As filed with the Securities and Exchange Commission on May 14, 2004
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MEMBERWORKS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1276882
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
MemberWorks Incorporated
680 Washington Boulevard, Suite 1100
Stamford, CT 06901
(203) 324-7635
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
George Thomas Esq.
MemberWorks Incorporated
680 Washington Boulevard, Suite 1100
Stamford, CT 06901
(203) 324-7635
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Steven T. Giove, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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(d)
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. | |
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of each Class of Amount to Price per Offering Registration
Securities to be Registered be Registered Unit Price (1) Fee
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9 1/4% Senior Notes due 2014.......................... $150,000,000 100% $150,000,000 $19,005
Subsidiary Guarantees of 9 1/4% Senior Notes due 2014. None (2) None (2) None (2) None (2)
======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f).
(2) Pursuant to Rule 457(n) under the Securities Act, no separate fee is
payable for the subsidiary guarantees.
The registrant hereby amends this Registration Statement on such date 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 this Registration Statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
TABLE OF ADDITIONAL REGISTRANTS
Primary
State or Other Standard I.R.S.
Jurisdiction of Industrial Employer
Incorporation Classification Identification
Name or Organization Code Number Number
---- --------------- ----------- ------
Interactive Voice Media Baltimore LLC(1) DE 7389 98-0169980
Interactive Voice Media Colorado LLC(1) DE 7389 98-0195835
Interactive Voice Media Georgia LLC(1) DE 7389 98-0190771
Interactive Voice Media Michigan LLC(1) DE 7389 98-0170250
Interactive Voice Media New Jersey LLC(1) DE 7389 98-0195847
Interactive Voice Media New York LLC(1) DE 7389 98-0195834
Interactive Voice Media Ohio LLC(1) DE 7389 98-0190772
Interactive Voice Media Pennsylvania LLC(1) DE 7389 98-0190773
Lavalife Washington D.C., L.L.C.(1) DE 7389 98-0169983
Interactive Media Group (USA) Ltd.(1) DE 7389 98-0121016
Interactive Media Consolidated, Inc.(1) DE 7389 98-0190774
Interactive (TX) Voice Media Corp.(1) TX 7389 76-0471301
Interactive L.A. Voice Media Corp.(1) CA 7389 95-4482652
Interactive Media (IL) Corp.(1) IL 7389 36-4060721
Interactive Media MO Corp.(1) MO 7389 45-1593730
Barnes Holding Corp.(1) NY 7389 98-0131452
Interactive S.J. Voice Media Corp.(1) CA 7389 94-3215560
Interactive Voice Media (CA) Corp.(1) CA 7389 94-3147771
Interactive Voice Media (MN) Corp.(1) MN 7389 41-1790935
Interactive Voice Media (Sacramento) Corp.(1) CA 7389 94-3230007
Coverdell & Company, Inc.(2) GA 7389 58-1604660
Discount Development Services, L.L.C.(3) IL 7389 36-4395849
MemberWorks Canada LLC(4) DE 7389 N/A
Impaq Marketing Corporation(4) DE 7389 47-0756248
Best Benefits, Inc.(3) DE 7389 N/A
Uni-Care, Inc.(3) IL 7389 36-3819290
Quota-Phone, Inc.(5) NY 7389 13-3078443
Countrywide Dental, Inc.(4) DE 7389 06-1378251
MemberWorks Canada Holdco, Inc.(4) DE 7389 N/A
Lavalife Corp.(1) Nova Scotia 7389 N/A
MyHealthySavings.com, Inc.(4) DE 7389 06-1596637
Billing Services International, Inc.(4) DE 7389 22-3792589
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(1) Registrant's address is 905 King Street West, Suite 500, Toronto, Ontario,
Canada M6K369.
(2) Registrant's address is 1718 Peachtree Street NW, Atlanta, GA 30309.
(3) Registrant's address is 8420 West Bryn Mawr, Chicago, IL 80631.
(4) Registrant's address is 680 Washington Blvd., 11th Floor, Stamford, CT
06091.
(5) Registrant's address is 3 Gannett Drive, White Plains, NY 10604.
The information in this prospectus is not complete and may be changed. A
registraiton 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 before the registration statement becomes effective.
This prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION DATED MAY 14, 2004
MemberWorks Incorporated
Offer to Exchange
all outstanding
9 1/4% Senior Notes due 2014
issued on April 13, 2004
which have not been registered under the Securities Act
($150,000,000 aggregate principal amount outstanding)
for
9 1/4% Senior Notes due 2014
registered under the Securities Act
------------
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and the accompanying letter of transmittal, which together
constitute the exchange offer, to exchange $150,000,000 aggregate principal
amount of our new 9 1/4% Senior Notes due 2014, or the new notes, for
$150,000,000 aggregate principal amount of our issued and outstanding 9 1/4%
Senior Notes due 2014, or the old notes, and collectively with the new notes,
the notes.
The Exchange Offer
o The exchange offer will expire at 5:00 p.m., New York City time, on
, 2004, unless extended.
o All old notes that are validly tendered and not validly withdrawn will be
exchanged.
o Tenders of old notes may be withdrawn any time prior to 5:00 p.m. on the
business day prior to expiration of the exchange offer.
o The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes.
o We will not receive any proceeds from the exchange offer.
The New Notes
o The terms of the new notes to be issued are substantially identical to the
outstanding old notes, except for the transfer restrictions and
registration rights relating to the old notes.
o The new notes will be our unsecured senior obligations and will be
guaranteed on a senior unsecured basis by all of our existing and future
domestic subsidiaries and certain existing and future foreign subsidiaries,
including Lavalife. The new notes and the related guarantees will rank
equally in right of payment with any of our and such guarantors' existing
and future unsecured senior indebtedness and will rank senior in right of
payment to all of our and such guarantors' existing and future unsecured
subordinated indebtedness. The new notes and the related guarantees will be
effectively subordinated to all of our and such guarantors' secured
indebtedness to the extent of the value of the assets securing such
indebtedness.
o No public market exists for the old notes or the new notes. We do not
intend to apply for listing of the new notes on any securities exchange or
to arrange for them to be quoted on any quotation system.
See "Risk Factors" beginning on page 16 for a discussion of matters that
should be considered in connection with the exchange offer.
Neither the Securities and Exchange Commission nor any state Securities
Commission has approved or disapproved of the notes to be distributed in the
exchange offer, nor have any of these organizations determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2004.
TABLE OF CONTENTS
Page Page
---- ----
Industry and Market Data.................................ii Business.................................................55
Currency Translation.....................................ii Management...............................................62
Forward-Looking Statements...............................ii Description of Other Indebtedness........................64
Summary...................................................1 The Exchange Offer.......................................65
Risk Factors.............................................16 Description of the New Notes.............................73
The Lavalife Acquisition.................................27 Certain U.S. Federal Income Tax Considerations..........112
Use of Proceeds..........................................28 Plan of Distribution....................................117
Capitalization...........................................29 Legal Matters...........................................117
Unaudited Pro Forma Condensed Combined Financial Data....30 Experts.................................................117
Selected Condensed Consolidated Financial Data...........44 Where You Can Find More Information.....................117
Management's Discussion and Analysis of Financial Incorporation by Reference..............................118
Condition and Results of Operations..................45 Index to Consolidated Financial Statements..............F-1
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This exchange offer is not being made to, nor will we accept surrenders of
old notes from, holders of old notes in any jurisdiction in which this exchange
offer or the acceptance of old notes would not be in compliance with the
securities of blue sky laws of such jurisdiction.
Each holder of old notes wishing to accept this exchange offer must deliver
the old notes to be exchanged, together with the letter of transmittal that
accompanies this prospectus and any other required documentation, to the
exchange agent identified in this prospectus. Alternatively, you may effect a
tender of old notes by book-entry transfer into the exchange agent's account at
The Depository Trust Company, DTC. All deliveries are at the risk of the holder.
You can find detailed instructions concerning delivery in the section called
"The Exchange Offer" in this prospectus and in the accompanying letter of
transmittal.
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If you are a broker-dealer that receives new notes for your own account
pursuant to this exchange offer, you must acknowledge that you will deliver a
prospectus in connection with any resale of the new notes. The letter of
transmittal accompanying this prospectus states that by so acknowledging and by
delivering a prospectus, you will not be deemed to admit that you are an
"underwriter" within the meaning of the Securities Act of 1933. You may use this
prospectus, as we may amend or supplement it in the future, for your resales of
new notes received in exchange for old notes where the old notes were acquired
by you as a result of market-making or other trading activities. We have agreed
to make this prospectus available to any broker-dealer in connection with any
such resale for a period of one year after the date of expiration of this
exchange offer. For more information, see the section called "Plan of
Distribution" in this prospectus.
-------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different or additional information. You should assume that the information
contained or incorporated by reference in this prospectus is accurate only as of
the date of this prospectus or the date of the document incorporated by them. We
are not making an offer of exchange in any jurisdiction where the offer is not
permitted.
-------------
We are incorporating by reference into this prospectus important business
and financial information about our company that is not included in or delivered
with the prospectus. This information is available without charge upon written
or oral request. Requests should be directed to:
MemberWorks Incorporated
680 Washington Boulevard
Stanford, Connecticut 06901
Attention: Investor Relations
Telephone: (203) 324-7635
Any request for documents should be made by , 2004 to ensure timely
delivery of the documents prior to the expiration of the exchange offer.
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INDUSTRY AND MARKET DATA
Industry and market data used throughout this prospectus were obtained
through company research, surveys and studies conducted by third parties and
industry and general publications. We have not independently verified market and
industry data from third-party sources. While we believe this information is
reliable and market definitions are appropriate, none of the research, surveys
and studies or these definitions has been verified by any independent sources.
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CURRENCY TRANSLATION
Unless otherwise indicated, all references to "$" in this prospectus refer
to United States dollars and all references to "Cdn$" refer to Canadian dollars.
The following table lists, for each period presented, the high and low
exchange rates, the average of the exchange rates on the last day of each month
during the period indicated and the exchange rates as of the end of the period
for one Canadian dollar, expressed in United States dollars, based on the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York. Unless
otherwise specified, all translations of Canadian dollars into U.S. dollars were
made based on the noon buying rate in New York City as of April 1, 2004. On
April 1, 2004, the inverse of the noon buying rate in New York City for cable
transfers of Canadian dollars was Cdn$1.00 = US$0.7633.
Year Ended December 31,
----------------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
High for the period............................ 0.6925 0.6969 0.6697 0.6619 0.7738
Low for the period............................. 0.6535 0.6410 0.6241 0.6200 0.6349
Average for the period......................... 0.6732 0.6734 0.6459 0.6369 0.7159
End of period.................................. 0.6925 0.6669 0.6279 0.6329 0.7738
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industry in
which MemberWorks operates and our management's beliefs and assumptions. These
forward-looking statements include statements that do not relate solely to
historical or current facts and can be identified by the use of words such as
"believe," "expect," "estimate," "project," "continue" or "anticipate." These
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance and
are based on a number of assumptions and estimates that are inherently subject
to significant risks and uncertainties, many of which are
ii
beyond our control, cannot be foreseen and reflect future business decisions
that are subject to change. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Among the many factors that could cause actual results to differ
materially from the forward-looking statements are:
o higher than expected membership cancellations or lower than expected
membership renewal rates;
o changes in the marketing techniques of credit card issuers;
o increases in the level of commission rates and other compensation required
by marketing partners to actively market with us;
o potential reserve requirements by business partners such as our credit card
processors;
o unanticipated termination of marketing agreements;
o our ability to integrate acquired businesses into our management and
operations and operate successfully;
o the extent to which we can continue to successfully develop and market new
products and services and introduce them on a timely basis;
o unanticipated changes in or termination of our ability to process
membership fees through third parties, including credit card processors and
bank card associations;
o our ability to develop and implement operational and financial systems to
manage growing operations;
o our ability to recover from a complete or partial system failure or
impairment, other hardware or software related malfunctions or programming
errors;
o the degree to which we are leveraged;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and to operate within the limitations imposed by financing
arrangements;
o further changes in the already competitive environment fix our products or
competitors' responses to our strategies;
o changes in the growth rate of the overall U.S. economy, or the
international economy where we do business, such that credit availability,
interest rates, consumer spending and related consumer debt are impacted;
o additional government regulations and changes to existing government
regulations of our industry, including the Federal Trade Commission's 2003
Amendment to its Telemarketing Sales Rule which created a national
do-not-call list;
o whether competitors of Lavalife move to a transactional-based model;
o our ability to compete with other companies that have financial or other
advantages;
o adverse movement in foreign exchange rates;
o our ability to attract and retain active members and users;
iii
o adverse results of litigation or regulatory matters; and
o new accounting pronouncements.
Many of these factors are beyond our control, and, therefore, our business,
financial condition, results of operations and cash flows may be adversely
affected by these factors.
We caution that such factors are not exclusive. All of the forward-looking
statements made or incorporated by reference in this prospectus are qualified by
these cautionary statements and you are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus. Except as required by law, we do not have any intention or
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise.
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iv
SUMMARY
This summary highlights selected information from this prospectus. It does
not contain all of the information that is important to you in order to
understand this exchange offer or the terms of the notes. You should read this
entire prospectus, including "Risk Factors" and the additional information,
including the financial statements and related notes, included or incorporated
by reference in this prospectus, before making a decision to participate in this
exchange offer. See "Incorporation by Reference."
On April 1, 2004, MemberWorks Incorporated completed the acquisition of all
of the assets and outstanding capital stock of Lavalife Inc. After the
acquisition, Lavalife Inc. changed its name to Lavalife Corp., which now
operates as a wholly owned subsidiary of MemberWorks Incorporated. As used in
this prospectus, unless otherwise stated or the context otherwise requires, the
term (1) "MemberWorks" refers to MemberWorks Incorporated and its subsidiaries
prior to the acquisition of Lavalife, (2) "Lavalife" refers to the business
conducted by Lavalife Inc. and its subsidiaries (3) "we," "us," "our" and
similar terms refer to MemberWorks Incorporated and its subsidiaries, including
Lavalife, and (4) the "Transactions" collectively refers to (i) the execution of
our amended and restated senior secured credit facility, borrowings thereunder
and the use of proceeds therefrom, (ii) our acquisition of Lavalife and the
concurrent purchases by Lavalife's senior management of MemberWorks' restricted
common stock and (iii) the offering of the old notes and the use of proceeds
therefrom.
The Exchange Offer
On April 13, 2004, we completed the private offering of $150 million of 9
1/4% senior notes due 2014. We entered into a registration rights agreement with
the initial purchasers in the private offering in which we agreed, among other
things, to deliver to you this prospectus and to complete the exchange offer
within 30 business days of the effectiveness of the exchange offer registration
statement. In the exchange offer, you are entitled to exchange your outstanding
old notes for new registered notes with substantially identical terms. If the
exchange offer is not completed within 30 business days of the effectiveness of
the exchange offer registration statement, and in certain other circumstances,
we will pay liquidated damages to each holder of the old notes. You should read
the discussions under the headings "The Exchange Offer -- Registration Rights"
and "Description of the New Notes" for further information regarding the
liquidated damages and the registered notes, respectively.
We believe that the new notes issued in the exchange offer may be resold by
you without compliance with the registration and prospectus delivery provisions
of the Securities Act, subject to certain conditions. You should read the
discussion under the heading "The Exchange Offer" for further information
regarding the exchange offer.
MemberWorks Incorporated
We are a leading provider of innovative membership programs to consumers
and, with the acquisition of Lavalife, a leading global provider of web-based
and interactive voice response ("IVR") based personals services. Our membership
programs offer consumers easy access to a variety of discounted products and
services provided by our participating vendors. Through Lavalife, we offer users
both web-based and IVR-based personals services, which allow them to interact
with each other from anywhere in real time. For the twelve months ended December
31, 2003, after giving pro forma effect to the Transactions, our revenues would
have been $545.4 million.
Membership Programs
Our members benefit by receiving significant discounts and insightful
information on everyday items in areas which include healthcare, personal
finance, insurance, travel, entertainment, fashion and personal security. We
design our membership programs to address the particular needs and preferences
of our members by combining various features and benefits to customize our
programs. We had approximately 6.3 million members as of December 31, 2003. Our
clients (who offer the membership programs to their customers), including
Citibank, N.A. and West Corporation, benefit by receiving royalty payments in
exchange for providing us with new members or access to potential members. Our
participating vendors (who offer products and/or services through our membership
programs) have an incentive to provide discounts to our members in order to
reach a large number of demographically attractive consumers while incurring
minimal incremental marketing costs.
Our membership programs are for either annual or monthly renewable terms.
Traditionally, we marketed membership programs which had an up-front annual
membership fee. However, in fiscal 2003, we expanded our marketing of membership
programs for which membership fees are payable in monthly installments, which
1
generally have higher margins than our annual payment membership programs.
During the six months ended December 31, 2003, more than 60% of our new member
enrollments were in monthly payment programs, and we expect the proportion of
our monthly payment programs to increase going forward. Membership fees vary
depending upon the particular services offered by the membership program. In the
first half of fiscal 2004, annual membership fees averaged approximately $106
per year and monthly membership fees averaged $11.18 per month, compared to $100
and $9.60, respectively, for the same period in fiscal 2003.
We continue to enhance our existing membership programs to add more member
value by continuously monitoring and addressing the needs and preferences of our
members, which, in turn, has enabled us to increase the average membership fees
year over year. We generally design membership programs to provide our members
with potential savings of at least twenty times their membership fees. Our
money-saving programs fall into the following four key categories:
o Health and Insurance -- The health and fitness membership programs offer
significant savings on a comprehensive array of products, including
prescription drugs, vitamins and supplements, eye glasses and contact
lenses, hearing aides, durable medical equipment and select consumer health
products. Also offered are discounts on professional services, including
medical, dental, chiropractic, alternative medicine, elder care and
personal health services. Our insurance programs offer competitively priced
insurance products, including life, accidental death, short-term and
catastrophic disability and supplemental medical, warranty and identity
theft insurance coverage.
o Travel, Entertainment and Shopping -- These membership programs offer
exclusive, members-only savings with leading brand name partners. Members
have multiple opportunities to save on airfare, hotel rates, car rental and
cruise packages, theme and amusement parks, restaurants and movie theaters.
Members also have access to savings on a wide range of merchandise, apparel
and personal services.
o Privacy, Protection and Home Improvement -- Members have access to bundles
of services that enable them to better manage their privacy and protection
through identity theft insurance, card registration, credit reporting,
scoring and monitoring, and personal information monitoring services, and
savings on security systems, 24-hour protection services, roadside
assistance, financial, tax and retirement planning and extended warranty
protection. Members also have access to discounts on home improvement,
consumer electronics and family entertainment.
o Specialty Markets and Custom Programs -- We partner with well known clients
to offer custom, private label or co-branded membership programs to meet
the specific needs of our client's defined customer base. In addition, we
offer membership materials and customer service in Spanish and French.
Personals Services
Through Lavalife, we offer both web-based and IVR-based personals services
to Lavalife's users. These services allow users to interact with each other from
anywhere in real time by phone, email, text chat or video. To acquire new users
and retain existing users, Lavalife relies on its innovative products, marketing
relationships with major media groups, advertising campaigns in large markets,
widely recognized brand and advanced technology infrastructure. Lavalife is
headquartered in Toronto, Canada, and serves customers in the United States,
Canada and other regions, principally Australia, which accounted for
approximately 69%, 25% and 6%, respectively, of its net sales for the fiscal
year ended September 30, 2003. As of December 31, 2003, Lavalife had
approximately 700,000 active web-based and IVR-based users. During January 2004,
Lavalife.com, our interactive website, had approximately 8.2 million unique web
visitors.
Lavalife employs a transactional business model, in which users buy
non-refundable credits up front and spend those credits only when they want to
interact with other users. Lavalife's competitors generally employ a
subscription model, in which users pay a fixed periodic fee. We believe a
transactional model is more attractive to new users, who will join due to a
lower initial cost and the ability to easily control their spending.
Furthermore, once a user has an account balance, the user has a strong financial
incentive to return to use their remaining credits. To further encourage return
visits, Lavalife continues to refine its existing service offerings and
introduce new interactive services such as video. Lavalife continues to refine
its product offerings and introduce innovative interactive products, including
video and real time online social networking.
2
Competitive Strengths
We participate in the consumer membership services market of the direct
marketing industry and, with the acquisition of Lavalife, in the personals
services industry. A successful business model for membership and personals
services business depends on a large and stable customer base, strong
relationships with marketing partners and vendors, diversified distribution
channels and an understanding of the regulatory environment. We believe we have
successfully developed all of these aspects of our business model. We believe
our competitive strengths are as follows:
o Proven Business Model with Recurring Cash Flows -- Over the last 15 years,
we have established a large and stable membership base. As of the end of
each of the last four fiscal years, we had over 6 million members. This
membership base has historically generated a recurring stream of cash
flows. After the initial new member acquisition costs are recovered, we
generate a substantial stream of cash flow because the cost of maintaining
a renewal member is minimal. In addition, with the acquisition of Lavalife,
we are diversifying our proven business model by adding a complementary
business with a history of consistent profitability and a large base of
active users. As of December 31, 2003, Lavalife had approximately 700,000
active web-based and IVR-based users.
o High Barriers to Entry -- The membership services business is characterized
by high barriers to entry, which include establishing client and vendor
relationships and acquiring a critical mass of members. By offering quality
programs and a high level of customer service over the last 15 years, we
have earned the trust of well-known vendors who, we believe, prefer to
license their brands to established industry participants, such as
ourselves. Building a membership services business sufficient to support
continued growth takes time. In addition, because the benefits of a high
margin cash flow are not realized until the member acquisition costs are
recovered, new entrants are not likely to experience positive cash flow
during the initial years of their operations and would require large
amounts of upfront capital. In addition, the personals services business is
characterized by barriers to entry, including a critical mass of users and
advanced computer and communication systems that support the business.
o Extensive Vendor Network -- In most cases, the products and services
accessed through our membership programs are offered and provided directly
to members by independent benefit providers, or vendors. To ensure member
satisfaction, we evaluate and engage only those vendors who we believe can
deliver high quality products and services at discounted prices. We have
thousands of vendors providing approximately 400 distinct benefits in the
areas of healthcare, insurance, travel and entertainment, shopping, home
improvement, financial and personal security and more. Our strong vendor
network continues to help us develop innovative membership programs by
giving us access to a variety of products and services. We are able to
establish and retain strong relationships with our vendors by leveraging
our client relationships and large member base to drive low-cost
incremental traffic to our vendors.
o Strong Client Relationships -- We have established strong relationships
with our clients, which have helped us increase our market penetration and
gain access to a large number of potential new members. Our clients include
banks and other financial institutions, e-commerce companies, direct
response television companies, catalog companies, retailers, major oil
companies and other organizations with large numbers of individual account
holders and customers. We have built and maintained these client
relationships by providing our clients' customers with high quality,
innovative membership programs supported by our extensive vendor network.
o Diversified Distribution Channels -- During the past several years, we have
been able to effectively diversify our distribution channels for membership
programs. We market our programs through a variety of direct marketing
channels, including inbound call marketing through MemberLinkSM, online
marketing, outbound telemarketing (which we outsource to third party
contractors) and direct mail. Our diversified distribution channels for
membership programs enable us to shift toward more cost effective
distribution channels to acquire new members.
o Lavalife's Transactional Business Model -- Lavalife employs a transactional
business model, in which users buy credits up front and spend those credits
only when they want to interact with other users. Our competitors generally
employ a subscription model, in which users pay a fixed periodic fee. We
3
believe that a transactional business model is more attractive to new
users, who will join due to a lower initial cost and the ability to easily
control their spending. In addition, once a user has an account balance,
the user has a strong financial incentive to return and use any remaining
credits. Furthermore, through its transactional business model, Lavalife is
positioned to immediately benefit from product upgrades that promote
credit-consuming features.
o Experienced Management Team -- We believe MemberWorks' senior management's
extensive knowledge of the consumer industry has been important in building
MemberWorks' successful membership programs business. In particular, Gary
Johnson, one of our co-founders, has served as our President and Chief
Executive Officer since our inception. MemberWorks' senior management has
an average of seven years of experience at MemberWorks. In addition, the
founders of Lavalife, each with 16 years of experience at Lavalife, have
joined MemberWorks and, in connection with the acquisition, have purchased
approximately Cdn$11.9 million ($9.1 million) in MemberWorks' restricted
common stock.
Our Strategy
Our business strategy is to extend our position as a leading consumer
membership and personals services company. We intend to strengthen our market
leadership positions, maximize profitability and enhance cash flow through the
following strategies:
o Optimize Customer Retention -- We will seek to optimize our customer
retention rates and revenue generated per customer by continuing to enhance
our programs and services by adding more value and/or features.
Historically, this strategy has enabled us to increase our average
membership fees year over year while maintaining our membership base.
o Pursue Growth Opportunities and Cost Synergies -- We expect to generate
revenue growth and realize cost synergies from the Lavalife acquisition. We
expect to increase our revenues by cross-selling MemberWorks' customized
membership programs to Lavalife's users and Lavalife's services to
MemberWorks' members. We also expect to realize cost savings by combining
certain of our operations and infrastructure and through potential volume
discounts with our existing vendors and media companies that carry our
advertisements.
o Continue to Develop Innovative Products and Services -- We believe our
membership programs are innovative with respect to the variety and quality
of particular services, discounts, and other features offered. We will
continue to increase the variety of programs offered and enhance the
customer value in our existing programs by combining various features and
benefits. We will also continue to customize our programs to the particular
needs of our members and clients.
o Capitalize on Global Online Market Opportunities -- Lavalife participates
in the global market for online personals, which was estimated to be
approximately $530.0 million in sales for 2003 according to Marketdata
Enterprises Inc. We believe that this market will continue to grow, driven
by growth in social acceptance, improved service offerings and the
integration of new technologies. We intend to pursue a wider target
audience for our membership programs by capitalizing on our broadened
online marketing presence.
o Pursue Strategic Acquisitions -- We believe that strategic acquisitions
represent an effective means to broaden our product offerings. We intend to
selectively pursue opportunities that enhance sales growth, increase
customer and geographic diversity, offer complementary products, have
proven technologies and/or provide potential revenue opportunities and
marketing synergies.
Recent Developments
The Lavalife Acquisition
On April 1, 2004, MemberWorks completed the acquisition of all of the
assets and outstanding capital stock of Lavalife for approximately Cdn$152.5
million ($116.4 million) in cash. See "The Lavalife Acquisition." Lavalife's
senior management purchased approximately Cdn$11.9 million ($9.1 million) in
MemberWorks'
4
restricted common stock at closing of the acquisition. We financed the purchase
price with cash on hand and borrowings of approximately $15.0 million under our
$45.0 million senior secured credit facility. For the twelve months ended
December 31, 2003, Lavalife had revenues of Cdn$98.6 million ($70.6 million).
We believe the Lavalife acquisition is an attractive opportunity for us
because Lavalife offers:
o entry into the growing personals services market with a leading brand;
o a proven business model with consistent profitability;
o a broad online marketing presence with a large potential target audience;
o a transactional business model, which we believe is more favorable than a
subscription business model for the personal services industry;
o opportunities to cross-sell our programs and services across our customer
base; and
o an experienced management team with significant expertise in the personals
services industry.
Lavalife now operates as a wholly owned restricted subsidiary of
MemberWorks, guarantees the old notes and will guarantee the new notes.
Senior Secured Credit Facility
On March 25, 2004, we entered into an amended and restated senior secured
credit facility that allows borrowings of up to $45.0 million. Borrowings under
the senior secured credit facility accrue interest at either LIBOR, or the base
commercial lending rate for the bank, plus an applicable margin. As of April 29,
2004, we had $25.6 million of borrowing capacity remaining under the senior
secured credit facility due to a $5.5 million letter of credit outstanding
thereunder and other restrictions under the senior secured credit facility. See
"Description of Other Indebtedness -- Senior Secured Credit Facility."
-------------
MemberWorks Incorporated, a Delaware corporation, was organized in 1996 and
conducted business under the name Cardmember Publishing Corporation from 1989 to
1996. Our principal office is located at 680 Washington Boulevard, Stamford, CT
06901 and our phone number is (203) 324-7635. Our internet address is
www.memberworks.com. Information on our website is not a part of this
prospectus.
5
Summary of the Terms of the Exchange Offer
On April 13, 2004, we issued $150,000,000 aggregate principal amount of
unregistered 9 1/4% senior notes due 2014. These old notes are unconditionally
guaranteed by all of our existing and future domestic subsidiaries that
guarantee our credit facilities. The exchange offer relates to the exchange of
up to $150 million aggregate principal amount of old notes for an equal
aggregate principal amount of new notes. The new notes will be obligations of
our company entitled to the benefits of the indenture governing the old notes.
The form and terms of the new notes are identical in all material respects to
the form and terms of the outstanding notes except that the new notes have been
registered under the Securities Act of 1933, as amended, and therefore are not
entitled to the benefits of the registration rights granted under the
registration rights agreement, executed as part of the offering of the
outstanding notes, dated April 13, 2004 among us and the initial purchasers in
the private offering. These benefits include the liquidated damages we would pay
in the event that the filing and declaration of effectiveness of the required
registration statement and subsequent consummation of an exchange offer pursuant
to the registration statement do not occur within the time periods specified in
the registration rights agreement.
Registration rights agreement...... You are entitled to exchange your notes
for registered notes with substantially
identical terms. The exchange offer is
intended to satisfy these rights. After
the exchange offer is complete, you will
no longer be entitled to any exchange or
registration rights with respect to your
notes.
The exchange offer................. We are offering to exchange $1,000
principal amount of 9 1/4% senior notes
due 2014 which have been registered
under the Securities Act for each $1,000
principal amount of our outstanding 9
1/4% senior notes due 2014 which were
issued on April 13, 2004 in a private
offering. In order to be exchanged, an
outstanding note must be properly
tendered and accepted. All outstanding
notes that are validly tendered and not
validly withdrawn will be exchanged. As
of this date there are $150 million
principal amount of notes outstanding.
We will issue registered notes on or
promptly after the expiration of the
exchange offer.
Resale of the new notes............ Based on an interpretation by the staff
of the Commission, we believe that you
will be able to resell the new notes
without compliance with the registration
and prospectus delivery provisions of
the Securities Act if:
o you are acquiring the new notes in
the ordinary course of your
business;
o you are not participating, do not
intend to participate, and have no
arrangement or understanding with
any person to participate, in the
distribution of the notes issued to
you in the exchange offer; and
o you are not an "affiliate" of ours.
If any of these conditions are not
satisfied, (1) you will not be eligible
to participate in the exchange offer,
(2) you should not rely on the
interpretations of the staff of the SEC
in connection with the exchange offer
and (3) you must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with the resale of your
notes.
If you are a broker-dealer and you will
receive new notes for your own account
in exchange for old notes that you
acquired as a result of market-making
activities or other trading activities,
you will be required to acknowledge that
you will deliver a prospectus in
connection with any resale of the new
notes. See "Plan of Distribution" for a
description of the prospectus delivery
obligations of broker-dealers in the
exchange offer.
6
In accordance with the conditions, if
you are a broker-dealer that acquired
the old notes directly from us in the
initial offering and not as a result of
market-making activities, you will not
be eligible to participate in the
exchange offer.
The exchange offer is not being made to,
nor will we accept surrenders for
exchange from, holders of outstanding
notes in any jurisdiction in which this
exchange offer or the acceptance thereof
would not be in compliance with the
securities or blue sky laws of such
jurisdiction.
Expiration date.................... The exchange offer will expire at 5:00
p.m., New York City time, , 2004,
unless we decide to extend the
expiration date.
Accrued interest on the new notes
and the outstanding notes....... The new notes will bear interest from
April 13, 2004. Holders of outstanding
notes whose notes are accepted for
exchange will be deemed to have waived
the right to receive any payment of
interest on such outstanding notes
accrued from April 13, 2004 to the date
of the issuance of the new notes.
Consequently, holders who exchange their
outstanding notes for new notes will
receive the same interest payment on
October 1, 2004 (the first interest
payment date with respect to the
outstanding notes and the new notes to
be issued in the exchange offer) that
they would have received had they not
accepted the exchange offer.
Termination of the exchange offer.. We may terminate the exchange offer if
we determine that our ability to proceed
with the exchange offer could be
materially impaired due to any legal or
governmental action, new law, statute,
rule or regulation or any interpretation
of the staff of the Commission of any
existing law, statute, rule or
regulation. We do not expect any of the
foregoing conditions to occur, although
there can be no assurance that such
conditions will not occur. Should we
fail to consummate the exchange offer,
holders of outstanding notes will have
the right under the registration rights
agreement executed as part of the
offering of the outstanding notes to
require us to file a shelf registration
statement relating to the resale of the
outstanding notes.
Procedures for tendering
outstanding notes .............. If you are a holder of a note and you
wish to tender your note for exchange
pursuant to the exchange offer, you must
transmit to LaSalle Bank National
Association, as exchange agent, on or
prior to the expiration date of the
exchange offer:
either
o a properly completed and duly
executed Letter of Transmittal,
which accompanies this prospectus,
or a facsimile of the Letter of
Transmittal, including all other
documents required by the Letter of
Transmittal, to the exchange agent
at the address set forth on the
cover page of the Letter of
Transmittal; or
o a computer-generated message
transmitted by means of DTC's
Automated Tender Offer Program
system and received by the
exchange agent and forming a part
of a confirmation of book entry
transfer in which you acknowledge
and agree to be bound by the terms
of the Letter of Transmittal;
7
and, either
o a timely confirmation of book-
entry transfer of your outstanding
notes into the exchange agent's
account at The Depository Trust
Company ("DTC") pursuant to the
procedure for book-entry transfers
described in this prospectus under
the heading "The Exchange Offer
Procedure for Tendering," must be
received by the exchange agent on
or prior to the expiration date
of the exchange offer; or
o the documents necessary for
compliance with the guaranteed
delivery procedures described
below.
By executing the Letter of Transmittal,
each holder will represent to us that,
among other things, (1) the notes to be
issued in the exchange offer are being
obtained in the ordinary course of
business of the person receiving such
new notes whether or not such person is
the holder, (2) neither the holder nor
any such other person has an arrangement
or understanding with any person to
participate in the distribution of such
new notes and (3) neither the holder nor
any such other person is an "affiliate"
(as defined in Rule 405 under the
Securities Act) of ours.
Special procedures for beneficial
owners ......................... If you are the beneficial owner of notes
and your name does not appear on a
security position listing of DTC as the
holder of such notes or if you are a
beneficial owner of registered notes
that are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender such notes or registered notes in
the exchange offer, you should contact
such person in whose name your notes or
registered notes are registered promptly
and instruct such person to tender on
your behalf. If such beneficial holder
wishes to tender on his own behalf, such
beneficial holder must, prior to
completing and executing the Letter of
Transmittal and delivering its
outstanding notes, either make
appropriate arrangements to register
ownership of the outstanding notes in
such holder's name or obtain a properly
completed bond power from the registered
holder. The transfer of record ownership
may take considerable time.
Guaranteed delivery procedures..... If you wish to tender your notes and
time will not permit your required
documents to reach the exchange agent by
the expiration date of the exchange
offer, or the procedure for book-entry
transfer cannot be completed on time or
certificates for registered notes cannot
be delivered on time, you may tender
your notes pursuant to the procedures
described in this prospectus under the
heading "The Exchange Offer--Guaranteed
Delivery Procedure."
Withdrawal rights.................. You may withdraw the tender of your
notes at any time prior to 5:00 p.m.,
New York City time, on , 2004,
the business day prior to the expiration
date of the exchange offer.
Acceptance of outstanding notes and
delivery of new notes........... Subject to the conditions summarized
above in "Termination of the Exchange
Offer" and described more fully under
"The Exchange Offer--Termination", we
will accept for exchange any and all
outstanding notes which are properly
tendered in the exchange offer prior to
5:00 p.m., New York City time, on the
expiration date of the exchange offer.
The notes issued pursuant to the
exchange offer will be delivered
promptly following the expiration date.
8
Material U.S. federal income
tax consequences................ The exchange of the notes pursuant to
the exchange offer will not be a taxable
exchange for U.S. federal income tax
purposes.
Consequences of failure
to exchange..................... If you are eligible to participate in
this exchange offer and you do not
tender your old notes as described in
this prospectus, you will not have any
further registration rights. In that
case, your old notes will continue to be
subject to restrictions on transfer. As
a result of the restrictions on transfer
and the availability of new notes, the
old notes are likely to be much less
liquid than before the exchange offer.
The old notes will, after the exchange
offer, bear interest at the same rate as
the new notes.
Use of proceeds.................... We will not receive any proceeds from
the issuance of notes pursuant to the
exchange offer. We will pay all expenses
incident to the exchange offer.
Exchange agent..................... LaSalle Bank National Association is
serving as exchange agent in connection
with the exchange offer. The exchange
agent can be reached at LaSalle Bank
N.A., 135 LaSalle Street, Suite 1960,
Chicago, IL 60603 Attention Christine
Linde, Vice President. For more
information with respect to the exchange
offer, the telephone number for the
exchange agent is (312) 904-5532 and the
facsimile number for the exchange agent
is (312) 904-2236.
9
Summary Description of the New Notes
Issuer............................ MemberWorks Incorporated.
Notes Offered..................... $150,000,000 in aggregate principal
amount of 9 1/4% Senior Notes due 2014.
Maturity Date..................... April 1, 2014.
Interest Payment Dates............ April 1 and October 1, commencing
October 1, 2004.
Subsidiary Guarantees............. Our obligations under the new notes will
be fully and unconditionally guaranteed
by all of our existing and future
domestic subsidiaries that guarantee our
credit facilities. The new notes will
also be guaranteed by Lavalife, which is
a guarantor under the senior secured
credit facility, and any of our future
restricted foreign subsidiaries that
guarantee our credit facilities. For the
twelve months ended December 31, 2003,
MemberWorks Incorporated and the
subsidiary guarantors, after giving pro
forma effect to the Transactions, would
have accounted for approximately 97% of
our revenues.
Ranking........................... The new notes will be our senior
unsecured obligations. Accordingly, they
will rank:
o pari passu in right of payment to
all of our existing and future
senior unsecured indebtedness; and
o senior in right of payment to all of
our existing and future subordinated
indebtedness that expressly provides
for its subordination to the new
notes.
The subsidiary guarantee of each
guarantor will be such guarantor's
senior unsecured obligations.
Accordingly, they will rank:
o pari passu in right of payment to
all of such subsidiary guarantor's
existing and future senior unsecured
indebtedness; and
o senior in right of payment to all of
such subsidiary guarantor's existing
and future unsecured indebtedness
that expressly provides for its
subordination to the new notes.
The new notes and the guarantees will
effectively be subordinated in right of
payment to any secured indebtedness of
us or our subsidiary guarantors to the
extent of the value of the assets
serving as security for such secured
indebtedness. The new notes will also be
effectively subordinated to all
liabilities, including trade payables,
of our subsidiaries that are not
subsidiary guarantors.
As of December 31, 2003, on a pro forma
basis after giving effect to the
Transactions:
o we and our subsidiaries would have
had approximately $240.0 million
aggregate principal amount of
outstanding indebtedness on a
consolidated basis, $5.5 million of
issued and undrawn letters of
credit outstanding under our
senior secured credit facility, and
an additional $25.6 million
available for borrowings
10
under the senior secured credit
facility;
o approximately $90.0 million
principal amount of our outstanding
indebtedness would have been
contractually subordinated to the
new notes; and
o our subsidiaries that are non-
guarantors would have had
approximately $5.6 million in
liabilities, excluding intercompany
liabilities but including trade
payables.
Optional Redemption................ At any time before April 1, 2007, we may
redeem up to 35% of the new notes with
net cash proceeds of certain equity
offerings, as long as at least 65% of
the aggregate principal amount of the
notes issued under the indenture remains
outstanding after the redemption.
We may redeem all or part of the new
notes prior to April 1, 2009 by paying a
make-whole premium. At any time on or
after April 1, 2009, we may redeem some
or all of the new notes at the
redemption prices set forth under
"Description of the New Notes-- Optional
Redemption," plus accrued and unpaid
interest and liquidated damages, if any,
to the date of redemption. See
"Description of the New Notes-- Optional
Redemption."
Mandatory Offer to Repurchase...... If we sell certain assets or experience
specific kinds of changes in control, we
must offer to purchase the new notes at
the prices set forth under "Description
of the New Notes-- Repurchase at the
Option of Holders," plus accrued and
unpaid interest and liquidated damages,
if any, to the date of purchase.
Certain Covenants.................. We will issue the new notes under an
indenture among us, the guarantors and
the trustee. The indenture (among other
things) will limit our and our
restricted subsidiaries' ability to:
o incur or guarantee additional
indebtedness and issue preferred
stock;
o pay dividends or make other
distributions;
o create liens;
o sell assets;
o engage in sale and leaseback
transactions;
o place restrictions on the ability of
our restricted subsidiaries to pay
dividends or make other
distributions;
o engage in mergers or consolidations
with other entities;
o engage in certain transactions with
affiliates: and
o make certain investments.
Each of these covenants is subject to a
number of important exceptions and
qualifications. See "Description of the
New Notes-- Certain Covenants."
11
No Prior Market.................... The new notes will be new securities
for which there is currently no market.
Although the initial purchasers of the
old notes have informed us that they
intend to make a market in the new
notes, they are not obligated to do so,
and they may discontinue market-making
at any time without notice. Accordingly,
we cannot assure you that a liquid
market for the new notes will develop or
be maintained.
Risk Factors
The new notes, like the old notes, entail substantial risk. You should
carefully consider all the information in this prospectus prior to participating
in the exchange offer. In particular, we urge you to consider carefully the
factors set forth herein under "Risk Factors."
12
Summary Unaudited Pro Forma Financial Data
The following table sets forth a summary of our unaudited pro forma
financial data, giving effect to the Transactions as if they had occurred on the
dates indicated and after giving effect to the pro forma adjustments. The
unaudited pro forma consolidated balance sheet data as of December 31, 2003 has
been derived from MemberWorks' historical unaudited balance sheet as of December
31, 2003 and Lavalife's unaudited balance sheet as of December 31, 2003,
adjusted to give effect to the Transactions as if they occurred on December 31,
2003. The unaudited pro forma consolidated statement of operations data for the
twelve months ended December 31, 2003 gives effect to the Transactions as if
they occurred on January 1, 2003. The Lavalife acquisition will be accounted for
under the purchase method of accounting.
The pro forma adjustments are based upon available information and certain
assumptions that we consider reasonable. The pro forma results of operations are
not necessarily indicative of the results of operations that would have been
achieved had the Transactions reflected therein been consummated prior to the
period presented. The unaudited pro forma financial data are only a summary and
should be read in conjunction with the "Capitalization," "Unaudited Pro Forma
Condensed Combined Financial Data," "Selected Historical Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and MemberWorks' and Lavalife's consolidated financial statements
and the notes thereto included elsewhere or incorporated by reference in this
prospectus. The unaudited pro forma financial data are presented for
informational purposes only and are not necessarily indicative of what the
actual combined results of operations of the combined company would have been
for the period presented, nor do these data purport to represent the results of
future periods.
Twelve Months
Ended
December 31, 2003
-----------------
($ in thousands)
Statement of Operations Data:
Revenues.............................................. $545,396
Total expenses........................................ 509,350
---------
Operating income...................................... 36,046
Interest income (expense), net........................ (15,455)
Other income (expense), net........................... (74)
---------
Income before provision for income taxes.............. 20,517
Provision for income taxes............................ 7,490
---------
Net income............................................ $ 13,027
=========
Other Financial Data and Selected Ratios:
Depreciation and amortization......................... $ 21,202
Capital expenditures.................................. 6,854
Ratio of earnings to fixed charges(1)................. 2.1lx
Balance Sheet Data (at period end):
Cash and cash equivalents............................. $152,939
Restricted cash....................................... 3,169
Total assets.......................................... 457,796
Total debt............................................ 237,627
Shareholders' (deficit) equity........................ (54,552)
-------------
(1) The ratio of earnings to fixed charges is computed by dividing pre-tax
income from continuing operations by fixed charges. Fixed charges consist
of interest charges, whether expensed or capitalized, and that portion of
rental expense we believe to be representative of interest.
13
Summary Financial Information of MemberWorks
We are providing the following financial information to assist you in your
analysis of the financial aspects of the Transactions. We derived the historical
information below from the audited consolidated financial statements of
MemberWorks as of and for the years ended June 30, 2001, 2002 and 2003 and from
the unaudited condensed consolidated financial statements of MemberWorks as of
and for the six months ended December 31, 2002 and 2003. The information is only
a summary and should be read in conjunction with "Capitalization," "Unaudited
Pro Forma Condensed Combined Financial Data," "Selected Historical Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and MemberWorks' consolidated financial statements and
the notes thereto included elsewhere in this prospectus. The historical results
included below and elsewhere in this document are not necessarily indicative of
the future performance of MemberWorks or the combined company.
Six Months Ended
Year Ended June 30, December 31,
----------------------------------- ------------------------
2001 2002 2003 2002 2003
--------- -------- --------- --------- ---------
($ in thousands)
Statement of Operations Data:
Revenues ....................................... $475,726 $427,602 $456,881 $219,049 $236,988
Total expenses ................................. 509,050 415,713 434,595 211,066 216,457
--------- --------- --------- --------- ---------
Operating income (loss) ........................ (33,324) 11,889 22,286 7,983 20,531
Non-operating gain (loss) ...................... (2,172) 31,980 17,983 17,983 -
Interest income (expense), net ................. (363) 333 570 605 (1,082)
Other income (expense), net .................... (87) (734) (244) (265) (183)
--------- --------- --------- --------- ---------
Income (loss) before equity in affiliate and
minority interest ......................... (35,946) 43,468 40,595 26,306 19,266
Equity in income of affiliate .................. 83 -- -- -- --
Minority interest .............................. 9,106 450 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes (26,757) 43,918 40,595 26,306 19,266
Provision for income taxes ..................... -- -- 16,239 10,523 7,706
--------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of
accounting change ......................... (26,757) 43,918 24,356 15,783 11,560
Cumulative effect of accounting change ......... (25,730) (5,907) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (52,487) $ 38,011 $ 24,356 $ 15,783 $ 11,560
========= ========== ========== ========== ==========
Other Operating Data:
Active members (in millions at period end)(1) 7.9 6.6 6.3 6.3 6.3
Price points(2):
New annual ................................ $ 78 $ 90 $ 105 $ 100 $ 106
Monthly ................................... n/a $ 9.00 $ 10.12 $ 9.60 $ 11.18
Other Financial Data and Selected Ratios:
Cash flow provided by operating activities ..... $ 12,022 $ 17,014 $ 48,533 $ 32,877 $ 20,441
Depreciation and amortization .................. 20,498 13,252 12,120 6,169 5,242
Capital expenditures............................ 15,133 5,761 5,463 2,762 2,538
Ratio of earnings to fixed charges(3) .......... NM 17.69x 15.52x 18.28x $8.22x
Balance Sheet Data (at period end):
Cash and cash equivalents ...................... $ 21,745 $ 45,502 $ 72,260 $ 79,950 $ 119,995
14
Six Months Ended
Year Ended June 30, December 31,
----------------------------------- ------------------------
2001 2002 2003 2002 2003
--------- -------- --------- --------- ---------
($ in thousands)
Restricted cash ................................ 991 5,683 2,732 2,842 3,169
Total assets ................................... 348,461 280,817 248,505 290,016 285,206
Total debt...................................... -- -- -- -- 90,000
Shareholders' (deficit) equity ................. (25,965) (20,630) (20,283) (9,786) (63,552)
-----------
(1) The number of active members for 2001 includes approximately 800,000
members of iPlace, Inc., which was sold in fiscal 2002.
(2) New annual price points reflect the weighted average price billed to new
annual members during the relevant period and monthly price points reflect
the weighted average price billed to new monthly members during the
relevant period.
(3) The ratio of earnings to fixed charges is computed by dividing pre-tax
income from continuing operations (before adjustment for minority interest
in consolidated subsidiaries and loss from equity investees) by fixed
charges. Fixed charges consist of interest charges, whether expensed or
capitalized, and that portion of rental expense we believe to be
representative of interest. For the year ended June 30, 2001, earnings were
insufficient to cover fixed charges by $3.8 million.
15
RISK FACTORS
You should carefully consider the risks described below before making a
decision to participate in the exchange offer. You should also consider the
other information included or incorporated by reference in this prospectus
before making a decision to participate in the exchange offer. Any of the
following risks, as well as other risks and uncertainties, could harm our
business and financial results and cause the value of the notes to decline,
which in turn could cause you to lose all or part of your investment.
Risks Related to MemberWorks' Business
MemberWorks' profitability depends on members continuing to retain their
memberships in its programs. Increased cancellations could impair MemberWorks'
profitability.
MemberWorks generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years.
This is due primarily to marketing costs associated with obtaining a new member.
In addition, MemberWorks experiences a higher percentage of cancellations during
the initial membership period as compared to renewal periods. Annual members may
cancel their membership at any time during the membership period generally for a
pro rata refund of the membership fee based on the remaining portion of the
membership period. Monthly members are billed each month after the trial period
until they cancel their membership. Accordingly, the profitability of each of
MemberWorks' programs depends on recurring and sustained membership renewals and
increased cancellations could have a material adverse effect on its business,
financial condition, results of operations and cash flows.
MemberWorks' business may suffer if it fails to successfully integrate Lavalife
or other businesses it acquires in the future or to properly assess the risks in
particular transactions.
MemberWorks has recently acquired all of the assets and outstanding capital
stock of Lavalife, and MemberWorks may acquire other businesses and assets in
the future. The successful integration of the acquired businesses and assets,
such as Lavalife, into its existing operations can be critical to MemberWorks'
future performance. Acquired businesses may not be successfully integrated with
MemberWorks' operations or produce the anticipated benefits in a timely manner,
or at all. Failure to successfully integrate acquired businesses or to achieve
anticipated operating synergies or cost savings could have a material adverse
effect on MemberWorks' business, financial condition, results of operations and
cash flows. Although MemberWorks attempts to evaluate the risks inherent in each
transaction and to value acquisition candidates appropriately, MemberWorks
cannot assure you that it will properly ascertain all such risks or that
acquired businesses and assets will perform as MemberWorks expects or enhance
the value of MemberWorks as a whole. In addition, acquired companies or
businesses may have larger than expected liabilities that are not covered by the
indemnification, if any, MemberWorks obtains from the seller.
