial condition and results of operations. See "Business -- Strategy" and "-- Sales and Marketing." MEMBERSHIP PROGRAM INDUSTRY; NEGATIVE IMPACT OF COMPETING INDUSTRIES Providers of membership service programs compete for client marketing budget dollars with other marketing activities and, in particular, other forms of direct marketing activities, such as direct mail. In recent years, there have been significant advances in new forms of direct marketing, such as the development of interactive shopping and data collection through television, the Internet and other media. Many industry experts predict that electronic interactive commerce, such as shopping and information exchange via the World Wide Web, will proliferate significantly in the foreseeable future. To the extent such proliferation occurs, it could have a material adverse effect on the demand for membership service programs. Furthermore, as the telemarketing industry continues to grow, the effectiveness of telemarketing, which is the Company's major means of marketing its programs, as a direct marketing tool may decrease as a result of increased consumer resistance to telemarketing in general. See "Business -- Industry Overview," "-- Sales and Marketing" and "-- Competition." FUTURE CAPITAL NEEDS The Company typically incurs high costs in the year a program is introduced. Principal elements of these costs relate to hiring personnel, developing program content, contracting with vendors, drafting, testing and refining telemarketing scripts and creating membership kits for mailing to potential new program members. The Company must incur costs to market programs to each potential member, regardless of whether that individual actually becomes a paying member. The Company's capital base is smaller than that of many of its competitors, and there can be no assurance that the Company's cash resources will be able to sustain its business, particularly if it experiences a reduction in revenues for a prolonged period or if it faces substantial unexpected capital requirements. To the extent that such cash resources are insufficient to fund the Company's activities, additional funds will be required. There can be no assurance that additional financing will be available on reasonable terms or at all. If additional capital is raised through the sale of additional equity or convertible debt securities, dilution to the Company's stockholders would occur. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RELIANCE ON COMPUTER AND COMMUNICATIONS SYSTEMS; TECHNOLOGY RISKS The Company's business is highly dependent on its computer and telecommunications systems and any temporary or permanent loss of either system, for whatever reason, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the technologies on which the Company is dependent to compete effectively and meet its clients' needs are rapidly evolving and in many instances are characterized by short product life cycles and/or innovation. As a result, the Company is dependent on ongoing, significant investment in advanced computer and telecommunications technology, including automated call distributors and digital switches, and its ability to anticipate and adapt to technological shifts. There can be no assurance that the Company will be successful in anticipating or adapting to technological changes or in selecting and developing new and enhanced technology on a timely basis. See "Business -- Technology." DEPENDENCE ON TELEPHONE SERVICE The Company markets and services its programs primarily telephonically, and accordingly, its business is highly dependent on telephone services provided by various local and long distance telephone companies. Any significant interruption in telephone services could adversely affect the 10 12 Company. Additionally, limitations on the ability of telephone companies to provide the Company with increased capacity that may be required in the future, if any, could adversely affect the Company's business, financial condition and results of operations. Rate increases imposed by these telephone companies will increase the Company's operating expenses and could materially adversely affect its business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on the members of its management and marketing staff, the loss of one or more of whom could have a material adverse effect on the Company. In addition, the Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled managerial and marketing personnel, particularly as the Company expands its activities. The Company faces significant competition for such personnel, and there can be no assurance that the Company will be successful in hiring or retaining the personnel it requires for continued growth, if any. The failure to hire and retain such personnel could materially and adversely affect the Company's business, financial condition and results of operations. See "Management." GOVERNMENT REGULATION; ADVERSE PUBLICITY The primary means which the Company uses to market its programs is telemarketing. The telemarketing industry has become subject to an increasing amount of Federal and state regulation as well as general public scrutiny in the past several years. The Federal Telephone Consumer Protection Act of 1991 limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and state attorneys general have authority to prevent telemarketing activities that constitute "unfair or deceptive acts or practices." Additionally, some states have enacted laws and others are considering enacting laws targeted directly at telemarketing practices, and there can be no assurance that any such laws, if enacted, will not adversely affect or limit the Company's current or future operations. Compliance with these regulations is generally the responsibility of the Company, and the Company could be subject to a variety of enforcement or private actions for any failure to comply with such regulations. The Company's provision of membership programs requires the Company to comply with certain state regulations, changes in which could materially increase the Company's operating costs associated with complying with such regulations. The risk of non-compliance by the Company with any rules and regulations enforced by a Federal or state consumer protection authority may subject the Company or its management to fines or various forms of civil or criminal prosecution, any of which could materially adversely affect the Company's business, financial condition and results of operations. Also, the media often publicizes perceived non-compliance with consumer protection regulations and violations of notions of fair dealing with consumers, and the membership programs industry is susceptible to preemptory charges by the media of regulatory noncompliance and unfair dealing. Any such publicity is potentially damaging to the Company's reputation, its client relationships and consumer acceptance and loyalty. See "Business -- Government Regulation." The Company believes that its Countrywide Dental Program currently is not considered to constitute an insurance program either by Federal or any state insurance regulatory authority where it is offered. If this program were in the future to be viewed by a Federal or any state insurance regulatory authority as an insurance program, this would subject the Company to the regulatory authority of such Federal or state insurance authority. The insurance industry currently is one of the most heavily regulated industries in the United States. The subjection of the Company to such regulatory authority would significantly increase the Company's costs associated with regulatory compliance and potentially cause the Company to terminate its Countrywide Dental Program in particular states, either of which would materially adversely affect the 11 13 Company's business, financial condition and results of operations. There can be no assurance that the Company will not in the future become subject to regulatory authority by the Federal or any state government as the result of its Countrywide Dental Program. See "Business -- Membership Service Programs" and "-- Government Regulation." NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiations between the Company, the Selling Stockholders and the Representatives of the Underwriters. See "Underwriting" for information relating to the method of determining the initial public offering price. Factors such as fluctuations in the Company's operating results, announcements of product or service innovations or new contracts by the Company or its competitors, and market conditions for stocks of companies similar to the Company and the condition of the capital markets generally could have a significant impact on the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of substantial amounts of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon closing of this offering, based upon the number of shares outstanding at June 30, 1996 and assuming no exercise after June 30, 1996 of outstanding stock options or warrants, there will be shares of Common Stock of the Company outstanding. Of these shares, the shares offered hereby ( shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"). The remaining shares of Common Stock are deemed "restricted securities" as that term is defined in Rule 144. Of the restricted securities, shares of Common Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See "Underwriting." Approximately shares of Common Stock, which are not subject to Lock-Up Agreements, will be eligible for sale in the public market in accordance with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the date of this Prospectus. Upon expiration of the Lock-Up Agreements 181 days after the date of this Prospectus, approximately additional shares of Common Stock will be available for sale in the public market, subject to the provisions of Rule 144 under the Securities Act. In addition, upon expiration of Lock-Up Agreements, an additional shares subject to stock options outstanding, if exercised, will be eligible for sale pursuant to Rule 701 unless sold pursuant to an effective registration statement under the Securities Act. As of June 30, 1996 there were outstanding warrants to purchase 53,864 shares of Common Stock. These warrants contain net exercise provisions. Accordingly, any shares issued upon net exercise will be eligible for sale immediately upon expiration of Lock-Up Agreements pursuant to Rule 144. See "Shares Eligible for Future Sale." In addition, after this offering, the holders of approximately shares of Common Stock and warrants to purchase an aggregate of shares of Common Stock will be entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by Affiliates) immediately upon the effectiveness of such registration. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were to include in a Company initiated registration such shares pursuant to the exercise of piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise additional capital. See "Description of Capital Stock -- Registration Rights." 12 14 CONTROL BY DIRECTORS AND OFFICERS Upon completion of this offering, the Company's officers and directors and their affiliates will beneficially own approximately % of the Company's outstanding Common Stock. As a practical matter, these stockholders, if acting together, would have the ability to elect the Company's directors and may have the ability to determine the outcome of corporate actions requiring stockholder approval, irrespective of how other stockholders of the Company may vote. This concentration of ownership also may have the effect of delaying or preventing a change in control of the Company. See "Management" and "Principal and Selling Stockholders." MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS Excluding approximately $2.6 million designated to redeem the Company's Series E and F Preferred Stock, the Company has not designated any specific use for the net proceeds from the sale of Common Stock described in this Prospectus. Rather, the Company expects to use the net proceeds for general corporate purposes, including working capital. Consequently, the Board of Directors and management of the Company will have significant discretion in applying the net proceeds of this offering. See "Use of Proceeds." ANTI-TAKEOVER PROVISIONS The Company's Restated Certificate of Incorporation (the "Charter") requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and requires reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chairman of the Board, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. The Charter provides for a classified Board of Directors, and members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares of capital stock of the Company entitled to vote. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The Company has no present plans to issue any shares of Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. These provisions, and other provisions of the Charter, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. See "Description of Capital Stock -- Delaware Law and Certain Charter and By-Law Provisions." DILUTION Purchasers of shares of Common Stock in this offering will suffer an immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. To the extent that outstanding options to purchase the Company's Common stock are exercised, there will be further dilution. See "Dilution." LACK OF DIVIDENDS The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share (after deducting estimated underwriting discounts and commissions and offering expenses) are estimated to be approximately $ million. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. Approximately $2.6 million of the estimated net proceeds will be applied to redeem all outstanding shares of Series E and Series F Preferred Stock, including approximately $637,000 in accrued dividends and redemption premiums. The remaining proceeds will be used for general corporate purposes, including acquisition of new members, program development, capital expenditures and working capital. A portion of the net proceeds may also be used for the acquisition of businesses, services and technologies that are complementary to those of the Company. The Company presently has no commitments or understandings for any such acquisitions, and is not presently engaged in any discussions or negotiations for any such acquisitions, and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the Company intends to invest the net proceeds from this offering in short-term interest-bearing securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends to date and anticipates that all of its earnings in the foreseeable future will be retained for use in its business. The Company's future dividend policy will depend on the Company's earnings, capital requirements, financial condition, requirements of the financing agreements to which the Company is a party and other factors considered relevant by the Board of Directors. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996 on (i) an actual basis, (ii) a pro forma basis to give effect to the conversion of all outstanding shares of the Company's Class A Common Stock and Series A, Series B, Series C, Series D and Series H Preferred Stock into an aggregate of 1,675,311 shares of Common Stock upon the closing of this offering, and (iii) a pro forma as adjusted basis to reflect the issuance and sale by the Company of shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, and the application of the net proceeds therefrom, including the redemption of all outstanding shares of the Company's Series E and Series F Preferred Stock upon the closing of this offering. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (IN THOUSANDS) Deferred membership income, net.......................... $ 8,416 $ 8,416 $ Long-term obligations.................................... 1,089 1,089 Redeemable Preferred Stock, $0.01 par value; actual: 978,226 shares authorized, 978,226 shares issued and outstanding; pro forma: 978,226 shares authorized, 80,536 shares issued and outstanding; pro forma as adjusted: no shares authorized, issued and outstanding ........................................... 20,487 1,949 Total stockholders' equity (deficit)(1): Preferred Stock, $0.01 par value; actual and pro forma: no shares authorized, issued and outstanding; pro forma as adjusted: 1,000,000 shares authorized, no shares issued and outstanding................................. -- -- Common Stock, $0.01 par value; 40,000,000 shares authorized; actual: 813,487 shares issued and outstanding; pro forma: 1,711,177 shares issued and outstanding; pro forma as adjusted: shares issued and outstanding................................. 8 17 Additional paid-in-capital.......................... 2,253 20,782 Accumulated deficit................................. (38,320) (38,320) Treasury Stock, 24,143 shares at cost............... (273) (273) -------- -------- Total stockholders' equity (deficit).............. (36,332) (17,794) -------- -------- Total capitalization (deficit)................. $ (6,340) $ (6,340) $ ======== ======== ========
- --------------- (1) Excludes 177,467 shares of Common Stock issuable pursuant to stock options outstanding at June 30, 1996 (of which options to purchase 52,525 shares were exercisable) at a weighted average exercise price of $18.89 per share and 53,864 shares of Class A Common Stock issuable upon exercise of warrants outstanding at June 30, 1996 (all of which warrants were exercisable) at a weighted average exercise price of $9.29 per share. See "Management -- Stock Plans." Also excludes 18,000 shares of Common Stock that may be granted to an executive officer of the Company upon achievement of certain performance goals prior to December 31, 1996. All of such options will be exercisable at an exercise price of $20.00 per share and will vest ratably over a four-year period. See "Management -- Executive Compensation." 15 17 DILUTION The pro forma deficit in net tangible book value of the Company's Common Stock as of June 30, 1996, was approximately $18,459,000, or $10.94 per share of Common Stock. Pro forma net tangible book value per share of Common Stock represents the amount of tangible assets (total assets less intangible assets) of the Company reduced by the Company's total liabilities and the redemption value of the Series E and Series F preferred stock, divided by the pro forma number of shares of Common Stock outstanding assuming conversion of all outstanding shares of Class A Common Stock and convertible preferred stock. After giving effect to the sale by the Company of shares of Common Stock offered by the Company hereby (assuming an initial public offering price of $ per share) and receipt of the net proceeds therefrom, the net tangible book value of the Company at June 30, 1996 would have been approximately , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares in this offering. The following table illustrates the per share dilution: Assumed initial public offering price per share........ $ Pro forma net tangible book value per share as of June 30, 1996..................................... $ Increase per share attributable to new investors..... -------- Pro forma net tangible book value per share after offering............................................. -------- Dilution per share to new investors.................... $ ========
The following table summarizes, on a pro forma basis as of June 30, 1996, the differences between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average consideration paid per share by the existing stockholders and by the new investors:
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders(1)......... 1,687,034 % $18,773,700 % $ 11.13 New investors(1)................. $ ------- --- -------- --- Total.................. % $ % ======= === ======== ===
- --------------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares held by existing shareholders as of June 30, 1996 to be reduced to shares or % of the total number of shares of Common Stock outstanding after this offering, and will increase the number of shares held by new investors to or % of the total number of shares of Common Stock outstanding after this offering. See "Principal and Selling Stockholders." The foregoing table assumes no exercise after June 30, 1996 of options or warrants to purchase shares of Common Stock outstanding at the date of this Prospectus. As of June 30, 1996, there were options outstanding to purchase an aggregate of 177,467 shares of Common Stock at a weighted average exercise price of $18.89 per share, and warrants outstanding to purchase an aggregate of 53,864 shares of Common Stock at a weighted average exercise price of $9.29 per share. To the extent that outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management -- Stock Option Plans." The foregoing table also excludes 18,000 shares of Common Stock issuable upon exercise of options that may be granted to an executive officer of the Company upon achievement of certain performance goals prior to December 31, 1996. All of such options will be exercisable at an exercise price of $20.00 per share and will vest ratably over a four-year vesting period. See "Management -- Executive Compensation." 16 18 SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated financial information set forth below for the years ended June 30, 1992 and 1993, and the selected consolidated balance sheet data as of June 30, 1992, 1993 and 1994 is derived from audited financial statements which are not included in this Prospectus. The selected consolidated financial information set forth below for each of the years ended June 30, 1994 (except as stated above), 1995 and 1996 is derived from audited consolidated financial statements of the Company, which are included elsewhere in this Prospectus. The selected consolidated financial information of the Company is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEAR ENDED JUNE 30, ---------------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.............................. $ 9,414 $ 17,269 $ 25,830 $ 41,547 $57,012 Total expenses........................ 13,879 21,527 31,846 52,279 62,259 ------- -------- -------- -------- ------- Net loss.............................. $(4,465) $ (4,258) $ (6,016) $(10,732) $(5,247) ======= ======== ======== ======== ======= Pro forma net loss per share.......... $ (2.94) ======= Pro forma weighted average common and common equivalent shares outstanding......................... 1,839 =======
JUNE 30, ---------------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- -------- -------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............. $ 463 $ 1,017 $ 2,566 $ 5,323 $ 4,312 Working capital (deficit)............. (2,910) (2,205) (8,345) (8,148) (10,561) Total assets.......................... 5,146 5,789 9,521 11,396 19,715 Long-term obligations................. 2,863 4,338 3,731 8,065 1,089 Redeemable preferred stock............ 4,573 5,216 6,096 10,926 20,487 Stockholders' equity (deficit)........ (8,841) (12,737) (18,627) (30,367) (36,332)
17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW MemberWorks addresses the needs of organizations seeking to leverage the expertise of an outside provider in offering membership service programs. The Company was founded in 1989 and had approximately 1.5 million members as of June 30, 1996. Membership service programs offer selected products and services from a variety of vendors intended to enhance the existing relationships between businesses and consumers. MemberWorks offers these programs to increasingly sophisticated consumers seeking economy, efficiency and convenience in their selection of products and services. The membership programs which the Company offers address such broad lifestyle needs as health and dental, travel, entertainment, sports, personal finance and computers and software. The Company's programs are marketed to credit card holders through arrangements with its client organizations, including banks, retailers, major oil companies and other credit card issuers. Such organizations include Household Credit Services, Capital One Financial Corp. ("Capital One"), Sears, Shell Oil Company ("Shell") and Texaco Credit Card Services ("Texaco"). The Company divides its memberships into two categories, individual and wholesale. Individual memberships consist of members who pay fees directly to the Company. The Company pays the marketing costs to solicit individual members, primarily using direct marketing techniques and customer lists provided by client organizations. In the case of wholesale memberships, the Company sells the membership service program to its client organization. The organization then either re-sells the program to its customers or provides the program to them as a benefit. In either wholesale case, the client is responsible for paying periodic membership fees to the Company and incurs substantially all marketing costs to solicit members. To date, substantially all of the Company's revenues have been from individual memberships. The Company derives its revenues principally from annually renewable membership fees. The annual membership fees for the Company's programs are generally billed to subscribers via their credit card accounts and remitted to the Company by a credit card processor. Upon receipt, the Company then pays royalties to its client. In certain cases, membership fees are remitted to the Company by the credit card issuer client, less royalties due the client. Annual memberships are renewed automatically and continue in effect unless canceled by the member. Revenues are presented net of expected cancellations. The Company receives full payment of annual fees at or near the beginning of the applicable period, but recognizes revenue with respect to the payment ratably over the membership period. Similarly, the costs associated with soliciting each member (such as marketing, royalties and printing and mailing of membership materials) are amortized ratably over the same period. The Company generally incurs losses and negative cash flow during the initial year of an individual membership program, as compared to renewal years, due primarily to higher marketing costs associated with initial member procurement. In addition, the Company experiences a higher percentage of cancellations during the initial membership period as compared to renewal periods. During the course of an initial annual membership term or renewal term, a member may cancel a membership in the program, generally for a complete refund of the membership fee paid for that period. Accordingly, the profitability of each of the Company's programs depends on recurring and sustained membership renewals. The Company has focused its resources on developing, introducing and expanding innovative new programs and, primarily as a result of this effort, it has experienced net 18 20 losses since its inception. The Company expects these net losses to continue at least through its current fiscal year. During December 1994, the Company discontinued its domestic discount coupon book business and recorded a charge of $659,000 to operations, primarily to write off unamortized goodwill of $166,000 and other assets of $461,000. Effective June 30, 1995, the Company returned its domestic discount coupon book operations, cash of $175,000 and net fixed assets of $14,000 to the former owner of the business in exchange for the shares of Common Stock issued in the original exchange. Fiscal 1995 consolidated operating results include revenues of $556,000 and operating losses of $1.6 million, including the $659,000 charge discussed above, attributable to the discontinued business. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items on the Company's consolidated statements of operations as a percentage of revenues:
YEAR ENDED JUNE 30, ----------------------------- 1994 1995 1996 ----- ----- ----- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.............................................. 100.0% 100.0% 100.0% Expenses: Operating.......................................... 20.7 23.4 20.4 Marketing.......................................... 78.2 78.9 67.4 General and administrative......................... 21.6 21.4 20.9 Interest expense, net.............................. 2.8 2.1 0.5 ----- ----- ----- Total expenses........................................ 123.3 125.8 109.2 ----- ----- ----- Net loss.............................................. (23.3)% (25.8)% (9.2)% ===== ===== =====
YEARS ENDED JUNE 30, 1996 AND 1995 Revenues. Revenues increased 37.2% to $57.0 million in 1996 from $41.5 million in 1995 due to an increase in the Company's membership base and an increase in the weighted average program fee. The Company's membership base increased to 1.5 million members at June 30, 1996 from 1.1 million members at June 30, 1995. The increase in the Company's membership base was due to an increase in the members enrolled in existing programs and the introduction in 1996 of three new programs. The increase in the weighted average program fee was due to an increase in the percentage of members enrolled in programs with higher fees and an increase in the initial and renewal fees for certain programs. Revenue attributable to members solicited through Sears, Capital One and Associates Credit Card Services, Inc. represented 35.2%, 10.5% and 15.6%, respectively, of total revenues in 1996 and 41.0%, 9.0% and 16.1%, respectively, of total revenues in 1995. Termination of any of these key relationships could have a material adverse effect on the future revenue from existing programs of which such client's customers are members and on the Company's ability to further market new or existing programs through such clients. Operating Expenses. Operating expenses consist of costs incurred in servicing the Company's membership base, including personnel, telephone and computer processing costs, as well as expenses associated with the production and distribution of membership information kits. Operating expenses increased 19.8% to $11.6 million in 1996 from $9.7 million in 1995. The increase was due principally to additional costs incurred to support the growth in the membership base, partially offset by the absence of costs associated with the Company's discount coupon business, which was discontinued in 1995. As a percentage of revenues, operating expenses decreased to 20.4% in 1996 from 23.4% in 1995. Excluding expenses associated with the discontinued discount coupon business, operating expenses as a 19 21 percentage of revenues in 1995 would have been 20.7%. The decrease as a percentage of revenues primarily resulted from increased efficiencies in the Company's membership services operations. The Company commenced operations at its new membership service facility in the quarter ended June 30, 1996 and, primarily as a result, the Company expects operating expenses to increase as a percentage of revenues in 1997. Marketing Expenses. Marketing expenses consist of fees to telemarketers to solicit potential members, royalties to clients, direct mail costs and other solicitation expenses. Marketing expenses increased 17.1% to $38.4 million in 1996 from $32.8 million in 1995. The increase was due primarily to increased telemarketing costs and increased royalty expense as a result of a larger membership base. As a percentage of revenues, marketing expenses decreased to 67.4% in 1996 from 78.9% in 1995. The decrease was due to lower per member telemarketing costs, as well as the favorable effect of an increase in the weighted average program fee and an increase in renewal revenues as a percentage of total revenues. Membership solicitation costs consist of marketing costs and, to a lesser extent, costs associated with the production and distribution of membership information kits, and are amortized ratably over the membership period. Membership solicitation costs increased 17.1% to $47.0 million in 1996 from $40.1 million in 1995 primarily due to increased marketing efforts. General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with the Company's executive, sales, marketing, finance, product and account management functions. General and administrative expenses increased 34.1% to $11.9 million in 1996 from $8.9 million in 1995. The increase was the result of hiring additional personnel at all levels and the related increase in facilities costs, partially offset by the absence of costs associated with the Company's discount coupon business, which was discontinued in 1995. As a percentage of revenues, general and administrative expenses decreased to 20.9% in 1996 from 21.4% in 1995. Excluding general and administrative expenses associated with the discontinued discount coupon business, general and administrative expenses increased as a percentage of revenues to 20.9% in 1996 from 18.7% in 1995. The increase as a percentage of revenues was primarily a result of hiring additional personnel in the second half of fiscal 1996 and a related increase in facilities costs. The Company expects general and administrative expenses will continue to increase as a percentage of revenues in 1997 as the Company incurs full year expenses associated with these costs. Interest Expense, Net. Interest expense, net is primarily composed of interest income from cash and cash equivalents, offset by financing charges relating to notes payable, equipment leases and other debt. Interest expense, net decreased to $310,000 in 1996 from $893,000 in 1995 as the result of lower borrowings by the Company in 1996. The Company generally invests in short-term, investment-grade, interest bearing securities. The amount of interest income fluctuates based upon the amount of funds available for investment and prevailing interest rates. Provision for Income Taxes. The Company made no provision for income taxes for the years ended June 30, 1996 and 1995 due to the net operating losses incurred during those years. As of June 30, 1996, the Company had accumulated net operating loss carry forwards of $17.7 million. YEARS ENDED JUNE 30, 1995 AND 1994 Revenues. Revenues increased 60.8% to $41.5 million in 1995 from $25.8 million in 1994 due to an increase in the Company's membership base and an increase in the weighted average program fee. The Company's membership base increased to 1.1 million members at June 30, 1995 from 820,000 members at June 30, 1994. The increase in the Company's membership base was due to an increase in the members enrolled in existing programs and the continued roll-out of a new program introduced in 1994. The increase in the weighted average program fee was due to an increase in the percentage of members enrolled in programs with higher fees and an increase in the initial and renewal fees for certain programs. 20 22 Revenue attributable to members solicited through Sears, Capital One and Associates represented 41.0%, 9.0% and 16.1%, respectively, of total revenues in 1995 and 55.4%, 5.5% and 7.4%, respectively, of total revenues in 1994. Operating Expenses. Operating expenses increased 81.2% to $9.7 million in 1995 from $5.4 million in 1994. The increase was due principally to additional costs incurred to support the growth in the membership base. As a percentage of revenues, operating expenses increased to 23.4% in 1995 from 20.7% in 1994. Excluding the one-time write-off of $659,000 in costs in 1995 related to the discontinuation of the Company's discount coupon business, operating expenses as a percentage of revenues increased to 21.8% in 1995 from 20.7% in 1994. The increase as a percentage of revenues primarily resulted from decreased efficiency experienced in membership services operations which was necessary to support the Company's rapid revenue growth. Marketing Expenses. Marketing expenses increased 62.5% to $32.8 million in 1995 from $20.2 million in 1994. The increase was due primarily to increased telemarketing costs and increased royalty expense as a result of a larger membership base. As a percentage of revenues, marketing expenses increased to 78.9% in 1995 from 78.2% in 1994. The increase as a percentage of revenues was primarily due to higher per member telemarketing costs, partially offset by the favorable effect of an increase in the weighted average program fee and an increase in renewal revenues as a percentage of total revenues. Membership solicitation costs increased 40.3% to $40.1 million in 1995 from $28.6 million in 1994 primarily due to increased marketing efforts. General and Administrative Expenses. General and administrative expenses increased 58.9% to $8.9 million in 1995 from $5.6 million in 1994. The increase was primarily the result of hiring additional personnel at all levels and the related increase in facilities costs. As a percentage of revenues, general and administrative expenses decreased to 21.4% in 1995 from 21.6% in 1994. Interest Expense, Net. Interest expense, net increased to $893,000 in 1995 from $712,000 in 1994 as a result of higher borrowings by the Company in 1995. Provision for Income Taxes. The Company made no provision for income taxes for the years ended June 30, 1995 and 1994 due to the net operating losses incurred during those years. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended June 30, 1996 and the percentage of the Company's revenues represented by each item in the respective quarter. In the opinion of the Company's management, this unaudited information has been prepared on a basis consistent with the audited Consolidated Financial Statements appearing elsewhere in this Prospectus and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein when read in conjunction with the Consolidated Financial Statements and related Notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period. 21 23
QUARTER ENDED ----------------------------------------------------------------------------------------------------- FISCAL YEAR 1995 FISCAL YEAR 1996 ------------------------------------------------ ------------------------------------------------ SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1994 1994 1995 1995 1995 1995 1996 1996 --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PERCENTAGE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................. $ 8,988 $ 9,884 $10,948 $11,727 $12,679 $14,089 $14,778 $15,466 ------- ------- ------- ------- ------- ------- ------- ------- Expenses: Operating............... 2,119 3,024 2,126 2,433 2,488 2,893 2,962 3,280 Marketing............... 7,409 7,948 8,571 8,871 9,127 9,626 9,579 10,078 General and administrative........ 2,129 2,542 2,083 2,131 2,060 3,229 3,090 3,537 Interest expense (income), net......... 181 237 232 243 300 (18 ) 3 25 ------- ------- ------- ------- ------- ------- ------- ------- Total expenses............ 11,838 13,751 13,012 13,678 13,975 15,730 15,634 16,920 ------- ------- ------- ------- ------- ------- ------- ------- Net loss.................. $(2,850) $(3,867 ) $(2,064 ) $(1,951 ) $(1,296) $(1,641 ) $ (856 ) $(1,454 ) ======= ======= ======= ======= ======= ======= ======= ======= PERCENTAGE OF TOTAL REVENUES: Revenues.................. 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0 % 100.0 % 100.0 % --------- -------- -------- -------- --------- -------- -------- -------- Expenses: Operating............... 23.6 30.6 19.4 20.7 19.6 20.5 20.0 21.2 Marketing............... 82.4 80.4 78.3 75.6 72.0 68.3 64.8 65.2 General and administrative........ 23.7 25.7 19.0 18.2 16.2 22.9 20.9 22.9 Interest expense (income), net......... 2.0 2.4 2.2 2.1 2.4 (0.1 ) 0.1 0.1 --------- -------- -------- -------- --------- -------- -------- -------- Total expenses............ 131.7 139.1 118.9 116.6 110.2 111.6 105.8 109.4 --------- -------- -------- -------- --------- -------- -------- -------- Net loss.................. (31.7)% (39.1 )% (18.9 )% (16.6 )% (10.2)% (11.6 )% (5.8 )% (9.4 )% ======== ======== ======== ======== ======== ======== ======== ========
