As filed with the Securities and Exchange Commission on November 12, 2004
Registration No. 333-110885
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
POST-EFFECTIVE AMENDMENT NO. 3
TO FORM S-3
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 (I.R.S. Employer
incorporation or organization) 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: From time
to time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Proposed
Maximum Maximum
Title of each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered (1) Price per Unit (2) Offering Price (2) Registration Fee
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5.50% Convertible Senior Subordinated Notes due 2010..... $90,000,000 100% $90,000,000 (3)
Common stock, par value $0.01 per share..................2,229,651 shares(4) - - (4)
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(Footnotes on next page)
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.
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(1) $90,000,000 aggregate principal amount of notes and 2,229,651 shares of
common stock issuable upon conversion of the notes are being registered
hereby.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Registration fee of $7,281 was previously paid by registrant.
(4) Reflects the number of shares of common stock issuable upon conversion of
the notes being registered hereunder at the rate of approximately 24.7739
shares of common stock per $1,000 principal amount at maturity of the
notes. Under Rule 416 under the Securities Act, the number of shares of
common stock registered includes an indeterminate number of shares of
common stock that may be issued in connection with a stock split, stock
dividend, recapitalization or similar event. No additional registration fee
is required pursuant to Rule 457(i) under the Securities Act because no
additional consideration will be received in connection with the exercise
of the conversion privilege.
PROSPECTUS
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Dated November 12, 2004
$90,000,000
MEMBERWORKS INCORPORATED
5.50% Convertible Senior Subordinated Notes due 2010
and
Common Stock issuable upon conversion of the Notes
-------------------------
This prospectus relates to $90,000,000 aggregate principal amount at
maturity of 5.50% Convertible Senior Subordinated Notes due 2010 of MemberWorks
Incorporated. The notes may be sold from time to time by or on behalf of the
selling securityholders named in this prospectus or in supplements to this
prospectus. This prospectus also relates to 2,229,651 shares of our common
stock, par value $0.01 per share, issuable upon conversion of the notes held by
certain selling securityholders, plus such additional indeterminate number of
shares as may become issuable upon conversion of the notes by reason of
adjustment to the conversion price in certain circumstances.
We will pay interest on the notes on April 1 and October 1 of each year,
beginning April 1, 2004. The selling securityholders may sell all or a portion
of the notes in market transactions, negotiated transactions or otherwise and at
prices which will be determined by the prevailing market price for the notes or
in the negotiated transactions. The selling securityholders also may sell all or
a portion of the shares of common stock from time to time on the Nasdaq National
Market, in the negotiated transactions or otherwise, and at prices which will be
determined by the prevailing market price for the shares or in negotiated
transactions. The selling securityholders will receive all of the proceeds from
the sale of the notes and the common stock. We will not receive any proceeds
from the sale of notes or common stock by the selling securityholders.
Holders of the notes may convert the notes into shares of our common stock
at any time prior to the maturity date of the notes (unless previously redeemed
or repurchased) at a conversion price of approximately $40.37 per share
(equivalent to an initial conversion rate of approximately 24.7739 shares per
$1,000 principal amount of notes), subject to adjustment as set forth in this
prospectus.
On or after October 6, 2008, we may redeem some or all of the notes at 100%
of their principal amount plus accrued and unpaid interest to, but excluding,
the redemption date.
Upon the occurrence of a change of control, holders of the notes may
require us to repurchase all or part of their notes for cash.
Shares of our common stock are quoted on the Nasdaq National Market under
the symbol "VTRU." The closing sales price of the shares on November 9, 2004 was
$34.97 per share.
The notes were originally issued in a private placement to qualified
institutional buyers in reliance on Rule 144A under the Securities Act of 1933,
as amended.
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Investing in the notes involves risks, some of which are described in the
"Risk Factors" section beginning on page 5 of this prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is November 12, 2004.
TABLE OF CONTENTS
Page
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FORWARD-LOOKING STATEMENTS....................................................ii
SUMMARY........................................................................1
RISK FACTORS...................................................................5
RATIO OF EARNINGS TO FIXED CHARGES............................................16
USE OF PROCEEDS...............................................................17
PRICE RANGE OF THE COMMON STOCK AND DIVIDEND POLICY...........................18
DESCRIPTION OF NOTES..........................................................19
DESCRIPTION OF OUR CAPITAL STOCK..............................................34
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS...............................36
SELLING SECURITYHOLDERS.......................................................42
PLAN OF DISTRIBUTION..........................................................45
LEGAL MATTERS.................................................................46
EXPERTS.......................................................................46
WHERE YOU CAN FIND MORE INFORMATION...........................................46
INCORPORATION BY REFERENCE....................................................47
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This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, using a "shelf" registration
process. Under this shelf registration process, the selling securityholders may,
from time to time, offer notes or shares of our common stock owned by them. Each
time the selling securityholders offer notes or common stock under this
prospectus, they will be provided a copy of this prospectus and, if applicable,
a copy of a prospectus supplement. You should read both this prospectus and, if
applicable, any prospectus supplement together with the information incorporated
by reference in this prospectus. See "Where You Can Find More Information" and
"Incorporation by Reference" for more information.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
or any documents incorporated by reference in this prospectus is accurate only
as of the date on the front cover of the applicable document or as specifically
indicated in the document. Our business, financial condition, results of
operations and prospects may have changed since that date.
References in this prospectus to "MemberWorks," "we," "us" and "our" refer
to MemberWorks Incorporated and its subsidiaries, unless the context indicates
otherwise.
i
FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference forward-looking
statements that are based on current expectations, estimates, forecasts and
projections about the industry in which we operate and our beliefs and
assumptions. These forward-looking statements include statements that do not
relate solely to historical or current facts and can be identified by the use of
words such as "believe," "expect," "estimate," "project," "continue" or
"anticipate." These forward-looking statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance and are
based on a number of assumptions and estimates that are inherently subject to
significant risks and uncertainties, many of which are beyond our control,
cannot be foreseen and reflect future business decisions that are subject to
change. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. Among the many
factors that could cause actual results to differ materially from the
forward-looking statements are:
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 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
revenues through third parties, including credit card processors and
bank card associations;
o Our ability to introduce new programs on a timely basis;
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 Our ability to integrate acquired businesses into our management and
operations and operate successfully;
o Further changes in the already competitive environment for our
products or competitors' responses to our strategies;
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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 the Company's industry including the Federal Trade
Commission's 2003 amendment to its Telemarketing Sales Rule which
creates 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;
o Adverse results of litigation or regulatory matters; and
o New accounting pronouncements.
Many of these factors are beyond our control and our business, financial
condition, results of operations and cash flows may be adversely affected by
these factors.
These 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.
iii
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere or incorporated by reference in this prospectus.
Because this is a summary, it may not contain all the information that may be
important to you. You should read the entire prospectus, as well as the
information incorporated by reference, before making an investment decision.
MemberWorks Incorporated
We are a leading provider of innovative membership programs. We combine
marketing innovation, entrepreneurial energy and consumer insight to create
industry leading membership programs that provide substantial benefits to our
members, clients and vendors. Our members benefit by receiving significant
discounts and insightful information on everyday items in the areas of
healthcare, personal finance, insurance, travel, entertainment, fashion,
personal security and more. In addition, our members save time by purchasing
goods and services and obtaining useful information over the telephone or the
internet. Our clients (organizations who offer the membership programs to their
customers) benefit by receiving royalty payments in exchange for providing us
with new members. Our clients also benefit because the membership programs are
designed to strengthen their relationships with customers. For the participating
vendors (whose products or services are offered through the membership
programs), the membership programs provide an opportunity for the vendors to
reach a large number of demographically attractive consumers while incurring
minimal incremental marketing costs.
Our programs are primarily marketed under the name of the membership
program 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 many cases,
these businesses lack the core competency to successfully design, market and
manage membership programs. As a result, these businesses seek to outsource to
providers that are able to apply advanced database systems to capture, process
and store consumer and market information, are able to use their experience to
provide effective membership programs and are able to realize economies of
scale. In addition, businesses seeking to implement a membership program demand
that the provider of those programs has the expertise to continue to introduce
innovative new programs and has resources, such as an extensive vendor network
and experienced management team, to launch membership programs quickly and
successfully.
We solicit members for our programs primarily by direct marketing methods
and we have been able to effectively diversify our distribution channels since
our initial public offering in 1996, at which time our primary method of
solicitation was outbound telemarketing. For the three months ended September
30, 2004, outbound telemarketing was the source for approximately 3% of our new
member enrollments. We believe we are the leading designer and provider of
innovative membership programs in the United States due to our senior
management's extensive knowledge of the industry, our extensive vendor network
and our relationships with leading consumer-driven organizations with large
numbers of individual account holders and customers. We also possess the
in-house operational capabilities and expertise to perform most aspects of our
business with minimal reliance on third-party outsourcing. For instance, we
generally create most of our own marketing, creative and fulfillment materials.
We also maintain in-house call center facilities to process phone inquiries from
our members. We believe this in-house approach enables us to provide better
customer service and market our products more efficiently.
Most of our membership programs are for one-year renewable terms and our
members are generally entitled to unlimited use of the services during the
membership period. We have traditionally marketed membership programs which have
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. During the three months ended September 30, 2004,
approximately 83% of our new member enrollments were in monthly payment programs
and we intend to further increase the mix of monthly payment programs in fiscal
2004. In general, membership fees vary depending upon the particular service
offered by the membership program. During the first three months of fiscal 2005,
annual membership fees averaged approximately $105 per year and monthly
membership fees averaged $11.83 per month. Our membership programs had
approximately 5.5 million members as of September 30, 2004.
MemberWorks Incorporated, a Delaware corporation, was organized in 1996 and
did business as CardMember Publishing Corporation from 1989 to 1996.