The loss of MemberWorks' key clients could have a material adverse effect on its
results of operations.
Membership programs sponsored by MemberWorks' two largest clients, West
Corporation and Citibank, N.A. (and its affiliates), accounted for 16% and 21%
of MemberWorks' revenue, respectively, for the fiscal year ended June 30, 2003
and 18% and 13% of MemberWorks' revenue, respectively, for the six months ended
December 31. 2003. A loss of MemberWorks' key clients or a decline in the
businesses of the clients from which MemberWorks acquires new members could have
a material adverse effect on MemberWorks' results of operations. There can be no
assurance that one or more of MemberWorks' key or other clients will not
terminate their relationship with MemberWorks or suffer a decline in their
business from which MemberWorks acquires new members.
MemberWorks markets many of its membership programs through credit card issuers.
A downturn in the credit card industry or changes in the marketing techniques of
credit card issuers could adversely affect MemberWorks.
MemberWorks' future success is dependent in large part on continued demand
for its membership programs within its clients' industries. In particular,
membership programs marketed through MemberWorks' credit card issuer clients
accounted for a significant amount of its revenues in fiscal 2003. A significant
downturn in the credit card industry or a trend in that industry to reduce or
eliminate its use of membership programs could have a material adverse effect on
MemberWorks' business, financial condition, results of operations and cash
flows.
16
The unanticipated termination of agreements with vendors could have a material
adverse effect on MemberWorks' business.
MemberWorks depends on vendors to provide most of the products and services
included in the programs it markets. The vendors generally operate pursuant to
non-exclusive agreements with MemberWorks that may be terminated by the vendor
with limited prior notice. There can be no assurance that, in the event a vendor
ceases operations, or terminates, breaches or chooses not to renew its agreement
with MemberWorks, a replacement vendor could be retained on a timely basis, if
at all. In addition, vendors are independent contractors and the level and
quality of services they provide is outside MemberWorks' control. Any service
interruptions, delays or quality problems could result in customer
dissatisfaction and membership cancellations and/or termination of clients'
relationships with MemberWorks, which could have a material adverse effect on
MemberWorks' business, financial condition, results of operations and cash
flows.
MemberWorks depends on credit card processors to obtain payments for it.
MemberWorks depends on credit card processors to obtain payments for it.
The credit card processors operate pursuant to agreements that may be terminated
with limited prior notice. In the event a credit card processor ceases
operations or terminates its agreement, there can be no assurance a replacement
credit card processor could be retained on a timely basis, if at all. Any
service interruptions, delays or quality problems could result in delays in
collecting payments, which could have a material adverse effect on MemberWorks'
business, financial condition, results of operations and cash flows.
MemberWorks' efforts to increase the share of monthly payment programs in its
program mix may adversely affect its cash flow.
MemberWorks has traditionally marketed membership programs which have an
up-front annual membership fee. However, in fiscal 2003, MemberWorks expanded
its marketing of membership programs for which membership fees are payable in
monthly installments. During the first half of fiscal 2004, more than 60% of
MemberWorks' new member enrollments were in monthly payment programs, and
MemberWorks expects the proportion of its monthly payment programs to increase
throughout fiscal 2004. MemberWorks' increased emphasis on monthly payment
programs adversely affects its cash flow because the immediate cost of acquiring
a new member is higher than the first month's membership fee.
MemberWorks may be unable to compete effectively with other companies in its
industry that have financial or other advantages.
MemberWorks believes that the principal competitive factors in its industry
include the ability to identify, develop and offer innovative membership
programs, the quality and breadth of membership programs offered, competitive
pricing and in-house marketing expertise. MemberWorks' competitors offer
membership programs which provide products or services similar to, or which
compete directly with, those provided by MemberWorks. These competitors include,
among others, Aegon N.V., Trilegiant (a subsidiary of Cendant Corporation).
Fords and General Electric Financial Assurance. In addition, MemberWorks could
face competition if its current clients or other companies were to introduce
their own in-house membership programs.
Some of these competitors have substantially larger customer bases and
greater financial and other resources than MemberWorks. To date, MemberWorks has
effectively competed with such competitors. There can be no assurance that:
o MemberWorks' competitors will not increase their emphasis on programs
similar to those MemberWorks offers;
o MemberWorks' competitors will not provide programs comparable or
superior to those MemberWorks provides at lower membership fees;
o MemberWorks' competitors will not adapt more quickly than MemberWorks
to evolving industry trends or changing market requirements;
o new competitors will not enter the market; or
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o other businesses (including our current clients) will not themselves
introduce in-house membership programs.
Such increased competition may result in price reductions, reduced
operating margins or loss of market share, any of which could materially
adversely affect MemberWorks' business, financial condition and results of
operations. Additionally, because contracts between clients and program
providers are often exclusive with respect to a particular program, potential
clients may be prohibited from contracting with MemberWorks to promote a new
program if the products and services provided by MemberWorks' program are
similar to, or overlap with, the products and services provided by an existing
program of a competitor.
We depend on key executive and marketing personnel.
MemberWorks is dependent on certain key members of its management and
marketing staff, particularly its Chief Executive Officer, Gary Johnson. In
addition, MemberWorks believes that its future success will depend in part upon
its ability to attract and retain highly skilled managerial and marketing
personnel. MemberWorks faces significant competition for such personnel, and it
may be unsuccessful in hiring or retaining the personnel it requires. The
failure to hire and retain such personnel could have a material adverse effect
on MemberWorks' business, financial condition and results of operations.
MemberWorks' industry is increasingly subject to federal and state government
regulation.
MemberWorks markets its membership programs through various distribution
channels, including MemberLinkSM (our inbound marketing channel), online
marketing, outbound telemarketing and direct mail. These channels are regulated
at both state and federal levels and MemberWorks believes that these channels
will be subject to increasing regulation, particularly in the area of consumer
privacy. Such regulation may limit MemberWorks' ability to solicit new members
or to offer products or services to existing members.
The telemarketing industry has become subject to an increasing amount of
federal and state regulation as well as general public scrutiny. For example,
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 prohibit deceptive, unfair or abusive
practices in telemarketing sales. The FTC's 2003 Amendment to its Telemarketing
Sales Rule created a national do-not-call list effective October 1, 2003. Both
the FTC and state attorneys general have authority to prevent telemarketing
activities deemed by them to be "unfair or deceptive acts or practices."
Further, some states have enacted laws, and others are considering enacting
laws, targeted directly at regulating telemarketing practices, including the
creation of do-not-call lists, and any such laws could adversely affect or limit
MemberWorks' operations.
Compliance with these regulations is generally MemberWorks' responsibility,
and MemberWorks could be subject to a variety of enforcement and/or private
actions for any failure to comply with such regulations. MemberWorks' provision
of membership programs requires it to comply with certain state regulations and
any changes to such regulations could materially increase MemberWorks'
compliance costs. The risk of MemberWorks' noncompliance with any rules and
regulations enforced by a federal or state consumer protection authority may
subject it or its management to fines or various forms of civil or criminal
prosecution, any of which could have a material adverse effect on MemberWorks'
business, financial condition and results of operations. See "Business --
MemberWorks -- Government Regulation and Litigation." Also, the media often
publicizes perceived noncompliance with consumer protection regulations and
violations of notions of fair dealing with consumers, and the membership
services industry is susceptible to peremptory charges by the media of
regulatory noncompliance and unfair dealing.
MemberWorks currently maintains rigorous security and quality controls that
are intended to ensure that all of its marketing practices meet or exceed
industry standards and all applicable state and federal laws and regulations.
MemberWorks only collects and maintains customer data that is necessary to
administer its business activities, such as a customer's name, address and
encrypted billing information. For marketing and modeling purposes, MemberWorks
only uses publicly available information, such as demographic, neighborhood and
lifestyle data. MemberWorks does not resell any confidential customer
information that is obtained or derived from its marketing efforts, nor does
MemberWorks purchase consumer information from financial institutions. However,
18
there can be no assurance that MemberWorks' efforts will continue to meet all
applicable state and federal laws and regulations in the future. See "Business
-- MemberWorks Government Regulation and Litigation."
Risks Related to Lavalife's Business
Competitors may move to a transactional model for their services.
Currently, Lavalife is one of a few online dating services that offers its
IVR and web services on a transactional model. This means that customers buy
credits, but only spend them when communicating with other users. Other
companies offer a subscription service, in which a customer pays a monthly fee
for access to the online dating service, whether or not they actually
communicate with other users. Lavalife believes that a transactional model is
more attractive to new users, who will join due to a lower initial cost and the
ability to easily control their spending. At the same time, unused credits lower
the churn of customers as they provide incentive for customers to return. If
other companies were to offer their services in a transactional model, Lavalife
could lose market share, which could materially adversely affect Lavalife's
business, financial condition and results of operations.
Lavalife may be unable to compete effectively with other companies in its
industry that have financial or other advantages.
The online dating industry is characterized by the need to achieve a
critical mass of users in each geographic area in order to attract and offer
services to customers. In order to compete effectively, Lavalife must attract
new users through marketing, brand recognition, competitive and innovative
pricing and quality technology.
Lavalife's competitors, such as Match.com, a subsidiary of
InterActiveCorp., and Yahoo! Personals, as well as other similar companies,
offer services similar to Lavalife's. Some of these competitors have larger
customer bases and greater financial and other resources than Lavalife. To date,
Lavalife has effectively competed with such companies. However, there can be no
assurance that:
o the competitors will not increase their emphasis on programs similar
to those offered by Lavalife;
o the competitors will not provide services comparable or superior to
those provided by Lavalife at a lower cost to the user;
o the competitors will not adapt more quickly than Lavalife to evolving
industry trends or changing market requirements; or
o additional competitors with greater financial or other resources will
emerge.
Such increased competition may result in price reductions, reduced
operating margins or loss of market share, any of which could materially
adversely affect Lavalife's business, financial condition and results of
operations.
Lavalife depends on its ability to attract and retain active members.
Lavalife's future success depends in large part upon continued demand for
its services. A number of factors could affect the frequency with which
customers utilize Lavalife's services or whether they use them at all. These
factors include the popularity of online dating and the availability of
alternative services. Any significant decline in usage could have a material
adverse effect on Lavalife's business, financial condition and results of
operations.
The online dating market is still young and rapidly evolving. The adoption
of online dating requires the acceptance of a new way of meeting other singles
and exchanging information. Many of Lavalife's potential customers have little
or no experience using the Internet as a dating tool, and therefore, Lavalife
also competes with traditional methods of meeting other singles. If online
dating acceptance declines or if Lavalife is not able to anticipate changes in
the online dating market, its business, results of operations and financial
condition could be adversely affected.
19
Lavalife relies heavily on its information technology and if access to this
technology is impaired or interrupted, or if Lavalife fails to further develop
this technology, Lavalife's business could be harmed.
Lavalife's success depends in large part upon its ability to process and
manage substantial amounts of information. Lavalife must continue developing and
enhancing its information systems to remain competitive. This may require the
acquisition of equipment and software and the development, either internally or
through independent consultants, of new proprietary software. Any interruption
or loss of its information technology capabilities could harm Lavalife's
business, financial condition, results of operations and cash flows.
If competitors introduce new products with new technologies, or if new
industry standards emerge, Lavalife's existing technology may become obsolete.
Lavalife's future success will depend on its ability to do the following:
o enhance existing products;
o develop and license new products and technologies; and
o respond to technological advances and emerging industry trends on a
cost-effective and timely basis.
The market for online dating services is characterized by rapid
technological developments, new product introductions and evolving industry
standards. The emerging character of these products and services and their rapid
evolution will require continuous improvement in the performance, features and
reliability of Lavalife's service, particularly in response to competitive
offerings. Lavalife may not be successful in responding to these developments in
a timely and cost-effective manner. In addition, the widespread adoption of new
online technologies or standards could require Lavalife to make substantial
expenditures to modify or adapt its websites and services. Any substantial
expenditures could have a material adverse effect on Lavalife's business,
financial condition and results of operations.
A critical part of Lavalife's service is its website that produces search
results, provides opportunities for interaction and tracks member activity for
billing purposes. A failure to adapt its website, transaction processing,
systems and network infrastructure to consumer requirements or emerging trends
could lead users to move to competitor's services and could have a material
adverse effect on Lavalife's business, financial condition, results of
operations and cash flows.
Lavalife relies on computer and communication systems. Computer viruses or other
system failures may cause Lavalife's systems to incur delays or interruptions.
Lavalife's business is highly dependent on computer and telecommunications
systems and any temporary or permanent loss of either system could have a
material adverse effect on Lavalife. In particular, computer viruses may cause
Lavalife's systems to incur delays or other service interruptions and could
damage its reputation which, in turn, could significantly harm Lavalife's
business, financial condition and results of operations. The inadvertent
transmission of computer viruses could expose Lavalife to a material risk of
loss or litigation and possible liability. The continuing and uninterrupted
performance of Lavalife's systems is critical to its success, as members may
become dissatisfied by any service interruptions. Sustained or repeated system
failures would reduce the attractiveness of Lavalife's system services and could
result in reduced traffic and revenues.
The success of Lavalife's business depends on maintaining the integrity of its
systems and infrastructure.
A fundamental requirement for online commerce and communications is the
secure transmission of confidential information, such as credit card numbers or
other personal information, over public networks. If any compromise of
Lavalife's security were to occur, it could have a detrimental effect on its
reputation and adversely affect Lavalife's ability to attract customers. As
Lavalife's operations continue to grow in both size and scope, Lavalife will
need to improve and upgrade its systems and infrastructure. This may require
Lavalife to commit substantial financial, operational and technical resources
before the volume of business increases, with no assurance that the volume of
business will increase.
20
A portion of Lavalife's revenues and expenses are denominated in foreign
currencies and its results may be affected by foreign currency exchange rate
fluctuations.
Lavalife is exposed to currency exchange rate fluctuations because a
portion of its sales and expenses are denominated in currencies other than the
U.S. dollar. In addition, a significant portion of Lavalife's sales are
denominated in a different currency than their expenses. As a result, Lavalife's
financial performance may be negatively affected by currency fluctuations. For
example, changes in exchange rates between the U.S. dollar and other currencies,
particularly the Canadian dollar, affect Lavalife's sales and expenses
denominated in currencies other than the U.S. dollar and may have a negative
impact on the value of Lavalife's assets located outside the United States. In
addition, Lavalife may expand its international operations in the future.
Although Lavalife has historically entered into hedging transactions designed to
mitigate these currency risks, there can be no assurance that we will be
successful in doing so in the future and that currency fluctuations will not
have a material adverse effect on Lavalife's business, financial condition and
results of operations.
Lavalife depends on key executives.
Lavalife is dependent on certain key members of its management,
particularly Chairman and Chief Executive Officer, Bruce Croxon, Vice President
of International Corporate Development Nicholas Paine and Vice President of
Product Design Ed Lum. In addition, Lavalife's future success will depend in
part upon its ability to attract and retain highly skilled personnel. The
failure to hire and retain such personnel could have a material adverse effect
on its business, financial condition and results of operations.
Changing laws and regulations and legal uncertainties regarding the Internet may
impair Lavalife's growth and harm its businesses.
A number of proposed laws and regulations regarding the Internet that
could impact Lavalife's businesses, including with respect to consumer privacy,
have been proposed or considered. Lavalife cannot predict whether any of these
types of laws or regulations will be enacted or amended and what effect, if any,
such laws or regulations would have on its businesses, financial condition or
results of operations. In addition, the application of various sales, use and
other tax provisions under state and local law could have a material adverse
effect on Lavalife's businesses, financial condition and results of operations.
Risks Related to Our Combined Business
We depend in part on the communication channels through which we market and
service our products, such as telephone, internet and the united States Postal
Service. An interruption of, or an increase in the billing rate for, such
communication channels could adversely affect our business.
We market and service our product and programs by various communication
channels, including telephone, internet and mail, and accordingly, our business
is dependent on the quality of service of providers of these communication
channels. Any significant interruption in these communication channels could
adversely affect us. In addition, rate increases imposed by providers would
increase our and our clients' operating expenses and could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
The success of our business depends on introduction of popular new programs or
services or the enhancement of existing programs or services.
Our business is substantially dependent on our ability to develop and
successfully introduce popular new programs or provide enhancements to existing
programs which generate consumer loyalty. Failure to introduce new programs in a
timely manner could result in our competitors acquiring additional market share.
In addition, the introduction or announcement of new innovative programs by us
or by others, could render existing programs obsolete or result in a delay or
decrease in orders for existing programs as customers evaluate new programs.
Similarly, Lavalife's business is substantially dependent on its ability to
refine existing service offerings and to introduce new interactive services.
Therefore, the announcement or introduction of new innovative programs by us or
others, or our failure to introduce new programs which generate broad consumer
appeal, or Lavalife's inability to refine its service offerings or introduce new
services could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
21
We may need to raise additional capital in the future to fund liquidity and
capital requirements, which may not be available to us on favorable terms.
Our future liquidity and capital requirements will depend upon numerous
factors, including the success of our membership programs, market developments,
potential acquisitions and additional repurchases of our common stock. We may
need to raise additional funds to support expansion, develop new membership
programs, respond to competitive pressures, acquire complementary businesses or
take advantage of unanticipated opportunities. The indenture governing the notes
and the credit agreement under our senior secured credit facility will contain
covenants that may restrict our ability to finance operations or capital needs.
We experienced negative cash flow in the period following the terrorist attacks
of September 11, 2001 and may experience negative cash flow in the future as a
result of various factors, some of which are outside of our control. We cannot
be certain that we will be able to obtain adequate financing on favorable terms
or at all.
We rely on our computer and communication systems. If such systems fail or are
unable to keep pace with technological advances, our business would suffer.
Our business is highly dependent on our computer and telecommunications
systems and any temporary or permanent loss of either system, for whatever
reason, could have a material adverse effect on our business, financial
condition and results of operations. In addition, the technologies on which we
are dependent to compete effectively and meet our clients' needs are rapidly
evolving and in many instances are characterized by short product life cycles.
As a result, we are dependent on ongoing, significant investment in advanced
computer and telecommunications technology, including automated call
distributors and digital switches. Our inability to anticipate and adapt to
technological shifts and to develop new and enhanced technology on a timely
basis could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Our operating results fluctuate from quarter to quarter.
Our quarterly revenues, expenses and operating results have varied
significantly in the past and may vary significantly from quarter to quarter in
the future. Factors which could cause our financial results to fluctuate
include:
o increased or decreased cancellation of member enrollments;
o the rate of renewal by existing members;
o our ability to introduce new programs or products or enhance existing
programs or products on a timely basis and the introduction of
programs or products by our competitors;
o the mix of our client base;
o seasonality of the businesses of our clients;
o market acceptance and demand for our and our clients' membership
programs generally;
o the mix of programs we offer and the price points of such programs;
o increased commission rates and other compensation required by our
clients;
o the mix of our marketing channels;
o unanticipated service interruptions;
o movement in foreign exchange rates;
o adverse outcomes of litigation or regulatory matters;
o the availability of vendors to support programs we offer;
22
o the level of enthusiasm for health and fitness, travel, entertainment
and leisure activities, and other lifestyle elements underlying our
programs; and
o competitive pressures on selling prices.
Many of these factors are beyond our control. Operating results would be
adversely affected if projected revenues for a given quarter are not achieved.
In addition, any future acquisitions by us could have a material adverse effect
on our results of operations, particularly in quarters immediately following
consummation of such transactions, while the operations of the acquired business
are being integrated into our operations.
Risks Related to the Notes
Increased leverage as a result of this offering may harm our financial
condition and results of operations, and could prevent us from fulfilling our
obligations under the notes.
We are highly leveraged and have significant fixed debt service obligations
in addition to our operating expenses. At December 31, 2003, after giving pro
forma effect to the Transactions, we had $237.6 million of outstanding
indebtedness, $5.5 million of issued and undrawn letters of credit, and $25.6
million in borrowing capacity under the senior secured credit facility. The
indenture governing the notes will permit us to incur additional debt in certain
circumstances. If we incur additional debt in the future, the related risks
could intensify. For example, our indebtedness could:
o reduce the availability of our cash flow, as a greater portion of our
cash flow from operations will be dedicated to the payment of any
interest required with respect to outstanding indebtedness;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o place us at a competitive disadvantage compared to our competitors
that have less debt;
o increase our vulnerability to adverse changes in general economic and
industry conditions, as well as to competitive pressure; and
o limit our ability to obtain additional financing for working capital,
capital expenditures, general corporate and other purposes.
If our indebtedness affects our operations in these ways, our business,
financial condition and results of operations could suffer, making it more
difficult for us to satisfy our obligations under the notes. Our ability to make
payments of principal, premium and interest on our indebtedness depends upon our
future performance, which will be subject to the success of the marketing of our
programs, general economic conditions, and financial, business and other factors
affecting our operations, many of which are beyond our control. We cannot assure
you that our business will generate cash flow from operations, or that future
borrowings will be available to us, in an amount sufficient to enable us to pay
our debt or to fund other liquidity needs. If we are not able generate
sufficient cash flow from operations in the future to service our indebtedness,
we may be required, among other things:
o to seek additional financing in the debt or equity markets;
o to refinance or restructure all or a portion of our indebtedness,
including the notes;
o to sell selected assets; and/or
o to reduce or delay planned expenditures on new marketing or capital
expenditures.
Such measures might not be sufficient to enable us to service our debt. In
addition, any such financing, refinancing or sale of assets might not be
available on economically favorable terms.
23
The notes will effectively be subordinated to our secured indebtedness and the
liabilities of our non-guarantor subsidiaries.
The notes will be unsecured and therefore are effectively subordinated to
any of our secured indebtedness to the extent of the value of the assets
securing such indebtedness. As of December 31, 2003, after giving pro forma
effect to the Transactions, we would not have had any senior secured
indebtedness and would have had $5.5 million of issued and undrawn letters of
credit under our senior secured credit facility, in addition to $25.6 million of
availability under our senior secured credit facility. The indenture permits us
to incur additional secured indebtedness provided that certain conditions are
met. See "Description of the New Notes -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." Consequently, in the event we are
the subject of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding, the holders of any secured indebtedness will be entitled to proceed
against the collateral that secures the secured indebtedness and the collateral
will not be available for satisfaction of any amounts owed under our unsecured
indebtedness, including the notes.
Our right to receive any assets of any of our non-guarantor subsidiaries
upon their liquidation or reorganization, and therefore the right of the holders
of the notes to participate in those assets, will be effectively subordinated to
the claim of that subsidiary's creditors, including trade creditors. In
addition, even if we were a creditor of any of our non-guarantor subsidiaries,
our rights as a creditor would be subordinate to any security interest in the
assets of our subsidiaries and any indebtedness of such subsidiaries senior to
that held by us. Our non-guarantor subsidiaries have no obligation to pay any
amounts due on the notes or to provide us with funds for our payment
obligations, whether by dividends, distributions, loans or other payments. As of
February 29, 2004, our non-guarantor subsidiaries had approximately $4.9 million
of indebtedness and other liabilities outstanding excluding intercompany notes,
but including trade payables.
Covenant restrictions under our credit facility and the indenture governing the
notes may limit our operating flexibility.
Our credit facility currently contains, and the indenture governing the
notes will contain, covenants that may restrict our ability to finance future
operations or capital needs or to engage in other business activities.
Agreements governing future indebtedness could also contain significant
financial and operating restrictions. In addition, our bank credit facility and
the indenture governing the notes will restrict, and other future agreements
governing our debt may restrict, among other things, our ability to:
o incur additional debt;
o prepay principal of or redeem or repurchase subordinated debt or
unsecured debt;
o dispose of property;
o merge, consolidate or sell our assets;
o make acquisitions and investments in other persons or entities;
o pay dividends or make distributions on, or redeem or repurchase, our
capital stock;
o grant liens and negative pledges with respect to our assets; and
o make capital expenditures.
We cannot assure you that we will meet the covenants in our debt agreements
or that the lenders that are party to such agreements will waive any failure to
meet those covenants. A breach of any of these covenants would result in a
default under the applicable agreement, which would in turn cause a default
under our other agreements, including our bank credit facility and the
indenture, as applicable. If an event of default occurs under one of our debt
agreements and continues beyond any applicable cure period, the lenders could
elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable. If our indebtedness were to be
accelerated, there can be no assurance that we would be able to pay it. Such
acceleration would have a material adverse effect on our financial condition.
See "Description of Other Indebtedness" and "Description of the New Notes."
24
Federal and state statutes allow courts under specific circumstances to void
guarantees and require note holders to return payments received from subsidiary
guarantors.
Our incurrence of debt, such as the notes, as well as the guarantees of our
subsidiary guarantors, may be subject to review under U.S. federal bankruptcy
laws or relevant state fraudulent conveyance laws if a bankruptcy case or
lawsuit is commenced by, or on behalf of, our or the guarantors' unpaid
creditors. Under these laws, if a court were to find that, at the time we or a
guarantor incurred debt (including debt represented by the notes or the
guarantee of such guarantor):
o we, or a guarantor, incurred this debt with the intent of hindering,
delaying or defrauding current or future creditors; or
o we, or a guarantor, received less than reasonably equivalent value or
fair consideration for incurring this debt and we, or a guarantor, as
the case may be:
o were insolvent or were rendered insolvent by reason of the
related financing transactions;
o were engaged, or were about to engage, in a business or
transaction for which our or its, as the case may be, remaining
assets constituted unreasonably small capital to carry on our
business; or
o intended to incur, or believed that we or it would incur, debts
beyond our or its, as the case may be, ability to pay as these
debts matured (as all of the foregoing terms are defined in or
interpreted under the relevant fraudulent transfer or conveyance
statutes);
then such court could set aside the notes or such guarantee, subordinate the
amounts owing under the notes or such guarantee to our or such guarantor's
presently existing or future debt or take other actions detrimental to you.
The standards for determining insolvency for purposes of the foregoing
considerations will vary depending upon the law of the jurisdiction that is
being applied in any such proceeding. Generally, a company would be considered
insolvent if, at the time it incurred the debt or issued the guarantee, either:
o the sum of its debts (including contingent liabilities) is greater
than its assets, at fair value, or
o the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute
and matured.
We believe that, at the time we and the guarantors initially incur the debt
represented by the notes and the guarantees, we and the guarantors will not be
insolvent or rendered insolvent by the incurrence of the debt, be lacking
sufficient capital to run our businesses effectively or be unable to pay
obligations on the notes and the guarantees as they mature or become due.
In reaching the foregoing conclusions, we have relied upon our analyses of
internal cash flow projections and estimated values of our assets and
liabilities and the assets and liabilities of the guarantors. We cannot assure
you, however, that a court passing on the same questions would reach the same
conclusions.
If a note or guarantee is voided as a fraudulent conveyance or found to be
unenforceable for any other reason, you will not have a claim against us or that
particular guarantor and you will only be our creditor or a creditor of any
guarantor whose obligation was not set aside or found to be unenforceable. In
addition, any payment by a guarantor pursuant to its guarantee could be voided
and required to be returned to the guarantor, or to a fund for the benefit of
the creditors of the guarantor.
If an active trading market for the notes does not develop, the market price of
the notes may decline or you may not be able to sell your notes.
The notes are a new issue of securities for which there is currently no
trading market. We do not intend to list the notes on any national securities
exchange or automated quotation system. If the notes are traded, they may trade
at a discount from their initial offering price, depending on prevailing
interest rates, the market for similar
25
securities, our financial condition, performance or prospects and other factors.
The initial purchasers of the old notes have advised us that they currently
intend to make a market in the new notes. However, they are not obligated to
make a market and may discontinue this market activity at any time without
notice. As a result, we do not know whether an active trading market will
develop for the notes. To the extent that an active trading market does not
develop, the price at which you may be able to sell the notes, if at all, may be
less than the price you pay for them.
We may not have sufficient funds to repurchase notes upon a change of control.
Upon certain change of control events, as that term is defined in the
indenture, including a change of control caused by an unsolicited third party,
we will be required to make an offer in cash to repurchase all or any part of
each holder's notes at a repurchase price equal to 101% of the principal
thereof, plus accrued interest. The source of funds for any such repurchase
would be our available cash or cash generated from operations or other sources,
including borrowings, sales of equity or funds provided by a new controlling
person or entity. We cannot assure you that sufficient funds will be available
at the time of any change of control event to repurchase all tendered notes
pursuant to this requirement. Our failure to offer to repurchase notes, or to
repurchase notes tendered, following a change of control will result in a
default under the indenture, which could lead to a cross-default under our
senior secured credit facility and under the terms of our other indebtedness.
Upon a change of control event, we will also be required to purchase all of our
outstanding 5.50% convertible senior subordinated notes due 2010, and a failure
to repurchase tendered convertible notes will constitute an event of default
under the indenture governing the convertible notes. In addition, our future
credit facilities or other agreements relating to our debt may restrict our
ability to make any such required repurchases. Prior to repurchasing the notes
upon a change of control event, we must either repay outstanding indebtedness
under or obtain the consent of the lenders under such credit facilities or
agreements in order to repurchase the notes. If we do not obtain the required
consents or repay our outstanding indebtedness under such credit facilities or
agreements, we would remain effectively prohibited from offering to purchase the
notes. See "Description of the New Notes -- Repurchase at the Option of Holders
-- Change of Control," "Description of the New Notes -- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock" and "Description of
Other Indebtedness".
If you do not tender your old notes to be exchanged in this exchange offer, your
notes will remain subject to transfer restrictions
If you do not tender your old notes to be exchanged in this exchange offer,
your notes will remain restricted securities and will be subject to transfer
restrictions. As restricted securities, your old notes:
o may be resold only if registered pursuant to the Securities Act, if an
exemption from registration is available thereunder, or if neither
such registration nor such exemption is required by law; and
o shall bear a legend restricting transfer in the absence of
registration or an exemption therefrom.
In addition, a holder of old notes who desires to sell or otherwise dispose
of all or any part of its old notes under an exemption from registration under
the Securities Act, if requested by us, must deliver to us an opinion of
counsel, reasonably satisfactory in form and substance to us, that such
exemption is available.
26
THE LAVALIFE ACQUISITION
The Acquisition
On April 1, 2004, MemberWorks completed the acquisition of all of the
assets and outstanding capital stock of Lavalife for approximately Cdn$152.5
million ($116.4 million) in cash. We financed the purchase price with cash on
hand and borrowings of approximately $15.0 million under our $45.0 million
senior secured credit facility. Lavalife now operates as a wholly owned
restricted subsidiary of MemberWorks, guarantees the old notes and will
guarantee the new notes. For the twelve months ended December 31, 2003, Lavalife
had revenues of Cdn$98.6 million ($70.6 million).
As a part of the Lavalife acquisition, members of Lavalife's senior
management entered into employment agreements with MemberWorks, including Bruce
Croxon, Chairman and Chief Executive Officer, Nicholas Paine, Vice President of
International Corporate Development, and Ed Lum, Vice President of Product
Design. In addition, these members of Lavalife's senior management purchased
approximately Cdn$11.9 million ($9.1 million) in MemberWorks' restricted common
stock at the closing of the acquisition.
The Master Transaction Agreement
The purchase price for the acquisition was approximately Cdn$152.5 million
($116.4 million) in cash, subject to certain adjustments and excluding fees and
expenses. In addition, the purchase price reflects certain assumptions of
MemberWorks related to its tax liabilities to be incurred in connection with the
Lavalife acquisition. The master transaction agreement contains customary
representations, warranties and covenants.
Each of the shareholders of Lavalife has agreed to indemnify MemberWorks
for losses arising from, among other things, breaches of representations and
warranties, breaches of covenants and certain liabilities. MemberWorks has
agreed to indemnify the shareholders of Lavalife for losses arising from, among
other things, breaches of representations and warranties and the failure to
perform any of its covenants. Such indemnification obligations of the
shareholders of Lavalife and of MemberWorks in relation to representations and
warranties survive for a period of eighteen months following the closing.
Certain other indemnification obligations of the shareholders of Lavalife and of
MemberWorks are not triggered unless the liabilities exceed certain minimum
amounts.
27
USE OF PROCEEDS
There will be no cash proceeds payable to us from the issuance of the new
notes pursuant to the exchange offer. Any old notes that are properly tendered
and exchanged pursuant to the exchange offer will be retired and cancelled. The
issuance of the new notes will not result in any change in our indebtedness.
The net proceeds less estimated debt issue costs received by us from the
sale of the outstanding old notes in the private offering completed on April 13,
2004, were approximately $141.6 million. We used approximately $15.0 million of
the net proceeds from the offering of the old notes to repay amounts borrowed
under our senior secured credit facility to fund a portion of the Lavalife
acquisition price. We intend to use the remainder of the net proceeds from the
private offering for general corporate purposes, including working capital,
future acquisitions and purchases of our common stock under our stock buyback
program to the extent permitted under the indenture governing the notes and the
senior secured credit facility.
28
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2003 on an actual basis and an as adjusted
basis, after giving effect to:
o the borrowings under our senior secured credit facility and the use of
proceeds therefrom;
o our acquisition of Lavalife for a price of approximately $118.0
million in cash and the concurrent purchase by Lavalife's senior
management of approximately $9.0 million of MemberWorks' restricted
common stock; and
o the offering of the old notes and the use of proceeds therefrom.
This table should be read together with "Use of Proceeds," "Unaudited Pro
Forma Condensed Combined Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes incorporated by reference in this prospectus.
December 31, 2003
----------------------------
Actual As Adjusted
----------- -------------
($ in thousands)
Cash and cash equivalents(1)............................. $ 119,995 $ 152,939
Restricted cash.......................................... 3,169 3,169
---------- ----------
Total cash and cash equivalents....................... 123,164 156,108
========== ==========
Senior secured credit facility(2)........................ $ -- $ --
========== ==========
9 1/4% Senior notes, net of discount of $2,373........... $ -- $ 147,627
5.50% Convertible senior subordinated notes due 2010..... 90,000 90,000
---------- ----------
Total debt............................................ 90,000 237,627
Total shareholders deficit(1)............................ (63,552) (54,552)
---------- ----------
Total capitalization.................................. $ 26,448 $ 183,075
========== ==========
---------------
(1) Concurrently with our acquisition of Lavalife, Lavalife's senior management
purchased approximately $9.0 million in MemberWorks' restricted common
stock.
(2) A portion of the proceeds from the offering of the old notes were used to
repay approximately $15.0 million of borrowings incurred under the senior
secured credit facility to fund a portion of the Lavalife acquisition
purchase price. On an as adjusted basis, we had $25.6 million of borrowing
capacity remaining under the $45.0 million senior secured credit facility
due to a $5.5 million letter of credit outstanding thereunder and other
restrictions under the senior secured credit facility. The senior secured
credit facility is a 364-day facility, which is renewable for two
additional 364-day periods upon our request, unless written notice of
non-renewal is provided by all lenders under the facility no less than 60
days prior to expiration. See "Description of Other Indebtedness."
29
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The unaudited pro forma condensed combined financial data are based on the
consolidated financial statements of MemberWorks and the consolidated financial
statements of Lavalife. The unaudited pro forma condensed combined balance sheet
at December 31, 2003 is adjusted to give effect to (i) the execution of our
amended and restated senior secured credit facility, borrowings thereunder and
the use of proceeds therefrom, (ii) the acquisition of Lavalife and the
concurrent purchase by Lavalife's senior management of MemberWorks' restricted
common stock and (iii) the offering of the old notes and the application of the
net proceeds from the offering of the old notes, as if each of these
transactions had occurred on December 31, 2003. The unaudited pro forma
condensed combined statements of operations for the year ended June 30, 2003,
the six months ended December 31, 2003 and the twelve months ended December 31,
2003 are adjusted to give effect to (i) the execution of our amended and
restated senior secured credit facility, borrowings thereunder and the use of
proceeds therefrom, (ii) the acquisition of Lavalife, and (iii) the offering of
the old notes and the application of the net proceeds from the offering of the
old notes, as if each of these transactions had occurred at the beginning of the
respective periods presented.
Lavalife's consolidated financial statements were prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"), which
differ in certain respects from accounting principles generally accepted in the
United States ("US GAAP") and were adjusted to US GAAP. Lavalife's condensed
consolidated statements of earnings were prepared in Canadian dollars and
translated to U.S. dollars at the average exchange rate of the daily noon buying
rates in New York City for the periods presented. Lavalife's condensed
consolidated balance sheet as of December 31, 2003 was translated to U.S.
dollars at the December 31, 2003 noon buying rate in New York City. Certain
reclassifications were made to the Lavalife's consolidated financial statements
to conform them to MemberWorks' presentation.
Adjustments for the Transactions are based upon the historical financial
information of MemberWorks and Lavalife and certain assumptions that management
of MemberWorks believes are reasonable. The acquisition will be accounted for
using the purchase method of accounting. Under this method, the purchase price
has been allocated to the assets and liabilities acquired based on preliminary
estimates of fair value. The actual fair value will be determined upon the
consummation of the acquisition and may vary from the preliminary estimates.
The pro forma financial data does not necessarily reflect our results of
operations or the financial position that actually would have resulted had the
transactions occurred at the date indicated, or project our results of
operations or financial position for any future date or period.
You should read the following unaudited pro forma condensed combined
financial data in conjunction with MemberWorks' and Lavalife's audited and
unaudited consolidated historical financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere or incorporated by
reference in this prospectus.
30
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2003
Lavalife
Historical Acquisition Total Financing
MemberWorks US Pro Forma Pro Forma Pro Forma Pro Forma
Historical GAAP(1) Adjustments(2) Acquisition Adjustments Total
------------ ---------- -------------- ----------- -------------- -----------
($ in thousands)
Assets
Cash and cash equivalents........ $ 119,995 $ 17,557 $ (111,240)(a) $ 26,312 $ 126,627(k) $ 152,939
Restricted cash.................. 3,169 -- -- 3,169 -- 3,169
Accounts receivable.............. 11,477 1,857 -- 13,334 -- 13,334
Other current assets............. 10,674 1,250 -- 11,924 600(k) 12,524
Deferred tax assets.............. -- 4,195 -- 4,195 -- 4,195
Membership solicitation and other
deferred costs................ 62,618 -- -- 62,618 -- 62,618
---------- ---------- ----------- ---------- ----------- ----------
Total current assets............. 207,933 24,859 (111,240) 121,552 127,227 248,779
Fixed assets, net................ 22,855 11,368 -- 34,223 -- 34,223
Goodwill......................... 42,039 -- 77,060 (b) 119,099 -- 119,099
Intangible and other assets...... 12,379 -- 37,916 (b) 50,295 5,400(k) 55,695
---------- ---------- ----------- ---------- ----------- ----------
Total assets..................... $ 285,206 $ 36,227 $ 3,736 $ 325,169 $ 132,627 $ 457,796
========== ========== =========== ========== =========== ==========
Liabilities and Shareholders'
(Deficit) Equity
Current maturities............... $ 28 $ -- $ 15,000 (c) $ 15,028 $ (15,000)(k) $ 28
Accounts payable................. 29,365 1,348 -- 30,713 -- 30,713
Accrued liabilities.............. 64,982 10,273 -- 75,255 -- 75,255
Deferred revenue................. 150,062 3,487 -- 153,549 -- 153,549
Deferred income taxes............ 6,171 -- -- 6,171 -- 6,171
---------- ---------- ----------- ---------- ----------- ----------
Total current liabilities........ 250,608 15,108 15,000 280,716 (15,000) 265,716
Deferred income taxes............ 5,157 855 -- 6,012 -- 6,012
Other long-terns liabilities..... 2,993 -- -- 2,993 -- 2,993
Long-term debt................... 90,000 -- -- 90,000 147,627(k) 237,627
---------- ---------- ----------- ---------- ----------- ----------
Total liabilities................ 348,758 15,963 15,000 379,721 132,627 512,348
---------- ---------- ----------- ---------- ----------- ----------
Convertible preferred stock...... -- 19,145 (19,145) (d) -- -- --
Common stock..................... 190 -- 3 (e) 193 -- 193
Capital in excess of par......... 146,646 6,086 19,145 (d) 155,643 -- 155,643
-- (15,235) (f)
(9,996) (g)
8,997 (h)
Accumulated deficit.............. (6,269) (5,824) 5,824 (i) (6,269) -- (6,269)
Accumulated other comprehensive
income (loss)................. (453) 857 (857) (j) (453) -- (453)
Treasury stock................... (203,666) -- -- (203,666) -- (203,666)
---------- ---------- ----------- ---------- ----------- ----------
Total shareholders' (deficit)
equity........................ (63,552) 1,119 7,881 (54,552) -- (54,552)
---------- ---------- ----------- ---------- ----------- ----------
Total liabilities and
shareholders' (deficit) equity $ 285,206 $ 36,227 $ 3,736 $ 325,169 $ 132,627 $ 457,796
========== ========== =========== ========== =========== ==========
-------------
(1) Reconciliation of Canadian GAAP to US GAAP is included on page 38 of this
prospectus.
(2) Footnote explanations of pro forma adjustments are included on page 32 of
this prospectus.
31
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
($ in thousands)
(a) Reflects the following adjustments to the cash and cash equivalents balance
resulting from the acquisition of Lavalife:
Distribution of excess cash to Lavalife's shareholders prior to closing...................... $ (15,235)
Cash received from Lavalife's senior management to purchase MemberWorks Incorporated's
common stock............................................................................. 9,000
Funding of a portion of the Lavalife acquisition purchase price.............................. (105,005)
------------
Total cash adjustment.................................................................... $ (111,240)
============
(b) The total estimated purchase price as shown in the table below is allocated
to the tangible and intangible assets and liabilities of Lavalife based on
their estimated fair values as if the acquisition of Lavalife had occurred
on December 31, 2003. The estimated purchase price and preliminary
allocation thereof is as follows:
Total estimated purchase price:
Cash purchase price paid.................................................................. $ 118,005
Acquisition related costs, including certain financing costs.............................. 2,000
------------
Total purchase price paid including acquisition related costs........................... $ 120,005
============
Preliminary allocation of purchase price:
Identifiable intangible assets............................................................ $ 37,916
Goodwill.................................................................................. 77,060
Book value of acquired assets and liabilities............................................. 5,029
------------
Total purchase price allocated.......................................................... $ 120,005
============
A final determination of the fair values and useful lives of such assets
cannot be made prior to the completion of the purchase accounting and may
differ materially from the preliminary estimates made by management. This
preliminary allocation includes an estimate that all intangible assets will
be acquired through a purchase transaction which yields a tax basis equal
to book basis and therefore no deferred tax liability has been recorded.
Any final adjustments may change the allocation of purchase price which
could affect the fair value assigned to the assets and liabilities and
could result in a change to the unaudited pro forma combined financial
data.
(c) Represents borrowings under our senior secured credit facility to fund a
portion of the purchase price.
(d) Reflects conversion of Lavalife's convertible preferred stock to Lavalife's
common stock immediately prior to the closing of the acquisition.
(e) Reflects the par value of the MemberWorks' restricted common stock
purchased by Lavalife's senior management.
(f) Reflects the reduction in shareholders' equity as a result of the
distribution of excess cash to Lavalife's shareholders prior to closing.
(g) Reflects the elimination of the balance of Lavalife's capital in excess of
par after giving effect to (d) and (f) above.
(h) Reflects the capital in excess of par resulting from the purchase of
MemberWorks' restricted common stock by Lavalife's senior management.
(i) Reflects elimination of Lavalife's accumulated deficit.
32
(j) Reflects elimination of Lavalife's other comprehensive income.
(k) Reflects issuance of the senior notes (including the incurrence of debt
issuance costs) and the use of proceeds therefrom, including the repayment
of $15,000 under the senior secured credit facility.
Issuance of the notes, net of discount....................... $ 147,627
Payment of debt issuance costs*.............................. (6,000)
Repayment of senior secured credit facility.................. (15,000)
------------
Net cash proceeds......................................... $ 126,627
============
---------
* $600 represents the current portion of debt issuance costs.
33
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 2003
Lavalife
MemberWorks Historical Acquisition Total Financing Pro Forma
Historical US Pro Forma Pro Forma Pro Forma Total
US GAAP GAAP(1) Adjustments(2) Acquisition Adjustments(2) US GAAP
------------ ---------- -------------- ----------- -------------- ----------
($ in thousands, except per share data)
Revenues......................... $ 474,820 $ 70,576 $ -- $ 545,396 $ -- $ 545,396
Expenses:
Marketing .................... 278,626 25,795 -- 304,421 -- 304,421
Operating .................... 85,697 14,780 -- 100,477 -- 100,477
General and Administrative.... 74,420 22,296 -- 96,716 -- 96,716
Amortization of intangibles... 1,243 -- 6,493 (a) 7,736 -- 7,736
---------- --------- ---------- --------- ---------- ----------
Operating income ................ 34,834 7,705 (6,493) 36,046 -- 36,046
Interest income (expense), net... (1,117) 287 (600)(b) (1,430) (14,025)(e) (15,455)
Other income (expense), net...... (162) 88 -- (74) -- (74)
---------- --------- ---------- --------- ---------- ----------
Income before income taxes....... 33,555 8,080 (7,093) 34,542 (14,025) 20,517
Provision for income taxes....... 13,422 2,515 (2,837)(c) 13,100 (5,610)(c) 7,490
---------- --------- ---------- --------- ---------- ----------
Net income ...................... $ 20,133 $ 5,565 $ (4,256) $ 21,442 $ (8,415) $ 13,027
========== ========= ========== ========= ========== ==========
Earnings per share
Basic ........................ $ 1.73 $ 1.77 $ 1.07
========== ========= ==========
Diluted ...................... $ 1.63 $ 1.67 $ 1.03
========== ========= ==========
Weighted average shares
Basic ........................ 11,638 501 (d) 12,139 12,139
========== ========== ========= ==========
Diluted ...................... 12,821 501 13,322 13,322
========== ========== ========= ==========
---------------
(1) Reconciliation of Canadian GAAP to US GAAP is included on page 40 of this
prospectus.
(2) Footnote explanations of pro forma adjustments are included on page 37 of
this prospectus.
34
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended December 31, 2003
Lavalife
Historical Acquisition Total Financing
MemberWorks US Pro Forma Pro Forma Pro Forma Pro Forma
Historical GAAP(1)(3) Adjustments(2) Acquisition(2) Adjustments(2) Total
------------ ----------- --------------- -------------- -------------- ----------
($ in thousands, except per share data)
Revenues........................ $ 236,988 $ 35,543 $ -- $ 272,531 $ -- $ 272,531
Expenses:
Marketing.................... 133,401 12,455 -- 145,856 -- 145,856
Operating.................... 44,505 7,426 -- 51,931 -- 51,931
General and
Administrative............. 37,962 11,646 -- 49,608 -- 49,608
Amortization of
intangibles................ 589 -- 3,247 (a) 3,836 -- 3,836
---------- ---------- ---------- ---------- ---------- ----------
Operating income................ 20,531 4,016 (3,247) 21,300 -- 21,300
Interest income (expense),
net.......................... (1,082) 183 (300)(b) (1,199) (7,012)(e) (8,211)
Other income (expense),
net.......................... (183) 999 -- 816 -- 816
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes...... 19,266 5,198 (3,547) 20,917 (7,012) 13,905
Provision for income taxes...... 7,706 1,474 (1,419)(c) 7,761 (2,805)(c) 4,956
---------- ---------- ---------- ---------- ---------- ----------
Net income...................... $ 11,560 $ 3,724 $ (2,128) $ 13,156 $ (4,207) $ 8,949
========== ========== ========== ========== =========== ==========
Earnings per share
Basic........................ $ 1.03 $ 1.13 $ 0.77
========== ========== ==========
Diluted...................... $ 0.91 $ 0.99 $ 0.69
========== ========== ==========
Weighted average shares
Basic........................ 11,192 452(d) 11,644 11,644
========== ========== ========== ==========
Diluted...................... 13,541 452 13,993 13,993
========== ========== ========== ==========
--------------
(1) Reconciliation of Canadian GAAP to US GAAP is included on page 41 of this
prospectus.
(2) Footnote explanations of pro forma adjustments are included on page 37 of
this prospectus.
(3) Includes $18,746 of revenue, $3,324 of operating income and $3,165 of net
income for the three months ended September 30, 2003, which is also
included in the unaudited pro forma condensed combined statement of
operations for the year ended June 30, 2003.
35
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended June 30, 2003
Lavalife
Historical Acquisition Total Financing
MemberWorks US Pro Forma Pro Forma Pro Forma Pro Forma
Historical GAAP(1)(3) Adjustments(2) Acquisition(2) Adjustments(2) Total
------------ ----------- --------------- ------------- ---------------
($ in thousands, except per share data)
Revenues......................... $ 456,881 $ 70,751 $ -- $ 527,632 $ -- $ 527,632
Expenses:
Marketing..................... 280,673 26,055 -- 306,728 -- 306,728
Operating..................... 78,444 14,657 -- 93,101 -- 93,101
General and Administrative.... 74,085 21,003 -- 95,088 -- 95,088
Amortization of intangibles... 1,393 -- 6,493 (a) 7,886 -- 7,886
---------- ---------- ---------- ---------- ---------- ----------
Operating income................. 22,286 9,036 (6,493) 24,829 -- 24,829
Settlement of investment
related litigation............ 19,148 -- -- 19,148 -- 19,148
Interest income (expense), net... 570 200 (600)(b) 170 (14,025)(e) (13,855)
Other income (expense), net...... (1,409) 142 -- (1,267) -- (1,267)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes....... 40,595 9,378 (7,093) 42,880 (14,025) 28,855
Provision for income taxes....... 16,239 3,484 (2,837)(c) 16,886 (5,610)(c) 11,276
---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 24,356 $ 5,894 $ (4,256) $ 25,994 $ (8,415) $ 17,579
========== ========== ========== ========== ========== ==========
Earnings per share
Basic......................... $ 1.93 $ 1.99 $ 1.34
========== ========== ===========
Diluted....................... $ 1.84 $ 1.90 $ 1.28
========== ========== ==========
Weighted average shares
Basic......................... 12,596 481(d) 13,077 13,077
========== ========== ========== ==========
Diluted....................... 13,233 481 13,714 13,714
========== ========== ========== ==========
-------------
(1) Reconciliation of Canadian GAAP to US GAAP is included on page 42 of this
prospectus.