The Company's quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. Factors which affect the Company's financial results include: the timing and cancellation of client orders; the Company's ability to introduce new programs on a timely basis; the introduction of programs by the Company's competitors; market acceptance of the Company's and its clients' programs; the timing of investments in program development; personnel changes; the demand for membership programs generally; the mix of programs offered by the Company; unanticipated service interruptions; increased costs associated with expansion of operations; availability of vendors to support offered programs; the rate of renewal by existing members of programs; the level of enthusiasm for health and fitness, travel, entertainment and leisure activities, and other lifestyle elements underlying the Company's programs; and competitive pressures on selling prices. Many of these factors are beyond the Company's control. Because the Company determines its expenditure levels in advance of each quarter, the Company's ability to reduce costs quickly in response to any revenue shortfall is limited, and thus operating results would be adversely affected if projected sales for a given quarter are not achieved. The Company incurs significant start-up costs in advance of the offering of a new program, including costs associated with hiring and training additional personnel, program development and distributing membership kits. In addition, any delay in the offering of the program, by the Company, its clients or otherwise, or slower than anticipated consumer acceptance of such program, could increase the Company's cost of revenues in a given period. There also can be no assurance that future acquisitions, if any, by the Company will not have an adverse effect upon the Company's results operations, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired business are being integrated into the Company's operations. In addition, the Company is required to grant options to purchase up to 18,000 shares of Common Stock to an executive officer upon achievement of certain performance goals, which options shall be exercisable at an exercise price of $20.00 per share. To the extent that such options are granted, the Company will incur compensation expense ratably over the four-year vesting period in an aggregate amount equal to the number of options granted multiplied by the difference between the exercise 22 24 price and the trading price of the Company's Common Stock on the date of the grant. The Company's agreement to grant such options terminates on December 31, 1996. The Company believes that its quarterly revenues, expenses and operating results are likely to vary significantly in the future, that period to period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. It is also likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors, which, in turn, could have a severe adverse affect on the price of the Company's Common Stock. The Company's revenue has increased in each of the quarters presented above. These increases have resulted primarily from an increase in the Company's overall membership base. Operating expenses have varied quarter to quarter due primarily to personnel expenses and other costs associated with providing services for new members or anticipated new members. Operating expenses in the quarter ended December 31, 1994 were relatively high as compared to other quarters primarily due to the discontinuance in 1995 of the Company's domestic discount coupon book business. Marketing expenses have generally increased in each quarter due to increased marketing efforts and increasing royalties associated with an expanding membership base. General and administrative expenses have varied quarter to quarter due primarily to the hiring of additional personnel, particularly in the last two quarters of fiscal 1996, and facilities costs for physical expansion needed to support the Company's growth. General and administrative expenses were lower in the quarters ended March 31, June 30 and September 30, 1995 as compared to prior quarters primarily as a result of the absence of general and administrative expenses associated with the Company's discount coupon business which was discontinued in the quarter ended December 31, 1994. General and administrative expenses in the quarter ended December 31, 1995 were higher primarily due to higher legal, employee recruiting and employee bonus expenses. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded operations primarily through private sales of securities. Total net proceeds from the sale of stock, warrants and notes through June 30, 1996 was $25.0 million. In addition, the Company has a $3.0 million bank line of credit. The line of credit bears interest at 1.5% per annum plus the higher of the base commercial lending rate for the bank or the Federal Funds Rate plus 0.5% per annum and expires in February 1997. At June 30, 1996, $10,000 was outstanding under the line of credit. Net cash provided by operating activities was $1,000 in 1996, net cash used by operating activities was $3.5 million in 1995 and net cash provided by operating activities was $600,000 in 1994. These results were attributable to the Company's strategy to use substantially all of its available cash to fund costs required to increase its membership base. The Company's capital expenditures for 1996, 1995 and 1994 were $1.7 million, $500,000 and $700,000, respectively. These expenditures were for acquisition of fixed assets required to support the Company's growth over the period from 1994 to 1996. Accounts receivable includes $3.6 million of unbilled receivables as of June 30, 1996 (none at June 30, 1995), which were billed and collected subsequent to the balance sheet date, and arise in certain instances when the Company elects to bill subsequent to, rather than upon, acceptance of membership. The Company had cash and cash equivalents of $4.3 million as of June 30, 1996. The development and marketing of the Company's programs requires significant expenditures, and the Company must incur costs to market programs to each potential member, regardless of whether that individual actually becomes a paying member. The Company's capital base is smaller than that of many of its competitors, and there can be no assurance that the Company's cash resources will be able to sustain its business, particularly if it experiences a reduction in revenues for a prolonged period or if it faces substantial unexpected capital requirements. To the extent that such cash resources are insufficient to fund the Company's activities, additional funds will be required. There can be no 23 25 assurance that additional financing will be available on reasonable terms or at all. If additional capital is raised through the sale of additional equity or convertible debt securities, dilution to the Company's stockholders would occur. The Company believes that the net proceeds from this offering, together with its cash balances following completion of the offering, funds generated from operations, and borrowings available under the Company's bank credit agreement, will be sufficient to meets its capital requirements for at least the next 18 months. RECENTLY ISSUED ACCOUNTING STANDARDS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The Company adopted SFAS No. 121, with no effect on operations, in fiscal 1996. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In fiscal 1997, the Company intends to adopt the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." 24 26 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated on these forward-looking statements as a result of certain factors, including those set forth under "Risk factors" and elsewhere in this Prospectus. MemberWorks is a leading designer and provider of innovative membership service programs. The Company addresses the needs of organizations seeking to leverage the expertise of an outside provider in offering these programs. MemberWorks offers its programs to increasingly sophisticated consumers seeking economy, efficiency and convenience in their purchase of products and services. For participating vendors, the programs provide the opportunity to reach a large number of demographically attractive members at minimal incremental marketing cost. The Company's programs are marketed to credit card holders through arrangements with its client organizations including banks, retailers, major oil companies and other credit card issuers. Such organizations include Household Credit Services, Capital One, Sears, Shell and Texaco. INDUSTRY BACKGROUND Businesses which sell services and products to consumers have substantially increased the use of direct marketing techniques to reach their customers. The estimated total consumer sales as a result of direct marketing in the United States were approximately $600 billion in 1995. Membership service programs are one of the fastest growing areas of direct marketing. Membership service programs, if designed, marketed and managed effectively, can be of substantial value to the consumers who become members of such programs, to the businesses which market to consumers and to the client organizations, such as credit card issuers, banks, insurance companies and others, which offer the programs to their customers. Increasingly sophisticated consumers, such as dual income couples and professionals, are faced with a growing number of products and services that are advertised and offered through media ranging from network television to traditional print media to the Internet. In addition, these consumers have limited time in which to make informed and efficient purchasing decisions. A well-designed membership service program provides value by allowing consumers to make purchases more efficiently, conveniently and knowledgeably through access to discounted products and services, information services and other types of assistance. Businesses are seeking more cost-effective and efficient methods to reach their customers than through the confusing array of traditional mass marketing channels. In addition, businesses also are seeking to reach new customers, strengthen relationships with existing customers and generate new, predictable revenues, including royalties. Historically, a substantial number of the businesses which utilize membership service programs have been issuers of credit cards. More recently, however, other businesses, including retailers, resort operators, banks, insurance companies and non-profit organizations have also begun to offer service programs. In many cases, these businesses lack the core competency to successfully design, market and manage membership programs. As a result, these businesses seek to outsource to companies which are able to apply advanced database systems to capture, process and store consumer and market information, are able to use their experience to provide effective programs, and are able to realize economies of scale. In addition, businesses seeking to implement membership service programs demand that the provider of those programs have the expertise to continue to introduce innovative new programs and that the provider have such resources as extensive vendor networks and experienced management teams, in order to market programs quickly and successfully. 25 27 THE MEMBERWORKS SOLUTION MemberWorks designs and manages innovative membership programs providing substantial benefits to member consumers, those organizations offering the programs and vendors whose products and services are offered through the programs. The Company addresses the needs of organizations seeking to leverage the expertise of an outside provider in offering membership service programs. In return for providing the Company with customer lists, the Company's clients receive royalty payments typically ranging between 15% and 20% of all membership fees. Clients also benefit because the programs are designed and managed to strengthen the relationship between clients and their customers. In addition, MemberWorks markets these programs of products and services to increasingly sophisticated consumers seeking economy, efficiency and convenience in their selection of products and services. Members save time by telephonically purchasing goods and services and obtaining useful information. Members also benefit because the vendors agree to allow discounts for products and services not generally available to non-members. MemberWorks offers participating vendors the opportunity to reach a large number of demographically attractive members at minimal incremental marketing cost. The Company maximizes its marketing effort by utilizing a proprietary database management system to analyze the demographics of customer lists provided by its clients in order to target specific consumers. MemberWorks is able to introduce new programs, as well as improve existing programs, through telemarketing rather than direct mail or other methods, thereby providing clients with a rapid, inexpensive means to test and introduce new concepts. MemberWorks leverages its substantial base of approximately 40 client organizations and approximately 1.5 million members to decrease its costs and to pass economic benefits on to its clients and members. The Company's broad membership base allows MemberWorks to render substantial discounts on its vendors' products and services. Economies of scale also permit the Company to maintain approximately 200 member service representatives on a 24 hour a day, seven day a week basis. These representatives ensure that members receive high-quality service and help build consumer loyalty with the Company's client organizations. STRATEGY The Company's objective is to become the leading provider of innovative membership programs. Key elements of the Company's strategy are as follows: Continue to Develop Innovative Service Programs for Broad Markets. The Company intends to emphasize the development and rapid introduction of innovative programs which address the lifestyle needs of large numbers of people. The Company believes that this strategy will position it to further penetrate its core membership market, both through existing clients and through new clients who will find the Company's new and innovative programs to be valuable to their own customers. For example, the Company believes that its Home PC Link program, which provides consumers with valuable information regarding, and purchasing access to, computer hardware, software and advisory services, is the first such program offered. The Company believes that its health, sports and financial programs also were the first of their kind when introduced. Expand and Develop Distribution Channels. The Company will continue to expand existing distribution channels and to seek new ones, including large and small banks, retailers, oil companies, insurance companies, interactive computer services and others. To date, the primary clients offering the Company's membership service programs have been issuers of credit cards. The Company believes that this distribution channel will continue to provide substantial opportunities and, therefore, intends to continue to devote significant resources to selling its membership service programs through credit card issuers. As part of this strategy, the Company intends to continue to develop service programs which can be easily modified to address the needs of a particular channel of distribution. 26 28 Maintain and Build a Recurring Revenue Base. The Company seeks to reach large numbers of members who will renew their membership regularly. The percentage of the Company's revenues from renewing members increased from 35.9% in fiscal 1994 to approximately 41.4% in fiscal 1996. Offer Premium Quality Services. The Company intends to continue investing significantly in its membership services system. For example, the Company has developed a proprietary computer interface between its members, clients and vendors which focuses on directing members to appropriate vendors of products and services or the Company's membership services representatives for assistance. Members can access the system 24 hours a day, 7 days a week. In addition, the Company recently significantly expanded its membership service capacity by opening its second membership service facility in Houston, Texas. The Company also maintains and monitors relationships with over 50 vendors to assure that those vendors are providing high quality products and services in order to enhance the relationship between the consumer and the Company's client offering the service program. Develop and Use Innovative Technical Solutions. The Company intends to continue its practice of developing and improving proprietary software designed to coordinate with telemarketing vendors and to accelerate the delivery of new member information kits and membership billings. Currently, the Company, through its sophisticated membership database management system, can model and analyze client lists to identify likely members. In addition, the Company's strategy includes investing in state-of-the-art technology in other key areas of its business, such as sophisticated call routing equipment for the Company's membership service centers and advanced modeling techniques for use with the customer databases provided to the Company by its clients. Leverage and Develop Multiple Vendor Partners. The Company intends to continue its practice of developing strong relationships with a wide variety of vendors who provide services at substantial discounts, rather than providing those services internally. The Company believes that its strengths are in designing new service programs, marketing those service programs to consumers and providing a high quality, member-friendly interface between the members and the service providers. The Company outsources these products and services from vendors instead of developing the infrastructure to integrate vertically for each new program, thereby preserving program flexibility. As a result, the Company is able to respond to and quickly develop new programs that address the changing needs of its clients. Pursue International Opportunities. The Company intends to seek international clients, particularly in Canada, Mexico and Europe, in the near future in order to further expand its client base. MemberWorks believes that, for the same reasons that membership service programs are growing rapidly in the United States, there is significant demand for such programs in foreign markets. MEMBERSHIP SERVICE PROGRAMS The Company's eight membership service programs, which had approximately 1.5 million members as of June 30, 1996, offer unique and valuable services, information and savings opportunities. The service programs are marketed under the name of the program on behalf of the client and are designed and developed to capitalize on the client's existing relationship with its customers or other constituents. In general, membership fees, which may be payable monthly, quarterly or annually depending on the program, ranged from approximately $40 per year to approximately $95 per year 27 29 during fiscal 1996. The Company can create customized service programs for clients based on elements of its standard programs. Currently, the Company markets the following eight programs:
TYPE OF SERVICE PROGRAM SERVICEMARK OR REGISTERED TRADEMARK Health HealthTrends Dental Countrywide Dental Program Dental and Health Countrywide Dental and Health Program Travel Travel Arrangements Entertainment Connections, Your source for entertainment values Sports Official Sports Connection Financial MoneyMaster Computers and Software Home PC Link
In general, members subscribe for renewable one-year memberships in the Company's programs. When consumers agree to enroll in a program, they generally receive a trial membership. During this time, the member may use the program's services without obligation, as outlined in a membership brochure received by mail along with a membership card and membership identification number. The brochure outlines in detail the benefits which the service offers and contains toll free numbers which may be called to access service benefits and information. In the event that a consumer elects not to participate in the service, he or she can call a toll free number during the trial period to cancel the service without charge. If the membership is not canceled during the trial period, the consumer is charged the annual membership fee. In the event that the member does not cancel the membership after the initial membership term, he or she generally receives a renewal kit in the mail in advance of each membership year and is charged for the succeeding year's membership fee. During the course of an initial annual membership term or renewal term, a member is free to cancel a membership in the program, generally for a complete refund of the membership fee for that period. The Company offers its service programs to consumers through clients, such as credit card issuers, who have an existing relationship with those consumers. The client provides the Company with lists of consumers which the Company inputs into its database management system to model, analyze and identify likely members. The Company pays the client an annual royalty for initial and renewal membership fees received by the Company from consumers provided to it by the client. The royalties paid to clients by the Company typically range between 15% and 20% of initial and renewal membership fees. The Company has developed a consultative product development process coordinating the efforts of its sales and marketing group with those of its client management group in order to anticipate client needs for new product offerings. The Company's senior management works with both of these groups to develop and refine new program concepts and then to introduce the new program. An important factor in the Company's ability to develop innovative programs is its emphasis on telemarketing, which allows it to obtain and analyze market trend information quickly. The Company believes this method of product development has allowed it to respond quickly and effectively to market demand for new programs, as evidenced by the recent introduction of Home PC Link. The Company believes that it was the first membership company to introduce aggregated discount services in the areas of health, sports, financial and personal computer programs. The Company also believes that all of its programs are innovative with respect to the variety and quality of particular services, discounts and other features which those programs offer. By bundling and reconfiguring various features of its standard programs, the Company can customize a program to the particular needs and demands of its clients. 28 30 The Company's standard programs contain the following features: HealthTrends HealthTrends is a unique membership program for the health conscious individual or family, providing convenient information and substantial savings on quality health and personal care services and maintenance. Benefits include: - Substantial discounts on brand name eyewear and contact lenses - Savings on prescription drugs, quality vitamins and personal care products - A Physicians Directory - Quality brand name hearing aids at significant discounts - Choice of an annual subscription to a popular health magazine, such as Prevention or Walking, or a health reference source book - A health risk appraisal service and a health reference library Countrywide Dental Program The Countrywide Dental Program ("CDP") consists of a network of independent dentists in 45 states who have agreed to accept a reduced fee schedule for subscribers in the program. CDP is not an insurance plan, but can be used with any dental insurance program to reduce a member's insurance co-payments. Benefits include: - Annual oral exams and bitewing x-rays at minimal or no cost - A discount ranging from 20% to 30% below rates offered to non-members. Countrywide Dental and Health Program The Countrywide Dental and Health Program offers a combination of benefits from the Company's Countrywide Dental Program and HealthTrends services. This combined service provides members and their families dental services at special discounted rates in addition to substantial discounts on eyewear, pharmaceuticals and hearing aids. Travel Arrangements Travel Arrangements is a comprehensive discount travel program that offers substantial savings and convenience on a broad range of business, leisure, and vacation travel services. Benefits include: - Guaranteed lowest airfares - Discounts of up to 50% at select hotels nationwide - Automatic 5% credit card rebates on qualified travel - Exclusive discounts on travel booked through a full-service travel agency - Discounts on car rentals from national agencies - Personalized travel planning services - Discounts on travel accessories - Complimentary memberships to hotel and car rental priority clubs - 24-Hour message service center in the contiguous 48 States 29 31 Connections, Your source for entertainment values Connections, Your source for entertainment values is designed to provide savings to members on a broad range of entertainment and leisure time activities and contains a shopping service for substantial savings on a wide array of merchandise. Benefits include: - Guaranteed lowest prices on over 50,000 brand-name entertainment products such as stereo equipment and televisions - Member only discounts on compact discs, movies, videos, and books - Discounts of up to 50% off the regular room rate at thousands of hotels nationwide - Discount admission to major amusement and theme parks and major attractions nationwide - Choice of an annual subscription to an entertainment magazine or a movie reference guide - Access to a toll-free activities hotline where members can learn about local events or events in an area they plan to visit - Discounts on movie theater tickets at major national cinemas, such as AMC, Loews Cineplex Odeon and General Cinema - Transmedia restaurant discount card Official Sports Connection Official Sports Connection provides discounts on all types of sports and athletic merchandise, apparel, and services. Benefits include: - Discounts on sports merchandise and apparel through major retail stores and popular sports catalogs - Savings on autographs, collectibles, personalized team scoreboards, and videos - Discounts on full-service sports event travel packages and premium tickets to sports events - Discounts of up to 50% off greens fees at participating golf courses, resorts, and driving ranges worldwide - Access to a toll-free sports event hotline - Choice of an annual subscription to a popular sports magazine or sports reference guide such as Football Digest, Inside Sports or Fodor's USA Today's Complete Four Sport Stadium Guide MoneyMaster MoneyMaster helps members plan for and manage their personal finances, taxes, insurance, and retirement planning. This service complements and can integrate some of the benefits currently offered by the Company's financial institution clients. Benefits include: - Discounts on tax preparation fees and an electronic filing service - Complimentary appraisal and discounts on competitively priced mortgages - Do-it-yourself retirement planning, will and estate planning kits with easy to understand guidelines - Choice of a complimentary annual subscription to a personal finance magazine such as Kiplinger's Personal Finance, Your Money or Worth, or a personal finance service reference guide - Reference library with articles and forms on financial topics including budgeting, credit management and investing 30 32 Home PC Link Home PC Link is the Company's newest program offering, introduced in August 1996. It offers a wide range of assistance to the first time computer purchaser as well as to existing users seeking information on upgrading their systems and enhancements. Benefits include: - Personal Computer ("PC") configuration and discount mail order service - PC registration and software upgrade service - PC tech support service - Product information and advisory service - Internet access kit - Shareware sampler, a CD-based catalog of software available for free and for purchase - Computer magazine and reference materials, including Family PC, Computer Life, or MacUser WHOLESALE PROGRAMS In addition to marketing its programs directly to consumers through lists provided by credit card issuers and other businesses and organizations, the Company has begun to provide membership service programs on a wholesale basis. Typically, the Company works with a wholesale client to incorporate elements from one or more of its standard service programs in the design of a custom program for the client. The client will then provide the membership in the customized format to its customers as a value-added feature. The client pays the Company the membership fees for the customers who receive the service program. Because wholesale programs substantially eliminate any cost for the Company to acquire new members, which results in substantially higher profit margins for the Company, the Company usually will agree to provide membership in the service program for periodic fees which are less than the Company's standard fees for the program. MEMBER SERVICE The Company believes that providing high quality service to its members is extremely important in order to encourage memberships and to strengthen the affinity of those members for the client which offered the service program. Currently, the Company maintains two call centers, in Omaha, Nebraska and Houston, Texas, with a total of approximately 200 membership service representatives. The Company's service centers are available to members, toll free, 24 hours a day, seven days a week. All new membership service representatives are required to complete a two-week classroom training course before beginning to take calls and attend on-the-job training thereafter. Through both its training programs, its systems and its software, the Company seeks to provide members with friendly, rapid and effective answers to questions. The Company also works closely with its clients' customer service staffs to ensure that their representatives are knowledgable in matters relating to membership service programs offered by the Company. TECHNOLOGY The Company has invested substantially in advanced management information systems to allow it to operate its business more efficiently and productively. Accordingly, the Company has developed proprietary software that is designed to accept its clients' customer databases for review, analysis and modeling in order to identify likely members. The Company receives new member information from telemarketers on a daily basis, and the system routes that data to other Company facilities for member fulfillment and allows the Company to mail member information kits to new members very rapidly. The system also receives confirmation of billing data from the Company's merchant processors on a regular basis, permitting the Company to update the status of each member, including member profile information. 31 33 In providing quality service to its members, the Company's management information system interacts with the Company's advanced call routing system to prepare the Company's membership service representatives to better serve members by displaying a member's profile prior to receiving the call. The Company's telecommunications systems also monitor the performance quality of its membership service representatives and other aspects of its business through sophisticated reporting capabilities. In addition, the Company's marketing experts use both the Company's proprietary systems and advanced systems from outside vendors to review, analyze and model the demographics of lists of prospective members supplied by clients, in order to determine which customers are most likely to respond to an offer and retain their membership. FULFILLMENT In most cases the products and services offered to members through the Company's programs are provided directly to the members by independent vendors. The Company evaluates and engages only those vendors which can cost-effectively deliver high quality products and services. Vendors generally benefit by gaining significant volume demand with minimal associated marketing expense. Accordingly, vendors generally quote a discount price to gain access and marketing exposure to the Company's membership base. The Company receives no material payments from these vendors for rendering services to the Company's members and, in certain cases, the Company pays its vendors a fee based on the volume of members in the Company's program or based on other agreed upon factors. The Company believes that the establishment of its vendor network can be leveraged and represents a valuable corporate asset in that it can be used by clients in a number of different distribution channels. For example, the Company has developed and maintains a national network of in excess of 6,000 independent dentists practicing in 45 states. The dentists have agreed to provide to Company members dental services at considerable discounts, ranging from 20% to 30% below rates offered to non-members. The Company believes that there is opportunity to engage other users for the dental network and to increase its revenues from this source with marginal associated incremental cost. The Company depends on independent vendors to provide most program products and services to members and on telemarketers to market its programs to prospective members. The vendors and telemarketers operate pursuant to agreements with the Company that may be terminated by the vendor or telemarketer with limited prior notice. There can be no assurance that, in the event a vendor or telemarketer ceases operations, or terminates, breaches or chooses not to renew its agreement with the Company, a replacement vendor or telemarketer could be retained on a timely basis, if at all. In addition, vendors and telemarketers are independent contractors and the level and quality of services provided is outside the control of the Company. Any service interruptions, delays or quality problems could result in customer dissatisfaction and membership cancellations, which could have a material adverse effect on the Company's business, financial condition and results of operations. SALES AND MARKETING The Company solicits members for its programs primarily by direct marketing methods, including telemarketing, which it outsources to third party contractors. To a lesser extent the Company uses direct mail, either as a solo piece mailed at its own expense or at its client's expense. Some of the Company's individual memberships are available at retail stores and on-line to interactive computer users through the World Wide Web. In fiscal 1996, approximately 3.3 million membership kits were mailed, and approximately 22 million telephone calls were made. The Company primarily offers its programs to consumers listed in databases provided to it by clients. The Company's proprietary software and systems permit it to accept this information from a client in electronic form. Marketing specialists at MemberWorks are then able to review, analyze and model the information on the database in order to design and implement an effective telemarketing program. In addition, the Company has recently begun to sell service programs on a wholesale basis. 32 34 Under those programs, the Company does not pay for the marketing costs to solicit memberships. Instead, the client offering the memberships is responsible for marketing, usually with the assistance of the Company. In some cases, the client may provide wholesale memberships to its customer free of charge and pay the periodic membership fee to the Company for each customer membership. In other cases, the client may charge a reduced fee to its customer. The Company's sales strategy is to establish and maintain long-term relationships with those clients who offer its programs. The Company employs a consultative sales process to understand and define client needs and to determine how those needs can be addressed by the membership service programs which the Company offers. MemberWorks seeks to build upon its existing customer relationships by integrating and cross-selling its different membership service programs. The term of the sales cycle for a new service program varies and can be six months or more if the client is new to the Company. The Company's client sales force currently consists of five executives and seven sales representatives and support staff. The Company markets and services its programs primarily telephonically, and accordingly, its business is highly dependent on telephone service provided by various local and long distance telephone companies. Any significant interruption in telephone services could adversely affect the Company. Additionally, limitations on the ability of telephone companies to provide the Company with increased capacity that may be required in the future, if any, could adversely affect the Company's business, financial condition and results of operations. Rate increases imposed by these telephone companies will increase the Company's operating expenses and could materially adversely affect its business, financial condition and results of operations. DISTRIBUTION Currently, MemberWorks distributes its programs almost exclusively through credit card issuers. The Company arranges with client financial institutions, retailers, oil companies and other credit card issuers to market membership programs to such clients' individual account holders and customers. Clients generally receive royalties on initial and renewal memberships typically ranging between 15% and 20% of annual membership fees. The Company's contracts with these clients typically grant the Company the right to continue providing membership services directly to such clients' individual account holders even if the client terminates the contract, provided that the client continues to receive its commission. Currently, the Company has 36 credit card issuer clients to whom it pays royalties, including 10 of the top 20 issuers of bank credit cards, four of the top five issuers of oil company credit cards and a leading issuer of retail company credit cards. The Company is also actively developing new distribution channels. Recently, for example, the Company entered into an agreement to offer its membership service programs through marketing programs at retail stores. In addition, the Company has entered into a new arrangement with one of its credit card issuer clients whose call centers receive numerous inbound calls from cardholders. If the inbound caller meets certain criteria, the client's service representative is instructed by the Company to offer the Company's membership service programs to the caller. Access and information about several of the Company's membership service programs are also available through home pages on the World Wide Web. The Company obtains substantially all of the information necessary to the Company's marketing efforts from customer lists supplied by its clients. Clients provide the lists to the Company for use in marketing a single, specific program which has been pre-approved by the client. As a result, the Company's ability to market a new program to an existing customer base or an existing program to a new customer base is dependent on first obtaining approval from a client. Approximately 61.3% of the Company's revenues for the year ended June 30, 1996 was attributable to members solicited from the customer lists provided by three key clients, including 35.2% from customer lists provided by Sears. These and other client relationships are pursuant to contracts which may be terminated by the client upon 30 to 90 days' notice without penalty. Upon such termination, 33 35 the Company generally has the right to continue its relationship with the client's customers that have become program members for a specified period to substantially the same extent as prior to the termination, but may not resolicit those members upon such member's cancellation or non-renewal of the member's membership. Approximately 75% of the revenue attributable to Sears for the year ended June 30, 1996 was generated pursuant to a contract which also provides that, upon termination of the agreement for default, Sears may prohibit the Company from renewing memberships and otherwise cause the Company to terminate its relationship with existing members. Events that constitute default include events outside the control of the Company, including acts and omissions by the Company's third-party vendors. There can be no assurance that one or more of the Company's key or other clients will not terminate its relationship with the Company or that clients will provide additional customer lists to the Company for use in further marketing new or existing membership programs. Approximately 25% of the revenue attributable to Sears for the year ended June 30, 1996 was generated pursuant to a contract which grants Sears the option, exercisable at any time, to assume the obligations of the Company under a specified membership program in exchange for a fee or commission per member. The agreement provides that the fee or commission shall be negotiated by the Company and Sears, or otherwise subjected to binding arbitration. There can be no assurance that, upon exercise of such option, the Company would receive, as a result of negotiation, arbitration or otherwise, revenue or net income commensurate with the amount which the Company would receive if the option were not exercised. Failure to receive a commensurate amount, and the loss of the ability to market to the members of the program following exercise of the option, could have a material adverse effect on the Company's business, financial condition and results of operations. Client relationships generally take six months or more to develop and are based in part on professional relationships and the reputation of the Company's management and marketing personnel. As a result, client relationships may be adversely affected by events beyond the Company's control, such as departures of key personnel and alterations in personal relationships, and such clients may not be replaced on a timely basis, if at all. GOVERNMENT REGULATION The primary means which the Company uses to market its programs is telemarketing. The telemarketing industry has become subject to an increasing amount of Federal and state regulation as well as general public scrutiny in the past several years. The Federal Telephone Consumer Protection Act of 1991 limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and state attorneys general have authority to prevent telemarketing activities that constitute "unfair or deceptive acts or practices." Additionally, some states have enacted laws and others are considering enacting laws targeted directly at telemarketing practices, and there can be no assurance that any such laws, if enacted, will not adversely affect or limit the Company's current or future operations. Compliance with these regulations is generally the responsibility of the Company, and the Company could be subject to a variety of enforcement or private actions for any failure to comply with such regulations. The Company's provision of membership programs requires the Company to comply with certain state regulations, changes in which could materially increase the Company's operating costs associated with complying with such regulations. The risk of noncompliance by the Company with any rules and regulations enforced by a Federal or state consumer protection authority may subject the Company or its management to fines or various forms of civil or criminal prosecution, any of which could materially adversely affect the Company's business, financial condition and results of operations. Also, the media often publicizes perceived non-compliance with consumer protection regulations and violations of notions of fair dealing with consumers, and the membership programs industry is susceptible to peremptory charges by the media of regulatory noncompliance and unfair dealing. 