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1
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Our principal office is located at 680 Washington Boulevard, Stamford, CT
06901 and our phone number is (203) 324-7635. Our fiscal year ends June 30 of
each year.
Recent Developments
Acquisitions. On April 1, 2004, we completed our previously announced
acquisition of the assets and capital stock of Lavalife Inc., a leading provider
of online and interactive voice response ("IVR") based personals services.
Lavalife will operate as a wholly owned subsidiary of MemberWorks. The purchase
price for the Lavalife acquisition was approximately Cdn$152.5 million and was
funded with cash on hand and borrowings under our $45.0 million amended and
restated senior secured credit facility, entered into on March 25, 2004. In
connection with the acquisition, Lavalife's senior management purchased
approximately 259,000 shares of our restricted common stock at the closing of
the Lavalife acquisition for approximately $9.1 million.
On October 20, 2004, we announced that we had entered into an agreement to
acquire Bargain Network Inc., a privately held provider of premier pricing
services for homes, vehicles and consumer durables. We agreed to pay $27 million
in cash at closing in addition to assuming certain liabilities. In addition, we
will pay additional amounts in 2005 if certain milestones are achieved.
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 September 30, 2004,
there were no borrowings under the senior secured credit facility and the
availability was reduced by an outstanding letter of credit of $5.5 million and
one year's worth of interest on our $150.0 million Senior Notes. As of September
30, 2004, the availability under the senior secured credit facility is
approximately $25.7 million.
Senior Notes Offering. On April 8, 2004, we priced our offering of $150.0
million in aggregate principal amount of our 9.25% Senior Notes due 2014 sold at
98.418% of the principal amount. We closed the sale of the Senior Notes on April
13, 2004. A portion of the net proceeds was used to repay amounts borrowed under
our senior secured credit facility. We intend to use the remainder of the
proceeds 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 Senior Notes and the
Senior Secured Credit Facility.
Dutch Auction Tender Offer. On November 8, 2004, we announced our intention
to initiate a Dutch auction tender offer for up to 500,000 shares of our common
stock, which represents approximately 5 percent of the outstanding shares. Under
this procedure, our stockholders will be given the opportunity to sell part or
all of their shares at a price of not less than $30.00 per share and not more
than $35.00 per share. This price range represents a 5.9% discount to a 9.8%
premium when compared to the November 5, 2004 closing price of $31.874 per
share. Based upon the minimum and maximum offering prices specified in the
offer, the aggregate purchase price, if 500,000 shares are purchased, would
range from $15,000,000 to $17,500,000.
For further information regarding our acquisition of Lavalife, our Senior
Notes offering and our amended and restated senior secured credit facility,
please see our current report on Forms 8-K filed March 4, 2004, March 26, 2004,
April 5, 2004, April 8, 2004 and September 10, 2004, all of which are
incorporated by reference herein. For further information regarding the pricing
of our Senior Notes, please see our current report on Form 8-K filed on April 8,
2004, incorporated herein.
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2
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THE NOTES
Issuer................. MemberWorks Incorporated
Notes.................. We issued $90.0 million aggregate principal amount of
5.50% Convertible Senior Subordinated Notes due 2010 in
a private placement on September 30, 2003. Each note
was issued at a price of $1,000 per note and has a
principal amount at maturity of $1,000.
Maturity Date.......... October 1, 2010, unless earlier converted, redeemed by
us at our option, or repurchased by us at your option
upon a change of control of MemberWorks.
Interest Rate.......... 5.50% per year. Interest will be payable semiannually
in arrears on April 1 and October 1 of each year,
commencing April 1, 2004. The initial interest payment
will include accrued interest from September 30, 2003.
Ranking................ The notes will be unsecured and
o subordinated in right of payment to all of our
existing and future senior indebtedness;
o equal in right of payment to our existing and
future senior subordinated indebtedness;
o senior in right of payment to our future
subordinated indebtedness; and
o effectively subordinated in right of payment to
all existing and future indebtedness and other
liabilities of any of our existing or future
subsidiaries.
As of September 30, 2004:
o our outstanding senior indebtedness was
approximately $155.5 million. In addition, we
had $25.7 million available under our bank
credit facility (all of which, if drawn, would
rank senior to the notes); and
o we had no outstanding senior subordinated
indebtedness.
o our subsidiaries had approximately $45.7
million of liabilities outstanding, excluding
intercompany liabilities.
Conversion Rights...... Holders may convert their notes into common stock at
any time prior to the close of business on the business
day prior to the maturity date of the notes, unless
previously redeemed or repurchased, at a conversion
price of approximately $40.37 per share (equal to a
conversion rate of approximately 24.7739 shares per
$1,000 principal amount of notes), subject to
adjustment as described under "Description of Notes --
Conversion Rights."
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3
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Redemption of Notes at
Our Option............ We may redeem all or a portion of the notes for cash at
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. We will therefore
be required to make at least 10 interest payments on
the notes before being able to redeem any notes. See
"Description of Notes -- Optional Redemption by
MemberWorks."
Use of Proceeds........ We will not receive any proceeds from the sale by any
selling securityholder of the notes or the shares of
common stock issuable upon conversion of the notes.
Sinking Fund........... None.
DTC Eligibility........ The notes will be issued in book-entry form and will be
represented by one or more permanent global
certificates deposited with a custodian for and
registered in the name of a nominee of The Depository
Trust Company, or DTC, in New York, New York.
Beneficial interests in any of the notes will be shown
on, and transfers will be effected only through,
records maintained by DTC and its direct and indirect
participants, and any such interest may not be
exchanged for definitive securities, except in limited
circumstances. See "Description of Notes -- Form,
Denomination and Registration."
Trading Symbol for Our
Common Stock.......... Our common stock is traded on the Nasdaq National
Market under the symbol "VTRU."
Risk Factors........... See "Risk Factors" beginning on page 5 of this
prospectus and the other information in this prospectus
for a discussion of factors you should consider
carefully before deciding to invest in the notes.
For a more complete description of the Notes, see "Description of Notes."
For a more complete description of the common stock, see "Description of Capital
Stock."
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4
RISK FACTORS
You should carefully consider the following risks, as well as the other
information contained in this prospectus, before investing in the notes. If any
of the following risks actually occur, our business could be harmed. You should
refer to the other information set forth in this prospectus and our consolidated
financial statements and the related notes incorporated by reference herein. For
more information about risks associated with Lavalife's business, see our
current report on Form 8-K filed on March 26, 2004 and incorporated by reference
herein.
Risks Related to the Offering
The price of the notes may fluctuate significantly as a result of the volatility
of the price for our common stock.
Because the notes are convertible into shares of our common stock,
volatility or depressed prices for our common stock could have a similar effect
on the trading price of the notes. In addition, if you convert any notes into
common stock, the value of the common stock you receive may fluctuate
significantly.
The volatility of the market price of our common stock could adversely affect
our stockholders.
The market price of our common stock has been, and may continue to be,
relatively volatile. In fiscal 2004, the highest closing sales price of our
stock was $38.22 on August 18, 2003 and the lowest closing sales price of our
stock was $19.99 on July 11, 2003. The high and low closing sales prices of our
common stock were $24.00 and $12.48 in fiscal 2003 and $25.00 and $7.98 in
fiscal 2002. Factors which may affect the market price for our common stock
include:
o actual or anticipated variations in our quarterly operating results or
financial condition or in those of our competitors or clients;
o announcements by us or our competitors of new programs or acquisitions
of new businesses;
o market conditions or trends in our industry;
o introduction of program enhancements by other competitors that reduce
the demand for our programs;
o changes in financial estimates by securities analysts;
o general economic conditions in the United States and Canada;
o unexpected departures of key personnel;
o changes in the market valuations of our competitors;
o the sale of a large amount of our common stock by our largest
shareholders;
o the other risk factors listed in this section; and
o new accounting pronouncements.
Sales of substantial amounts of shares of common stock in the public market
could adversely affect the market price of our common stock. As of October 22,
2004, we had 10,176,000 shares of common stock outstanding.
5
The notes are subordinated. You will receive payment on your notes only if we
have funds remaining after we have paid any existing and future senior
indebtedness.
The notes will be unsecured and subordinated in right of payment to all of
our existing and future senior indebtedness. Currently we have $150.0 million
aggregate principal amount of Senior Notes outstanding and a $45.0 million bank
credit facility, which had no borrowings outstanding as of September 30, 2004.
As of September 30, 2004, the availability under the bank credit facility was
reduced by an outstanding letter of credit of $5.5 million and one year's worth
of interest on our $150.0 million Senior Notes. In the future, we may incur
additional senior indebtedness. In the event of our bankruptcy, liquidation or
reorganization or upon acceleration of the notes due to an event of default
under the indenture and in certain other events, our assets will be available to
pay obligations on the notes only after all senior indebtedness has been paid.
As a result, there may not be sufficient assets remaining to pay amounts due on
any or all of the outstanding notes.
The notes will effectively be subordinated to the liabilities of our
subsidiaries.
Our right to receive any assets of any of our 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 subsidiaries, our rights as a creditor
would be subordinate to any security interest in the assets of our subsidiaries
and any indebtedness of our subsidiaries senior to that held by us. Our
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 September 30, 2004, our
subsidiaries had approximately $45.7 million of indebtedness and other
liabilities outstanding.
If an active trading market for the notes does not develop, then the market
price of the notes may decline or you may not be able to sell your notes.
The notes comprise a new issue of securities for which there is currently
no public 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 offering price, depending on prevailing interest rates,
the market for similar securities, the price of our common stock, our
performance and other factors. The initial purchasers advised us that they
intend to make a market in the 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.
Increased leverage may harm our financial condition and results of operations.