(2) Footnote explanations of pro forma adjustments are included on page 37 of
this prospectus.
(3) Lavalife's statement of income is for the year ended September 30, 2003.
36
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
($ in thousands)
(a) Reflects the amortization of acquired identifiable intangible assets deemed
to have determinable useful lives. Preliminary estimates of identifiable
intangible assets include trade names of approximately $18,800 with a
useful life of 12 years, customer relationships of $14,700 with useful
lives of 3-5 years and other intangibles of $4,400 with useful lives of 3-5
years.
(b) Reflects increased interest expense incurred due to borrowings of $15,000
under our senior secured credit facility to fund a portion of the Lavalife
acquisition purchase price.
(c) Reflects the income tax effect of the acquisition pro forma adjustments at
a 40% effective tax rate.
(d) Reflects the purchase of MemberWorks' restricted common stock by Lavalife's
senior management.
(e) Reflects interest expense, including amortization of debt issuance costs
and discount related to the senior notes, and the elimination of interest
expenses under the senior secured credit facility.
37
RECONCILIATION OF CANADIAN GAAP TO US GAAP
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2003
The following table reconciles the Lavalife's unaudited condensed
consolidated balance sheet as of December 31, 2003, derived from the December
31, 2003 unaudited condensed consolidated financial statements, from Canadian
GAAP to US GAAP. The amounts have been translated at the December 31, 2003 noon
buying rate in New York City of $0.7738 to Cdn$ 1.00.
Reclassifications Lavalife US
Lavalife to GAAP
Canadian US GAAP Lavalife MemberWorks in MemberWorks Lavalife
GAAP Adjustments US GAAP Presentation Presentation US GAAP
(Cdn$) (Cdn$)(1) (Cdn$) (Cdn$) (Cdn$) (US$)
--------- ------------- ---------- ----------------- -------------- -----------
($ in thousands)
Assets
Cash and cash equivalents......... $ 22,689 $ -- $ 22,689 $ -- $ 22,689 $ 17,557
Accounts receivable............... 2,041 -- 2,041 359 2,400 1,857
Income taxes receivable........... 359 -- 359 (359) -- --
Prepaid membership materials...... -- -- -- -- -- --
Prepaid expenses and other current
assets......................... 1,616 -- 1,616 -- 1,616 1,250
Future tax assets................. 5,052 369 (a) 5,421 -- 5,421 4,195
--------- -------- --------- ---------- ---------- --------
Total current assets.............. 31,757 369 32,126 -- 32,126 24,859
Fixed assets, net................. 14,691 -- 14,691 -- 14,691 11,368
Share purchase loans.............. 47 (47)(b) -- -- -- --
Deferred charges.................. 45 (45)(c) -- -- -- --
Intangible assets................. 25 (25)(d) -- -- -- --
--------- -------- --------- ---------- ---------- --------
Total assets...................... $ 46,565 $ 252 $ 46,817 $ -- $ 46,817 $ 36,227
========= ======== ========= ========== ========== ========
Liabilities and Shareholders' Equity
Accounts payable(2)............... $ 9,517 $ 1,798 (e) $ 11,315 $ (9,572) $ 1,743 $ 1,348
Accrued liabilities............... -- -- -- 13,276 13,276 10,273
Income and other taxes payable.... 3,704 -- 3,704 (3,704) -- --
Deferred revenue.................. 3,512 994 (f) 4,506 -- 4,506 3,487
--------- -------- --------- ---------- ---------- --------
Total current liabilities......... 16,733 2,792 19,525 -- 19,525 15,108
Deferred income taxes............. 1,105 -- 1,105 -- 1,105 855
Liability component of convertible
preferred shares............... 18,678 (18,678)(c) -- -- -- --
--------- -------- --------- ---------- ---------- --------
Total liabilities................. 36,516 (15,886) 20,630 -- 20,630 15,963
--------- -------- --------- ---------- ---------- --------
Convertible preferred stock....... -- 24,741 (c) 24,741 -- 24,741 19,145
Share capital..................... 18,123 (10,258)(c),(b) 7,865 (7,865) -- --
Capital in excess of par.......... -- -- -- 7,865 7,865 6,086
Accumulated deficit............... (9,181) 1,655 (7,526) -- (7,526) (5,824)
Accumulated other comprehensive income 1,107 -- 1,107 -- 1,107 857
--------- -------- --------- ---------- ---------- --------
Total shareholders' equity........ 10,049 (8,603) 1,446 -- 1,446 1,119
--------- -------- --------- ---------- ---------- --------
Total liabilities and shareholders'
equity......................... $ 46,565 $ 252 $ 46,817 $ -- $ 46,817 $ 36,227
========= ======== ========= ========== ========== ========
-------------
(1) Footnote explanations of reconciliation of Canadian GAAP to US GAAP are
included on page 39 of this prospectus.
(2) The accounts payable amount of Cdn$9,517 for Lavalife Canadian GAAP
includes Cdn$7,774 in accrued liabilities.
38
NOTES TO CANADIAN GAAP TO US GAAP RECONCILIATION OF
LAVALIFE'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
The following notes should be read in conjunction with Note 21 of
Lavalife's consolidated financial statements for the year ended September 30,
2003 incorporated by reference in this prospectus.
(a) Current and deferred taxes have been provided on all adjustments at the
applicable local statutory rate to which the adjustment relates.
(b) Shareholder Loans. Lavalife records loans to shareholders to purchase
shares of Lavalife as receivables under Canadian GAAP. Under US GAAP, these
amounts are deducted from shareholders' equity.
(c) Financial Instruments. Under Canadian GAAP, Lavalife accounts for its
convertible preferred shares in accordance with their substance and, as
such, they are presented in the financial statements in their liability and
equity components. The liability component is accreted to the face amount
of the convertible preferred shares as interest expense. Financing costs
associated with the convertible preferred shares have been allocated
between the liability and equity components whereby those costs allocated
to the liability component are recorded as deferred financing costs and
those allocated to the equity component are recorded as a reduction of the
carrying value of the equity component.
Under US GAAP the convertible preferred shares are treated as mezzanine
equity and the associated financing costs have been recorded as a reduction
of the carrying value of the convertible preferred shares.
During the year ended September 30, 2003, Lavalife made a payment to the
holders of the convertible preferred shares in the amount of Cdn$3,125
that, under Canadian GAAP, was recorded as a reduction in the carrying
value of the equity component of the convertible preferred shares. Under US
GAAP, this payment is recorded as a direct charge to deficit.
(d) Intangible Assets. Marketing costs related to launching new services are
deferred until launch under Canadian GAAP. Under US GAAP, these costs are
expensed as incurred.
(e) Stock Based Compensation. Lavalife's stock option plan allows for the
redemption of the employees' vested options whereby the difference between
the grant price and the market price is paid by Lavalife under certain
conditions. Under Canadian GAAP, Lavalife records amounts paid on
redemption as a direct charge to deficit. Under US GAAP, Emerging Issues
Task Force Abstract No. 00-23 requires that all options with such a feature
be marked-to-market and the obligation be recognized through the income
statement of Lavalife.
(f) Revenue Recognition. Under US GAAP, Lavalife has adopted the
recommendations of Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." Based on these recommendations, which require a
more restrictive analysis of management's best estimates of deferred
revenue, Lavalife defers revenue from the sale of voice-based meeting
services based on usage and management's estimate that unused minutes aged
less than one year will be used by customers. Revenue from web-based
meeting services is deferred ratably over the estimated average expected
usage of the customer.
39
RECONCILIATION OF CANADIAN GAAP TO US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Twelve Months Ended December 31, 2003
The following table reconciles from Canadian GAAP to US GAAP Lavalife's
unaudited condensed combined statement of income for the twelve months ended
December 31, 2003 that has been derived from Lavalife's unaudited condensed
consolidated financial statements for the three months ended December 31, 2003
and December 31, 2002 and the audited consolidated financial statements for the
year ended September 30, 2003. The amounts have been translated at an average
daily rate for the period of $0.7159 to Cdn$1.00.
Reclassifications Lavalife US
Lavalife to GAAP
Canadian US GAAP Lavalife MemberWorks in MemberWorks Lavalife
GAAP Adjustments US GAAP Presentation Presentation US GAAP
(Cdn$) (Cdn$)(1) (Cdn$) (Cdn$) (Cdn$) (US$)
---------- ------------ -------- ----------------- -------------- -----------
($ in thousands)
Revenues............................ $ 98,561 $ 23(a) $ 98,584 $ -- $ 98,584 $ 70,576
Expenses:
Cost of services sold............ 13,400 (15)(b) 13,385 (13,385) -- --
Marketing expense................ -- -- -- 36,032 36,032 25,795
Operating expense................ -- -- -- 20,646 20,646 14,780
Salaries and benefits............ 19,570 (249)(c) 19,321 (19,321) -- --
Selling, office and general...... 50,307 (152)(6) 50,155 (50,155) -- --
General and administrative....... -- -- -- 31,143 31,143 22,296
Intangible amortization.......... -- -- -- -- -- --
---------- ------------ -------- ----------------- -------------- -----------
Operating income.................... 15,284 439 15,723 (4,960) 10,763 7,705
Other income........................ 246 -- 246 (123) 123 88
Amortization........................ (4,929) 18(d) (4,911) 4,911 -- --
Accretion of liability component of
convertible preferred shares..... (2,001) 2,001(d) -- -- -- --
Loss on disposal of capital assets.. (172) -- (172) 172 -- --
Interest income..................... 432 -- 432 (432) -- --
Interest expense.................... (31) -- (31) 432 401 287
---------- ------------ -------- ----------------- -------------- -----------
Income before income taxes.......... 8,829 2,458 11,287 -- 11,287 8,080
Current provision for taxes......... 275 -- 275 (275) -- --
Future provision for taxes.......... 3,266 (27)(e) 3,239 (3,239) -- --
Provision for income taxes.......... -- -- -- 3,514 3,514 2,515
---------- ------------ -------- ----------------- -------------- -----------
Net income.......................... $ 5,288 $ 2,485 $ 7,773 $ -- $ 7,773 $ 5,565
========== ============ ======== ================= ============== ===========
------------
(1) Footnote explanations of reconciliation of Canadian GAAP to US GAAP are
included on page 43 of this prospectus.
40
RECONCILIATION OF CANADIAN GAAP TO US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended December 31, 2003
The following table reconciles from Canadian GAAP to US GAAP Lavalife's
unaudited condensed consolidated statement of income for the six months ended
December 31, 2003 that has been derived from Lavalife's unaudited condensed
consolidated financial statements for the three months ended September 30, 2003
and December 31, 2003. The amounts have been translated at an average daily rate
for the period of $0.7419 to Cdn$ l.00.
Lavalife US
Reclassifications GAAP
Lavalife to in
Canadian US GAAP Lavalife MemberWorks MemberWorks Lavalife
GAAP Adjustments US GAAP Presentation Presentation US GAAP
(Cdn$) (Cdn$)(1) (Cdn$) (Cdn$) (Cdn$) (US$)
-------- ------------- --------- ----------------- ------------ ---------
($ in thousands)
Revenues.......................... $ 48,305 $ (397)(a) $ 47,908 $ -- $ 47,908 $ 35,543
Expenses:
Cost of services sold.......... 6,778 -- 6,778 (6,778) -- --
Marketing expense.............. -- -- -- 16,788 16,788 12,455
Operating expense.............. -- -- -- 10,009 10,009 7,426
Salaries and benefits.......... 9,588 19(b) 9,607 (9,607) -- --
Selling, office and general.... 23,683 25(c) 23,708 (23,708) -- --
General and administrative..... -- -- -- 15,698 15,698 11,646
Intangible amortization........ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Operating income.................. 8,256 (441) 7,815 (2,402) 5,413 4,016
Other income...................... 1,411 1,411 (65) 1,346 999
Amortization...................... (2,304) 8(d) (2,296) 2,296 -- --
Accretion of liability component of
convertible preferred shares... (1,030) 1,030(d) -- -- -- --
Loss on disposal of capital
assets......................... (171) -- (171) 171 -- --
Interest income................... 247 -- 247 (247) -- --
Interest expense.................. -- -- -- 247 247 183
-------- -------- -------- -------- -------- --------
Income before income taxes........ 6,409 597 7,006 -- 7,006 5,198
Current provision for taxes....... 58 -- 58 (58) -- --
Future provision for taxes........ 2,105 (177)(e) 1,928 (1,928) -- --
Provision for income taxes........ -- -- -- 1,986 1,986 1,474
-------- -------- -------- -------- -------- --------
Net income........................ $ 4,246 $ 774 $ 5,020 $ -- $ 5,020 $ 3,724
======== ======== ======== ======== ======== ========
------------
(1) Footnote explanations of reconciliation of Canadian GAAP to US GAAP are
included on page 43 of this prospectus.
41
RECONCILIATION OF CANADIAN GAAP TO US GAAP
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended September 30, 2003
The following table reconciles from Canadian GAAP to US GAAP Lavalife's
unaudited condensed consolidated statement of income for the year ended
September 30, 2003 derived from the audited consolidated financial statements
for the year ended September 30, 2003. The amounts have been translated at an
average daily rate for the period of $0.6853 to Cdn$l.00.
Lavalife US
Reclassifications GAAP
Lavalife to in
Canadian US GAAP Lavalife MemberWorks MemberWorks Lavalife
GAAP Adjustments US GAAP Presentation Presentation US GAAP
-------- ------------- --------- ----------------- ------------ ---------
(Cdn$) (Cdn$)(1) (Cdn$) (Cdn$) (Cdn$) (US$)
($ in thousands)
Revenues.......................... $ 102,613 $ 626(a) $ 103,239 $ -- $ 103,239 $70,751
Expenses:
Cost of services sold.......... 13,831 -- 13,831 (13,831) -- --
Marketing expense.............. -- -- -- 38,020 38,020 26,055
Operating expense.............. -- -- -- 21,388 21,388 14,657
Salaries and benefits.......... 19,406 (452)(b) 18,954 (18,954) -- --
Selling, office and general.... 52,260 (124)(c) 52,136 (52,136) -- --
General and administrative..... -- -- -- 30,646 30,646 21,003
Intangible amortization........ -- -- -- -- -- --
--------- --------- ---------- ----------- ------------ --------
Operating income.................. 17,116 1,202 18,318 (5,133) 13,185 9,036
Other income...................... 335 -- 335 (128) 207 142
Amortization...................... (5,107) 18(d) (5,089) 5,089 -- --
Accretion of liability component of
convertible preferred shares... (1,943) 1,943(d) -- -- -- --
Loss on disposal of capital
assets......................... (172) -- (172) 172 -- --
Interest income................... 385 -- 385 (385) -- --
Interest expense.................. (93) -- (93) 385 292 200
---------- --------- ----------- ----------- ------------ --------
Income before income taxes........ 10,521 3,163 13,684 -- 13,684 9,378
Current provision for taxes....... 708 -- 708 (708) -- --
Future provision for taxes........ 4,172 203(e) 4,375 (4,375) -- --
Provision for income taxes........ -- -- -- 5,083 5,083 3,484
--------- --------- ---------- ----------- ------------ --------
Net income........................ $ 5,641 $ 2,960 $ 8,601 $ -- $ 8,601 $ 5,894
========= ========= ========== =========== ============ ========
------------
(1) Footnote explanations of reconciliation of Canadian GAAP to US GAAP are
included on page 43 of this prospectus.
42
NOTES TO CANADIAN GAAP TO US GAAP RECONCILIATION OF
LAVALIFE'S UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands)
The following notes should be read in conjunction with Note 21 of
Lavalife's consolidated financial statements for the year ended September
30, 2003 incorporated by reference in this prospectus.
(a) Revenue Recognition. Under US GAAP, Lavalife has adopted the
recommendations of Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." Based on these recommendations, which require a
more restrictive analysis of management's best estimates of deferred
revenue, Lavalife defers revenue from the sale of voice-based meeting
services based on usage and management's estimate that unused minutes aged
less than one year will be used by customers. Revenue from web-based
meeting services is deferred ratably over the estimated average expected
usage of the customer.
(b) Stock Based Compensation. Lavalife's stock option plan allows for the
redemption of the employees' vested options whereby the difference between
the grant price and the market price is paid by Lavalife under certain
conditions. Under Canadian GAAP, Lavalife records amounts paid on
redemption as a direct charge to deficit. Under US GAAP, Emerging Issues
Task Force Abstract No. 00-23 requires that all options with such a feature
be marked-to-market and the obligation be recognized through the income
statement of Lavalife.
(c) Intangible Assets. Marketing costs related to launching new services are
deferred until launch under Canadian GAAP. Under US GAAP, these costs are
expensed as incurred.
(d) Financial Instruments. Under Canadian GAAP, Lavalife accounts for its
convertible preferred shares in accordance with their substance and, as
such, they are presented in the financial statements in their liability and
equity components. The liability component is accreted to the face amount
of the convertible preferred shares as interest expense. Financing costs
associated with the convertible preferred shares have been allocated
between the liability and equity components whereby those costs allocated
to the liability component are recorded as deferred financing costs and
those allocated to the equity component are recorded as a reduction of the
carrying value of the equity component.
Under U.S. GAAP the convertible preferred shares are treated as mezzanine
equity and the associated financing costs have been recorded as a reduction
of the carrying value of the convertible preferred shares.
During the year ended September 30, 2003, Lavalife made a payment to the
holders of the convertible preferred shares in the amount of Cdn$3,125
that, under Canadian GAAP, was recorded as a reduction in the carrying
value of the equity component of the convertible preferred shares. Under
U.S. GAAP, this payment is recorded as a direct charge to deficit.
(e) Current and deferred taxes have been provided on all adjustments at the
applicable local statutory rate to which the adjustment relates.
43
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
MemberWorks
The following table sets forth selected historical consolidated financial
data for MemberWorks. The selected consolidated financial data as of and for
each of the fiscal years ended June 30, 1999 through 2003 have been derived from
MemberWorks' audited consolidated financial statements. The selected
consolidated financial data as of and for the six months ended December 31, 2003
and 2002 have been derived from MemberWorks' unaudited condensed consolidated
financial statements and in the opinion of MemberWorks' management, include all
adjustments of a normal recurring nature necessary to present fairly the
financial position and results of operations for the interim periods. The
historical consolidated results for these respective six months are not
necessarily indicative of MemberWorks' results of operations for the full years.
The selected consolidated financial information is qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and MemberWorks'
consolidated financial statements, including the related notes thereto,
contained in this prospectus.
Six Months Ended
Year Ended June 30, December 31,
----------------------------------------------------- -------------------
1999 2000 2001 2002 2003 2002 2003
--------- ---------- ---------- ---------- ---------- --------- ---------
($ in thousands)
Statement of Operations Data:
Revenues.............................. $218,086 $330,107 $475,726 $427,602 $456,881 $219,049 $236,988
Total expenses........................ 212,292 331,547 509,050 415,713 434,595 211,066 216,457
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)............... 5,794 (1,440) (33,324) 11,889 22,286 7,983 20,531
Settlement of investment related
litigation......................... -- -- -- -- 19,148 19,148 --
(Loss) gain on sale of subsidiary..... -- -- -- 65,608 (959) (959) --
Net (loss) gain on investment......... -- 8,854 (2,172) (33,628) (206) (206) --
Other income (expense), net........... 2,154 873 (450) (401) 326 340 (1,265)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before equity in affiliate
and minority interest.............. 7,948 8,287 (35,946) 43,468 40,595 26,306 19,266
Equity in income (loss) of affiliate.. (1,912) 19 83 -- -- -- --
Minority interest..................... -- 2,027 9,106 450 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before provision for
income taxes....................... 6,036 10,333 (26,757) 43,918 40,595 26,306 19,266
Provision for income taxes............ -- -- -- -- 16,239 10,523 7,706
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before cumulative
effect of accounting change........ 6,036 10,333 (26,757) 43,918 24,356 15,783 11,560
Cumulative effect of accounting change (3,367) -- (25,730) (5,907) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 2,669 $ 10,333 $(52,487) $ 38,011 $ 24,356 $ 15,783 $ 11,560
======== ======== ========= ======== ======== ======== ========
Other Financial Data:
Cash flow provided by operating
activities......................... $ 50,573 $ 44,910 $ 12,022 $ 17,014 $ 48,533 $ 32,877 $ 20,441
Depreciation and amortization......... 5,517 13,002 20,498 13,252 12,120 6,169 5,242
Capital expenditures.................. 12,101 20,326 15,133 5,761 5,463 2,762 2,538
Ratio of earnings to fixed charges(1). 8.60x 6.75x NM 17.69x 15.52x 18.28x 8.22x
Consolidated Balance Sheet (at period
end):
Cash and cash equivalents............. $ 50,939 $ 30,169 $ 21,745 $ 45,502 $ 72,260 $ 79,950 $119,995
Restricted cash....................... -- -- 991 5,683 2,732 2,842 3,169
Total assets.......................... 209,827 316,772 348,461 280,817 248,505 290,016 285,206
Total debt............................ 6 1,083 3,057 3,627 8,273 3,079 98,150
Shareholders' (deficit) equity........ 30,287 19,021 (25,965) (20,630) (20,283) (9,786) (63,552)
------------
(1) The ratio of earnings to fixed charges is computed by dividing pre-tax
income from continuing operations (before adjustment for minority interests
in consolidated subsidiaries and loss from equity investees) by fixed
charges. Fixed charges consist of interest charges, whether expensed or
capitalized, and that portion of rental expense we believe to be
representative of interest. For the year ended June 30, 2001, earnings were
insufficient to cover fixed charges of $3.8 million.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MemberWorks
Overview
We design and manage innovative membership programs and provide
organizations with an opportunity to leverage the expertise of an outside
provider in offering these membership programs. Our membership service programs
offer selected products and services from a variety of vendors for either an
annual fee or a monthly fee. We derive our revenues principally from renewable
membership fees which are billed to the customer either on an annual or monthly
basis. In the case of annual programs, we receive full payment at or near the
beginning of the membership period, but recognize the revenue as the member's
refund privilege expires. Membership fees that are billed monthly are recognized
when earned. We have traditionally marketed membership programs which have an
up-front annual membership fee. However, during fiscal 2003, we expanded our
marketing of membership programs in which the membership fee is payable in
monthly installments. We intend to further increase the mix of monthly payment
programs during fiscal 2004. Profitability and cash flow generated from renewal
memberships exceed that of new memberships due to the absence of solicitation
costs associated with new member procurement.
The Lavalife Acquisition
On April 1, 2004, we completed the acquisition of all of the assets and
outstanding capital stock of Lavalife for approximately Cdn$152.5 million
($116.4 million) in cash. Lavalife's senior management purchased approximately
Cdn$11.9 million ($9.1 million) in MemberWorks' restricted common stock at
closing of the acquisition. We financed the purchase price with cash on hand and
borrowings of approximately $15.0 million under our $45.0 million senior secured
credit facility. For the twelve months ended December 31, 2003, Lavalife had
revenues of Cdn$98.6 million ($70.6 million).
Critical Accounting Policies
Critical accounting policies are those policies that are important to our
financial condition and results of operations and involve subjective or complex
judgments on the part of management, often as a result of the need to make
estimates. The following areas all require the use of judgments and estimates:
membership cancellation rates, deferred marketing costs, valuation of goodwill
and intangible assets, estimation of remaining useful lives of intangible assets
and valuation of deferred tax assets. Estimates in each of these areas are based
on historical experience and various assumptions that we believe are
appropriate. Actual results may differ from these estimates. We believe the
following represent our critical accounting policies as contemplated by
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
about Critical Accounting Policies." For a summary of all of our significant
accounting policies, see Note 2 of MemberWorks' consolidated financial
statements on page F-7 of this prospectus.
Revenue Recognition
Membership fees are billed through our clients primarily through credit
cards. In the case of annually billed membership programs, a member may cancel
their membership in the program generally for a pro rata refund of the
membership fee based on the remaining portion of the membership period. In
accordance with Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), deferred membership fees are recorded, net of estimated
cancellations, and are amortized as revenues from membership fees upon the
expiration of membership refund privileges. An allowance for membership
cancellations is established based on our estimates and is updated regularly. In
determining the estimate of allowance for membership cancellations, we analyze
historical cancellation experience, current economic trends and changes in
customer demand for the our products. Actual membership cancellations are
charged against the allowance for membership cancellations on a current basis.
If actual cancellations differ from the estimate, the revenues would be
impacted.
Membership solicitation and other deferred costs
Our marketing expenses are comprised of telemarketing, direct mail,
refundable royalty payments, nonrefundable royalty payments and advertising
costs. Telemarketing and direct mail costs are direct response advertising costs
which are accounted for in accordance with American Institute of Certified
Public Accountants
45
Statement of Position 93-7, "Reporting on Advertising Costs" ("SOP 93-7"). Under
SOP 93-7, direct response advertising costs are deferred and charged to
operations over the membership period as revenues from membership fees are
recognized. Refundable royalty payments are also deferred and charged to
operations over the membership period in order to match the marketing costs with
the associated revenues from membership fees. Advertising costs and
non-refundable royalty payments, which include fee per pitch, fee per sale and
fee per impression marketing arrangements, are expensed when incurred.
Total membership solicitation costs incurred to obtain a new member are
generally less than the estimated total membership fees. However, if total
membership solicitation costs were to exceed total estimated membership margins,
an adjustment would be made to the membership solicitation and other deferred
costs balance and marketing expenses to the extent of any impairment.
Valuation of goodwill and other intangibles
We review the carrying value of its goodwill and other intangible assets
and assesses the remaining estimated useful lives of its intangible assets in
accordance with FASB Statement No. 142, "Goodwill and Other Intangible Assets."
We review the carrying value of our goodwill and other intangible assets for
impairment by comparing such amounts to their fair values. We are required to
perform this comparison at least annually or more frequently if circumstances
indicate possible impairment. When determining fair value, we utilize various
assumptions, including projections of future cash flows. A change in these
underlying assumptions would cause a change in the results of the tests and, as
such, could cause fair value to be less than the carrying amounts. In such an
event, we would then be required to record a corresponding charge which would
negatively impact earnings. Goodwill at July 1, 2003 and 2002, was tested for
impairment during the quarters ended September 30, 2003 and 2002, respectively.
We concluded that none of our goodwill was impaired as of July 1, 2003 nor 2002.
Income Taxes
We account for income taxes under the provisions of FASB Statement No. 109,
"Accounting for Income Taxes." 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. We estimate current tax provisions or benefits based
on a projected effective tax rate for the fiscal year ended June 30, 2004 using
the most currently available information and forecasts. The projected effective
tax rate is updated for actual results and estimates when they become known. In
addition, we assess the realization of deferred tax assets considering various
assumptions, including estimates of future taxable income and ongoing tax
strategies. A change in these underlying assumptions would impact the results of
operations.
Six Month Period Ended December 31, 2003 and December 31, 2002
Revenues. Revenues increased 8% to $237.0 million for the six months ended
December 31, 2003 from $219.0 million for the six months ended December 31,
2002. The increase in revenues is primarily due to an increase in the weighted
average program price point. As a result of our strategic initiative to shift
new marketing towards members on a monthly payment program, renewal revenues
from annual payment programs as a percent of total revenues decreased to 41% in
2003 from 48% in 2002. Revenues from members who are charged on a monthly
payment program increased to $67.7 million for the six months ended December 31,
2003 from $33.8 million for the six months ended December 31, 2002 due to an
increase in members enrolled in a monthly payment plan.
Marketing Expenses. Marketing expenses decreased 2% to $133.4 million for
the six months ended December 31, 2003 from $135.4 million for the six months
ended December 31, 2002 and, as a percentage of revenue, marketing expenses
decreased to 56.3% in 2003 from 61.8% in 2002. The improvement in the marketing
expense ratio is primarily due to the increase in the mix of marketing in our
more profitable MemberLinksm and online channels.
Operating Expenses. Operating expenses increased 19% to $44.5 million for
the six months ended December 31, 2003 from $37.3 million for the six months
ended December 31, 2002. As a percentage of revenues, operating expenses
increased to 18.8% for the six months ended December 31, 2003 from 17.0% for the
six months ended December 31, 2002. These increases were due to increased call
center and other related costs incurred to service the membership base.
46
General and Administrative Expenses. General and administrative expenses
were $38.0 million for the six months ended December 31, 2003 versus $37.6
million for the six months ended December 31, 2002. As a percentage of revenues,
general and administrative expenses decreased to 16.0% in 2003 from 17.2% in
2002 primarily due to leveraging the increase in our reported revenues.
Interest Expense. Interest expense increased to $1.6 million for the six
months ended December 31, 2003 from $57,000 for the six months ended December
31, 2002. The increase is due to the issuance of the convertible senior
subordinated notes in September 2003.
Provision for Income Taxes. During the six months ended December 31, 2003,
we recorded a tax provision of $7.7 million based on an effective tax rate of
approximately 40%. The effective tax rate was higher than the United States
federal statutory rate for the six months ended December 31, 2003 primarily due
to state taxes and other non-deductible items. During the six months ended
December 31, 2002, we recorded a tax provision of $10.5 million based on an
effective tax rate of approximately 40%.
Fiscal 2003 Compared to Fiscal 2002
Revenues. Revenues increased 7% to $456.9 million in 2003 from $427.6
million in 2002. Excluding $9.4 million of revenue generated from iPlace, Inc.,
which was sold in the first quarter of fiscal 2002, revenues would have
increased 9% over the prior year. The increase in revenues is due to the effect
of our strategic initiative to migrate our members participating in a
full-money-back refund policy program to a pro rata refund policy program, in
addition to increased levels of monthly member marketing and an increase in the
average program price point. As of December 31, 2002, virtually all of our
membership base was enrolled in a pro rata refund policy program. As a result of
our strategic initiative to move our members to a pro rata refund policy
program, revenues which would have been recognized at the end of a membership
year are now recognized ratably during the membership year as the refund
privileges expire in accordance with SAB 101. This strategic move to pro rata
refund policy programs increased the revenue recognized in fiscal 2003 under SAB
101. Revenue from members who are charged on a monthly payment program increased
to $76.9 million from $41.3 million due to an increase in members enrolled in a
monthly payment plan. As a percentage of total revenues, renewal revenues from
annual payment programs were 47% in 2003 and 48% in 2002.
Operating Expenses. Operating expenses consist of member service call
center costs, membership benefit costs and membership program fulfillment costs.
Operating expenses decreased slightly to $78.4 million in 2003 from $78.7
million in 2002 primarily due to the sale of iPlace, Inc., offset by an increase
in costs to support the Company's strategy to improve member satisfaction. As a
percentage of revenues, operating expenses decreased to 17.2% in 2003 from 18.4%
in 2002 primarily due to the cost savings initiatives implemented in the
beginning of the December 2001 quarter and operating expense language gained
from increased revenues.
Marketing Expenses. Marketing expenses consist of costs incurred to obtain
new members and royalties paid to clients. Those costs that are considered
direct response advertising costs and refundable royalties paid to clients are
generally amortized in the same manner as the related revenue as required by SOP
93-7 and SAB 101. Marketing expenses increased 13% to $280.7 million in 2003
from $249.0 million in 2002. As a percent of revenue, marketing expenses
increased to 61.4% in 2003 from 58.2% in 2002 primarily due to a higher level of
non-refundable royalties and advertising costs incurred during fiscal 2003 due
to the Company's shift away from telemarketing.
General and Administrative Expenses. General and administrative expenses
primarily include personnel-related costs, occupancy costs and other overhead
costs. General and administrative expenses decreased 7% to $74.1 million in 2003
from $79.2 million in 2002. As a percentage of revenues, general and
administrative expenses decreased to 16.2% in 2003 from 18.5% in 2002. These
decreases were primarily due to the sale of iPlace, Inc. and the closing of the
United Kingdom operations.
Amortization of Goodwill and Other Intangibles. Intangible amortization
decreased to $1.4 million in 2003 from $1.9 million in 2002 primarily due to the
effect of the sale of iPlace, Inc.
Settlement of Investment-Related Litigation. During fiscal 2003, we, along
with certain of the other former shareholders of iPlace, Inc., settled our
lawsuit against Homestore.com, Inc. The total settlement amount in favor of the
plaintiffs was $23.0 million, of which we received $19.1 million.
47
Gain on Sale of Subsidiary. During fiscal 2002, we sold our investment in
iPlace, Inc. for $50.1 million in cash and 1.6 million shares of Homestore.com,
Inc. common stock. We reported a gain of $65.6 million on the sale. During
fiscal 2003, we settled with Homestore.com, Inc. all issues pending related to
amounts held in escrow in connection with the sale. We recorded a net loss of
$1.0 million related to this settlement in fiscal 2003.
Net Loss on Investment. During fiscal 2002, we reported a loss of $33.6
million reflecting the write-down of our investment in Homestore.com, Inc.
common stock to its fair market value. During fiscal 2003, we sold all of our
Homestore.com, Inc. common stock and recognized a loss of $0.2 million.
Other Income/Expense, Net. Other income/expense, net is primarily composed
of interest income from cash and cash equivalents and bank fees related to our
line of credit. Other income increased to $0.3 million in 2003 from expense of
$0.4 million in 2002 due to the increase in our cash balance.
Provision for Income Taxes. For the year ended June 30, 2003, we recorded a
provision for income taxes of $16.2 million based on an effective tax rate of
40%. The effective tax rate was higher than the U.S. federal statutory rate for
the year ended June 30, 2003 primarily due to state taxes and other
non-deductible items. During fiscal 2002, we were not required to record a
provision for income taxes due to the ability to utilize net operating loss
carryforwards against which we had carried a full valuation allowance. The
valuation allowance recognized in prior periods has been fully reversed in 2003
based upon our belief that it is more likely than not that we will realize our
deferred tax assets. As of June 30, 2003, we had accumulated federal net
operating loss carryforwards of $41.4 million.
Fiscal 2002 Compared to Fiscal 2001
Revenues. Revenues decreased 10% to $427.6 million in 2002 from $475.7
million in 2001. Excluding iPlace, Inc. revenues of $9.4 million and $42.4
million in 2002 and 2001, respectively, revenues would have decreased 3%. The
decrease in revenues is due to the controlled slow down in new member marketing
implemented in the beginning of fiscal 2002. This controlled slow down was a
reaction to decreased consumer response rates. Revenue from members who are
charged on a monthly payment program increased to $41.3 million in 2002 from
$27.6 million in 2001. As a percentage of total revenues, renewal revenues from
annual payment programs were 48% in 2002 and 41% in 2001. The increase in
renewal revenues as a percentage of total revenues is due to the controlled slow
down in new member marketing implemented in the beginning of the fiscal year.
Operating Expenses. Operating expenses decreased 13% to $78.7 million in
2002 from $90.4 million in 2001 primarily due to the sale of iPlace, Inc., the
closing of the United Kingdom operations and lower revenues during the year. As
a percentage of revenues, operating expenses decreased to 18.4% in 2002 from
19.0% in 2001 primarily due to the sale of iPlace, Inc., which had higher
operating costs as a percentage of revenues.
Marketing Expenses. Marketing expenses decreased 18% to $249.0 million in
2002 from $305.0 million in 2001 primarily due to the effect of the controlled
slow down in new member marketing implemented in the beginning of fiscal 2002
and the effect of the sale of iPlace, Inc. As a percent of revenue, marketing
expenses decreased to 58.2% in 2002 from 64.1% in 2001 primarily due to the
increase in the mix of renewal revenue as a percent of total revenue. The lower
level of new member marketing resulted in an increase in the ratio of renewal
member revenues to total revenues. Marketing expenses related to renewal
revenues are typically significantly lower than expenses related to new member
revenues. Expenses related to new member marketing, as a percent of new member
revenues, increased in 2002 compared to 2001 primarily due to a decrease in
consumer response rates.
General and Administrative Expenses. General and administrative expenses
decreased 21% to $79.2 million in 2002 from $99.7 million in 2001, and as a
percentage of revenues, decreased to 18.5% in 2002 from 21.0% in 2001. These
decreases were primarily due to the sale of iPlace, Inc. and the effect of cost
saving initiatives related to the restructuring, as described below.
Restructuring Charges. In October 2001, we implemented certain cost saving
initiatives due to a slowdown in consumer response rates and increased economic
uncertainty in both the U.S. and abroad. This restructuring program included a
workforce reduction of approximately 190 employees, the closing of our United
Kingdom operations and the downsizing of our operational infrastructure. As a
result of this restructuring program, we recorded restructuring charges of $6.9
million during the second quarter ended December 31, 2001. See Note 12 of
MemberWorks' consolidated financial statements on page F-19 of this prospectus.
48
Amortization of Goodwill and Other Intangibles. Intangible amortization
decreased to $1.9 million in 2002 from $10.9 million in 2001 due to the adoption
of SFAS 142, which no longer requires the amortization of indefinite lived
intangible assets, and the sale of iPlace, Inc. Excluding the amortization of
indefinite lived intangible assets of $7.8 million in 2001, amortization of
goodwill and other intangibles would have been $3.1 million. This decrease was
due to the sale of iPlace, Inc.
Gain on Sale of Subsidiary. During the quarter ended September 30, 2001, we
sold our investment in iPlace, Inc. for $50.1 million in cash and 1.6 million
shares of Homestore.com, Inc. stock. We reported a gain of $65.6 million on the
sale.
Net Loss on Investment. During fiscal 2002, we reported a loss of $33.6
million reflecting the write-down of our investment in Homestore.com, Inc.
common stock to its fair market value.
Other Expense, Net. Other expense, net is primarily composed of interest
income from cash and cash equivalents, bank fees related to our borrowings under
our line of credit and interest expense related to our notes payable. Other
expense decreased to $0.4 million in 2002 from $0.5 million in 2001. We had no
borrowings outstanding under our line of credit as of June 30, 2002.
Provision for Income Taxes. We were not required to record a provision for
income taxes for the year ended June 30, 2002 due to the ability to utilize net
operating loss carryforwards against which we had carried a full valuation
allowance. We were not required to record a provision for income taxes for the
year ended June 30, 2001, due to tax losses realized. As of June 30, 2002, we
had accumulated federal net operating loss carryforwards of $68.7 million.
Liquidity and Capital Resources
Net cash provided by operating activities was $20.4 million for the six
months ended December 31, 2003 versus $32.9 million for the six months ended
December 31, 2002. The decrease in operating cash flow in the six months ended
December 31, 2003 versus the prior year was primarily due to the impact of
changes in assets and liabilities which reduced cash by $1.6 million in the six
months ended December 31, 2003 and increased cash by $7.6 million in the six
months ended December 31, 2002. The decrease in changes in assets and
liabilities over the prior year was primarily driven by the timing of vendor
payments. Also contributing to the decrease in operating cash flow were
increased operating expenses partially offset by an increase in marketing margin
before deferral (revenues before deferral less marketing costs before deferral).
As a percent of revenue before deferral, marketing costs before deferral were
53.8% in the six months ended December 31, 2003 compared to 54.8% in the six
months ended December 31, 2002.
Net cash provided by operating activities was $48.5 million, $17.0 million
and $12.0 million for the years ended June 30, 2003, 2002 and 2001,
respectively. The increase in operating cash flow in fiscal 2003 was due to a
shift in the marketing mix to more profitable marketing channels, cost savings
as a result of the restructuring plan and the actual costs incurred in December
2001 related to the restructuring plan. The shift in marketing mix to more
profitable marketing channels is demonstrated by the decrease in marketing costs
before deferral as a percentage of revenues before deferral.
Our management believes that revenues before deferral and marketing costs
before deferral are important measures of liquidity. Revenues before deferral
are revenues before the application of SAB 101 and represent the actual
membership fees billed during the current reporting period less an allowance for
membership cancellations. Marketing costs before deferral are marketing costs
before the application of SAB 101 and SOP 93-7 and represent our obligation for
marketing efforts that occurred during the current reporting period.
Revenues before deferral are calculated as follows (in thousands):
Six Months Ended
December 31, Fiscal Year
------------------------ ------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ---------- ---------- ---------
Revenues reported in the Statements of
Operations ................................. $ 236,988 $ 219,049 $ 456,881 $ 427,602 $ 475,726
Change in deferred membership fees............. (17,733) (9,909) (39,003) (17,116) 9,266
---------- --------- --------- --------- ---------
Revenues before deferral ...................... $ 219,255 $ 209,140 $ 417,878 $ 410,486 $ 484,992
========= ========= ========= ========= =========
49
Revenues before deferral increased 5% to $219.3 million for the six months
ended December 31, 2003 from $209.1 million for the six months ended December
31, 2002. The increase in revenues is primarily due to an increase in the
weighted average program price point. Revenues before deferral were $417.9
million, $410.5 million and $485.0 million for the years ended June 30, 2003,
2002 and 2001, respectively. Revenues before deferral increased 2% in fiscal
2003 from the prior year. Excluding revenue from iPlace, Inc. of $11.0 million
and the United Kingdom of $1.9 million from the prior year, revenues before
deferral increased 5% in fiscal 2003. The United Kingdom operations were closed
in fiscal 2002 and iPlace, Inc. was sold in fiscal 2002. Revenues before
deferral increased in fiscal 2003 compared to the prior year primarily due to an
increase in the average program price point. The following table summarizes the
weighted average price points:
Fiscal Year
-----------------------------
2004 2003 2002
--------- --------- --------
Weighted Average Annual Price Points:
First Quarter ................................ $ 105 $ 96 $ 80
Second Quarter ............................... $ 107 $ 104 $ 84
Third Quarter ................................ n/a $ 111 $ 95
Fourth Quarter ............................... n/a $ 112 $ 96
Weighted Average Monthly Price Points:
First Quarter ................................ $10.72 $ 9.44 n/a
Second Quarter ............................... $11.54 $ 9.76 $8.58
Third Quarter ................................ n/a $10.14 $9.00
Fourth Quarter ............................... n/a $10.22 $9.33
Revenues before deferral from members who are charged on a monthly payment
program were $74.7 million during the six months ended December 31, 2003 and
$33.8 million during the six months ended December 31, 2002. Revenues before
deferral from members who are charged on a monthly payment program were $76.9
million, $41.3 million and $27.6 million, respectively, for the fiscal years
ended June 30, 2003, 2002 and 2001. The following table summarizes the average
monthly members billed each month:
Fiscal Year
-----------------------------
2004 2003 2002
--------- --------- --------
First Quarter .................................. 955 576 292
Second Quarter ................................. 1,239 588 300
Third Quarter .................................. NA 664 395
Fourth Quarter ................................. NA 739 538
The following table summarizes the components of revenues before deferral:
Six Months Ended
December 31, Fiscal Year
----------------- --------------------------
2003 2002 2003 2002 2001
-------- -------- -------- ------- --------
New annual ..................... 19% 35% 37% 39% 50%
Renewal annual ................. 47% 49% 45% 51% 44%
Monthly ........................ 34% 16% 18% 10% 6%
As a percentage of total revenues before deferral, renewal revenues from
annual payment programs decreased to 47% in the six months ended December 31,
2003 from 49% in the six months ended December 31, 2002 due to our strategic
initiative to shift new marketing towards members on a monthly payment program.
This shift to monthly payment programs has a near-term negative impact on
operating cash flow due to the timing of revenues collected relative to the
corresponding timing of marketing expenditures. As a percentage of total
revenues before deferral, renewal revenues from annual payment programs were 45%
in fiscal 2003, 51% in fiscal 2002 and 44% in fiscal 2001. The decrease in
renewal revenues from annual payment programs in fiscal 2003 is due to the
controlled marketing slowdown implemented in the beginning of fiscal 2002, the
growth in monthly payment programs and the sale of iPlace, Inc.
50
Active members were approximately 6.3 million at December 31, 2003 and
December 31, 2002. Active members at June 30, 2003, June 30, 2002 and June 30,
2001 were 6.3 million, 6.6 million and 7.9 million, respectively.
Marketing costs before deferral are calculated as follows (in thousands):
Six Months Ended
December 31, Fiscal Year
------------------------ --------------------------------------
2003 2002 2003 2002 2001
---------- ---------- ----------- ------------ ----------
Marketing expenses reported in the Statements
of Operations ........................... $ 133,401 $ 135,448 $ 280,673 $ 248,974 $ 305,032
Change in membership solicitation and other
deferred costs .......................... (15,368) (20,775) (51,411) (15,038) (17,177)
--------- --------- --------- --------- ---------
Marketing costs before deferral ............ $ 118,033 $ 114,673 $ 229,262 $ 233,936 $ 287,855
========= ========= ========= ========= =========
Marketing costs before deferral increased 3% to $118.0 million for the six
months ended December 31, 2003 from $114.7 million for the six months ended
December 31, 2002. As a percent of revenues before deferral, marketing expenses
before deferral were 53.8% for the six months ended December 31, 2003 and 54.8%
for the six months ended December 31, 2002. The decrease is primarily due to the
increase in the mix of marketing in our more profitable MemberLinkssm and online
channels. Marketing costs before deferral were $229.3 million, $233.9 million
and $287.9 million in 2003, 2002 and 2001, respectively. Marketing costs before
deferral decreased 2.0% in fiscal 2003 from the prior year. As a percent of
revenues before deferral, marketing expenses before deferral were 54.9% in 2003,
57.0% in 2002 and 59.4% in 2001. These decreases were primarily due to a shift
in the marketing mix to more profitable marketing channels and have a direct
positive impact on our net cash flow provided by operating activities. See "Risk
Factors -- MemberWorks' efforts to increase the share of monthly payment
programs in its program mix may adversely affect its cash flow."
Net cash used in investing activities was $2.5 million during the six
months ended December 31, 2003 versus net cash provided by investing activities
of $15.6 million during the six months ended December 31, 2002. Net cash
provided by investing activities during the six months ended December 31, 2002
included $19.1 million proceeds related to the settlement of a lawsuit and $0.8
million of funds paid in connection with a purchase price adjustment related to
the sale of iPlace, Inc. Capital expenditures were $2.5 million during the six
months ended December 31, 2003 and $2.8 million during the six months ended
December 31, 2002. Net cash provided by investing activities was $12.4 million
in 2003 and $40.2 million in 2002, while net cash used in investing activities
was $18.2 million in 2001. Fiscal 2003 included $19.1 million of proceeds
related to the settlement of a lawsuit and $0.8 million of funds paid in
connection with a purchase price adjustment related to the sale of iPlace, Inc.
In fiscal 2003, we made a $0.5 million investment in a small business outsource
marketing company. Net cash provided by investing activities in 2002 reflects
the receipt of $46.0 million in net proceeds from the sale of iPlace, Inc. In
fiscal 2001, we paid $8.2 million in cash to acquire the remaining 81% of
Discount Development Services, LLC. In addition, during fiscal 2001, we received
$4.1 million in proceeds from the sale of our investment in 24/7 Media Inc.
Capital expenditures were $5.5 million, $5.8 million and $15.1 million in 2003,
2002 and 2001, respectively.
Net cash provided by financing activities was $29.8 million for the six
months ended December 31, 2003 versus net cash used in financing activities of
$14.0 million for the six months ended December 31, 2002. The increase in cash
provided by financing activities was primarily due to the issuance of $90.0
million aggregate principal amount 5.50% convertible senior subordinated notes
due September 2010. In addition, we received $22.6 million from the exercise of
stock options during the six months ended December 31, 2003. These increases in
financing activities during the six months ended December 31, 2003 were offset
by increased spending under our stock repurchase program. We purchased 2.5
million shares for $79.1 million, an average price of $31.91, during the six
months ended December 31, 2003 compared to 0.9 million shares for $15.0 million,
an average price of $17.13, during the six months ended December 31, 2002. Net
cash used in financing activities was $34.2 million, $33.5 million and $2.1
million in 2003, 2002 and 2001, respectively. The increase in cash used in
financing activities was primarily due to an increase in spending under our
stock repurchase program. We purchased 2.0 million shares for $37.2 million, an
average price of $18.67, during the year ended June 30, 2003 compared to 2.2
million shares for $34.3 million, an average price of $15.40, during the year
ended June 30, 2002 and compared to 0.3 million shares for $8.9 million, an
average price of $26.30, during the year ended June 30, 2001. We utilize cash
from operations and stock option exercises to repurchase shares, as we believe
this enhances shareholder value. During the six months ended December 31, 2003,
the Board of Directors authorized 2.0 million additional shares to be
repurchased under the buyback program. As of December 31, 2003, we had 500,000
shares available for
51
repurchase under our buyback program. In January 2004, the Board of Directors
authorized an additional 1.0 million shares to be repurchased under the buyback
program. We have purchased approximately 184,000 shares of our common stock for
$5.9 million at an average price of $31.90, since December 31, 2003.
On April 1, 2004, we completed the acquisition of all of the assets and
outstanding capital stock of Lavalife for approximately Cdn$152.5 million
($116.4 million) in cash. Lavalife's senior management purchased approximately
Cdn$11.9 million ($9.1 million) in MemberWorks restricted common stock at
closing. We financed the purchase price with cash on hand and borrowings under
our $45.0 million senior secured credit facility. Lavalife now operates as our
wholly owned restricted subsidiary.
As of December 31, 2003, we had cash and cash equivalents of $120.0
million. In addition, on March 25, 2004, we entered into a $45.0 million amended
and restated senior secured credit facility. As of April 29, 2004, we had $25.6
million of borrowing capacity remaining under the senior secured credit facility
due to a $5.5 million letter of credit outstanding thereunder and other
restrictions under the senior secured credit facility. As of April 29, 2004, the
effective interest rate for borrowings was 4.00%. See "Description of Other
Indebtedness" for additional information on the senior secured credit facility.