34 36 The Company believes that its Countrywide Dental Program currently is not considered to constitute an insurance program either by Federal or any state insurance regulatory authority where it is offered. If this program were in the future to be viewed by a Federal or any state insurance regulatory authority as an insurance program, this would subject the Company to the regulatory authority of such Federal or state insurance authority. The insurance industry currently is one of the most heavily regulated industries in the United States. The subjection of the Company to such regulatory authority would significantly increase the Company's costs associated with regulatory compliance and potentially cause the Company to terminate its Countrywide Dental Program in particular states, either of which would materially adversely affect the Company's business, financial condition and results of operations. COMPETITION Competition in the membership services market for clients, such as credit card issuers, is intense. Several of the Company's competitors offer membership programs which provide services similar to, or which directly compete with, those provided by the Company. Because contracts between clients and program providers are often exclusive with respect to a particular service, potential clients may be prohibited from contracting with the Company to promote a program if the services provided by the Company's program are similar to, or merely overlap with, the services provided by an existing program of a competitor. Most of the Company's clients provide, either directly or through third parties, programs offered by the Company's competitors, and the Company's agreement with Sears, its principal client, permits Sears to offer its customers programs that directly compete with those offered by the Company. Competition for new members is also intense, particularly as the market becomes saturated with customers who are already members of competing programs. The Company's principal competitor is CUC International Inc. ("CUC"). The Company's other competitors include large retailers, travel agencies, financial institutions and other organizations. There can be no assurance that the Company's competitors will not increase their emphasis on programs similar to those offered by the Company and more directly compete with the Company, that new competitors will not enter the market, or that other businesses will not themselves introduce competing programs. Many of the Company's current and prospective competitors, including CUC, have substantially larger customer bases and greater financial and other resources than the Company. There can be no assurance that the Company's current or potential competitors will not provide programs comparable or superior to those provided by the Company at lower membership prices or adapt more quickly than the Company to evolving industry trends or changing market requirements. In addition, alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete effectively against current and future competitors. The Company believes that the principal competitive factors in the membership services industry include the ability to identify, develop and offer innovative service programs, the quality and breadth of service programs offered, price and marketing expertise. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability to hire and retain employees, the development by others of service programs that are competitive with the Company's service programs, the price at which others offer comparable service programs and the extent of the Company's competitors' responsiveness to customer needs. Providers of membership programs compete for client marketing budget dollars with other marketing activities and, in particular, other forms of direct marketing activities, such as direct mail. In recent years, there have been significant advances in new forms of direct marketing, such as the development of interactive shopping and data collection through television, the Internet and other media. Many industry experts predict that electronic interactive commerce, such as shopping and information exchange through the World Wide Web, will proliferate significantly in the foreseeable 35 37 future. To the extent such proliferation occurs, it could have a material adverse effect on the demand for membership programs. Furthermore, as the telemarketing industry continues to grow, the effectiveness of telemarketing, which is the Company's major means of marketing its programs, as a direct marketing tool may decrease as a result of increased consumer resistance to telemarketing in general. EMPLOYEES As of June 30, 1996, the Company employed 349 persons on a full-time basis and 47 on a part-time basis. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are good. FACILITIES The Company leases space in Stamford, Connecticut, Omaha, Nebraska and Houston, Texas. The Stamford office serves as the Company's headquarters. The Omaha and Houston locations are primarily call centers for membership services representatives, operations and telemarketing personnel. The Omaha location is also the Company's main computer and telecommunications systems center and contains member fulfillment and warehouse facilities. A summary of key information with respect to the Company's leased facilities is as follows:
LOCATION SQUARE FOOTAGE LEASE EXPIRATION ------------------------------------------------ -------------- ------------------ Stamford, CT.................................... 18,650 March 14, 2006 Omaha, NE....................................... 19,800 June 30, 2000 Omaha, NE....................................... 11,000 December 31, 1997 Omaha, NE....................................... 16,400 December 31, 2000 Houston, TX..................................... 26,000 July 31, 2006
LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation or in settlement proceedings relating to claims arising out of its operations in the normal course of business. Except as described below, the Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, could have a material adverse affect on the Company's business, financial conditions and results of operations. On June 29, 1995, Thomas J. St. Denis, a co-founder of the Company, filed a complaint against the Company, Gary A. Johnson and Steven H. Levenherz, who are executive officers of the Company, in Stamford, Connecticut Superior Court, alleging various claims arising out of his termination on October 3, 1994 as Executive Vice President and Chief Operating Officer of the Company. Mr. St. Denis alleges wrongful termination, breach of fiduciary duty, fraudulent inducement and certain other claims arising out of alleged accounting irregularities in fiscal 1994. The complaint claims an unspecified amount of compensatory and punitive damages and certain other costs. The Company has moved to strike the complaint, and its motion is being considered by the court. If the motion to strike is not allowed, the Company intends to contest the claims alleged in the complaint vigorously, and to assert counterclaims against Mr. St. Denis. Prolonged litigation arising from this complaint or an adverse determination could have a material adverse effect on the Company's business, financial condition and results of operations. 36 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their respective ages as of June 30, 1996, are as follows:
NAME AGE POSITION - ---------------------------- --- ------------------------------------------------ Gary A. Johnson............. 41 President and Chief Executive Officer, Director Dennis P. Walker............ 51 Executive Vice President, Director James B. Duffy.............. 42 Senior Vice President and Chief Financial Officer David Schachne.............. 35 Senior Vice President -- Marketing/Operations Steven H. Levenherz......... 52 Senior Vice President -- Administration/Law Stephen J. Clearman......... 45 Director Alec L. Ellison............. 33 Director Michael R. O'Brien.......... 53 Director Marc S. Tesler.............. 50 Director
Gary A. Johnson, a co-founder of the Company, has served as President and Chief Executive Officer and a Director of the Company since its inception. From 1987 to 1989, Mr. Johnson founded and served as President of American Target Group Marketing, a marketer of membership services for magazine publishers. From 1983 to 1987, Mr. Johnson was Vice President of New Product Development and Marketing for CUC, a membership program services marketing firm. From 1981 to 1983, Mr. Johnson was a Marketing Director of the Marketing Consulting Division of General Electric. Mr. Johnson received a B.S. from Tufts University and an M.B.A. from Harvard Business School. Dennis P. Walker, a co-founder of the Company, has served as Executive Vice President and a Director of the Company since its inception. Prior to founding MemberWorks, Mr. Walker founded and served as President of Walker Enterprises, a direct marketing and credit card merchandising business from 1978 to 1988. Mr. Walker received a B.A. from the University of Nebraska. James B. Duffy joined the Company as Senior Vice President and Chief Financial Officer in June 1996. Prior to joining the Company, Mr. Duffy served in various senior financial management positions, most recently as Senior Vice President, Business Planning, at Merck Medco Managed Care, Inc., a prescription benefit management company, from 1986 to November 1995. Mr. Duffy received a B.B.A. from Pace University. David Schachne joined the Company as Senior Vice President -- Marketing/Operations in 1990. Prior to joining the Company, Mr. Schachne was Vice President of Sleep Technologies, Inc., a manufacturer and wholesaler of home furnishing products. Mr. Schachne received a B.A. from the State University of New York, Albany and his M.B.A. from Harvard Business School. Steven H. Levenherz, Senior Vice President -- Administration/Law, joined the Company in May 1993 and, through June 1996, served as Chief Financial Officer. Prior to joining the Company, Mr. Levenherz was an independent consultant in financial and mergers and acquisitions matters from 1992 through 1993 and, from 1990 to 1992, he served as Chief Financial Officer at Phoenix Partners, a merchant banking firm. From 1987 to 1990 Mr. Levenherz served as Senior Vice President of Financial Planning at Horsehead Industries, Inc., a leveraged buy-out company. Mr. Levenherz received a B.B.A. from the Baruch School of the City College of New York and a J.D. from the University of North Carolina, Chapel Hill. Stephen J. Clearman has been a Director of the Company since 1989. Since 1984, Mr. Clearman has been a general partner of Geocapital Partners, a venture fund he co-founded. Mr. Clearman received a B.A. from Haverford College, an M.S. from Columbia University and a J.D. from Harvard Law School. Mr. Clearman is also a director of Expert Software, Inc. and Restor Industries, Inc. 37 39 Alec L. Ellison has been a Director of the Company since 1989. Mr. Ellison has served as Managing Director of Broadview Associates LLC, an investment bank, since 1988. Prior to 1988, Mr. Ellison was affiliated with the Technology and Emerging Growth Group of Morgan Stanley & Co. Incorporated, an investment banking firm. Mr. Ellison holds a B.A. from Yale University and an M.B.A from Harvard Business School, where he was a Baker Scholar. Michael R. O'Brien has been a Director of the Company since June 1996. Mr. O'Brien founded Catalina Marketing, Inc. ("Catalina"), a direct marketing company, in 1983, and served as Catalina's President until 1989 and as its Chairman of the Board and Chief Executive Officer until 1992. Since 1992, Mr. O'Brien has been Chairman Emeritus of, and a consultant to, Catalina. Prior to founding Catalina, Mr. O'Brien was President of TRIM, Inc., a marketing research and information company specializing in the utilization of scanner data. Previously, he held various sales management positions with several consumer product manufacturers, including the Liggett Group, Inc. Mr. O'Brien received a B.A. from the University of Kansas. Marc S. Tesler has been a Director of the Company since January 1996. Since July 1995, he has been a member of the general partner of Technology Crossover Ventures, L.P., a private partnership specializing in information technology investments. From 1982 to June 1995, Mr. Tesler served in various positions at Chancellor Capital Management, an investment management firm, most recently as head of its Alternative Asset Management Group. Mr. Tesler received his B.S. from the University of Massachusetts and his M.B.A. from New York University. The Company is party to a Stockholders' Agreement dated December 28, 1990, as amended, with certain of its stockholders, including certain of its executive officers and entities affiliated with certain of its directors, pursuant to which such stockholders agreed, subject to certain exceptions, to vote all securities of the Company owned by them to elect as directors of the Company (i) one person nominated by Chancellor Capital Management, Inc. ("Chancellor"), (ii) one person nominated by Geocapital II, L.P. ("Geocapital"), (iii) Messrs. Johnson, St. Denis and Walker (the "Founders"), and (iv) an independent director designated by Chancellor, Geocapital and the Founders. The Stockholders' Agreement will terminate by its terms upon the closing of this offering. Following this offering, the Board of Directors will be divided into three classes, and each director will serve for a staggered three-year term. The Board will consist of two Class I Directors (Messrs. Tesler and Ellison), two Class II Directors (Messrs. Clearman and O'Brien) and two Class III Directors (Messrs. Johnson and Walker). At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors or director of the same class whose terms are then expiring. The terms of the Class I Directors, Class II Directors and Class III Directors expire upon the election and qualification of successor directors at the annual meeting of stockholders held during the calendar years 1997, 1998 and 1999, respectively. To the extent there is an increase in the number of directors, additional directorships resulting therefrom will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal numbers of directors. Each officer serves at the discretion of the Board of Directors. The Company does not have any existing employment agreements with any executive officer. There are no family relationships among any of the directors and executive officers of the Company. BOARD COMMITTEES The Board of Directors has a Compensation Committee, currently composed of Messrs. Clearman Ellison and Tesler which makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company and administers and grants stock options pursuant to the Company's stock option plans. The Board of Directors also has an Audit Committee, currently composed of Messrs. Clearman, O'Brien and Tesler, which reviews the results and scope of the audit and other services provided by the Company's independent public accountant. 38 40 DIRECTOR COMPENSATION The Company's Directors do not receive any compensation for their services on the Board of Directors or any committee thereof and are not reimbursed for expenses incurred in connection with their attendance at Board or committee meetings. However, non-employee directors have received options to purchase shares of Common Stock pursuant to the 1995 Non-Employee Director Stock Option Plan. See "-- Stock Plans." LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Restated Certificate of Incorporation (the "Charter") contains certain provisions permitted under the Delaware General Corporation Law ("DGCL") relating to the liability of directors. These provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, unlawful payments or dividends or unlawful stock repurchases or redemptions or any transaction from which the director derived an improper personal benefit. As a result, the Company and its stockholders may be unable to obtain monetary damages from a director for breach of duty of care. Although stockholders may continue to seek injunctive or other equitable relief for an alleged breach of fiduciary duty by a director, stockholders may not have any effective remedy against the challenged conduct if equitable remedies are not available. The Charter also contains provisions indemnifying the directors and officers of the Company to the fullest extent permitted by the DGCL. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. The Company intends to obtain officer and director liability insurance with respect to liabilities arising out of certain matters, including matters arising under the Securities Act. There is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by any director, officer, employee or other agent, other than the lawsuit filed by Thomas J. St. Denis against the Company and two of its executive officers. The Company has undertaken to defend the two executive officers in this litigation. See "Business -- Legal Proceedings." 39 41 EXECUTIVE COMPENSATION Summary of Cash and Other Compensation The following table sets forth the compensation earned for the fiscal year ended June 30, 1996 by the Company's Chief Executive Officer and three additional executive officers (together with the Chief Executive Officer, the "Named Executive Officers"), each of whom earned aggregate compensation for such year in excess of $100,000.
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS - -------------------------------------------------------- -------- ------- ------------ Gary A. Johnson......................................... $203,881 $51,550 15,000 President and Chief Executive Officer Dennis P. Walker........................................ 197,802 40,378 5,000(1) Executive Vice President David Schachne.......................................... 149,025 36,625 2,000 Senior Vice President -- Marketing/Operations Steven H. Levenherz..................................... 160,485 22,088 3,000 Senior Vice President -- Administration/Law
- --------------- (1) Mr. Walker entered into an agreement with the Company whereby the Company is required to grant options to purchase up to 20,000 shares of Common Stock to Mr. Walker for achievement of certain performance goals. Specifically, the Company will grant an option to purchase 2,000 shares of Common Stock for each new client, from a selected list of ten prospective large clients, he obtains for the Company prior to December 31, 1996. These options become exercisable over a four-year period, one quarter of such options vesting each 12 months commencing on the last day of the first 12-month period after the date of grant, at an exercise price of $20.00 per share. In April 1996, Mr. Walker was granted an option to purchase 2,000 shares of Common Stock pursuant to this agreement. Option Grants The following table sets forth certain information concerning grants of stock options made during fiscal 1996 to each of the Named Executive Officers. No stock appreciation rights were granted to the Named Executive Officers during such year. 40 42
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE ------------------------------------------------------ VALUE AT ASSUMED NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------- NAME GRANTED FISCAL YEAR SHARE(3) DATE 5% 10% - ------------------------ ---------- ---------------- --------- ---------- -------- -------- Gary A. Johnson......... 15,000 20.4% $ 20.00 7/31/05 $188,670 $478,110 Dennis P. Walker........ 3,000 4.1% 20.00 7/31/05 37,734 95,622 2,000(4) 2.7% 20.00 4/30/06 57,734 115,622 David Schachne.......... 2,000 2.7% 20.00 7/31/03 19,100 45,744 Steven H. Levenherz..... 3,000 4.1% 20.00 7/31/03 28,650 68,616
- --------------- (1) The option referenced in footnote (4) and options granted under the 1995 Executive Officers' Stock Option Plan (the "1995 Plan") have a term of ten years, and options granted prior to December 31, 1995 under the Amended 1990 Stock Option Plan (the "1990 Plan") have a term of eight years. These options are subject to earlier termination in certain events related to termination of employment. All such options become exercisable over a four-year period, one-quarter of such options vesting each 12 months commencing on the last day of the first 12-month period after the date of grant. (2) In accordance with the rules of the Commission, the potential realizable values for such options shown in the table are reported net of the option exercise price and are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted (based on the fair market value of the Common Stock on the date of the grant as determined by the Board of Directors) to their expiration date. These assumed rates of appreciation do not represent the Company's estimation or projection of the appreciation of shares of Common Stock of the Company. (3) All options, other than the option referenced in footnote (4), were granted at an exercise price equal to the fair market value as determined by the Board of Directors of the Company on the date of grant. (4) This option was granted pursuant to an agreement with the Company, whereby the Company will grant Mr. Walker an option to purchase 2,000 shares of Common Stock for each new client, from a selected list of certain prospective large clients, he obtains for the Company prior to December 31, 1996. This option has an exercise price of $20.00 per share. See footnote (1) to the table appearing in "-- Summary of Cash and Other Compensation." 41 43 Option Exercises and Holdings The following table sets forth certain information concerning the number and value of unexercised stock options held as of June 30, 1996 by each of the Named Executive Officers. No options were exercised by the Named Executive Officers in fiscal 1996, and no stock appreciation rights were exercised or were outstanding during and at the end of fiscal 1996.
SHARES OF COMMON STOCK UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR END(1) AT FISCAL YEAR END(2) -------------------------- -------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------- ----------- ------------- ----------- ------------- Gary A. Johnson............................... -- 15,000 $ -- $ 150,000 Dennis P. Walker(3)........................... -- 5,000 -- 50,000 David Schachne................................ 9,000 6,500 172,275 92,885 Steven H. Levenherz........................... 15,126 8,041 282,554 124,166
- ------------ (1) All options granted become exercisable over a four-year period, one-quarter of such options vesting each 12 months commencing on the last day of the first 12-month period after the date of grant. (2) There was no public trading market for the Common Stock as of June 30, 1996. Accordingly, these values have been calculated on the basis of the fair market value of the Company's Common Stock of $30.00 at June 30, 1996, as determined by the Company's Board of Directors, minus the applicable per share exercise price. (3) Of these shares, 2,000 are subject to an option which was granted pursuant to an agreement with the Company, whereby the Company will grant Mr. Walker an option to purchase 2,000 shares of Common Stock for each new client, from a selected list of certain prospective large clients, he obtains for the Company prior to December 31, 1996. This option has an exercise price of $20.00 per share. See footnote (1) to the table appearing in "-- Summary of Cash and Other Compensation." STOCK PLANS Amended 1990 Stock Option Plan The Company's Amended 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock Option Plan") was adopted by the Board of Directors and approved by the Company's stockholders in August 1990. The Amended 1990 Stock Option Plan provides for the grant of (i) "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to employees and officers of the Company, and (ii) non-qualified stock options to employees, consultants, directors and officers of the Company. Up to 180,000 shares of Common Stock are authorized for issuance under the Amended 1990 Stock Option Plan. On August 13, 1996, the Board of Directors voted that, effective upon the closing of this offering, no further options may be granted or issued under the Amended 1990 Stock Option Plan. Options granted under the Amended 1990 Stock Option Plan are not transferable by the optionholder except by will or by laws of descent and distribution. Generally, no incentive stock option may be exercised by an optionee under the Amended 1990 Stock Option Plan following termination of employment. Options granted under the Amended 1990 Stock Option Plan expire not more than ten years after the date of grant, except that options granted on or before December 31, 1995 expire on the eighth anniversary of the date of grant. Options granted under the Amended 1990 Stock Option Plan generally vest 25% on the one-year anniversary of the date of grant, and an additional 25% each year thereafter. 42 44 As of June 30, 1996, options to purchase a total of 122,467 shares of Common Stock at a weighted average exercise price of $15.53 per share were outstanding under the Amended 1990 Stock Option Plan (of which options to purchase 52,525 shares were exercisable as of such date), and options to purchase 11,723 shares had been exercised at a weighted average exercise price of $6.50 per share. 1995 Executive Officers' Stock Option Plan In August 1995, the Company's Board of Directors approved the 1995 Stock Option Plan (the "Executive Officers' Plan"), which provides for the grant of options to purchase up to an aggregate of 50,000 Shares of Common Stock of the Company to executive officers of the Company. The Executive Officers' Plan is administered by the Compensation Committee of the Board of Directors. Under the Executive Officers' Plan, each executive officer of the Company is eligible to receive an option to purchase shares of Common Stock. The exercise price per share for all options granted under the Executive Officers' Plan must equal the fair market value of the Common Stock on the date of grant. The Executive Officers' Plan does not provide for any specific period over which granted options vest. The term of each option is ten years from the date of grant. In addition, the Executive Officers' Plan authorizes the Compensation Committee to grant additional options to the Company's executive officers and to determine the terms applicable to such options. Options may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable to the extent vested only while the optionee is serving as an executive officer of the Company or within one year after the optionee ceases to serve as an executive officer of the Company. Options to purchase 35,000 shares have been granted to date under the Executive Officers' Plan. 1995 Non-Employee Directors' Stock Option Plan In August 1995, the Company's Board of Directors adopted the 1995 Non-Employee Director Stock Option Plan (the "Director Plan"), which provides for the grant of options to purchase a maximum of 25,000 shares of Common Stock of the Company to non-employee directors of the Company. The Director Plan is administered by the Compensation Committee of the Board of Directors. Under the Director Plan, each director of the Company who is not also an employee or officer of the Company is eligible to receive an option to purchase shares of Common Stock on the date such person is first elected to the Board of Directors. The exercise price per share for all options granted under the Director Plan will be equal to the fair market value of the Common Stock on the date of grant. The options granted to a director are exercisable in four equal annual installments, beginning on the first anniversary of the grant date, provided that the optionee remains a director at such time. The term of each option is ten years from the date of grant. In addition, the Director Plan authorizes the Compensation Committee to grant additional options to non-employee directors and to determine the terms applicable to such options. Options may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable to the extent vested only while the optionee is serving as a director of the Company and within one year after the optionee ceases to serve as a director of the Company. Options to purchase 20,000 shares have been granted to date under the Director Plan. 1996 Stock Option Plan The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") was adopted by the Board of Directors and approved by the stockholders of the Company in August 1996, and becomes effective upon the closing of this offering. No options have been granted under the 1996 Stock Option Plan. The 1996 Stock Option Plan authorizes the issuance of up to a total of 250,000 shares of Common Stock pursuant to the grant to employees of "incentive stock options" within the meaning of the Code, and the grant of non-qualified stock options to employees, consultants, officers or directors of the Company. 43 45 The 1996 Stock Option Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the optionees and determine the terms of the options granted, including (i) the number of shares subject to each option, (ii) option exercise terms, (iii) the exercise price of the option, (which in the case of an incentive stock option cannot be less than the fair market value of the Common Stock on the date of grant), (iv) the duration of the option, and (v) the time, manner and form of payment upon exercise of an option. An option is not transferable by the optionholder except by will or by laws of descent and distribution. Generally, no incentive stock option may be exercised by an optionee more than three months following termination of employment, unless termination is due to death or disability, in which case the option is exercisable for a maximum of one year after such termination. 1996 Employee Stock Purchase Plan The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and approved by the stockholders of the Company in August 1996, and becomes effective upon the closing of this offering. The Purchase Plan authorizes the issuance of up to a total of 50,000 shares of Common Stock to participating employees. All employees of the Company, including directors of the Company who are employees, and who have been employed for more than 12 months are eligible to participate in the Purchase Plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary are not eligible to participate. On the first day of a designated payroll deduction period (the "Offering Period"), the Company will grant to each eligible employee who has elected to participate in the Purchase Plan an option to purchase shares of Common Stock as follows: the employee may authorize an amount to be deducted by the Company from such pay during the Offering Period. On the last day of the Offering Period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the Purchase Plan, the option price is an amount equal to 85% of the fair market value per share of the Common Stock on either the first day or the last day of the Offering Period, whichever is lower. An employee may purchase, in any one Offering Period, a number of shares the aggregate purchase price of which is up to 10% of the employee's compensation for the immediately preceding six month period divided by 85% of the market value of a share of Common Stock on the commencement date of the Offering Period. The Compensation Committee may, in its discretion, choose an Offering Period of 12 months or less for each of the Offerings and choose a different Offering Period for each Offering. If an employee is not a participant on the last day of the Offering Period, such employee is not entitled to exercise any option, and the amount of such employee's accumulated payroll deductions will be refunded. An employee's rights under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time, or when such employee ceases employment for any reason, except that upon termination of employment because of death, the employee's beneficiary has certain rights to elect to exercise the option to purchase the shares which the accumulated payroll deductions in the participant's account would purchase at the date of death. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1996, all decisions relating to executive compensation were made by the Compensation Committee, of which Messrs. Clearman and Ellison were members. Neither of these individuals has served at any time as an officer or employee of the Company. For a description of the transactions between the Company and members of the Compensation Committee and entities affiliated with such members, see "Certain Transactions." No executive officer of the Company serves as a member of the Board of Directors or Compensation Committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. 44 46 CERTAIN TRANSACTIONS Since June 30, 1993, the Company has issued and sold, in private placement transactions, shares of Class A Common Stock and Preferred Stock and warrants to purchase Common Stock to the Company's executive officers, directors and principal stockholders as follows:
NUMBER OF NUMBER OF NUMBER OF SHARES OF SHARES OF SHARES OF CLASS A SERIES F SERIES H CLASS A COMMON STOCK INVESTOR(1) PREFERRED STOCK(2) PREFERRED STOCK(3) COMMON STOCK(2) WARRANTS - -------------------------------- ------------------ ------------------ --------------- ------------ Geocapital II, L.P. (4)......... 4,794 -- 4,794 975(5) Marc S. Tesler(6)............... -- 73,189 -- 3,789(7) Entities Affiliated with Chancellor.................... 20,071 75,433 20,071 7,988(8) Entities Affiliated with Abbott Capital....................... 13,493 -- 13,493 2,744(9)
- --------------- (1) Shares held by all affiliated persons and entities have been aggregated. See "Principal and Selling Stockholders" for more detail on shares held by these purchasers. (2) On March 30, 1994 the Company sold a total of 38,358 shares of Series F Preferred Stock and 38,358 shares of Class A Common Stock for an aggregate purchase price of $1 million. The shares of Series F Preferred Stock will be redeemed by the Company upon closing this offering at $26.07 per share, plus (i) accrued and unpaid dividends thereon and (ii) a 6% redemption premium, if applicable. Approximately $24,700, $103,500 and $69,600 of dividends have accrued as of June 30, 1996 on shares of Series F Preferred Stock owned by Geocapital, and entities advised by Chancellor Capital Management Inc. and Abbott Capital Management, L.P., respectively. (3) The per share purchase price for Series H Preferred Stock was $40.99. (4) Stephen J. Clearman, a general partner of Geocapital II, L.P., is a director of the Company. Alec L. Ellison, a Managing Director of Broadview Associates LLC, which is an affiliate of Geocapital II, L.P., is a director of the Company. (5) These warrants have an exercise price of $25.64 per share. (6) Reflects shares owned by Technology Crossover Ventures, L.P. and Technology Crossover Ventures, C.V. (together, "Technology Crossover Ventures"). Marc S. Tesler, an affiliate of Technology Crossover Ventures, is a director of the Company. (7) These warrants have an exercise price of $.01 per share. (8) Of the 7,988 warrants, 4,082 are exercisable at $25.64 per share and 3,906 are exercisable at $.01 per share. (9) These warrants have an exercise price of $25.64 per share. On December 31, 1990, the Company issued promissory notes to two of its founders, Gary A. Johnson and Thomas St. Denis, both in the amount of $133,333 and bearing interest payable monthly at the rate of 12% percent per annum. The notes mature and all outstanding principal is payable in full on February 28, 1997. Currently, the Company's credit agreement with a third-party lender requires that the entire principal amount of the notes remain outstanding. For a description of option grants to certain executive officers of the Company, see "Management -- Executive Compensation." The Company believes that the terms of the foregoing transactions were no less favorable to the Company than could have been obtained from unaffiliated third parties. The Company intends to adopt a policy, effective following the consummation of this offering, that all material transactions between the Company and its officers, directors and other affiliates must (i) be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors, and (ii) be on terms that are no less favorable to the Company than could be obtained from unaffiliated third parties. In addition, this policy will require that any loans by the Company to its officers, directors or other affiliates be for bona fide business purposes only. 45 47 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of June 30, 1996, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each person or entity known to the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors and Named Executive Officers, (iii) each of the Selling Stockholders and (iv) all directors and executive officers as a group.