At July 31, 2004, we had $240 million of outstanding indebtedness. We may
incur additional indebtedness in the future and the notes do not restrict our
future issuance of indebtedness. Our level of indebtedness will have several
important effects on our future operations, including, without limitation:
o 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 increases in our outstanding indebtedness and leverage will increase
our vulnerability to adverse changes in general economic and industry
conditions, as well as to competitive pressure; and
o depending on the levels of our outstanding indebtedness, our ability
to obtain additional financing for working capital, capital
expenditures, general corporate and other purposes may be limited.
Our ability to make payments of principal 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. If we are not able to generate sufficient cash flow from operations in
the future to service our indebtedness, we may be required, among other things:
6
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.
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.
The notes will not contain restrictive covenants, and there is limited
protection in the event of a change in control.
The indenture under which the notes are issued does not contain restrictive
covenants that would protect you from several kinds of transactions that may
adversely affect you. In particular, the indenture does not contain covenants
that limit our ability to pay dividends or make distributions on or redeem our
capital stock or limit our ability to incur additional indebtedness and,
therefore, may not protect you in the event of a highly leveraged transaction or
other similar transaction. In addition, the requirement that we offer to
repurchase the notes upon a change of control is limited to the transactions
specified in the definition of a "change of control" under "Description of Notes
-- Repurchase at Option of Holders Upon a Change of Control." Accordingly, we
could enter into certain transactions, such as acquisitions, refinancings or a
recapitalization, that could affect our capital structure and the value of our
common stock but would not constitute a change of control.
We may not have sufficient funds to repurchase notes upon a change of control.
Should a "change of control" occur, no assurance can be given that we will
have sufficient funds available to purchase notes which are tendered for
repurchase. A failure by us to repurchase tendered notes will constitute an
event of default under the indenture.
We have never paid any dividends on our common stock.
To date we have not paid, and the terms of our credit agreement prohibit us
from paying, any cash dividend. We anticipate that all of our earnings in the
foreseeable future will be retained for use in our business and to repurchase
our common stock under our stock buyback program.
If we pay cash dividends on our common stock, you will be deemed to have
received a taxable dividend without the receipt of any cash.
If we pay a cash dividend on our common stock, and an adjustment to the
conversion price results, you will be deemed to have received a taxable dividend
subject to U.S. federal income tax, to the extent of our current or accumulated
earnings and profits, without the receipt of any cash. See "United States
Federal Income Tax Consequences -- Constructive Dividends."
Future sales of our common stock in the public market could lower our stock
price.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in stock offerings. As of October
22, 2004, we had 10,176,000 outstanding shares of our common stock. As of
October 22, 2004, our outstanding shares are subject to dilution by 3,375,000
shares of common stock issuable upon the exercise of outstanding stock options,
of which 2,334,000 are currently exercisable.
7
We may also issue additional shares of common stock as consideration for
future acquisitions or other investments. Sales of a substantial amount of
common stock in the public market, or the perception that these sales may occur,
could adversely affect the market price of our common stock prevailing from time
to time in the public market and could impair our ability to raise funds in
additional stock offerings.
Risks Related to Our Business
Our profitability depends on members continuing to retain their memberships in
our programs. Increased cancellations could impair our profitability.
We generally incur 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, we experience 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
our programs depends on recurring and sustained membership renewals and
increased cancellations could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Our business may suffer if we fail to successfully integrate Lavalife or other
businesses we acquire in the future or to properly assess the risks in
particular transactions.
We have acquired the assets and outstanding capital stock of Lavalife, and
we may acquire other businesses and assets in the future. The successful
integration of the acquired businesses and assets, such as Lavalife, into our
existing operations can be critical to our future performance. Acquired
businesses may not be successfully integrated with our 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 our business, financial
condition, results of operations and cash flows. Although we attempt to evaluate
the risks inherent in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly ascertain all such
risks or that acquired businesses and assets will perform as we expect or
enhance the value of our Company as a whole. In addition, acquired companies or
businesses may have larger than expected liabilities that are not covered by the
indemnification, if any, we obtain from the seller.
The loss of our key clients could have a material adverse effect on our results
of operations.
Membership programs sponsored by our two largest clients, West Corporation
and Citibank, N.A. (and its affiliates), accounted for 18% and 12% of our
revenue, respectively, for the fiscal year ended June 30, 2004 and 18% and 12%
of our revenue, respectively, for the nine months ended March 31, 2004. A loss
of our key clients or a decline in the businesses of the operations of the
clients from which we acquire new members could have a material adverse effect
on our results of operations. There can be no assurance that one or more of our
key or other clients will not terminate their relationship with us or suffer a
decline in their business from which we acquire new members.
We market many of our 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 us.
Our future success is dependent in large part on continued demand for our
membership programs within our clients industries. In particular, membership
programs marketed through our credit card issuer clients accounted for a
significant amount of our 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 our business,
financial condition, results of operations and cash flows.
8
The unanticipated termination of agreements with vendors could have a material
adverse effect on our business.
We depend on vendors to provide most of the products and services included
in the programs that we market. The vendors generally operate pursuant to
non-exclusive agreements with us 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 us, 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 our control. Any service interruptions, delays
or quality problems could result in customer dissatisfaction and membership
cancellations and/or termination of clients' relationships with us, which could
have a material adverse effect on our business, financial condition, results of
operations and cash flows.
We depend on credit card processors to obtain payments for us.
We depend on credit card processors to obtain payments for us. 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 with us, 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 our business, financial
condition, results of operations and cash flows.
Our efforts to increase the share of monthly payment programs in our program mix
may adversely affect our cash flow.
We have traditionally marketed membership programs which have 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. During the first three months of fiscal 2005, approximately 83% of
our new member enrollments were in monthly payment programs, and we expect the
proportion of our monthly payment programs to increase throughout fiscal 2005.
Our increased emphasis on monthly payment programs adversely affects our cash
flow because the immediate cost of acquiring a new member is higher than the
first month's membership fee.
We may be unable to compete effectively with other companies in our industry
that have financial or other advantages.
We believe that the principal competitive factors in our 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. Our competitors offer membership programs which
provide products or services similar to, or which compete directly with, those
provided by us. These competitors include, among others, Aegon, N.V., Trilegiant
(a subsidiary of Cendant Corporation), Fortis and General Electric Financial
Assurance. In addition, we could face competition if our 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 we do. To date, we have effectively
competed with such competitors. There can be no assurance that:
o our competitors will not increase their emphasis on programs similar
to those we offer;
o our competitors will not provide programs comparable or superior to
those we provide at lower membership fees;
o our competitors will not adapt more quickly than us to evolving
industry trends or changing market requirements;
9
o new competitors will not enter the market; or
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 our 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 us to promote a new program if the products and
services provided by our 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.
We are dependent on certain key members of our management and marketing
staff, particularly our Chief Executive Officer, Gary Johnson. In addition, we
believe that our future success will depend in part upon our ability to attract
and retain highly skilled managerial and marketing personnel. We face
significant competition for such personnel, and we may be unsuccessful in hiring
or retaining the personnel we require. The failure to hire and retain such
personnel could have a material adverse effect on our business, financial
condition and results of operations.
Our industry is increasingly subject to federal and state government regulation.
We market our membership programs through various distribution channels,
including MemberLinkTM (our inbound marketing channel), online marketing,
outbound telemarketing and direct mail. These channels are regulated at both
state and federal levels and we believe that these channels will be subject to
increasing regulation, particularly in the area of consumer privacy. Such
regulation may limit our 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 which became 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 our 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 and any changes to such
regulations could materially increase our compliance costs. The risk of our
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 effect 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 services industry is susceptible to peremptory
charges by the media of regulatory noncompliance and unfair dealing.
We currently maintain rigorous security and quality controls that are
intended 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 necessary to administer our business
activities, such as a customer's name, address and encrypted billing
information. For marketing and modeling purposes, we only use publicly available
information, such as demographic, neighborhood and lifestyle data. We do not
resell any confidential customer information that is obtained or derived from
our marketing efforts, nor do we purchase consumer information from financial
institutions. However, there can be no assurance that our efforts will continue
to meet all applicable state and federal laws and regulations in the future.
10
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:
the competitors will not increase their emphasis on programs similar
to those offered by Lavalife;
the competitors will not provide services comparable or superior to
those provided by Lavalife at a lower cost to the user;
the competitors will not adapt more quickly than Lavalife to evolving
industry trends or changing market requirements; or
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.
11
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:
|_| enhance existing products;
|_| develop and license new products and technologies; and
|_| 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.
12
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.
13
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 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;
14
o increased commission rates and other compensation required by 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;
o the level of enthusiasm for health and fitness, travel, entertainment
and leisure activities, and other lifestyle elements underlying the
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.
15
RATIO OF EARNINGS TO FIXED CHARGES
Set forth below is information concerning our ratio of earnings to fixed
charges on a consolidated basis for the periods indicated. This ratio shows the
extent to which our business generates enough earnings after the payment of all
expenses other than interest to make required interest payments on our debt.
For the purpose of computing the ratios of earnings to fixed charges,
"earnings" consist of income before tax and fixed charges. "Fixed charges"
consist of interest expense, amortization of expenses related to indebtedness,
and the portion of rental expense which is considered to be representative of
the interest factors in our leases.
Three Months Ended
September 30, Fiscal Year Ended June 30,
------------------ -------------------------------------
2004 2004 2003 2002 2001 2000
------------------ ------ ------- -------- ----- ------
Ratio of earnings to fixed charges .......... 3.04x 5.67x 15.52x 17.69x (1) 6.75x
--------------------------
(1) For the year ended June 30, 2001, earnings were insufficient to cover fixed
charges by $32.2 million.
16
USE OF PROCEEDS
The selling securityholders will receive all of the net proceeds from the
sale of the notes or the shares of common stock sold under this prospectus. We
will not receive any of the proceeds from sales by the selling securityholders
of the notes or the underlying common stock.