The senior secured credit facility has certain financial covenants, including a
maximum debt coverage ratio, minimum EBITDA requirement, restrictions on
additional borrowings and potential restrictions on additional stock
repurchases. We believe that existing cash balances, together with the
availability under our senior secured credit facility, will be sufficient to
meet our funding requirements for at least the next twelve months.
We did not have any material commitments for capital expenditures as of
December 31, 2003. We intend to utilize cash generated from operations to
fulfill any capital expenditure requirements for the remainder of fiscal 2004.
Commitments
We are not aware of factors that are reasonably likely to adversely affect
liquidity trends, other than the risk factors presented in this prospectus under
"Forward Looking Statements" and "Risk Factors." We do not have off-balance
sheet arrangements, non-exchange traded contracts or material related party
transactions.
Future minimum payments of contractual obligations as of December 31, 2003
are as follows (amounts in thousands):
Payments Due by Period
----------------------------------------------------------------
Less than 1 After 5
Total year 1-3years 4-5years years
---------- ------------ ---------- --------- ----------
Operating leases ........................... $ 24,314 $ 6,630 $ 9,363 $ 4,838 $ 3,483
Convertible notes payable .................. 90,000 -- -- -- 90,000
Purchase obligations........................ 1,407 1,407 -- -- --
Other long-term obligations................. 28 28 -- -- --
--------- --------- --------- --------- ---------
Total payments due.......................... $ 115,749 $ 8,065 $ 9,363 $ 4,838 $ 93,483
========= ========= ========= ========= =========
We operate in leased facilities. We expect that leases currently in effect
will be renewed or replaced by other leases of a similar nature and term. See
Notes 10 and 11 of MemberWorks' consolidated financial statements on page F-16.
Lavalife operates in leased facilities. (See Note 14 to the Lavalife's
consolidated financial statements incorporated by reference into this
prospectus). As of December 31, 2003, Lavalife had certain purchase commitments.
(See Note 3 to the Lavalife's unaudited consolidated financial statements
incorporated by reference into this prospectus).
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. While we will continue
52
to evaluate the requirements of FIN 46, we do not believe that the adoption of
FIN 46 will have a material impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). This statement requires that certain financial instruments that
were accounted for as equity under previous guidance be classified as
liabilities in statements of financial position. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We do not believe that the adoption of SFAS 150 will have a material
impact on our financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB
104"), "Revenue Recognition," which supercedes SAB 101. The primary purpose of
SAB 104 is to rescind accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, which was superseded as a result of the
issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." SAB 104 did not have a significant impact on our financial
statements.
Lavalife
Overview
Lavalife is a leading independent provider of web-based and IVR based
personals services. Lavalife offers its services to its approximately 700,000
active web-based and IVR-based users and had approximately 8.2 million unique
web visitors during January 2004. These interactive services allow users who
want to enhance their social lives to search for a date, meet new people and
communicate with other users. Lavalife serves customers in the United States,
Canada and other regions, principally Australia, which accounted for
approximately 69%, 25% and 6%, respectively, of its net sales for the fiscal
year ended September 30, 2003. To acquire new users and retain existing users,
Lavalife relies on its innovative products, marketing relationships with major
media groups, advertising campaigns in large markets, widely recognized brand
and advanced technology infrastructure.
Lavalife employs a transactional business model, in which users buy
non-refundable credits up front and spend those credits when they want to
interact with other users. The customer determines when to use the credits to
communicate with other users. Lavalife derives its revenues from the sale of
these credits to its users. Revenue is recognized on the basis of credits
consumed. Deferred revenue represents credits purchased by customers remaining
unused at the end of the period and estimated to be used in the future.
Lavalife is a Canadian company and is exposed to currency exchange rate
fluctuations because a significant portion of its revenues and expenses are
denominated in currencies other than the Canadian dollar. For the year ended
September 30, 2003, 81% of the revenue generated was denominated in U.S.
dollars, 14% was denominated in Canadian dollars and 5% in Australian dollars.
For the year ended September 30, 2003, 48% of the costs were denominated in
Canadian dollars, 47% in U.S. dollars and 5% in Australian dollars.
Three Month Period Ended December 31, 2003 and December 31, 2002
Sales. Sales decreased Cdn$4.1 million, or 15%, to Cdn$23.1 million during
the three months ended December 31, 2003 from Cdn$27.2 million during the three
months ended December 31, 2002. The decrease was driven by the decrease in sales
of Cdn$3.5 million, or 13%, due to a decline in value of U.S. dollars relative
to Canadian dollars, which had a negative impact on the sales generated in U.S.
dollars. The average foreign exchange rate for U.S. dollars, expressed in
Canadian dollars, for the three months ended December 31, 2003 decreased 16%
over the prior year period. Excluding the negative impact of the foreign
exchange rate movement, sales decreased by Cdn$0.6 million, or 2%, due to
continued growth in its web based business, which was offset by a decline in the
IVR business experienced during the upgrade of its dating systems technology.
Operating income. Operating income decreased Cdn$l.8 million, or 41%, to
Cdn$2.6 million during the three months ended December 31, 2003 from Cdn$4.4
million during the three months ended December 31, 2002. The decrease was
primarily driven by the negative impact of the foreign exchange rate movement
described above, which reduced operating income by Cdn$1.7 million. Excluding
the negative impact of the foreign exchange rate movement, operating income
decreased by Cdn$0.2 million.
53
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30,
2002
Sales. Sales decreased Cdn$5.6 million, or 5% to Cdn$102.6 million in
fiscal 2003 from Cdn$l08.2 million in fiscal 2002. The decrease was driven by a
decrease in sales of Cdn$5.8 million, or 5%, due to a decline in value of U.S.
dollars relative to Canadian dollars, which had a negative impact on the sales
generated in U.S. dollars. The average foreign exchange rate for U.S. dollars
expressed in Canadian dollars, for the 2003 fiscal year decreased 7% over the
prior year. Excluding the negative impact of the foreign exchange movement,
Lavalife's sales would have increased by $0.2 million due to continued growth in
its web-based business, which was offset by a decline in the IVR business
experienced during the upgrade of its dating systems technology.
Operating income. Operating income decreased Cdn$2.8 million, or 14%, to
Cdn$l7.1 million in fiscal 2003 from Cdn$19.9 million in fiscal 2002. The
decrease was primarily driven by the negative impact of foreign exchange rate
movement on sales discussed above, which reduced operating income by Cdn$3.1
million. Excluding the negative impact of the foreign exchange rate movement,
operating income increased by Cdn$0.3 million or 0.3% of sales, which was
primarily due to the recovery of disputed telecommunications charges, partially
offset by the increase in advertising expenses to promote Lavalife's web-based
services.
Liquidity and Capital Resources
Cash flows from operating activities increased to Cdn$4.4 million during
the three months ended December 31, 2003 from Cdn$l.7 million during the three
months ended December 31, 2002 primarily due to an increase in changes in
working capital. Cash flows from operating activities increased to Cdn$16.3
million in fiscal 2003 from Cdn$14.6 million in fiscal 2002 primarily due to an
increase in changes in working capital.
Cash used in investing activities decreased to Cdn$0.2 million during the
three months ended December 31, 2003 from Cdn$0.9 million during the three
months ended December 31, 2002 primarily driven by a decrease in capital
expenditures. Capital expenditures during the three months ended December 31,
2003 decreased to Cdn$0.2 million from Cdn$0.8 million during the three months
ended December 31, 2002. Cash used in investing activities decreased to Cdn$2.8
million in fiscal 2003 from Cdn$5.9 million in fiscal 2002 primarily driven by a
decrease in capital expenditures. Capital expenditures in fiscal 2003 decreased
to Cdn$2.9 million from Cdn$5.7 million fiscal 2002 primarily due to the
completion of the upgrade of the dating systems technology in the year ended
September 30, 2003.
Cash used in financing activities was Cdn$21.0 thousand during the three
months ended December 31, 2003 versus cash provided by financing activities of
Cdn$9.6 million during the three months ended December 31, 2002. Financing
activities during the three months ended December 31, 2002 included the net cash
received from the issuance of capital of Cdn$9.7 million. Cash used in financing
activities decreased to Cdn$8.5 million in fiscal 2003 from Cdn$9.7 million in
fiscal 2002. Financing activities during fiscal 2003 included a return of
capital of Cdn$17.0 million and a premium paid on the cancellation of common
stock and stock options of Cdn$l.0 million offset by net cash received from the
issuance of capital of Cdn$9.8 million. Financing activities during fiscal 2002
included the repayment of subordinated debt of Cdn$9.7 million.
54
BUSINESS
MemberWorks
Overview
We are a leading provider of innovative membership programs to consumers.
Our members benefit by receiving significant discounts and insightful
information on everyday items in areas which include healthcare, personal
finance, insurance, travel, entertainment, fashion and personal security. As of
December 31, 2003, we had approximately 6.3 million members and had over 6
million members as of the end of each of the last four fiscal years. Our clients
(who offer the membership programs to their customers), including Citibank N.A.
and West Corporation, benefit by receiving royalty payments in exchange for
providing us with new members or access to potential members. Our participating
vendors (who offer products and/or services through our membership programs),
have an incentive to provide discounts to our members in order to reach a large
number of demographically attractive consumers while incurring minimal
incremental marketing costs. For the twelve months ended December 31, 2003,
after giving pro forma effect to the acquisition of Lavalife, our revenues would
have been $545.4 million.
Membership Programs
We design our membership programs to address the particular needs and
preferences of our members by combining various features and benefits to
customize our programs. Our membership programs are for either annual or monthly
renewable terms. Traditionally, we marketed membership programs which had an
up-front annual membership fee. However, in fiscal 2003, we expanded our
marketing of membership programs for which membership fees are payable in
monthly installments, which generally have higher margins. During the six months
ended December 31, 2003, more than 60% of our new member enrollments were in
monthly payment programs, and we expect the proportion of our monthly payment
programs to increase going forward. In general, membership fees vary depending
upon the particular services offered by the membership program. In the first
half of fiscal 2004, annual membership fees averaged approximately $106 per year
and monthly membership fees averaged $11.18 per month, compared to $100 and
$9.60, respectively, for the same period in fiscal 2003.
We continue to enhance our existing membership programs to add more member
value by continuously monitoring and addressing the needs and preferences of our
members, which, in turn, has enabled us to increase the average membership fees
year over year. We generally design membership programs to provide our members
with potential savings of at least twenty times their membership fees. Our
money-saving programs fall into the following four key categories:
o Health and Insurance -- The health and fitness membership programs
offer significant savings on a comprehensive array of products,
including prescription drugs, vitamins and supplements, eye glasses
and contact lenses, hearing aides, durable medical equipment and
select consumer health products. Also offered are discounts on
professional services, including medical, dental, chiropractic,
alternative medicine, elder care and personal health services. Our
insurance programs offer competitively priced insurance products,
including life, accidental death, short-term and catastrophic
disability and supplemental medical, warranty and identity theft
insurance coverage.
o Travel, Entertainment and Shopping -- These membership programs offer
exclusive, members-only savings with leading brand name partners.
Members have multiple opportunities to save on airfare, hotel rates,
car rental and cruise packages, theme and amusement parks, restaurants
and movie theaters. Members also have access to savings on a wide
range of merchandise, apparel and personal services.
o Privacy, Protection and Home Improvement -- Members have access to
bundles of services that enable them to better manage their privacy
and protection through identity theft insurance, card registration,
credit reporting, scoring and monitoring, and personal information
monitoring services, and savings on security systems, 24-hour
protection services, roadside assistance, financial, tax and
retirement planning and extended warranty protection. Members also
have access to discounts on home improvement, consumer electronics and
family entertainment.
o Specialty Markets and Custom Programs -- We partner with well known
clients to offer custom, private label or co-branded membership
programs to meet the specific needs of our client's defined
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customer base. In addition, we also offer membership materials and
customer service in Spanish and French.
If the membership is not cancelled during the trial period, the consumer is
charged the annual or monthly membership fee, depending upon the applicable
billing method. For annual members, in the event that the member does not cancel
the membership after the initial one-year membership term, he or she generally
receives a renewal notice 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 may cancel his or her
membership in the program, generally for a pro rata refund of the membership fee
based on the remaining portion of the membership period. Monthly members are
billed each month after the trial period ends and continue to be billed each
month until the member cancels.
Clients
Our programs are primarily marketed to customers through arrangements with
our clients, which include banks and other financial institutions, e-commerce
companies, direct response television companies, catalog companies, retailers,
major oil companies and other organizations with large numbers of individual
customers. In some cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource the implementation of membership programs to
providers that are able to apply advanced database systems to capture, process
and store market information, are able to use their experience to provide
effective membership programs and are able to realize economies of scale. In
addition, businesses demand that the program providers have the expertise to
continue to introduce innovative new programs and have resources, such as an
extensive vendor network and experienced management team, to launch membership
programs quickly and successfully.
Membership programs sponsored by our two largest clients, West Corporation
and Citibank N.A. (and its affiliates), accounted for 16% and 21% of our
revenue, respectively, for the fiscal year ended June 30, 2003 and 18% and 13%
of revenue, respectively, for the six months ended December 31, 2003.
Vendors
In most cases, the products and services accessed through our programs are
offered and provided directly to members by independent benefit providers, or
vendors. We evaluate and engage only those vendors who we believe can
cost-effectively deliver high quality products and services. Vendors generally
benefit by gaining access to a large number of demographically attractive
consumers with minimal incremental marketing costs. Vendors provide a
members-only discount on their products or services pursuant to contractual
arrangements with us. We generally do not receive payments from our vendors for
offering their products or services to our members and, in certain cases, we pay
our vendors a fee based on the number of members in our program or based on
other agreed upon factors.
Our contracts with vendors are generally for one year or more, with
subsequent one-year renewal terms at our option. In most cases, vendors may
cancel contracts only for cause and subject to notice provisions to provide us
time to locate a substitute vendor. Most vendor contracts are non-exclusive but
require vendors to maintain the confidentiality of the terms of the contract.
Marketing and Distribution
We solicit members for our programs primarily by direct marketing methods,
including inbound call marketing through MemberLinkSM, online marketing,
outbound telemarketing, which we outsource to third party contractors, and
direct mail, which is mailed either at our expense or our client's expense. We
have effectively diversified our distribution channels since our initial public
offering in 1996, at which time our primary method of solicitation was outbound
telemarketing. For the six months ended December 31, 2003, outbound
telemarketing was the source for only approximately 10% of our new member
enrollments.
MemberLinkSM inbound call marketing occurs when inbound callers to a client
meeting certain criteria are offered our membership service programs by the
client's service representative or by one of our membership service
representatives through a call transfer. This type of marketing method
essentially turns the client call center into a profit center. We pay the client
either a royalty for initial and renewal membership fees or a fee per marketing
pitch
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or per sale. Generally, MemberLinksm arrangements serve as a more efficient and
cost effective way to acquire members than our traditional outbound
telemarketing marketing model.
Online marketing is executed through arrangements with Internet service
providers ("ISPs"), online retailers and online marketers. The marketing methods
include banner ads, pop-up boxes and e-commerce cross-sells. We pay the client
either a royalty for membership fees or a fee per impression or per sale.
All outbound telemarketing is outsourced to third party contractors. Under
outbound telemarketing arrangements, participating marketing partners, such as
banks and other financial institutions and other organizations with large
numbers of individual account holders and customers, provide lists of consumers
which we input into our database management system to model, analyze and
identify likely members. We only collect and maintain customer data that is
required to administer our business activities, such as a customer's name,
address and encrypted billing information. We pay participating marketing
partners an annual royalty for initial and renewal membership fees received from
consumers who were provided to us by the marketing partner.
Substantially all of the information necessary for our marketing efforts is
supplied by our clients in accordance with strict consumer privacy safeguards.
As a result, our ability to market new programs to our existing customer base or
an existing program to a new customer base is generally dependent upon first
obtaining client approval.
Our contracts with our clients typically grant us the right to continue
providing membership services directly to the clients' individual account
holders even if the client terminates the contract. Many client relationships
are pursuant to contracts that may be terminated by the client upon 30 to 90
days' notice without cause and without penalty. Upon termination, we generally
have the right to continue the relationship with the client's customers who have
become program members, either indefinitely or for a specified period of time,
but we may not re-solicit those members upon their cancellation or non-renewal
of their membership.
In addition to marketing our programs directly to consumers through
MemberLinksm marketing, online marketing, outbound telemarketing and direct mail
marketing, we also deliver our membership service programs through our wholesale
arrangements. We work with a wholesale client to incorporate elements from one
or more of our standard service programs and design a custom program for the
client. The client will then either provide the customized membership program to
its customers as a value-added feature or resell the customized membership
program. In some cases, the client may provide wholesale memberships to its
customers free of charge and pay us the periodic membership fee for each
customer's membership. In other cases, the client may charge a reduced fee to
its customer. The client pays us membership fees for the customers who receive
the customized membership program. Under our wholesale programs, we do not pay
for the marketing costs to solicit memberships. Instead, the client offering the
memberships is responsible for marketing, usually with our assistance. Since we
do not pay for the marketing costs, wholesale programs have substantially lower
acquisition costs, which result in higher profit margins for us.
We also provide membership programs internationally through our subsidiary
MemberWorks Canada. MemberWorks Canada provides retail membership programs
similar to those offered in the U.S. as well as credit card enhancement services
to Canadian financial institutions through wholesale arrangements. Our revenues
from international operations represented 4%, 3%, 3% and 2% of total revenues
for the six months ended December 31, 2003, and fiscal years ended June 30,
2003, 2002 and 2001, respectively.
Membership Service
We believe that providing high quality service to our members is extremely
important in order to retain members and to strengthen the affinity of the
clients' members that were offered the membership program. Currently, we
maintain four call centers located in Montreal, Canada; Houston, Texas; Omaha,
Nebraska and Chicago, Illinois with a total of almost 800 membership service
representatives. All new membership service representatives are required to
attend on-the-job training. Through our training programs, systems and software,
we seek to provide members with friendly, rapid and effective answers to
questions. Members can access their benefits 24 hours a day via the program's
web site or automated telephone response technology. We also work closely with
our clients' customer service staff to ensure that their representatives are
knowledgeable in matters relating to membership service programs we offer.
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Technology
We have invested substantially in new technology, including a
state-of-the-art fulfillment center, a sophisticated customer service customer
relationship management, or CRM, platform, data warehousing and mining
capabilities, and various Internet applications, all of which work together to
allow us to effectively and efficiently service our members. We receive new
member information from our marketing partners daily, and that information is
maintained on core infrastructure systems that drive information constantly to
call center, fulfillment, billing and financial systems. This allows for rapid
fulfillment of member information kits as well as other benefits. All membership
information is maintained on a state-of-the-art CRM system, which allows
extremely responsive targeted call center interactions. We receive confirmation
of billing data from our merchant processors on a regular basis, permitting us
to update the status of each member, including member profile information.
In providing quality service to our members, our management information
systems interact with our advanced call routing system in order to display
member profile information prior to answering the call, allowing our membership
service representatives to have the best possible information prior to serving
the members. Our telecommunications systems also monitor the performance quality
of our membership service representatives and other aspects of our business
through sophisticated reporting capabilities. In addition, our marketing experts
use proprietary systems in combination with 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.
Government Regulation and Litigation
We market membership programs through various distribution channels
including MemberLinksm, online marketing, outbound telemarketing and direct
mail. These channels are regulated on both the state and federal levels and we
believe that these marketing methods will increasingly be subject to regulation,
particularly in the area of consumer privacy. Regulation may limit our ability
to solicit new members or to offer one or more products or services to existing
members. 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. For example, 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. Additionally, the Federal Telemarketing and Consumer Fraud
and Abuse Prevention Act of 1994 and Federal Trade Commission ("FTC")
regulations, including the Telemarketing Sales Rule, as amended, promulgated
thereunder prohibit deceptive, unfair or abusive practices in telemarketing
sales. Both the FTC and state attorneys general have authority to prevent
telemarketing activities deemed by them to be "unfair or deceptive acts or
practices." Further, some states have enacted laws and others are considering
enacting laws targeted directly at regulating telemarketing practices, and there
can be no assurance that any such laws, if enacted, will not adversely affect or
limit our current or future operations. Compliance with these regulations is
generally our responsibility, and we could be subject to a variety of
enforcement and/or private actions for any failure to comply with such
regulations. Our provision of membership programs requires us to comply with
certain state regulations, changes in which could materially increase our
operating costs associated with complying with such regulations. The risk of
noncompliance with any rules and regulations enforced by a federal or state
consumer protection authority may subject us or our management to fines or
various forms of civil or criminal prosecution, any of which could have a
material adverse affect on our business, financial condition and results of
operations. Also, the media often publicizes perceived noncompliance with
consumer protection regulations and violations of notions of fair dealing with
consumers, and the membership programs industry is susceptible to peremptory
charges of regulatory noncompliance and unfair dealing by the media.
We currently maintain rigorous security and quality controls to ensure that
all of our marketing practices meet or exceed industry standards and all
applicable state and federal laws and regulations. We only collect and maintain
customer data that is required to administer our business activities, such as a
customer's name, address and encrypted billing information and only public
information is used for marketing and modeling purposes, such as demographic,
neighborhood and lifestyle data. We neither resell any confidential customer
information we obtain or derive in marketing efforts nor purchase consumer
information from financial institutions.
Except as set forth below, in management's opinion, there are no
significant legal proceedings to which we or any of our subsidiaries are a party
or to which any of our properties are subject. We are involved in other lawsuits
and claims generally incidental to our business, including, but not limited to,
various suits, including previously disclosed suits, brought against us by
individual consumers seeking monetary and/or injunctive relief
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relating to the marketing of our programs. In addition, from time to time, and
in the regular course of its business, we receive inquiries from various federal
and/or state regulatory authorities.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company, a wholly owned subsidiary of ours, Monumental Life
Insurance Company and other defendants in the United States District Court for
the Eastern District of Michigan, Southern Division. The suit, which seeks
unspecified monetary damages, alleges that Coverdell and the other defendants
violated the Michigan Consumer Protection Act and other applicable Michigan laws
in connection with the marketing of Monumental Life Insurance Company insurance
products. The complaint includes a claim that the suit should be certified as a
class action and the plaintiff has filed a motion for class certification to
which all of the defendants have filed opposing papers regarding the same. The
Court certified a class of Michigan residents. The Court of Appeals denied the
defendants' petition for leave to appeal the certification order. No discovery
scheduling order has been set. We believe that the claims made against Coverdell
are unfounded, and we and Coverdell will vigorously defend our interests against
this suit.
On January 24, 2003, we filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration, filed against
us by MedValUSA Health Programs, Inc. in September 2000, involved claims of
breach of contract, breach of the duty of good faith and fair dealing, and
violation of the Connecticut Unfair Trade Practices Act ("CUTPA"). Even though
the arbitrators found that we were not liable to MedVal for any compensatory
damages, they awarded $5,495,000 in punitive damages and costs against us solely
under CUTPA. We believe that this arbitration award is unjustified and not based
on any existing legal precedent. Specifically, we are challenging the award on a
number of grounds, including that it violates a well defined public policy
against excessive punitive damage awards, raises constitutional issues and
disregards certain legal requirements for a valid award under CUTPA. The hearing
on our motion was held on February 10, 2003. On June 22, 2003, the Superior
Court denied our motion to vacate the award, and we filed an appeal of that
decision. While we intend to take action to prevent the enforcement of the award
by, among other things, vigorously pursuing an appeal, there can be no assurance
that we will be successful in our efforts. We have made no provision in our
financial statements for this contingency because we believe that a loss is not
probable. If we were ultimately unsuccessful in this or other available appeals,
and a final non-appealable court order confirming the arbitration award is
rendered, the payment of the award could have a material adverse effect on our
results of operations in the period in which the final order is entered.
On October 21, 2003, the Florida Attorney General's Office filed a civil
complaint against us based upon concerns that some of our past marketing
practices may have violated various consumer laws. We believe that any
legitimate concerns have previously been fully addressed, including the
implementation of industry-leading Best Marketing Practices and voluntary
agreements incorporating those practices, such as the nationwide assurance
agreement that we entered into with the State of Nebraska in 2001. We believe
that the allegations of the complaint are unfounded and we intend to vigorously
defend our interests in this matter. We further believe that the potential
liability represented by the lawsuit and the final resolution of this matter
will not be material to us.
Competition
We believe the principal competitive factors in the membership services
industry include the ability to identify, develop and offer innovative
membership programs, the quality and breadth of membership programs offered,
competitive prices and in-house marketing expertise. Our competitors offer
membership programs which provide services similar to, or which directly compete
with, those we provide. Some of these competitors have substantially larger
customer bases and greater financial and other resources than we have. To date,
we have effectively competed with such competitors. However, there can be no
assurance that our competitors will not increase their emphasis on programs
similar to those we offer to more directly compete with us; provide programs
comparable or superior to those we provide at lower membership prices; adapt
more quickly than we do to evolving industry trends or changing market
requirements; or that new competitors will not enter the market or that other
businesses will not themselves introduce competing programs. This increased
competition may result in price reductions, reduced marketing margins or loss of
market share, any of which could materially adversely affect our business,
financial condition and results of operations. Additionally, because contracts
between clients and program providers are often exclusive with respect to a
particular service, potential clients may be prohibited from contracting with us
to promote a program if the services we provide are similar to, or merely
overlap with, the services provided by an existing program of a competitor.
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Employees
As of December 31, 2003, we employed 1,164 persons on a full-time basis and
133 on a part-time basis. None of our employees is represented by a labor union.
We believe that our employee relations are good.
Lavalife
Overview
Through our subsidiary Lavalife, we are a leading global provider of
web-based and interactive voice response ("IVR") based personals services.
Founded in 1987, Lavalife markets its web and telephone products in
approximately 60 markets principally across the United States, Canada and
Australia. Lavalife's open-minded approach to dating allows members to choose
how they want to "click" with other singles by offering three unique categories:
dating, relationships and intimate encounters. Lavalife has had over 8 million
unique users since its inception. During 2003, Lavalife's users on average
exchanged 1.3 million messages every day.
Lavalife offers both web-based and IVR-based personals services to its
users. These services allow them to interact with each other from anywhere in
real time by phone, email, text chat or video. To acquire new users and retain
existing users, Lavalife relies on its innovative products, marketing
relationships with major media groups, advertising campaigns in large markets,
widely recognized brand and advanced technology infrastructure. These
interactive services allow users who want to enhance their social lives to
search for a date, meet new people and communicate with other users in a real
time, "Anywhere," "Anytime" and "Anyhow" environment. Lavalife's global revenues
are estimated to rank 2nd in 2003 for interactive personals services.
Lavalife.com, the company's interactive web site, had 8.2 million unique
visitors in January 2004, ranking 5th globally and 1st in Canada, according to
comScore Media Metrix.
Lavalife currently has over 700,000 active web-based and IVR-based users.
Lavalife serves customers in the United States, Canada and other regions,
principally Australia, which accounted for approximately 69%, 25% and 6%,
respectively, of its net sales for the fiscal year ended September 30. 2003. We
believe that Lavalife has developed a unique personals services brand that
focuses on outgoing singles living in major metropolitan areas.
Lavalife employs a transactional business model, in which users buy
non-refundable credits up front and spend those credits only when they want to
interact with other users. Lavalife's competitors generally employ a
subscription model, in which users pay a fixed periodic fee. We believe a
transactional model is more attractive to new users, who will join due to a
lower initial cost and the ability to easily control their spending. The
customer determines when to use the credits to communicate with other users.
Furthermore, once a user has an account balance, the user has a strong financial
incentive to return to use their remaining credits. To further encourage return
visits, Lavalife continues to refine its existing service offerings and
introduce new interactive services, such as video. Lavalife continues to refine
its product offerings and introduce innovative interactive products including
video and real time online social networking.
Lavalife's web personals services business started in 1996 as a free
service and began charging users on a transaction basis in 1998. Currently,
Lavalife is adding approximately 6,500 new users per day. We believe Lavalife is
well positioned to capitalize on anticipated expansion of online personals
services market generated by the growth in consumer participation driven by
social, practical and economic factors.
We believe Lavalife is currently the only company in the world offering
both web-based and IVR-based services on a global scale. The online dating
industry is characterized by two significant barriers to entry: critical mass
and technology. A critical mass of users in each geographic area is required to
offer value to and attract customers. In addition, highly responsive and
technologically advanced applications are required to attract and retain
customers. With an already strong market presence in the major North American
metropolitan areas and advanced technology, we believe Lavalife is well
positioned to benefit from these market dynamics.
Technology
Lavalife has recently upgraded its integrated global network to support
both its IVR and web operations from two network operations centers. These
centers, located in Toronto, Canada and Sydney, Australia, allow Lavalife to
scale both its web and IVR operations, as well as support mobile operations,
with full remote
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management capabilities of all services. Lavalife invested approximately Cdn$50
million in the current system, which was completed in April 2003.
Employees
As of February 29, 2004, Lavalife had 302 full-time equivalent employees in
two locations, Toronto, Ontario and Sydney, Australia. None of Lavalife's
employees are unionized. Lavalife has had no labor-related work stoppages and
believes that its labor relations are good.
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MANAGEMENT
Directors and Executive Officers
The following table provides information regarding our directors and
executive officers.
Name Age Position
----------------------------- --- --------------------------------------
Gary A. Johnson ............. 49 President and Chief Executive Officer,
Director
Vincent DiBenedetto ......... 47 Executive Vice President, Health and
Insurance Services
James B. Duffy .............. 50 Executive Vice President and Chief
Financial Officer
William Olson ............... 46 Executive Vice President, Client
Development
David Schachne .............. 43 Executive Vice President, Internet
Business Development and Strategic
Planning
Alec L. Ellison ............. 41 Director
Scott N. Flanders ........... 47 Director
Robert Kamerschen ........... 68 Director
Michael T. McClorey ......... 44 Director
Edward M. Stern ............. 45 Director
Marc S. Tesler .............. 58 Director
Gary A. Johnson, one of our co-founders, has served as our President and
Chief Executive Officer and a director since our inception in 1989. From 1987 to
1989, Mr. Johnson founded and served as President of American Target Group
Marketing, a marketer of membership services for magazine publishers. Mr.
Johnson received a B.S. from Tufts University and an M.B.A. from Harvard
Business School.
Vincent DiBenedetto joined us in October 2000 and currently serves as
Executive Vice President, Health and Insurance Services. Prior to joining us,
Mr. DiBenedetto was President of our subsidiary Discount Development Services,
L.L.C., which we acquired in October 2000. Mr. DiBenedetto received a B.S. from
Loyola University.
James B. Duffy joined us in 1996 and currently serves as Executive Vice
President and Chief Financial Officer. Prior to joining us, Mr. Duffy served in
various senior financial executive positions, including Senior Vice President,
Business Planning, at Merck Medco Managed Care, Inc., a prescription benefit
company, from 1986 to November 1995. Mr. Duffy received a B.B.A. from Pace
University.
William Olson joined us in March 2001 and currently serves as Executive
Vice President, Client Development. Prior to joining us, Mr. Olson served in
various senior positions, including President and Chief Executive Officer of
Dunlop/Maxfli Sports Corporation, President and Chief Executive Officer of Gold
Coast Beverage Distributors and President and Chief Executive Officer of
Guinness Brewing North America Corporation. Mr. Olson received a B.A. from
Temple University.
David Schachne joined us in 1990 and currently serves as Executive Vice
President, Internet Business Development and Strategic Planning. He has held
various senior management positions with us in the Marketing and Business
Development departments. Mr. Schachne received a B.A. from the State University
of New York, Albany and an M.B.A. from Harvard Business School.
Alec L. Ellison has been a director since 1989. Mr. Ellison has been
affiliated with Broadview International LLC, an investment bank, since 1988 and
has served as a Managing Director since 1993 and President since 2001. Mr.
Ellison holds a B.A. from Yale University and an M.B.A. from Harvard Business
School, where he was a Baker Scholar.
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Scott N. Flanders has been a director since July 2002. Mr. Flanders has
been the Chairman and Chief Executive Officer of Columbia House since September
1999. Prior to joining Columbia House, Mr. Flanders co-founded and served as the
Chairman of Telstreet.com, an e-commerce company, from January 1999 to September
1999. Previously, Mr. Flanders served as President of Macmillan Publishing, a
unit of Viacom, from January 1993 through December 1998. Mr. Flanders also
serves on the Board of Directors of Freedom Communications and the Gazelle Fund.
Mr. Flanders, a certified public accountant, holds a B.A. from the University of
Colorado and a J.D. from Indiana University.
Robert Kamerschen is a retired Chairman and Chief Executive Officer of
DIMAC Corporation, a direct marketing services company. He served as the
Chairman and Chief Executive Officer from September 1999 to February 2002. DIMAC
Corporation filed a voluntary petition for reorganization under the U.S.
bankruptcy laws in April 2000 and successfully emerged from bankruptcy in
February 2001. Prior to joining DIMAC Corporation, he was the Chairman and Chief
Executive Officer of ADVO, Inc., a leading full-service direct mail marketing
services company, and served in key senior leadership roles in a number of
prominent sales and marketing driven businesses involving significant turnaround
and/or transformation initiatives. Mr. Kamerschen currently serves on the boards
of IMS Health Incorporated, Linens-N-Things, Inc., RadioShack Corporation and
R.H. Donnelley Corporation. Mr. Kamerschen is a Regent for the University of
Hartford and Trustee of Wadsworth Antheneum Museum. Mr. Kamerschen received a
B.S. and an M.B.A. from Miami University (Ohio).
Michael T. McClorey has been a director since April 2001. Mr. McClorey
served as President of Health Services Marketing, an operating unit of the
Catalina Marketing Corporation, and as a member of the Office of the President
from February 2000 through August 2002. He also served as Chief Executive
Officer of Health Resource Publishing Company, a subsidiary of Catalina
Marketing Corporation, from April 1995 through August 2002, and as President
from April 1995 to February 2002. Catalina Marketing Corporation is a targeted
marketing firm. Mr. McClorey holds a B.B.A. in finance from the University of
Cincinnati.
Edward M. Stern has been a director since April 2002. Mr. Stern has been
the President and Chief Executive Officer of Neptune Regional Transmission
System, LLC, a company which is developing an undersea electronic transmission
system that will connect New Jersey and Long Island, New York since April 2004.
From April 1991 through February 2004, Mr. Stern held various executive
management positions, including President and Chief Executive Officer, at CHI
Energy Inc., an energy company specializing in renewable technologies and a
wholly owned subsidiary of Enel S.p.A. Mr. Stern also serves on the Board of
Directors of Energy Photovoltaics, Inc., a manufacturer of solar energy
products and systems. Mr. Stern holds B.A., J.D. and M.B.A. degrees from Boston
University.
Marc S. Tesler has been a director since January 1996. From July 1995 to
January 2001, he was a general partner of Technology Crossover Ventures, L.P., a
private partnership specializing in information technology investments. Mr.
Tesler received his B.S. from the University of Massachusetts and his M.B.A.
from New York University.
63
DESCRIPTION OF OTHER INDEBTEDNESS
Senior Secured Credit Facility
On March 25, 2004, we entered into an amended and restated senior secured
credit facility that allows borrowings of up to $45.0 million. The senior
secured credit facility was provided by a syndicate of banks led by LaSalle Bank
National Association. As of April 29, 2004, we had $25.6 million of borrowing
capacity remaining under the senior secured credit facility due to a $5.5
million letter of credit outstanding thereunder and other restrictions reducing
availability by an amount equal to twelve months' interest on the outstanding
notes. The senior secured credit facility is a 364-day facility, which is
renewable for two additional 364-day periods upon our request, unless written
notice of non-renewal is provided by all of the lenders under the facility no
less than 60 days prior to expiration.
At our option, interest on all borrowings under the senior secured credit
facility accrue at either LIBOR or the base commercial lending rate for the
bank, plus an applicable margin. The applicable margin on the base rate will be
between 0% and 0.50% based on our leverage ratio as defined in the senior
secured credit agreement. On April 29, 2004, the effective interest rate was
4.0%.
The senior secured credit facility will be guaranteed by all of
MemberWorks' present and future domestic subsidiaries and certain material
foreign subsidiaries, including Lavalife.
Our borrowings under the senior secured credit facility and the guarantees
will be secured by a first priority perfected security interest in:
o all the capital stock of our existing and future direct or indirect
domestic subsidiaries (in the case of a foreign subsidiary, such
pledge shall be limited to 65% of the shares of such capital stock);
and
o substantially all of our tangible and intangible property and the
tangible and intangible property of each of the guarantors, with
certain exceptions as set forth in the senior secured credit facility.
The senior secured credit facility contains customary negative covenants
and financial covenants. During the term of the senior secured credit facility,
the negative covenants restrict MemberWorks' and its subsidiaries' ability to do
certain things, including but not limited to: incur or guarantee additional
indebtedness; create, incur, assume or permit to exist liens on property, assets
or revenues; liquidate or dissolve; merge or consolidate with another entity;
make loans and investments; make capital expenditures or enter into operating
leases; engage in acquisitions and asset dispositions; declare or pay dividends
and make distributions or restrict the ability of our subsidiaries to pay
dividends and make distributions; repurchase our stock; and enter into
transactions with affiliates. The financial covenants impose minimum EBITDA
requirements and a maximum debt coverage ratio. Upon the closing of the offering
of the old notes, we became subject to a liquidity covenant under which we will
not permit the sum of (1) the unused availability under the senior secured
credit facility and (2) cash and cash equivalents, to be less than $30.0
million.
The credit agreement also contains customary events of default, including,
but not limited to, cross defaults to MemberWorks' other material debt.
5.50% Convertible Senior Subordinated Notes due 2010
On September 30, 2003, we issued $90.0 million aggregate principal amount
of 5.50% convertible senior subordinated notes due September 2010. The notes
bear interest at the rate of 5.50% per year, which is payable semi-annually in
arrears on April 1 and October 1 of each year. The notes are convertible into
our common stock at a conversion price of approximately $40.37, subject to
adjustment. We may redeem the notes for cash any time on or after October 6,
2008, at 100% of their principal amount, plus accrued and unpaid interest to,
but excluding, the redemption date. Upon a change of control, holders of the
notes may require us to repurchase for cash all or a portion of their notes at a
repurchase price equal to 100% of the principal amount of the notes to be
repurchased, plus accrued and unpaid interest thereon to, but excluding, the
repurchase date.
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THE EXCHANGE OFFER
Registration Rights
In connection with the sale of the old notes, the purchasers of the old
notes became entitled to the benefits of certain registration rights. Pursuant
to the registration rights agreement executed as part of the offering of the old
notes, we agreed to:
o file within 120 days, and cause to become effective within 210 days,
from the date of the original issue of the outstanding old notes, the
registration statement of which this prospectus is a part with respect
to the exchange of the old notes for the new notes to be issued in the
exchange offer; and
o use our reasonable best efforts to issue on or prior to 30 business
days, or longer, after the date on which the exchange offer
registration statement was declared effective, new notes in exchange
for the old notes.
If:
(1) we are not required to file the exchange offer registration
statement or permitted to consummate the exchange offer because
the exchange offer is not permitted by applicable law or
Commission policy; or
(2) any holder of old notes notifies us within 20 business days
following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from
participating in the exchange offer; or
(b) that it may not resell the new notes acquired by it in the
exchange offer to the public without delivering a prospectus
and the prospectus contained in the exchange offer
registration statement is not appropriate or available for
such resales; or
(c) that it is a broker-dealer and owns notes acquired directly
from the Company or an affiliate of the Company;
we will file with the Commission a shelf registration statement to cover resales
of the notes by the holders who satisfy certain conditions relating to the
provision of information in connection with the shelf registration statement.
In the event the exchange offer is consummated, we will not be required to
file a shelf registration statement relating to any outstanding old notes other
than those held by persons not eligible to participate in the exchange offer.
The exchange offer shall be deemed to have been consummated upon the earlier to
occur of:
o our having exchanged new notes for all outstanding old notes (other
than old notes held by persons not eligible to participate in the
exchange offer) pursuant to the exchange offer and
o our having exchanged, pursuant to the exchange offer, new notes for
all old notes that have been tendered and not withdrawn on the
expiration date.
Upon consummation, holders of old notes seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the Securities Act. See "Risk Factors--If you do not tender your old notes to be
exchanged in this exchange offer, your notes will remain subject to transfer
restrictions."
Liquidated Damages
In the registration rights agreement, we also agreed that in the event
that:
(1) we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such filing;
65
(2) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness;
(3) we fail to consummate the exchange offer within 30 business days after
the exchange offer registration statement is declared effective by the
Commission; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or fails
to be usable for its intended purposes during the periods specified in the
registration rights agreement,
then we will pay liquidated damages to each holder, with respect to the first
90-day period immediately following the occurrence of the first registration
default in an amount equal to 0.50% per annum per $1,000 principal amount of
notes held by such holder. The amount of the liquidated damages will increase by
an additional 0.50% per annum per $1,000 principal amount of notes with respect
to each subsequent 90-day period until all registration defaults have been
cured, up to a maximum amount of liquidated damages for all registration
defaults equal to 1.0% per annum.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying Letter of Transmittal, we will accept all old notes
validly tendered prior to 5:00 p.m., New York City time, on the expiration date
of the exchange offer. We will issue $1,000 principal amount of new notes in
exchange for each $1,000 principal amount of outstanding old notes accepted in
the exchange offer. Holders may tender some or all of their old notes pursuant
to the exchange offer in denominations of $1,000 and integral multiples thereof.
As of the date of this prospectus, $150 million aggregate principal amount
of old notes are outstanding. In connection with the issuance of the old notes,
we arranged for the old notes initially purchased by Qualified Institutional
Buyers to be issued and transferable in book-entry form through the facilities
of DTC, acting as depositary. The new notes will also be issuable and
transferable in book-entry form through DTC.
This prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of , 2004, which is the record date
for purposes of the exchange offer.
We shall be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice thereof to the exchange agent. See
"--Exchange Agent." The exchange agent will act as agent for the tendering
holders of old notes for the purpose of receiving new notes from us and
delivering new notes to such holders.
If any tendered old notes are not accepted for any exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted old notes will be returned, without
expenses, to the tendering holder thereof promptly after the expiration date.
Holders of old notes who tender in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
certain applicable taxes in connection with the exchange offer. See "--Fees and
Expenses."
Expiration Dates, Extensions, and Amendments
The term "expiration date" shall mean , 2004 unless we, in our sole
discretion, extend the exchange offer, in which case the term "expiration date"
shall mean the latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent
of any extension by oral or written notice and will mail to the record holders
of old notes an announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
Such announcement may state that we are extending the exchange offer for a
specified period of time.
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We reserve the right:
o to delay acceptance of any old notes in the event that the exchange
offer is extended, to extend the exchange offer or to terminate the
exchange offer and to refuse to accept any old notes, if any of the
conditions set forth herein under "--Termination" shall have occurred
and shall not have been waived by us (if permitted to be waived by us)
prior to the expiration date, by giving oral or written notice of such
delay, extension or termination to the exchange agent; and
o to amend the terms of the exchange offer in any manner deemed by us to
be advantageous to the holders of the old notes.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
exchange offer is amended in a manner determined by us to constitute a material
change, we will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the old notes of such amendment.
Without limiting the manner by which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
Interest on the New Notes
The new notes will bear interest from April 13, 2004 payable semiannually
on April 1 and October 1 of each year commencing on October 1, 2004 at the rate
of 9 1/4% per annum. Holders of old notes whose old notes are accepted for
exchange will be deemed to have waived the right to receive any payment in
respect of interest on the old notes accrued from April 13, 2004 until the date
of the issuance of the new notes. Consequently, holders who exchange their old
notes for new notes will receive the same interest payment on October 1, 2004
(the first interest payment date with respect to the old notes and the new
notes) that they would have received had they not accepted the exchange offer.
Resale of the New Notes
Based on no-action letters issued by the staff of the Commission to third
parties, we believe that the new notes issued pursuant to the exchange offer in
exchange for old notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a broker-dealer who purchased the
notes directly from us to resell pursuant to an exemption under the Securities
Act or a person that is an "affiliate" of ours within the meaning of Rule 405
under the Securities Act) without a compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that:
o the new notes were acquired in the ordinary course of business; and
o the holder is not participating, and has no arrangements or
understanding with any person to participate, in the distribution of
the new notes.
Holders of old notes wishing to accept the exchange offer must represent to
us that these conditions have been met.
Each broker-dealer that receives new notes in exchange for old notes held
for its own account, as a result of market-making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such new notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by such broker-dealer in connection with resales of new notes received in
exchange for old notes. We have agreed that, for a period of one year after the
expiration date, we will make this prospectus and any amendment or supplement to
this prospectus available to any such broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
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Procedure for Tendering
To tender in the exchange offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the old
notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the expiration date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the old notes by
causing DTC to transfer such old notes into the exchange agent's account in
accordance with DTC's procedure for such transfer. Although delivery of old
notes may be effected through book-entry transfer into the exchange agent's
account at DTC, the Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the exchange agent at its
addresses set forth herein under "--Exchange Agent" prior to 5:00 p.m., New York
City time, on the expiration date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE
WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of old notes will constitute an agreement between
such holder and us in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the exchange agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies, or nominees effect such tender for
such holders.
The method of delivery of old notes and the Letters of Transmittal and all
other required documents to the exchange agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or old notes should
be sent to us.
Only a holder of old notes may tender such old notes in the exchange offer.
The term "holder" with respect to the exchange offer means any person in whose
name old notes are registered on the books of the company or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose old notes are held of record by DTC who desires to deliver such
old notes by book-entry transfer at DTC.
Any beneficial holder whose old notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his old notes, either make
appropriate arrangements to register ownership of the old notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the old notes
tendered pursuant thereto are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal; or
o for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any old notes listed therein, such old notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the old notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders that appears on the old
notes.
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If the Letter of Transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
Letter of Transmittal.
All the questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered old notes will be determined
by us in our sole discretion, which determinations will be final and binding. We
reserve the absolute right to reject any and all old notes not validly tendered
or any old notes our acceptance of which would, in the opinion of counsel for
us, be unlawful. We also reserve the absolute right to waive any irregularities
as to particular old notes and any conditions of tender as to all of the old
notes. Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of old notes must be cured within such time as we shall
determine. Neither we, the exchange agent nor any other person shall be under
any duty to give notification of defects or irregularities with respect to
tenders of old notes nor shall any of them incur any liability for failure to
give such notification. Tenders of old notes will not be deemed to have been
made until such irregularities have been cured or waived. Any old notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost by
the exchange agent to the tendering holder of such old notes unless otherwise
provided in the Letter of Transmittal promptly following the expiration date.
In addition, we reserve the right in our sole discretion to:
o purchase or make offers for any old notes that remain outstanding
subsequent to the expiration date, or, as set forth under
"--Termination," to terminate the exchange offer; and
o to the extent permitted by applicable law, purchase old notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchase or offers may differ from the terms of the
exchange offer.
By tendering, each holder of old notes will represent to us that among
other things, the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of the person receiving such new
notes, whether or not such person is the holder, that neither the holder nor any
other person has an arrangement or understanding with any person to participate
in the distribution of the new notes and that neither the holder nor any such
other person in an "affiliate" of our company within the meaning of Rule 405
under the Securities Act.
Guaranteed Delivery Procedure
Holders who wish to tender their old notes and whose old notes are not
immediately available, or who cannot deliver their old notes, the Letter of
Transmittal, or any other required documents to the exchange agent prior to the
expiration date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
o The tender is made through an Eligible Institution;
o Prior to the expiration date, the exchange agent receives from such
eligible institution properly competed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand
delivery):
o setting forth the name and address of the holder of the old
notes, the certificate number or numbers of such old notes and
the principal amount of old notes tendered;
o stating that the tender is being made by guaranteed delivery; and
o guaranteeing that, within five business days after the expiration
date, the Letter of Transmittal (or facsimile thereof), together
with the certificate(s) representing the old notes to be tendered
in proper form for transfer and any other documents required by
the Letter of Transmittal, will be deposited by the Eligible
Institution with the exchange agent; and
69
o the exchange agent receives the properly completed and executed
Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing all tendered old notes in proper form
for transfer (or confirmation of a book-entry transfer into the
exchange agents' account at DTC of old notes delivered
electronically) and all other documents required by the Letter of
Transmittal within five business days after the expiration date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the expiration date.
To withdraw a tender of old notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the business day prior to the expiration date. Any such notice of withdrawal
must:
o specify the name of the person having deposited the old notes to be
withdrawn (the "Depositor");
o identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount of the old notes);
o be signed by the Depositor in the same manner as the original
signature on the Letter of Transmittal by which the old notes were
tendered (including any required signature guarantees) or be
accompanied by documents of transfers sufficient to permit the Trustee
with respect to the old notes to register the transfer of the old
notes into the name of the Depositor withdrawing the tender; and
o specify the name in which the old notes are to be registered, if
different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) for such withdrawal notices will be determined by us, and our
determination shall be final and binding on all parties. Any old notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer and no new notes will be issued with respect thereto unless the
old notes so withdrawn are validly tendered. Any old notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder promptly after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
tendered by following one of the procedures described above under "--Procedures
for Tendering" at any time prior to the expiration date.
Termination
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
therefore accepted for exchange, and may terminate or amend the exchange offer
as provided herein before the acceptance of such old notes if:
o any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange
offer, which, in our judgment, might materially impair our ability to
proceed with the exchange offer; or
o any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute rule or regulation is interpreted by the
staff of the Commission or court of competent jurisdiction in a
manner, which, in our judgment, might materially impair our ability to
proceed with the exchange offer.
If we determine that we may terminate the exchange offer, as set forth
above, we may:
o refuse to accept any old notes and return any old notes that have been
tendered to the holders thereof;
o extend the exchange offer and retain all old notes that have been
tendered prior to the expiration of the exchange offer, subject to the
rights of such holders of tendered old notes to withdraw their
tendered old notes; or
70
o waive such termination event with respect to the exchange offer and
accept all properly tendered old notes that have not been withdrawn.