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) NUMBER OF OFFERING(1) ------------------- SHARES ---------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - --------------------------------------------------- ------- ------- ---------- ------ ------- Chancellor Capital Management, Inc.(2)........... 261,684 15.4% 1166 Avenue of the Americas New York, NY 10036 Geocapital II, L.P.(3)........................... 386,035 22.9% One Bridge Plaza Fort Lee, NJ 07024 Gary A. Johnson(4)............................... 228,750 13.5% Thomas St. Denis................................. 225,000 13.3% Dennis P. Walker(5).............................. 225,750 13.4% Abbott Capital Management, L.P.(6)............... 122,582 7.3% 1330 Avenue of the Americas, Suite 2800 New York, NY 10019 Stephen J. Clearman(3)(7)........................ 386,035 22.9% Alec L. Ellison(3)(8)............................ 386,035 22.9% Marc S. Tesler(9)................................ 76,978 4.6% Steven H. Levenherz(10).......................... 15,876 * David Schachne(11)............................... 16,250 1.0% Other Selling Stockholders All executive officers and directors, as a group (9 persons)(3)(4)(5)(7)(8)(9)(10)(11)............ 949,639 55.1%
- ------------ * Less than 1%. (1) The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, shares of Common Stock subject to options or warrants exercisable within 60 days after June 30, 1996 are deemed to be outstanding for computing the percentage of the person or entity holding such options or warrants but are not deemed outstanding for computing percentage of any other person or entity. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. (2) Chancellor Capital Management, Inc. ("Chancellor") is the investment manager for various fiduciary client accounts, with full voting and investment, including dispositive, powers. Such client accounts and their respective share ownership are as follows: Howe & Co. as nominee for Northern Trust as trustee of Burnett Pension Trust; Howe & Co. as nominee for Northern Trust as trustee of Burnett Profit Sharing Trust; Focus & Co.; Focus & Co. for the benefit of Baxter Healthcare Corp.; Hank & Co. for the account of Citiventures Private Participation Ltd. II; Pitt & Co. for the account of GTE Pension Plan; and Parag Saxena. Each of the accounts owns 3,865; 5,055; 6,608; 4,862; 187,537; 45,460; and 309 shares of Common Stock, respectively. Also includes 46 48 an aggregate of 7,988 shares of Common Stock issuable upon the exercise of outstanding warrants held by such accounts that are presently exercisable. (3) Consists of 367,270 and 17,790 shares of Common Stock and 929 and 46 shares issuable upon the exercise of presently exercisable warrants held of record by Geocapital II, L.P. and Bernard Goldstein, respectively, both of which are part of an affiliated group of entities and individuals referred to, collectively, as Geocapital. (4) Includes 3,750 shares issuable upon the exercise of outstanding options presently exercisable or exercisable within 60 days after June 30, 1996. Includes 7,500 shares held in trust for the benefit of Mr. Johnson's children; Mr. Johnson disclaims beneficial ownership of such shares. (5) Includes 750 shares issuable upon the exercise of outstanding options presently exercisable or exercisable within 60 days after June 30, 1996. Includes an aggregate of 25,000 shares held in trust for the benefit of Mr. Walker's children; Mr. Walker disclaims beneficial ownership of such shares. (6) Includes 2,744 shares issuable upon the exercise of warrants presently exercisable. (7) Mr. Clearman is a general partner of Geocapital II, L.P., and as such may be deemed to be the beneficial owner of shares held by Geocapital. Mr. Clearman disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in Geocapital. (8) Mr. Ellison is a Managing Director of Broadview Associates LLC, an affiliate of Geocapital II, L.P., and as such may be deemed to be the beneficial owner of shares held by Geocapital. Mr. Ellison disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in Geocapital. (9) Consists of an aggregate of 73,189 shares of Common Stock and 3,789 shares issuable upon the exercise of warrants held of record by Technology Crossover Ventures, L.P. and Technology Crossover Ventures, C.V., of which Mr. Tesler is an affiliate. As a result, Mr. Tesler may be deemed to be the beneficial owner of such shares. Mr. Tesler disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such entities. (10) Represents 15,876 shares issuable upon the exercise of outstanding options presently exercisable or exercisable within 60 days after June 30, 1996. (11) Includes 11,750 shares issuable upon the exercise of outstanding options presently exercisable or exercisable within 60 days after June 30, 1996. 47 49 DESCRIPTION OF CAPITAL STOCK Upon the closing of the offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock, $0.01 par value per share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share. COMMON STOCK As of June 30, 1996 there were 1,687,034 shares of Common Stock and Preferred Stock convertible into Common Stock outstanding held by 39 stockholders of record. Based upon the number of shares outstanding as of June 30, 1996, assuming no exercise after June 30, 1996 of outstanding stock options and warrants and giving effect to the issuance of the shares of Common Stock offered by the Company hereby, there will be shares of Common Stock outstanding upon the closing of this offering. Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. WARRANTS As of June 30, 1996, the Company had issued warrants to purchase an aggregate of 53,864 shares of Class A Common Stock with the following per share exercise prices: 7,801 at $25.64; 20,337 at $14.75; and 25,726 at $0.01. These warrants expire at various dates between March 1999 and August 2000. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue such shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. The Company has no present plans to issue any shares of Preferred Stock. It is not possible to state the effect of the authorization and issuance of any series of Preferred Stock upon the rights of holders of Common Stock until the Board of Directors determines the specific terms, rights and preferences of such a series of Preferred Stock. However, such effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock or impairing the liquidation rights of such shares without further action by holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management, which could thereby depress the market price of the Company's Common Stock. 48 50 DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Restated Certificate of Incorporation (the "Charter") provides for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. See "Management -- Executive Officers and Directors." In addition, the Charter provides that directors may be removed only for cause by the affirmative vote of the holders of two-thirds of the shares of capital stock of the corporation entitled to vote. Under the Charter, any vacancy on the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Charter also provides that after the closing of this Offering, any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. The Charter further provides that special meetings of the stockholders may only be called by the Chairman of the Board of Directors, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. Under the Restated By-laws, in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. The foregoing provisions could have the effect of delaying until the next stockholders meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or by-laws, unless a corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. The Charter requires the affirmative vote of the holders of at least 75% of the shares of capital stock of the Company issued and outstanding and entitled to vote to amend or repeal any of the foregoing Charter provisions. The Restated By-laws also may be amended or repealed by a majority vote of the Board of Directors subject to any limitations set forth in the Restated By-laws. The 75% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series Preferred Stock that might be outstanding at the time any such amendments are submitted to stockholders. REGISTRATION RIGHTS Following this offering, the holders (the "Holders") of approximately shares of Common Stock and warrants to purchase approximately shares of Common Stock or their assignees (collectively, the "Registrable Securities"), will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of an agreement between the 49 51 Company and the Holders, in the event the Company intends to register any of its securities under the Securities Act the Holders shall be entitled to include Registrable Securities in such registration. However, the managing underwriter of any such offering may, under certain circumstances, exclude some or all of such registrable Securities from such registration. The Holders also are entitled, subject to certain conditions and limitations, to demand the Company to register some or all of their Registrable Securities under the Securities Act, provided that such demand may not be exercised more than once in any twelve-month period or more than twice in the aggregate. The Company is generally required to bear the expenses of all such registrations, except underwriting discounts and commissions. If the Holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. Moreover, if the Company were to include in a Company initiated registration shares held by the Holders pursuant to exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise additional capital. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company. 50 52 SHARES ELIGIBLE FOR FUTURE SALE Upon closing of this offering, based upon the number of shares outstanding at June 30, 1996 and assuming no exercise after June 30, 1996 of outstanding stock options or warrants, there will be shares of Common Stock of the Company outstanding. Of these shares, the shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates") described below. The remaining shares of Common Stock are deemed "restricted securities" as that term is defined in Rule 144. Of the restricted securities, shares of Common Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See "Underwriting." Approximately shares of Common Stock, which are not subject to Lock-Up Agreements, will be eligible for sale in the public market in accordance with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the date of this Prospectus. Upon expiration of the Lock-Up Agreements 181 days after the date of this Prospectus, approximately additional shares of Common Stock will be available for sale in the public market, subject to the provisions of Rule 144 under the Securities Act. In addition, upon expiration of Lock-Up Agreements, an additional shares subject to stock options outstanding, if exercised, will be eligible for sale pursuant to Rule 701 unless sold pursuant to an effective registration statement under the Securities Act. As of June 30, 1996 there were outstanding warrants to purchase 53,864 shares of Common Stock. These warrants contain net exercise provisions. Accordingly, any shares issued upon net exercise will be eligible for sale immediately upon expiration of lock-up agreements pursuant to Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the Registration Statement of which this Prospectus is a part, a stockholder, including an Affiliate, who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least two years from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately shares immediately after this offering) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least three years has elapsed between the later of the date restricted securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate of the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale is entitled to sell the shares immediately without compliance with the foregoing requirements under Rule 144. Securities issued in reliance on Rule 701 (such as shares of Common Stock that may be acquired pursuant to the exercise of certain options granted under the Amended 1990 Stock Option Plan, the Executive Officers' Plan and the Director Plan) are also restricted securities and, beginning 90 days after the effective date of the Registration Statement of which this Prospectus is a part, may be sold by stockholders other than Affiliates of the Company subject only to the manner of sale provisions of Rule 144 and by Affiliates under Rule 144 without compliance with its two-year holding period requirement. The Company intends to file registration statements on Form S-8 under the Act to register approximately 555,000 shares of Common Stock issuable under the Amended 1990 Stock Option Plan, the Executive Officers' Plan, the Director Plan, the 1996 Stock Option Plan and the Purchase Plan. The registration statements are expected to be filed shortly after the effective date of the Registration Statement of which this Prospectus is a part and will be effective upon filing. Shares issued upon the exercise of stock options after the effective date of the Form S-8 registration statements will be eligible 51 53 for resale in the public market without restriction, subject to Rule 144 limitations applicable to Affiliates and the Lock-Up Agreements noted above. Prior to the offering, there has been no public market for the Common Stock of the Company, and no prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. In addition, after this offering, the holders of approximately shares of Common Stock and warrants to purchase an aggregate of shares of Common Stock will be entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by Affiliates) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were to include shares in a Company-initiated registration pursuant to the exercise of piggyback registration rights, sales of such shares may have an adverse effect on the Company's ability to raise additional capital. 52 54 UNDERWRITING The Underwriters named below, acting through their representatives, Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and PaineWebber Incorporated (the "Representatives"), have severally agreed with the Company and the Selling Stockholders, subject to the terms and conditions of the Underwriting Agreement, to purchase the numbers of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER NAME OF SHARES ------------------------------------------------------------------ --------- Robertson, Stephens & Company LLC................................. Hambrecht & Quist LLC............................................. PaineWebber Incorporated.......................................... --------- Total................................................... =========
The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Selling Stockholders have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to additional shares of Common Stock, at the same price per share as the Company and Selling Stockholders will receive for the shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act. Each officer and director of the Company, and certain other persons that beneficially own or have dispositive power over substantially all of the shares of the Company's Common Stock, have agreed with the Representatives for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions, not of offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned or hereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of Robertson, Stephens & Company LLC. Robertson, Stephens & Company LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition, the Company has agreed that during the Lock-Up Period, the Company will not, without prior written consent of Robertson, Stephens & Company LLC, subject to certain exceptions, issue, sell, contract to sell, or otherwise dispose of, any shares of Common Stock, any 53 55 options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sales of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and the Company's issuance of options and stock under the Amended 1990 Stock Option Plan, the 1995 Executive Officers' Stock Option Plan and the 1995 Non-Employee Directors' Stock Option Plan. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock is being determined through negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. Certain venture funds affiliated with Robertson, Stephens & Company LLC beneficially owned 81,311 shares of Common Stock and warrants to purchase 316 shares of Common Stock as of June 30, 1996. LEGAL MATTERS The validity of the shares of Common Stock being offered hereby will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The Consolidated Financial Statements of the Company as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996 included in this Prospectus, have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall include all amendments, exhibits, schedules and supplements thereto) on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, to which Registration Statement reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the Company is required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 54 56 MEMBERWORKS INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... F-2 Consolidated Balance Sheets as of June 30, 1996 and 1995.............................. F-3 Consolidated Statements of Operations for each of the years in the three-year period ended June 30, 1996................................................................. F-4 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended June 30, 1996............................................... F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 1996................................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 57 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MemberWorks Incorporated In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of MemberWorks Incorporated and its subsidiaries at June 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Stamford, Connecticut July 25, 1996, except as to Note 15 which is as of August 15, 1996 F-2 58 MEMBERWORKS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, ----------------------- 1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents........................... $ 5,323 $ 4,312 Accounts receivable................................. 1,365 6,439 Membership solicitations in process................. 2,252 3,474 Prepaid membership materials........................ 332 1,065 Prepaid expenses.................................... 90 204 -------- -------- Total current assets........................ 9,362 15,494 Fixed assets, net..................................... 1,782 3,261 Other assets.......................................... 252 960 -------- -------- $ 11,396 $ 19,715 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable....................................... $ 297 $ 675 PRO Current maturities of capital lease obligations..... 205 316 FORMA AT Accounts payable.................................... 7,879 10,433 JUNE 30, Accrued liabilities................................. 9,129 14,631 1996 -------- -------- Total current liabilities................... 17,510 26,055 (UNAUDITED) Deferred membership income, net....................... 5,262 8,416 (NOTE 16) Long-term capital lease obligations................... 392 456 ---------- Notes payable......................................... 7,673 633 -------- -------- Total liabilities........................... 30,837 35,560 Redeemable preferred stock............................ 10,926 20,487 $ -- -------- -------- Total liabilities and redeemable preferred stock..................................... 41,763 56,047 -------- -------- Commitments and contingencies (Note 8) Stockholders' equity: Class A common stock, $.01 par value -- 1,779,175 shares (1,464,191 shares in 1995) authorized; 777,621 shares issued and outstanding............ 8 8 -- Class B common stock, $.01 par value -- 2,058,318 shares (1,600,334 shares in 1995) authorized; 35,866 shares (35,816 shares in 1995) issued and outstanding...................................... -- -- 17 Capital in excess of par value...................... 1,737 2,253 20,782 Accumulated deficit................................. (31,839) (38,320) (38,857) Treasury stock, 24,143 shares at cost............... (273) (273) (273) -------- -------- ----------- Total stockholders' equity (deficit)........ (30,367) (36,332) $(18,331) ========= -------- -------- $ 11,396 $ 19,715 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 59 MEMBERWORKS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, ---------------------------- 1994 1995 1996 ------- -------- ------- Revenues Membership fees................................................ $25,830 $ 41,547 $57,012 Expenses Operating...................................................... 5,354 9,702 11,623 Marketing...................................................... 20,188 32,799 38,410 General and administrative..................................... 5,592 8,885 11,916 Interest expense, net.......................................... 712 893 310 ------- -------- ------- Total expenses................................................... 31,846 52,279 62,259 ------- -------- ------- Loss before income taxes......................................... (6,016) (10,732) (5,247) Provision for income taxes....................................... -- -- -- ------- -------- ------- Net loss......................................................... $(6,016) $(10,732) $(5,247) ======= ======== ======= Unaudited pro forma net loss per share........................... $ (2.94) ======= Unaudited pro forma weighted average shares outstanding.......... 1,839 =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 60 MEMBERWORKS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ------------------------------------ CLASS A CLASS B CAPITAL IN ----------------- ---------------- EXCESS OF ACCUMULATED TREASURY SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT STOCK TOTAL --------- ------ ------- ------ ---------- ----------- -------- -------- Balance -- June 30, 1993................... 739,263 $8 24,705 $ -- $1,074 $ (13,819) $(12,737) For the year ended June 30, 1994: Issuance of common stock.................. 38,358 -- 500 -- 514 514 Preferred stock: Accretion of discount............ (90) (90) Accretion to redemption value............... (193) (193) Accumulated dividends.. (105) (105) Net loss................. (6,016) (6,016) -- ------- ------ --- ------ -------- ---- -------- Balance -- June 30, 1994................... 777,621 8 25,205 -- 1,588 (20,223) (18,627) For the year ended June 30, 1995: Issuance of common stock.................. 10,611 -- 65 65 Issuance of warrants..... -- -- Acquisition of treasury stock.................. 84 $ (273) (189) Preferred stock: Accretion of discount............ (163) (163) Accretion to redemption value............... (297) (297) Accumulated dividends.. (424) (424) Net loss................. (10,732) (10,732) -- ------- ------ --- ------ -------- ---- -------- Balance -- June 30, 1995................... 777,621 8 35,816 -- 1,737 (31,839) (273) (30,367) For the year ended June 30, 1996: Issuance of common stock.................. 50 -- 1 1 Issuance of warrants..... 515 515 Preferred stock: Accretion of discount............ (219) (219) Accretion to redemption value............... (648) (648) Accumulated dividends.. (367) (367) Net loss............... (5,247) (5,247) -- ------- ------ --- ------ -------- ---- -------- Balance -- June 30, 1996................... 777,621 $8 35,866 $ -- $2,253 $ (38,320) $ (273) $(36,332) ======= == ====== === ====== ======== ==== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 61 MEMBERWORKS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ---------------------------------- 1994 1995 1996 -------- -------- -------- OPERATING ACTIVITIES Net loss................................................. $ (6,016) $(10,732) $ (5,247) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Membership solicitation costs......................... (28,600) (40,120) (46,979) Amortization of membership solicitation costs......... 22,053 36,092 43,097 Deferred membership fees.............................. 6,866 6,569 7,036 Depreciation and amortization......................... 337 536 708 Loss on sale of fixed assets.......................... -- -- 38 Write-off of discontinued product line assets......... -- 659 -- Share of joint venture's losses....................... 28 52 51 Write-off of deferred debt issuance costs............. -- -- 103 Preferred stock redemption cost....................... -- -- 315 Change in assets and liabilities affecting operating cash flows: Accounts receivable...................................... 71 659 (5,074) Membership solicitations in process...................... (1,199) (58) (1,222) Prepaid membership materials............................. (139) 30 (733) Prepaid expenses......................................... (73) 20 (114) Other assets............................................. (323) (40) (252) Accounts payable......................................... 3,653 476 2,729 Accrued liabilities...................................... 3,980 2,381 5,545 -------- -------- -------- Net cash provided by (used in) operating activities........ 638 (3,476) 1 -------- -------- -------- INVESTING ACTIVITIES Acquisition of fixed assets.............................. (744) (519) (1,740) Deposit on equipment..................................... -- -- (539) Proceeds from sale of fixed assets....................... -- -- 15 Investment in and advances to joint venture.............. (31) (98) (48) -------- -------- -------- Net cash used in investing activities...................... (775) (617) (2,312) -------- -------- -------- FINANCING ACTIVITIES Net proceeds from issuance of stock and warrants......... 1,005 4,012 12,887 Redemption of preferred stock............................ -- -- (4,000) Purchase of treasury stock............................... -- -- (175) Preferred stock dividends................................ -- -- (402) Proceeds from issuance of notes payable.................. 1,000 6,860 502 Debt issuance costs...................................... -- (273) (117) Payments of notes payable................................ (206) (3,603) (7,164) Payments of capital lease obligations.................... (113) (146) (231) -------- -------- -------- Net cash provided by financing activities.................. 1,686 6,850 1,300 -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... 1,549 2,757 (1,011) Cash and cash equivalents at beginning of year............. 1,017 2,566 5,323 -------- -------- -------- Cash and cash equivalents at end of year................... $ 2,566 $ 5,323 $ 4,312 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 62 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS MemberWorks Incorporated (the "Company") is a leading provider of innovative membership service programs. The Company 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 the existing relationships between businesses and consumers. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation -- consolidation The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of estimates 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. Fair value of financial instruments and concentration of credit risk All current assets and liabilities are carried at cost, which approximates fair value because of the short-term maturity of those instruments. The recorded amounts of the Company's long-term debt also approximate fair value. See Note 10 for disclosure of the estimated fair value of the redeemable preferred stock. Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of accounts receivable from financial and other card holder based institutions (clients of the Company) whose card holders constitute the Company's membership base. These entities include major banks, financial institutions, large oil companies and retailers located in the United States. Fixed assets Fixed assets and capital leases are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the lesser of the estimated productive lives of the assets or the terms of the related leases, and range from three to ten years. Maintenance and repair expenditures are charged to operations as incurred. Revenue recognition Membership fees are billed through clients of the Company to credit card holders. Deferred membership fees are recorded, net of estimated cancellations, when the trial period has elapsed. Deferred membership fees are amortized as membership fees on a straight-line basis, over the remainder of the membership period, generally twelve months. Accounts receivable includes $3,624,000 of unbilled receivables as of June 30, 1996 (none at June 30, 1995), which were billed and collected subsequent to the balance sheet date, and arise in certain instances when the Company elects to bill subsequent to, rather than upon, acceptance of membership. F-7 63 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Membership service programs sponsored by three clients of the Company accounted for 35.2%, 15.6% and 10.5%, respectively, of membership fees for the fiscal year ended June 30, 1996. Membership solicitation costs In accordance with the provisions of Statement of Position 93-7, "Reporting on Advertising Costs," membership solicitation costs are deferred and charged to operations as membership fees are recognized. Membership solicitation costs relate directly to membership solicitations (direct response advertising costs), and include telemarketing costs, royalties paid to clients, kits, printing, postage and mailings. Membership solicitation costs are amortized ratably over the corresponding period in which revenues are recognized. Membership solicitation costs incurred to obtain a new member generally are less than the initial membership fee. However, if membership solicitation costs were to exceed the membership fee, an adjustment would be made to the extent of any impairment. Included in current assets in the accompanying consolidated balance sheets at June 30, 1996 and 1995 are costs pertaining to membership solicitation programs that were in process at year-end. These costs are accumulated over a one month solicitation period and are transferred to deferred membership solicitation costs when the membership begins. Earnings per Share Unaudited pro forma net loss per share is determined by dividing net loss, after adding back preferred stock dividends paid, by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents include stock options, warrants and preferred stock which will be converted into common stock upon the closing of the initial public offering of the Company's common stock. The weighted average number of shares has been adjusted to reflect as outstanding all common stock and common stock equivalents issued during the twelve-month period preceding the anticipated initial public offering of the Company's common stock using the treasury stock method, as well as the number of shares which would be necessary in order to redeem Series E and F preferred stock. Cash and cash equivalents The Company considers highly liquid investment instruments with terms of three months or less at the time of acquisition to be cash equivalents. Income taxes Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect of adopting FAS 109 was immaterial. Impairment of long-lived assets In 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). The Company adopted FAS 121, with no effect on operations, in fiscal 1996. F-8 64 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-based compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the Company's current plans, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted, except as noted in Note 12. In fiscal 1997, the Company intends to adopt the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." NOTE 3 -- DEFERRED MEMBERSHIP INCOME, NET Deferred membership income, net as of June 30 is comprised of the following (in thousands):
1995 1996 -------- -------- Deferred membership fees....................................... $ 23,592 $ 30,628 Deferred membership solicitation costs......................... (18,330) (22,212) ------ -------- Deferred membership income, net................................ $ 5,262 $ 8,416 ====== ========
Amortization of deferred membership solicitation costs amounted to $22,053,000, $36,092,000 and $43,097,000 for the years ended June 30, 1994, 1995 and 1996, respectively. Allowance for membership cancellations set forth in the accompanying consolidated balance sheets as of June 30, 1995 and 1996 were $6,765,000 and $10,117,000, respectively. Deferred membership income, net is classified as a non-current liability as working capital will not be required as the amount represents deferred future income. NOTE 4 -- IMPAQ On May 18, 1992, the Company issued 24,143 shares of Class B common stock valued at $273,000 in exchange for the net assets of IMPAQ Publishing Corporation. During December 1994, the Company discontinued Impaq's domestic discount coupon book business and recorded a charge of $659,000 to operations, primarily to write off unamortized goodwill of $166,000 and other assets of $461,000. Effective June 30, 1995, the Company returned Impaq's domestic discount coupon book operations, cash of $175,000 and net fixed assets of $14,000 to Impaq's former owner in exchange for the aforementioned originally issued shares of Class B common stock. There was no gain or loss on this transaction. Fiscal 1994 and 1995 consolidated results include Impaq revenues of $333,000 and $556,000 and operating losses of $643,000 and $1,639,000 respectively, including in 1995 the $659,000 charge discussed above. NOTE 5 -- JOINT VENTURE On November 1, 1993, the Company and a United Kingdom (UK) venture partner completed the formation of R.S.V.P. Publishing Ltd. (R.S.V.P.), a corporate joint venture based in the UK. The business of R.S.V.P. is to develop and market a coupon book program and other enhancement services in the UK, Europe and elsewhere. The financial position and results of operations of the venture are immaterial. The Company's net investment in and advances to the venture of $177,000 have been reduced to $46,000 as of June 30, 1996 by its recorded share of the venture's losses under the equity method of accounting of $28,000, $52,000, $51,000 for the years ended June 30, 1994, 1995, 1996, respectively. F-9 65 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- FIXED ASSETS Fixed assets are comprised of the following (in thousands):
1995 1996 ------ ------- Computer and office equipment............................. $2,447 $ 3,955 Furniture and fixtures.................................... 267 709 Leasehold improvements.................................... 11 113 ------- ------ 2,725 4,777 Accumulated depreciation and amortization................. (943) (1,516) ------- ------ $1,782 $ 3,261 ======= ======
NOTE 7 -- NOTES PAYABLE Notes payable are summarized as follows (in thousands):
1995 1996 ------ ------ Bank Credit Agreement...................................... $6,850 $ 10 Stockholder notes payable.................................. 267 267 Equipment term loans....................................... 853 1,031 ------ ------ 7,970 1,308 Less current maturities.................................... 297 675 ------ ------ Long-term notes payable.................................... $7,673 $ 633 ====== ======
On September 9, 1994, the Company entered into a $7,000,000 Bank Credit Agreement extending to February 28, 1997. In conjunction with the Bank Credit Agreement, the Company issued a warrant to acquire 20,000 shares of Class A common stock at an exercise price of $15.00 per share, subject to adjustment for dilution. The warrant is exercisable at any time prior to December 31, 1999. The Company amended the Bank Credit Agreement as of September 28, 1995 and paid down the outstanding balance to $10,000 with a portion of the proceeds from issuance of Series H convertible preferred stock. Interest on borrowings under the Bank Credit Agreement was at the bank's prime rate plus 3.5%, and there was a 1.0% per annum commitment fee on the total facility. Effective April 9, 1996, the Bank Credit Agreement was amended and restated to allow borrowings up to $3,000,000 through February 28, 1997. Borrowings under the amended and restated facility accrue interest at 1.5% per annum plus the higher of the base commercial lending rate for the bank or the Federal Funds Rate plus 0.5% per annum. A commitment fee is charged based on the total facility at the rate of 1% per annum. The credit agreement is secured by all of the Company's assets, including the stock of its subsidiaries. In addition, the founders of the Company have guaranteed the borrowings under the credit agreement and have pledged their stock ownership in the Company as collateral. The Company has 12.0% notes totaling $267,000 payable to two Class A common stockholders. Pursuant to the terms of the Bank Credit Agreement, the stockholder notes are subordinate to the Bank Credit Agreement and their maturity was extended to February 28, 1997. The Company has several equipment term loans extending to September 2001, secured by certain computer equipment. Interest is at rates of 7.5% to 11.6%, and principal is repayable monthly. The aggregate amount of payments related to the equipment term loans is $398,000 in 1997, $436,000 in 1998, $190,000 in 1999, $5,000 in 2000 and $2,000 in 2001. F-10 66 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On March 30, 1994, the Company issued $1,000,000 of 10% convertible notes due September 30, 1994 with warrants attached. The warrants are exercisable at any time prior to March 30, 1999, and allow the holders to acquire up to 7,672 shares of Class A common stock based on an exercise price of $26.07, subject to adjustment for dilution. The notes were paid on the due date. Interest expense in 1994, 1995 and 1996, as shown in the statement of operations, is net of interest income of $10,000, $125,000 and $305,000, respectively. NOTE 8 -- COMMITMENTS AND CONTINGENCIES 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. Rent expense under operating leases was $409,000, $491,000, and $733,000 for the fiscal years ended June 30, 1994, 1995 and 1996, respectively. During 1994, 1995 and 1996, the Company entered into capital leases of certain computer equipment totaling $110,000, $68,000 and $406,000, respectively, of capitalized cost. Lease amortization for the years ended June 30, 1994, 1995 and 1996 was $171,000, $163,000 and $194,000, respectively, and is included in depreciation and amortization expense. The future minimum lease payments under capital leases (including present value of net minimum lease payments) and operating leases as of June 30, 1996 are as follows (in thousands):
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ----------------------------------------------------------------- ------- --------- 1997............................................................. $ 316 $ 936 1998............................................................. 316 988 1999............................................................. 197 952 2000............................................................. 56 947 2001............................................................. 9 631 Thereafter....................................................... -- 3,140 ------- --------- Total minimum lease payments..................................... 894 $ 7,594 ======== Less -- Amount representing interest............................. 122 ------- Present value of net minimum lease payments including current maturities of $316 with interest rates ranging from 6.9% to 10.4%.......................................................... $ 772 =====