17
PRICE RANGE OF THE COMMON STOCK AND DIVIDEND POLICY
Our common stock is quoted and traded on the Nasdaq National Market under
the symbol "VTRU." The table below shows the range of reported high and low
closing sale prices per share for our common stock on the Nasdaq National Market
for the periods indicated.
High Low
-------- -------
Fiscal Year Ended June 30, 2002
First Quarter ended September 30............................. $25.00 $17.90
Second Quarter ended December 31............................. 21.00 7.98
Third Quarter ended March 31................................. 18.93 14.26
Fourth Quarter ended June 30................................. 18.53 16.27
Fiscal Year Ended June 30, 2003
First Quarter ended September 30............................. $18.80 $12.48
Second Quarter ended December 31............................. 19.53 16.65
Third Quarter ended March 31................................. 20.71 14.00
Fourth Quarter ended June 30................................. 24.00 19.30
Fiscal Year Ended June 30, 2004
First Quarter ended September 30............................. $38.22 $19.75
Second Quarter ended December 31............................. 34.00 24.16
Third Quarter ended March 31................................. 36.77 26.96
Fourth Quarter ended June 30................................. 35.02 26.89
Fiscal Year Ended June 30, 2005
First Quarter ended September 30............................. $29.28 $24.42
Second Quarter ended December 31 (through November 9, 2004).. $24.70 $34.97
As of November 9, 2004, the closing sales price for our common stock as
reported by the Nasdaq National Market was $34.97 per share.
We had 1,163 common stockholders of record as of October 22, 2004.
We have not declared or paid to date, and currently are not permitted by
the terms of our credit agreement to pay, any cash dividends. We anticipate that
all of our earnings in the foreseeable future will be retained for use in our
business and to repurchase our common stock under our stock buyback program. Our
future dividend policy will depend on our earnings, capital requirements,
financial condition, requirements of the financing agreements to which we are a
party and other factors considered relevant by our Board of Directors.
18
DESCRIPTION OF NOTES
We issued $90,000,000 aggregate principal amount of notes in a private
placement on September 30, 2003, under an indenture between us and Deutsche Bank
Trust Company Americas, as trustee. The terms of the notes include those
provided in the indenture, the notes and those provided in the registration
rights agreement, which we entered into with the initial purchasers. The
following description is only a summary of the material provisions of the notes,
the indenture and the registration rights agreement. We urge you to read these
documents in their entirety because they, and not this description, will define
your rights as holders of the notes. You may request copies of these documents
at our address set forth above under the caption "Summary."
When we refer to "MemberWorks," "we," "our" or "us" in this section, we
refer only to MemberWorks Incorporated, a Delaware corporation, and not its
subsidiaries.
Brief Description of the Notes
The notes are:
o limited to $90.0 million in aggregate principal amount;
o our unsecured senior subordinated obligations, ranking junior in right
of payment to all of our existing and future senior indebtedness,
equally in right of payment to our future senior subordinated
indebtedness and senior in right of payment to our future subordinated
indebtedness, but as indebtedness of MemberWorks, the notes will be
effectively subordinated to all existing and future secured
indebtedness to the extent of the value of the related security and to
all existing and future indebtedness and other liabilities of our
subsidiaries;
o convertible into our common stock at an initial conversion price of
approximately $40.37 per share, subject to adjustment as described
below under "-- Conversion Rights";
o redeemable at our option in whole or in part beginning on October 6,
2008 upon the terms set forth under "-- Optional Redemption by
MemberWorks";
o subject to repurchase by us at your option if a change of control
occurs as set forth below under "-- Repurchase at Option of Holders
Upon a Change of Control"; and
o due on October 1, 2010, unless earlier converted, redeemed by us at
our option or repurchased by us at your option upon a change of
control of MemberWorks.
The indenture does not contain any financial covenants and does not
restrict us or our subsidiaries from paying dividends, incurring additional debt
or issuing or repurchasing our other securities. In addition, the indenture will
not protect you in the event of a highly leveraged transaction or a change in
control of MemberWorks except to the extent described below under "-- Repurchase
at Option of Holders upon a Change of Control."
As of September 30, 2004, we had outstanding approximately $155.5 million
of indebtedness that would rank senior to the notes. In addition, we had $25.7
million available under our bank credit facility (all of which would rank senior
to the notes if drawn). As of September 30, 2004, our subsidiaries had
outstanding approximately $45.7 million of indebtedness and other liabilities,
all of which would be effectively senior to the notes.
No sinking fund is provided for the notes. The notes are not subject to
defeasance. The notes were issued only in registered form in denominations of
$1,000 and any integral multiple of $1,000 above that amount. No service charge
will be made for any registration of transfer or exchange of notes, but we may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
You may present definitive notes for conversion, registration of transfer
and exchange, without service charge, at our office or agency in New York City,
which shall initially be the office or agency of the trustee in New York City.
For information regarding conversion, registration of transfer and exchange of
global notes, see "-- Form, Denomination and Registration."
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Interest
The notes will bear interest from September 30, 2003 at the rate of 5.50%
per year. We will pay interest semiannually in arrears on April 1 and October 1
of each year to the holders of record at the close of business on the preceding
March 15 and September 15, respectively, beginning April 1, 2004. There are two
exceptions to the preceding sentence:
o In general, we will not pay accrued and unpaid interest on any note
that is converted into our common stock. See "-- Conversion Rights --
Conversion Procedures"; and
o We will pay interest to a person other than the holder of record on
the relevant record date if we redeem, or holders elect to require us
to repurchase, the notes on a date that is after the record date and
on or prior to the corresponding interest payment date. In this
instance, we will pay accrued and unpaid interest on the notes being
redeemed to, but excluding, the redemption date or repurchase date, as
the case may be, to the same person to whom we will pay the principal
of those notes.
We will pay the principal of, interest on, and any additional amounts due
in respect of the global notes to DTC in immediately available funds.
In the event definitive notes are issued, we will pay interest and any
additional amount due on:
o definitive notes having an aggregate principal amount of $5,000,000 or
less by check mailed to the holders of those notes;
o definitive notes having an aggregate principal amount of more than
$5,000,000 by wire transfer in immediately available funds if
requested by the holder of those notes; and
o at maturity, we will pay the principal of and interest on the
definitive notes at our office or agency in New York City, which
initially will be the office or agency of the trustee in New York
City.
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Conversion Rights
General
You may convert any outstanding notes (or portions of outstanding notes)
into our common stock, initially at the conversion price of approximately $40.37
per share, equal to a conversion rate of approximately 24.7739 shares per $1,000
principal amount of notes. The conversion price will be subject to adjustment as
described below under "Conversion Price Adjustments". We will not issue
fractional shares of common stock upon conversion of notes. Instead, we will pay
cash to you in an amount equal to the market value of that fractional share
based upon the closing sale price of our common stock on the trading day
immediately preceding the conversion date. You may convert notes only in
denominations of $1,000 and whole multiples of $1,000.
You may exercise conversion rights at any time prior to the close of
business on the business day prior to the final maturity date of the notes.
However, if you are a holder of notes that have been called for redemption, you
must exercise your conversion rights prior to the close of business on the
second business day preceding the redemption date, unless we default in payment
of the redemption price on the redemption date. In addition, if you have
exercised your right to require us to repurchase your notes because a change of
control has occurred, you may convert your notes into our common stock only if
you withdraw your notice and convert your notes prior to the close of business
on the business day immediately preceding the change of control repurchase date.
20
Conversion Procedures
Except as provided below, if you convert your notes into common stock on
any day other than an interest payment date, you will not receive any interest
that has accrued on these notes since the prior interest payment date. By
delivering to the holder the number of shares issuable upon conversion,
determined by dividing the principal amount of the notes being converted by the
conversion price, together with a cash payment, if any, in lieu of fractional
shares, we will satisfy our obligation with respect to the converted notes. That
is, accrued but unpaid interest will be deemed to be paid in full rather than
canceled, extinguished or forfeited.
If you convert after a record date for an interest payment date but prior
to the corresponding interest payment date, you will receive on the interest
payment date interest accrued and paid on such notes, notwithstanding the
conversion of such notes prior to such interest payment date, because you will
have been the holder of record on the corresponding record date. However, at the
time you surrender such notes for conversion, you must pay us an amount equal to
the interest that has accrued and will be paid on the notes being converted on
the interest payment date. The preceding sentence does not apply, however, to a
holder that converts, after a record date for an interest payment date but prior
to the corresponding interest payment date, notes that we call for redemption
prior to such conversion on a redemption date that is on or prior to the third
business day after such interest payment date. Accordingly, if we call your
notes for redemption on a date that is after a record date for an interest
payment date but on or prior to the third business day after the corresponding
interest payment date, and prior to the redemption date you choose to convert
your notes, you will receive on the date that has been fixed for redemption the
amount of interest you would have received if you had not converted your notes.
You will not be required to pay any transfer taxes or duties relating to
the issuance or delivery of our common stock if you exercise your conversion
rights, but you will be required to pay any transfer tax or duties which may be
payable relating to any transfer involved in the issuance or delivery of the
common stock in a name other than yours. Certificates representing shares of
common stock will be issued or delivered only after all applicable transfer
taxes and duties, if any, payable by you have been paid.
To convert interests in a global note, you must deliver to DTC the
appropriate instruction form for conversion pursuant to DTC's conversion
program.
To convert a definitive note, you will be required to:
o complete the conversion notice on the back of the note (or a facsimile
of it);
o deliver the completed conversion notice and the notes to be converted
to the specified office of the conversion agent;
o pay all funds required, if any, relating to interest on the notes to
be converted to which you are not entitled, as described in the third
preceding paragraph; and
o pay all transfer taxes or duties, if any, as described in the second
preceding paragraph.
The conversion date will be the date on which all of the foregoing
requirements have been satisfied. The notes will be deemed to have been
converted immediately prior to the close of business on the conversion date. We
will deliver, or cause to be delivered, to you a certificate for the number of
shares of common stock into which the notes are converted (and cash in lieu of
any fractional shares) as soon as practicable on or after the conversion date.