If such waiver constitutes a material change in the exchange offer, we will
disclose the change by means of a supplement to this prospectus that will be
distributed to each registered holder of old notes and we will extend the
exchange offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the old notes, if the exchange offer would otherwise expire during
such period.
Exchange Agent
LaSalle Bank National Association has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the Letter of Transmittal should be
directed to the exchange agent addressed as follows:
By Mail or Hand Delivery: LaSalle Bank N.A.
135 LaSalle Street, Suite 1960
Chicago, IL 60603
Attention: Christine Linde, Vice President
Facsimile Transmission: (312) 904-2236
Confirm by Telephone: (312) 904-5532
Fees and Expenses
The expense of soliciting tenders pursuant to the exchange offer will be
borne by us. The principal solicitation for tenders pursuant to the exchange
offer is being made by mail. Additional solicitations may be made by officers
and regular employees of ours and our affiliates in person, by facsimile or
telephone.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We, however, will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent's reasonable out-of-pocket expenses in connection therewith. We
may also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
prospectus, Letters of Transmittal and related documents to the beneficial
owners of the old notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting and
legal fees, will be paid by us.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. If, however, certificates representing new
notes or old notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
other person other than the registered holder of the old notes tendered, or if
tendered old notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of old notes pursuant to the exchange offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other person) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
Consequences of Failure to Exchange
If you do not tender your old notes to be exchanged in this exchange offer,
they will remain "restricted securities" within the meaning of Rule 144(a)(3) of
the Securities Act. Accordingly, they may only be resold if:
o registered pursuant to the Securities Act;
o an exemption from registration is available; or
71
o neither registration nor an exemption is required by law; and
they shall continue to bear a legend restricting transfer in the absence of
registration or an exemption from registration.
As a result of the restrictions on transfer and the availability of the new
notes, the old notes are likely to be much less liquid than before the exchange
offer. Following the consummation of the exchange offer, in general, holders of
old notes will have no further registration rights under the registration rights
agreement.
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Description of the New Notes
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the terms
"Company," "we," "us" and "our" refer only to MemberWorks Incorporated and not
to any of its Subsidiaries.
The Company issued the outstanding old notes under an indenture dated as of
April 13, 2004 among itself, the Guarantors and LaSalle Bank National
Association, as trustee, a copy of the form of which will be made available upon
request. Upon the issuance of the new notes, the indenture will be subject to
and governed by the Trust Indenture Act of 1939, as amended. We refer to the new
notes throughout this description as the "new notes," the older outstanding
notes as the "old notes" and the new notes and old notes together as the
"notes."
The following description is a summary of the material provisions of the
indenture. It does not restate those agreements in their entirety. We urge you
to read the indenture because it, and not this description, define your rights
as holders of the notes. Certain defined terms used in this description but not
defined below under "--Certain Definitions" have the meanings assigned to them
in the indenture.
The registered Holder will be treated as the owner of it for all purposes.
Only registered Holders will have rights under the indenture.
General
The new notes will be unsecured, senior obligations of the Company. The old
notes were issued in an initial principal amount of $150 million. The new notes
will be issued solely in exchange for an equal principal amount of old notes
pursuant to the exchange offer. The form and terms of the new notes will be
identical in all material respects to the form and terms of the old notes except
that: (1) the new notes will have been registered under the Securities Act and
(2) the registration rights and liquidated damages provisions, which are
triggered if the filing and declaration of effectiveness of the required
registration statement and subsequent consummation of an exchange offer pursuant
to the registration statement do not occur within the time periods specified in
the registration rights agreement, applicable to the old notes are not
applicable to the new notes. See "The Exchange Offer--Registration Rights."
Brief Description of the Notes and the Guarantees
The Notes
The notes:
o are general unsecured obligations of the Company;
o are pari passu in right of payment with any existing and future senior
unsecured Indebtedness of the Company;
o are senior in right of payment to any future Indebtedness of the
Company that expressly provides for its subordination to the notes;
o will be effectively subordinated to all existing and future secured
Indebtedness of the Company; and
o are unconditionally guaranteed by the Guarantors on a senior unsecured
basis.
The Guarantees
The notes are jointly and severally guaranteed by each of our Domestic
Subsidiaries that guarantee our Credit Facilities. As of the Issue Date, none of
our Foreign Subsidiaries, other than Lavalife Corp. (formerly Lavalife Inc.),
will guarantee the notes. Our Subsidiaries that will not guarantee the notes as
of the Issue Date accounted for, after giving pro forma effect to the
Transactions as if they occurred on January 1, 2003, 3% of our revenues for the
twelve month period ended December 31, 2003 and represented 4% of our assets as
of December 31, 2003.
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Each Guarantee of the notes:
o is a general unsecured obligation of the Guarantor;
o is pari passu in right of payment with any existing and future senior
unsecured Indebtedness of the Guarantor;
o is senior in right of payment to any future Indebtedness of the
Guarantor that expressly provides for its subordination to the
Guarantee of the Guarantor; and
o will be effectively subordinated to all existing and future secured
Indebtedness of the Guarantor.
Assuming we had completed this offering and the other Transactions as of
December 31, 2003, the Company and the Guarantors would have had an issued and
undrawn letter of credit of $5.5 million under the Credit Agreement and $25.6
million available for borrowing under the Credit Agreement and the non-Guarantor
Subsidiaries would have had $5.6 million of outstanding Indebtedness. The
indenture will permit the Company, the Guarantors and the non-Guarantor
Subsidiaries to incur additional secured and unsecured Indebtedness.
On the Issue Date, all of our Domestic Subsidiaries and none of our Foreign
Subsidiaries, other than Lavalife Corp., will guarantee the notes. In the
future, it is possible that we will have additional Subsidiaries that will not
guarantee the notes. In the event of a bankruptcy, liquidation or reorganization
of any of these non-Guarantor Subsidiaries, the non-Guarantor Subsidiaries will
pay the holders of their debt and their trade creditors before they will be able
to distribute any of their assets to us.
On the Issue Date, all of our Subsidiaries will be "Restricted
Subsidiaries." However, under the circumstances described below under the
caption "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our Subsidiaries as
"Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants in the indenture. Our Unrestricted
Subsidiaries will not guarantee the notes.
Principal, Maturity and Interest
The Company issued $150,000,000 aggregate principal amount of notes in the
private offering on April 13, 2004. The Company may issue additional notes under
the indenture from time to time. Any issuance of additional notes ("Additional
Notes") is subject to the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The
notes and any Additional Notes subsequently issued under the indenture will be
treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase. The
Company issued notes in denominations of $1,000 and integral multiples of
$1,000. The notes will mature on April 1, 2014.
Interest on the notes will accrue at the rate of 9 1/4% per annum and will
be payable semi-annually in arrears on April 1 and October 1, commencing on
October 1, 2004. The Company will make each interest payment to the Holders of
record on the immediately preceding March 15 and September 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a Holder owning more than $1.0 million principal amount of the notes has
given wire transfer instructions to the Company, the Company will pay all
principal, interest and premium and Liquidated Damages, if any, on that Holder's
notes in accordance with those instructions. All other payments on notes will be
made at the office or agency of the paying agent and registrar within the City
and State of New York unless the Company elects to make interest payments by
check mailed to the Holders at their respective addresses set forth in the
register of Holders.
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Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. The Company
may change the paying agent or registrar without prior notice to the Holders,
and the Company or any of its Restricted Subsidiaries may act as paying agent or
registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. The Company is not
required to transfer or exchange any note selected for redemption. Also, the
Company is not required to transfer or exchange any note for a period of 15 days
before a selection of notes to be redeemed.
Subsidiary Guarantees
The notes will be guaranteed by each of our current and future Domestic
Subsidiaries, Lavalife Corp. and any other Foreign Subsidiary that is a
Restricted Subsidiary that Guarantees any Credit Facility. The Guarantees will
be joint and several Obligations of the Guarantors. The Obligations of each
Guarantor under its Guarantee will be limited as necessary to prevent that
Guarantee from constituting a fraudulent conveyance under applicable law. See
"Risk Factors -- Federal and state statutes allow courts under specific
circumstances to void guarantees and require note holders to return payments
received from subsidiary guarantors."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than the Company or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default
or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such
consolidation or merger assumes all the Obligations of that Guarantor
under the indenture, the notes, its Guarantee and the registration
rights agreement pursuant to a supplemental indenture satisfactory to
the trustee; or
(b) the Net Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the indenture.
The Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Subsidiary of the Company, if the sale
or other disposition complies with the "Asset Sale" and other provisions of
the indenture;
(2) in connection with any sale of all of the Capital Stock of a
Guarantor to a Person that is not (either before or after giving effect to
such transaction) a Subsidiary of the Company, if the sale complies with
the "Asset Sale" and other provisions of the indenture;
(3) if the Company designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary in accordance with the applicable
provisions of the indenture;
(4) in connection with any Legal Defeasance or Covenant Defeasance of
the notes in accordance with the terms of the indenture; or
75
(5) if the applicable Guarantor no longer Guarantees Obligations
under any Credit Facilities.
Optional Redemption
At any time prior to April 1, 2007, the Company may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 109.250% of the principal amount,
plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings by
the Company or from the cash contribution of equity capital (other than
Disqualified Stock) to the Company, provided that:
(1) at least 65% of the aggregate principal amount of notes
(including Additional Notes, if any) issued under the indenture remains
outstanding immediately after the occurrence of such redemption (excluding
notes held by the Company and its Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing
of such Equity Offering.
Notice of any redemption upon an Equity Offering may be given prior to
completion of the related Equity Offering. At the Company's discretion, any such
redemption or notice may be subject to one or more conditions precedent,
including, but not limited to completion of the related Equity Offering.
At any time prior to April 1, 2009, the Company may also redeem all or a
part of the notes, upon not less than 30 nor more than 60 days prior notice
mailed by first class mail to each Holder's registered address, at a redemption
price equal to 100% of the principal amount of notes redeemed plus the
Applicable Premium as of, and accrued and unpaid interest and Liquidated
Damages, if any, to, the date of redemption (the "Redemption Date").
Except pursuant to the preceding paragraphs, the notes will not be
redeemable at the Company's option prior to April 1, 2009.
After April 1, 2009, the Company may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes redeemed to the
applicable redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
Year Percentage
---- ----------
2009....................................................... 104.625%
2010....................................................... 103.083%
2011....................................................... 101.542%
2012 and thereafter ....................................... 100.00%
Redemption, Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange,
on a pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder to be redeemed at its registered
76
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notice of any redemption
may, at the Company's discretion, be subject to one or more conditions
precedent.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
Mandatory Redemption
The Company is not required to make any mandatory redemption or sinking
fund payments with respect to the notes. However, under certain circumstances,
the Company may be required to offer to purchase notes as described under the
captions "--Repurchase at the Option of Holders--Asset Sales" and "Change of
Control." The Company may at any time and from time to time purchase notes in
the open market or otherwise.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder will have the right to require
the Company to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer, the
Company will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid interest
and Liquidated Damages, if any, on the notes repurchased to the date of
purchase. Within 30 days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change of
Control provisions of the indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the indenture by virtue of
such conflict.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes
properly accepted together with an officers' certificate stating the
aggregate principal amount of notes or portions of notes being purchased by
the Company.
The paying agent will promptly mail to each Holder of notes properly
tendered, the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require the Company to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as
77
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders to require that the Company
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
A Change of Control Offer may be made in advance of a Change of Control,
and conditional upon the occurrence of such Change of Control, if a definitive
agreement is in place for the Change of Control at the time of making the Change
of Control Offer.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by the Company and
purchases all notes properly tendered and not withdrawn under the Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of the Company and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder to require the Company to repurchase its notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of the Company and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) The Company (or its Restricted Subsidiary, as the case may be)
receives consideration at the time of the Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of,
(2) the fair market value is determined by the Company's Board of
Directors and evidenced by a resolution of such Board of Directors set
forth in an officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration received in the Asset Sale by
the Company or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following will be
deemed to be cash:
(a) any liabilities, as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet, of the Company or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the notes or any
Guarantee) that are assumed by the transferee of any such assets as a
result of which assumption the Company or such Restricted Subsidiary
is released from further liability;
(b) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that
are within 90 days of such Asset Sale converted into cash by the
Company or such Restricted Subsidiary, to the extent of the cash
received in that conversion; and
(c) any stock or assets of the kind referred to in clause (II) or
(IV) of the next paragraph of this covenant.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or the applicable Restricted Subsidiary, as the case may be) may
apply those Net Proceeds at its option:
(I) to repay secured Indebtedness of the Company or any Guarantor
under a Credit Facility;
(II) to acquire (or enter into a binding agreement to acquire;
provided that such commitment will be subject only to customary
conditions (other than financing) and such acquisition will be
78
consummated within 90 days after the end of such 360-day period) all
or substantially all of the assets of, or a majority of the Voting
Stock of, another Permitted Business;
(III) to make a capital expenditure; or
(IV) to acquire (or enter into a binding agreement to acquire;
provided that such commitment will be subject only to customary
conditions (other than financing) and such acquisition will be
consummated within 90 days after the end of such 360-day period) other
long-term assets that are used or useful in a Permitted Business or
the minority interest in any Restricted Subsidiary that is not a
Wholly-Owned Restricted Subsidiary.
Pending the final application of any Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will make
an Asset Sale Offer to all Holders and all holders of other Indebtedness that is
pari passu with the notes containing provisions similar to those set forth in
the indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets to purchase the maximum principal amount of notes and such other
pari passu Indebtedness that may be purchased out of the Excess Proceeds. The
offer price in any Asset Sale Offer will be equal to 100% of principal amount
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use those Excess Proceeds
for any purpose not otherwise prohibited by the indenture. If the aggregate
principal amount of notes and other pari passu Indebtedness tendered into such
Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select
the notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds
will be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the indenture by virtue of such
conflict.
The Credit Agreement provides that certain change of control or asset sale
events with respect to the Company would constitute a default under the Credit
Agreement. Any future credit agreements or other agreements relating to
Indebtedness to which the Company becomes a party may prohibit the Company from
purchasing notes or provide that certain change of control or asset sale events
with respect to the Company would constitute a default thereunder. In the event
a Change of Control or Asset Sale occurs at a time when the Company is
prohibited from purchasing notes, the Company could seek the consent of its
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing notes.
In such case, the Company's failure to purchase tendered notes would constitute
an Event of Default under the indenture which would, in turn, constitute a
default under such Indebtedness.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution (A) on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any
of its Restricted Subsidiaries) or (B) to the direct or indirect holders of
the Company's or any of its Restricted Subsidiaries' Equity Interests in
their capacity as such (other than dividends or distributions (i) payable
in Equity Interests (other than Disqualified Stock) of the Company or (ii)
to the Company or a Restricted Subsidiary of the Company;
79
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Indebtedness that is
subordinated to the notes or the Guarantees (excluding any intercompany
Indebtedness between the Company and any of its Restricted Subsidiaries),
except a payment of interest or principal at the Stated Maturity thereof;
or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (l) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (2), (3), (4), (6), (7), (8), (9) and (10) of the next
succeeding paragraph), is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the
fiscal quarter in which the Issue Date occurs to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus
(b) 100% of the fair market value of the aggregate net proceeds
received by the Company since the Issue Date as a contribution to its
common equity capital or from the issue or sale of Equity Interests of
the Company (other than Disqualified Stock) or from the issue or sale
of convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been converted
into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to a
Subsidiary of the Company); provided that such aggregate net proceeds
are limited to cash and Cash Equivalents and other assets used or
useful in a Permitted Business or the Capital Stock of a Person
engaged in a Permitted Business, plus
(c) the sum of (1) the aggregate amount returned in cash on or
with respect to any Restricted Investment in or to a Person that was
made after the Issue Date whether through interest payments, principal
payments, dividends or other distributions or payments, plus (2) the
net cash proceeds received by the Company or any of its Restricted
Subsidiaries from the disposition of all or any portion of such
Restricted Investment, provided, however, that the sum of clauses (1)
and (2) above shall not exceed the sum of (i) the aggregate amount of
all such Restricted Investments made in or to such Person subsequent
to the Issue Date and (ii) without duplication of clause (i), one half
of the gain from any disposition of all or any portion of such
Restricted Investments made subsequent to the Issue Date, plus
(d) to the extent that after the Issue Date, any Unrestricted
Subsidiary of the Company is redesignated as a Restricted Subsidiary
or is merged, consolidated or amalgamated with or into or transfers or
conveys assets to, or is liquidated into the
80
Company or any of its Restricted Subsidiaries, the lesser of (i) the
fair market value of the Company's Investment in such Subsidiary as of
the date of such redesignation, merger, consolidation or amalgamation
(or of the assets transferred or conveyed, as applicable) and (ii)
such fair market value as of the date on which such Subsidiary was
originally designated as an Unrestricted Subsidiary; plus
(e) $7.5 million.
The preceding provisions will not prohibit:
(1) the payment of any dividend or the consummation of any
irrevocable redemption of debt that is subordinate to the notes within 60
days after the date of declaration of the dividend or giving of any such
redemption notice, as the case may be, if at the date of declaration or
notice the dividend or redemption payment would have complied with the
provisions of the indenture;
(2) the redemption, repurchase, retirement or other acquisition of
subordinated Indebtedness of the Company or any Guarantor or of any Equity
Interests of the Company in exchange for, or out of the net cash proceeds
of the substantially concurrent sale (other than to a Subsidiary of the
Company) of, Equity Interests of the Company (other than Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition will be excluded from clause (3)(b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) so long as no Default or Event of Default has occurred and is
continuing, the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its Equity Interests on a pro rata basis;
(5) so long as no Default or Event of Default has occurred and is
continuing, the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company (A) held by any current or former director,
officer or employee of the Company or any of its Restricted Subsidiaries
(or permitted transferees of such directors, officers or employees) and (B)
in the open market to the extent such shares are acquired to satisfy a
current obligation to deliver shares in connection with the exercise of
stock options or similar rights or the matching contributions under any
401(k) plan subject to the provisions of Section 401 of the Internal
Revenue Code of 1986, as amended, in each case pursuant to the terms of the
agreements (including any equity subscription agreement, stock option
agreement, shareholders' agreement, employment agreement or similar
agreement) or plans (or amendments thereto); provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests may not in any fiscal year exceed $3.0 million unless the
aggregate amount of such repurchases, redemptions, acquisitions and
retirement in any fiscal year was less than $3.0 million in which case the
Company may carry-forward the unused amounts to the immediately succeeding
fiscal year; provided, however, the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests may not exceed
$6.0 million in any one fiscal year;
(6) the repurchase of Equity Interests deemed to occur upon the
exercise of stock options to the extent such Equity Interests represent a
portion of the exercise price of those stock options;
(7) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Company or preferred stock of any
Restricted Subsidiary of the Company issued on or after the Issue Date in
accordance with the Fixed Charge Coverage Ratio test described below under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"
to the extent such dividends are included in the definition of "Fixed
Charges"; provided that no Default or Event of Default shall have occurred
and be continuing immediately after making such Restricted Payment;
81
(8) so long as no Default or Event of Default has occurred and is
continuing, the purchase by the Company of fractional shares arising out of
stock dividends, splits or combinations or business combinations;
(9) so long as no Default or Event of Default has occurred and is
continuing, the repurchase, redemption or other acquisition of the
Company's issued and outstanding common stock pursuant to the Company's
stock repurchase program as in effect from time to time in an amount not to
exceed $10.0 million; and
(10) so long as no Default or Event of Default has occurred and is
continuing, other Restricted Payments since the Issue Date in an aggregate
amount not to exceed $12.5 million.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors of the Company whose good
faith determination will be conclusive and will be delivered to the trustee.
Such Board of Directors' determination must be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds $10.0 million. Not later than
the last day of each fiscal quarter in which any Restricted Payment was made,
the Company will deliver to the trustee an officers' certificate stating that
each Restricted Payment made in such fiscal quarter is permitted and setting
forth the basis upon which the calculations required by this "Restricted
Payments" covenant were computed, together with a copy of any fairness opinion
or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and the Company will not issue any Disqualified Stock and will not permit
any of its Restricted Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company and any Guarantor may incur Indebtedness
(including Acquired Debt), the Company may issue Disqualified Stock or any
Guarantor may issue preferred stock, if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is to be incurred or such Disqualified Stock or
preferred stock is to be issued would have been at least 2.25 to 1.0 if such
incurrence is on or prior to October 1, 2005 and 2.50 to 1.0 if such incurrence
is after October 1, 2005, determined, in each case, on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or Disqualified Stock or preferred
stock had been issued, as the case may be, at the beginning of such four-quarter
period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company and/or any Guarantor of additional
Indebtedness and letters of credit under one or more Credit Facilities in
an aggregate principal amount at any one time outstanding under this clause
(1) (with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of the Company and the Guarantors
thereunder) not to exceed $75.0 million;
(2) the incurrence by the Company and its Restricted Subsidiaries of
the Existing Indebtedness;
(3) the incurrence by the Company and the Guarantors of Indebtedness
represented by the old notes and the related Guarantees and the new notes
and the related Guarantees to be issued pursuant to the registration rights
agreement;
(4) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of design,
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construction, installation or improvement of property, plant or equipment
used in the business of the Company or such Restricted Subsidiary, in an
aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (4), not to exceed $5.0 million at any
time outstanding;
(5) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the indenture
to be incurred under the first paragraph of this covenant or clause (2),
(3) or (5) of this paragraph;
(6) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that:
(a) if the Company or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated to the
prior payment in full in cash of all Obligations then due with respect
to the notes, in the case of the Company, or the Guarantee, in the
case of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Company or a Restricted Subsidiary of the Company and (ii)
any sale or other transfer of any such Indebtedness to a Person that
is not either the Company or a Restricted Subsidiary of the Company
will be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (6);
(7) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations;
(8) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or any Guarantor that was permitted to be
incurred by another provision of this covenant;
(9) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company that was not permitted by this clause (9);
(10) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in respect of workers' compensation claims,
self-insurance obligations, bankers' acceptances, and performance and
surety bonds and completion guarantees in the ordinary course of business;
(11) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
drawn against insufficient funds, so long as such Indebtedness is covered
within five business days;
(12) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness consisting of guarantees, indemnities,
holdbacks or obligations in respect of purchase price adjustments in
connection with the acquisition or disposition of assets; provided,
however, that such Indebtedness is not reflected on the balance sheet of
the Company or any Restricted Subsidiary; and
(13) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (13), not to exceed $20.0
million.
The accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, the accumulation of dividends on Disqualified
Stock or preferred stock (to the extent not paid) and the payment of dividends
on Disqualified Stock or preferred stock in the form of additional shares of the
same class of Disqualified Stock or preferred stock will not be
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deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock
or preferred stock for purposes of this covenant; provided, in each such case,
that the amount thereof is included in Fixed Charges of the Company as accrued.
Notwithstanding anything to the contrary in this "--Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in no event will the
Company or any of its Restricted Subsidiaries be permitted to refinance the
Convertible Senior Subordinated Notes, in whole or in part, with the proceeds of
Senior Debt.
For purposes of determining compliance with this "--Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of Indebtedness (including Acquired Debt) meets the criteria of more than
one of the categories of Permitted Debt described in clauses (1) through (13)
above, or is entitled to be incurred pursuant to the first paragraph of this
covenant, the Company will be permitted to divide and classify (later classify
or reclassify in whole or in part in its sole discretion) such item of
Indebtedness in any manner that complies with this covenant.
Notwithstanding anything to the contrary contained in this "--Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, any increase in the
amount of Indebtedness solely by reason of currency fluctuation shall not be
considered an incurrence of Indebtedness for purposes of this covenant. For
purposes of determining compliance with this covenant, the U.S.
dollar-equivalent principal amount of Indebtedness denominated in any currency
other than U.S. dollars shall be calculated based on the relevant currency
exchange rate in effect as of the date such Indebtedness is incurred.
Liens
The Company will not and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or otherwise cause or suffer to exist or become
effective any Lien of any kind (other than Permitted Liens) securing
Indebtedness or trade payables upon any of their property or assets, now owned
or hereafter acquired, unless all payments due under the indenture and the notes
are secured on an equal and ratable basis (or on a senior basis to, in the case
of obligations subordinated in right or payment to the notes) with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital
Stock to the Company or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits, or
pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities
as in effect on the Issue Date and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, restructurings,
replacements or refinancings of those agreements, provided that the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, restructurings, replacement or refinancings are not materially
more restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in those agreements on the Issue
Date;
(2) the indenture, the old notes, the new notes and the related
Guarantees;
(3) applicable law, rule, regulation or order;
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(4) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition or assumed by the Company or any of
its Restricted Subsidiaries in connection with an acquisition of all or
substantially all the assets of a Person (except to the extent such
Indebtedness or Capital Stock was incurred or assumed in connection with or
in contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases, licenses or other
contracts entered into in the ordinary course of business and consistent
with past practices:
(6) purchase money obligations for property acquired in the ordinary
course of business and Capital Lease Obligations permitted under the
indenture that impose restrictions of the nature described in clause (3) of
the preceding paragraph on the property purchased or leased;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of the Company that restricts distributions by that Restricted
Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are not materially more restrictive, taken as a
whole, than those contained in the agreements governing the Indebtedness
being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
under the provisions of the covenant described above under the caption
"--Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale agreements,
sale-leaseback agreements, stock sale agreements and other similar
agreements entered into in the ordinary course of business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
Neither the Company nor any of its Restricted Subsidiaries may, directly or
indirectly: (1) consolidate or merge with or into another Person (whether or not
the Company or a Restricted Subsidiary of the Company is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person; unless:
(1) either: (a) the Company or any Restricted Subsidiary of the
Company is the surviving corporation; or (b) the Person formed by or
surviving any such consolidation or merger (if other than the Company or
any Restricted Subsidiary of the Company) or to which such sale,
assignment, transfer, conveyance or other disposition has been made is a
corporation organized or existing under the laws of the United States, any
state of the United States or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or
merger (if other than the Company or any Restricted Subsidiary of the
Company) or the Person to which such sale, assignment, transfer, conveyance
or other disposition has been made assumes all the obligations of the
Company or its Restricted Subsidiaries, as applicable, under the notes, the
indenture, the registration rights agreement and the Guarantee, if any,
pursuant to agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) in the case of the consolidation or merger of the Company or the
Person formed by or surviving any such consolidation or merger (if other
than the Company), or to which such sale,
85
assignment, transfer, conveyance or other disposition has been made or, in
the case of a consolidation or merger of a Restricted Subsidiary of the
Company or the sale, assignment, transfer, conveyance or other disposition
of the property or assets of the Restricted Subsidiary, the Company will,
in each case, on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had occurred
at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or have a Fixed Charge Coverage Ratio that is
no less than the Fixed Charge Coverage Ratio of the Company immediately
prior to such transaction.
In addition, neither the Company nor any of its Restricted Subsidiaries
may, directly or indirectly, lease all or substantially all of its properties or
assets, in one or more related transactions, to any other Person.
Notwithstanding the foregoing:
(A) the Company or any of its Restricted Subsidiaries may merge with
an Affiliate that has no significant assets or liabilities and was
incorporated solely for the purpose of reincorporating the Company or such
Restricted Subsidiaries in another jurisdiction within the United States;
and
(B) any Restricted Subsidiary of the Company may consolidate with,
merge into or transfer all or part of its properties and assets to the
Company or to a Subsidiary that is a Guarantor.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with a Person who was not an Affiliate; and
(2) the Company delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, a resolution of the Board of Directors of the
Company set forth in an officers' certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors of the Company; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a written opinion from an independent
investment banking, accounting or appraisal firm of nationally
recognized standing to the effect that such Affiliate Transaction is
fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries or not materially less favorable to the Company and its
Restricted Subsidiaries than could reasonably be expected to be
obtained at the time in an arm's-length transaction with a Person who
was not an Affiliate.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreements or arrangements, employee benefit plans
or arrangements, officer and director indemnification agreements or
arrangements or other similar agreements or arrangements entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business;
86
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of the Company
solely because the Company or any of its Restricted Subsidiaries owns an
Equity Interest in, or controls, such Person;
(4) payment of reasonable directors' fees and indemnity provided on
behalf of officers, directors or employees of the Company or any of its
Restricted Subsidiaries;
(5) any issuance or sale of Equity Interests (other than Disqualified
Stock) to Affiliates of the Company;
(6) Permitted Investments and Restricted Payments that are permitted
by the provisions of the indenture described above under the caption "--
Restricted Payments":
(7) the issuance of securities or other payments, awards or grants in
cash, securities or otherwise pursuant to, or funding of, employment
arrangements, stock options and stock ownership plans or similar employee
benefit plans approved by the Board of Directors of the Company in good
faith and loans to employees of the Company and its Subsidiaries that are
approved by the Board of Directors of the Company in good faith; and
(8) transactions with customers, clients, suppliers or purchasers or
sellers of goods or services, in each case on ordinary business terms
consistent with past practices and otherwise in compliance with the terms
of the indenture, which are fair to the Company or its Restricted
Subsidiaries, in the reasonable determination of the Board of Directors or
senior management of the Company, or are on terms at least as favorable as
could reasonably have been obtained at such time from a Person that is not
an Affiliate of the Company or any of its Restricted Subsidiaries.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if that designation would not cause
a Default or Event of Default. If a Restricted Subsidiary is designated as an
Unrestricted Subsidiary, the aggregate fair market value of all outstanding
Investments owned by the Company and its Restricted Subsidiaries in the
Subsidiary properly designated will be deemed to be an Investment made as of the
time of the designation and will reduce the amount available for Restricted
Payments under the covenant described above under the caption "-- Restricted
Payments" or under one or more clauses of the definition of Permitted
Investments, as determined by the Company. That designation will only be
permitted if the Investment would be permitted at that time and if the
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
Additional Guarantees
If (i) the Company or any of its Restricted Subsidiaries acquires or
creates another Domestic Subsidiary after the Issue Date that Guarantees any
Credit Facilities or (ii) any Foreign Subsidiary Guarantees any Credit
Facilities, then in each case, such Subsidiary will become a Guarantor and
execute a supplemental indenture and deliver an opinion of counsel satisfactory
to the trustee within 10 Business Days of the date on which such Subsidiary
executed the Guarantee with respect to any such Credit Facilities; provided,
however, that the foregoing shall not apply to Subsidiaries that have properly
been designated as Unrestricted Subsidiaries in accordance with the indenture
for so long as they continue to constitute Unrestricted Subsidiaries.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to the Company and its Subsidiaries taken as a whole.
87
Payments for Consent
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes unless
such consideration is offered to he paid and is paid to all Holders that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Termination of Certain Covenants
During any period of time that the notes have a rating equal to or greater
than BBB- by S&P and Baa3 by Moody's (each such rating, an "Investment Grade
Rating") and no Default or Event of Default has occurred and is continuing, the
Company and the Subsidiaries will no longer be subject to the provisions of the
indenture described under the following captions:
(a) "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
(b) "-- Restricted Payments";
(c) "-- Transactions with Affiliates";
(d) "-- Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries";
(e) "-- Designation of Restricted and Unrestricted Subsidiaries":
(f) "-- Business Activities";
(g) "-- Payments for Consents"; and
(h) "-- Repurchase at the Option of the Holders".
(collectively, the "Suspended Covenants"), provided, however, that the
provisions of the indenture described under the following captions will not be
so terminated:
(a) "-- Liens";
(b) "-- Reports";
(c) "-- Merger, Consolidation or Sale of Assets"; provided, however,
the Company will no longer be subject to clause (4) of such provision; and
(d) "-- Additional Guarantees".
In the event that the Company and any of its Subsidiaries are not subject
to the Suspended Covenants for any period of time as a result of the preceding
sentence and that subsequently the notes cease to have an Investment Grade
Rating from either S&P or Moody's, as a result of a downgrade, withdrawal of
rating or otherwise, then the Company and its Subsidiaries will from such time
and thereafter again be subject to the Suspended Covenants.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, the Company will furnish to the trustee for mailing to the Holders,
within the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
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Operations" and, with respect to the annual information only, a report on
the annual financial statements by the Company's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement (the "Exchange Offer"), whether or not
required by the Commission, the Company will file a copy of all of the
information and reports referred to in clauses (1) and (2) above with the
Commission for public availability within the time periods specified in the
Commission's rules and regulations (unless the Commission will not accept such a
filing) and make such information available to prospective investors upon
request. In addition, the Company and the Guarantors have agreed that they will
furnish to the Holders and to prospective investors, upon the request of such
Holders, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act so long as the notes are not freely transferable under
the Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if
any, on the notes;
(3) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets," "-- Repurchase at
the Option of Holders -- Asset Sales" or "-- Repurchase at the Option of
Holders -- Change of Control";
(4) failure by the Company or any of its Restricted Subsidiaries for
60 days after notice to comply with any of the other agreements in the
indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
Stated Maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million (exclusive of
amounts covered by insurance), which judgments are not paid, discharged or
stayed for a period of 60 days;
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(7) except as permitted by the indenture, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
Obligations under its Guarantee; and
(8) certain events of bankruptcy or insolvency described in the
indenture with respect to the Company or any of its Significant
Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Significant
Subsidiary, all outstanding notes will become due and payable immediately
without further action or notice. If any other Event of Default occurs and is
continuing, the trustee or the Holders of at least 25% in principal amount of
the then outstanding notes may declare all the notes to be due and payable
immediately.
However, a default under clause (4) or (5) above will not constitute an
Event of Default until the trustee or the Holders of 25% in aggregate principal
amount of the outstanding notes notify the Company of the default and the
Company does not cure such default within the time specified after receipt of
such notice.
Holders may not enforce the indenture or the notes except as provided in
the indenture. Subject to certain limitations, Holders of a majority in
aggregate principal amount of the then outstanding notes may direct the trustee
in its exercise of any trust or power. The trustee may withhold from Holders
notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except with respect to a Default or
Event of Default relating to the payment of principal, premium, interest or
Liquidated Damages, if any, on the notes.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may, on behalf of the Holders of all of the
notes, waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
principal, premium, interest or Liquidated Damages, if any, on the notes;
provided that the Holders of a majority in aggregate principal amount of the
then outstanding notes may rescind an acceleration and its consequences, if the
rescission would not conflict with any judgment or decree or if all existing
Events of Default have been cured or waived.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the notes pursuant to the optional
redemption provisions of the indenture, an equivalent premium will also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs prior to April 1, 2009,
by reason of any willful action (or inaction) taken (or not taken) by or on
behalf of the Company with the intention of avoiding the prohibition on
redemption of the notes prior to that date, then the premium specified in the
indenture with respect to the first year that the notes may be redeemed at the
Company's option will also become immediately due and payable to the extent
permitted by law upon the acceleration of the notes.
The Company is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, will have any liability for any obligations of the
Company or the Guarantors under the notes, the indenture, the Guarantees, or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
Obligations discharged with respect to the outstanding notes and all Obligations
of the Guarantors discharged with respect to their Guarantees ("Legal
Defeasance") except for:
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(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) the Company's obligations with respect to the notes concerning
registration of notes, replacing mutilated, destroyed, lost or stolen notes
and the maintenance of an office or agency for payment and money for
security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and the Company's and the Guarantors' Obligations in connection therewith;
and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the Guarantors released with respect to
certain covenants (including its obligations to make Change of Control Offers
and Asset Sale Offers) that are described in the indenture ("Covenant
Defeasance") and thereafter any omission to comply with those covenants will not
constitute a Default or Event of Default with respect to the notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the notes.
If the Company exercises its Legal Defeasance option or its Covenant
Defeasance option, each Guarantor will be released from all of its Obligations
with respect to the Subsidiary Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the trustee, in trust,
for the benefit of the Holders, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in
the opinion of a nationally recognized investment bank or firm of
independent public accountants, to pay the principal of, premium, interest
and Liquidated Damages, if any, on the outstanding notes on the Stated
Maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the notes are being defeased to maturity or to
a particular redemption date;
(2) in the case of Legal Defeasance, the Company has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that:
(a) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in
the applicable federal income tax law;
in either case to the effect that, and based thereon such opinion of
counsel will confirm that, the Holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company has delivered to
the trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
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(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of or constitute a default under any material agreement
or instrument (other than the indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company must deliver to the trustee an opinion of counsel to
the effect that, assuming, among other things, no intervening bankruptcy of
the Company between the date of deposit and the 91st day following the
deposit, and assuming that no Holder is an "insider" of the Company under
applicable bankruptcy law, after the 91st day following the deposit, the
cash or securities deposited in trust will not be subject to avoidance and
repayment under Sections 547 and 550 of the United States Bankruptcy Code;
(7) the Company must deliver to the trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders over the other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(8) the Company must deliver to the trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
relating to Legal Defeasance or Covenant Defeasance have been complied
with.
However, the opinion of counsel required by clause (2) above will not be
required if all notes not theretofore delivered to the trustee for cancellation
have become due and payable, will become due and payable on their maturity date
within one year or are to be called for redemption within one year under
arrangements satisfactory to the trustee for the giving of notice of redemption
by the trustee in the Company's name, and at the Company's expense.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or Liquidated Damages, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from such acceleration);
(5) make any note payable in currency other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders to receive payments of
principal of, premium, interest or Liquidated Damages, if any, on the
notes;
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(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"),
(8) release any Guarantor from any of its Obligations under its
Guarantee or the indenture, except in accordance with the terms of the
indenture; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder, the
Company, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of the Company's obligations to
Holders in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders or that does not adversely affect the legal rights
under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust Indenture
Act;
(6) to comply with the rules of any applicable securities depository;
(7) to comply with the covenant relating to mergers, consolidations
and sales of assets;
(8) to add Guarantees with respect to the notes or to secure the
notes;
(9) to add to the covenants of the Company or any Guarantor for the
benefit of the Holders or surrender any right or power conferred upon the
Company or any Guarantor; or
(10) to evidence and provide for the acceptance and appointment under
the indenture of a successor trustee pursuant to the requirements thereof.
The consent of the Holders is not necessary under the indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment. However,
the failure to give such notice to all Holders, or any defect therein, will not
impair or affect the validity of the amendment.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen
or destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to the
Company, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable or will become due and
payable within one year by reason of the mailing of a notice of
redemption or otherwise and the Company or any Guarantor has
93
irrevocably deposited or caused to be deposited with the trustee as
funds in trust solely for the benefit of the Holders, cash in U.S.
dollars, non-callable Government Securities, or a combination of cash
in U.S. dollars and non-callable Government Securities, in amounts as
will be sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire indebtedness on the notes
not delivered to the trustee for cancellation for principal, premium
and Liquidated Damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company or any Guarantor
is a party or by which the Company or any Guarantor is bound other than a
Default or Event of Default resulting from the borrowing of funds to be
applied to such deposit and the guaranteeing of any Lien securing such
borrowing;
(3) the Company or any Guarantor has paid or caused to be paid all
sums payable by it under the indenture; and
(4) the Company has delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an
opinion of counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of the Company or any Guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder, unless such Holder has offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to MemberWorks
Incorporated, 680 Washington Boulevard, Stamford, Connecticut 06901, Attention:
Investor Relations.
Book-Entry, Delivery and Form
The old notes were offered and sold to qualified institutional buyers in
reliance on Rule 144A. Old notes may also be offered and sold in offshore
transactions in reliance on Regulation S. Notes will be issued in fully
registered form without interest coupons. Except as set forth below, the notes
will be issued in registered, global form in minimum denominations of $1,000 and
integral multiples of $1,000 in excess of $1,000. The notes will be issued at
the closing of this offering only against payment in immediately available
funds.
The old notes issued in accordance with Rule 144A initially were
represented by one or more notes in registered, global form without interest
coupons (collectively, the "Rule 144A Global Notes") and old notes issued in
accordance with Regulation S initially were represented by one or more Notes in
registered, global form without interest coupons (collectively, the "Regulation
S Global Notes"). The new notes will also be issued in the form of
94
one or more global notes (collectively, and, together with the Rule 144A Global
Notes and the Regulation S Global Notes, the "Global Notes").
The Global Notes will be deposited upon issuance with the trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below. In
addition, beneficial interests in the Rule 144A Global Note may be exchanged for
beneficial interests in the Regulation S Global Note and vice versa only in
accordance with the Indenture and the applicable rules and system procedures of
DTC and its direct or indirect participants (including, if applicable, those of
Euroclear System ("Euroclear") and Clearstream Banking, ("Clearstream")), which
may change from time to time.
Except as set forth below, the Global Notes may be transferred, in whole
but not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of Notes in certificated
form.
Transfers of beneficial interests in the Global Notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Clearstream),
which may change from time to time.
Depository Procedures
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in the accounts of its Participants. The Participants include securities brokers
and dealers (including the initial purchasers of the old notes), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants with portions of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown
on, and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Notes).
Investors in the Rule 144A Global Notes who are Participants in DTC's
system may hold their interests therein directly through DTC. Investors in the
Rule 144A Global Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Clearstream) which are
Participants in such system. Investors in the Regulation S Global Notes must
initially hold their interests therein through Euroclear or Clearstream, if they
are participants in such systems, or indirectly through organizations that are
participants in such systems. Euroclear and Clearstream will hold interests in
the Regulation S Global Notes on behalf of their participants through customers'
securities accounts in their respective names on the books of their respective
depositories, which are Euroclear Bank S.A./N.V., as operator of Euroclear, and
Citibank, N.A., as operator of Clearstream. All interests in a Global Note,
including those held through Euroclear or Clearstream, may be subject
95
to the procedures and requirements of DTC. Those interests held through
Euroclear or Clearstream may also be subject to the procedures and requirements
of such systems.
The laws of some states require that certain Persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Note to pledge such interests to Persons that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of an interest in the Global Notes will
not have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, the Company and the
trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners of the notes for the purpose of receiving
payments and for all other purposes. Consequently, neither the Company, the
trustee nor any agent of the Company or the trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or the Company. Neither the Company
nor the trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the notes, and the Company and the
trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Subject to the transfer restrictions with respect to the Rule 144A Global
Notes and the Regulation S Global Notes, transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds. Transfers between participants in Euroclear and Clearstream will
be effected in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Clearstream participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Clearstream, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, as the case may be, by the counterparty in such system
in accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a
Holder only at the direction of one or more Participants to whose account DTC
has credited the interests in the Global Notes and only in respect of
96
such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. None of the Company, the trustee or any of their
respective agents will have any responsibility for the performance by DTC.
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the Global Notes and the Company fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) the Company, at its option, notifies the trustee in writing that
it elects to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of
Default with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
Exchange of Certificated Notes for Global Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors."
Same Day Settlement and Payment
The Company will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. The Company will make all payments of
principal, interest and premium and Liquidated Damages, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the Holders of the Certificated Notes or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The Notes represented by the Global Notes are expected to trade in
DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such notes will, therefore, be required by DTC to be settled
in immediately available funds. The Company expects that secondary trading in
any Certificated Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
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Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" have correlative
meanings.
"Applicable Premium" means, with respect to any note on any Redemption
Date, the greater of:
(1) 1.0% of the principal amount of the note; and
(2) the excess of:
(a) the present value at such Redemption Date of (i) the
redemption price of the note at April 1, 2009 (such redemption price
being set forth in the table appearing above under the caption "--
Optional Redemption") plus (ii) all required interest payments due on
the note through April 1, 2009 (excluding accrued but unpaid interest)
computed using a discount rate equal to the Treasury Rate as of such
Redemption Date plus 50 basis points; over
(b) the principal amount of the note.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights; provided that the sale, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
indenture described above under the caption "-- Repurchase at the Option of
Holders -- Change of Control" and/or the provisions described above under
the caption "-- Certain Covenants -- Merger, Consolidation or Sale of
Assets" and not by the provisions of the caption "-- Repurchase at the
Option of Holders -- Asset Sales"; and
(2) the issuance of Equity Interests in any of the Company's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Restricted Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $3.0 million;
(2) a sale, lease, transfer conveyance or other disposition of assets
between or among the Company and its Restricted Subsidiaries,
98
(3) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(4) the sale, lease, transfer conveyance or other disposition of
products, services, equipment, inventory, accounts receivable or other
assets in the ordinary course of business or other disposition of damaged,
worn-out or obsolete assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) the license of patents, trademarks, copyrights and know-how to
third Persons in the ordinary course of business;
(7) the creation of Liens; and
(8) a Restricted Payment that does not violate, or Permitted
Investment that is permitted by, the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have correlative meanings.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the
general partner of the partnership;
and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Business Day" means each day that is not a Saturday, Sunday or other day
on which banking institutions in New York, New York are authorized or required
by law to close.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
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"Cash Equivalents" means:
(1) United States dollars and any other currency that is convertible
into United States dollars without legal restrictions and which is utilized
by the Company or any of its Restricted Subsidiaries in the ordinary course
of its business;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of 270 days or less from the date of acquisition, bankers'
acceptances with maturities not exceeding 270 days and overnight bank
deposits, in each case, with any lender party to the Credit Agreement or
with any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson BankWatch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable
from Moody's or S&P and in each case maturing within 270 days after the
date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of the Company and its Restricted Subsidiaries, taken
as a whole to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act);
(2) the approval by the holders of Voting Stock of the Company of a
plan relating to the liquidation or dissolution of the Company or the
adoption of a plan relating to the liquidation or dissolution of the
Company by its Board of Directors;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as that term is used in Section 13(d)(3) of the Exchange Act),
becomes the Beneficial Owner, directly or indirectly, of more than 50% of
the Voting Stock of the Company, measured by voting power rather than
number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company or such other Person is converted
into or exchanged for cash, securities or other property, other than any
such transaction where the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting
Stock of such surviving or transferee Person (immediately after giving
effect to such issuance).
Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur as a result of any merger primarily for the purpose of changing the
Company's jurisdiction of incorporation and resulting in a reclassification,
conversion or exchange of outstanding shares of common stock solely into shares
of common stock of the surviving entity.
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"Commission" means the U.S. Securities Exchange Commission.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Restricted Subsidiaries in connection
with (a) an Asset Sale or (b) the disposition of any securities by, or the
extinguishment of any Indebtedness of, such Person or any of its Restricted
Subsidiaries, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Obligations), to the extent
that any such expense was deducted in computing such Consolidated Net
Income; plus
(4) depreciation, amortization (including amortization of intangibles
but excluding amortization of prepaid cash expenses that were paid in a
prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Subsidiaries for
such period to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated Net Income;
plus
(5) unrealized non-cash losses resulting from foreign currency
balance sheet adjustments required by GAAP to the extent such losses were
deducted in computing such Consolidated Net Income; minus
(6) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Restricted
Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the cumulative effect of a change in accounting principles will
be excluded;
(4) any impairment loss of such Person or its Restricted Subsidiaries
relating to goodwill or other non-amortizing intangible asset will be
excluded; and
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(5) the Net Income or loss of any Unrestricted Subsidiary will be
excluded, whether or not distributed to the specified Person or one of its
Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board of Directors at the time of such nomination or
election.
"Convertible Senior Subordinated Notes" means the 5.50% Convertible Senior
Subordinated Notes of the Company due October 1, 2010.
"Credit Agreement" means that certain Amended and Restated Credit
Agreement, dated as of March 25, 2004, by and among the Company, certain
Subsidiaries of the Company, La Salle Bank National Association, as Agent,
certain financial institutions as lenders and other agents and arrangers party
thereto, providing for up to $45.0 million of revolving credit borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
restated, modified, renewed, refunded, replaced (whether upon or after
termination or otherwise) or refinanced (including by means of Debt Issuances),
in whole or in part, from time to time.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks, investment banks, insurance companies, mutual funds and/or other
institutional lenders providing for revolving credit loans, term loans,
receivables or inventory financing (including through the sale of receivables or
inventory to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables or inventory) or letters of credit, in
each case, as amended, restated, modified, renewed, refunded, replaced (whether
upon or after termination or otherwise) or refinanced (including by means of
Debt Issuances) in whole or in part from time to time.
"Debt Issuances" means, with respect to the Company or any Guarantor, one
or more issuances after the Issue Date of Indebtedness evidenced by notes,
debentures, bonds or other similar securities or instruments.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require the
Company to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale will not constitute Disqualified Stock if the terms of
such Capital Stock provide that the Company may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption "--
Certain Covenants -- Restricted Payments."
"Domestic Subsidiary" means any Restricted Subsidiary of the Company that
was formed under the laws of the United States or any state of the United States
or the District of Columbia.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of Equity Interests
(other than Disqualified Stock) made for cash on a primary basis by the Company
after the Issue Date.
"Exchange Notes" or "new notes" mean the notes issued in the Exchange
Offer.
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"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Credit Agreement) in
existence on the Issue Date, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any four-quarter reference period, the ratio of the Consolidated Cash Flow
of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person and its Restricted Subsidiaries for such period. In the
event that the specified Person or any of its Restricted Subsidiaries incurs,
assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than
ordinary working capital borrowings) or issues, repurchases or redeems preferred
stock subsequent to the commencement of the applicable period for which the
Fixed Charge Coverage Ratio is being calculated and on or prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio will be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment, repurchase or redemption of Indebtedness, or such issuance,
repurchase or redemption of preferred stock, and the use of the proceeds
therefrom, as if the same had occurred at the beginning of such period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any
of its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, subsequent to the
commencement of the applicable four-quarter reference period and on or
prior to the Calculation Date will be given pro forma effect as if they had
occurred on the first day of the four-quarter reference period, including
any Consolidated Cash Flow and any pro forma expense and cost reductions
that have occurred or are reasonably expected to occur, in the reasonable
judgment of the chief financial officer of the specified Person (regardless
of whether those cost savings or operating improvements could then be
reflected in pro forma financial statements in accordance with Regulation
S-X promulgated under the Securities Act or any other regulation or policy
of the Commission related thereto);
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be excluded;
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date;
(4) any Person that is a Restricted Subsidiary on the Calculation
Date will be deemed to have been a Restricted Subsidiary at all times
during the applicable four-quarter reference period;
(5) any Person that is not a Restricted Subsidiary on such
Calculation Date will be deemed not to have been a Restricted Subsidiary at
any time during the applicable four-quarter reference period; and
(6) if any Indebtedness bears a floating rate of interest, the
interest expense on such Indebtedness will be calculated as if the rate in
effect on the Calculation Date had been the applicable rate for the entire
applicable four-quarter reference period (taking into account any Hedging
Obligation applicable to such Indebtedness if such Hedging Obligation has a
remaining term as at the Calculation Date in excess of 12 months).