The Company deposited $539,000 on certain telephone equipment which has a purchase price of $725,000. The deposit is included in other assets at June 30, 1996. The equipment is installed at the Company's facilities and, upon acceptance by the Company, a lease will be executed and the deposit refunded by the lessor. In June 1995, a co-founder of the Company filed a complaint against the Company and certain of its executive officers alleging various claims arising out of his termination in October 1994 as Executive Vice President and Chief Operating Officer of the Company. The former officer alleges wrongful termination, breach of fiduciary duty, fraudulent inducement and certain other claims arising out of alleged accounting irregularities in fiscal 1994. The complaint claims an unspecified amount of compensatory and punitive damages and certain other costs. The Company has moved to strike the complaint, and the Company's motion is being considered by the court. If the motion to strike the complaint is not allowed, the Company intends to contest the claims alleged in the complaint vigorously, and intends to assert counter claims. At present, it is not possible to predict the ultimate outcome or the range of possible loss, if any, resulting from the resolution of this matter. F-11 67 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- INCOME TAXES There was no current or deferred provision for income taxes for the years ended June 30, 1994, 1995 and 1996. No current provision was required because tax losses were incurred in those years. Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for tax and financial statement purposes. The tax effects of the basis differences and net operating loss carryforwards, and the valuation allowance established in accordance with FAS 109, are summarized below as of June 30, 1995 and 1996 (in thousands):
1995 1996 -------- ------- Allowance for membership cancellations.......................... $ 2,304 $ 3,361 Deferred membership income, net................................. 14 713 Other deferred tax assets....................................... 435 562 Benefit of net operating loss carryforward...................... 6,947 6,963 -------- ------- Total deferred tax assets............................. 9,700 11,599 Less: Valuation allowance....................................... (9,700) (11,599) -------- ------- Net deferred tax asset................................ $ -- $ -- ======== =======
The valuation allowance for deferred tax assets as of July 1, 1994 was $6,003,000. The net change in the valuation allowance for the years ended June 30, 1995 and 1996 were increases of $3,697,000 and $1,899,000, respectively. At June 30, 1996, the Company had federal net operating loss carryforwards of $17,705,000. The Company's ability to use these losses to offset future taxable income would be subject to limitations under the Internal Revenue Code if certain changes in the Company's ownership occur. The tax basis net operating loss carry forwards expire as follows (in thousands):
FISCAL YEAR AMOUNT --------------------------------------------------- ------- 2005............................................... $ 1,950 2006............................................... 2,673 2007............................................... 2,702 2008............................................... 1,757 2009............................................... 3,176 2010............................................... 5,009 2011............................................... 438 ------- $17,705 =======
The Company also has state net operating loss carryforwards expiring at various dates through June 30, 2001 available to reduce future state taxable income. F-12 68 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- REDEEMABLE PREFERRED STOCK The following table presents the authorized and outstanding shares of preferred stock which must be redeemed other than at the Company's option, and recorded values as of June 30, 1996 and 1995 (in thousands except share data):
AT JUNE 30, 1996 RECORDED VALUES ------------------------ GROSS AT JUNE 30, FISCAL YEAR AUTHORIZED OUTSTANDING PROCEEDS ----------------- ISSUE OF ISSUANCE SHARES SHARES RECEIVED 1995 1996 --------------------------- ----------- ---------- ----------- -------- ------- ------- Series A................... 1990 225,000 225,000 $ 750 $ 1,208 $ 1,490 Series B................... 1991 218,818 218,818 $ 2,000 2,173 2,422 Series C................... 1992 88,339 88,339 $ 1,000 1,029 1,117 Series D................... 1992 48,383 48,383 $ 750 750 780 Series E................... 1993 42,178 42,178 $ 1,000 877 1,072 Series F................... 1994 38,358 38,358 $ 1,000 684 877 Series G................... 1995 -- -- $ 4,000 4,205 -- Series H................... 1996 317,150 317,150 $ 13,000 -- 12,729 ------- ------- $10,926 $20,487 ======= =======
Series A, B, C, D and H preferred stock are convertible at any time into Class A common stock at a conversion price per share (subject to adjustment for dilution) of $3.33, $9.14, $11.32, $15.50 and $40.99, respectively, and automatically convert into Class B common stock at the then effective conversion price in the event of a qualified public offering. These series of preferred stock are redeemable at the holder's option, on or after July 31, 2001, at a redemption value equal to the greater of the then fair market value or the conversion price per share. The Series A, B, C, D and H preferred stock were recorded at fair value at the date of issuance. The difference between recorded fair value and redemption value in the year 2001 is being accreted using the interest method. The fair value of the Company's Class B common stock, which value was greater than the conversion price per share for the Series A, B, C, and D preferred stock at June 30, 1996 and 1995, is accordingly being used as the redemption value for purposes of calculating accretion. As discussed in Note 12, warrants to acquire 10,000 shares of Class A common stock at $0.01 per share were issued in conjunction with the issuance of Series H preferred stock. As a result, the recorded value of the Series H preferred stock was $12,800,000, reflecting a $200,000 discount attributable to the warrants, which is being accreted through the exercise date using the interest method. Additionally, the Company paid $114,000 of issuance costs in connection with this offering, which was recorded as a reduction in net proceeds, and is being accreted to the redemption date. The holders of Series A, B, C, D and H preferred stock are entitled to vote (on a common stock equivalent basis) on all matters submitted to the stockholders. Series E and F shares are mandatorily redeemable on April 30, 1998 and April 30, 1999, respectively, at $23.71 and $26.07 per share, respectively, plus all accumulated and unpaid dividends. The Company may be required to redeem all or any portion of Series E and F upon change in ownership or in the event of a qualified public offering at the redemption value per share plus all accumulated and unpaid dividends. If redeemed at the option of the Company, the redemption premium on Series E and F is 4% and 6%, respectively, through April 30, 1997 and declines annually thereafter by 2% through the respective mandatory redemption date. These series of preferred stock accrue dividends at a rate of 8% per annum, compounded daily. At June 30, 1996 accumulated and unpaid dividends were $288,000 and $198,000 on Series E and F preferred stock, respectively. F-13 69 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As further discussed in Note 11, Class A common stock was issued in conjunction with the issuance of the Series E and F preferred stock. As a result, the Series E and F redeemable preferred stock was recorded at discounts of $522,000 and $491,000, respectively. The discounts recognized are being accreted through the required redemption dates using the interest method. On September 28, 1994, the Company issued 40,000 of new Series G preferred stock with attached warrants to acquire 40,000 shares of Class A common stock for a total of $4,000,000. Preferred dividends on Series G preferred stock is 8% per annum, payable quarterly in kind. On August 3, 1995, the Company redeemed 40,000 shares of issued and outstanding Series G preferred stock and redeemed attached warrants to acquire 40,000 shares of Class A common stock of the Company issued September 28, 1994 for $4,000,000, and also paid the investor a preferred dividend in the amount of $402,000. Additionally, the Company substituted 15,726 warrants to acquire Class A common stock, exercisable at $0.01 per share, in exchange for the 40,000 warrants previously redeemed. As a result the substituted warrants issued were accounted for at fair value of $315,000 and recorded as a charge to operations as a cost of redeeming the preferred stock. Upon liquidation, dissolution or winding up of the Company, the holders of Series E and F preferred stock are entitled to receive the applicable liquidation value plus all accrued and unpaid dividends, prior to any distribution to holders of Series A, B, C, D or H preferred stock or common stock. Holders of Series A, B, C, D and H preferred are entitled to receive the applicable liquidation value plus accrued, declared and unpaid dividends, if any. If, in the event of liquidation, dissolution or winding up of the Company, the Company's assets to be distributed among the holders of Series A, B, C, D, and H preferred were insufficient, then the assets would be distributed ratably to such holders based upon the aggregate applicable amounts that are owed. The holders of Series A, B, C, D and H preferred stock are entitled to receive non-cumulative dividends if and when declared by the Company's Board of Directors, subject to the prior and superior rights of Series E and F preferred stock. The Company may not pay or declare a dividend to the holders of these Series if at the time of or immediately following the dividend the Company has failed to pay the full amount of dividends accrued on the Series E and F preferred stock or to declare any dividend or make any distribution upon any common stock. The redemption requirements for all issues of redeemable preferred stock for the five years following June 30, 1996 are as follows: $0 in 1997, $1,491,000 in 1998, $1,503,000 in 1999, and $0 in 2000 and 2001. The recorded value of the Company's redeemable preferred stock at June 30, 1996 was $20,487,000. In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Market Value of Financial Instruments," the Company estimates that fair value of the redeemable preferred stock at June 30, 1996 was approximately $23,500,000. Estimated fair value at June 30, 1996 was calculated based on the higher of the redemption value of the redeemable preferred stock or the then fair value of the Company's common stock, plus accumulated dividends, discounted to present value at an appropriate rate of interest. This estimate is not necessarily indicative of the amount the holders could realize in a current market exchange. NOTE 11 -- COMMON STOCK Class A common stock and Class B common stock are entitled to one vote per share on all matters voted on by the stockholders. Shares of Class A common stock are convertible on a share for share basis into shares of Class B common stock at the option of the holder and automatically convert upon the closing of a qualified public offering. Class A common stock has preference rights over Class B common stock in case of a liquidation, dissolution or winding up of the Company. F-14 70 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Dividends may be declared on Class A and B common stock subject to the prior and superior rights of the preferred stock. The Company's Board of Directors may not declare or pay a dividend to the holders of Class A or B common stock, other than in the form of shares of common stock, unless the Board simultaneously declares a dividend payable to the holders of Series A, B, C, D and H preferred stock at the same rate (on an as-converted basis). In March 1994, 38,358 shares of Class A common stock were issued for proceeds of $384, an amount equal to par value. These shares were issued in connection with the Series F preferred stock offerings, and have been recorded at fair value of $508,000 (see Note 10). In May 1993, 42,178 shares of Class A common stock were issued for proceeds of $422, an amount equal to par value. These shares were issued in connection with the Series E preferred stock offerings, and have been recorded at fair value of $478,000 (see Note 10). NOTE 12 -- STOCK OPTIONS AND WARRANTS Under the Amended 1990 Employee Incentive Stock Option Plan, the Board is authorized to grant 180,000 incentive stock options, entitling certain employees and officers to acquire shares of Class B common stock at a price per share equal to fair market value at the date of grant. Options become exercisable over a four year period and expire at the earlier of termination of employment or eight years from date of grant (ten years for grants after December 31, 1995). As of June 30, 1996 there were 45,810 options available for grant. During 1996, the Board of Directors and stockholders of the Company approved the adoption of the 1995 Executive Officers' Stock Option Plan and the 1995 Non-Employee Directors' Stock Option Plan under which the Board is authorized to grant 50,000 and 25,000 options, respectively, to acquire shares of Class B common stock at a price per share equal to or greater than fair market value at the date of grant. Under the Executive Officers' Stock Option Plan, the Board can determine the date on which options vest and become exercisable. Options become exercisable over a four year period under the Non-Employee Directors' Stock Option Plan. As of June 30, 1996 there were 15,000 and 5,000 shares available for grant under the Executive Officers' Stock Option Plan and the Non-Employee Directors' Stock Option Plan, respectively. F-15 71 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information with respect to shares under option under the plans is as follows:
OPTION PRICE PER SHARE OUTSTANDING EXERCISABLE --------------- ----------- ----------- Balance -- June 30, 1993........................... $3.33 - $11.32 61,167 11,937 Granted.......................................... $13.25 26,450 Became exercisable............................... $3.33 - $11.32 15,292 Exercised........................................ $11.32 (500) (500) Canceled......................................... $11.32 - $13.25 (2,750) (250) --------------- ----------- ----------- Balance -- June 30, 1994........................... $3.33 - $13.25 84,367 26,479 Granted.......................................... $15.00 30,500 Became exercisable............................... $3.33 - $13.25 19,405 Exercised........................................ $3.33 - $13.25 (10,611) (10,611) Canceled......................................... $9.14 - $15.00 (13,739) (865) --------------- ----------- ----------- Balance -- June 30, 1995........................... $3.33 - $15.00 90,517 34,408 Granted.......................................... $20.00 - $30.00 93,700 Became exercisable............................... $9.14 - $20.00 19,442 Exercised........................................ $15.00 (50) (50) Canceled......................................... $13.25 - $20.00 (6,700) (1,275) --------------- ----------- ----------- Balance -- June 30, 1996........................... $3.33 - $30.00 177,467 52,525 ============== ========= =========
On March 30, 1994, a warrant was issued to acquire 7,672 shares of Class A common stock at an exercise price of $26.07 per share, subject to adjustment for dilution when issued. The warrant is exercisable at any time prior to March 30, 1999. On September 9, 1994, the Company issued a warrant in conjunction with the Bank Credit Agreement to acquire 20,000 shares of Class A common stock at an exercise price of $15.00 per share, subject to adjustment for dilution when issued. The warrant is exercisable at any time prior to December 31, 1999. As discussed in Note 10, warrants to acquire 10,000 shares of Class A common stock were issued in conjunction with the Series H preferred stock offering. Each warrant is exercisable at $0.01 per share for a period of five years from the issuance date. The warrants have been recorded at a fair value of $200,000. The Company has an agreement with an executive officer, whereby the Company is required to grant options to purchase up to 20,000 shares of Class B common stock to the executive for achievement of certain performance goals. Specifically, the Company will grant an option to purchase 2,000 shares of Class B common stock for each new client, from a selected list of certain prospective large clients, he obtains for the Company prior to December 31, 1996. These options have a stated exercise price of $20.00 per share and vest ratably over a four year period from date of grant. In 1996, the executive was granted an option to purchase 2,000 shares of Class B common stock pursuant to this agreement. Compensation expense in 1996 related to this grant was $3,000, measured based on the excess of the fair value of the common stock of the Company on the date of grant over the grant price. Compensation charges related to future grants, if any, will be measured in the same manner and recognized over the vesting period. F-16 72 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 -- EMPLOYEE BENEFIT PLAN Effective April 1, 1996 the Company adopted a 401(k) profit sharing plan. Employees of the Company are eligible to contribute to the plan once they have completed one year of service and attained age 18. Employees may contribute up to 15% of their compensation subject to certain limitations. The Company may elect to make matching contributions or profit sharing contributions to the plan. There were no Company contributions made for the year ended June 30, 1996. NOTE 14 -- STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ---------------------- 1994 1995 1996 ---- ---- ---- Supplemental disclosure of cash flow information: Cash paid during the period for interest.................... $728 $896 $493 ==== ==== ==== Cash paid during the period for income taxes................ $ -- $ -- $ 45 ==== ==== ==== Supplemental schedule of noncash investing and financing activities: Capital lease obligation related to acquisition of fixed assets................................................... $110 $ 68 $406 ==== ==== ==== Dividends accumulated on Series E, F and G preferred stock.................................................... $105 $424 $212 ==== ==== ==== Accretion of discount on Series E, F, G and H preferred stock.................................................... $ 90 $163 $219 ==== ==== ==== Accretion to redemption value on Series A, B, C, and D preferred stock.......................................... $193 $297 $648 ==== ==== ==== Issuance of warrants........................................ $ -- $ -- $200 ==== ==== ====
NOTE 15 -- SUBSEQUENT EVENTS On July 1, 1996, the Company granted 43,075 employee stock options with an exercise price of $30.00 per share. On August 13, 1996, the Board of Directors approved a corporate name change from CardMember Publishing Corporation to MemberWorks Incorporated. On August 15, 1996, the Company amended its certificate of incorporation to increase the authorized number of shares of stock to 41,000,000. A total of 32,000,000 shares were designated as Common Stock, par value $0.01, 8,000,000 shares were designated as Class A common stock, par value $0.01 and 1,000,000 shares were designated as Preferred Stock, par value $0.01. On August 13, 1996, the Board of Directors authorized the automatic reclassification and conversion of Class A common stock into Common Stock upon the closing of the Company's initial public offering and the elimination of Class A common stock. On August 13, 1996, the Board of Directors authorized the automatic reclassification and conversion of Class B common stock into Common Stock. On August 13, 1996, the Board of Directors authorized the officers of the Company to negotiate the terms of a proposed public offering of Common Stock of the Company. In addition, the officers were authorized and directed to cause to be prepared, executed and filed with the Securities and Exchange Commission (the "Commission"), under the Securities Act of 1933, as amended, a Registration Statement on Form S-1, including a preliminary prospectus included therein and all exhibits thereto and any amendments or supplements thereto, relating to the registration. F-17 73 MEMBERWORKS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On August 13, 1996, the Company adopted an employee stock purchase plan (the "1996 Employee Stock Purchase Plan"). The plan will be implemented with an initial offering period commencing on the effective date of the offering. The plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 15% of an employee's compensation, at a price equal to 85% of the price of the Common Stock of the Company reported by Nasdaq at the commencement date of the Offering Period. On August 13, 1996, the Board of Directors approved the Company's 1996 Stock Option Plan (the "1996 Stock Option Plan"), which becomes effective upon the closing of the Company's initial public offering. The 1996 Stock Option Plan authorizes the issuance of shares of Common Stock pursuant to the grant to employees of incentive stock options and the grant of non-qualified stock options to employees, consultants, officers or directors of the Company. The aggregate number of shares of Common Stock of the Company reserved for both the 1996 Employee Stock Purchase Plan and the 1996 Stock Option Plan is 300,000. On August 13, 1996, the Board of Directors approved an amendment to the Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock Option Plan"). The Amended 1990 Stock Option Plan provides for the grant of "incentive stock options" to employees and officers of the Company and non-qualified stock options to employees, consultants, directors and officers of the Company. The Company is authorized to grant up to 180,000 shares under the Amended 1990 Stock Option Plan. The Board of Directors also voted that no further options may be granted under the Amended 1990 Stock Option Plan effective upon the closing of the initial public offering. NOTE 16 -- PRO FORMA STOCKHOLDERS' EQUITY DATA AS OF JUNE 30, 1996 (UNAUDITED) The accompanying pro forma stockholders' equity data as of June 30, 1996 gives effect to the automatic conversion of all Series A, B, C, D and H convertible preferred stock into Common Stock and the redemption of Series E and F redeemable preferred stock for approximately $2,500,000 from application of a portion of the proceeds of the Company's initial public offering described in Note 15. F-18 74 MEMBERWORKS SERVICE PROGRAMS AND DISTRIBUTION CHANNELS
Large Retail Oil Small Vacation Retail New Banks Cards Cards Banks Owners Stores Interactive Direct Channels - ------------------------------------------------------------------------------------------------------------------------------- Health x x x x T Dental x x x T x T Dental & Health x x x T x x T Travel x x X X x T Entertainment X X X X X X T Sports X X X X X T Financial X X X X T Computers and Software X X T New Service T T T T
X = Programs in place. T = Testing of products that may or may not be offered to consumers. 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee and the NASD filing fee. SEC Registration Fee................................................... $ 20,690 NASD Filing Fee........................................................ 6,500 Nasdaq National Market Listing Fee..................................... 6,500 Blue Sky Fees and Expenses............................................. 20,000 Transfer Agent and Registrar Fees...................................... 10,000 Accounting Fees and Expenses........................................... 275,000 Legal Fees and Expenses................................................ 275,000 Printing and Mailing Expenses.......................................... 150,000 Miscellaneous.......................................................... 136,310 ---------- Total........................................................ $ 900,000 =========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article Eighth of the Registrant's Amended and Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") provides that no director of the Registrant shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty. Article Ninth of the Registrant's Restated Certificate of Incorporation provides that a director or officer of the Registrant (a) shall be indemnified by the Registrant against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Registrant) brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful and (b) shall be indemnified by the Registrant against all expenses (including attorneys' fees) and amounts paid in settlement incurred in connection with any action by or in the right of the Registrant brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Registrant, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he is required to be indemnified by the Registrant against all expenses (including attorneys' fees) incurred in connection therewith. Expenses shall be advanced to a Director or officer at his request, provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. Indemnification is required to be made unless the Registrant determines that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Registrant that the director or officer did not meet the applicable standard of conduct required for II-1 76 indemnification, or if the Registrant fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether such person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Registrant notice of the action for which indemnity is sought and the Registrant has the right to participate in such action or assume the defense thereof. Article Ninth of the Registrant's Restated Certificate of Incorporation further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers the Registrant must indemnify those persons to the fullest extent permitted by such law as so amended. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Under the Underwriting Agreement, the Underwriters are obligated, under certain circumstances, to indemnify directors and officers of the Registrant against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1 hereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On March 30, 1994, the Registrant sold an aggregate of 38,358 shares of Class A Common Stock and 38,358 shares of Series F Preferred Stock to accredited investors for an aggregate purchase price of $1 million pursuant to Regulation D of the Commission promulgated under the Securities Act ("Regulation D"). On September 28, 1994, the Registrant sold an aggregate of 40,000 shares of Series G Preferred Stock and warrants to acquire the same number of shares of Class A Common Stock to accredited investors for an aggregate purchase price of $4 million pursuant to Regulation D. Effective August 3, 1995, all 40,000 shares of Series G Preferred Stock and warrants acquired were redeemed by the Registrant for an aggregate redemption amount of $4,000,400, plus a preferred dividend of $401,611. Additionally, the Registrant substituted 15,726 warrants to acquire Class A Common Stock, exercisable at $0.01 per share, for the warrants redeemed by the Registrant. On August 3, August 15 and August 21, 1995, the Registrant sold an aggregate of 317,150 shares of Series H Convertible Preferred Stock to accredited investors for an aggregate purchase price of $12,999,979 pursuant to Regulation D. On March 30, 1994, the Registrant issued a warrant to acquire 7,672 shares of Class A Common Stock at an exercise of $26.07 per share, subject to adjustment for dilution. On September 9, 1994, the Company issued a warrant in conjunction with the Bank Credit Agreement to acquire 20,000 shares of Class A Common Stock at an exercise price of $15.00 per share, subject to adjustment for dilution when issued. The warrant is exercisable at any time prior to December 31, 1999. In connection with the redemption of 40,000 shares of Series G Preferred Stock and attached warrants to acquire 40,000 shares of Series A Preferred Stock, the Registrant issued warrants to acquire 15,726 shares of Class A Common Stock, exercisable at $0.01 per share. II-2 77 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NO. DESCRIPTION - -------- ----------------------------------------------------------------------------------- *1 Form of Underwriting Agreement. *3.1 Certificate of Incorporation of the Registrant, as amended. *3.2 Restated Certificate of Incorporation of the Registrant, to be filed upon closing of this offering. 3.3 Restated By-laws of the Registrant. *4 Specimen Certificate for shares of Common Stock, $0.01 par value, of the Registrant. *5 Opinion of Hale and Dorr with respect to the validity of the securities being offered. *10.1 Amended 1990 Employee Incentive Stock Option Plan. 10.2 1995 Executive Officers' Stock Option Plan. 10.3 1995 Non-Employee Directors' Stock Option Plan. *10.4 1996 Stock Option Plan. *10.5 1996 Employee Stock Purchase Plan. 10.6 401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996. 10.7 Term Lease Master Agreement between IBM Credit Corporation and the Registrant, dated as of November 26, 1991. 10.8 Master Lease Agreement between Bankers Leasing Association, Inc. and the Registrant, dated as of May 7, 1996. *10.9 Promissory Note between Thomas St. Denis and the Registrant, dated December 31, 1990. *10.10 Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990. *11 Computation of unaudited pro forma net loss per share. *21 Subsidiaries of the Registrant. *23.1 Consent of Hale and Dorr (included in Exhibit 5). 23.2 Consent of Price Waterhouse LLP. 24 Power of Attorney (included on page II-5). 27 Financial Data Schedule.
- --------------- * To be filed by amendment. (B) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions contained in the Restated Certificate of Incorporation and Amended and Restated By-laws of the Registrant and the laws of the State of Delaware, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities II-3 78 being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 79 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on this 21st day of August, 1996. MemberWorks Incorporated By: /s/ GARY A. JOHNSON -------------------------------------- Gary A. Johnson President, Chief Executive Officer and Director POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of MemberWorks Incorporated, hereby severally constitute and appoint Gary A. Johnson, James B. Duffy and Steven H. Levenherz, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-1 filed herewith and any and all pre-effective and posteffective amendments to said Registration Statement, and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b), and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable MemberWorks Incorporated to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Registration Statement and any and all amendments thereto or to any subsequent Registration Statement for the same offering which may be filed under Rule 462(b). Pursuant to the requirements of the Securities act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------------- --------------- /s/ GARY A. JOHNSON President and Chief Executive Officer August 21, 1996 - ------------------------------------- (Principal Executive Officer) Gary A. Johnson /s/ DENNIS P. WALKER Executive Vice President and Director August 21, 1996 - ------------------------------------- Dennis P. Walker /s/ JAMES B. DUFFY Chief Financial Officer (Principal August 21, 1996 - ------------------------------------- Financial and Accounting Officer) James B. Duffy /s/ STEPHEN J. CLEARMAN Director August 21, 1996 - ------------------------------------- Stephen J. Clearman /s/ ALEC L. ELLISON Director August 21, 1996 - ------------------------------------- Alec L. Ellison /s/ MICHAEL R. O'BRIEN Director August 21, 1996 - ------------------------------------- Michael R. O'Brien /s/ MARC S. TESLER Director August 21, 1996 - ------------------------------------- Marc S. Tesler
II-5 80 VALUATION AND QUALIFYING ACCOUNTS
COLUMN C ----------------------------- COLUMN B ADDITIONS ---------- ----------------------------- COLUMN D COLUMN E COLUMN A BALANCE AT CHARGED TO CHARGED TO ----------- ------------- - -------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT DESCRIPTION OF PERIOD EXPENSES -- DESCRIBE -- DESCRIBE END OF PERIOD - -------------------------------- ---------- ---------- -------------- ----------- ------------- YEAR ENDED JUNE 30, 1996: Allowance for cancellations..... $6,765,000 $ 61,264,000(A) $57,912,000(B) $10,117,000 Valuation allowance for deferred tax assets.................... 9,700,000 $1,899,000 11,599,000 YEAR ENDED JUNE 30, 1995: Allowance for cancellations..... 5,101,000 46,667,000(A) 45,003,000(B) 6,765,000 Valuation allowance for deferred tax assets.................... 6,003,000 3,697,000 9,700,000 YEAR ENDED JUNE 30, 1994: Allowance for cancellations..... 2,650,000 29,753,000(A) 27,302,000(B) 5,101,000 Valuation allowance for deferred tax assets.................... 4,235,000 1,768,000 6,003,000
- --------------- (A) Charged to balance sheet account "Deferred membership income, net" (B) Charges for refunds upon membership cancellations. S-1 81 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - -------- ----------------------------------------------------------------------------------- *1 Form of Underwriting Agreement. *3.1 Certificate of Incorporation of the Registrant, as amended. *3.2 Restated Certificate of Incorporation of the Registrant, to be filed upon closing of this offering. 3.3 Restated By-laws of the Registrant. *4 Specimen Certificate for shares of Common Stock, $ par value, of the Registrant. *5 Opinion of Hale and Dorr with respect to the validity of the securities being offered. *10.1 Amended 1990 Employee Incentive Stock Option Plan. 10.2 1995 Executive Officers' Stock Option Plan. 10.3 1995 Non-Employee Directors' Stock Option Plan. *10.4 1996 Stock Option Plan. *10.5 1996 Employee Stock Purchase Plan. 10.6 401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996. 10.7 Term Lease Master Agreement between IBM Credit Corporation and the Registrant, dated as of November 26, 1991. 10.8 Master Lease Agreement between Bankers Leasing Association, Inc. and the Registrant, dated as of May 7, 1996. *10.9 Promissory Note between Thomas St. Denis and the Registrant, dated December 31, 1990. *10.10 Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990. *11 Computation of unaudited pro forma net loss per share. *21 Subsidiaries of the Registrant. *23.1 Consent of Hale and Dorr (included in Exhibit 5). 23.2 Consent of Price Waterhouse LLP. 24 Power of Attorney (included on page II-5). 27 Financial Data Schedule.
- --------------- * To be filed by amendment. EX-3.3 2 RESTATED BY-LAWS OF THE REGISTRANT 1 Exhibit 3.3 MEMBERWORKS INCORPORATED RESTATED BY-LAWS TABLE OF CONTENTS ARTICLE 1 - Stockholders 1.1 Place of Meetings 1.2 Annual Meeting 1.3 Special Meetings 1.4 Notice of Meetings 1.5 Voting List 1.6 Quorum 1.7 Adjournments 1.8 Voting and Proxies 1.9 Action at Meeting 1.10 Action without Meeting ARTICLE 2 - Directors 2.1 General Powers 2.2 Number; Election and Qualification 2.3 Enlargement of the Board 2.4 Tenure 2.5 Vacancies 2.6 Resignation 2.7 Regular Meetings 2.8 Special Meetings 2.9 Notice of Special Meetings 2.10 Meetings by Telephone Conference Calls 2 2.11 Quorum 2.12 Action at Meeting 2.13 Action by Consent 2.14 Removal 2.15 Committees 2.16 Compensation of Directors ARTICLE 3 - Officers 3.1 Enumeration 3.2 Election 3.3 Qualification 3.4 Tenure 3.5 Resignation and Removal 3.6 Vacancies 3.7 Chairman of the Board and Vice-Chairman of the Board 3.8 President 3.9 Vice Presidents 3.10 Secretary and Assistant Secretaries 3.11 Treasurer and Assistant Treasurers 3.12 Salaries ARTICLE 4 - Capital Stock 4.1 Issuance of Stock 4.2 Certificates of Stock 4.3 Transfers 4.4 Lost, Stolen or Destroyed Certificates 4.5 Record Date ARTICLE 5 - General Provisions 5.1 Fiscal Year 5.2 Corporate Seal 5.3 Waiver of Notice 5.4 Voting of Securities 5.5 Evidence of Authority 5.6 Certificate of Incorporation 5.7 Transactions with Interested Parties 5.8 Severability 5.9 Pronouns ARTICLE 6 - Amendments 6.1 By the Board of Directors 6.2 By the Stockholders 3 ARTICLE 1 - Stockholders 1.1 Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. 1.3 Special Meetings. Special meetings of stockholders may be called at any time by the President or by the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in 4 the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 1.5 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. 1.6 Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. 1.7 Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. 1.8 Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a 5 proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by written proxy executed by the stockholder or his authorized agent and delivered to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 1.9 Action at Meeting. When a quorum is present at any meeting, the holders of shares of stock representing a majority of the votes cast on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of shares of stock of that class representing a majority of the votes cast on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. When a quorum is present at any meeting, any election by stockholders shall be determined by a plurality of the votes cast on the election. 1.10 Action without Meeting. Any action required or permitted to be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 2 - Directors 2.1 General Powers. The business and affairs of the 6 corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2.2 Number; Election and Qualification. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the stockholders or the Board of Directors, but in no event shall be less than one. The number of directors may be decreased at any time and from time to time either by the stockholders or by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. 2.3 Enlargement of the Board. The number of directors may be increased at any time and from time to time by the stockholders or by a majority of the directors then in office. 2.4 Tenure. Each director shall hold office until the next annual meeting and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.5 Vacancies. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, or until his earlier death, resignation or removal. 7 2.6 Resignation. Any director may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.7 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 2.8 Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in office. 2.9 Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or telex, or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.10 Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at 8 such meeting. 2.11 Quorum. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.12 Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.13 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. 2.14 Removal. Except as otherwise provided by the General Corporation Law of Delaware, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except that the directors elected by the holders of a particular class or series of stock may be removed without cause only by vote of the holders of a majority of the outstanding shares of such class or series. 2.15 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as 9 alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-laws for the Board of Directors. 2.16 Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. ARTICLE 3 - Officers 3.1 Enumeration. The officers of the corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem 10 appropriate. 3.2 Election. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. 3.3 Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-laws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. 3.5 Resignation and Removal. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. 3.6 Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is 11 elected and qualified, or until his earlier death, resignation or removal. 3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of Directors may appoint a Chairman of the Board and may designate the Chairman of the Board as Chief Executive Officer. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors. 3.8 President. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. 3.9 Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. 3.10 Secretary and Assistant Secretaries. The Secretary shall 12 perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary, (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the 13 Board of Directors, the President or the Treasurer may from time to time prescribe. In he event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.12 Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. ARTICLE 4 - Capital Stock 4.1 Issuance of Stock. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 Certificates of Stock. Every holder of stock of the corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the corporation 14 shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of each certificate representing shares of such class or series of stock, provided that in lieu of the foregoing requirements there may be set forth on the face or back of each certificate representing shares of such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the full text of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 4.3 Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws. 4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board 15 of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. 