Conversion Price Adjustments
We will adjust the initial conversion price for certain events, including:
(1) issuances of our common stock as a dividend or distribution on
our common stock;
(2) certain subdivisions, combinations or reclassifications of our
common stock;
21
(3) issuances to all or substantially all holders of our common stock
of certain rights or warrants to purchase our common stock (or
securities convertible into our common stock) at less than (or
having a conversion price per share less than) the current market
price of our common stock;
(4) distributions to all or substantially all holders of our common
stock of shares of our capital stock, evidences of our
indebtedness or assets (including securities), but excluding:
o dividends or distributions referred to in paragraph (1) above;
o rights or warrants referred to in paragraph (3) above;
o dividends or distributions paid exclusively in cash referred to
in paragraph (5) below; or
o dividends and distributions in connection with a
reclassification, consolidation, merger, statutory share
exchange, combination, sale or conveyance resulting in a change
in the conversion consideration pursuant to the fourth succeeding
paragraph;
(5) dividends or other distributions consisting exclusively of cash
to all or substantially all holders of our common stock, other
than dividends or distributions made in connection with our
liquidation, dissolution or winding-up; and
(6) purchases of our common stock pursuant to a tender offer or
exchange offer made by us or any of our subsidiaries to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
closing sale price per share of our common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to such tender or exchange offer.
We will not make any adjustment if holders may participate in the
transaction or in certain other cases. In cases where the fair market value of
assets, debt securities or certain rights, warrants or options to purchase our
securities, applicable to one share of common stock, distributed to
stockholders:
o equals or exceeds the average closing price of the common stock over
the ten consecutive trading day period ending on the record date for
such distribution, or
o such average closing price exceeds the fair market value of such
assets, debt securities or rights, warrants or options so distributed
by less than $1.00,
rather than being entitled to an adjustment in the conversion price, the holder
of a note will be entitled to receive upon conversion, in addition to the shares
of common stock, the kind and amount of assets, debt securities or rights,
warrants or options comprising the distribution that such holder would have
received if such holder had converted such notes immediately prior to the record
date for determining the shareholders entitled to receive the distribution.
We will not make an adjustment in the conversion price unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. We will carry forward and take into account in any
subsequent adjustment any adjustment that would otherwise be required to be
made. Except as stated above, we will not adjust the conversion price for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing.
In the event that we distribute shares of capital stock of a subsidiary of
ours, the conversion price will be adjusted, if at all, based on the market
value of the subsidiary stock so distributed relative to the market value of our
common stock, in each case over a measurement period following the distribution,
unless we elect to reserve the pro rata portion of such shares for the benefit
of the holders of the notes.
If we:
22
o reclassify or change our common stock (other than changes resulting
from a subdivision or combination); or
o consolidate or combine with or merge into any person or sell or convey
to another person all or substantially all of our property and assets,
and the holders of our common stock receive stock, other securities or other
property or assets (including cash or any combination thereof) with respect to
or in exchange for their common stock, each outstanding note will, without the
consent of any holders of notes, become convertible only into the consideration
the holders of notes would have received if they had converted their notes
immediately prior to such reclassification, change, consolidation, combination,
merger, statutory share exchange, sale or conveyance. We may not become a party
to any such transaction unless its terms are consistent with the foregoing.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price
(including an adjustment at our option), you may, in certain circumstances, be
deemed to have received a distribution subject to U.S. income tax as a dividend.
For example, you will be deemed to have received a constructive distribution
from us to the extent of any change in the conversion rate of the notes made to
compensate you for cash dividends paid to holders of our common stock. In
certain other circumstances, the absence of an adjustment may result in a
taxable dividend to the holders of our common stock. See "United States Federal
Income Tax Consequences."
We may from time to time, to the extent permitted by law, reduce the
conversion price of the notes by any amount for any period of at least 20 days.
In that case, we will give at least 15 days' notice of such decrease. We may
make such reductions in the conversion price, in addition to those set forth
above, as our board of directors deems advisable to avoid or diminish any income
tax to holders of our common stock resulting from any dividend or distribution
of stock (or rights to acquire stock) or from any event treated as such for
income tax purposes.
If we adjust the conversion price pursuant to the above provisions, we will
issue a press release through Dow Jones & Company, Inc., Bloomberg Business News
or a similar newswire service containing the relevant information and make this
information available on our web site or through another public medium as we may
use at that time.
Subordination
The payment of principal, interest and premium, if any, on the notes will
be subordinated in right of payment, as set forth in the indenture, to the prior
payment in full of all senior indebtedness of MemberWorks, including senior
indebtedness incurred after the date the notes are issued.
Upon any distribution to creditors of MemberWorks in a liquidation or
dissolution of MemberWorks or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to MemberWorks or its property, an
assignment for the benefit of creditors or any marshalling of MemberWorks'
assets and liabilities, the holders of senior indebtedness will be entitled to
receive payment in full in cash of all obligations due in respect of such senior
indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable senior indebtedness, whether or not an
allowable claim in any such proceeding) before the holders of notes will be
entitled to receive any payment with respect to the notes, and until all
obligations with respect to senior indebtedness are paid in full, any
distribution to which the holders of notes would be entitled shall be made to
the holders of senior indebtedness.
MemberWorks also may not make any payment upon or in respect of the notes
if:
o a default in the payment of the principal of, premium, if any, or
interest on designated senior indebtedness occurs and is continuing;
or
o any other default occurs and is continuing with respect to designated
senior indebtedness that permits holders of the designated senior
indebtedness as to which such default relates to accelerate its
maturity (or that would permit such holders to accelerate with the
giving of notice or the passage of time or both) and the trustee
receives a notice of such default (a "Payment Blockage Notice") from
MemberWorks or the holders of any designated senior indebtedness.
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Payments on the notes may and shall be resumed:
o in the case of a payment default, upon the date on which such default
is cured or waived; and
o in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any designated senior indebtedness has been accelerated.
No new period of payment blockage may be commenced unless and until:
o 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
o all scheduled payments of principal, interest and premium, if any, on
the notes that have come due have been paid in full in cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been waived for a period of not less than 90 days.
The indenture further requires that MemberWorks promptly notify holders of
senior indebtedness if payment of the notes is accelerated because of an event
of default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, the holders of notes may recover less ratably
than creditors of MemberWorks who are holders of senior indebtedness. See "Risk
Factors -- The notes are subordinated. You will receive payment on your notes
only if we have funds remaining after we have paid any existing and future
senior indebtedness." You will receive payment on your notes only if we have
funds remaining after we have paid any existing and future senior indebtedness.
As of September 30, 2004, we had outstanding $155.5 million of senior
indebtedness.
"senior indebtedness" means:
o all indebtedness of MemberWorks outstanding under credit facilities
and all hedging obligations with respect thereto;
o any other indebtedness permitted to be incurred by MemberWorks under
the terms of the indenture, unless the instrument under which such
indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the notes; and
o all principal, 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),
premium, penalties, fees, charges, expenses, indemnification,
reimbursement obligations, damages, guarantees and other liabilities
or amounts payable under the documentation governing any indebtedness
of MemberWorks referred to above.
Notwithstanding anything to the contrary in the foregoing, senior
indebtedness will not include:
o any liability for federal, state, local or other taxes owed or owing
by MemberWorks;
o any indebtedness of MemberWorks to any of its subsidiaries or other
affiliates;
24
o any trade payables; or
o any indebtedness of MemberWorks that is incurred in violation of the
indenture.
"Indebtedness" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing capital lease obligations or the balance deferred and unpaid of the
purchase price of any property or representing any hedging obligations, except
any obligations that constitutes an accrued expense, deferred revenue or trade
payable, if and to the extent any of the foregoing indebtedness (other than
letters of credit and hedging obligations) would appear as a liability upon a
balance sheet of such person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a lien on any assets of such person (whether
or not such indebtedness is assumed by such person) and, to the extent not
otherwise included, the guarantee by such person of any indebtedness of any
other person.
"designated senior indebtedness" means (1) any senior indebtedness
outstanding under any credit facility and (2) any other senior indebtedness
permitted under the indenture, the principal amount of which is $25.0 million or
more and that has been designated by MemberWorks as "designated senior
indebtedness." The indenture does not restrict the creation of senior
indebtedness or any other indebtedness in the future. For information concerning
our potential incurrence of additional senior indebtedness, see "Risk Factors --
The notes will not contain restrictive covenants, and there is limited
protection in the event of a change of control."
We will be obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against any losses, liabilities or expenses incurred by it
in connection with its duties relating to the notes. The trustee's claims for
such payments will be senior to those of holders of the notes in respect of all
funds collected or held by the trustee.
Optional Redemption by MemberWorks
We may not redeem the notes in whole or in part at any time prior to
October 6, 2008. At any time on or after October 6, 2008, we may redeem some or
all of the notes on at least 30 but not more than 60 days' prior notice, at a
redemption price equal to 100% of the principal amount of notes to be redeemed,
plus accrued and unpaid interest to, but excluding, the redemption date. In each
case, we will pay accrued and unpaid interest on the notes being redeemed to,
but excluding, the redemption date. In the event the notes are converted into
our common stock after the date the notice of the redemption is mailed and prior
to the third business day after the optional redemption date, we will pay
interest on such notes. See "-- Conversion Rights -- Conversion Procedures."
Procedures for Partial Redemption
If we do not redeem all of the notes, the trustee will select the notes to
be redeemed in principal amounts of $1,000 or whole multiples of $1,000 by lot
or on a pro rata basis. If any notes are to be redeemed in part only, we will
issue a new note or notes in principal amount equal to the unredeemed principal
portion thereof. If a portion of your notes are selected for partial redemption
and you convert a portion of your notes, the converted portion will be deemed to
be part of the portion of notes selected for redemption.