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or
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bankers' acceptance financings, and net of the effect of all payments made
or received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of the Company (other than
Disqualified Stock) or to the Company or a Restricted Subsidiary of the
Company, times (b) if such dividends are not deductible for income tax
purposes based on the law in effect at the time of payment, a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Foreign Subsidiary" means Subsidiaries of the Company that are not
Domestic Subsidiaries.
"GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each Subsidiary that executes a Guarantee in accordance
with the provisions of the indenture and their respective successors and
assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person incurred in the ordinary course of business and not
for speculative purposes under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements entered into with one or more financial
institutions and designed to protect the Person or entity entering into the
agreement against fluctuations in interest rates with respect to
Indebtedness incurred;
(2) foreign exchange contracts and currency protection agreements
entered into with one of more financial institutions that are designed to
protect the Person or entity entering into the agreement against
fluctuations in currency exchanges rates with respect to Indebtedness
incurred;
(3) any commodity futures contract, commodity option or other similar
agreement or arrangement designed to protect against fluctuations in the
price of commodities used by such Person at the time; and
(4) other agreements or arrangements designed to protect such person
against fluctuations in interest rates or currency exchange rates.
"Holder" means a holder of notes.
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"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person (excluding accrued expenses and trade payables),
whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase
price of any property due more than six months after such property is
acquired; or
(6) representing Hedging Obligations;
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness that is more than 30 days past due, in the
case of any other Indebtedness; and
(3) with respect to Hedging Obligations, the amount required to be
recorded as a liability in accordance with GAAP.
In addition, for the purpose of avoiding duplication in calculating the
outstanding principal amount of Indebtedness for purposes of the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock", Indebtedness arising solely by reason of the
existence of a Lien to secure other Indebtedness permitted to be incurred under
the covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" will not be considered incremental
Indebtedness.
Indebtedness will not include the obligations of any Person (A) resulting
from the endorsement of negotiable instruments for collection in the ordinary
course of business, (B) under stand-by letters of credit to the extent
collateralized by cash or Cash Equivalents and (C) resulting from
representations, warranties, covenants and indemnities given by such Person that
are reasonably customary for sellers or transferors in an accounts receivable
securitization transaction.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Restricted Subsidiary of the Company, the Company will be deemed to
have made an Investment on the date of any such sale or disposition in an amount
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "Certain
Covenants -- Restricted Payments." The acquisition by the Company or any
Restricted Subsidiary of the Company of a Person that holds an
105
Investment in a third Person will be deemed to be an Investment made by the
Company or such Restricted Subsidiary in such third Person in an amount equal to
the fair market value of the Investment held by the acquired Person in such
third Person on the date of any such acquisition in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments."
"Issue Date" means the first date on which the notes are initially issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Liquidated Damages" means amounts payable under the Registration Rights
Agreement.
"Moody's" means Moody's Investor Services, Inc. or any successor rating
agency.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes
on such gain (but not loss), realized in connection with: (a) any Asset
Sale; or (b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (or loss), together with any related
provision for taxes on such extraordinary gain (or loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, recording fees, title
transfer fees, appraiser fees, costs of preparation of assets for sale and any
relocation expenses incurred as a result of the Asset Sale, and taxes paid or
payable as a result of the Asset Sale, in each case, after taking into account
any available tax credits or deductions and any tax sharing arrangements, and
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that were the subject of such Asset Sale, all
distributions and other payments required to be made to minority interest
holders in Restricted Subsidiaries or joint ventures as a result of the Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c) is
the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness (other than the notes) of the Company
or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment of the Indebtedness to be accelerated or
payable prior to its Stated Maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock (other than the stock of an
Unrestricted Subsidiary pledged by the Company or any of its Restricted
Subsidiaries) or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, premium and Liquidated Damages, if any,
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization, whether or not a claim for post-filing
interest is allowed in such proceeding), penalties, fees, charges, expenses,
indemnifications, reimbursement
106
obligations, damages, guarantees and other liabilities or amounts payable under
the documentation governing any Indebtedness or in respect thereto.
"Permitted Business" means (i) the lines of business conducted by the
Company and its Restricted Subsidiaries on the Issue Date, (ii) any business in
the field of consumer services and (iii) any business incidental or reasonably
related to the foregoing clauses (i) and (ii) or which is a reasonable extension
thereof as determined in good faith by the Company's Board of Directors and set
forth in an officers' certificate delivered to the trustee.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of
the Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company;
or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Restricted Subsidiary of the
Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company or made
with the proceeds of a substantially concurrent sale of such Equity
Interests (other than Disqualified Stock);
(6) any Investments received in compromise or resolution of
obligations of (A) trade creditors or customers that were incurred in the
ordinary course of business, including pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of
any trade creditor or customer or (B) litigation, arbitration or other
similar disputes;
(7) Hedging Obligations permitted to be incurred under the covenant
described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock";
(8) repurchases of the notes;
(9) loans and advances made in the ordinary course of business, to
officers, directors and employees in an aggregate amount not to exceed $1.0
million outstanding at any one time;
(10) Investments of any Person (other than Indebtedness of such
Person) in existence at the time such Person becomes a Subsidiary of the
Company; provided such Investment was not made in connection with or
anticipation of such Person becoming a Subsidiary of the Company;
(11) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business and advances,
loans or extensions of credit to suppliers in the ordinary course of
business; and
(12) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (12) since the Issue Date
that remain outstanding at the time, not to exceed $5.0 million; provided,
however, that if any Investment pursuant to this clause (12) is made in any
Person that subsequent to the date of such Investment becomes a Restricted
Subsidiary of the Company, then such Investment shall thereafter be
107
deemed to have been made pursuant to clause (1) above, and the amount
of such Investment shall be reset to zero for purposes of this clause
(12).
"Permitted Liens" means:
(1) Liens of the Company and the Guarantors securing Indebtedness
under Credit Facilities that was permitted by the terms of the indenture,
whether incurred under clause (1) of the second paragraph of the covenant
described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" or under the first paragraph
of the covenant described under "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock";
(2) Liens in favor of the Company or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company or any Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the
property by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of
such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second paragraph of the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only the assets
acquired with or financed by such Indebtedness;
(7) Liens existing on the Issue Date;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(9) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
(10) Liens imposed by law, such as carriers', warehousemen's,
landlord's and mechanics' Liens, in each case, incurred in the ordinary
course of business;
(11) survey exceptions, easements or reservations of, or rights of
others for, licenses, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions
as to the use of real property that were not incurred in connection with
Indebtedness and that do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the
operation of the business of such Person;
(12) Liens created for the benefit of (or to secure) the notes (or
Guarantees of the notes);
(13) Liens to secure any Permitted Refinancing Indebtedness permitted
to be incurred under the indenture; provided, however, that:
(A) the new Lien shall be limited to all or part of the same
property and assets that secured or, under the written agreements
pursuant to which the original Lien arose, could secure the original
Lien (plus improvements and accessions to, such property or proceeds
or distributions thereof); and
108
(B) the Indebtedness secured by the new Lien is not increased to
any amount greater than the sum of (x) the outstanding principal
amount or, if greater, committed amount, of the Permitted Referencing
Indebtedness and (y) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancings, refunding,
extension, renewal or replacement;
(14) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security; and
(15) Liens incurred in the ordinary course of business of the Company
or any Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
notes, such Permitted Refinancing Indebtedness is subordinated in right of
payment to the notes on terms at least as favorable to the Holders as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary of the Company that is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc., or any successor rating agency.
"Senior Debt" means, Indebtedness of the Company and its Restricted
Subsidiaries, at the time any determination is to be made, in an amount equal to
the sum of:
(1) all Indebtedness of the Company and its Restricted Subsidiaries
outstanding under Credit Facilities and Hedging Obligations related thereto
at such time, and
(2) all other outstanding Indebtedness of the Company or any of its
Restricted Subsidiaries, unless the instrument under which such
Indebtedness is incurred expressly provides that such Indebtedness is
subordinated to the notes and the Guarantees.
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Notwithstanding anything to the contrary in the preceding sentence, Senior
Debt will not include:
(1) any liability for federal, state, local or other taxes owed or
owing by the Company or any of its Restricted Subsidiaries;
(2) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates that is by its term subordinate to the notes;
(3) any trade payables; or
(4) any obligations with respect to any Capital Stock of the Company
or any of its Restricted Subsidiaries.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article l, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issue
Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"Treasury Rate" means, as of any Redemption Date, the yield to maturity as
of such Redemption Date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the Redemption Date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the Redemption Date to October 1, 2009;
provided, however, that if the period from the Redemption Date to October 1,
2009 is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year will be
used.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
resolution of the Board of Directors of the Company, but only to the extent that
such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results; and
110
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary will be evidenced to the trustee by filing with the trustee a
certified copy of the resolution of the Board of Directors of the Company giving
effect to such designation and an officers' certificate certifying that such
designation complied with the preceding conditions and was permitted by the
covenant described above under the caption "-- Certain Covenants -- Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
preceding requirements as an Unrestricted Subsidiary, it will thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of such Subsidiary will be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock," the Company will be in default of such covenant. The Board of
Directors of the Company may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation will be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation will only be permitted if (1) such Indebtedness is permitted under
the covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly-Owned Restricted Subsidiary" means a direct or indirect Restricted
Subsidiary of the Company all of the Capital Stock of which, other than
directors' qualifying shares, is owned by the Company or another Wholly-Owned
Restricted Subsidiary.
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Certain U.S. Federal Income Tax Considerations
Overview
The following is a general discussion of material U.S. federal income tax
consequences to a holder with respect to the purchase, ownership and disposition
of the Notes. This summary, is generally limited to holders who will hold the
Notes as "capital assets" within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code') and who acquire the Notes in this
offering at the initial offering price. This summary does not purport to deal
with all aspects of the U.S. federal income tax consequences that might be
relevant to holders in light of their particular investment circumstances or
status nor does it deal with the U.S. federal income tax consequences to
investors subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the Notes as part of a
"straddle," a "hedge" against currency risk, a "conversion transaction" or other
integrated transaction, certain financial institutions, insurance companies and
U.S. Holders (as defined herein) that have a "functional currency" other than
the U.S. dollar, all within the meaning of the Code. In addition, this
discussion does not describe any tax consequences arising out of the tax laws of
any state, local or foreign jurisdiction.
The U.S. federal income tax considerations set forth below are based upon
the Code, existing and proposed Treasury regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change
or different interpretations. Prospective investors should particularly note
that any such change could have retroactive application so as to result in U.S.
federal income tax consequences different from those discussed below.
Based on currently applicable authorities, we will treat the Notes as
indebtedness for U.S. federal income tax purposes, and the remainder of this
discussion assumes that the Notes will constitute indebtedness for U.S. tax
purposes. We have not sought and will not seek any rulings from the Internal
Revenue Service (the "IRS") with respect to the matters discussed below. There
can be no assurance that the IRS will not take a different position concerning
the tax consequences of the purchase, ownership or disposition of the Notes or
that any such position would not be sustained.
The following discussion constitutes the material U.S. federal income tax
consequences generally applicable to holders who acquire the Notes in this
offering at the initial offering price. Investors considering the purchase of
the Notes should consult their own tax advisors with respect to the application
of the U.S. federal income tax laws to their particular situations, as well as
any tax consequences arising under the U.S. federal estate or gift tax rules or
under the laws of any state, local or foreign taxing jurisdiction or under any
applicable tax treaty.
Taxation of U.S. Holders
The following discussion is limited to the U.S. federal income tax
consequences relevant to U.S. Holders. As used herein, "U.S. Holders" are
beneficial owners of the Notes, that are, for U.S. federal income tax purposes:
o individuals who are citizens or residents of the United States:
o corporations or other entities taxable as corporations created or
organized in, or under the laws of, the United States, any state thereof
or the District of Columbia;
o estates, the income of which is subject to U.S. federal income taxation
regardless of its source; or
o trusts if (i) (A) a court within the United States is able to exercise
primary supervision over the administration of the trust and (B) one or
more U.S. persons have the authority to control all substantial
decisions of the trust or (ii) a valid election to be treated as a U.S.
person is in effect with respect to such trust.
If a partnership (or other entity taxable as a partnership for U.S. federal
income tax purposes) holds Notes, the tax treatment of a partner in the
partnership (or other entity) will generally depend upon the status of the
partner and the activities of the partnership or other entity. If you are a
partner of a partnership (or other entity taxable as a
112
partnership) holding the Notes, you should consult your tax advisor regarding
the tax consequences of the purchase, ownership and disposition of the Notes.
Certain U.S. federal income tax consequences relevant to a non-U.S. Holder
are discussed separately below.
Taxation of Interest
U.S. Holders generally will be required to recognize as ordinary income any
interest paid or accrued on the Notes, in accordance with their regular method
of accounting for U.S. federal income tax purposes. In certain circumstances
(see "Description of the New Notes -- Repurchase at the Option of Holders"), we
may be obligated to pay amounts in excess of stated interest or principal on the
Notes. According to Treasury Regulations, the possibility that any such payments
in excess of stated interest or principal will be made will not affect the
amount of interest income that a U.S. Holder currently recognizes if there is
only a remote chance as of the date the Notes were issued that such payments
will be made. We intend to take the position that the likelihood of payment of
these amounts is remote; therefore, we do not intend to treat these potential
payments as part of the yield to maturity of the Notes. Under this approach, if
we ultimately make any additional payments, U.S. Holders should recognize such
amounts as ordinary income in accordance with their regular method of accounting
for U.S. federal income tax purposes. Our determination that these contingencies
are remote is binding on a U.S. Holder unless such holder discloses its contrary
position in the manner required by applicable Treasury Regulations. Our
determination is not, however, binding on the IRS, and if the IRS were to
challenge this determination, a U.S. Holder might be required to accrue income
on its Notes in excess of stated interest, and to treat as ordinary income
rather than capital gain any income realized on the taxable disposition of a
Note before the resolution of the contingencies. U.S. Holders should consult
their own tax advisors about the treatment of additional payments that might be
made in respect of the Notes.
Market Discount
If a U.S. Holder purchases a Note for an amount that is less than its
stated redemption price at maturity the amount of the difference will be treated
as "market discount" unless such difference is a specified de minimis amount.
Market discount is considered to be de minimis if it is less than 1/4 of 1% of
the Note's stated redemption price at maturity multiplied by the number of
complete years to maturity after the Note was acquired. Under the market
discount rules of the Code, a U.S Holder will be required to treat any partial
principal payment on, or any gain realized upon the sale, redemption or other
taxable disposition of, a Note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such Note at the time of such payment or disposition. In
addition, if a U.S. Holder acquired a Note with market discount such U.S. Holder
may be required to defer the deduction of all or a portion of the interest paid
or accrued on any indebtedness incurred or maintained to purchase or carry such
Note until the maturity of the note or its earlier disposition in a taxable
transaction. Market discount is considered to accrue ratably during the period
from the date of acquisition to the maturity date of a Note, unless a U.S.
Holder elects to include market discount in income on a current basis. A U.S.
Holder may elect to include market discount in income (generally as ordinary
income) currently as it accrues, in which case the rules described above
regarding the deferral of interest deductions will not apply. Such election will
also apply to all debt obligations held or subsequently acquired by the U.S.
Holder on or after the first day of the taxable year to which the election
applies. The election may not be revoked without the consent of the IRS. U.S.
Holders should consult their own tax advisors before making this election.
Acquisition Premium
In general, if a U.S. Holder purchases a Note for an amount in excess of
the stated principal amount such U.S. Holder will be treated as having purchased
such Note with acquisition premium in the amount of such excess. A U.S. Holder
generally may elect to amortize the acquisition premium (with a corresponding
decrease in adjusted tax basis) over the remaining term of the Note on a
constant yield method as an offset to interest income when includible in income
under such U.S. Holder's regular method of accounting for U.S. federal income
tax purposes. If such U.S. Holder does not elect to amortize acquisition
premium, that premium will decrease the gain or increase the loss it would
otherwise recognize upon a sale or other disposition of the Note. An election to
amortize premium on a constant yield method will also apply to all debt
obligations held or subsequently acquired by the U.S. Holder on or after the
first day of the taxable year to which the election applies. The election may
not be revoked without the consent of the IRS. U.S. Holders should consult their
own tax advisors before making this election.
113
The rules governing market discount and amortizable premium are complex,
and U.S. Holders should consult their own tax advisors concerning the
application of these rules.
Exchange Offer
The exchange of the Notes for the new notes in the exchange offer will not
constitute a taxable exchange. See "Description of the New Notes." As a result,
(1) a U.S. Holder will not recognize taxable gain or loss as a result of
exchanging such holder's Notes for new notes; (2) the holding period of the new
notes will include the holding period of the Notes exchanged therefor; and (3)
the adjusted tax basis of the new notes received will be the same as the
adjusted tax basis of the Notes exchanged therefor immediately before such
exchange.
Disposition of the Notes
Upon the disposition of a Note by sale, exchange, redemption or other
taxable disposition (other than an exchange for new notes pursuant to the
exchange offer or other tax-free transaction), a U.S. Holder will generally
recognize gain or loss equal to the difference between (1) the amount realized
on the disposition of the Note (other than amounts attributable to accrued
interest on the Note, which will be treated as ordinary interest income for U.S.
federal income tax purposes if not previously included in gross income) and (2)
the U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in a Note generally will equal the cost of the Note to such U.S. Holder
less any prior principal payments. Gain or loss from the taxable disposition of
a Note generally will be capital gain or loss and will be long-term capital gain
or loss if the Note was held by the U.S. Holder for more than one year at the
time of the disposition. For non-corporate U.S. holders, certain preferential
tax rates may apply to gain recognized as long-term capital gain. The
deductibility of capital losses is subject to certain limitations under the
Code.
Information Reporting and Backup Withholding
Where required, information will be reported to both U.S. Holders of Notes
and the IRS regarding the amount of interest and principal paid on the Notes in
each calendar year as well as the corresponding amount of tax withheld, if any
exists. This obligation, however, does not apply with respect to payments to
certain U.S. Holders, including corporations and tax-exempt organizations,
provided that such U.S. Holders establish entitlement to an exemption.
Under the backup withholding provisions of the Code and the applicable
Treasury regulations, a holder of Notes may be subject to backup withholding
(currently at a 28% rate) with respect to interest and principal paid on the
Notes and/or the proceeds from dispositions of the Notes. Certain U.S. holders
(including, among others, corporations and tax-exempt organizations) are
generally not subject to backup withholding. U.S. Holders will be subject to
this backup withholding tax if such holder is not otherwise exempt and such
holder: (1) fails to furnish its taxpayer identification number, or TIN (which,
for an individual, is ordinarily his or her social security number); (2)
furnishes an incorrect TIN; (3) is notified by the IRS that it has failed to
properly report payments of interest or dividends; or (4) fails to certify,
under penalties of perjury, that it has furnished a correct TIN and that the IRS
has not notified the U.S. holder that it is subject to backup withholding. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
holder will be allowed as a credit against such holder's U.S. federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
Taxation of Non-U.S. Holders
The following discussion is limited to the U.S. federal income and estate
tax consequences of the acquisition, ownership and disposition of the Notes by
an initial investor of the Notes that is neither a U.S. Holder as defined above
nor a partnership. The rules governing the U.S. federal income taxation of a
non-U.S. Holder of Notes are complex and no attempt will be made herein to
provide more than a summary of such rules. Special rules may apply to certain
non-U.S. Holders such as "controlled foreign corporations," "passive foreign
investment companies" and "foreign personal holding companies." Non-U.S. Holders
should consult with their own tax advisors to determine the effect of federal,
state, local and foreign income tax laws, as well as treaties, with regard to an
investment in the Notes, including any reporting requirements.
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Taxation of Interest
Generally, interest income earned on a Note by a non-U.S. Holder will
qualify for the "portfolio interest" exception, and therefore will not be
subject to U.S. federal income tax or withholding tax, if
o the interest income is not effectively connected with the conduct of a
U.S. trade or business of the non-U.S. Holder (i.e., not "U.S. trade or
business income"):
o the non-U.S. Holder does not, directly or indirectly, actually or
constructively, own 10% or more of the total combined voting power of
our stock entitled to vote;
o the non-U.S. Holder is not, for U.S. federal income tax purposes, a
controlled foreign corporation that is related to us through stock
ownership;
o the non-U.S. Holder is not a bank which acquired the Note in
consideration for an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business;
and
o either (A) the non-U.S. Holder certifies, under penalty of perjury, to
us or our agent that it is not a U.S. person and such non-U.S. Holder
provides its name, address and certain other information on a properly
executed Form W-8 BEN (or an applicable substitute form), or (B) a
securities clearing organization bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business holds the Note on behalf of the beneficial owner and provides a
statement to us or our agent signed under penalty of perjury in which
the organization, bank or financial institution certifies that the form
or an applicable substitute has been received by it from the non-U.S.
Holder or from another financial institution entity on behalf of the
non-U.S. Holder and furnishes us or our agent with a copy thereof.
If a non-U.S. Holder cannot satisfy the requirements for the portfolio
interest exception as described above, the gross amount of payments of interest
to such non-U.S. Holder that are not effectively connected with the conduct of a
U.S. trade or business of the non-U.S. Holder will be subject to U.S. federal
withholding tax at the rate of 30%, unless a U.S. income tax treaty applies to
reduce or eliminate withholding. U.S. trade or business income will not be
subject to U.S. federal withholding tax but will be taxed on a net income basis
at regular U.S. federal income tax rates, and if the non-U.S. Holder is a
foreign corporation, such U.S. trade or business income may be subject to the
branch profits tax equal to 30%, or a lower rate provided by an applicable
income tax treaty. In order to claim the benefit provided by an applicable
income tax treaty or to claim exemption from withholding because the income is
U.S. trade or business income, a non-U.S. Holder must provide either:
o a properly executed Form W-8 BEN (or an applicable substitute form)
claiming an exemption from or reduction in withholding under the benefit
of an applicable income tax treaty; or
o a properly executed Form W-8 ECI (or an applicable substitute form)
stating that interest paid on the Note is not subject to withholding tax
because it is effectively connected with the conduct of a U.S. trade or
business of the non-U.S. Holder.
Disposition of the Notes
Generally, a non-U.S. Holder will not be subject to U.S. federal income tax
or withholding tax on any gain realized on the sale, exchange, redemption or
other taxable disposition (other than an exchange for new notes pursuant to the
exchange offer or other tax free transaction) of a Note unless:
o the gain is effectively connected with the conduct of a U.S. trade or
business of the non-U.S. Holder (and, if an income tax treaty applies,
the gain is attributable to a U.S. permanent establishment (for a fixed
base) in the United States); or
o the non-U.S. Holder is an individual who is present in the United States
for 183 days or more during the taxable year in which the disposition of
the Note is made and certain other requirements are met, or is subject
to tax pursuant to the provisions of U.S. federal income tax law
applicable to certain former citizens and residents of the United
States.
115
A non-U.S. holder described in the first bullet point above will be
required to pay U.S. federal income tax on the net gain derived from the sale,
except as otherwise required by an applicable income tax treaty, and if such
holder is a foreign corporation, it may also be required to pay a branch profits
tax at a 30% rate or a lower rate if so specified by an applicable income tax
treaty. A non-U.S. holder described in the second bullet point above will be
subject to a 30% U.S. federal income tax on the gain derived from the sale,
which may be offset by U.S. source capital losses, even though the non-U.S.
holder is not considered a resident of the United States. The exchange of the
Notes for the new notes in the exchange offer will not constitute a taxable
exchange.
Information Reporting and Backup Withholding
Where required, information will be reported annually to each non-U.S.
Holder as well as the IRS regarding any interest that is either subject to
withholding or exempt from U.S. federal withholding tax pursuant to an
applicable income tax treaty or to the portfolio interest exception. Copies of
these information returns may also be made available to the tax authorities of
the country in which the non-U.S. Holder resides under the provisions of a
specific treaty or agreement.
Under the backup withholding provisions of the Code and the applicable
Treasury Regulations, a holder of Notes may be subject to backup withholding
(currently at a 28% rate) with respect to interest and principal paid on the
Notes and/or the proceeds from dispositions of the Notes. However, the Treasury
regulations provide that payments of principal and interest to a non-U.S. Holder
will not be subject to backup withholding and information reporting if the
non-U.S. Holder certifies its non-U.S. status under penalty of perjury or
satisfies the requirements of an otherwise established exemption, provided that
neither us or our paying agent has actual knowledge that such holder is a U.S.
person or that the conditions of any other exemption are not, in fact,
satisfied.
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding unless the non-U.S. Holder certifies
its non-U.S. status under penalty of perjury or satisfies the requirements of an
otherwise established exemption, provided that the broker does not have actual
knowledge that such holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a Note to or through a non-U.S. office of a non-U.S. broker that
does not have certain enumerated relationships with the United States will not
be subject to information reporting or backup withholding.
When a non-U.S. Holder receives a payment of proceeds from the disposition
of Notes either to or through a non-U.S. office of a broker that is either a
U.S. person or a person who has certain enumerated relationships with the United
States, the Treasury regulations require information reporting (but generally
not backup withholding) on the payment, unless the broker has documentary
evidence in its files that the non-U.S. Holder is not a U.S. person and the
broker has no knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be allowed as a credit against such holder's U.S. federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS. Non-U.S. Holders should consult
their own tax advisors regarding the filing of a U.S. federal income tax return
for claiming a refund of such backup withholding.
U.S. Federal Estate Tax
The U.S. federal estate tax will not apply to Notes owned by an individual
who is not a citizen or resident of the United States at the time of his death
provided that (1) the individual does not, directly or indirectly, actually or
constructively, own 10% or more of the total combined voting power of our stock
entitled to vote and (2) interest on the Note would not have been, if received
at the time death, effectively connected with the conduct of a U.S. trade or
business of such holder.
Investors considering the purchase of the Notes should consult their own
tax advisors with respect to the application of the U.S. federal income tax laws
to their particular situations, as well as any tax consequences arising under
the U.S. federal estate or gift tax rules or under the laws of any state, local
or foreign taxing jurisdiction or under any applicable tax treaty.
116
Plan of Distribution
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of one year after the
expiration of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resales. In addition, we have agreed that we would not for a period of 90 days
from April 13, 2004, the date of the offering memorandum distributed in
connection with the sale of the old notes, directly or indirectly offer, sell,
grant any options to purchase or otherwise dispose of any debt securities other
than in connection with this exchange offer.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have been advised by the initial purchasers of the old notes, that
following completion of the exchange offer they intend to make a market in the
new notes to be issued in the exchange offer. However, they are under no
obligation to do so and any market activities with respect to the new notes may
be discontinued at any time.
Legal Matters
Certain matters with respect to the validity of the new notes will be
passed upon for us by Shearman & Sterling LLP, New York, New York.
Experts
The financial statements of MemberWorks Incorporated as of June 30, 2003
and 2002, and for each of the three years in the period ended June 30, 2003,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Lavalife Inc. of September 30, 2003 and 2002,
and for each of the two years in the period ended September 30, 2003,
incorporated by reference in this prospectus, have been audited by Ernst & Young
LLP, independent accountants, as stated in their report appearing herein.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549, and obtain copies of our filings at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
117
Incorporation by Reference
We are incorporating by reference into this prospectus the information we
have filed with the SEC, which means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus but is automatically
updated and superseded by information in this prospectus, including our
financial statements for the year ended June 30, 2003. In addition, information
in documents that we file later with the SEC will automatically update and
supersede information in this prospectus. We incorporate by reference the
documents listed below into this prospectus, and any future filings made by us
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act (excluding any information
furnished pursuant to Item 9 or Item 12 on any current report on Form 8-K),
until our offering is complete. The documents we incorporate by reference are:
o Our Annual Report on Form 10-K for the year ended June 30, 2003 filed
with the SEC on September 15, 2003.
o Our Quarterly Reports on Form 10-Q for the periods ended September 30,
2003 and December 31, 2003 filed with the SEC on November 13, 2003 and
February 9, 2004, respectively.
o Our Current Reports on Form 8-K file with the SEC on September 22, 2003,
September 25, 2003, September 30, 2003, October 24, 2003, March 4, 2004,
March 26, 2004 (Items 5 and 7), March 26 (Items 7 and 9), April 5, 2004
and April 8, 2004.
o Our Proxy Statement on Form 14A filed with the SEC on October 3, 2003.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
MemberWorks Incorporated
680 Washington Boulevard
Stamford, Connecticut 06901
Attention: Investor Relations
Telephone: (203) 324-7635
118
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements of MemberWorks Incorporated
Audited Consolidated Financial Statements for the Years Ended
June 30, 2003, 2002 and 2001
Report of Independent Auditors............................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets-- June 30, 2003 and June 30, 2002..........F-3
Consolidated Statements of Operations -- For the Fiscal
Years Ended June 30, 2003, June 30, 2002 and June 30, 2001..........F-4
Consolidated Statements of Shareholders' Deficit -- For the Fiscal
Years Ended June 30, 2003, June 30, 2002 and June 30, 2001..........F-5
Consolidated Statements of Cash Flows -- For the Fiscal Years Ended
June 30, 2003, June 30, 2002 and June 30, 2001.....................F-6
Notes to Consolidated Financial Statements............................F-7
Unaudited Condensed Consolidated Financial Statements for the Six Months Ended
December 31, 2003
Condensed Consolidated Balance Sheets as of December 31, 2003 and
June 30, 2003.......................................................F-31
Condensed Consolidated Statements of Operations for the three and
six months ended December 31, 2003 and 2002.........................F-32
Condensed Consolidated Statements of Cash Flows for the six months
ended December 31, 2003 and 2002....................................F-33
Notes to Unaudited Condensed Consolidated Financial Statements.........F-34
F-1
MEMBERWORKS INCORPORATED
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of MemberWorks Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' deficit, and of cash
flows present fairly, in all material respects, the financial position of
MemberWorks Incorporated and its subsidiaries at June 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the accompanying financial statement schedule included on page F-31 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for membership fee revenue in fiscal 2001 and
goodwill and other intangible assets in fiscal 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
July 28, 2003, except for Note 21,
as to which the date is March 31, 2004
F-2
MEMBERWORKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30,
2003 2002
(In thousands, except
per share amounts)
Assets
Current assets:
Cash and cash equivalents......................................................... $ 72,260 $ 45,502
Restricted cash................................................................... 2,732 5,683
Marketable securities............................................................. -- 912
Accounts receivable (net of allowance for doubtful accounts of $1,743 and $914,
at June 30, 2003 and 2002, respectively)........................................ 8,713 9,831
Prepaid membership materials...................................................... 2,196 2,061
Prepaid expenses.................................................................. 7,571 4,325
Membership solicitation and other deferred costs.................................. 77,883 129,085
----------- -----------
Total current assets........................................................ 171,355 197,399
Fixed assets, net.................................................................... 24,969 31,420
Goodwill............................................................................. 42,039 42,039
Intangible assets, net............................................................... 6,656 8,049
Other assets......................................................................... 3,486 1,910
----------- -----------
Total assets................................................................ $ 248,505 $ 280,817
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long term obligations....................................... $ 244 $ 1,070
Accounts payable.................................................................. 32,644 32,769
Accrued liabilities............................................................... 59,105 57,709
Deferred membership fees.......................................................... 167,643 206,272
Deferred income taxes............................................................. 879 --
----------- -----------
Total current liabilities................................................... 260,515 297,820
Deferred income taxes................................................................ 5,145 --
Long-term liabilities................................................................ 3,128 3,627
----------- -----------
Total liabilities........................................................... 268,788 301,447
----------- -----------
Commitments and contingencies (Note 11).............................................. -- --
Shareholders' deficit:...............................................................
Preferred stock, $0.01 par value-- 1,000 shares authorized; no shares issued...... -- --
Common stock, $0.01 par value-- 40,000 shares authorized;
17,847 shares issued (17,493 shares at June 30, 2002)........................... 178 175
Capital in excess of par value.................................................... 122,425 109,254
Accumulated deficit............................................................... (17,829) (42,185)
Accumulated other comprehensive loss.............................................. (469) (373)
Treasury stock, 6,126 shares at cost (4,139 shares at June 30, 2002).............. (124,588) (87,501)
----------- -----------
Total shareholders' deficit................................................. (20,283) (20,630)
----------- -----------
Total liabilities and shareholders' deficit................................. $ 248,505 $ 280,817
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
2003 2002 2001
(In thousands, except
per share amounts)
Revenues................................................................... $ 456,881 $ 427,602 $ 475,726
Expenses:
Marketing............................................................... 280,673 248,974 305,032
Operating............................................................... 78,444 78,694 90,368
General and administrative.............................................. 74,085 79,211 99,732
Restructuring charges (Note 12)......................................... -- 6,893 --
Non-recurring charge (Note 11).......................................... -- -- 3,000
Amortization of intangibles............................................. 1,393 1,941 10,918
----------- ------------- -----------
Operating income (loss).................................................... 22,286 11,889 (33,324)
Settlement of investment related litigation (Note 7)....................... 19,148 -- --
(Loss) gain on sale of subsidiary (Note 6)................................. (959) 65,608 --
Net (loss) gain on investment (Note 6)..................................... (206) (33,628) (2,172)
Other income (expense), net................................................ 326 (401) (450)
----------- ------------- -----------
Income (loss) before equity in affiliate and minority interest............. 40,595 43,468 (35,946)
Equity in income of affiliate.............................................. -- -- 83
Minority interest (Note 15)................................................ -- 450 9,106
----------- ------------- -----------
Income (loss) before income taxes.......................................... 40,595 43,918 (26,757)
Provision for income taxes................................................. 16,239 -- --
----------- ------------- -----------
Income (loss) before cumulative effect of accounting change................ 24,356 43,918 (26,757)
Cumulative effect of accounting change (Note 4)............................ -- (5,907) (25,730)
----------- ------------- -----------
Net income (loss).......................................................... $ 24,356 $ 38,011 $ (52,487)
=========== ============= ===========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting change............. $ 1.93 $ 3.03 $ (1.75)
Cumulative effect of accounting change.................................. -- (0.41) (1.69)
----------- ------------- -----------
Basic earnings (loss) per share......................................... $ 1.93 $ 2.63 $ (3.44)
=========== ============= ===========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting change............. $ 1.84 $ 2.95 $ (1.75)
Cumulative effect of accounting change.................................. -- (0.40) (1.69)
----------- ------------- -----------
Diluted earnings (loss) per share....................................... $ 1.84 $ 2.55 $ (3.44)
=========== ============= ===========
Pro forma assuming accounting changes are retroactively applied:
Net income (loss)....................................................... $ 24,356 $ 43,918 $ (18,978)
Basic earnings (loss) per share......................................... 1.93 3.03 (1.24)
Diluted earnings (loss) per share....................................... 1.84 2.95 (1.24)
Weighted average common shares used in earnings (loss) per share calculations:
Basic................................................................... 12,596 14,477 15,248
=========== ============= ===========
Diluted................................................................. 13,233 14,909 15,248
=========== ============= ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-4
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Accumulated
Common Stock Capital in Other
----------------- Excess of Deferred Accumulated Comprehensive Treasury
Shares Amount Par Value Compensation Deficit Loss Stock Total
------ ------ ---------- ------------ ----------- ------------- ---------- -----------
(In thousands)
Balance-- June 30, 2000.......... 16,507 $165 $ 91,398 $(44) $(27,709) $(145) $(44,644) $ 19,021
Issuance of common stock......... 376 4 3,234 3,238
Issuance of common stock for
an acquisition............... 425 4 12,880 12,884
Issuance of treasury stock to fund
401K Plan.................... (28) 154 126
Acquisition of treasury stock.... (8,917) (8,917)
Deferred compensation............ 351 44 395
Comprehensive loss:
Net loss..................... (52,487)
Currency translation adjustment (225)
Total comprehensive loss..... (52,712)
-------------------------------------------------------------------------------------------
Balance - June 30, 2001.......... 17,308 173 107,835 -- (80,196) (370) (53,407) (25,965)
Issuance of common stock......... 185 2 1,462 1,464
Issuance of treasury stock to fund
401K Plan.................... (51) 207 156
Expense associated with the
issuance of stock options to a
non-employee................. 8 8
Acquisition of treasury stock.... (34,301) (34,301)
Comprehensive income:
Net income....................... 38,011
Currency translation adjustment.. (3)
Total comprehensive income....... 38,008
-------------------------------------------------------------------------------------------
Balance - June 30, 2002.......... 17,493 175 109,254 -- (42,185) (373) (87,501) (20,630)
Issuance of common stock options. 354 3 4,047 4,050
Tax Benefit from employee stock
options...................... 9,100 9,100
Issuance of treasury stock to fund
401K Plan.................... (21) 127 106
Expense associated with the
issuance of stock options to a
non-employee................. 45 45
Acquisition of treasury stock.... (37,214) (37,214)
Comprehensive income:
Net income....................... 24,356
Currency translation adjustment.. (96)
Total comprehensive income....... 24,260
-------------------------------------------------------------------------------------------
Balance - June 30, 2003.......... 17,847 $ 178 $122,425 $-- $(17,829) (469) $ (124,588) $(20,283)
========== ======== ========= ============ =========== ============= ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-5
MEMBERWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
----------------------------------------
2003 2002 2001
------------ ----------- ------------
(In thousands)
Operating activities....................................................... $ 24,356 $ 38,011 $ (52,487)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Change in deferred membership fees.................................... (39,003) (17,116) 9,266
Change in membership solicitation and other deferred costs............ 51,411 15,038 17,177
Depreciation and amortization......................................... 12,120 13,252 20,498
Deferred income taxes................................................. 14,182 -- --
Tax benefit from employee stock plans................................. 942 -- --
Gain on settlement of investment relating litigation.................. (19,148) -- --
Loss (gain) on sale of subsidiary..................................... 959 (65,608) --
Net loss on investment................................................ 206 33,628 2,172
Equity in income of affiliate......................................... -- -- (83)
Non-cash restructuring charges........................................ -- 1,585 --
Minority interest..................................................... -- (450) (9,106)
Cumulative effect of accounting change................................ -- 5,907 25,730
Other................................................................. 2,485 2,605 2,863
Change in assets and liabilities:
Restricted cash......................................................... 2,951 (4,692) (991)
Accounts receivable..................................................... 758 8,830 (2,299)
Prepaid membership materials............................................ (135) 315 202
Prepaid expenses (3,246) (2,217) (2,938)
Other assets............................................................ (1,331) (251) 773
Related party payables.................................................. -- 12 176
Accounts payable........................................................ (255) (10,752) (827)
Accrued liabilities..................................................... 1,281 (1,083) 1,896
------------ ----------- ------------
Net cash provided by operating activities................................. 48,533 17,014 12,022
------------ ----------- ------------
Investing activities.......................................................
Acquisition of fixed assets............................................. (5,463) (5,761) (15,133)
Settlement of investment related litigation............................. 19,148 -- --
Proceeds from sale of subsidiary, net of cash sold...................... -- 45,997 --
Other investing activities.............................................. (1,250) -- 4,144
Business combinations, net of cash acquired............................. -- -- (7,185)
------------ ----------- ------------
Net cash provided by (used in) investing activities........................ 12,435 40,236 (18,174)
------------ ----------- ------------
Financing activities ......................................................
Net proceeds from issuance of stock..................................... 4,050 1,515 8,059
Net repayments of credit facility....................................... -- -- (526)
Treasury of stock purchases............................................. (37,214) (34,301) (8,917)
Payments of long-term obligations....................................... (1,051) (718) (755)
------------ ----------- ------------
Net cash used in financing activities ..................................... (34,215) (33,504) (2,139)
------------ ----------- ------------
Effect of exchange rate changes on cash and cash equivalents............... 5 11 (133)
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents....................... 26,758 23,757 (8,424)
Cash and cash equivalents at beginning of year............................. 45,502 21,745 30,169
------------ ----------- ------------
Cash and cash equivalents at end of year................................... $ 72,260 $ 45,502 $ 21,745
============ =========== ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
Note 1 -- Nature of Business
MemberWorks Incorporated ("MemberWorks" or the "Company"), a Delaware
Corporation organized in 1996 and did business as Card Member Publishing
Corporation from 1989 to 1996, designs and manages membership programs that
offer services and discounts on everyday needs in healthcare, personal finance,
insurance, travel, entertainment, fashion, personal security and more. As of
June 30, 2003, 6.3 million retail members are enrolled in MemberWorks programs,
gaining convenient access to thousands of service providers and vendors.
MemberWorks is the trusted marketing partner of leading consumer-driven
organizations and offers them effective tools to enhance their market presence,
strengthen customer affinity and generate additional revenue.
Note 2 -- Summary of Significant Accounting Policies
Basis of presentation -- consolidation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management of the Company to make estimates, judgements and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant judgments
and estimates include: membership cancellation rates, deferred marketing costs,
valuation of intangible assets, estimation of remaining useful lives of
intangible assets and valuation of deferred tax assets.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current years presentation.
Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect as of the balance sheet dates. Equity accounts are
translated at historical exchange rates and revenues, expenses and cash flows
are translated at the average exchange rates for the periods presented.
Translation gains and losses are included as a component of comprehensive income
in the consolidated statements of shareholders' deficit. Transaction gains and
losses, if any, are included in the consolidated statements of operations.
Fair value of financial instruments and concentration of credit risk
All current assets and liabilities are carried at cost, which
approximates fair value due to the short-term maturity of those instruments. The
recorded amounts of the Company's long-term liabilities also approximate fair
value. Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable from
financial and other cardholder-based institutions (clients of the Company) whose
cardholders constitute the Company's membership base. These entities include
major banks, financial institutions, retailers and major oil companies located
primarily in the United States.
Fixed assets
Fixed assets, capitalized software costs and capital leases are carried
at cost, less accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the related assets. Useful lives are generally 3 years for
computer software and equipment, 5 years or
F-7
the remaining life of the lease for leasehold improvements and 5 to 10 years for
furniture and fixtures. Maintenance and repair expenditures are charged to
operations as incurred.
Revenue recognition
Membership fees are billed through clients of the Company primarily
through credit cards. During an initial annual membership term or renewal term,
a member may cancel his or her membership in the program generally for a pro
rata refund of the membership fee based on the remaining portion of the
membership period. Revenue from members who are charged on a monthly payment
program is recognized as the membership fees are earned. In accordance with
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"), deferred membership fees are recorded, net of estimated
cancellations, and are amortized as revenues from membership fees upon the
expiration of membership refund privileges. An allowance for membership
cancellations is established based on management's estimates and is updated
regularly. In determining the estimate of allowance for membership
cancellations, management analyzes historical cancellation experience, current
economic trends and changes in customer demand for the Company's products.
Actual membership cancellations are charged against the allowance for membership
cancellations on a current basis. If actual cancellations differ from the
estimate, the results of operations would be impacted. Accrued liabilities set
forth in the accompanying consolidated balance sheets as of June 30, 2003 and
2002 include an allowance for membership cancellations of $20,934,000 and
$23,753,000, respectively.
Membership programs sponsored by the Company's two largest clients in
2003 accounted for 21% and 16% of revenue, respectively. For the fiscal years
ended June 30, 2002 and 2001, membership programs sponsored by the Company's
largest client accounted for 16% and 13% of revenue, respectively.
Marketing Expenses
The Company's marketing expenses are comprised of telemarketing, direct
mail, refundable royalty payments, non- refundable royalty payments and
advertising costs. Telemarketing and direct mail are direct response advertising
costs which are accounted for in accordance with American Institute of Certified
Public Accountants Statement of Position 93-7, "Reporting on Advertising Costs"
("SOP 93-7"). Under SOP 93-7, direct response advertising costs are deferred and
charged to operations over the membership period as revenues from membership
fees are recognized. Refundable royalty payments are also deferred and charged
to operations over the membership period in order to match the marketing costs
with the associated revenues from membership fees. Advertising costs and
non-refundable royalty payments, which include fee per pitch, fee per sale and
fee per impression marketing arrangements, are expensed when incurred.
Total membership solicitation costs incurred to obtain a new member are
generally less than the estimated total membership fees. However, if total
membership solicitation costs were to exceed total estimated membership margins,
an adjustment would be made to the membership solicitation and other deferred
costs balance to the extent of any impairment.
Earnings per share
Basic and diluted earnings per share amounts are determined in accordance
with the provisions of Financial Accounting Standards Board Statement ("SFAS")
No. 128, "Earnings Per Share" ("SFAS 128"). Basic earnings per share is computed
using the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per share is computed using the weighted
average number of common shares outstanding and the dilutive effect of potential
common shares outstanding, determined using the treasury stock method.
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.
F-8
Restricted cash
The Company excludes from cash and cash equivalents restricted cash which
is held in an escrow account for the payment of commissions to a client and the
related refunds to customers. In fiscal 2002, the Company held cash in an escrow
account pursuant to the iPlace, Inc. merger agreement (see Note 6).
Marketable securities
Marketable securities are classified as available-for-sale. Unrealized
gains and losses are excluded from earnings and are reported as a separate
component of other comprehensive income in shareholders' equity. Losses incurred
that are deemed to be other than temporary are charged to earnings. Realized
gains and losses are included in income and are determined based on the specific
identification method. As of June 30, 2003, the Company did not have any
marketable securities. As of June 30, 2002, the Company had marketable
securities of $912,000.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes" ("SFAS 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.
Valuation of goodwill and other intangibles
MemberWorks reviews the carrying value of its goodwill and other
intangible assets, and assesses the remaining estimated useful lives of its
intangible assets, in accordance with SFAS 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The Company reviews the carrying value of its goodwill and
other intangible assets for impairment by comparing such amounts to their fair
values. MemberWorks is required to perform this comparison at least annually or
more frequently if circumstances indicate possible impairment. When determining
fair value, the Company utilizes various assumptions, including projections of
future cash flows. A change in these underlying assumptions would cause a change
in the results of the tests and, as such, could cause fair value to be less than
the carrying amounts. In such an event, MemberWorks would then be required to
record a corresponding charge which would negatively impact earnings. Goodwill
at July 1, 2002 and 2001 was tested for impairment during the quarters ended
September 30, 2002 and 2001, respectively. The Company concluded that none of
its goodwill was impaired as of July 1, 2002. As of July 1, 2001, the Company
determined that there was an impairment of goodwill of $5,907,000 at one of its
reporting units (see Note 4) due to the change in methodology of calculating
impairment under SFAS 142 concurrent with downward trends in the operations of
the reporting unit. This amount was recorded as a cumulative effect of
accounting change in the statement of operations in fiscal 2002.
Intangible assets principally include member and customer relationships
that arose in connection with business acquisitions. Acquired intangibles,
except member relationships, are recorded at cost and are amortized on a
straight-line basis over their estimated useful lives ranging from 3 to 20
years. The value of member relationships is amortized using an accelerated
method based on estimated future cash flows.
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company reviews its intangible and other long-lived
assets for impairment whenever events or changes in circumstances indicate that
their carrying value may not be recoverable. As of June 30, 2003, no impairment
has been indicated.
Treasury stock
Treasury stock is accounted for under the cost method.
F-9
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" ("APB 25"), and its related interpretations.
As of June 30, 2003, the Company has five stock-based compensation plans
which are described below. In accordance with APB 25, the Company applies the
intrinsic value method in accounting for employee stock options. Accordingly,
the Company generally does not recognize compensation expense with respect to
stock-based awards to employees. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and SFAS No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS
148"), the Company's pro forma net income and earnings per share would have been
as follows:
Year Ended June 30,
---------------------------------------
2003 2002 2001
----------- ----------- ------------
($ in thousands, except per share
data)
Net income (loss) reported:............................................. $24,356 $ 38,011 $(52,487)
Add: Stock-based employee compensation expense determined
under the intrinsic value based method for all awards, net of related
tax effects........................................................... -- 8 395
Deduct: Stock-based employee compensation expense determined under the
fair value based method for all awards, net of related tax effects.... (6,055) (11,406) (11,310)
----------- ----------- ------------
Pro forma net income.................................................. $18,301 $ 26,613 $(63,402)
=========== =========== ============
Earnings (loss) per share:
As reported
Basic............................................................... $ 1.93 $2.63 $ (3.44)
Diluted............................................................. 1.84 2.55 (3.44)
Pro forma
Basic............................................................... $ 1.45 $ 1.84 $ (4.16)
Diluted............................................................. 1.38 1.79 (4.16)
Under the stock options plans and the agreement with an executive
officer, the fair value of each option grant calculated under the provisions of
SFAS 123 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for the
years ended June 30:
2003 2002 2001
----------- ----------- ------------
Dividend yield.......................................................... 0% 0% 0%
Expected volatility..................................................... 69% 50% 50%
Risk free interest rate................................................. 3.5% 4.8% 5.9%
Expected lives.......................................................... 5 years 5 years 5 years
The weighted average fair value per share of options granted at market
value were $7.95, $9.55 and $14.03 for the years ended June 30, 2003, 2002 and
2001, respectively. For pro forma purposes, the estimated fair value of the
Company's stock-based awards to employees is amortized over the options' vesting
period of four years and the Employee Stock Purchase Plan's look-back period of
six-months.
For purposes of calculating the pro forma SFAS 123 compensation expense
under the iPlace Inc. stock option plan, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for the year ended June 30, 2002:
dividend yield of 0%; volatility of 50%; risk free interest rate of 4.6%; and
expected life of 5.0 years. The weighted average fair value of options granted
at market value during fiscal 2002 was $1.34. The following weighted average
assumptions were
F-10
used for the year ended June 30, 2001: dividend yield of 0%; volatility of 50%;
risk free interest rate of 4.9%; and expected life of 5.0 years. The weighted
average fair value of options granted at market value during fiscal 2001 was
$2.07.