4.5 Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 10 days after the date of adoption of a record date for a written consent without a meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is properly delivered to the corporation. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - General Provisions 16 5.1 Fiscal Year. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. 5.2 Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 Waiver of Notice. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these By-laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.4 Voting of Securities. Except as the directors may otherwise designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 Certificate of Incorporation. All references in these By-laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. 5.7 Transactions with Interested Parties. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a 17 financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 5.8 Severability. Any determination that any provision of these By-laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-laws. Pronouns. All pronouns used in these By-laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. ARTICLE 6 - Amendments 18 6.1 By the Board of Directors. These By-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 By the Stockholders. These By-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. EX-10.2 3 1995 EXECUTIVE OFFICERS' STOCK OPTION PLAN 1 Exhibit 10.2 CARDMEMBER PUBLISHING CORPORATION 1995 EXECUTIVE OFFICERS' STOCK OPTION PLAN A. Purpose and Scope. The purposes of this Plan are to encourage stock ownership by key executive officers of Cardmember Publishing Corporation (herein called the "Company") and its Subsidiaries, to provide an incentive for such executive officers to expand and improve the profits and prosperity of the Company and its Subsidiaries, and to assist the Company and its Subsidiaries in attracting and retaining key executive officers through the grant of Options to purchase shares of the Company's common stock. B. Definitions. Unless otherwise required by the context: 1. "Board" shall mean the Board of Directors of the Company. 2. "Committee" shall mean the Compensation Committee, which is appointed by the Board. 3. "Company" shall mean Cardmember Publishing Corporation, a Delaware corporation. 4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 5. "Option" shall mean a right to purchase Stock, granted pursuant to the Plan. 6. "Option Price" shall mean the purchase price for Stock under an Option, as determined in Section F below. 7. "Participant" shall mean an executive officer of the Company, or of any Subsidiary of the Company, to whom an Option is granted under the Plan. 2 8. "Plan" shall mean this Cardmember Publishing Corporation Executive Officers' Stock Option Plan. 9. "Stock" shall mean the Class B Common Stock of the Company, par value $.01. 10. "Subsidiary" shall mean a subsidiary corporation of the Company, as defined in Sections 425(f) and 425(g) of the Code. C. Stock to be Optioned. Subject to the provisions of Section L of the Plan, the maximum number of shares of Stock that maybe optioned or sold under the Plan is 50,000 shares. Such shares may be treasury, or authorized, but unissued, shares of Stock of the Company. D. Administration. The Plan shall be administered by the Committee. The Committee shall be responsible to the Board for the operation of the Plan, and shall make recommendations to the Board with respect to participation in the Plan by employees of the Company and its Subsidiaries, and with respect to the extent of that participation. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise determined by the Board. No member of the Board or the Committee shall be liable for any action or determination made by him in good faith. E. Eligibility. The Board, upon recommendation of the Committee, may grant Options to any Executive Officer (including an employee who is a director or an officer) of the Company or its Subsidiaries. Options may be awarded by the Board at any time and - 2 - 3 from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Board, upon recommendation by the Committee shall determine. Options granted at different times need not contain similar provisions. F. Option Price. The purchase price for Stock under each Option shall be 100 percent of the fair market value of the Stock at the time the Option is granted, but in no event less than the par value of the Stock. G. Terms and Conditions of Options. Options granted pursuant to the Plan shall be authorized by the Board and shall be evidenced by agreements in such form as the Board, upon recommendation of the Committee, shall from time to time approve. Such agreements shall comply with and be subject to the following terms and conditions: 1. Employment Agreement. The Board may, in its discretion, include in any Option granted under the Plan a condition that the Participant shall agree to remain in the employ of, and to render services to, the Company or any of its Subsidiaries for a period of time (specified in the agreement) following the date the Option is granted. No such agreement shall impose upon the Company or any of its Subsidiaries, however, any obligation to employ the Participant for any period of time. 2. Time and Method of Payment. The Option Price shall be paid in full in cash at the time an Option is exercised under the Plan. Otherwise, an exercise of any Option granted under the Plan shall be invalid and of no effect. Promptly after the - 3 - 4 exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such a Stock. A Participant shall have none of the rights of a stockholder with respect to such shares, until shares are issued to him, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 3. Number of Shares. Each Option shall state the total number of shares of Stock to which it pertains. 4. Option Period and Limitations on Exercise of Options. The Board may, in its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option agreement. Except as provided in the Option Agreement, an Option may be exercised in whole in part at any time during its term. No Option may be exercised after the expiration of ten years from the date it is granted. No Option may be exercised for a fractional share of Stock. 5. Stock Purchase Agreement. All shares of Common Stock issued pursuant to the Plan shall be subject to the provisions of a certain Stock Purchase Agreement to be approved by the Board which the Optionee shall execute as a condition precedent to the Optionee's receipt of the stock covered by this Plan. 6. Restrictive Legend. All shares issued upon the exercise of the Option shall bear the following legend: "The shares represented by this Certificate may not be sold, transferred, pledged, hypothecated or otherwise disposed of (1) unless they have first been registered under the Securities Act of 1933, as amended, or unless, in the opinion of counsel for the Company, such registration is not required; and (2) the - 4 - 5 shares represented by this Certificate are subject to the terms and conditions of a Stock Purchase Agreement, dated as of ______________, 199_, by and among the Company and the original holder of this Certificate. Copies of such Agreement may be obtained at no cost by written request made by the Holder of record of this Certificate to the Secretary of the Company." 7. Withholding. As a condition to the issuance of shares of Common Stock of the Company under any Option, the Participant authorizes the Company to withhold in accordance with applicable law from any regular cash compensation payable to him any taxes required to be withheld by the Company under Federal, State, or Local law as a result of his exercise of any Option. In the alternative, as a condition to the issuance of shares of Common Stock of the Company under any Option, the Participant agrees to remit to the Company at the time of the exercise of any Option, any taxes required to be withheld by the Company under Federal, State, or Local law as a result of the exercise of an Option. H. Termination of Employment Except as provided in Section I below, if a Participant ceases to be employed by the Company or any of its Subsidiaries, his Options shall terminate one year after the date of ceasing to serve as an employee, but in no event shall any Option be exercisable more than ten years from the date it was granted. The Committee may cancel an Option during the one year period referred to in this paragraph, if the Participant engages in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company or any of its Subsidiaries. The Committee shall determine subject to applicable law whether a leave of absence shall - 5 - 6 constitute a termination of employment. Any such determination of the Committee shall be final and conclusive, unless overruled by the Board. I. Rights in Event of Death If a Participant dies while employed by the Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised his Options, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options for one year after the date of death to the extent that such deceased Participant was entitled to exercise the Options on the date of his death; provided, however, that in no event shall the Options be exercisable more than ten years from the date they were granted. J. No Obligations to Exercise Option. The granting of an Option shall impose no obligation upon the Participant to exercise such Option. K. Nonassignability. Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by such Participant. L. Effect of Change in Stock Subject to the Plan. The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option, and the price per share, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (1) a subdivision or - 6 - 7 consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend, or (3) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that all stock options granted to Participants prior to termination of the Plan shall become 100 per cent vested and each Participant (and each other person entitled under Section I to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Participant's Options in whole or in part. M. Amendment and Termination. The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. - 7 - 8 N. Agreement and Representation of Participant. As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. O. Reservation of Shares of Stock. The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by counsel for the Company for the lawful issuance and sale of its Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Stock as to which the requisite authority has not been obtained. P. Effective Date of Plan. The Plan shall be effective from July 1, 1995 provided that it has been approved by the stockholders of the Company on or before April 30, 1996. - 8 - 9 Q. Governing Law. This Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without reference to principles of conflict of laws, and shall be construed accordingly. - 9 - EX-10.3 4 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 1 Exhibit 10.3 CARDMEMBER PUBLISHING CORPORATION 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 1. Purpose. The 1995 Non-Employee Director Stock Plan (the "Plan") is to benefit Cardmember Publishing Corporation (the "Company") and its subsidiary corporations by offering some of its non-employee directors an opportunity to become owners of the Class B Common Stock $.01 par value, of the Company (the "Stock") and is intended to advance the best interests of the Company by increasing their proprietary interest in the success of the Company and its subsidiary corporation. 2. Administration. The Plan shall be administered by the Board of Directors of the Company (the "Board"). Subject to the terms of the Plan, the Board shall have the power to construe the provisions of the Plan, or of options granted hereunder (the "Options") or Stock issued hereunder, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for administering the Plan as the Board deems desirable. 3. Available Shares. The total amount of the Stock with respect to which Options may be granted under this Plan shall not exceed in the aggregate 25,000 shares; provided, that the class and aggregate number of shares of Stock which may be granted hereunder shall be subject to adjustment in accordance with the provisions of Paragraph 17 hereof. Such shares of Stock may be treasury shares or authorized but unissued shares of Stock. In the event that any outstanding Option for any reason shall expire or is terminated or cancelled, the shares of Stock allocable 2 to the unexercised portion of such Option may again be subject to an Option or Options under the Plan. 4. Authority to Grant Options and Stock. All Options granted under the Plan shall be non-qualified stock options. No Options shall be granted under the Plan subsequent to June 30, 2005. The only Options and Stock under the Plan which may be granted are those which are granted after both adoption of the Plan by the Board and approval thereof by the stockholders of the Company. 5. Eligibility for Stock Options and Stock. The individuals who shall be eligible to receive Options under the Plan shall be certain non-employee Directors of the Company who are designated by the Board as Eligible Directors ("Eligible Directors"). 6. Option Grant Size and Grant Dates. Options to purchase shares of Stock shall be granted to Eligible Directors as determined by the Board from time to time during the term of this Plan. 7. Option Price; Fair Market Value. The price at which shares of Stock may be purchased by an Eligible Director pursuant to an Option (the "Optionee") shall be the fair market value of the shares of Stock on the date the Option is granted as determined by the Board. - 2 - 3 8. Duration of Options. The term of each Option hereunder shall be ten years, and no Option shall be exercisable after the expiration of ten years from the date such Option is granted. An Option shall expire immediately following the last day on which such Option is exercisable pursuant to this Paragraph 8. 9. Amount Exercisable. (a) No Option shall be exercisable earlier than six months from the date of grant. (b) The Options shall become exercisable according to the following schedule:
Period from Portion of Grant That the Date the Becomes Exercisable Option is Granted after Such Period ----------------- ----------------- One year after grant ............ 25% Two years after grant ........... 50% Three years after grant ......... 75% Four years after grant .......... 100%
10. Exercise of Options. The Option shall be exercised by the delivery of written notice to the Company setting forth the number of shares of Stock with respect to which the Option is to be exercised, together with cash, wire transfer, certified check, bank draft or postal or express money order payable to the order of the Company (the "Acceptable Funds") for an amount equal to the Option price of such shares of Stock. As promptly as practicable after receipt of such written notification and payment, the Company shall deliver to the Optionee certificates of the number of shares with respect to which such Option has been so exercised, issued in the - 3 - 4 Optionee's name; provided, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to the Optionee, at the address specified pursuant to this Paragraph 10. The delivery of certificates upon the exercise of Options is subject to the condition that the person exercising such Option provide the Company with such information as the Company might reasonably request pertaining to such exercise, sale or other disposition. 11. Restrictive Legend. All shares issued upon the exercise of the Option shall bear the following legend: "The shares represented by this Certificate may not be sold, transferred, pledged, hypothecated or otherwise disposed of (1) unless they have first been registered under the Securities Act of 1933, as amended, or unless, in the opinion of counsel for the Company, such registration is not required; and (2) the shares represented by this Certificate are subject to the terms and conditions of a Stock Purchase Agreement, dated as of _____________, 199_, by and among the Company and the original holder of this Certificate. Copies of such Agreement may be obtained at no cost by written request made by the Holder of record of this Certificate to the Secretary of the Company." 12. Transferability of Options. Options shall not be transferable by the Optionee other than by will or under laws of descent and distribution, and shall be exercisable, during the Optionee's lifetime, only by the Optionee or his legal guardian or representative. - 4 - 5 13. Termination of Directorship of Optionee. If, before the date of expiration of the Option, the Optionee shall cease to be a director of the Company, the Option shall terminate on the earlier of such date of expiration or one year after the date of ceasing to serve as a director. In such event, the Optionee shall have the right prior to the termination of such Option to exercise the Option to the extent to which he was entitled to exercise such Option immediately prior to ceasing to serve as a director; however, in the event that the Optionee has ceased to serve as director on or after attaining the age of sixty-two (62) years, the Optionee shall be entitled to exercise all of such Option (without regard to any limitations imposed pursuant to Paragraph 9(b) hereof, but subject to Paragraph 9(a)). Upon the death of the Optionee, his executors, administrators, or any person or persons to whom his Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to the earlier of the date of expiration or one year following the date of such death, to exercise the Option, in whole or in part (without regard to any limitations imposed pursuant to Paragraph 9(b) hereof, but subject to Paragraph 9(a)). 14. Requirements of Law. The Company shall not be required to issue any shares under any Option if the issuance of such shares shall constitute a violation by the Optionee or the Company of any provisions of any law or regulation of any governmental authority. - 5 - 6 15. No Rights as Stockholder. No Optionee shall have rights as a Stockholder with respect to shares covered by any Option until the date of issuance of stock certificate of such shares; and except as otherwise provided in Paragraph 17 hereof, no adjustment for dividends, or otherwise, shall be made if the record date thereof is prior to the date of issuance of such certificate. 16. No Employment or Nomination Obligation. The granting of any Options shall not impose upon the Company or its stockholders any obligation to employ any Optionee or to continue to nominate any Optionee for election as a director of the Company. 17. Effect of Change in Stock Subject to the Plan. The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option, and the price per share, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (1) a subdivision or consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend, or (3) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all - 6 - 7 Options outstanding under the Plan shall terminate; provided, however, that all stock options granted to Directors prior to termination of this Plan shall become 100 percent vested and each Optionee (and each other person entitled under Paragraph 13 to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Optionee's Options in whole or in part. 18. Amendment and Termination. The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. The Board may not, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. 19. Written Agreement. Each Option granted hereunder or Stock issued hereunder shall be embodied in a written agreement, which shall be subject to the terms and conditions prescribed above and shall be signed by the Eligible Director and by the President of the Company for and in the name and on behalf of the Company. 20. Indemnification of Board. The Company shall indemnify each present and future member of the Board against, and each member of the Board shall be entitled - 7 - 8 without further act on his part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Board, whether or not he continues to be such member of the Board at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Board (a) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Board, or (b) in respect of any matter in which any settlement is effected, to an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further, that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Board unless, within sixty (60) days after institution of any such action, suit or proceeding, he shall have offered the Company, in writing, the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Board and shall be in addition to all other rights to which such member of the Board may be entitled as a matter of law, contract, or otherwise. - 8 - 9 21. Adoption, Approval and Effective Date of Plan. The Plan shall be considered adopted and shall become effective on the date the Plan is approved by the stockholders of the Company. 22. Governing Law. This Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware, without reference to principles of conflict of laws, and shall be construed accordingly. - 9 - EX-10.6 5 401(K) PROFIT SHARING PLAN OF THE REGISTRANT 1 Exhibit 10.6 CardMember Publishing Corporation 401(k) Profit Sharing Plan Effective Date: 04/01/1996 This document is a description of the Plan. It is intended that the language be clear and understandable. The law governing plans is very complicated. Consequently, the language in the law and the Plan is very technical and legal. The government requires that the Plan document and this description contain much of the same language. If this description says something different from what the Plan says, the Plan must be followed. A copy of the Plan is available for inspection by contacting the Plan Administrator, whose telephone number is on the Plan Information Page. Date Prepared: February 27, 1996 2 CardMember Publishing Corporation 401(k) Profit Sharing Plan TABLE OF CONTENTS I. PLAN INFORMATION .................................................... 1 II. ELIGIBILITY REQUIREMENTS ............................................ 2 III. PLAN CONTRIBUTIONS .................................................. 3 Generally: .......................................................... 3 Elective Deferral Contributions: .................................... 3 Profit Sharing Contributions: ....................................... 3 Additional Contributions: ........................................... 4 Matching Contributions: ............................................. 4 Compensation: ....................................................... 4 IV. PLAN BENEFITS AND METHODS OF PAYMENTS Distributions: ...................................................... 5 Hardship Distributions: ............................................. 5 Rollover Contributions: ............................................. 6 Payment of Your Distribution: ....................................... 6 Amount and Form of Payment of Your Distribution: .................... 7 V. PLAN ADMINISTRATION ................................................. 8 Plan Operation: ..................................................... 8 Plan Administrator: ................................................. 8 Trustee: ............................................................ 8 Investment of Plan Assets: .......................................... 8 Plan Insurance: ..................................................... 8 VI. LOSS OR DENIAL OF BENEFITS .......................................... 9 Vesting: ............................................................ 9 Break in Service: ................................................... 9 Beneficiary Designation: ............................................ 10 VII. TERMINATION OF THE PLAN ............................................. 11 VIII. YOUR RIGHTS UNDER ERISA ............................................. 12 LOAN ADDENDUM ............................................................. 13
3 CardMember Publishing Corporation 401(k) Profit Sharing Plan I. PLAN INFORMATION. Plan Name: CardMember Publishing Corporation 401(k) Profit Sharing Plan Employer: CardMember Publishing Corporation Address: 11165 Mill Valley Road Omaha, NE 68154 Employer Identification Number of Plan Sponsor: 06-1276882 Plan Serial Number: 001 Type of Plan: 401(k) Profit Sharing Plan Normal Retirement Age: 65 with 5 participation years Trustee(s): State Street Bank & Trust Company Business Address: Two Heritage Drive Quincy, MA 02171 Plan Administrator and Plan Sponsor: CardMember Publishing Corporation Business Address: 11165 Mill Valley Road Omaha, NE 68154 Phone Number: (402) 492-2565 Agent for service of legal process: Plan Administrator (see above) Note: Service of legal process may be made upon a Plan Trustee or the Plan Administrator. Ending Date of Plan's Year: December 31 1 4 CardMember Publishing Corporation 401(k) Profit Sharing Plan II. ELIGIBILITY REQUIREMENTS. Once you start work, the number of hours that you work during your first year of employment is counted. If you work 1000 hours during that year, you will receive a year of Service Credit for eligibility to participate in the Plan for that year. If you fail to attain 1000 hours in your first year of employment, then the number of hours you work in your second year of employment is counted to determine if you have 1000 hours. If you do, you will receive a Year of Service Credit for eligibility. To be eligible to become a participant in the Plan, you must, as of these dates: January 1, April 1, July 1, October 1. 1. have completed 1 Year(s) of Service. 2. have attained age 18. 3. not be covered by a collective bargaining agreement (i.e., not in a union). 4. not be a nonresident alien and not earning any U.S. income. - 2- 5 CardMember Publishing Corporation 401(k) Profit Sharing Plan III. PLAN CONTRIBUTIONS. Once you have satisfied the eligibility requirements, you become a Participant automatically. Generally: The amount of Contributions to the Plan is determined by the sum of Elective Deferral Contributions, Profit Sharing Contributions, Matching Contributions, Rollover Contributions, and additional contributions which may be made by the employer during the year. These contributions are based on the profits of the Company. Your social security benefits are paid by the government and are in addition to the benefits paid from the Plan. The existence of this Plan and the contributions made to it will not affect your social security benefits in any way. Elective Deferral Contributions: You may elect to reduce your salary and have the amount contributed to the Trust. The amount may not be more than the lesser of: 1. 15% of your pay or, 2. $9500 as adjusted to reflect annual federal cost of living increases, or 3. such lesser amount as determined by the discrimination tests for the Plan. You may choose to begin Elective Deferral Contributions on 1/1, 4/1, 7/1, 10/1. Your election will be effective with the 1st pay period following the period in which you make the election. Your election will remain in effect until modified or terminated by you. You can modify your election effective 1/1, 4/1, 7/1, 10/1. You may terminate your deferrals at any time. Contact your Plan Administrator for the deadline for making modification requests. Because it is a Cash or Deferred Arrangement, this Plan must meet special tests which assure that highly compensated employees do not make significantly more Elective Deferral Contributions to the Plan than non-highly compensated employees. If, under the test, the contributions of the highly compensated employees exceed the amount permitted, the employer must either return some of the Elective Deferral Contributions, or make additional contributions on behalf of certain participants. The additional contributions will be treated as Elective Deferral Contributions. You may not contribute more than $9500 (as adjusted under Federal Law) to all 401(k) type plans to which you belong. You must apply to your Plan Administrator in writing for a refund of any Elective Deferred Contribution by 03/01. Profit Sharing Contributions: The Employer may decide to make additional contributions which will be subject to the "Vesting Schedule" shown in Section VI below. The Profit Sharing Contribution will be allocated to your account in the ratio that your compensation bears to the compensation of all participants. Forfeitures of this contribution shall be allocated with the Profit Sharing Contribution. - 3 - 6 CardMember Publishing Corporation 401(k) Profit Sharing Plan Additional Contributions: The employer may make special contributions to enable the Elective Deferral Contributions and Matching Contributions to pass discrimination tests required under the Internal Revenue Code. These contributions are called Qualified Non-Elective Contributions in the Plan Document and Adoption Agreement and will be made in the manner required for the purpose of passing the tests. Matching Contributions: The Employer may make Matching Contributions to the Plan to all Participants who have Elective Deferral Contributions. These contributions are subject to the vesting schedule shown in Section VI below. This contribution will be equal to a percentage of your Elective Deferral Contribution and will be determined at the end of the plan year. These contributions must meet special tests which assure that highly compensated employees do not make significantly more Matching Contributions to the Plan than non-highly compensated employees. If, under the test, contributions of the highly compensated employees exceed the amount permitted, the employer must reallocate some of the Matching Contribution, make additional contributions, distribute some of the vested contributions, or hold the excess in the Plan and use it as part of the employer's matching contribution for the next year. Compensation: All your contributions are based on the amount you are paid. Your pay or earnings are the sum of your W-2 earnings and amounts deferred through a salary deferral agreement under an IRC 401(k) Plan, through a Cafeteria Plan under IRC 125, a SEP under 402(h), or through an annuity under IRC 403(b). The amount of your compensation which will be used for plan purposes will be that paid to you during the Plan Year beginning each January 1 and ending each December 31. - 4 - 7 CardMember Publishing Corporation 401(k) Profit Sharing Plan IV. PLAN BENEFITS AND METHODS OF PAYMENTS. Distributions: You may elect to receive a distribution from the 401(k) Plan if you: 1. Separate from service, 2. Die, or 3. Become disabled. Also, you may receive a distribution of your salary deferral contributions: 1. If the Plan terminates and there is no successor Plan, or 2. If the employer or most of his working assets are sold to another unrelated company, or 3. If the employer sells its interest in a subsidiary to another unrelated company, or 4. If you have a "financial hardship." (Note: Applicable to Salary Deferral Contributions, as defined below, only.) When you are ready to begin receiving your benefit, contact the Plan Administrator. The Plan cannot compel you to take a distribution, unless your benefit is less than $3,500, until the year following the year in which you reach 70 1/2. If you have not separated from service or elected your benefit by that time, it will automatically be paid to you. You may receive it in installments or in a lump sum. Hardship Distributions: You may receive a distribution of Elective Deferrals (and earnings thereon accrued as of December 31, 1988) in the event of hardship. The following is a general explanation of the rules for such a distribution. Contact the Plan Administrator for complete details and application. This is a taxable distribution. Hardship is defined as an immediate and heavy financial need where you lack other available resources. You will need to receive your spouse's consent to the distribution. The following are the only financial needs considered immediate and heavy for which you may receive a hardship distribution: * incurred or necessary medical expenses of the Employee, the Employee's spouse, children, or dependents; * the purchase (excluding mortgage payments) of a principal residence for the Employee; * payment of tuition for the next 12 months of post-secondary education for the Employee, the Employee's spouse, children or dependents; * the prevention of eviction of the Employee from, or a foreclosure on the mortgage of, the Employee's principal residence. - 5 - 8 CardMember Publishing Corporation 401(k) Profit Sharing Plan In order to quality for a hardship distribution, you must first obtain all other types of distributions and all nontaxable loans permitted under all plans maintained by the Employer. Your right to make Elective Deferrals will be suspended for twelve months after the receipt of the hardship distribution. The amount you may receive may not be in excess of the amount of an immediate and heavy financial need, or the amount of your Elective Deferrals. The amount of Elective Deferrals you will be allowed to make for the taxable year immediately following the taxable year of the hardship distribution may not be in excess of the applicable limit under Section 402(g) of the Code (the $7,000 limit adjusted for cost of living) for that taxable year, less the amount of your Elective Deferrals made in the taxable year of the hardship distribution. The determination of the existence of financial hardship, and the amount required to be distributed to meet the need created by the hardship, shall be made in a nondiscriminatory manner by the Plan Administrator according to the written rules and regulations of the Plan. To apply for a financial hardship distribution you must: 1. Complete an application for the Plan Administrator, 2. Provide proof to the Administrator of expenditures showing the amount of the withdrawal needed, and 3. Provide proof to the Administrator, such as bank statements, showing that there are no other financial resources available to meet the expense. Rollover Contributions: You may apply to the Plan Administrator asking the Plan to receive a contribution of a distribution to you from another qualified plan. If the Plan accepts this money, it is called a Rollover Contribution. Under rules established by the Plan Administrator, the Plan will not accept such a contribution if the distribution to you was from a Defined Benefit Plan, or other Plan to which IRC 417 spousal rights apply. Contact the Plan Administrator about the rules and process for making this type of contribution. Payment of Your Distribution: Once you become eligible for a distribution and elect to receive it, the Trustee will be instructed to pay it out. The amount of this distribution will be the vested portion of your plan money. It cannot be specified exactly how long it will take for you to receive this distribution, for two reasons: 1. In the daily valuation system the Plan Administrator will generally know the value of your account, however, the assets will need to be liquidated in order for you to receive payment. This may take a period of time. Some types of assets may take a longer period of time to liquidate than others. Publicly traded stocks and mutual funds generally are easily liquidated. - 6 - 9 CardMember Publishing Corporation 401(k) Profit Sharing Plan 2. After you leave, the Plan Administrator must calculate your exact years of vesting, prepare a final statement of your account, prepare an IRS form showing how it is taxable, and have a check prepared. Of course, your employer is interested in paying benefits when due, but must do so in an orderly course of business. For this reason, it is anticipated that any distribution will take a reasonable length of time. Amount and Form of Payment of Your Distribution: The amount of your benefit in this Plan depends on the amount in your account and the extent to which you are vested in that amount. The other benefit forms available are: 1. Lump Sum, 2. Installment Payments. You can defer paying taxes on all or a portion of your distribution by requesting that the Plan transfer it directly to an Individual Retirement Account or a Qualified Defined Contribution Plan. This is called a direct rollover. If you elect a direct rollover from this plan to your new plan or IRA, no money will be withheld for payment of federal income taxes. At the time of your distribution you will want to be sure to speak with the Plan Administrator as to how you can accomplish a direct rollover. If you do not elect to make a direct rollover to a Qualified Defined Contribution Plan or IRA, the Employer will be required to withhold 20% of any monies you receive to pay federal income taxes. You may still receive your money and then decide to roll it over, as long as you do so within 60 days of the date of payment. But the withholding will have already occurred at the time of distribution and you will pay taxes on this amount as well as any other amount you do not roll over. If you decide to roll over the whole distribution including the amount that was withheld, you must provide other money to replace the amount withheld. The withholding will be credited against any income tax you owe for the year, and when you file your income tax return, you may get a refund of the amount withheld. If you are ever going to receive a distribution, be sure to review carefully the Notice of Taxation of Distribution that you will receive from your Plan Administrator. If you keep all or a part of your distribution, then you must show the payment as income on your tax return for that year. You or your tax preparer should calculate the tax when you prepare the return. If you have applied for and received a Hardship Distribution, the amount must be reported by you as income in the year it was received. A Hardship Distribution will always be given to you as a lump sum. If you are under 59 1/2 when you receive a distribution, you will be liable for an early distribution tax unless you roll the amount into an Individual Retirement Account. The Plan Administrator cannot give you legal or tax advice. You should rely on your own personal tax advisor when the time comes to decide on how you wish to take distribution and to determine the tax consequences of receiving a distribution. - 7 - 10 CardMember Publishing Corporation 401(k) Profit Sharing Plan V. PLAN ADMINISTRATION. Plan Operation: Your employer makes contributions to the Plan. These contributions can never go back to the employer. The Trustee, each year, tells the Plan Administrator what the trust is worth and the Plan Administrator then must divide the funds among all of the plan participants accounts. The Plan Administrator may issue a statement of his account to each participant. The Plan Administrator must give the value of your account to you if you request it in writing. Plan Administrator: The plan is administered by the Plan Administrator, whose name is typed on the Plan Information page. Your employer has appointed the Plan Administrator and can change the Plan Administrator at any time. The Plan Administrator has the sole and ultimate responsibility to interpret Plan provisions and determine Plan Benefits, and is responsible for such things as keeping plan records and reporting to government agencies. Trustee: Your plan is funded by a Trust. The name of the Trustee is typed on the Plan Information page. Your employer has appointed the Trustee and can change the Trustee at any time. The job of the Trustee is to safekeep the fund of money in the Plan and to invest the money. Investment of Plan Assets: In your Plan each Participant has an Individual Investment Account. This account will hold the Salary Deferral Contributions, additional contributions, Profit Sharing Contributions, and Matching Contributions allocable to the Participant. Rollover Contributions will also be included. You must direct the Trustee as to how your assets are to be invested. The employer and Plan Administrator will select a series of mutual funds or pooled investment accounts for you to invest in. You may direct the investment of your account assets into any investment permitted by regulation and the policy of the Plan. Note that the Plan Administrator, the Employer, and the Trustee will not provide investment advice. You are totally responsible for any investment selection which you make. Your Employer is not responsible for the financial gains or losses to your account which result from your directions. Plan Insurance: You may have heard that the government provides insurance to pay pension benefits if a Plan fails. This Plan is not eligible for such insurance because contributions are made right into your own account. If the Plan terminates or your employer goes out of business, you will be entitled to receive all the benefits in your account at the time. This amount could be more or less than the total amount of contributions made to your account depending on your investment expenses. - 8 - 11 VI. LOSS OR DENIAL OF BENEFITS. You should be aware that some actions by you or the employer may result in a loss or denial of benefits from your Plan. Also, because a 401(k) Plan must pass special nondiscrimination tests, sometimes your contributions will have to be returned to you as excess contributions which the Plan cannot continue to hold. If the Plan returns contributions, you will have to pay income taxes on them. Vesting: Your plan has a Vesting Schedule that establishes what percentage of your Profit Sharing Contribution and your Matching Contribution is nonforfeitable if you leave the employer. If you leave the employer, then you get the percentage of the Matching and other contributions in which you vest based on the following schedule. The remainder of the Matching Contribution is then forfeited to the Plan to reduce future employer contributions. Forfeitures of Profit Sharing Contributions will be reallocated in the same manner as current Profit Sharing Contributions. The vesting schedule is based on Covered Years of Service. A Covered Year of Service is any 12 month period ending on the plan year end during which you worked for the employer at least 1000 hours. Vesting Schedule Covered Years of Service: Percentage of Account Vested: less than 1 0% 1 but less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% If you have reached Normal Retirement Age, if you die, if you are totally and permanently disabled, or if the Plan is terminated then your balance of these funds becomes 100% vested. This means that you or your beneficiaries get the entire value of your accounts. You are always 100% vested in your Elective Deferral contributions to this Plan. Break in Service: Once you have become a participant in the Plan, you will remain a participant until a year (which ends on December 31) passes, during which you did not work 500 hours. This is called a 1 year break in service. If you return before having 5 consecutive 1 year breaks in service, then you continue to participate in the Plan as if you had never left the employer. -9- 12 Other circumstances which may cause either a reduction or denial of benefits: A. If the employer amends the Plan to reduce future contributions, then your account will not grow at the same rate. B. If the employer terminates the Plan, then your account will have no further contributions. C. If your salary decreases, then your allocation of the contribution will be less. D. If the Plan investments do poorly, then your account balance will decrease. E. If you receive a loan from the Plan which you fail to repay, then your account balance will be offset by the loan. Beneficiary Designation: If you die before benefits are distributed to you, the Trustee will pay out the whole amount to the beneficiary you have set forth on the beneficiary designation form on file with the Employer. Make sure you keep this form current. -10- 13 VII. TERMINATION OF THE PLAN. While the Plan is intended to be permanent, the employer reserves the right to amend or terminate the Plan. If the Plan is terminated, you will immediately become 100% vested in all your benefits in the Plan. -11- 14 VIII. YOUR RIGHTS UNDER ERISA. As a participant in this plan you are entitled to certain rights and projections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all plan participants shall be entitled to: Examine, without charge, at the Plan Administrator's office and at other specified locations all plan documents, including insurance contracts, collective bargaining agreements and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports and Plan descriptions. Obtain copies of all plan documents and other plan information upon written request to the Plan Administrator. The Administrator may make a reasonable charge for the copies. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report. In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your plan, called Fiduciaries of the Plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including your employer, your union, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a pension benefit or exercising your rights under ERISA. If your claim for a pension benefit is denied in whole or in part you must receive a written explanation of the reason for the denial. You have the right to have the Plan reviewed and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that the Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in Federal Court. The Court will decide who pays Court Cost and Legal Fees. If you are successful the Court may order the person you have sued to pay these costs and fees. If you lose, the Court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. The Plan Administrator has the sole and ultimate authority to define and interpret plan language, terms and documentation. If you have any questions about your plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest area office of the U.S. Labor-Management Services Administration, Department of Labor. -12- 15 You may apply for a loan under the Retirement Plan. This information sheet has been prepared to give you some general information concerning these loans. You may apply for a loan by obtaining a loan application form from your Plan Administrator. 1. The maximum loan you may borrow may not exceed the lesser of 50% of your vested interest in the Plan or $50,000 (reduced by the excess of the highest loan balance held by you in the last 12 months, over the outstanding balance on the date of the loan) less your current loan balance. The minimum loan you may borrow will not be less than $1,000.00 (minimum may not exceed $1,000.00). 2. The interest rate will be the prevailing rate found by the Plan Administrator. It will be the average of the rate used for similar personal loan transactions used by several commercial banks in the general geographic area of the Plan. 3. The maximum loan term is 5 years, unless you certify that you are going to use it to purchase your primary residence. In that case, the maximum term for a home loan is 30 years. A loan to purchase a primary residence is not a mortgage, and does not permit you to take a deduction on your personal income taxes. 4. The loan will be fully amortized and secured by the vested balance of your account in the Plan. 5. Loan amounts will first be taken from money attributed to rollovers, then pro-rata from all other accounts until liquidated, until the loan amount requested has been taken. 6. All loans must be fully amortized, principal and interest, and must be paid through regular payroll deductions. Loan payments will be deposited to your plan accounts in the reverse order to that in #5 according to current fund elections. 7. When you take a loan from the plan you will be pledging your account balance to repay the entire balance of the loan if you should default. 8. You may prepay the total outstanding balance of your loan at any time. There is no prepayment penalty. Partial prepayments are not allowed. -13- 16 9. Since payments are made by payroll deductions, default occurs when you no longer are receiving a paycheck from the Company, and you fail to make payments. If you are still an employee, but are on an unpaid leave of absence, you may continue to make the regular payments by personal check. Default will occur if you fail to send in your check. If you fail to make up the payments you owe, default occurs. The amount outstanding will be deemed distributed to you as income. However, the loan will continue to be held as an asset of the Plan. 10. If you terminate your employment with a remaining loan balance, or if you otherwise default on your loan, the balance will be immediately due and payable. If you do not pay off the loan, the outstanding amount will be deducted from your account balance upon its distribution to you. The amount of the loan balance would then be a taxable distribution from the Plan and may also be subject to a 10% early distribution penalty if you are not at least 59 1/2. Your employer will be required to withhold 20% of the amount of your loan in default for payment of Federal Income Taxes. This withholding will be paid from your remaining vested account balance at the time of distribution. You should consult a tax advisor if this occurs to determine its effect on your taxes. Note that if the loan is deemed to be distributed as taxable income to you, and you are not otherwise entitled to receive a distribution, the loan will remain part of your account balance. 11. Further information concerning the loans is contained in the Loan Application, the Promissory Note, and the Truth-in-Lending Disclosure Statement, if applicable, copies of which are provided by the Plan Administrator. 12. Provisions for loans are subject to change by the Plan Administrator at any time. Any future changes will not affect existing loans unless required by law. 13. Generally, interest repayments are not deductible. -14- EX-10.7 6 TERM LEASE MASTER AGREEMENT 1 Exhibit 10.7 IBM Credit Corporation Stamford, CT 06904 Term Lease Master Agreement Name and Address of Lessee: Agreement No.: 1492403 CardMember Publishing Corp. 10703 J St IBM Branch Office No.: VS4 Omaha, Ne 68127 IBM Branch Office Addressee: IBM Customer No.: 1492403 450 Regency Pkwy Omaha, Ne 68114 The Lessor pursuant to this Term Lease Master Agreement (Agreement) will be (a) IBM Credit Corporation, or a subsidiary or affiliate thereof, (b) a partnership in which IBM Credit Corporation is a partner, or (c) a related business enterprise for whom IBM Credit Corporation is the agent (Lessor). The subject matter of the lease shall be machines, field installable upgrades, feature additions or accessories marketed by International Business Machines Corporation (IBM) and shall be referred to as Equipment. Any lease transaction requested by Lessee and accepted by Lessor shall be specified in a Term Lease Supplement (Supplement). A Supplement shall refer to and incorporate by reference this Agreement and, when signed by the parties, shall constitute the lease (Lease) for the Equipment specified therein. Additional details pertaining to a Lease shall be specified in a Supplement. A Supplement may also specify additional terms and conditions as well as other amounts to be financed (Financing). Financing may include licensed program material charges (LPM Charges) for licensed programs marketed by IBM under the referenced IBM license agreement (License Agreement). 1. Options. The Supplement shall designate various lease and financing options. Option A is a Lease available only for Modifications (Paragraph 23) to Equipment under Option A prior to enactment of the Tax Reform Act of 1986. Option B is a Lease with a fair market purchase option at the end of the Lease. For Equipment under Option B Prime (B'), Lessor assumes for tax purposes that Lessee is the owner. For financing LPM Charges, Option S will apply. 2. Credit Review. For each Lease, Lessee consents to any reasonable credit investigation and review by Lessor. 3. Agreement Term. This Agreement shall be effective when signed by both parties and may be terminated by either party upon one month's written notice. However, each Lease then in effect shall survive any termination of this Agreement. 4. Changes. Lessor may, upon prior written notice, change the terms and conditions of this Agreement. Any change will apply on the effective date specified in the notice to Leases which have an Estimated Shipment Date, or Effective Date for 2 Additional License, one month or more after the date of notice. By notice to Lessor in writing prior to delivery, or Effective Date for Additional License, and within 15 days after receipt of such notice, Lessee may terminate the Lease for an affected item. Otherwise, the change shall apply. 5. Advance Rent. Lessee shall pay to Lessor, prior to Lessor's acceptance of a Lease, Advance Rent, if specified. Advance Rent shall be refunded if Lessor for any reasons does not accept the Lease or Lessee terminates the Lease in accordance with Paragraph 4, 12 or 15. 6. Selection and Use of Equipment, Programming and Licensed Program Materials. Lessee agrees that it shall be responsible for the selection, use of, and results obtained from, the Equipment, any programming supplied by IBM without additional charge for use on the Equipment (Programming), licensed program materials, and any other associated equipment, programs or services. 7. Assignment To Lessor. Lessee hereby assigns, exclusively to Lessor, Lessee's right to purchase the Equipment from IBM. This assignment is effective when Lessor accepts the applicable Supplement and Lessor shall then be obligated to purchase and pay for the Equipment. Other than the obligation to pay the purchase price, all responsibilities and limitations applicable to Customer as defined in the referenced IBM purchase agreement in effect at the time the Lease is accepted by Lessor (Purchase Agreement) shall apply to Lessee. If the Equipment is subject to a volume procurement amendment to the Purchase Agreement or to another discount offering, (a) Lessor will pay the same amount for the Equipment that would have been payable by Lessee, and (b) Lessee will remain responsible to IBM for any late order change charges, settlement charges, adjustment charges or any other charges incurred under the volume procurement amendment or other discount offering. 8. Lease Not Cancellable; Lessee's Obligations Absolute. Lessee's obligation to pay shall be absolute and unconditional and shall not be subject to any delay, reduction, set-off, defense, counterclaim or recoupment for any reason whatsoever, including any failure of the Equipment, Programming or licensed program materials or any representations by IBM. If the Equipment, Programming or licensed program materials are unsatisfactory for any reason, Lessee shall make any claim solely against IBM and shall, nevertheless, pay Lessor all amounts payable under the Lease. 9. Warranties. Lessor grants to Lessee the benefit of any and all warranties made available by IBM in the Purchase Agreement. Lessor warrants that neither Lessor nor anyone acting or claiming through Lessor, by assignment or otherwise, will interfere with Lessee's quiet enjoyment of the use of the Equipment so long as no event of default shall have occurred and be continuing. EXCEPT FOR LESSOR'S WARRANTY OF - 2 - 3 QUIET ENJOYMENT, LESSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. AS TO LESSOR, LESSEE LEASES THE EQUIPMENT TAKES ANY PROGRAMMING "AS IS" IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY FOR, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR FOR, CONSEQUENTIAL DAMAGES, ANY LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER COMMERCIAL LOSS. 10. Lessee Authorization. So long as Lessee is not in default under the Lease (a) Lessee is authorized to act on Lessor's behalf concerning delivery and installation of the Equipment, any IBM warranty service for the Equipment, and any programming services for the Programming, and (b) Lessee shall have, solely for these purposes, all rights Lessor may have against IBM under the Purchase Agreement. The foregoing authorization shall not constitute any surrender of Lessor's Interest in the Equipment. 11. Delivery and Installation. Lessee shall arrange with IBM for the delivery of the Equipment and Programming and for Installation of the Equipment at the Equipment Location. Lessee shall pay any delivery and installation charges. Lessor shall not be liable to Lessee for any delay in, or failure of, delivery of the Equipment and Programming. Lessee shall examine the Equipment and Programming immediately upon delivery. If the Equipment is not in good condition or the Equipment or Programming does not correspond to IBM's specifications, Lessee shall promptly give IBM written notice and shall provide IBM reasonable assistance to cure the defect or discrepancy. 12. Late Delivery. If the Equipment or licensed program materials are not delivered to the Equipment Location on or before the 15th day after the Estimated Shipment Date, Lessor may, upon written notice to Lessee, increase the Lease Rate. Lessee may terminate the Lease for the affected item by giving Lessor written notice prior to delivery. Otherwise, the Rent shall be adjusted to reflect such increase. 13. Rent Commencement Date. The Rent Commencement Date, unless otherwise specified in the Supplement, shall be the date payment is due IBM under the applicable referenced agreement. Lessee shall be notified of the Rent Commencement Date and the serial numbers of the Equipment. 14. Lease Term. The Lease shall be effective when signed by both parties. The initial Term of the Lease shall expire at the end of the number of Payment Periods, specified as "Term" in the Supplement, after the Rent Commencement Date. However, obligations under the Lease shall continue until they have been performed in full. 15. Rate Protection. Unless modified pursuant to Paragraph 12, the Rent shall be based on the Lease Rate specified in the Supplement or such greater Lease Rate as - 3 - 4 may be specified by written notice to Lessee more than one month before the Estimated Shipment Date or Effective Date for Additional License. By notice to Lessor in writing prior to delivery, or Effective Date for Additional License, and within 15 days after receipt of such notice, Lessee may terminate the Lease for the affected item. Otherwise, the Rent shall be adjusted to reflect the increase. The Unit Purchase Price and LPM Charges are subject to change in accordance with the referenced agreements. 16. Rent. During the initial Term, Lessee shall pay Lessor, for each Payment Period, Rent as determined in Paragraph 15. Lessee's obligation to pay shall begin on the Rent Commencement Date. Rent will be invoiced in advance as of the first day of each Payment Period and will be due on the day following the last day of the Payment Period. When the Rent Commencement Date is not on the first day of a calendar month and/or when the initial Term does not expire on the last day of a calendar month, the applicable Rent will be prorated on the basis of 30-day months. Advance Rent, if any, will be applied to the initial invoice(s). 17. Renewal. If Lessee is not then in default under the Lease, Lessee may renew the Lease one or more times but not beyond six years from the expiration of the initial Term. Lessor shall offer renewal Terms of one year and may offer longer Terms if then generally available. For a renewal Term, upon request by Lessee, at least five months prior to Lease expiration, Lessor shall notify Lessee, at least four months prior to expiration, of the Rent, any changes to the Payment Period and due dates, and of any required Purchase Option or Renewal Option Percents not specified in the Supplement. The Rent shall be objectively determined by Lessor by using the projected fair market rental value of the Equipment as of the commencement of such renewal Term. However, for Option B', the Rent shall be as specified in the Supplement. Lessee may renew for any renewal Term only by so notifying Lessor in writing at least three months before expiration. 18. Purchase of Equipment. If Lessee is not then in default under the Lease, Lessee may, upon three months prior written notice to Lessor, purchase Equipment upon expiration of the Lease. Under Option A or B, the purchase price shall be objectively determined by Lessor by using the projected fair market sales value of the Equipment as of such expiration date plus, for Equipment under Option A, any recapture of investment tax credit and any tax due thereon. Under Option B Prime (B') the purchase price shall be an amount determined by multiplying the Unit Purchase Price by the Purchase Option Percent for such Equipment. If Lessee purchases any Equipment, Lessee shall, on or before the date of purchase, pay to Lessor the purchase price, any applicable taxes, all Rent due through the day preceding the date of purchase, any other amounts due, and the prepayment of Financing (Paragraph 35). Lessor shall, on the date of purchase, transfer to Lessee by bill of sale, without recourse or warranty of any kind, express or implied, all of Lessor's - 4 - 5 right, title and interest in and to such Equipment on an "As Is", "Where Is" basis except that Lessor shall warrant title free and clear of all encumbrances. 19. Optional Extension. If Lessee has not elected to renew or purchase, and as long as Lessee is not in default under the Lease, the Lease will be extended unless Lessee notifies Lessor in writing, not less than three months prior to Lease expiration, that Lessee does not want the extension. The extension will be under the same terms and conditions then in effect, including Rent (but, for Options A or B, not less than fair market rental value) and will continue until the earlier of termination by either party upon three months' prior written notice or six years after expiration of the initial Term. 20. Inspection; Marking; Financing Statement. Upon request, Lessee shall make the Equipment and its maintenance records available for inspection by Lessor during Lessee's normal business hours. Lessee shall affix to the Equipment any labels indicating ownership supplied by Lessor. Lessee shall execute and deliver to Lessor for filing any Uniform Commercial Code financing statements or similar documents Lessor may reasonably request. 21. Equipment Use. Lessee agrees that Equipment will be operated by competent, qualified personnel, in accordance with applicable operating instructions, laws and government regulations and that Equipment under Option A will be used only for business purposes. 22. Maintenance. Lessee, at its expense, shall keep the Equipment in a suitable environment as specified by IBM and in good condition and working order, ordinary wear and tear excepted. 23. Alterations; Modifications; Parts. Lessee may alter or modify the Equipment only upon written notice to Lessor. Any non-IBM alteration is to be removed and the Equipment restored to its normal, unaltered condition at Lessee's expense prior to its return to Lessor. At Lessee's option, any IBM field installable upgrade, feature addition or accessory added to any item of Equipment (Modification) may be removed. If removed, the Equipment is to be restored at Lessee's expense to its normal, unmodified condition. If not removed, such Modification shall, upon return of the Equipment, become, without charge, the property of Lessor free of all encumbrances. Restoration will include replacement of any parts removed in connection with the installation of an alteration or Modification. Any part installed in connection with warranty or maintenance service shall be the property of Lessor. 24. Leases for Modifications and Additions. Lessor will arrange for leasing of Modifications and Additions under terms and conditions then generally, in effect, subject to satisfactory credit review. Additions shall be machines, or LPM Charges for licensed program materials, which are associated with the Equipment. These Modifications and Additions must be ordered by Lessee from IBM. Any lease for Modifications shall, and - 5 - 6 any lease for Additions may, expire at the same time as the Lease for the Equipment. The rent shall be determined by Lessor and specified in a Supplement. If Lessee purchases Equipment prior to Lease expiration, Lessee shall simultaneously purchase any Modifications under the Lease. 25. Return of Equipment. Upon expiration or termination of the Lease for any item of Equipment,, or upon demand by Lessor pursuant to Paragraph 38, Lessee shall promptly return the Equipment, freight prepaid, to a location in the continental United States specified by Lessor. Except for Casualty Loss, Lessee shall pay any costs and expenses incurred by Lessor to inspect and qualify the Equipment for IBM's maintenance agreement service. Any parts removed in connection therewith shall become Lessor's property. 26. Casualty Insurance; Loss or Damage. Lessor will maintain, at its own expense, insurance covering loss of or damage to the Equipment (but excluding any Modifications not subject to a Lease and any non-IBM alterations) with a $5,000 deductible per incident. If any item of Equipment shall be lost, stolen, destroyed or irreparably damaged for any cause whatsoever (Casualty Loss) before the Date of Installation as defined in the Purchase Agreement, the Lease for that item shall terminate. If any item of Equipment suffers Casualty Loss, or shall be otherwise damaged, on or after the Date of Installation, Lessee shall promptly inform Lessor. If Lessor determines that the item can be economically repaired, Lessee shall place the item in good condition and working order and Lessor will reimburse Lessee the reasonable cost of such repair, less the deductible. If not so repairable, Lessee shall pay Lessor the lesser of $5,000 or the fair market value of the Equipment immediately prior to the Casualty Loss. Upon Lessor's receipt of payment the Lease for that item shall terminate. 27. Taxes. Lessee shall promptly reimburse Lessor for, or shall pay directly if so requested by Lessor, as additional Rent, all taxes, charges and fees imposed or levied by any governmental body or agency upon or in connection with the purchase, ownership, leasing, possession, use or relocation of the Equipment or Programming or in connection with the financing of LPM Charges or otherwise in connection with the transactions contemplated by the Lease, excluding, however, all taxes on or measured by the net income of Lessor. Upon request, Lessee will provide proof of payment. Any other taxes, charges and fees relating to the licensing, possession or use of licensed program materials will be governed by the License Agreement. 28. Lessor's Payment. If Lessee fails to perform its obligations under Paragraph 27 or 31 or to discharge any encumbrances created by Lessee, Lessor shall have the right to substitute performance, in which case, Lessee shall pay Lessor the cost thereof. 29. Tax Indemnification (Applies Only for Equipment Under Options A or B). The Lease is entered into on the basis that under the Internal Revenue Code of 1986, as - 6 - 7 amended (Code), Lessor shall be entitled to (1) maximum Accelerated Cost Recovery System (ACRS) deductions for 5-year property, and (2) deductions for interest expense incurred to finance purchase of the Equipment. The Bulletin "Lessor's Tax Assumptions" will be given to Lessee on request. Lessee represents, warrants and covenants that at all times during the Lease: (a) no item of Equipment will constitute "public utility property" as defined in the Code; (b) Lessee will not make any election under the Code or take any action, or fail to take any action, if such election, action or failure to act would cause any item of Equipment to cease to be eligible for any ACRS deductions or interest deductions; (c) Lessee will keep and make available to Lessor the records required to establish the matters referred to in this Paragraph 29; and (d) for Equipment located in a United States possession, Lessee represents that Lessee is a tax exempt entity as defined in the Code. Furthermore, if Lessee is a tax exempt entity, Lessee covenants that it will not renew or extend the Lease if such action shall cause Lessor a Tax Loss as described below. If, as a result of any act, failure to act, misrepresentation, inaccuracy, or breach of any warranty or covenant, or default under the Lease, by Lessee, an affiliate of Lessee, or any person who shall obtain the use or possession of any item of Equipment through Lessee, Lessor shall lose the right to claim or shall suffer any disallowance or recapture of all or any portion of any ACRS deductions or interest deductions (Tax Loss) with respect to any item of Equipment, then, promptly upon written notice to Lessee that a Tax Loss has occurred, Lessee shall reimburse Lessor the amount determined below. The reimbursement shall be an amount that, in the reasonable opinion of Lessor, shall make Lessor's after-tax rate of return and cash flows (Financial Returns), over the term of the Lease for such item of Equipment, equal to the expected Financial Returns that would have been otherwise available. The reimbursement shall take into account the effects of any interest, penalties and additions to tax required to be paid by Lessor as a result of such Tax Loss and all taxes required to be paid by Lessor as a result of any payments pursuant to this paragraph. Financial Returns shall be based on economic and tax assumptions used by Lessor in entering into the Lease. All the rights and privileges of Lessor arising from this Paragraph 29 shall survive the expiration or termination of the Lease. - 7 - 8 For purposes of determining tax effects under Paragraphs 16, 27, 29 and 30, the term "Lessor" shall include, to the extent of interests, any partner in Lessor and any affiliated group of corporations and each member thereof, of which Lessor or any such partner is or shall become a member and with which Lessor or any such partner joins in the filing of consolidated or combined returns. 30. General Indemnity. This Lease is a net lease. Therefore, Lessee shall indemnify Lessor against, and hold Lessor harmless from, any and all claims, actions, damages, obligations, liabilities and liens; and all costs and expenses, including legal fees, incurred by Lessor in connection therewith; arising out the Lease including, without limitation, the purchase, ownership, lease, licensing, possession, maintenance, condition, use or return of the Equipment, Programming or licensed program materials; or arising by operation of law; excluding, however, any of the foregoing which result from the sole negligence or willful misconduct of Lessor. Lessee agrees that upon written notice by Lessor of the assertion of any claim, action, damage, obligation, liability or lien, Lessee shall assume full responsibility for the defense thereof. Any payment pursuant to this paragraph shall be of such amount as shall be necessary so that, after payment of any taxes required to be paid thereon by Lessor, including taxes on or measured by the net income of Lessor, the balance will equal the amount due hereunder. Lessee's obligations under this paragraph shall not constitute a guarantee of the residual value or useful life of any item of Equipment or a guarantee of any debt of Lessor. The provisions of this paragraph with regard to matters arising during the Lease shall survive the expiration or termination of the Lease. 31. Liability Insurance. Lessee shall obtain and maintain comprehensive general liability insurance, in an amount of $1,000,000 or more for each occurrence, with an insurer having "Best's Policyholders" rating of B+ or better. The policy shall name Lessor as an additional insured as Lessor's interests may appear and shall contain a clause requiring the insurer to give Lessor at least one month's prior written notice of the cancellation, or any alteration in the terms, of the policy. Lessee shall furnish Lessor, upon request, evidence that such insurance coverage is in effect. 32. Sublease and Relocation of Equipment; Assignment by Lessee. Upon Lessor's prior written consent which will not be unreasonably withheld, Lessee may sublet the Equipment or relocate it from the Equipment Location. No sublease or relocation shall relieve Lessee of its obligations under the Lease. In no event shall Lessee remove the Equipment from the United States. Lessee shall not assign, transfer or otherwise dispose of the Lease or Equipment, or any interest therein, or create or suffer any levy, lien or encumbrance thereof except those created by Lessor. 33. Assignment by Lessor. Lessee acknowledges and understands that the terms and conditions of the Lease have been fixed to enable Lessor to sell and assign its interest or grant a security interest or interests in the Lease and the Equipment individually or together, in whole or in part, for the purpose of securing loans ___ - 8 - 9 Lessor or otherwise. If Lessee is given written notice of any assignment, it shall promptly acknowledge receipt thereof in writing. Each such assignee shall have all of the rights of Lessor under the Lease. Lessee shall not assert against any such assignee any ___ off, defense or counterclaim that Lessee may have against Lessor or any other person. Lessor shall not be relieved of its obligations hereunder as a result of any such assignment unless Lessee expressly consents thereto. 34. Financing. If the Lease provides for financing of LPM Charges, Lessor will pay such Charges directly to IBM. Any other charges due IBM under the License Agreement shall be paid directly to IBM by Lessee. Lessee's obligation to pay Rent shall not be affected by any discontinuance, return or destruction of license or licensed program materials under the License Agreement on or after the date LPM Charges are due. If Lessee discontinues any of the licensed program materials in accordance with the terms of the License Agreement prior to the date LPM Charges are due, the financing of affected LPM Charges shall be cancelled. 35. Financing Prepayment. (Does Not Apply For Items of Equipment). Lessee may terminate an item of Financing (but not an item of Equipment) by prepaying its remaining Rent. Lessee shall provide Lessor with notice of the intended prepayment date which shall be at least one month after the date of the notice. Lessor may, depending on market conditions at the time, make an adjustment in the remaining Rent to reflect such prepayment and shall advise Lessee of the balance to be paid. If, prior to Lease expiration, Lessee purchases the Equipment or if the Lease is terminated, Lessee shall at the same time prepay any related Financing including that for programs licensed to the Equipment. 36. Delinquent Payments. If any amount to be paid to Lessor is not paid on or before its due date, Lessee shall pay Lessor on demand 2% of such late payment for each month or part thereof from the due date until the date paid or, if less, the maximum allowed by law. 37. Default; No Waiver. Lessee shall be in default under the Lease upon the occurrence of any of the following events: (a) Lessee fails to pay when due any amount required to be paid by Lessee under the Lease and such failure shall continue for a period of seven days after the due date; (b) Lessee fails to perform any other provisions under the Lease or violates any of the covenants or representations made by Lessee in the Lease, or Lessee fails to perform any of its obligations under any other Lease entered into pursuant to this Agreement, and such failure or breach shall continue unremedied for a period of 15 days after written notice is received by Lessee from Lessor; (c) Lessee violates any of the covenants or representations made by Lessee in any application for credit or in any agreement with IBM with respect to the Equipment or licensed program materials or fails to perform any provision in any such agreement (except the obligation to pay the purchase price or LPM Charges); (d) Lessee makes an assignment for the benefit of creditors, whether voluntary or involuntary, or consents to the appointment of - 9 - 10 a trustee or receiver, or if either shall be appointed for Lessee or for a substantial part of its property without its consent; (e) any petition or proceeding is filed by or against Lessee under any Federal or State bankruptcy or insolvency code or similar law; or (f) if applicable, Lessee makes a bulk transfer subject to the provisions of the Uniform Commercial Code. Any failure of Lessor to require strict performance by Lessee or any waiver by Lessor of any provision in the Lease shall not be construed as a consent or waiver of any other breach of the same or of any other provision. 38. Remedies. If Lessee is in default under the Lease, Lessor shall have the right, in its sole discretion, to exercise any one or more of the following remedies in order to protect its interests, reasonably expected profits and economic benefits. Lessor may (a) declare any Lease entered into pursuant to this Agreement to be in default; (b) terminate in whole or in part any Lease; (c) recover from Lessee any and all amounts then due and to become due; (d) take possession of any or all items of Equipment, wherever located, without demand or notice, without any court order or other process of law; and (e) demand that Lessee return any or all such items of Equipment to Lessor in accordance with Paragraph 25 and, for each day that Lessee shall fail to return any item of Equipment, Lessor may demand an amount equal to the Rent, prorated on the basis of a 30-day month, in effect immediately prior to such default. Upon repossession or return of such item or items of Equipment, Lessor shall sell, lease or otherwise dispose of such item or items in a commercially reasonable manner, with or without notice and on public or private bid, and apply the net proceeds thereof towards the amounts due under the Lease but only after deducting (i) in the case of sale, the estimated fair market value of such item or items as of the scheduled expiration of the Lease; or (ii) in the case of any replacement lease, the rent due for any period beyond the scheduled expiration of the Lease for such item or items; (iii) in either case, all expenses, including legal fees, incurred in connection therewith; and (iv) where appropriate, any amount in accordance with Paragraph 29. Any excess net proceeds are to be retained by Lessor. Lessor may pursue any other remedy available at law or in equity, including, but not limited to, seeking damages, specific performance and an injunction. No right or remedy is exclusive of any other provided herein or permitted by law or equity. All such rights and remedies shall be cumulative and may be enforced concurrently or individually from time to time. 39. Lessor's Expense. Lessee shall pay Lessor on demand all costs and expenses, including legal and collection fees, incurred by Lessor in enforcing the terms, conditions or provisions of the Lease or in protecting Lessor's rights and interests in the Lease and the Equipment. 40. Ownership; Personal Property; Licensed Program Materials. The Equipment under Lease is and shall be the property of Lessor. Lessee shall have no - 10 - 11 right, title or interest therein except as set forth in the Lease. The Equipment is, and shall at all times be and remain, personal property and shall not become a fixture or realty. Licensed program materials are licensed and provided by IBM directly to Lessee under the terms and conditions of the License Agreement. 41. Notices; Administration. Service of all notices under the Lease shall be sufficient if delivered personally or mailed to Lessee at its address specified in the Supplement or to IBM Credit Corporation as Lessor in care of the IBM Branch Office specified in the Supplement. Notice by mail shall be effective when deposited in the United States mail, duly addressed and with postage prepaid. Notices, consents and approvals from or by Lessor shall be given by Lessor or on its behalf by IBM and all payments shall be made to IBM until Lessor shall notify Lessee otherwise. 42. Lessee Representation. If the Lease includes Financing, Lessee represents that it is (a) a corporation if any item of Equipment is located in Ohio, Mississippi, Virginia or West Virginia, and/or (b) a business corporation if any item of Equipment is located in Pennsylvania. 