Repurchase at Option of Holders upon a Change of Control
Repurchase upon a Change of Control
If a change of control occurs, holders may require us to repurchase all or
any portion of their notes not previously called for redemption at a repurchase
price equal to 100% of the principal amount of the notes to be repurchased plus
any accrued and unpaid interest to, but excluding, the repurchase date. The
principal amount submitted for repurchase by a holder must be equal to $1,000 or
a whole multiple of $1,000.
A "change of control" will be deemed to have occurred at such time after
the original issuance of the notes when any of the following has occurred:
25
o the acquisition by any person, including any syndicate or group deemed
to be a "person" under Section 13(d)(3) of the Exchange Act, of
beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of purchases,
mergers or other acquisition transactions of shares of our capital
stock entitling that person to exercise 50% or more of the total
voting power of all shares of our capital stock entitled to vote
generally in elections of directors, other than any acquisition by us,
any of our subsidiaries or any of our employee benefit plans; or
o the first day on which a majority of the members of our board of
directors does not consist of continuing directors; or
o the consolidation or merger of us with or into any other person, any
merger of another person into us, or any conveyance, transfer, sale,
lease or other disposition of all or substantially all of our
properties and assets to another person, other than:
(1) any transaction:
o that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital
stock; and
o pursuant to which the holders of 50% or more of the total voting
power of all shares of our capital stock entitled to vote
generally in elections of directors immediately prior to such
transaction have the right to exercise, directly or indirectly,
50% or more of the total voting power of all shares of our
capital stock entitled to vote generally in elections of
directors of the continuing or surviving person immediately after
giving effect to such issuance; and
(2) any merger primarily for the purpose of changing our 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.
However, a change of control will be deemed not to have occurred if:
o the closing sale price per share of our common stock for any five
trading days within:
(i) the period of 10 consecutive trading days ending immediately
after the later of the change of control or the public
announcement of the change of control, in the case of a change of
control under the first or second bullet point above; or
(ii) the period of 10 consecutive trading days ending immediately
before the change of control, in the case of a change of control
under the third bullet point above, equals or exceeds 110% of the
conversion price of the notes in effect on each such trading day;
or
o all of the consideration in the transaction or transactions (other
than cash payments for fractional shares and cash payments made in
respect of dissenters' appraisal rights) constituting a change of
control consists of shares of common stock traded or to be traded
immediately following such change of control on a national securities
exchange or the Nasdaq National Market and, as a result of the
transaction or transactions, the notes become convertible solely into
such common stock (and any rights attached thereto).
Beneficial ownership shall be determined in accordance with Rules l3d-3 and
13d-5 under the Exchange Act (except that a person shall be deemed to have
beneficial ownership of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition). The term "person" includes any
syndicate or group which would be deemed to be a "person" under Section l3(d)(3)
under the Exchange Act.
26
"Continuing directors" means, as of any date of determination, any member
of the board of directors of MemberWorks who:
o was a member of the board of directors on September 24, 2003; or
o was nominated for election or elected to the board of directors with
the approval of a majority of the continuing directors who were
members of the board at the time of new director's nomination or
election.
The definition of "change of control" includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our properties and assets. There is no precise, established definition of the
phrase "substantially all" under applicable law. In interpreting this phrase,
courts, among other things, make a subjective determination as to the portion of
assets conveyed, considering many factors, including the value of assets
conveyed, the proportion of an entity's income derived from the assets conveyed
and the significance of those assets to the ongoing business of the entity. To
the extent the meaning of such phrase is uncertain, uncertainty will exist as to
whether or not a change of control may have occurred and, accordingly, as to
whether or not the holders of notes will have the right to require us to
repurchase their notes.
Repurchase Right Procedures
Within 30 days after the occurrence of a change of control, we will be
required to give notice to all holders of the occurrence of the change of
control and of their resulting repurchase right. The repurchase date will be no
later than 30 days after the date we give that notice. The notice will be
delivered to the holders at their addresses shown in the register of the
registrar and to beneficial owners as required by applicable law, stating, among
other things, the procedures that holders must follow to require us to
repurchase their notes as described below.
If holders have the right to cause us to repurchase their notes as
described above, we will issue a press release through Dow Jones & Company,
Inc., Bloomberg Business News or a similar newswire service containing the
relevant information and make this information available on our web site or
through another public medium as we may use at that time.
To elect to require us to repurchase notes, each holder must deliver the
repurchase notice so that it is received by the paying agent no later than the
close of business on the second business day immediately prior to the repurchase
date, unless we specify a later date, and must state certain information,
including:
o if certificated notes have been issued, the certificate numbers of the
holders' notes to be delivered for repurchase or, if not, such
information as may be required under applicable DTC procedures;
o the portion of the principal amount of notes to be repurchased, which
must be $1,000 or an integral multiple of $1,000; and
o that the notes are to be repurchased by us pursuant to the applicable
provision of the indenture.
A holder may withdraw any repurchase notice by delivering a written notice
of withdrawal to the paying agent prior to the close of business on the
repurchase date. The notice of withdrawal must state certain information,
including:
o the principal amount of notes being withdrawn;
o if certificated notes have been issued, the certificate numbers of the
notes being withdrawn or, if not, such information as may be required
under applicable DTC procedures; and
o the principal amount, if any, of the notes that remain subject to the
repurchase notice.
27
The Exchange Act requires the dissemination of certain information to
security holders and that an issuer follow certain procedures if an issuer
tender offer occurs, which requirements may apply if the repurchase right
summarized above becomes available to holders of the notes. In connection with
any offer to require us to repurchase notes as summarized above, we will, to the
extent applicable:
o comply with the provisions of Rule l3e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be
applicable; and
o file a Schedule TO or any other required schedule or form under the
Exchange Act.
Our obligation to pay the repurchase price for notes for which a repurchase
notice has been delivered and not validly withdrawn is conditioned upon
book-entry transfer or delivery of the notes, together with necessary
endorsements, to the paying agent at any time after delivery of the repurchase
notice. We will cause the repurchase price for the notes to be paid promptly
following the later of the repurchase date or the time of book-entry transfer or
delivery of the notes, together with such endorsements.
If the paying agent holds money sufficient to pay the repurchase price of
the notes for which a repurchase notice has been given on the business day
following the repurchase date in accordance with the terms of the indenture,
then, immediately after the repurchase date, the notes will cease to be
outstanding and interest on the notes will cease to accrue, whether or not the
notes are delivered to the paying agent. Thereafter, all other rights of the
holder shall terminate, other than the right to receive the repurchase price
upon delivery of the notes.
We may, to the extent permitted by applicable law and the agreements
governing any of our other indebtedness at the time outstanding, at any time
purchase the notes in the open market or by tender at any price or by private
agreement. Any notes so purchased by us shall be surrendered to the trustee for
cancellation. Any notes surrendered to the trustee may, to the extent permitted
by applicable law, be reissued or resold or may be surrendered to the trustee
for cancellation. Any note surrendered to the trustee for cancellation may not
be reissued or resold and will be canceled promptly.
Limitations on Repurchase Rights
The repurchase rights described above may not necessarily protect holders
of the notes if a highly leveraged or another transaction involving us occurs
that may adversely affect holders.
Our ability to repurchase notes upon the occurrence of a change of control
is subject to important limitations. The occurrence of a change of control will
cause an event of default under, and may otherwise be prohibited or limited by,
the terms of our existing bank credit facility and could cause an event of
default under, or be prohibited or limited by, the terms of our future
indebtedness. Further, we cannot assure you that, in that event, we would have
the financial resources, or would be able to arrange financing, to pay the
repurchase price for all the notes that might be delivered by holders of notes
seeking to exercise the repurchase right. Any failure by us to repurchase the
notes when required following a change of control would result in an event of
default under the indenture. Any such default may, in turn, cause a default
under our other indebtedness that may be outstanding at that time. In addition,
our ability to repurchase notes may be limited by restrictions on our ability to
obtain funds for such repurchase through dividends from our subsidiaries and
other provisions in agreements that may govern our other indebtedness
outstanding at the time.
The change of control repurchase provision of the notes may, in certain
circumstances, make more difficult or discourage a takeover of our company. The
change of control repurchase feature, however, is not the result of our
knowledge of any specific effort by others to accumulate shares of our common
stock or to obtain control of us by means of a merger, tender offer solicitation
or otherwise or by management to adopt a series of anti-takeover provisions.
Instead, the change of control purchase feature is a standard term contained in
convertible securities similar to the notes.
28
Consolidation, Merger, Etc.
The indenture will provide that we may, without the consent of the holders
of any of the notes, consolidate with or merge into any other person or convey,
transfer, sell, lease or otherwise dispose of all or substantially all of our
properties and assets to another person as long as, among other things:
o the resulting, surviving or transferee person is organized and
existing under the laws of the United States, any state thereof or the
District of Columbia;
o that person assumes all of our obligations under the indenture and the
notes; and
o MemberWorks or such successor is not then or immediately thereafter in
default under the indenture and no event which, after notice or lapse
of time, would become an event of default under the indenture, shall
have occurred and be continuing.
The occurrence of certain of the foregoing transactions could also
constitute a change of control under the indenture.
The covenant described above includes a phrase relating to the conveyance,
transfer, sale, lease or disposition of "all or substantially all" of our
properties and assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. In interpreting this phrase, courts,
among other things, make a subjective determination as to the portion of assets
conveyed, considering many factors, including the value of assets conveyed, the
proportion of an entity's income derived from the assets conveyed and the
significance of those assets to the ongoing business of the entity. To the
extent the meaning of such phrase is uncertain, uncertainty will exist as to
whether or not the restrictions on the sale, lease or disposition of our assets
described above apply to a particular transaction.