New accounting pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), which is effective for exit or disposal activities
that are initiated after December 31, 2002. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs in a Restructuring)." The adoption of SFAS 146 did not
have a material impact on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the Company's financial
statements.
In December 2002, the FASB issued SFAS 148. This Statement amends SFAS
123 to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. The transition provisions of this statement are effective
for financial statements with fiscal years ending after December 15, 2002. The
disclosure provisions of this statement are effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002. The Company will continue to account for its stock based
compensation according to the provisions of APB Opinion No. 25.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. While it will continue to evaluate the requirements of FIN 46, MemberWorks
does not believe that the adoption of FIN 46 will have a material impact on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). This statement requires that certain financial instruments that
were accounted for as equity under previous guidance be classified as
liabilities in statements of financial position. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. MemberWorks does not believe that the adoption of SFAS 150 will have a
material impact on Company's financial statements.
Note 3 -- Stock-Based Compensation
Stock Compensation Plans
During fiscal 1997, the Board of Directors approved the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan"), which became effective upon
the closing of the Company's initial public offering. Under the 1996 Stock
Option Plan, the Board can determine the date on which options can vest and
become exercisable as well as the term of the options granted. During fiscal
1999, the Board of Directors and shareholders approved an increase
F-11
in the number of shares of Common Stock reserved for issuance under the 1996
Stock Option Plan from 1,800,000 to 3,600,000. During fiscal 2002, the Company
added an additional 2,000,000 options, which may be granted using treasury
stock.
During fiscal 1996, the Board of Directors and shareholders 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 360,000 and 180,000 options, respectively, to acquire shares
of 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.
Under the stock option plans described above, options generally become
exercisable over a four to five year period and expire at the earlier of
termination of employment or between five to ten years from the date of grant.
The Company had an agreement with an executive officer, whereby the
Company was required to grant options to purchase up to 144,000 shares of Common
Stock to the executive for achievement of certain performance goals. These
options have a stated exercise price of $2.78 per share and vest ratably over a
four-year period from the date of grant. The Company recognized compensation
expense related to those options of $44,000 for the year ended June 30, 2001.
At June 30, 2003, 5,508,000 shares of common stock were reserved for
issuance under the stock option plans, of which 900,000 shares were available
for future grant.
Information with respect to options to purchase shares issued under these
plans is as follows:
2003 2002 2001
--------------------- ---------------------- -----------------------
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
--------- -------- --------- --------- ---------- ---------
Outstanding at beginning of year 4,341 $20.82 3,815 $21.45 2,980 $17.14
Granted at market value........ 850 13.42 1,128 19.36 1,766 27.61
Exercised...................... (338) 11.30 (127) 21.29 (366) 7.78
Forfeited...................... (321) 24.53 (475) 25.31 (565) 26.32
--------- --------- ----------
Outstanding at end of year..... 4,532 $19.88 4,341 $20.82 3,815 $21.45
========= ========= ==========
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Average
Shares Remaining Average Shares Average
Outstanding Life Exercise Outstanding Exercise
(Shares in thousands) at 6/30/03 (Years) Price at 6/30/03 Price
------------ --------- -------- ------------- ---------
$2.78 to $13.00................ 447 3.6 $ 5.95 392 $ 5.67
$13.05 to $14.26............... 773 9.1 13.10 -- --
$15.00 to $19.38............... 754 5.9 16.76 599 16.42
$20.31 to $20.35............... 988 8.0 20.34 294 20.34
$20.81 to $29.00............... 671 6.5 26.81 534 26.53
$29.56 to $29.88............... 899 6.9 29.59 486 26.60
------------ -------------
4,532 7.0 $19.88 2,305 $20.21
============ =============
Options exercisable as of June 30, 2002 and 2001 were 1,876,000 and
1,345,000, respectively.
iPlace Stock Option Plan
In April 2001, the Board of Directors of iPlace approved a five-for-one
stock split of iPlace's outstanding stock and options. The stock option split
did not impact the value of outstanding options and all option share information
has been adjusted to reflect the five-for-one stock split.
F-12
The iPlace options were issued at the estimated fair value of the
underlying common stock and generally vested 25% per year beginning one year
from the date of grant. During 2002, 470,000 options were granted at an average
exercise price of $2.74 and 205,000 options were forfeited at an average
exercise price of $2.40. In August 2001, MemberWorks sold iPlace (see Note 6).
Therefore, there were no stock options outstanding under this plan as of June
30, 2003 or 2002. During 2001, 2,941,000 options were granted at an average
exercise price of $4.20 and 482,000 options were forfeited at an average
exercise price of $2.80. At June 30, 2001, options to purchase approximately
5,585,000 shares of iPlace stock remained outstanding at an average exercise
price of $3.18 with 1,548,000 of those options exercisable at an average
exercise price of $2.54.
Employee Stock Purchase Plan
During fiscal 1997, the Company adopted the 1996 Employee Stock Purchase
Plan which provides for the issuance of up to 360,000 shares of common stock.
The plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 10% of an employee's compensation, at a price
equal to the lower of (a) 85% of the closing price of the Common Stock on the
day the purchase period commences or (b) 85% of the closing price of the Common
Stock on the day the purchase period terminates. During fiscal 2003, 2002, and
2001, 16,000, 18,000 and 20,000 shares were purchased under the plan,
respectively.
Warrants
During fiscal 2001, warrants to acquire 3,000 shares of Common Stock were
exercised at $0.0014 per share. In addition, during fiscal 2001, warrants to
acquire 4,000 shares of Common Stock at $0.0014 expired.
Warrants were issued to outside investors prior to fiscal 1997. As of
June 30, 2003, 2002 and 2001, no warrants are outstanding to purchase Common
Stock.
Note 4 -- Cumulative Effect of Accounting Change
Adoption of SFAS 142
The Company adopted SFAS 142 effective July 1, 2001. With the adoption of
SFAS 142, the Company reassessed the useful lives and residual values of all
acquired intangible assets to make any necessary valuation or amortization
period adjustments. Based on that assessment, only goodwill was determined to
have an indefinite useful life and no adjustments were made to the amortization
period or residual values of other intangible assets. The Company determined
that at July 1, 2001, there was an impairment of goodwill of $5,907,000 at one
of its reporting units due to the change in methodology of calculating
impairment under SFAS 142 concurrent with recent downward trends in the
operations of the reporting unit. This amount was recorded as a cumulative
effect of accounting change in the statement of operations in the fiscal quarter
ended September 30, 2001.
F-13
The following pro forma net income and earnings per share have been
prepared assuming SFAS 142 was adopted as of July 1, 2000. Pro forma balances
have been adjusted to exclude goodwill amortization expense which is no longer
recorded under the provisions of SFAS 142 (in thousands, except per share data).
2003 2002 2001
----------- ---------- ------------
Net income (loss) before cumulative effect of accounting change:
Reported income (loss) before cumulative effect of accounting change $ 24,356 $ 43,918 $ (26,757)
Indefinite lived intangible asset amortization..................... -- -- 7,779
----------- ---------- -----------
Adjusted net income (loss) before cumulative effect of accounting
change............................................................. $ 24,356 $ 43,918 $ (18,978)
=========== ========== ===========
Basic earnings (loss) before cumulative effect of accounting change per share:
Reported earnings (loss) before cumulative effect of accounting
change per share................................................. $ 1.93 $ 3.03 $ (1.75)
Indefinite lived intangible asset amortization per share........... -- -- 0.51
----------- ---------- -----------
Adjusted earnings (loss) before cumulative effect of accounting
change per share................................................. $ 1.93 $ 3.03 $ (1.24)
=========== ========== ===========
Diluted earnings (loss) before cumulative effect of accounting change per share:
Reported earnings (loss) before cumulative effect of accounting change
per share........................................................ $ 1.84 $ 2.95 $ (1.75)
Indefinite lived intangible asset amortization per share........... -- -- 0.51
----------- ---------- -----------
Adjusted earnings (loss) before cumulative effect of accounting
change per share................................................. $ 1.84 $ 2.95 $ (1.24)
=========== ========== ===========
Net income (loss):
Reported income (loss)............................................. $ 24,356 $ 38,011 $ (52,487)
Indefinite lived intangible asset amortization..................... -- -- 7,779
----------- ---------- -----------
Adjusted net income (loss)......................................... $ 24,356 $ 38,011 $ (44,708)
----------- ---------- -----------
Basic earnings (loss) per share:
Reported earnings (loss) per share................................. $ 1.93 $ 2.63 $ (3.44)
Indefinite lived intangible asset amortization per share........... -- -- 0.51
----------- ---------- -----------
Adjusted earnings (loss) per share................................. $ 1.93 $ 2.63 $ (2.93)
=========== ========== ===========
Diluted earnings (loss) per share:
Reported earnings (loss) per share................................. $ 1.84 $ 2.55 $ (3.44)
Indefinite lived intangible asset amortization per share........... -- -- 0.51
----------- ---------- -----------
Adjusted earnings (loss) per share................................. $ 1.84 $ 2.55 $ (2.93)
=========== ========== ===========
Adoption of SAB 101
The Company adopted SAB 101 as of July 1, 2000. SAB 101 establishes the
Security and Exchange Commission's (the "Staff") preference that membership fees
should not be recognized in earnings prior to the expiration of refund
privileges. Effective July 1, 2000, the Company changed its method of accounting
for membership fee revenue to comply with the Staff's preferred method as
outlined in SAB 101. Membership fees, and the related direct costs associated
with acquiring the underlying memberships, are no longer recognized on a prorata
basis over the corresponding membership period, but instead are recognized in
earnings upon the expiration of membership refund privileges. The cumulative
effect of this change in accounting principle as of July 1, 2000 of $25,730,000
was recorded in the fiscal quarter ended September 30, 2000. The membership
fees, net of estimated refunds and associated direct costs, which were deferred
as part of the cumulative effect adjustment at July 1, 2000 were recognized in
earnings during fiscal year 2001 as the underlying refund privileges expired.
During the fiscal year ended June 30, 2001, the Company recognized $68,195,000
of revenue which was included as a component of the cumulative effect of
accounting change booked July 1, 2000. The effect of the adoption of SAB 101 on
reported revenue, loss before the cumulative effect of accounting change and
loss per share before the cumulative effect of accounting change for the fiscal
year ended June 30, 2001, is an increase of $13,470,000, $3,758,000 and $0.25,
respectively.
F-14
Note 5 -- Business Combinations
In October 2000, the Company increased its ownership in Discount
Development Services, L.L.C. and its subsidiary, Uni-Care, Inc., (together
"DDS") from 19% to 100%. The Company paid $8,150,000 in cash and 425,232 shares
of MemberWorks Common Stock with an approximate fair market value of $13,641,000
as of the date the Company entered into the purchase agreement. The acquisition
was accounted for as a purchase, with the purchase price allocated to the assets
acquired and liabilities assumed based upon their respective estimated fair
value at the date of acquisition. DDS is in the business of marketing and
administering healthcare network membership programs that provide its members
access to various healthcare networks including hearing, vision, prescription
and chiropractic. The results of DDS's operations are included in the
consolidated financial statements from the date of acquisition. Due to the
immateriality of the acquisition, pro forma results were not required to be
presented.
Note 6 -- (Loss) Gain on Sale of Subsidiary/Loss on Investment
During fiscal 2002, the Company sold its investment in and advances to
iPlace, Inc. in exchange for $50,111,000 in cash, including $3,703,000 held in
escrow, and 1,601,000 shares of Homestore.com, Inc. common stock, including
451,000 shares held in escrow. The Company reported a gain of $65,608,000 on the
sale. Subsequent to the date of sale, the investment in Homestore.com, Inc.
declined in value and management determined that the decline was other than
temporary. As a result, the Company wrote down its investment in Homestore.com,
Inc. to its fair value and recognized a loss of $33,628,000 during fiscal 2002.
As of June 30, 2002, the Company's investment in Homestore.com, Inc. was valued
at $912,000. During fiscal 2002, 84,000 shares were released from the escrow.
During fiscal 2003, the Company settled with Homestore.com, Inc. all pending
issues related to amounts held in escrow in connection with the sale. The
Company returned cash and stock to Homestore.com, Inc., which resulted in a net
loss of $959,000. During fiscal 2003, the Company sold all of its Homestore.com,
Inc. common stock and recognized a loss of $206,000 in connection with this sale
(see Note 7).
During fiscal 2001, MemberWorks' investment in 24/7 Media, Inc., ("24/7")
declined in value and management determined that the decline was other than
temporary. As a result, MemberWorks wrote down its investment in 24/7 by
$1,790,000. In addition, during fiscal 2001, MemberWorks sold its remaining
shares of 24/7 stock. Proceeds from the sales were $4,144,000 and related
realized losses were $382,000. The financial impact of the transactions on
fiscal 2001 is a net loss of $2,172,000.
Note 7 -- Settlement of Investment Related Litigation
During fiscal 2003, MemberWorks, along with certain of the other former
shareholders of iPlace, Inc., settled their lawsuit against Homestore.com, Inc.
The total settlement amount in favor of the plaintiffs was $23,000,000 of which
MemberWorks received $19,148,000 (see Note 6).
Note 8 -- Goodwill and Other Intangible Assets
The gross carrying value and accumulated amortization of goodwill and
other intangibles are as follows (in thousands):
F-15
As of June 30, 2003 As of June 30, 2002
------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------- ------------- --------------
Finite lived intangible assets:
Membership and client relationships...... $ 13,195 $ (6,730) $ 13,195 $ (5,466)
Other.................................... 950 (759) 950 (630)
-------------- ------------- ------------- --------------
Total amortized intangible assets...... $ 14,145 $ (7,489) $ 14,145 $ (6,096)
============= ============= ============= ==============
Indefinite lived intangible assets:
Goodwill................................. $ 42,039 $ 42,039
============= =============
The future intangible amortization expense for the next five fiscal years
is estimated to be as follows (in thousands):
Fiscal Year:
2004..................................................... 1,045
2005..................................................... 840
2006..................................................... 695
2007..................................................... 554
2008..................................................... 485
Goodwill was tested for impairment during the quarter ended September 30,
2002 as required by SFAS 142. The Company concluded that none of its goodwill
was impaired. Fair value was estimated using discounted cash flow methodologies.
Goodwill was tested at July 1, 2001, for impairment during the quarter ended
September 30, 2001, in connection with the adoption of SFAS 142 (see Note 4). In
addition, the Company reassessed the estimated useful lives of its indefinite
lived intangible assets and determined that the lives were appropriate. The
Company will continue to test the goodwill of each of its reporting units
annually or more frequently if impairment indicators exist.
Note 9 -- Fixed Assets
Fixed assets, net are comprised of the following at June 30, (in
thousands):
2003 2002
----------- ------------
Computer software and equipment.............................. $ 44,535 $ 44,935
Furniture and fixtures....................................... 8,161 8,103
Leasehold improvements....................................... 6,356 6,895
----------- ------------
59,052 59,933
Accumulated depreciation and amortization.................... (34,083) (28,513)
----------- ------------
$ 24,969 $ 31,420
=========== ============
Depreciation and amortization expense was $10,818,000, $11,311,000 and
$10,545,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
Note 10 -- Long-Term Liabilities
Long-term liabilities are summarized as follows at June 30, (in
thousands):
2003 2002
----------- ------------
Notes payable................................................ $ -- $ 760
Lease incentives............................................. 1,466 1,519
Other long-term obligations.................................. 1,898 2,355
----------- ------------
F-16
3,364 4,634
Less: current maturities..................................... 236 1,015
----------- ------------
Long-term liabilities........................................ $ 3,128 $ 3,619
=========== ============
The Company has a bank credit facility that allows borrowings up to
$28,000,000. Borrowings under the facility accrue interest at 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 0.50% per annum on the average daily unused portion of the facility. This
bank credit facility matures on March 29, 2004. As of June 30, 2003,
availability under the bank credit facility was reduced by an outstanding letter
of credit of $5,495,000. There were no borrowings outstanding under this bank
credit facility as of June 30, 2003 or 2002. The bank credit facility has
certain financial covenants, including a maximum debt coverage ratio, a minimum
fixed charge ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. For the periods ended
June 30, 2003 and 2002, the Company was in compliance with all financial and
restrictive loan covenants. The credit facility is secured by all of the
Company's assets, including the stock of its subsidiaries.
As of June 30, 2002, the Company's subsidiary, DDS, had $760,000
outstanding under a note payable that had an interest rate of 5.0% per annum
which was paid in full in fiscal 2003.
As of June 30, 2003 and 2002, MemberWorks Canada had $1,466,000 and
$1,519,000, respectively, outstanding for lease incentives related to certain
operating leases. These lease incentives are amortized as a reduction to rent
expense over the terms of the leases.
Other long-term obligations are comprised of the long-term portion of the
restructuring reserve (see note 12) and two consulting agreements entered into
by DDS which expire during fiscal 2005.
Other income (expense) as shown in the statements of operations for the
fiscal years ended June 30, 2003, 2002 and 2001, includes interest expense of
$238,000, $435,000 and $1,263,000, respectively. Other income (expense) as shown
in the statements of operations for the fiscal years ended June 30, 2003, 2002
and 2001, includes interest income of $808,000, $768,000 and $900,000,
respectively.
Note 11 -- 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 $7,671,000, $6,508,000
and $7,552,000 for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
The Company entered into certain capital leases for certain equipment.
Lease amortization for the years ended June 30, 2003, 2002 and 2001 was $55,000,
$62,000 and $47,000, respectively, and is included in depreciation and
amortization expense.
Future minimum lease payments under capital leases, including the present
value of net minimum lease payments, as of June 30, 2003 are $8,000, which will
be paid in fiscal 2004. Interest rates on these capital leases ranged from 9.9%
to 31.6%.
The future minimum lease payments under operating leases as of June 30,
2003 are as follows (in thousands):
Operating
Fiscal Year Leases
----------- -----------
2004.................................................... $ 6,620
2005.................................................... 6,160
2006.................................................... 4,977
2007.................................................... 2,516
2008.................................................... 2,393
Thereafter.............................................. 4,496
-----------
Total minimum lease payments............................ $ 27,162
===========
F-17
In fiscal 2003, the Company entered into an advertising agreement with
one of its clients to promote products and services to prospective new members.
Pursuant to the agreement, as of June 30, 2003, the Company has a purchase
commitment of $1,000,000, that is payable in fiscal 2004.
In fiscal 2001, the Company entered into a voluntary agreement with the
State of California and Ventura and Orange Counties to implement certain
marketing practices in the State of California. Pursuant to the agreement, the
Company paid costs of investigation and civil penalties of $2,000,000, which
were split between the state and the counties. The Company also established a
reserve of $1,000,000 to cover specific costs related to the agreement. As a
result of the agreement, the Company recorded a non-recurring charge of
$3,000,000 during fiscal 2001. As of June 30, 2003, this obligation was $0.
Legal proceedings
Except as set forth below, in management's opinion, there are no
significant legal proceedings to which the Company or any of its subsidiaries is
a party or to which any of their properties are subject. The Company is involved
in other lawsuits and claims generally incidental to its business including, but
not limited to, various suits, including previously disclosed suits in the 2002
Annual Report filed on Form 10-K, brought against the Company by individual
consumers seeking monetary and/or injunctive relief relating to the marketing of
the Company's programs. In addition, from time to time, and in the regular
course of its business, the Company receives inquiries from various federal
and/or state regulatory authorities. Management does not believe that there will
be any material effects on the results of operations as a result of its
outstanding litigation proceedings.
In March 2001, an action was instituted by plaintiff Teresa McClain
against Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the
Company, Monumental Life Insurance Company and other defendants in the United
States District Court for the Eastern District of Michigan, Southern Division.
The suit, which seeks unspecified monetary damages, alleges that Coverdell and
the other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The Court has announced that it will deny the motion
for national class certification, but it has indicated that it would consider
certifying a class of Michigan residents. A hearing has not yet been held on
class certification, and no order has been issued. The Company believes that the
claims made against Coverdell are unfounded and Coverdell and the Company will
vigorously defend their interests against this suit.
On January 24, 2003, the Company filed a motion with the Superior Court
for the Judicial District of Hartford, Connecticut to vacate and oppose the
confirmation of an arbitration award issued in December 2002. The arbitration,
filed against the Company by MedValUSA Health Programs, Inc. ("MedVal") in
September 2000, involved claims of breach of contract, breach of the duty of
good faith and fair dealing, and violation of the Connecticut Unfair Trade
Practices Act ("CUTPA"). Even though the arbitrators found that MemberWorks was
not liable to MedVal for any compensatory damages, they awarded $5,495,000 in
punitive damages and costs against MemberWorks solely under CUTPA. MemberWorks
believes that this arbitration award is unjustified and not based on any
existing legal precedent. Specifically, the Company is challenging the award on
a number of grounds, including that it violates a well defined public policy
against excessive punitive damage awards, raises constitutional issues and
disregards certain legal requirements for a valid award under CUTPA. The hearing
on the Company's motion was held on February 10, 2003. On June 22, 2003, the
Superior Court denied the Company's motion to vacate the award, and the Company
filed an appeal of that decision. No briefing schedule has yet been set in the
appeal. While the Company intends to take action to prevent the enforcement of
the award by, among other things, vigorously pursuing an appeal, there can be no
assurance that MemberWorks will be successful in its efforts. The Company has
made no provision in its financial statements for this contingency because it
believes that a loss is not probable. If the Company were ultimately
unsuccessful on this or other available appeals, and a final non-appealable
court order confirming the arbitration award is rendered, the payment of the
award could have a material adverse effect on the Company's results of
operations and liquidity in the period in which the final order is entered.
F-18
Note 12 -- Restructuring Charges
During fiscal 2002, the Company announced the implementation of several
cost saving initiatives due to a slowdown in consumer response rates and
increased economic uncertainty in both the U.S. and abroad. This restructuring
program included a workforce reduction, the closing of the Company's United
Kingdom operations and the downsizing of the operational infrastructure
throughout the Company. As a result of the restructuring program, the Company
recorded restructuring charges of $6,893,000 during the quarter ended December
31, 2001.
The following is a rollforward of the major components of the
restructuring reserve (in thousands):
Workforce Lease Asset
Reduction Obligations Disposals Total
----------- ----------- ---------- ----------
Additions to the reserve..................... $ 2,214 $ 3,094 $ 1,585 $ 6,893
Charges to the reserve....................... 1,823 548 1,585 3,956
----------- ----------- ---------- ----------
Reserve balance at June 30, 2002............. 391 2,546 -- 2,937
Additions to the reserve..................... -- -- -- --
Charges to the reserve....................... 300 836 -- 1,136
----------- ----------- ---------- ----------
Reserve balance at June 30, 2003............. $ 91 $ 1,710 $ -- $ 1,801
=========== =========== ========== ==========
Workforce Reduction
As part of the restructuring plan, the Company reduced its workforce by
approximately 190 regular employees, consisting of membership service
representatives and other professional personnel. All 190 employees have been
terminated.
Lease Obligations and Asset Disposals
In connection with the closing of the United Kingdom offices and the
downsizing of the Company's infrastructure, the Company recorded $73,000 for
lease terminations, $3,021,000 for non-cancelable lease obligations and
$1,585,000 for asset disposals. The reserve for lease obligations has been
reduced by anticipated sublease income.
Note 13 -- Income Taxes
The provision for income taxes is as follows as of June 30, (in
thousands):
2003 2002 2001
------------- ----------- -------------
Current
Federal........................................ $ 1,635 $ -- $ --
State.......................................... 422 -- --
Foreign........................................ -- -- --
------------- ----------- -------------
Total............................................ $ 2,057 $ -- $ --
============= =========== =============
Deferred
Federal........................................ $ 11,642 $ -- $ --
State.......................................... 2,540 -- --
Foreign........................................ -- -- --
------------- ----------- -------------
Total............................................ $ 14,182 $ -- $ --
============= =========== =============
There was no current or deferred provision for income taxes for the years
ended June 30, 2002 or 2001 due to the utilization of the Company's net
operating loss carry forwards against which the Company had carried a full
valuation allowance. Deferred tax assets and liabilities result from differences
in the basis of assets and liabilities for tax and financial statement purposes.
F-19
The tax effects of the basis differences and net operating loss carry
forwards and the valuation allowance established in accordance with SFAS 109 are
summarized below as of June 30, 2003 and 2002 (in thousands):
2003 2002
------------- ------------
Deferred Tax Assets:
Benefit of federal and state net operating loss carry forwards.. $ 16,163 $ 28,859
Deferred membership fees........................................ 2,965 18,944
Allowance for membership cancellations.......................... 8,361 9,453
Sale of Homestore.com, Inc. marketable securities............... -- 335
Other deferred tax assets ...................................... 1,997 4,751
------------- ------------
Gross deferred tax assets....................................... 29,486 62,342
Less: Valuation allowance....................................... -- (6,581)
------------- ------------
Deferred tax assets after valuation allowance................... 29,486 55,761
------------- ------------
Deferred Tax Liabilities:
Membership solicitation and other deferred costs................ (30,266) (54,175)
Goodwill and other intangibles.................................. (3,204) (992)
Depreciation.................................................... (2,040) (594)
------------- ------------
Gross deferred tax liabilities.................................. (35,510) (55,761)
------------- ------------
Net deferred tax liability........................................ $ (6,024) $ --
============= ============
As of June 30, 2003, the Company had federal net operating loss carry
forwards of $41,443,000 expiring at various dates from December 31, 2017 to June
30, 2021. 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 Company also has state net
operating loss carry forwards available to reduce future state taxable income
which expire beginning June 30, 2003 through June 30, 2022.
Tax benefits resulting from the exercise of nonqualified stock options
and the disqualifying dispositions of shares issued under the Company's
stock-based compensation plans reduced taxes payable by approximately $942,000
in 2003. Such benefits were credited to additional paid-in capital. There has
been no tax benefit recognized into income in fiscal 2003 for the reversal of
the valuation allowance of $8,157,000 that was attributable to prior period
disqualifying dispositions. These amounts have been credited to additional
paid-in capital. The amount credited to additional paid-in capital exceeds the
June 30, 2002 valuation allowance due to the Company's revaluation of certain
deferred tax assets.
Income tax expense as a percentage of pre-tax income was 40% for fiscal
2003. The effective tax rate was higher than the U.S. statutory rate primarily
due to state taxes and other non-deductible items. During fiscal 2002,
MemberWorks was not required to record a provision for income taxes due to the
ability to utilize net operating loss carryforwards against which the Company
had carried a full valuation allowance. MemberWorks was not required to record a
provision for income taxes for the year ended June 30, 2001 due to tax losses
incurred and the provision of a full valuation allowance against those losses.
The valuation allowance recognized in prior periods has been fully reversed in
fiscal 2003 based upon the Company's belief that it is more likely than not that
it will realize its deferred tax assets.
Note 14 -- Related Party Obligations
As of June 30, 2001, the Company's majority-owned subsidiary, iPlace,
Inc. had a note payable to the president of iPlace, Inc. for $1,973,000. The
note bore interest at the Citibank, N.A. publicly announced interest rate plus
1% per annum and was due on demand. Other income, net for fiscal 2003, 2002 and
2001 included related party interest expense of $0, $12,000 and $176,000,
respectively.
Note 15 -- Minority Interest
Prior to the sale of iPlace, Inc. in August 2001, the Company was the
majority shareholder of iPlace, Inc. with an approximate 58% ownership share.
Minority interest in the statement of operations for the year ended June
F-20
30, 2002 and 2001 represents approximately 42% of iPlace's losses incurred
through the date of the sale of iPlace, Inc. in August 2001.
Note 16 -- Shareholders' Equity
The Company has a stock repurchase program. During fiscal 2003, the Board
of Directors authorized the Company to repurchase up to an additional 2,500,000
shares of the Company's Common Stock. As of June 30, 2003, approximately 979,000
shares were remaining for repurchase under the stock repurchase program. During
fiscal 2003, the Company repurchased 1,993,000 shares for $37,214,000, an
average price of $18.67 per share, compared to the repurchase of 2,227,000
shares for $34,301,000, an average price of $15.40 per share, in fiscal 2002 and
340,000 shares for $8,917,000, an average price of $26.23 per share, in fiscal
2001.
In July 2003, the Board of Directors authorized an additional 1,000,000
shares to be purchased under the stock repurchase program. Pursuant to the share
repurchase program, the Company is authorized to repurchase approximately
1,979,000 additional shares as market conditions permit.
Note 17 -- Employee Benefit Plan
All employees over the age of 18 may participate in the Company's 401(k)
profit sharing plan. Employees may contribute up to 20% of their compensation
subject to certain limitations. Effective July 1, 2000, MemberWorks began making
quarterly matching contributions in Common Stock based on qualified employee
contributions. Treasury stock, calculated under the cost method, was used to
match qualified employee contributions. Effective January 1, 2003, MemberWorks
began making matching contributions in cash. Matching contributions were
$153,000, $156,000 and $126,000 for fiscal 2003, 2002 and 2001, respectively.
Note 18 -- Statement of Cash Flows
Supplemental disclosure of cash flow information (in thousands):
Year ended June 30,
---------------------------------------
2003 2002 2001
---------- ---------- -----------
Cash paid during the period for interest...................... $ 241 $ 377 $ 1,246
Cash paid during the period for income taxes.................. 411 43 595
Note 19 -- Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share amounts are determined in
accordance with the provisions SFAS 128. The following table sets forth the
reconciliation of the numerators and denominators in the computation of basic
and diluted earnings (loss) per share (in thousands, except per share data):
2003 2002 2001
---------- ---------- -----------
Numerator for basic and diluted earnings (loss) per share:
Net income (loss) before cumulative effect of accounting change $ 24,356 $ 43,918 $ (26,757)
Cumulative effect of accounting change.......................... -- (5,907) (25,730)
---------- ---------- -----------
Net income (loss)............................................... $ 24,356 $ 38,011 $ (52,487)
========== ========== ===========
Denominator for basic earnings (loss) per share:
Weighted average number of common shares outstanding- basic 12,596 14,477 15,248
Effect of dilutive securities:
Options......................................................... 637 432 --
---------- ---------- ---------
Weighted average number of common shares outstanding--diluted... 13,233 14,909 15,248
========== ========== ===========
Basic earnings (loss) per share................................. $ 1.93 $ 2.63 $ (3.44)
========== ========== ===========
Diluted earnings (loss) per share............................... $ 1.84 $ 2.55 $ (3.44)
========== ========== ===========
F-21
The diluted earnings (loss) per common share calculation excludes the
effect of potentially dilutive shares when their effect is antidilutive.
Excluded from the diluted share calculation above for the year ended June 30,
2003, 2002 and 2001 are incremental weighted average stock option shares of
approximately 2,838,000, 3,383,000 and 2,870,000, respectively.
Note 20 - Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts):
Year ended June 30, 2003
----------------------------------------------------
First Second Third Fourth
Quarter (a) Quarter Quarter Quarter
----------- ------------ ------------ ------------
Revenues...................................... $ 105,004 $ 114,045 $ 118,647 $ 119,185
Operating income.............................. 2,125 5,858 5,516 8,787
Income before cumulative effect of accounting
change...................................... 12,136 3,647 3,332 5,241
Net income.................................... 12,136 3,647 3,332 5,241
Diluted earnings before cumulative effect of
accounting change per share................. 0.89 0.27 0.25 0.41
Diluted earnings per share.................... 0.89 0.27 0.25 0.41
Year ended June 30, 2002
----------------------------------------------------
First Second Third Fourth
Quarter (b) Quarter (c) Quarter Quarter (d)
----------- ------------ ------------- ------------
Revenues...................................... $ 118,964 $ 102,684 $ 100,800 $ 105,154
Operating (loss) income....................... (2,578) (171) 10,816 3,822
Income (loss) before cumulative effect of
accounting change........................... 40,351 (9,160) 10,495 2,232
Net income (loss)............................. 34,444 (9,160) 10,495 2,232
Diluted earnings (loss) before cumulative
effect of accounting change per share....... 2.51 (0.62) 0.72 0.16
Diluted earnings (loss) per share............. 2.14 (0.62) 0.72 0.16
-----------------
(a) Results of operations for this period include a $19,148,000 gain related to
the settlement of investment related litigation (see Note 7), a $959,000
loss related to the sale of iPlace, Inc. (see Note 6) and a $206,000 loss
on investment (see Note 6).
(b) Results of operations for this period include a $65,608,000 gain related to
the sale of iPlace, Inc. (see Note 6), a $22,296,000 loss on investment
(see Note 6) and a $5,907,000 cumulative effect of accounting change (see
Note 4).
(c) Results of operations for this period include a $9,043,000 loss on
investment (see Note 6) and a $6,893,000 restructuring charge (see Note
12).
(d) Results of operations for this period include a $2,289,000 loss on
investment (see Note 6).
Note 21 -- Guarantor and Nonguarantor Financial Statements
MemberWorks has entered into an agreement to sell an aggregate of $150.0
million of Senior Notes in private placements pursuant to Rule 144A. The Senior
Notes will be unsecured obligations and will rank pari passu in right of payment
to all of the Company's existing and future senior unsecured indebtedness and
senior in right of payment to all of the Company's existing and future
subordinated indebtedness that expressly provides for its subordination to the
Notes. The Senior Notes will be fully and unconditionally guaranteed by all of
the Company's existing and future domestic subsidiaries and certain of the
Company's existing and future foreign subsidiaries.
The following consolidating financial information presents the
consolidating balance sheets as of June 30, 2003 and 2002 and the related
statements of income and cash flows for each of the three years in the period
ended
F-22
June 30, 2003. The information includes elimination entries necessary to
consolidate MemberWorks ("Parent") with the guarantor and nonguarantor
subsidiaries.
Investment in subsidiaries are accounted for by the parent using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are presented
on a combined basis. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
F-23
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2003
---------------------------------------------------------------------
Nonguarantor Consolidated
Parent Guarantor Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents.............. $ 51,895 $ 18,716 $ 1,649 $ -- $ 72,260
Restricted cash........................ -- 2,732 -- -- 2,732
Accounts receivable.................... 2,811 3,907 1,995 -- 8,713
Intercompany receivable................ 686 298 -- (984) --
Prepaid membership materials........... 1,762 170 264 -- 2,196
Prepaid expenses and other current assets 6,032 1,031 508 -- 7,571
Membership solicitation and other
deferred costs....................... 73,856 1,853 2,174 -- 77,883
------------ ------------ ------------- ------------ ------------
Total current assets................. 137,042 28,707 6,590 (984) 171,355
Fixed assets, net......................... 22,193 535 2,241 -- 24,969
Goodwill.................................. -- 35,320 6,719 -- 42,039
Intangible assets, net.................... -- 6,656 -- -- 6,656
Other assets.............................. 3,426 60 -- -- 3,486
Investment in subsidiaries................ 56,419 -- -- (56,419) --
------------ ------------ ------------- ------------ ------------
Total assets......................... $ 219,080 $ 71,278 $ 15,550 $ (57,403) $ 248,505
============ ============ ============= ============= ============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term
obligations.......................... $ -- $ 244 $ -- $ -- $ 244
Accounts payable....................... 17,678 13,018 1,948 -- 32,644
Accrued liabilities.................... 53,692 3,333 2,080 -- 59,105
Intercompany payable................... -- 804 180 (984) --
Deferred membership fees............... 163,276 1,007 3,360 -- 167,643
Deferred income taxes.................. 662 (1,701) 1,918 -- 879
------------ ------------ ------------- ------------ ------------
Total current liabilities............ 235,308 16,705 9,486 (984) 260,515
Deferred income taxes..................... 2,456 3,260 (571) -- 5,145
Other long-term liabilities............... 1,599 63 1,466 -- 3,128
------------ ------------ ------------- ------------ ------------
Total liabilities.................... 239,363 20,028 10,381 (984) 268,788
Shareholders' deficit:
Preferred stock........................ -- -- -- -- --
Common stock........................... 178 6 3 (9) 178
Capital in excess of par value......... 122,425 52,296 9,564 (61,860) 122,425
Accumulated deficit.................... (17,829) (1,052) (3,929) 4,981 (17,829)
Accumulated other comprehensive loss... (469) -- (469) 469 (469)
Treasury stock......................... (124,588) -- -- -- (124,588)
------------ ------------ ------------- ------------ ------------
Total shareholders' deficit.......... (20,283) 51,250 5,169 (56,419) (20,283)
------------ ------------ ------------- ------------ ------------
Total liabilities and shareholders'
deficit............................ $ 219,080 $ 71,278 $ 15,550 $ (57,403) $ 248,505
============ ============ ============= ============= ============
F-24
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2003
---------------------------------------------------------------------
Nonguarantor Consolidated
Parent Guarantor Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents.............. $ 34,476 $ 8,463 $ 2,563 $ -- $ 45,502
Restricted cash........................ -- 5,683 -- -- 5,683
Marketable securities.................. 912 -- -- -- 912
Accounts receivable.................... 3,675 4,127 2,029 -- 9,831
Intercompany receivable................ 3,538 1,144 -- (4,682) --
Prepaid membership materials........... 1,676 180 205 -- 2,061
Prepaid expenses and other current assets 3,233 720 372 -- 4,325
Membership solicitation and other
deferred costs....................... 124,531 2,157 2,397 -- 129,085
------------ ------------ ------------- ------------ ------------
Total current assets................. 172,041 22,474 7,566 (4,682) 197,399
Fixed assets, net......................... 27,979 704 2,737 -- 31,420
Goodwill.................................. -- 35,320 6,719 -- 42,039
Intangible assets, net.................... -- 8,049 -- -- 8,049
Other assets.............................. 1,794 116 -- -- 1,910
Investment in subsidiaries................ 52,067 -- -- (52,067) --
------------ ------------ ------------- ------------ ------------
Total assets......................... $ 253,881 $ 66,663 $ 17,022 $ (56,749) $ 280,817
============ ============ ============= ============= ============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term
obligations.......................... $ -- $ 1,070 $ -- $ -- $ 1,070
Accounts payable....................... 20,005 10,936 1,828 -- 32,769
Accrued liabilities.................... 51,706 3,664 2,339 -- 57,709
Intercompany payable................... -- 286 4,396 (4,682) --
Deferred membership fees............... 200,981 1,748 3,543 -- 206,272
Deferred income taxes.................. -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Total current liabilities............ 272,692 17,704 12,106 (4,682) 297,820
Deferred income taxes..................... -- -- -- -- --
Other long-term liabilities............... 1,819 289 1,519 -- 3,627
------------ ------------ ------------- ------------ ------------
Total liabilities.................... 274,511 17,993 13,625 (4,682) 301,447
Shareholders' deficit:
Preferred stock........................ -- -- -- -- --
Common stock........................... 175 6 155 (161) 175
Capital in excess of par value......... 109,254 52,296 9,564 (61,860) 109,254
Accumulated deficit.................... (42,185) (3,632) (5,949) 9,581 (42,185)
Accumulated other comprehensive loss... (373) -- (373) 373 (373)
Treasury stock......................... (87,501) -- -- -- (87,501)
------------ ------------ ------------- ------------ ------------
Total shareholders' deficit.......... (20,630) 48,670 3,397 (52,067) (20,630)
------------ ------------ ------------- ------------ ------------
Total liabilities and shareholders'
deficit............................ $ 253,881 $ 66,663 $ 17,022 $ (56,749) $ 280,817
============ ============ ============= ============= ============
F-25
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
As of June 30, 2003
---------------------------------------------------------------------
Nonguarantor Consolidated
Parent Guarantor Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues.................................. $ 393,958 $ 50,787 $ 12,972 $ (836) $ 456,881
Expenses:
Marketing.............................. 253,389 23,198 4,086 -- 280,673
Operating.............................. 64,539 11,639 3,102 (836) 78,444
General and administrative............. 60,553 10,381 3,151 -- 74,085
Amortization of intangibles............ -- 1,393 -- -- 1,393
------------ ------------ ------------- ------------ ------------
Operating income.......................... 15,477 4,176 2,633 -- 22,286
Settlement of investment related
litigation............................. 19,148 -- -- -- 19,148
Loss on sale of subsidiary................ (959) -- -- -- (959)
Loss on investment........................ (206) -- -- -- (206)
Equity in income of subsidiary............ 4,600 -- -- (4,600) --
Other income (expense), net............... (532) 124 734 -- 326
------------ ------------ ------------- ------------ ------------
Income before income taxes................ 37,528 4,300 3,367 (4,600) 40,595
Provision for income taxes................ 13,172 1,720 1,347 -- 16,239
------------ ------------ ------------- ------------ ------------
Net income................................ $ 24,356 $ 2,580 $ 2,020 $ (4,600) $ 24,356
============ ============ ============= ============= ============
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
As of June 30, 2003
---------------------------------------------------------------------
Nonguarantor Consolidated
Parent Guarantor Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues.................................. $ 358,283 $ 55,380 $ 14,576 $ (637) $ 427,602
Expenses:
Marketing.............................. 220,224 22,867 5,883 -- 248,974
Operating.............................. 59,286 13,650 6,395 (637) 78,694
General and administrative............. 60,815 13,600 4,796 -- 79,211
Restructuring charge................... 4,720 -- 2,173 -- 6,893
Amortization of intangibles............ -- 1,941 -- -- 1,941
------------ ------------ ------------- ------------ ------------
Operating income.......................... 13,238 3,322 (4,671) -- 11,889
Gain on sale of subsidiary................ 69,379 (3,771) -- -- 65,608
Loss on investment........................ (33,628) -- -- -- (33,628)
Equity in income of subsidiary............ 3,769 -- -- (3,769) --
Other income (expense), net............... (14,747) (136) 14,482 -- (401)
------------ ------------ ------------- ------------ ------------
Income before minority interest........... 38,011 (585) 9,811 (3,769) 43,468
Minority interest......................... -- 450 -- -- 450
------------ ------------ ------------- ------------ ------------
Income before income taxes................ 38,011 (135) 9,811 (3,769) 43,918
Provision for income taxes................ -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Income before cumulative effect of
accounting change...................... 38,011 (135) 9,811 (3,769) 43,918
Cumulative effect of accounting change.... -- (5,907) -- -- (5,907)
------------ ------------ ------------- ------------ ------------
Net income................................ $ 38,011 $ (6,042) $ 9,811 $ (3,769) $ 38,011
============ ============ ============= ============= ============
F-26
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, 2001
----------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues.................................. $ 382,597 $ 83,102 $ 11,299 $ (1,272) $ 475,726
Expenses:
Marketing.............................. 261,915 38,507 4,610 -- 305,032
Operating.............................. 61,745 22,406 7,489 (1,272) 90,368
General and administrative............. 61,577 29,334 8,821 -- 99,732
Non-recurring charge................... 3,000 -- -- -- 3,000
Amortization of intangibles............ 84 10,288 546 -- 10,918
------------ ------------ ------------- ------------ ------------
Operating income.......................... (5,724) (17,433) (10,167) -- (33,324)
Loss on investment........................ (2,172) -- -- -- (2,172)
Equity in income of subsidiary............ (19,891) -- -- 19,891 --
Other income (expense), net............... 947 (1,443) 46 -- (450)
------------ ------------ ------------- ------------ ------------
Income before equity in affiliate and
minority interest...................... (26,840) (18,876) (10,121) 19,891 (35,946)
Equity in income of affiliate............. 83 -- -- -- 83
Minority interest......................... -- 9,106 -- -- 9,106
------------ ------------ ------------- ------------ ------------
Income before income taxes................ (26,757) (9,770) (10,121) 19,891 (26,757)
Provision for income taxes................ -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Income before cumulative effect of
accounting change...................... (26,757) (9,770) (10,121) 19,891 (26,757)
Cumulative effect of accounting change.... (25,730) -- -- -- (25,730)
------------ ------------ ------------- ------------ ------------
Net income................................ $ (52,487) $ (9,770) $ (10,121) $ 19,891 $ (52,487)
============ ============ ============= ============= ============
F-27
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2001
----------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Operating activities
Net income............................. $ 24,356 $ 2,580 $ 2,020 $ (4,600) $ 24,356
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in deferred membership fees... (37,705) (741) (557) -- (39,003)
Change in membership solicitation and
other deferred costs............... 50,675 304 432 -- 51,411
Depreciation and amortization........ 9,390 1,750 980 -- 12,120
Deferred income taxes................ 11,276 1,559 1,347 -- 14,182
Tax benefit from employee stock plans 942 -- -- -- 942
Gain on settlement of investment
related litigation................. (19,148) -- -- -- (19,148)
Loss on sale of subsidiary........... 959 -- -- -- 959
Net loss on investment............... 206 -- -- -- 206
Other................................ 2,635 -- (150) -- 2,485
Change in assets and liabilities:
Restricted cash...................... -- 2,951 -- -- 2,951
Accounts receivable.................. 504 220 34 -- 758
Intercompany receivable & payable.... 2,852 1,364 (4,216) -- --
Prepaid membership materials......... (86) 10 (59) -- (135)
Prepaid expenses..................... (2,799) (311) (136) -- (3,246)
Other assets......................... (1,387) 56 -- -- (1,331)
Accounts payable..................... (2,457) 2,082 120 -- (255)
Accrued liabilities.................. 2,003 (332) (390) -- 1,281
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities............................. 42,216 11,492 (575) (4,600) 48,533
------------ ------------ ------------- ------------ ------------
Investing activities
Acquisition of fixed assets............ (4,931) (188) (344) -- (5,463)
Investment in subsidiaries............. (4,600) -- -- 4,600 --
Settlement of investment related
litigation........................... 19,148 -- -- -- 19,148
Other investing activities............. (1,250) -- -- -- (1,250)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) investing
activities............................. 8,367 (188) (344) 4,600 12,435
------------ ------------ ------------- ------------ ------------
Financing activities
Net proceeds from exercise of stock
options.............................. 4,050 -- -- -- 4,050
Treasury stock purchases............... (37,214) -- -- -- (37,214)
Payments of long-term obligations...... -- (1,051) -- -- (1,051)
------------ ------------ ------------- ------------ ------------
Net cash used in financing activities..... (33,164) (1,051) -- -- (34,215)
------------ ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents....................... -- -- 5 -- 5
------------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................ 17,419 10,253 (914) -- 26,758
Cash and cash equivalents at beginning of
year................................... 34,476 8,463 2,563 -- 45,502
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of year.. $ 51,895 $ 18,716 $ 1,649 $ -- $ 72,260
============ ============ ============= ============= ============
F-28
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2001
----------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Operating activities
Net income (loss)......................... $ 38,011 $ (6,042) $ 9,811 $ (3,769) $ 38,011
Adjustments to reconcile net income
(loss)to net cash provided by operating
activities:
Change in deferred membership fees..... (18,701) 1,721 (136) -- (17,116)
Change in membership solicitation and
other deferred costs................. 16,485 (2,641) 1,194 -- 15,038
Depreciation and amortization.......... 9,452 2,544 1,256 -- 13,252
(Gain) loss on sale of subsidiary...... (69,378) 3,770 -- -- (65,608)
Net loss on investment................. 33,628 -- -- -- 33,628
Non-cash restructuring charges......... -- -- 1,585 -- 1,585
Minority interest...................... -- (450) -- -- (450)
Cumulative effect of accounting change. -- 5,907 -- -- 5,907
Other.................................. 2,435 54 116 -- 2,605
Change in assets and liabilities:
Restricted cash........................ -- (4,692) -- -- (4,692)
Accounts receivable.................... 2,837 4,573 1,420 -- 8,830
Intercompany receivable & payable...... 24,764 (13,280) (11,484) -- --
Prepaid membership materials........... 560 11 (256) -- 315
Prepaid expenses....................... (1,832) (613) 228 -- (2,217)
Other assets........................... (337) 86 -- -- (251)
Related party payables................. -- 12 -- -- 12
Accounts payable....................... (10,783) 2,524 (2,493) -- (10,752)
Accrued liabilities.................... (199) (807) (77) -- (1,083)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities............................. 26,942 (7,323) 1,164 (3,769) 17,014
------------ ------------ ------------- ------------ ------------
Investing activities
Acquisition of fixed assets............ (5,074) (262) (425) -- (5,761)
Investment in subsidiaries............. (3,769) -- -- 3,769 --
Proceeds from sale of subsidiary, net of
cash sold............................ 35,582 10,415 -- -- 45,997
Other investing activities............. 1,499 (1,499) -- -- --
------------ ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities............................. 28,238 8,654 (425) 3,769 40,236
------------ ------------ ------------- ------------ ------------
Financing activities
Net proceeds from exercise of stock
options.............................. 1,461 54 -- -- 1,515
Treasury stock purchases............... (34,301) -- -- -- (34,301)
Payments of long-term obligations...... -- (718) -- -- (718)
------------ ------------ ------------- ------------ ------------
Net cash (used in) financing activities... (32,840) (664) -- -- (33,504)
------------ ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents....................... -- -- 11 -- 11
------------ ------------ ------------- ------------ ------------
Net increase in cash and cash equivalents. 22,340 667 750 -- 23,757
Cash and cash equivalents at beginning of
year................................... 12,136 7,796 1,813 -- 21,745
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of year.. $ 34,476 $ 8,463 $ 2,563 $ -- $ 45,502
============ ============ ============= ============= ============
F-29
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2001
----------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Operating activities
Net income............................. $ (52,487) $ (9,770) $ (10,121) $ 19,891 $ (52,487)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in deferred membership fees... (4,259) 10,576 2,949 -- 9,266
Change in membership solicitation and
other deferred costs............... 25,142 (5,640) (2,325) -- 17,177
Depreciation and amortization........ 7,639 11,356 1,503 -- 20,498
Net loss on investment............... 2,172 -- -- -- 2,172
Equity in income of affiliate........ (83) -- -- -- (83)
Minority interest.................... -- (9,106) -- -- (9,106)
Cumulative effect of accounting change 25,730 -- -- -- 25,730
Other................................ 1,662 867 334 -- 2,863
Change in assets and liabilities:
Restricted cash...................... -- (991) -- -- (991)
Accounts receivable.................. (75) (2,086) (138) -- (2,299)
Intercompany receivable & payable.... (6,570) (3,440) 10,010 -- --
Prepaid membership materials......... 613 26 (437) -- 202
Prepaid expenses and other current
assets............................. (535) (1,675) (728) -- (2,938)
Other assets......................... 23 134 616 -- 773
Related party payables............... -- 176 -- -- 176
Accounts payable..................... (6,031) 4,218 986 -- (827)
Accrued liabilities.................. (3,000) 3,629 1,267 -- 1,896
------------ ------------ ------------- ------------ ------------
Net cash provided by operating activities. (10,059) (1,726) 3,916 19,891 12,022
------------ ------------ ------------- ------------ ------------
Investing activities
Acquisition of fixed assets............ (11,823) (1,215) (2,095) -- (15,133)
Investment in subsidiaries............. 19,891 -- -- (19,891) --
Other investing activities............. 4,944 (800) -- -- 4,144
Business combinations, net of cash acquired (8,349) 1,164 -- -- (7,185)
------------ ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities............................. 4,663 (851) (2,095) (19,891) (18,174)
------------ ------------ ------------- ------------ ------------
Financing activities
Net proceeds from exercise of stock
options.............................. 3,239 4,820 -- -- 8,059
Net repayments of credit facility...... -- -- (526) -- (526)
Treasury stock purchases............... (8,917) -- -- -- (8,917)
Payments of long-term obligations...... (7) (748) -- -- (755)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) financing
activities............................. (5,685) 4,072 (526) -- (2,139)
------------ ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents....................... -- -- (133) -- (133)
------------ ------------ ------------- ------------ ------------
Net increase in cash and cash equivalents. (11,081) 1,495 1,162 -- (8,424)
Cash and cash equivalents at beginning of
period................................. 23,217 6,301 651 -- 30,169
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of period $ 12,136 $ 7,796 $ 1,813 $ -- $ 21,745
============ ============ ============= ============= ============
F-30
MemberWorks Incorporated
Schedule II -- Valuation and Qualifying Accounts
Charged
Balance at to Costs Charged to Other
Beginning of and Accounts -- Deductions -- Balance at
Description Period Expense Describe Describe End of Period
---------------------------- ------------- --------- ----------------- -------------- --------------
Year Ended June 30, 2003
Allowance for membership
cancellations............ $23,753,000 $-- $281,250,000(A) $284,069,000(B) $20,934,000
Valuation allowance for
deferred tax assets...... 6,581,000 -- (6,581,000)(D) -- --
Year Ended June 30, 2002
Allowance for membership
cancellations............ $30,004,000 $-- $277,412,000(A) $283,663,000(B) $23,753,000
Valuation allowance for
deferred tax assets...... 22,690,000 -- (16,109,000)(D) -- 6,581,000
Year Ended June 30, 2001
Allowance for membership
cancellations............ $33,477,000 $-- $362,623,000(A) $366,096,000(B) $30,004,000
Valuation allowance for
deferred tax assets...... 10,175,000 -- 12,515,000(C) -- 22,690,000
---------------
(A) Charged to balance sheet account "Deferred membership fees."