43. Revisions for Previously Installed Equipment. Equipment installed with Lessee under an IBM lease or rental agreement may be purchased by Lessor, on the Effective Date of Purchase (as defined in the Purchase Agreement), for lease to Lessee under Option B or B'. For such Equipment, the Lease shall be revised as follows: Paragraphs 4 and 26 - replace "Estimated Shipment Date" by "Intended Effective Date of Purchase"; replace "delivery" and "Date of Installation" by "Effective Date of Purchase"; Paragraph 7 - add at the end of the first paragraph, "Assignment of the option to purchase installed Equipment at the net purchase option price under an IBM lease or rental agreement will be permitted only when Lessee submits the Supplement in sufficient time to achieve the intended Effective Date of Purchase. The Effective Date of Purchase under this assignment shall be the later of the first day of the Quotation Month or the day on which the applicable Supplement is accepted by Lessor. If the Quotation Month expires and the purchase of Equipment is not concluded, this assignment and Lease will be null and void regarding any such Equipment and all rights, duties and obligations of Lessee and IBM will remain in accordance with the provisions of the IBM agreement under which the Equipment is currently installed."; Paragraphs 11 and 12 - delete both paragraphs; and Paragraph 15 - replace the entire paragraph with the following: "The Rent shall be based on the Lease Ratespecified in the Supplement or such greater Lease Rate as may be specified by written notice to Lessee more than one month before the Effective Date of Purchase. The Unit Purchaser Price is subject to change in accordance with the - 11 - 12 referenced Purchase Agreement. Lessee may terminate the Lease for any item subject to an increase by giving Lessor written notice on or before the Effective Date of Purchase." 44. Applicable Law; Severability. The Lease shall be governed by the laws of the State of Connecticut. If any provisions shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall not in any way be affected or impaired. LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND ITS SUPPLEMENT, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER, LESSEE AGREES THAT THIS AGREEMENT AND ITS SUPPLEMENT ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. Accepted by: IBM Credit Corporation CardMember Publishing Corp. By: /s/ J.A. Settles By: /s/ Thomas St. Denis ------------------------------------ ---------------------------------- J.A. Settles 26 Nov 91 Thomas St. Denis 11/21/91 - --------------------------------------- ---------------------------------- Name (Type or Print) Date Name (Type of Print) Date - 12 - EX-10.8 7 MASTER LEASE AGREEMENT 1 Exhibit 10.8 BANKERS MASTER LEASE AGREEMENT Dated as of May 7, 1996 LESSOR: Bankers Leasing Association, Inc. (herein called "LESSOR") ADDRESS: 4201 Lake Cook Road, Northbrook, IL 60062 LESSEE: CARDMEMBER PUBLISHING CORPORATION (herein called "LESSEE") ADDRESS: 655 WASHINGTON BLVD., SUITE 1000, STAMFORD, CT 06901 1. LEASE. LESSOR hereby leases and/or grants to, LESSEE the right to use, and LESSEE hereby leases from and/or agrees to accept the right to use, subject to the terms and conditions herein set forth, the item(s) of personal property including but not limited to hardware and/or software and herein referred to as "Equipment" described in each Equipment Schedule entered into from time to time pursuant to this Master Lease Agreement. Each Equipment Schedule entered into by the parties shall constitute a separate non-cancelable lease agreement and shall incorporate therein all of the terms and conditions of this Master Lease Agreement and contain such additional terms and conditions as agreed upon. The term "LEASE" as used hereinafter shall refer to an individual Equipment Schedule which incorporates this Master Lease Agreement. Until an Equipment Schedule is signed by LESSOR, an Equipment Schedule signed by LESSEE constitutes an irrevocable offer by LESSEE to lease from LESSOR. 2. TERM. This Master Lease Agreement shall be effective when signed by both parties and shall continue in effect until all obligations of LESSEE under each Equipment Schedule are fully satisfied. The Lease Term for each Equipment Schedule shall become effective on the first day of the month following the Installation Date ("Commencement Date'). The Installation Date is the (i) date on which the Equipment is installed at the location set forth in the Equipment Schedule ("Equipment Location") and declared acceptable for maintenance by the Maintenance Provider (as defined in paragraph 9) or, if LESSEE causes a delay in installation or acceptance for maintenance, then even (7) days after the date on which the Equipment is delivered; or (ii) if the Equipment is already installed, being used and leased from another party and is being purchased by LESSOR for lease to LESSEE hereunder, then the date on which LESSOR pays for the Equipment. LESSEE shall promptly sign and deliver to LESSOR a Certificate of Acceptance dated as of the Installation Date. Unless LESSEE, not more than two-hundred ten (210) days or less than one-hundred eighty (180) days prior to the initial or extended expiration of the LEASE, notifies LESSOR in writing by certified mail of its intention not to extend the LEASE, the LEASE shall automatically and continuously be extended on the same terms and conditions for a period of twelve (12) months. In the event LESSEE notifies LESSOR of its intention not to extend the LEASE, then LESSEE must do one of the following: (A) Purchase all of the Equipment at a Mutually Agreeable Purchase Price; (B) Extend the LEASE for a period of twelve (12) months at the periodic rent identified on the Equipment Schedule; (C) Enter into a new LEASE with LESSOR to lease equipment which replaces the Equipment on the Equipment Schedule and which has a cost that is greater than or equal to the original cost of the Equipment. LESSOR and LESSEE shall each have absolute discretion regarding their agreement or lock of agreement to the terms of options (A) and (C). If LESSOR and LESSEE have not reached agreeable terms to either option (A) or option (C) by the expiration of the Initial Lease Term, then option (B) shall prevail. At the end of the extension provided by option (B), the LEASE shall continue subject to termination at the end of any calendar month upon no less than 120 days written notice by either LESSOR or LESSEE. 3. RENT. LESSEE shall pay to LESSOR at its address set forth above, or at such other address LESSOR may hereinafter designate in writing, the rent specified for the Equipment, payable in advance, effective on the Commencement Date. Charges from the Installation Date to the Commencement Date shall be computed by converting the monthly or other calendar period rental to a daily rate based on a 30-day month. Subsequent monthly or other calendar period rental payments shall be due on the same day of subsequent months or other calendar periods as the Commencement Date of the LEASE. 4. DISCLAIMER OF WARRANTIES. (a) LESSEE ACKNOWLEDGES THAT LESSEE MADE THE SELECTION OF THE EQUIPMENT BASED ON ITS OWN JUDGMENT AND IS NOT RELYING ON LESSOR'S SKILL OR JUDGMENT TO SELECT OR FURNISH GOODS SUITABLE FOR ANY PARTICULAR PURPOSE. LESSEE ACKNOWLEDGES THAT LESSOR HAS NOT MADE AND DOES NOT MAKE ANY WARRANTIES, EXPRESS OR IMPLIED, DIRECTLY OR INDIRECTLY, INCLUDING, WITHOUT LIMITATION, THE WARRANTY OF 2 MERCHANTABILITY AND OF FITNESS, CAPACITY OR DURABILITY FOR ANY PARTICULAR PURPOSE, AND WARRANTIES AS TO THE DESIGN OR CONDITION OF THE EQUIPMENT AND THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY CLAIM, LOSS, OR DAMAGE OF ANY KIND OR NATURE WHATSOEVER, INCLUDING ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, TO ANY EXTENT WHATSOEVER, RELATING TO OR ARISING OUT OF THE SELECTION, QUALITY, CONDITION, MERCHANTABILITY, SUITABILITY, FITNESS, OPERATION OR PERFORMANCE OF THE EQUIPMENT. NO DEFECT IN OR UNFITNESS OF THE EQUIPMENT SHALL RELIEVE LESSEE OF ITS OBLIGATIONS UNDER THE LEASE. LESSEE agrees that LESSOR assumes no liability for and makes no representation as to the treatment by LESSEE of the LEASE, the Equipment or the rent payments or other sums due thereunder for financial statement or tax purposes. (b) For the term of the LEASE, or any extension thereof, LESSOR hereby assigns to LESSEE and LESSEE may have the benefit of any and all Vendor's warranties, service agreements and patent indemnities, if any, with respect to the Equipment to the extent assignable by LESSOR, provided, however, that LESSEE'S sole remedy for the breach of any such warranty or indemnification shall be against the Vendor and not against LESSOR, nor shall any such breach have any effect whatsoever on the rights and obligations of either party with respect to the LEASE. 5. STATUTORY FINANCE LEASE. LESSEE agrees and acknowledges that it is the intent of both parties to the LEASE that it qualify as a statutory finance lease under Article 2A of the Uniform Commercial Code. LESSEE acknowledges and agrees the LESSEE has selected both: (1) the Equipment and (2) the Vendor from whom the Equipment is to be acquired. LESSEE acknowledges the LESSOR has not participated in any way in LESSEE'S selection of the Equipment or of the Vendor, and LESSOR has not selected, manufactured, or supplied the Equipment. LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE ACQUISITION OF THE EQUIPMENT FROM THE VENDOR CHOSEN BY LESSEE AND THAT LESSEE SHOULD CONTACT THE VENDOR OF THE EQUIPMENT FOR A DESCRIPTION OF ANY SUCH RIGHTS. 6. EQUIPMENT AND LIABILITY. LESSOR, at the request of LESSEE, has ordered or shall order the Equipment described in each Equipment Schedule attached hereto from a Vendor selected by LESSEE. LESSOR shall not be liable for specific performance of the LEASE or for damages if, for any reason, the Vendor fails to accept such order or delays or fails to fill the order. LESSEE agrees to accept such Equipment and authorizes LESSOR to add the serial number of the Equipment to the LEASE. 7. VENDOR NOT AN AGENT. LESSEE understands and agrees that neither the Vendor, nor any salesman or other agent of the Vendor, is an agent of LESSOR, no salesman or agent of the Vendor is authorized to waive or alter any term or condition of the LEASE, and no representation as to Equipment or any other matter by the Vendor shall in any way affect LESSEE'S duly to pay the rent and perform its other obligations as set forth in the LEASE. 8. PLACE OF USE. LESSEE shall keep the Equipment at its place of business as specified in the LEASE, or at such other place as LESSOR may consent to in writing. LESSEE covenants and agrees not to allow the use of the Equipment by other than the employees of the LESSEE and covenants and agrees not to rent or sublet the Equipment or any part thereof AND WILL NOT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT ASSIGN THE LEASE OR ITS INTEREST THEREUNDER. 9. USE AND RETURN OF EQUIPMENT. The LESSEE leases and shall use the Equipment only for its intended purposes and shall exercise due and proper care in the use, repair and servicing of the Equipment and at all times and at its expense shall keep and maintain the Equipment in good working condition, order, and repair. The LESSEE shall make no alteration to the Equipment without the prior written consent of the LESSOR. LESSEE represents and warrants that the Equipment will be covered and maintained under the best standard full service maintenance agreement offered by the Vendor, provided the Vendor is either the original equipment manufacturer/licensor or an authorized original equipment manufacturer/licensor maintenance organization, or such other maintenance organization authorized by the original equipment manufacture/licensor (hereinafter called "Maintenance Provider"), during the full term of the LEASE or any extension thereof. Upon the expiration or termination of the LEASE, LESSEE at its sole expense shall forthwith have the Equipment de-installed and properly prepared for shipment by the Maintenance Provider, insure, warrant eligibility for continued maintenance provider's best standard and most current - 2 - 3 version full service and maintenance agreement and return the Equipment unencumbered to LESSOR, at such place designated by LESSOR, in the same condition as when received by LESSEE. LESSOR reserves the right to approve or designate the carrier and the means of shipment. However, if requested by LESSOR, LESSEE will, prior to shipment, at its sole expense, store the Equipment after deinstallation and packing on its premises for ninety (90) days. All replacement parts, additions and accessories incorporated in or affixed to the Equipment, including but not limited to wiring, software and operating systems, at or after the commencement of the LEASE shall become the property of LESSOR. All related documentation, manuals and service logs are the property of LESSOR and are to be returned with the Equipment. 10. RISK OF LOSS AND DAMAGE. (a) LESSEE hereby assumes and shall bear the entire risk of loss for theft, loss, damage, destruction or governmental taking, and from any and every cause whatsoever to the Equipment, whether partial or complete and whether or not through any default or neglect of LESSEE. Except as provided herein, no such event shall relieve LESSEE of its obligation to pay rent hereunder, nor shall any such event impair any other obligation of LESSEE under the LEASE which shall continue in full force and effect. (b) If any Equipment is damaged, LESSEE must promptly notify LESSOR and within sixty (60) days of such damage shall, at its expense, cause such repairs to be made as are necessary to return the Equipment to its previous condition. LESSEE shall then be entitled to receive from LESSOR any insurance proceeds received in connection with such damage. (c) In the event that any Equipment is destroyed, damaged beyond repair, lost, stolen or taken by governmental action for a period extending beyond the term of the LEASE, or any extension thereof (an "Event of Loss"), LESSEE must promptly notify LESSOR and pay to LESSOR on the next rental payment date following the Event of Loss, an amount equal to the Stipulated Loss Value set forth in the applicable table (the form of which is attached to each Equipment Schedule as Exhibit A) of the greater of (a) the fair market value of such Equipment prior to such loss, or (b) twenty (20) percent of the Equipment Cost, all discounted to present value at an annual rate of 6%. Upon payment of such amounts, LESSEE'S obligation to pay further rent will cease with respect to such Equipment and LESSEE will be entitled to receive any insurance proceeds or other recovery received by LESSOR in connection with such Event of Loss. (d) In the event of a governmental taking of the Equipment for an indefinite period which does not extend beyond the term of the LEASE, all obligations of the LESSEE with respect to such Equipment (including payment of rent) will continue. So long as LESSEE is not in default hereunder, LESSOR will pay to LESSEE all sums received by LESSOR by reason of such governmental taking up to the amount paid by LESSEE during such period. 11. INSURANCE. LESSEE, at its expense, shall insure the Equipment against all risks and shall maintain a loss payable endorsement in favor of LESSOR. The all risks insurance shall be in such amounts as LESSOR reasonably requires but in no event less than the full replacement value of the Equipment or if the Equipment is not repaired or replaced the Stipulated Loss Value as set forth in the applicable table (the form of which is attached to each Equipment Schedule as Exhibit A), if applicable, or an amount equal to all unpaid and remaining rentals due during the term of the LEASE plus an amount equal to twenty (20) percent of the original Equipment Cost, all discounted to present value at an annual rate of 6%. LESSEE may act as a self-insurer in amounts acceptable to LESSOR only upon written consent of the LESSOR. LESSEE shall insure the LESSOR and LESSEE with respect to liability for personal injuries, death; damage to or loss of use of property resulting from the ownership, use and operation of the Equipment, in the amount of at least one million dollars combined single limit, or such greater amount as LESSOR shall reasonably require. All such insurance policies shall name both the LESSOR and LESSEE as insured, and must provide that they may not be cancelled or altered without at least 30 days prior written notice to LESSOR. Such property insurance and liability insurance (and written evidence therefor delivered to LESSOR upon request) shall be satisfactory to LESSOR. If LESSEE fails to provide such evidence, then LESSOR shall have the right, but not the obligation to halve either property insurance or liability insurance or both protecting the LESSOR placed at LESSEE'S expense. LESSEE'S expense may include the full premium paid by LESSOR (not reduced by any credit or refund due or paid to LESSOR) and any customary charges or fees of LESSOR and of its designee(s) associated with such insurance. LESSEE shall pay such amounts in equal installments allocated to each rent payment plus interest on such amounts at the lesser of the highest rate permitted by law or 1.5% per month. - 3 - 4 12. TAXES. The LESSEE shall pay all taxes and assessments (and interest and penalties, if any thereon) which may be levied, directly or indirectly, against the Equipment or any interest therein or with respect to the ownership, possession or use thereof, whether such taxes are levied against the LESSOR or the LESSEE. Such taxes to be paid by the LESSEE shall include, without limitation, property, sale, rent, lease, ad valorem and use taxes and any other tax measured by the gross rent payable hereunder, but shall not include net income or franchise taxes payable by the LESSOR. If such taxes are levied against the LESSOR, it shall notify the LESSEE of such fact. The LESSOR shall have the right, but not the obligation, to pay any such taxes, whether levied against the LESSOR or LESSEE. In such event the LESSEE shall reimburse the LESSOR therefor within five days after the receipt of an invoice based on the full amount of such taxes without regard to any discounts LESSOR may obtain due to early payment or otherwise. In the event of failure to make such reimbursement when due the LESSOR shall have all remedies provided herein with respect to the nonpayment of the rental hereunder. LESSEE agrees to reimburse LESSOR for reasonable costs incurred by LESSOR in collecting taxes and assessments hereunder. LESSOR reserves the right to invoice and collect an estimated amount for personal property taxes each year, such estimate to be based on the most recent ascertainable assessment. Upon receipt of an invoice for the actual amount due, LESSOR will invoice and LESSEE will pay to LESSOR or LESSOR will rebate to LESSEE any difference between the actual invoice and the estimated amount. 13. ADDITIONAL SECURITY. In any jurisdiction where the Uniform Commercial Code is in effect, LESSEE grants to LESSOR a security interest in any and all goods, chattels, fixtures, furniture, equipment, assets, accounts receivable, contract rights, general intangibles, and property of every kind wherever located now and/or hereafter belonging to LESSEE and in which LESSEE has any interest and proceeds thereof, and agrees that any security interest created by this agreement secures any and all obligations of LESSEE and those of any affiliate of LESSEE to LESSOR whether hereunder or otherwise and whether now in existence and/or to come into existence and whether initially owing to LESSOR or acquired by LESSOR through one or more assignments. 14. TITLE. All Equipment shall remain personal property and the title thereto shall remain in the LESSOR exclusively unless the Equipment is, or includes software in which event and only to the extent required by the applicable license, title to said software shall remain in the Licensor. To the extent that the License allows title to software to pass to the Licensee, such title shall vest and remain in LESSOR. To the extent that such vesting requires a specific written conveyance, LESSEE hereby conveys to LESSOR any title it has or may hereafter acquire in the software and relinquishes any subsequent claim or title in the software, including any rights to purchase the software and/or retain rights to use the same beyond the Lease Term. If any provision of this paragraph requires for its effectiveness Licensor's prior written consent because the License limits transfers, encumbrance, or assignment of the software, then LESSEE shall assist LESSOR, if so requested, in obtaining such consent. LESSEE shall keep the LESSOR'S title rights in the Equipment free from any and all liens, claims, and legal processes. LESSEE shall give LESSOR immediate notice of any attachment or other judicial process, liens, or claims affecting the Equipment and shall indemnify and save LESSOR harmless from any loss or damage caused thereby. To further secure payment to LESSOR, LESSEE agrees that each LEASE is cross-collateralized with all others and in the event of default by LESSEE of any LEASE, LESSOR may exercise its rights and remedies as if LESSEE defaulted on all LEASES. In the event the Maintenance Provider deems it necessary to replace any Equipment with like equipment LESSEE shall immediately notify LESSOR of the same. However, no exchange or replacement shall occur without LESSOR'S prior written approval and consent. LESSEE further agrees (a) to take all necessary and reasonable steps to insure title to the replacement Equipment is, subject to LESSOR'S satisfaction, transferred to the LESSOR, (b) agrees to insure the replacement Equipment as provided in paragraph 11, and (c) to pay any and all costs in connection with or related to such Equipment exchange. 15. FILING. LESSEE, on behalf of LESSEE and LESSOR, hereby authorizes LESSOR and appoints LESSOR its attorney-in-fact to execute and file the LEASE, any financing statements or security agreements with respect to the Equipment or any collateral provided by LESSEE to LESSOR prior to or following LESSOR'S acceptance of the LEASE, in any state of the United States. LESSEE shall execute such supplemental instruments and financing statements if LESSOR deems such to be necessary or advisable and shall otherwise cooperate to defend the title of the LESSOR by filing or otherwise. - 4 - 5 16. RIGHT OF INSPECTION. The LESSOR, its agents, dealers, and representatives shall have the right at any time during usual business hours to inspect the Equipment and for this purpose to have access to the location of the Equipment. 17. NON-WAIVER. LESSOR'S failure at any time to require strict performance by LESSEE of any of the provisions of the LEASE shall not waive or diminish LESSOR'S right thereafter to demand strict compliance therewith or with any other provision. Waiver of any default shall not waive any other default. LESSOR'S rights under the LEASE are cumulative and not alternative. 18. DEFAULT. Time is of the essence of the LEASE, and no waiver by LESSOR of any breach or default shall constitute a waiver of any other breach or default by LESSEE or waiver of any of LESSOR'S rights. If LESSEE fails to pay any rent or other amounts required within ten (10) days after the same is due and payable, or if LESSEE fails to observe, keep or perform any other provision of the LEASE required to be observed, kept or performed by LESSEE, or if LESSEE ceases doing business as a going concern, or if a petition if filed by or against LESSEE under the Bankruptcy Act or any amendment thereto (including a petition for re-organization or an arrangement), or if a receiver is appointed for LESSEE or its property, or if LESSEE commits an act of bankruptcy, becomes insolvent, makes an assignment for the benefit of creditors, offers a composition or extension of any of its indebtedness, or if LESSEE without LESSOR'S prior written consent, attempts to remove or sell or transfer or encumber or sublet or part with the possession of the Equipment, or if LESSOR deems itself insecure, LESSOR or its agents shall have the right to exercise any one or more of the following remedies; (a) to declare the entire amount of rent hereunder immediately due and payable without notice or demand to LESSEE, (b) to sue for and recover from the LESSEE the amount stated in the Stipulated Loss Value as set forth in the applicable table (the form of which is attached to the Equipment Schedule as Exhibit A), if any, or an amount equal to the unpaid balance of the rent due and to become due during the term of the LEASE plus an amount equal to the greater of (i) the fair market value of the Equipment prior to the event of default, or (ii) twenty (20) percent of the Equipment Cost, all discounted to present value at an annual rate of 6% , (c) to take possession of any Equipment without demand or notice wherever same may be located without any court order or other process of law. Upon retaking possession of any Equipment, the LESSOR at its option may (i) lease repossessed Equipment or any part thereof to any third party on such terms and conditions as the LESSOR may determine or (ii) sell the Equipment or any part thereof to the highest bidder at public auction or at private sale, and will credit the new amount so realized less expenses incurred in connection with such disposition to the amount due pursuant to (b) above. LESSEE hereby waives any and all damages occasioned by such taking of possession. Any said taking of possession shall not constitute termination of the LEASE and shall not relived LESSEE of its original obligations unless LESSOR expressly so notifies LESSEE in writing. To the extent permitted by applicable law, the LESSEE waives any and all rights and remedies conferred upon a LESSEE by UCC Sections 2A-508 through 2A-522, including (without limitation) the LESSEE'S right to (a) cancel or repudiate the LEASE, (b) reject or revoke acceptance of the leased Equipment, (c) recover damages from the LESSOR for breach of warranty or for any other reason, (d) claim a security interest in any rejected Equipment in the LESSEE'S possession or control, (e) deduct from rental payment all or any part of any claimed damages resulting from the LESSOR'S default under the LEASE, (f) accept partial delivery of the leased Equipment, (g) "cover" by making any purchase or lease of other equipment in substitution for Equipment due from the LESSOR, (h) recover from the LESSOR any general, special, incidental or consequential damages, for any reason whatsoever, and (i) specific performance, replevin or the like for any of the leased Equipment. To the extent permitted by applicable law, the LESSEE waives any rights now or hereafter conferred by statute or otherwise that may require the LESSOR to sell, release or otherwise use or dispose of any of the leased Equipment in mitigation of the LESSOR'S damages as set forth in the LEASE or that may otherwise limit or modify any of LESSOR's rights or remedies under the LEASE. The remedies provided for in the LEASE shall not be deemed exclusive but shall be cumulative, and shall be in addition to all other remedies existing at law or in equity. Should any legal proceedings be instituted by LESSOR to recover any monies due or to become due under the LEASE and/or for the possession of the Equipment, LESSEE shall pay LESSOR'S reasonable attorney's fees, court costs, and other related expenses as well as fees and costs incurred in connection with a bankruptcy proceeding including, but not limited to, any objections of disputes. The LESSEE and all endorsers and guarantors hereby consent to the - 5 - 6 LESSOR granting, at its own option, one or more extensions of the time of payment or performance of any of the obligations of the LESSEE or of any security agreement securing the LEASE, hereby waiving all notice thereof. 19. ASSIGNMENT. NEITHER THE LEASE NOR THE RIGHTS THEREUNDER SHALL BE ASSIGNED, NOR SHALL ANY OF THE EQUIPMENT BE SUBLEASED BY LESSEE WITHOUT PRIOR WRITTEN CONSENT OF LESSOR. LESSOR, WITHOUT NOTICE TO LESSEE, MAY AT ANY TIME ASSIGN ALL OR PART OF ITS RIGHT, TITLE AND INTEREST IN AND TO THE LEASE IN AND TO EACH ITEM OF EQUIPMENT AND MONIES TO BECOME DUE TO THE LESSOR THEREUNDER; and, LESSOR may grant a security interest in the Equipment, subject to the LESSEE'S rights therein as set forth in the Lease. Any assignee of LESSOR shall have all of the rights, but none of the obligations, of LESSOR under the LEASE and LESSEE agrees that it will not assert against any assignee of LESSOR any defense, counterclaim or offset that LESSEE may have against LESSOR. LESSEE acknowledges that any assignment or transfer by LESSOR would neither materially change LESSEE'S duties or obligations under the LEASE nor materially increase the burdens or risks imposed on LESSEE. 20. POSSESSION AND QUIET ENJOYMENT. LESSOR covenants to and with LESSEE that, provided LESSEE performs the conditions of the LEASE and so long as LESSEE shall not be in default thereunder, LESSEE shall peaceably and quietly hold and use the Equipment during the LEASE term without hindrance or interruption by LESSOR. 21. LIABILITY AND INDEMNITY. Except for the gross negligence or willful misconduct of LESSOR, LESSEE agrees to indemnify LESSOR against and hold LESSOR harmless from any and all claims, (INCLUDING WITHOUT LIMITATION, CLAIMS INVOLVING STRICT OR ABSOLUTE LIABILITY), actions, suits, proceedings, costs, expenses, damages and liabilities at law or in equity, including costs and reasonable attorney's fees, arising out of, connected with or resulting from the LEASE or the Equipment, including, without limitation the manufacture, selection, purchase, ownership, delivery, possession, use, operation, condition, sales, return, storage or disposition thereof, any latent or other defects, whether or not discoverable, and any claim for patent, trademark or trade name infringement. LESSOR shall not be liable to LESSEE for any loss, damage, injury, or expense of any kind or nature, caused directly or indirectly by any Equipment or the use or maintenance thereof; the repair, servicing or adjustment thereto, or for any delay or failure to provide any thereof, any interruption of service or loss of use of the Equipment, or for any loss of business or damage whatsoever and howsoever caused. For purposes of this Paragraph, the term "LESSOR" shall include LESSOR, its successors and assigns, shareholders, directors, officers, representatives, employees, and agents, and the provisions of this Paragraph shall survive expiration of the LEASE with respect to events occurring prior thereto. 22. NET LEASE. The LEASE is a net lease and LESSEE agrees that its obligation to pay all rent and other sums payable thereunder are absolute and unconditional and shall not be subject to any abatement, reduction, setoff, defense, counterclaim or recoupment for any reason whatsoever. 23. REPRESENTATIONS AND WARRANTIES OF LESSEE. LESSEE hereby represents, warrants and covenants that, with respect to the LEASE, any amendment, addendum, rider, or other attachment executed thereunder: (a) The execution, delivery and performance thereof by LESSEE has been duly authorized by all necessary corporate or business action. (b) The individual executing such was duly authorized to do so. (c) they constitute legal, valid and binding agreements of LESSEE enforceable in accordance with their respective terms. (d) Any and all financial statements or other information with respect to LESSEE supplied to LESSOR at the time of execution hereof and any amendments, addendums, or riders hereto are true and complete. - 6 - 7 The foregoing representations and warranties shall survive the signing and delivery of the LEASE and any amendments, addendums, riders or other attachments thereto. 24. MISCELLANEOUS. (a) All notices relating hereto shall be in writing and mailed to LESSOR or LESSEE by certified mail, return receipt requested at its respective address above shown or at any later address last known to the sender. The LEASE is irrevocable for the full term thereof and for the aggregate rental therein reserved, and the rent shall not abate by reason of termination of LESSEE'S right of possession and/or the taking of possession by LESSOR or for any other reason. If more than one LESSEE is named in the LEASE, the liability of each shall be joint and several. (b) Delinquent installments of rent, or other amounts due under the LEASE, of more than ten (10) days shall be subject to a penalty equal to ten (10) percent of such payment, plus interest at the rate of one and one-half (1 1/2) percent per month, but in no event greater than the highest lawful rate. If LESSOR supplies LESSEE with labels stating that Equipment is owned by LESSOR, LESSEE shall label the Equipment and shall keep the same affixed in a prominent place. (c) LESSEE agrees to furnish to LESSOR upon request: (1) Such additional information as LESSOR may reasonably request concerning LESSEE and LESSEE'S use of the Equipment in order to enable LESSOR to determine whether the covenants, terms, and provisions of the LEASE have been complied with by LESSEE. (2) copies of annual or quarterly financial statements, including a copy of the Balance Sheet and Profit and Loss Statement of LESSEE. (3) Financial Statements of any corporation that owns a controlling interest in LESSEE. (4) Copies of all Maintenance Provider's reports covering the Equipment. (5) A duly executed written warranty verifying the serial number(s) of the Equipment and any attachments or appurtenances thereto, specifying the shipment date for the return of the Equipment, its general condition, that the Equipment has been and continues to be in use for its intended purpose and within the limitations set forth and at the location specified in the LEASE and that insurance is in full force and effect. (d) LESSEE shall furnish to LESSOR such information and data as LESSOR may from time to time reasonably request as to existence of and status of any claims for damages (whether against the Equipment or against LESSOR or LESSEE) arising out of the use, operation, or condition of the Equipment; the taxes of the nature provided to be paid by LESSEE under the provisions of Paragraph 12 which have been assessed and the amount of such taxes paid, and such other data pertinent to the Equipment and the condition, use, and operation thereof as LESSOR may from time to time reasonably request. (e) If LESSEE shall fail to comply with its covenants and obligations under the LEASE, the payment of taxes, assessments, and other charges of keeping the Equipment in repair and free of liens, charges, and encumbrances, LESSOR may, after reasonable notice to LESSEE of LESSOR'S intent, pay such charges, taxes, assessments or cause compliance with such covenants, however, LESSOR shall not be obligated to make advances to perform the same, and all sums so advanced shall be payable to LESSOR upon demand as additional rent. No such advance shall be deemed to relieve LESSEE from any default under the LEASE or be considered a waiver by LESSOR of any of its rights or remedies. (f) In the event a major change in the ownership or financial condition of LESSEE occurs prior to delivery and acceptance of any Equipment, and LESSOR, in its sole discretion deems itself insecure as a result of such change, LESSOR reserves the right to cancel the LEASE and LESSEE hereby agrees to hold LESSOR harmless and to indemnify LESSOR from any and all obligations liabilities, costs and expenses incurred as a result of such cancellation, including but not limited to LESSOR'S issuance of its purchase order to the Equipment Vendor. - 7 - 8 (g) The LEASE, any amendments, addendums, riders, or other attachments made thereto shall be deemed to have been made and executed in Cook county, Illinois, regardless of the order in which the signatures of the parties shall be affixed thereto, and shall be interpreted and the rights and liabilities of the parties thereto determined in accordance with the laws of the State of Illinois. All claims and other matters relating to the LEASE, any amendments, addendums, riders, or other attachments made thereto and the Equipment SHALL BE HEARD IN ANY STATE OR FEDERAL COURT LOCATED IN COOK COUNTY, ILLINOIS, AND THE PARTIES CONSENT TO THE EXCLUSIVE PERSONAL JURISDICTION OF SUCH COURTS, AND WAIVE TRIAL BY JURY. (h) Notwithstanding anything to the contrary contained in the LEASE, including but not limited to paragraph 18, in addition to all other remedies provided therein, in the event LESSEE fails to ship the Equipment to the destination designated by LESSOR on or before the warranted date as specified in paragraph 24(c)(5), LESSEE agrees to pay to LESSOR upon demand an amount equal to the daily rate, based on a 30 day month, of the monthly or other calendar period rental for each day after such date until such time as the Equipment leaves the LESSEE'S location. (i) LESSEE and any guarantor agree that any process served for any action or proceeding shall be valid if mailed by certified mail, return receipt requested, with delivery directed to the LESSEE, its registered agent, or any agent appointed in writing to accept such process. LESSEE and any guarantor accordingly hereby expressly appoint "COOK COUNTY PROCESS SERVERS," or its successor, in Illinois as THEIR AGENT TO ACCEPT SERVICE of such process in connection with the LEASE. (j) AT LESSOR'S SOLE ELECTION, LESSOR MAY SUBMIT ANY MATTER ARISING OUT OF THIS TRANSACTION, INCLUDING ANY CLAIM, COUNTER-CLAIM, SETOFF, OR DEFENSE, TO BINDING ARBITRATION BY THE AMERICAN ARBITRATION ASSOCIATION IN COOK COUNTY, ILLINOIS OR ANY OTHER SITE OF LESSOR'S CHOICE. THE DECISION AND AWARD OF THE ARBITRATOR(S) SHALL BE FINAL AND BINDING AND MAY BE ENTERED AS RENDERED IN ANY COURT HAVING JURISDICTION THEREOF. 25. SEVERABILITY. If any provisions of the LEASE or any remedy thereunder provided for is deemed invalid under any applicable law, such provision shall be inapplicable and deemed omitted, but the remaining provisions thereof including remaining default remedies, shall be given effect in accordance with the manifest intent thereof. 26. CONFLICTS. If any of the provisions of the LEASE conflict with any provisions of any other documentation relating to the transaction, the terms of the LEASE shall prevail and control, unless otherwise agreed to in writing by LESSOR. 27. ENTIRE AGREEMENT, WAIVER. This instrument constitutes the entire agreement between the parties. No waiver by LESSOR of any provision hereof shall constitute a waiver of any other matter. This Master Lease Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Master Lease Agreement including any amendments, additions, riders or other attachments is not valid and binding until execution thereof by an authorized officer of LESSOR in Northbrook, Illinois. LESSEE'S INITIAL [ ] IN WITNESS WHEREOF, LESSOR and LESSEE have signed this Master Lease Agreement as of the date set forth above. LESSOR: LESSEE: BANKERS LEASING ASSOCIATION, INC. CARDMEMBER PUBLISHING CORPORATION By:________________________________ By:________________________________ ___________________________________ ___________________________________ (Print or Type Name) (Print or Type Name) Title:_____________________________ Title: SENIOR VICE PRESIDENT/CFO - 8 - 9 AMENDMENT NO. 1 TO MASTER LEASE AGREEMENT DATED AS OF MAY 7, 1996 BETWEEN BANKERS LEASING ASSOCIATION, INC.. (AS "LESSOR") AND CARDMEMBER PUBLISHING CORPORATION (AS "LESSEE") This Amendment is entered into in accordance with the Master Lease Agreement identified above. All the terms and conditions of the Master Lease Agreement are hereby incorporated herein and made a part hereof. In the event of a conflict between the terms of the Master Lease Agreement and this Amendment, the terms of this Amendment shall prevail. Amend Lessee's address to read: 680 Washington Blvd., Suite 1100 Stamford, Connecticut 06901-3709 In all other respects, the terms and conditions of the Master Lease Agreement shall remain in full force and effect as originally written. IN WITNESS WHEREOF, the parties hereto, by their authorized signatories, have executed this Amendment at the date set forth below their respective signatures. Lessor: Lessee: BANKERS LEASING ASSOCIATION, INC. CARDMEMBER PUBLISHING CORPORATION By: By: /s/ Steven Levenherz ----------------------------- ------------------------------ Steven Levenherz Title: Title: Senior Vice President/CFO -------------------------- --------------------------- Dated as of: Dated as of: 6-24-96 -------------------- -------------------- - -------------------------------------------------------------------------------- BANKERS LEASING ASSOCIATION, INC. 4201 Lake Cook Road, Northbrook, IL 60062 TEL: (708) 564-5353 FAX: (708) 564-5412 OFFICES IN PRINCIPAL CITIES (800) 477-2000 Except in Illinois EX-23.2 8 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated July 25, 1996, except as to Note 15 which is as of August 15, 1996, relating to the consolidated financial statements of MemberWorks Incorporated, which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the three years ended June 30, 1996 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Stamford, Connecticut August 21, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 4,312,000 0 6,349,000 0 0 15,494,000 4,777,000 1,516,000 19,715,000 26,055,000 0 20,487,000 0 8,000 (36,340,000) 19,715,000 0 57,012,000 0 61,949,000 0 0 310,000 (5,247,000) 0 (5,247,000) 0 0 0 (5,247,000) (2.94) 0
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