Events of Default
Each of the following will constitute an event of default under the
indenture:
(1) our failure to pay when due the principal of any of the notes at
maturity, upon redemption or exercise of a repurchase right or
otherwise;
(2) our failure to pay installment of interest (including additional
amounts, if any) on any of the notes for 30 days after the date
when due;
(3) our failure to perform or observe any other covenant or agreement
contained in the notes or the indenture for a period of 60 days
after written notice of such failure, requiring us to remedy the
same, shall have been given to us by the trustee or to us and the
trustee by the holders of at least 25% in aggregate principal
amount of the notes then outstanding;
(4) a default under any indebtedness for money borrowed by us or any
of our subsidiaries that is a "significant subsidiary" (as
defined in Rule 405 of the Securities Act) the aggregate
outstanding principal amount of which is in an amount in excess
of $10 million, for a period of 30 days after written notice to
us by the trustee or to us and the trustee by holders of at least
25% in aggregate principal amount of the notes then outstanding,
which default:
o is caused by a failure to pay principal or interest when due
on such indebtedness by the end of the applicable grace
period, if any, unless such indebtedness is discharged; or
o results in the acceleration of such indebtedness, unless
such acceleration is waived, cured, rescinded, annulled or
such indebtedness is discharged; and
29
(5) certain events of bankruptcy, insolvency or reorganization with
respect to us or any of our subsidiaries that is a significant
subsidiary.
The indenture will provide that the trustee will, within 90 days of the
occurrence of a default, give to the registered holders of the notes notice of
all uncured defaults or events of default known to it, but the trustee shall be
protected in withholding such notice if it, in good faith, determines that the
withholding of such notice is in the best interest of such registered holders,
except in the case of a default or event of default in the payment of the
principal of, or interest on, any of the notes when due or in the payment of any
redemption or repurchase obligation.
If an event of default specified in clause (5) above occurs and is
continuing with respect to us, then automatically the principal of all the notes
and the interest thereon shall become immediately due and payable. If an event
of default shall occur and be continuing, other than with respect to clause (5)
above with respect to us (the default not having been cured or waived as
provided under "-- Modifications and Amendments" below), the trustee or the
holders of at least 25% in aggregate principal amount of the notes then
outstanding may declare the notes due and payable at their principal amount
together with accrued interest, and thereupon the trustee may, at its
discretion, proceed to protect and enforce the rights of the holders of notes by
appropriate judicial proceedings. Such declaration may be rescinded or annulled
with the written consent of the holders of a majority in aggregate principal
amount of the notes then outstanding if all events of default (other than the
nonpayment of amounts due solely as a result of such acceleration) have been
cured or waived.
The indenture will contain a provision entitling the trustee, subject to
the duty of the trustee during default to act with the required standard of
care, to be indemnified by the holders of notes before proceeding to exercise
any right or power under the indenture at the request of such holders. The
indenture provides that the holders of a majority in aggregate principal amount
of the notes then outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred upon the trustee.
We will be required to furnish annually to the trustee a statement as to
the fulfillment of our obligations under the indenture.
Modifications and Amendments
Changes Requiring Approval of Each Affected Holder
Except as set forth below and under "-- Changes Requiring No Approval," we
and the trustee may amend or supplement the indenture or the notes with the
consent of the holders of a majority in aggregate principal amount of the
outstanding notes. However, the indenture, including the terms and conditions of
the notes, may not be modified or amended without the written consent or the
affirmative vote of the holder of each note affected by such change to:
o change the maturity of the principal of or the date any installment of
interest (including any payment of additional amounts) is due on any
note;
o reduce the principal amount, repurchase price or redemption price of,
or interest (including any payment of additional amounts) on, any
note;
o change the currency of payment of such note or interest thereon;
o impair the right to institute suit for the enforcement of any payment
on or conversion of any note;
o modify our obligations to maintain an office or agency in New York
City;
o except as otherwise permitted or contemplated by provisions concerning
corporate reorganizations, adversely affect the repurchase rights of
holders or the conversion rights of holders of the notes;
30
o modify the redemption provisions of the indenture in a manner adverse
to the holders of notes; or
o reduce the percentage in aggregate principal amount of notes
outstanding necessary to modify or amend the indenture or to waive any
past default.
Changes Requiring No Approval
The indenture, including the terms and conditions of the notes, may be
modified or amended by us and the trustee, without the consent of any holders of
notes, for the purposes of, among other things:
o adding to our covenants for the benefit of the holders of notes;
o surrendering any right or power conferred upon us;
o providing for conversion rights of holders of notes if any
reclassification or change of our common stock or any consolidation,
merger or sale of all or substantially all of our assets occurs;
o providing for the assumption of our obligations to the holders of
notes in the case of a merger, consolidation, conveyance, transfer or
lease;
o reducing the conversion price, provided that the reduction will not
adversely affect the interests of the holders of notes;
o complying with the requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act of 1939;
o curing any ambiguity or correcting or supplementing any defective
provision contained in the indenture, provided that such modification
or amendment does not, in the good faith opinion of our board of
directors, adversely affect the interests of the holders of notes in
any material respect; or
o adding or modifying any other provisions with respect to matters or
questions arising under the indenture that we and the trustee may deem
necessary or desirable and that will not, in the good faith opinion of
our board of directors, adversely affect the interests of the holders
of notes.
The terms of our senior indebtedness may require us to obtain the consent
of our lender before agreeing to amendments to the indenture.
No Personal Liability of Directors, Officers, Employees or Stockholders
None of our directors, officers, employees or stockholders, as such, shall
have any liability for any of our obligations under the notes or the indenture
or for any claim based on, in respect of or by reason of such obligations or
their creation. By accepting a note, each noteholder shall waive and release all
such liability. The waiver and release shall be part of the consideration for
the issue of the notes.
Governing Law
The indenture and the notes are governed by, and construed in accordance
with, the law of the State of New York.
Information Concerning the Trustee and the Transfer Agent
Deutsche Bank Trust Company Americas, as trustee under the indenture, has
been appointed by us as paying agent, conversion agent, registrar and custodian
with regard to the notes. The American Stock Transfer & Trust Company is the
transfer agent and registrar for our common stock. The trustee or its affiliates
may from time to time in the future provide banking and other services to us in
the ordinary course of their business.
31
Form, Denomination and Registration
Denomination and Registration
The notes will be issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and whole multiples of $1,000.
Global Notes; Book-Entry Form
Except as provided below, the notes will be evidenced by one or more global
notes deposited with the trustee as custodian for DTC, and registered in the
name of Cede & Co. as DTC's nominee.
Record ownership of the global notes may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee,
except as set forth below. A holder may hold its interests in a global note
directly through DTC if such holder is a participant in DTC, or indirectly
through organizations which are direct DTC participants if such holder is not a
participant in DTC. Transfers between direct DTC participants will be effected
in the ordinary way in accordance with DTC's rules and procedures and will be
settled in same-day funds. Holders may also beneficially own interests in the
global notes held by DTC through certain banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a direct DTC participant, either directly or indirectly.
Transfers between direct DTC participants will be effected in the ordinary way
in accordance with DTC's rules and procedures and will be settled in same-day
funds.
So long as Cede & Co., as nominee of DTC, is the registered owner of the
global notes, Cede & Co. for all purposes will be considered the sole holder of
the global notes. Except as provided below, owners of beneficial interests in
the global notes:
o will not be entitled to have certificates registered in their names;
o will not receive or be entitled to receive physical delivery of
certificates in definitive form; and
o will not be considered holders of the global notes.
The laws of some states require that certain persons take physical delivery
of securities in definitive form. Consequently, the ability of an owner of a
beneficial interest in a global note to transfer the beneficial interest in the
global note to such persons may be limited.
We will wire, through the facilities of the trustee, payments of principal
of and interest on the global notes to Cede & Co., the nominee of DTC, as the
registered owner of the global notes. None of MemberWorks, the trustee and any
paying agent will have any responsibility or be liable for paying amounts due on
the global notes to owners of beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal of
and interest on the global notes, to credit participants' accounts on the
payment date in amounts proportionate to their respective beneficial interests
in the notes represented by the global notes, as shown on the records of DTC,
unless DTC believes that it will not receive payment on the payment date.
Payments by DTC participants to owners of beneficial interests in notes
represented by the global notes held through DTC participants will be the
responsibility of DTC participants, as is now the case with securities held for
the accounts of customers registered in "street name."
If you would like to convert your notes into common stock pursuant to the
terms of the notes, you should contact your broker or other direct or indirect
DTC participant to obtain information on procedures, including proper forms and
cut-off times, for submitting those requests.
32
Because DTC can only act on behalf of DTC participants, who in turn act on
behalf of indirect DTC participants and other banks, your ability to pledge your
interest in the notes represented by global notes to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate.
Neither MemberWorks nor the trustee (nor any registrar, paying agent or
conversion agent under the indenture) will have any responsibility for the
performance by DTC or direct or indirect DTC participants of their obligations
under the rules and procedures governing their operations. DTC has advised us
that it will take any action permitted to be taken by a holder of notes,
including, without limitation, the presentation of notes for conversion as
described below, only at the direction of one or more direct DTC participants to
whose account with DTC interests in the global notes are credited and only for
the principal amount of the notes for which directions have been given.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for DTC
participants and to facilitate the clearance and settlement of securities
transactions between DTC participants through electronic book-entry changes to
the accounts of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations, such as the initial purchasers of the notes. Certain DTC
participants or their representatives, together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among DTC participants, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days or an event of default has occurred and is continuing with
respect to the notes, we will cause notes to be issued in definitive form in
exchange for the global notes. None of MemberWorks, the trustee or any of their
respective agents will have any responsibility for the performance by DTC or
direct or indirect DTC participants of their obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in global notes.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
33
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
$0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par
value per share.