(B) Charges for refunds upon membership cancellations. In addition, the
allowance was reduced by $2,082,000 in connection with the sale of iPlace
in fiscal 2002.
(C) Increase in the valuation allowance for deferred tax assets is due to an
increase in deferred tax assets that management does not believe will be
more likely than not realizable.
(D) Decrease in the valuation allowance is due to current utilization of
deferred tax assets as well as management's belief that the Company will
more likely than not realize its deferred tax assets in the future.
F-31
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31, June 30,
2003 2003
--------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................................................ $ 119,995 $ 72,260
Restricted cash.......................................................... 3,169 2,732
Accounts receivable (net of allowance for doubtful accounts of $1,744 and 11,477 8,713
$1,743, at December 31, 2003 and June 2003, respectively)..............
Prepaid membership materials............................................. 3,742 2,196
Prepaid expenses and other current assets................................ 6,932 7,571
Membership solicitation and other deferred costs......................... 62,618 77,883
--------------- -------------
Total current assets................................................... 207,933 171,355
Fixed assets, net........................................................... 22,855 24,969
Goodwill (Note 4)........................................................... 42,039 42,039
Intangible assets, net (Note 4)............................................. 6,277 6,656
Other assets................................................................ 6,102 3,486
--------------- -------------
Total assets........................................................... $ 285,206 $ 248,505
=============== =============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations.............................. $ 28 $ 244
Accounts payable......................................................... 29,365 32,644
Accrued liabilities...................................................... 64,982 59,105
Deferred membership fees................................................. 150,062 167,643
Deferred income taxes.................................................... 6,171 879
--------------- -------------
Total current liabilities.............................................. 250,608 260,515
Deferred income taxes....................................................... 5,157 5,145
Other long-term liabilities................................................. 2,993 3,128
Convertible debt (Note 6)................................................... 90,000 --
--------------- -------------
Total liabilities...................................................... 348,758 268,788
--------------- -------------
Commitments and contingencies (Note 11)..................................... -- --
Shareholders' deficit:
Preferred stock, $0.01 par value-- 1,000 shares authorized; no shares issued -- --
Common stock, $0.01 par value-- 40,000 shares authorized; 18,998 shares 190 178
issued (17,847 shares at June 30, 2003)................................
Capital in excess of par value........................................... 146,646 122,425
Accumulated deficit...................................................... (6,269) (17,829)
Accumulated other comprehensive loss..................................... (453) (469)
Treasury stock, 8,604 shares at cost (6,126 shares at June 30, 2003)..... (203,666) (124,588)
--------------- -------------
Total shareholders' deficit............................................ (63,552) (20,283)
--------------- -------------
Total liabilities and shareholders' deficit............................ $ 285,206 $ 248,505
=============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-32
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
(In thousands, except per share data)
Revenues............................................... $123,164 $114,045 $236,988 $219,049
Expenses:
Marketing........................................... 66,745 69,899 133,401 135,448
Operating........................................... 23,042 19,178 44,505 37,252
General and administrative.......................... 19,195 18,764 37,962 37,627
Amortization of intangible assets................... 271 346 589 739
---------- --------- ---------- ----------
Operating income....................................... 13,911 5,858 20,531 7,983
Settlement of investment related litigation............ -- -- -- 19,148
Loss on sale of subsidiary............................. -- -- -- (959)
Net loss on investment................................. -- -- -- (206)
Interest expense....................................... (1,456) (25) (1,570) (57)
Other income, net...................................... 320 246 305 397
---------- --------- ---------- ----------
Income before income taxes............................. 12,775 6,079 19,266 26,306
Provision for income taxes............................. 5,110 2,432 7,706 10,523
---------- --------- ---------- ----------
Net income............................................. $7,665 $3,647 $11,560 $15,783
========== ========= ========== ==========
Basic earnings per share............................ $0.71 $0.29 $1.03 $1.22
========== ========= ========== ==========
Diluted earnings per share.......................... $0.60 $0.27 $0.91 $1.17
========== ========= ========== ==========
Weighted average common shares used in earnings per share calculations:
Basic............................................... 10,756 12,735 11,192 12,949
========== ========= ========== ==========
Diluted............................................. 14,074 13,396 13,541 13,530
========== ========= ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-33
MEMBERWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended December 31,
-------------------------------
2003 2002
-------------- -------------
(In thousands)
Operating activities
Net income............................................................... $ 11,560 $ 15,783
Adjustments to reconcile net income to net cash provided by operating
activities:
Change in deferred membership fees..................................... (17,733) (9,909)
Change in membership solicitation and other deferred costs............. 15,368 20,775
Depreciation and amortization.......................................... 5,242 6,169
Deferred income taxes.................................................. 5,304 9,744
Tax benefit from employee stock plans.................................. 1,553 297
Gain on settlement of investment related litigation.................... -- (19,148)
Loss on sale of subsidiary............................................. -- 959
Net loss on investment................................................. -- 206
Other.................................................................. 720 382
Change in assets and liabilities:
Restricted cash........................................................ (437) 2,841
Accounts receivable.................................................... (2,764) (1,529)
Prepaid membership materials........................................... (1,996) (1,169)
Prepaid expenses and other current assets.............................. 1,243 334
Other assets........................................................... (140) (424)
Accounts payable....................................................... (3,351) 1,044
Accrued liabilities.................................................... 5,872 6,522
-------------- -------------
Net cash provided by operating activities................................... 20,441 32,877
-------------- -------------
Investing activities
Acquisition of fixed assets ............................................. (2,538) (2,762)
Settlement of investment related litigation.............................. -- 19,148
Purchase price adjustments from sale of subsidiary....................... -- (750)
-------------- -------------
Net cash (used in) provided by investing activities......................... (2,538) 15,636
-------------- -------------
Financing activities
Net proceeds from exercise of stock options.............................. 22,551 1,851
Treasury stock purchases................................................. (79,078) (14,957)
Net proceeds from issuance of convertible debt........................... 86,568 --
Payments of long-term obligations........................................ (250) (927)
-------------- -------------
Net cash provided by (used in) financing activities......................... 29,791 (14,033)
-------------- -------------
Effect of exchange rate changes on cash and cash equivalents................ 41 (32)
-------------- -------------
Net increase in cash and cash equivalents................................... 47,735 34,448
Cash and cash equivalents at beginning of period............................ 72,260 45,502
-------------- -------------
Cash and cash equivalents at end of period.................................. $ 119,995 $ 79,950
============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-34
MEMBERWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, such
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management of MemberWorks
Incorporated ("the Company" or "MemberWorks") to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Operating results for
the three and six months ended December 31, 2003 are not necessarily indicative
of the results that may be expected for the fiscal year ending June 30, 2004.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K with respect to the fiscal
year ended June 30, 2003.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Note 2 -- Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Note 3 -- Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), the Company applies the intrinsic
value method in accounting for employee stock options. Accordingly, the Company
generally does not recognize compensation expense with respect to stock-based
awards to employees. If compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value (estimated using
the Black-Scholes option-pricing model) at the grant dates for awards under
those plans consistent with the method of Financial Accounting Standards Board
Statement ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure" ("SFAS 148"), the Company's pro forma net income and earnings per
share would have been as follows:
F-35
Three Months Six Months
Ended Ended
December 31, December 31,
---------------------- --------------------
2003 2002 2003 2002
--------- ---------- --------- --------
Net income reported.................................. $ 7,665 $ 3,647 $ 11,560 $ 15,783
Add: Stock-based employee compensation expense
determined under the intrinsic value based method
for all awards, net of related tax effects........ -- -- -- --
Deduct: Stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects................ 1,262 1,486 2,527 3,071
--------- ---------- --------- --------
Pro forma net income................................. $ 6,403 $ 2,161 $ 9,033 $ 12,712
========= ========== ========= ========
Earnings per share:
As reported:
Basic........................................... $ 0.71 $ 0.29 $ 1.03 $ 1.22
Diluted......................................... $ 0.60 $ 0.27 $ 0.91 $ 1.17
Pro forma:
Basic........................................... $ 0.60 $ 0.17 $ 0.81 $ 0.98
Diluted......................................... $ 0.51 $ 0.16 $ 0.72 $ 0.94
NOTE 4 -- Goodwill and Other Intangible Assets
The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
As of December 31, 2003 As of June 30, 2003
-------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- -------------- ---------------- - ------------
Amortized intangible assets:
Membership and Client
Relationships.............. $ 13,405 $ (7,269) $ 13,195 $ (6,730)
Other........................ 950 (809) 950 (759)
--------------- -------------- ---------------- -------------
Total amortized intangible
assets................... $ 14,355 $ (8,078) $ 14,145 $ (7,489)
--------------- -------------- ---------------- -------------
Intangible assets, net..... $ 6,277 $ 6,656
=============== ================
Unamortized intangible assets:
Goodwill..................... $ 42,039 $ 42,039
=============== ================
Acquired intangibles, except member relationships, are recorded at cost and
are amortized on a straight-line basis over their estimated useful lives ranging
from 3 to 20 years. The value of member relationships is amortized using an
accelerated method based on estimated future cash flows. The future intangible
amortization expense for the next five years is estimated to be as follows (in
thousands):
Fiscal Year:
2004........................................................ 1,090
2005........................................................ 900
2006........................................................ 755
2007........................................................ 599
2008........................................................ 485
As a result of increased integration of operations and management at three
of its five reporting units during fiscal 2003, the Company aggregated these
three reporting units into a single reporting unit for fiscal 2004 impairment
testing purposes, resulting in a total of three reporting units in the current
year. Goodwill was tested for impairment during the quarter ended September 30,
2003 as required by SFAS 142. The Company concluded that
F-36
none of its goodwill was impaired. Fair value was estimated using discounted
cash flow methodologies. In addition, the Company reassessed the estimated
useful lives of its definite-lived intangible assets and determined that the
lives were appropriate. The Company will test the goodwill of each of its
reporting units annually or more frequently if impairment indicators exist.
NOTE 5 -- Allowance for Membership Cancellations
Accrued liabilities set forth in the accompanying condensed consolidated
balance sheets as of December 31, 2003 and June 30, 2003 include an allowance
for membership cancellations of $21,320,000 and $20,934,000, respectively.
Recording an allowance for membership cancellations has the effect of reducing
the amount of deferred membership fees recorded.
NOTE 6 -- Convertible Debt
On September 30, 2003, the Company issued $90,000,000 aggregate principal
amount of 5.5% convertible senior subordinated notes ("Notes") due September
2010 in a private offering pursuant to rule 144A of the Securities Act of 1933,
as amended. The Notes bear interest at the rate of 5.5% per year, which will be
payable in cash semi-annually in arrears on April 1 and October 1 of each year,
with the first payment due on April 1, 2004. Holders of the Notes may convert
their Notes into shares of MemberWorks common stock at any time prior to
maturity at an initial conversion price of approximately $40.37 per share, which
is equivalent to an initial conversion rate of approximately 24.7739 shares per
$1,000 principal amount of the Notes. In accordance with Accounting Principles
Board Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants," these Notes have been classified as a liability.
On December 3, 2003, Memberworks filed on Form S-3 a shelf registration
statement with the Securities and Exchange Commission covering the resale of the
Notes and the common stock issuable upon their conversion, which has not yet
been declared effective.
Debt issuance costs associated with this issuance were $3,432,000 for the
six months ended December 31, 2003. Debt issuance costs are capitalized and
amortized as interest expense over the term of the Notes using the effective
interest method.
NOTE 7 -- Restructuring Charges
During fiscal 2002, the Company announced the implementation of several
cost saving initiatives due to a slowdown in consumer response rates and
increased economic uncertainty in both the U.S. and abroad. This restructuring
program included a workforce reduction, the closing of the Company's United
Kingdom operations and the downsizing of the operational infrastructure
throughout the Company. As a result of the restructuring program, the Company
recorded restructuring charges of $6,893,000 during the quarter ended December
31, 2001.
The following is a rollforward of the major components of the restructuring
reserve (in thousands) which is recorded in accrued liabilities and other
long-term liabilities:
Workforce Lease
Reduction Obligations Total
--------- ----------- ---------
Restructuring reserve balance at June 30, 2002...... $ 391 $ 2,546 $ 2,937
Additions to the reserve............................ -- -- --
Charges to the reserve.............................. 300 836 1,136
--------- ----------- ---------
Restructuring reserve balance at June 30, 2003...... 91 1,710 1,801
Additions to the reserve............................ -- -- --
Charges to the reserve.............................. 54 41 95
--------- ----------- ---------
Restructuring reserve balance at December 31, 2003.. $ 37 $ 1,669 $ 1,706
========= =========== =========
F-37
NOTE 8 -- Income Tax Expense
Income tax expense as a percentage of pre-tax income was 40% for the three
and six months ended December 31, 2003 and 2002. The effective tax rate was
higher than the U.S. statutory rate for the three and six months ended December
31, 2003 and 2002 primarily due to state taxes and other non-deductible items.
Tax benefits resulting from the exercise of nonqualified stock options and the
disqualifying dispositions of shares issued under the Company's stock based
compensation plans reduced taxes payable by $38,000 and $271,000 during the
quarter ended December 31, 2003 and 2002, respectively. Tax benefits resulting
from the exercise of nonqualified stock options and the disqualifying
dispositions of shares issued under the Company's stock based compensation plans
reduced taxes payable by $1,553,000 and $297,000 during the six months ended
December 31, 2003 and 2002, respectively. Such benefits are credited to capital
in excess of par value.
NOTE 9 -- Earnings Per Share
Basic and diluted earnings per share amounts are determined in accordance
with the provisions of SFAS No. 128, "Earnings Per Share." The following table
sets forth the reconciliation of the numerators and denominators in the
computation of basic and diluted earnings per share (in thousands, except per
share data):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
Numerator:
Income available to common shareholders used in basic
earnings per share................................. $ 7,665 $ 3,647 $ 11,560 $ 15,783
Add back: Interest expense on convertible securities. 743 -- 751 --
---------- ---------- ----------- ----------
Income available to common shareholders after assumed
conversion of convertible debt for diluted earnings
per share.......................................... $ 8,408 $ 3,647 $ 12,311 $ 15,783
========== ========== =========== ==========
Denominator:
Weighted average number of common shares outstanding--
basic.............................................. 10,756 12,735 11,192 12,949
Effect of dilutive securities:
Convertible securities................................ 2,230 -- 1,127 --
Options............................................... 1,088 661 1,222 581
---------- ---------- ----------- ----------
Weighted average number of common shares outstanding--
diluted............................................ 14,074 13,396 13,541 13,530
========== ========== =========== ==========
Basic earnings per share.............................. $ 0.71 $ 0.29 $ 1.03 $ 1.22
========== ========== =========== ==========
Diluted earnings per share............................ $ 0.60 $ 0.27 $ 0.91 $ 1.17
========== ========== =========== ==========
The diluted earnings per share calculation excludes the effect of
potentially dilutive shares when their effect is antidilutive. For the three
months ended December 31, 2003 and 2002, the Company had 996,000 and 3,041,000
shares, respectively, of potentially dilutive stock options outstanding that are
not included in the calculation as they are antidilutive. For the six months
ended December 31, 2003 and 2002, the Company had 765,000 and 3,112,000 shares,
respectively, of potentially dilutive stock options that are not included in the
calculations as they are antidilutive.
NOTE 10 -- Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
Net income........................................... $ 7,665 $ 3,647 $ 11,560 $ 15,783
Foreign currency translation gain (loss)............. 14 5 16 (80)
---------- ---------- ----------- ----------
Comprehensive income................................. $ 7,679 $ 3,652 $ 11,576 $ 15,703
========== ========== =========== ==========
F-38
NOTE 11 -- 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.
As of December 31, 2003, the Company has purchase obligations of $1,407,000
outstanding, of which $250,000 has been recorded in the Condensed Consolidated
Balance Sheet.
Except as set forth below, in management's opinion, there are no
significant legal proceedings to which the Company or any of its subsidiaries is
a party or to which any of their properties are subject. The Company is involved
in other lawsuits and claims generally incidental to its business including, but
not limited to, various suits, including previously disclosed suits, brought
against the Company by individual consumers seeking monetary and/or injunctive
relief relating to the marketing of he Company's programs. In addition, from
time to time, and in the regular course of its business, the Company receives
inquiries from various federal and/or state regulatory authorities.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly-owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which seeks unspecified monetary damages, alleges that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The complaint includes a claim that the
suit should be certified as a class action and the plaintiff has filed a motion
for class certification to which all of the defendants have filed opposing
papers regarding the same. The Court certified a class of Michigan residents.
The Court of Appeals denied the defendants' petition for leave to appeal the
certification order. No discovery scheduling order has been set. The Company
believes that the claims made against Coverdell are unfounded and Coverdell and
the Company will vigorously defend their interests against this suit.
On January 24, 2003, the Company filed a motion with the Superior Court for
the Judicial District of Hartford, Connecticut to vacate and oppose the
confirmation of an arbitration award issued in December 2002. The arbitration,
filed against the Company by MedValUSA Health Programs, Inc. ("MedVal") in
September 2000, involved claims of breach of contract, breach of the duty of
good faith and fair dealing, and violation of the Connecticut Unfair Trade
Practices Act ("CUTPA"). Even though the arbitrators found that MemberWorks was
not liable to MedVal for any compensatory damages, they awarded $5,495,000 in
punitive damages and costs against MemberWorks solely under CUTPA. MemberWorks
believes that this arbitration award is unjustified and not based on any
existing legal precedent. Specifically, the Company is challenging the award on
a number of grounds, including that it violates a well defined public policy
against excessive punitive damage awards, raises constitutional issues and
disregards certain legal requirements for a valid award under CUTPA. The hearing
on the Company's motion was held on February 10, 2003. On June 22, 2003, the
Superior Court denied the Company's motion to vacate the award, and the Company
filed an appeal of that decision. While the Company intends to take action to
prevent the enforcement of the award by, among other things, vigorously pursuing
an appeal, there can be no assurance that MemberWorks will be successful in its
efforts. The Company has made no provision in its financial statements for this
contingency because it believes that a loss is not probable. If the Company were
ultimately unsuccessful in this or other available appeals, and a final
non-appealable court order confirming the arbitration award is rendered, the
payment of the award could have a material adverse effect on the Company's
results of operations in the period in which the final order is entered.
On October 21, 2003, the Florida Attorney General's Office filed a civil
complaint against the Company based upon concerns that some of its past
marketing practices may have violated various consumer laws. The Company
believes that any legitimate concerns have previously been fully addressed,
including the implementation of industry-leading Best Marketing Practices and
voluntary agreements incorporating those practices, such as the nationwide
assurance agreement that the Company entered into with the State of Nebraska in
2001. The Company believes that the allegations of the complaint are unfounded
and the Company intends to vigorously defend its interests in this matter. The
Company further believes that the potential liability represented by the lawsuit
and the final resolution of this matter will not be material to the Company.
F-39
NOTE 12 -- New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which was revised in December 2003. FIN
46 clarifies the application of Accounting Research Bulletin No. 51 and provides
guidance on the identification of and reporting for variable interest entities.
FIN 46 is effective immediately for variable interest entities formed after
January 31, 2003 and is effective for periods ending after March 15, 2004 for
any variable interest entity formed prior to February 1, 2003. While it will
continue to evaluate the requirements of FIN 46, MemberWorks does not believe
that the adoption of FIN 46 will have a material impact on the Company's
financial statements.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity " ("SFAS 150"). This statement requires that certain
financial instruments that were accounted for as equity under previous guidance
be classified as liabilities in statements of financial position. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial statements.
NOTE 13 -- Guarantor and Nonguarantor Financial Statements
MemberWorks has entered into an agreement to sell an aggregate of $150.0
million of Senior Notes in private placements pursuant to Rule 144A. The Senior
Notes will be unsecured obligations and will rank pari passu in right of payment
to all of the Company's existing and future senior unsecured indebtedness and
senior in right of payment to all of the Company's existing and future
subordinated indebtedness that expressly provides for its subordination to the
Notes. The Senior Notes will be fully and unconditionally guaranteed by all of
the Company's existing and future domestic subsidiaries and certain of the
Company's existing and future foreign subsidiaries.
The following consolidating financial information presents the
consolidating balance sheets as of December 31, 2003 and June 30, 2003, the
related statements of income for each of the three and six month periods ended
December 31, 2003 and December 31, 2002 and the related statements of cash flows
for the six month periods ended December 31, 2003 and 2002. The information
includes elimination entries necessary to consolidate MemberWorks ("Parent")
with the guarantor and nonguarantor subsidiaries.
Investment in subsidiaries are accounted for by the parent using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are presented
on a combined basis. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
F-40
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of December 31, 2003
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents............. $ 99,518 $ 18,369 $ 2,108 $ -- $ 119,995
Restricted cash....................... -- 3,169 -- -- 3,169
Accounts receivable................... 4,048 3,561 3,868 -- 11,477
Intercompany receivable............... 1,671 384 -- (2,055) --
Prepaid membership materials.......... 2,678 175 889 -- 3,742
Prepaid expenses and other current assets 5,373 1,164 395 -- 6,932
Membership solicitation and other
deferred costs...................... 54,303 5,624 2,691 -- 62,618
------------ ------------ ------------- ------------ ------------
Total current assets................ 167,591 32,446 9,951 (2,055) 207,933
Fixed assets, net........................ 20,096 583 2,176 -- 22,855
Goodwill................................. -- 35,320 6,719 -- 42,039
Intangible assets, net................... -- 6,277 -- -- 6,277
Other assets............................. 6,082 20 -- -- 6,102
Investment in subsidiaries............... 58,067 -- -- (58,067) --
------------ ------------ ------------- ------------ ------------
Total assets........................ $ 251,836 $ 74,646 $ 18,846 $ (60,122) $ 285,206
============ ============ ============= ============ ============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term
obligations......................... $ -- $ 28 $ -- $ -- $ 28
Accounts payable...................... 13,339 12,876 3,150 -- 29,365
Accrued liabilities................... 58,321 4,182 2,479 -- 64,982
Intercompany payable.................. -- 1,686 369 (2,055) --
Deferred membership fees.............. 144,702 1,142 4,218 -- 150,062
Deferred income taxes................. 4,900 (877) 2,148 -- 6,171
------------ ------------ ------------- ------------ ------------
Total current liabilities........... 221,262 19,037 12,364 (2,055) 250,608
Deferred income taxes.................... 2,532 3,152 (527) -- 5,157
Other long-term liabilities.............. 1,594 -- 1,399 -- 2,993
Convertible debt......................... 90,000 -- -- -- 90,000
------------ ------------ ------------- ------------ ------------
Total liabilities................... 315,388 22,189 13,236 (2,055) 348,758
Shareholders' deficit:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 190 6 3 (9) 190
Capital in excess of par value........ 146,646 52,296 9,564 (61,860) 146,646
Accumulated deficit................... (6,269) 155 (3,504) 3,349 (6,269)
Accumulated other comprehensive loss (453) -- (453) 453 (453)
Treasury stock........................ (203,666) -- -- -- (203,666)
------------ ------------ ------------- ------------ ------------
Total shareholders' deficit (equity) (63,552) 52,457 5,610 (58,067) (63,552)
------------ ------------ ------------- ------------ ------------
Total liabilities and shareholders'
deficit........................... $ 251,836 $ 74,646 $ 18,846 $ (60,122) $ 285,206
============ ============ ============= ============ ============
F-41
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2003
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Assets
Current assets:
Cash and cash equivalents............. $ 51,895 $ 18,716 $ 1,649 $ -- $ 72,260
Restricted cash....................... -- 2,732 -- -- 2,732
Accounts receivable................... 2,811 3,907 1,995 -- 8,713
Intercompany receivable............... 686 298 -- (984) --
Prepaid membership materials.......... 1,762 170 264 -- 2,196
Prepaid expenses and other current assets 6,032 1,031 508 -- 7,571
Membership solicitation and other
deferred costs...................... 73,856 1,853 2,174 -- 77,883
------------ ------------ ------------- ------------ ------------
Total current assets................ 137,042 28,707 6,590 (984) 171,355
Fixed assets, net....................... 22,193 535 2,241 -- 24,969
Goodwill................................ -- 35,320 6,719 -- 42,039
Intangible assets, net.................. -- 6,656 -- -- 6,656
Other assets............................ 3,426 60 -- -- 3,486
Investment in subsidiaries.............. 56,419 -- -- (56,419) --
------------ ------------ ------------- ------------ ------------
Total assets........................ $ 219,080 $ 71,278 $ 15,550 $ (57,403) $ 248,505
============ ============ ============= ============ ============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term
obligations......................... $ -- $ 244 $ -- $ -- $ 244
Accounts payable...................... 17,678 13,018 1,948 -- 32,644
Accrued liabilities................... 53,692 3,333 2,080 -- 59,105
Intercompany payable.................. -- 804 180 (984) --
Deferred membership fees.............. 163,276 1,007 3,360 -- 167,643
Deferred income taxes................. 662 (1,701) 1,918 -- 879
------------ ------------ ------------- ------------ ------------
Total current liabilities........... 235,308 16,705 9,486 (984) 260,515
Deferred income taxes................... 2,456 3,260 (571) -- 5,145
Other long-term liabilities............. 1,599 63 1,466 -- 3,128
------------ ------------ ------------- ------------ ------------
Total liabilities................... 239,363 20,028 10,381 (984) 268,788
Shareholders' deficit:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 178 6 3 (9) 178
Capital in excess of par value........ 122,425 52,296 9,564 (61,860) 122,425
Accumulated deficit................... (17,829) (1,052) (3,929) 4,981 (17,829)
Accumulated other comprehensive
loss................................ (469) -- (469) 469 (469)
Treasury stock........................ (124,588) -- -- -- (124,588)
------------ ------------ ------------- ------------ ------------
Total shareholders' deficit......... (20,283) 51,250 5,169 (56,419) (20,283)
------------ ------------ ------------- ------------ ------------
Total liabilities and shareholders'
deficit........................... $ 219,080 $ 71,278 $ 15,550 $ (57,403) $ 248,505
============ ============ ============= ============ ============
F-42
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended December 31, 2003
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues................................. $ 103,006 $ 15,128 $ 5,451 $ (421) $ 123,164
Expenses:
Marketing............................. 58,013 7,532 1,200 -- 66,745
Operating............................. 17,762 3,156 2,545 (421) 23,042
General and administrative............ 15,631 2,583 981 -- 19,195
Amortization of intangible assets..... -- 271 -- -- 271
------------ ------------ ------------- ------------ ------------
Operating income......................... 11,600 1,586 725 -- 13,911
Interest expense......................... (1,456) -- -- -- (1,456)
Equity in income of subsidiaries......... 1,423 -- -- (1,423) --
Other income, net........................ 260 61 (1) -- 320
------------ ------------ ------------- ------------ ------------
Income before income taxes............... 11,827 1,647 724 (1,423) 12,775
Provision for income taxes............... 4,162 659 289 -- 5,110
------------ ------------ ------------- ------------ ------------
Net income............................... $ 7,665 $ 988 $ 435 $ (1,423) $ 7,665
============ ============ ============= ============ ============
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended December 31, 2002
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues................................. $ 98,509 $ 12,409 $ 3,313 $ (186) $ 114,045
Expenses:
Marketing............................. 63,262 5,578 1,059 -- 69,899
Operating............................. 15,654 2,877 833 (186) 19,178
General and administrative............ 15,451 2,526 787 -- 18,764
Amortization of intangible assets..... -- 346 -- -- 346
------------ ------------ ------------- ------------ ------------
Operating income......................... 4,142 1,082 634 -- 5,858
Interest expense......................... (23) (2) -- -- (25)
Equity in income of subsidiaries......... 1,066 -- -- (1,066) --
Other income, net........................ 183 35 28 -- 246
------------ ------------ ------------- ------------ ------------
Income before income taxes............... 5,368 1,115 662 (1,066) 6,079
Provision for income taxes............... 1,721 446 265 -- 2,432
------------ ------------ ------------- ------------ ------------
Net income............................... $ 3,647 $ 669 $ 397 $ (1,066) $ 3,647
============ ============ ============= ============ ============
F-43
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended December 31, 2003
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues................................. $ 201,176 $ 27,998 $ 8,598 $ (784) $ 236,988
Expenses:
Marketing............................. 117,124 14,039 2,238 -- 133,401
Operating............................. 35,144 6,358 3,787 (784) 44,505
General and administrative............ 31,016 5,089 1,857 -- 37,962
Amortization of intangible assets..... -- 589 -- -- 589
------------ ------------ ------------- ------------ ------------
Operating income......................... 17,892 1,923 716 -- 20,531
Interest expense......................... (1,570) -- -- -- (1,570)
Equity in income of subsidiaries......... 1,632 -- -- (1,632) --
Other income, net........................ 224 89 (8) -- 305
------------ ------------ ------------- ------------ ------------
Income before income taxes............... 18,178 2,012 708 (1,632) 19,266
Provision for income taxes............... 6,618 805 283 -- 7,706
------------ ------------ ------------- ------------ ------------
Net income............................... $ 11,560 $ 1,207 $ 425 $ (1,632) $ 11,560
============ ============ ============= ============ =============
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended December 31, 2002
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Revenues................................. $ 188,381 $ 24,767 $ 6,370 $ (469) $ 219,049
Expenses:
Marketing............................. 122,029 11,182 2,237 -- 135,448
Operating............................. 30,350 5,863 1,508 (469) 37,252
General and administrative............ 30,799 5,266 1,562 -- 37,627
Amortization of intangible assets..... -- 739 -- -- 739
------------ ------------ ------------- ------------ ------------
Operating income......................... 5,203 1,717 1,063 -- 7,983
Settlement of investment related litigation 19,148 -- -- -- 19,148
Loss on sale of subsidiary............... (959) -- -- -- (959)
Net loss on investment................... (206) -- -- -- (206)
Interest expense......................... (46) (11) -- -- (57)
Equity in income of subsidiaries......... 1,716 -- -- (1,716) --
Other income, net........................ 307 67 23 -- 397
------------ ------------ ------------- ------------ ------------
Income before income taxes............... 25,163 1,773 1,086 (1,716) 26,306
Provision for income taxes............... 9,380 709 434 -- 10,523
------------ ------------ ------------- ------------ ------------
Net income............................... $ 15,783 $ 1,064 $ 652 $ (1,716) $ 15,783
============ ============ ============= ============ =============
F-44
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended December 31, 2003
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Operating activities
Net income............................ $ 11,560 $ 1,207 $ 425 $ (1,632) $ 11,560
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in deferred membership fees.. (18,574) 135 706 -- (17,733)
Change in membership solicitation and
other deferred costs.............. 19,553 (3,771) (414) -- 15,368
Depreciation and amortization....... 4,151 741 350 -- 5,242
Deferred income taxes............... 4,314 716 274 -- 5,304
Tax benefit from employee stock plans 1,553 -- -- -- 1,553
Other............................... 602 118 -- -- 720
Change in assets and liabilities:
Restricted cash..................... -- (437) -- -- (437)
Accounts receivable................. (1,237) 346 (1,873) -- (2,764)
Intercompany receivable & payable... (985) 796 189 -- --
Prepaid membership materials........ (1,366) (5) (625) -- (1,996)
Prepaid expenses and other current
assets 1,223 (93) 113 -- 1,243
Other assets........................ 212 (352) -- -- (140)
Accounts payable.................... (4,339) (214) 1,202 -- (3,351)
Accrued liabilities................. 4,629 917 326 -- 5,872
------------ ------------ ------------- ------------ ------------
Net cash provided by operating activities 21,296 104 673 (1,632) 20,441
------------ ------------ ------------- ------------ ------------
Investing activities
Acquisition of fixed assets........... (2,082) (201) (255) -- (2,538)
Investment in subsidiaries............ (1,632) -- -- 1,632 --
------------ ------------ ------------- ------------ ------------
Net cash used in by investing activities. (3,714) (201) (255) 1,632 (2,538)
------------ ------------ ------------- ------------ ------------
Net proceeds from exercise of stock
options............................. 22,551 -- -- -- 22,551
Treasury stock purchases.............. (79,078) -- -- -- (79,078)
Net proceeds from issuance of
convertible debt.................... 86,568 -- -- -- 86,568
Payments of long-term obligations..... -- (250) -- -- (250)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) financing
activities............................ 30,041 (250) -- -- 29,791
------------ ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents...................... -- -- 41 -- 41
------------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................... 47,623 (347) 459 -- 47,735
Cash and cash equivalents at beginning of
period................................ 51,895 18,716 1,649 -- 72,260
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of period $ 99,518 $ 18,369 $ 2,108 $ -- $ 119,995
============ ============ ============= ============ =============
F-45
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended December 31, 2002
---------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------- ------------ ------------
(In thousands)
Operating activities
Net income............................ $ 15,783 $ 1,064 $ 652 $ (1,716) $ 15,783
Adjustments to reconcile net income to
net cash provided by operating
activities:
Change in deferred membership fees.. (8,690) (600) (619) -- (9,909)
Change in membership solicitation and
other deferred costs.............. 19,657 521 597 -- 20,775
Depreciation and amortization....... 4,743 940 486 -- 6,169
Deferred income taxes............... 8,601 709 434 -- 9,744
Tax benefit from employee stock plans 297 -- -- -- 297
Gain on settlement of investment
related litigation................ (19,148) -- -- -- (19,148)
Loss on sale of subsidiary.......... 959 -- -- -- 959
Net loss on investment.............. 206 -- -- -- 206
Other............................... 382 -- -- -- 382
Change in assets and liabilities:
Restricted cash..................... -- 2,841 -- -- 2,841
Accounts receivable................. 587 (567) (1,549) -- (1,529)
Intercompany receivable & payable... 1,098 686 (1,784) -- --
Prepaid membership materials........ (1,151) -- (18) -- (1,169)
Prepaid expenses and other current
assets 586 (380) 128 -- 334
Other assets........................ (451) 27 -- -- (424)
Accounts payable.................... (3,070) 3,371 743 -- 1,044
Accrued liabilities................. 6,359 304 (141) -- 6,522
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities............................ 26,748 8,916 (1,071) (1,716) 32,877
------------ ------------ ------------- ------------ ------------
Investing activities
Acquisition of fixed assets........... (2,677) (62) (23) -- (2,762)
Investment in subsidiaries............ (1,716) -- -- 1,716 --
Settlement of investment related
litigation.......................... 19,148 -- -- -- 19,148
Purchase price adjustments from sale of
subsidiary.......................... (750) -- -- -- (750)
------------ ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities............................ 14,005 (62) (23) 1,716 15,636
------------ ------------ ------------- ------------ ------------
Financing activities.....................
Net proceeds from exercise of stock
options............................. 1,851 -- -- -- 1,851
Treasury stock purchases.............. (14,957) -- -- -- (14,957)
Payments of long-term obligations..... -- (927) -- -- (927)
------------ ------------ ------------- ------------ ------------
Net cash used in financing activities.... (13,106) (927) -- -- (14,033)
------------ ------------ ------------- ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents...................... -- -- (32) -- (32)
------------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................... 27,647 7,927 (1,126) -- 34,448
Cash and cash equivalents at beginning of
period................................ 34,476 8,463 2,563 -- 45,502
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of period $ 62,123 $ 16,390 $ 1,437 $ -- $ 79,950
============ ============ ============= ============ =============
F-46
PART II
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership or other enterprise, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with such
action, suit or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, if he or she
had no reasonable cause to believe their conduct was unlawful. Section 145
further provides that a corporation similarly may indemnify any such person
serving in any such capacity who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor, against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of the action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made
against expense in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Our certificate of incorporation and by-laws provide that we shall, to the
maximum extent permitted under Delaware law, indemnify any director or officer
of the corporation who is or was made a party to any action or proceeding by
reason of the fact that he or she is or was an agent of the corporation, against
liability incurred in connection with such action or proceeding. We have entered
into agreements with our directors, executive officers and some of our other
officers implementing such indemnification. In addition, our certificate of
incorporation limits, to the fullest extent permitted by Delaware law, the
liability of directors for monetary damages for breach of fiduciary duty. We may
also purchase and maintain insurance policies insuring our directors and
officers against certain liabilities they may incur in their capacity as
directors and officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The exhibits to this registration statement are listed in the Exhibit Index
to this registration statement, which Exhibit Index is hereby incorporated by
reference.
(b) Financial Statement Schedule.
Not applicable.
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
II-1
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement 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.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 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 such action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act in
accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act.
(5) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(6) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became
effective.
II-2
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
MEMBERWORKS INCORPORATED
By: /s/ George Thomas
------------------------------
George Thomas
Senior Vice President, General Counsel
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President, Chief Executive Officer and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Executive Vice President and Chief Financial
James B. Duffy Officer
/s/ Alec L. Ellison
--------------------------- Director
Alec L. Ellison
/s/ Scott N. Flanders
--------------------------- Director
Scott N. Flanders
/s/ Robert Kamerschen
--------------------------- Director
Robert Kamerschen
/s/ Michael T. McClorey
--------------------------- Director
Michael T. McClorey
/s/ Edward M. Stern
--------------------------- Director
Edward M. Stern
/s/ Marc S. Tesler
--------------------------- Director
Marc S. Tesler
II-3
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA BALTIMORE LLC
By: /s/ George Thomas
------------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-4
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA COLORADO LLC
By: /s/ George Thomas
------------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-5
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA GEORGIA LLC
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-6
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA MICHIGAN LLC
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-7
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA NEW JERSEY LLC
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-8
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA NEW YORK LLC
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-9
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA OHIO LLC
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-10
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA PENNSYLVANIA LLC
By: /s/ George Thomas
------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-11
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
LAVALIFE WASHINGTON D.C., L.L.C.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-12
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE MEDIA GROUP (USA) LTD.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-13
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE MEDIA CONSOLIDATED, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-14
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE (TX) VOICE MEDIA CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ Gary A. Johnson
--------------------------- Vice President, Treasurer and Director
Gary A. Johnson
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-15
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE L.A. VOICE MEDIA CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-16
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE MEDIA (IL) CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-17
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE MEDIA MO CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-18
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
BARNES HOLDING CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-19
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE S.J. VOICE MEDIA CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-20
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA (CA) CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-21
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA (MN) CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-22
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
INTERACTIVE VOICE MEDIA (SACRAMENTO) CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------- President and Director
Gary A. Johnson
/s/ James B. Duffy
--------------------------- Vice President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Bruce Croxon
--------------------------- Director
Bruce Croxon
II-23
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
COVERDELL & COMPANY, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Assistant Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Michael Owens
--------------------------- President and Chief Executive Officer
Michael Owens
/s/ James B. Duffy
--------------------------- Director
James B. Duffy
II-24
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
DISCOUNT DEVELOPMENT SERVICES, L.L.C
By: /s/ George Thomas
---------------------------
George Thomas
Assistant Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Vincent DiBenedetto
--------------------------- President
Vincent DiBenedetto
/s/ James B. Duffy
--------------------------- Vice President and Director
James B. Duffy
II-25
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
MEMBERWORKS CANADA LLC
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Manager
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-26
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
IMPAQ MARKETING CORPORATION
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-27
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
BEST BENEFITS, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-28
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
UNI-CARE, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Assistant Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Vincent DiBenedetto
--------------------------- President
Vincent DiBenedetto
/s/ James B. Duffy
--------------------------- Vice President, Secretary and Director
James B. Duffy
II-29
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
QUOTA-PHONE, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-30
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
COUNTRYWIDE DENTAL, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-31
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
MEMBERWORKS CANADA HOLDCO, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Treasurer and Director
James B. Duffy
/s/ George Thomas
--------------------------- Director
George Thomas
/s/ Gary A. Johnson
--------------------------- Director
Gary A. Johnson
II-32
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
LAVALIFE CORP.
By: /s/ George Thomas
---------------------------
George Thomas
Assistant Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ Bruce Croxon
--------------------------- Chief Executive Officer and Director
Bruce Croxon
/s/ James B. Duffy
--------------------------- Assistant Treasurer and Director
James B. Duffy
/s/ Gary A. Johnson
--------------------------- Director
Gary A. Johnson
/s/ George Thomas
--------------------------- Director
George Thomas
II-33
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
MYHEALTHYSAVINGS.COM, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-34
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 our
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on May 12, 2004.
BILLING SERVICES INTERNATIONAL, INC.
By: /s/ George Thomas
---------------------------
George Thomas
Vice President and Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 12, 2004.
Each individual whose signature appears below constitutes and appoints
George Thomas his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign this registration statement and any and all
amendments thereto, including post-effective amendments, and to file other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all the said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Signature Title
--------- -----
/s/ James B. Duffy
--------------------------- President, Secretary and Director
James B. Duffy
/s/ George Thomas
--------------------------- Vice President and Treasurer
George Thomas
II-35
EXHIBIT INDEX
Exhibit No. Description of Exhibits
----------- -----------------------
3.1* Restated Certificate of Incorporation of MemberWorks
Incorporated (filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration No.
333-10541, filed on October 18, 1996, and incorporated herein
by reference).
3.2* Restated By-laws of MemberWorks Incorporated, as amended
(filed as Exhibit 3.4 to the Company's Registration Statement
on Form S-1, Registration No. 333-10541, filed on October 18,
1996, and incorporated herein by reference).
3.3 Certificate of Formation of Interactive Voice Media Baltimore
L.L.C.
3.4 Limited Liability Company Agreement with Amendments of
Interactive Voice Media Baltimore L.L.C.
3.5 Certificate of Formation and Certificate of Merger of
Interactive Voice Media Colorado LLC
3.6 Limited Liability Company Agreement with Amendment of
Interactive Voice Media Colorado LLC
3.7 Certificate of Formation and Certificate of Merger of
Interactive Voice Media Georgia LLC
3.8 Limited Liability Company Agreement with Amendment of
Interactive Voice Media Georgia LLC
3.9 Certificate of Formation of Interactive Voice Media
Michigan L.L.C
3.10 Limited Liability Company Agreement with Amendments of
Interactive Voice Media Michigan L.L.C
3.11 Certificate of Formation and Certificate of Merger of
Interactive Voice Media New Jersey LLC
3.12 Limited Liability Company Agreement with Amendment of
Interactive Voice Media New Jersey LLC
3.13 Certificate of Formation and Certificate of Merger of
Interactive Voice Media New York LLC
3.14 Limited Liability Company Agreement with Amendment of
Interactive Voice Media New York LLC
3.15 Certificate of Formation and Certificate of Merger of
Interactive Voice Media Ohio LLC
3.16 Limited Liability Company Agreement with Amendment of
Interactive Voice Media Ohio LLC
3.17 Certificate of Formation and Certificate of Merger of
Interactive Voice Media Pennsylvania LLC
3.18 Limited Liability Company Agreement with Amendment of
Interactive Voice Media Pennsylvania LLC
II-36
3.19 Certificate of Formation and Certificate of Amendment of
Lavalife Washington D.C., L.L.C
3.20 Limited Liability Company Agreement with Amendments of
Lavalife Washington D.C., L.L.C.
3.21 Certificate of Incorporation and Certificate of Amendment of
Interactive Media Group (USA) Ltd.
3.22 Bylaws of Interactive Media Group (USA) Ltd.
3.23 Certificate of Incorporation of Interactive Media
Consolidated, Inc.
3.24 Bylaws of Interactive Media Consolidated, Inc.
3.25 Articles of Incorporation of Interactive (TX) Voice Media
Corp.
3.26 Bylaws of Interactive (TX) Voice Media Corp.
3.27 Articles of Incorporation of Interactive L.A. Voice Media
Corp.
3.28 Bylaws of Interactive L.A. Voice Media Corp.
3.29 Articles of Incorporation of Interactive Media (IL) Corp.
3.30 Bylaws of Interactive Media (IL) Corp.
3.31 Articles of Incorporation of Interactive Media MO Corp.
3.32 Bylaws of Interactive Media MO Corp.
3.33 Articles of Incorporation and Certificate of Amendment of
Interactive Voice Media (CA) Corp.
3.34 Bylaws of Interactive Voice Media (CA) Corp.
3.35 Certificate of Incorporation of Interactive Voice Media (MN)
Corp.
3.36 Bylaws of Interactive Voice Media (MN) Corp.
3.37 Certificate of Incorporation and Certificate of Amendment of
Barnes Holding Corporation
3.38 Bylaws of Barnes Holding Corporation
3.39 Articles of Incorporation of Interactive Voice Media
(Sacramento) Corp.
3.40 Bylaws of Interactive Voice Media (Sacramento) Corp.
3.41 Articles of Incorporation of Interactive S.J. Media Corp.
3.42 Bylaws of Interactive S.J. Media Corp.
3.43 Articles of Incorporation, Amendments and Certificate
of Merger of Coverdell & Company, Inc.
3.44 Bylaws of Coverdell & Company, Inc.
II-37
3.45 Articles of Organization of Discount Development Services,
L.L.C.
3.46 Limited Liability Company Operating Agreement of Discount
Development Services, L.L.C.
3.47 Certificate of Formation of MemberWorks Canada LLC
3.48 Limited Liability Company Operating Agreement of MemberWorks
Canada LLC
3.49 Certificate of Incorporation of Impaq Marketing Corporation
3.50 Bylaws of Impaq Marketing Corporation
3.51 Certificate of Incorporation of Best Benefits, Inc.
3.52 Bylaws of Best Benefits, Inc.
3.53 Articles of Incorporation of Uni-Care, Inc.
3.54 Bylaws of Uni-Care, Inc.
3.55 Certificate of Incorporation, Amendments and Certificate of
Merger of Quota-Phone, Inc.
3.56 Bylaws of Quota-Phone, Inc.
3.57 Certificate of Incorporation and Amendment of Countrywide
Dental, Inc.
3.58 Bylaws of Countrywide Dental, Inc.
3.59 Certificate of Incorporation of MemberWorks Canada Holdco,
Inc.
3.60 Bylaws of MemberWorks Canada Holdco, Inc.
3.61 Memorandum of Association and Articles of Association of
Lavalife Corp.
3.62 Certificate of Incorporation of MyHealthySavings.com, Inc.
3.63 Bylaws of MyHealthySavings.com, Inc.
3.64 Certificate of Incorporation of Billing Services
International, Inc.
3.65 Bylaws of Billing Services International, Inc.
4.1 Indenture dated as of April 13, 2004 between MemberWorks
Incorporated and each of the Guarantors party thereto and
LaSalle Bank National Association, as Trustee relating to the
9 1/4% Senior Notes due 2014, including the form of notes.
4.2 Registration Rights Agreement dated as of April 13, 2004
between MemberWorks Incorporated and each of the Guarantors
party thereto and Lehman Brothers Inc., UBS Securities LLC and
ABN AMRO Incorporated.
5.1** Opinion of Shearman & Sterling LLP.
12.1 Computation of Ratio of Earnings to Fixed Charges.
II-38
21.1 List of subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, as independent
accountants.
23.2 Consent of Ernst & Young LLP, as independent accountants.
24.1 Power of Attorney (contained on signature page).
25.1 Form T-1 Statement of Eligibility of Trustee under the Trust
Indenture Act of 1939 of LaSalle Bank National Association.
99.1 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companied and Other Nominees.
99.2 Form of Letter of Transmittal.
99.3 Form of Letter to Clients.
99.4 Form of Notice of Guaranteed Delivery.
99.5 Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9.
------------------
* Previously filed.
** To be filed by amendment.
II-39