Common Stock
As of October 22, 2004, there were 10,176,000 shares of common stock
outstanding held by 1,163 stockholders of record. Holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding preferred stock. Upon
the liquidation, dissolution or winding up of the company, the holders of common
stock are entitled to receive ratably the net assets of the company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue shares of preferred stock
in one or more series. Each series of preferred stock shall have the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors. We have no present plans to issue
any shares of preferred stock. It is not possible to state the effect of the
authorization and issuance of any series of preferred stock upon the rights of
holders of common stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of preferred stock. However, the
effects may include, among other things, restricting dividends on our common
stock, diluting the voting power of our common stock or impairing the
liquidation rights of our common stock without further action by holders of
common stock. In addition, under certain circumstances, the issuance of
preferred stock may render more difficult or tend to discourage a merger, tender
offer or proxy contest, the assumption of control by a holder of a large block
of our securities or the removal of incumbent management, which could thereby
depress the market price of our common stock.
Delaware Law and Certain Charter and By-law Provisions
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock.
Our Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. In addition, our certificate of incorporation
provides that directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of capital stock of the corporation
entitled to vote. Under our certificate of incorporation, any vacancy on the
Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may only be filled by vote of a majority of the
directors then in office. The classification of the Board of Directors and the
limitations on the removal of directors and filling of vacancies could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the company.
34
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President or by the Board of Directors.
Under the Restated By-laws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the company. The foregoing provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
the company. These provisions may also discourage another person or entity from
making a tender offer for the company's common stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our certificate of incorporation requires the
affirmative vote of the holders of at least 75% of the shares of capital stock
of the company issued and outstanding and entitled to vote to amend or repeal
any of the foregoing provisions of our certificate of incorporation. The
Restated By-laws also may be amended or repealed by a majority vote of the Board
of Directors subject to any limitations set forth in the Restated By-laws. The
75% stockholder vote would be in addition to any separate class vote that might
in the future be required pursuant to the terms of any series Preferred Stock
that might be outstanding at the time any such amendments are submitted to
stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
35
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income
tax consequences relating to the purchase, ownership and disposition of the
notes, and of common stock into which notes may be converted, but does not
purport to be a complete analysis of all of the potential tax consequences that
may be material to the particular tax situation of an investor. This summary is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the applicable Treasury Regulations promulgated or proposed thereunder
("Treasury Regulations"), administrative pronouncements of the Internal Revenue
Service ("IRS") and judicial decisions as of the date of this prospectus. All of
those authorities are subject to change, possibly on a retroactive basis, or
differing interpretations, which could result in U.S. federal income tax
consequences different from those discussed below. This summary deals only with
beneficial owners of notes that will hold the notes, and common stock into which
notes may be converted, as "capital assets," within the meaning of Section 1221
of the Code. This summary does not discuss the U.S. federal income tax
consequences applicable to beneficial owners that may be subject to special tax
rules, such as financial institutions, tax-exempt organizations, expatriates,
pension funds, regulated investment companies, real estate investment trusts,
insurance companies, dealers in securities or foreign currencies, traders that
elect to mark-to-market their securities, persons liable for the alternative
minimum tax, persons that will hold notes as a position in a hedging
transaction, "straddle," "conversion transaction" or other risk reduction
transaction for tax purposes, partnerships or other pass-through entities or
"U.S. Holders" (as defined below) that have a "functional currency" other than
the U.S. dollar. Moreover, this summary does not address the effect of any
applicable state, local or foreign tax laws, or any aspect of U.S. federal tax
law other than income taxation. We have not sought any ruling from the IRS with
respect to the statements made and the conclusions reached in this summary, and
there can be no assurance that the IRS will agree with such statements and
conclusions. INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME AND
OTHER TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR
UNDER ANY APPLICABLE INCOME TAX TREATY.
As used herein, the term "U.S. Holder" means an initial beneficial owner of
a note that is, for U.S. federal income tax purposes, (i) an individual who is a
citizen or resident of the United States, (ii) a corporation created or
organized in or under the laws of the United States or any State thereof
(including the District of Columbia), (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a
trust that (a) is subject to the primary supervision of a court within the
United States and one or more U.S. persons, as defined in Section 7701(a)(30) of
the Code, having the authority to control all substantial decisions of the
trust, or (b) has properly elected under applicable Treasury Regulations to be
treated as a U.S. person. The term "Non-U.S. Holder" means an initial beneficial
owner of a note that is neither a U.S. Holder nor a partnership for U.S. federal
income tax purposes. If a partnership (including any entity treated as a
partnership for U.S. federal income tax purposes) holds notes, the U.S. federal
income tax treatment of a partner generally will depend upon the status of the
partner and the activities of the partnership. Partners in partnerships holding
the notes should consult their own tax advisors.
U.S. Federal Income Tax Consequences to U.S. Holders
Payment of Interest
Stated interest on a note generally will be includible in the gross income
of a U.S. Holder as ordinary income at the time such interest is received or
accrued, in accordance with such U.S. Holder's regular method of accounting for
U.S. federal income tax purposes.
Market Discount and Bond Premium
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. If a
U.S. Holder disposes of a note in a nontaxable transaction (other than as
provided in Section 1276(c) of the Code), the U.S. Holder will be treated as if
the U.S. Holder had disposed of the note in a taxable transaction at the note's
fair market value. 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 (including a nontaxable transaction other than as provided
in Section 1276(c) of the Code). 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 treatment of partial principal payments and realized gain as
ordinary income and 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.
36
In general, if a U.S. Holder purchases a note for an amount in excess of
the U.S. Holder's initial tax basis in the note, reduced by an amount equal to
the conversion option of the note, such U.S. Holder will be treated as having
purchased such note with bond premium in the amount of such excess. A U.S.
Holder's initial tax basis in a note generally will be the cost of such note to
such U.S. Holder. The value of the conversion option of the note may be
determined under any reasonable method, including by comparing the market price
of the notes to the market price of similar debt instruments that do not have a
conversion option. A U.S. Holder generally may elect to amortize the bond
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
bond premium, that premium will decrease the gain or increase the loss the U.S.
Holder would otherwise recognize upon a sale or other disposition of the note.
An election to amortize bond 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.
The rules governing market discount and amortizable bond premium are
complex, and U.S. Holders should consult their own tax advisors concerning the
application of these rules.
Sale, Redemption or Other Taxable Dispositions of Notes
Upon the sale, redemption or other taxable disposition of a note, a U.S.
Holder generally will recognize gain or loss equal to the difference, if any,
between the amount realized on the sale, redemption or other taxable
disposition, and the U.S. Holder's adjusted tax basis in such note. The U.S.
Holder's amount realized would equal the amount of cash plus the fair market
value of any other property received, but would not include any amount
attributable to accrued but unpaid interest on the note (which amount would be
taxable as interest to the extent not previously included in gross income by the
U.S. Holder). A U.S. Holder's adjusted tax basis in a note generally will be the
cost of such note to such U.S. Holder. Gain or loss so recognized generally will
be capital gain or loss and will be long-term capital gain or loss if, at the
time of the sale, redemption or other taxable disposition, the U.S. Holder's
holding period for the notes is more than one year. Certain U.S. Holders
(including individuals) are eligible for preferential rates of U.S. federal
income taxation in respect of long-term capital gains. The deductibility of
capital losses is subject to limitations under the Code.
Constructive Dividends
The conversion price of the notes is subject to adjustment under certain
circumstances. Under Section 305 of the Code, adjustments to the conversion
price that increase a U.S. Holder's proportionate share of our assets or our
earnings may in certain circumstances result in a constructive dividend that is
taxable to such U.S. Holder to the extent of our current and accumulated
earnings and profits, as determined under U.S. federal income tax principles.
Generally, an increase in the conversion ratio pursuant to a bona-fide
reasonable formula which has the effect of preventing the dilution of the
interest of U.S. Holders in the notes will not be considered to result in a
constructive dividend. However, certain adjustments provided in the notes
(including, without limitation, adjustments to the conversion price of the notes
in connection with cash dividends to our stockholders) will not qualify as being
pursuant to a bona-fide reasonable formula. If such adjustments are made, a U.S.
Holder will, to the extent of our current and accumulated earnings and profits,
be deemed to have received a constructive dividend even though such U.S. Holder
has not received any cash or property as a result of the adjustment. In
addition, a failure to adjust the conversion price of the notes to reflect a
stock dividend or similar event could in some circumstances give rise to a
constructive dividend to U.S. Holders of common stock.
37
Conversion of the Notes
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock, except with respect to (i) cash received
in lieu of a fractional share of common stock, or (ii) common stock that is
attributable to accrued but unpaid interest not previously included in gross
income. Cash received in lieu of a fractional share of common stock upon
conversion will be treated as a payment in exchange for such fractional share.
Accordingly, the receipt of cash in lieu of a fractional share of common stock
generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and the U.S. Holder's
adjusted tax basis in the note that is allocable to the fractional share).
Amounts that are attributable to accrued but unpaid interest generally will be
taxable to the U.S. Holder as interest to the extent not previously included in
gross income.
A U.S. Holder's initial tax basis in the common stock received on
conversion of a note will be the same as the U.S. Holder's adjusted tax basis in
the note at the time of conversion, reduced by any tax basis allocable to a
fractional share treated as exchanged for cash. However, the tax basis of common
stock received upon a conversion with respect to accrued but unpaid interest
should equal the fair market value of such common stock. The holding period for
the common stock received on conversion generally will include the holding
period of the note converted. To the extent any common stock issued upon a
conversion is allocable to accrued interest, however, the U.S. Holder's holding
period for such common stock may commence on the day following the date of
delivery of common stock.
Dividends on Common Stock
Generally, a distribution by us with respect to our common stock will be
treated as a taxable dividend to the extent of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles).
To the extent that the amount of a distribution exceeds our current and
accumulated earnings and profits, the excess will constitute a tax-free return
of capital to the extent of a U.S. Holder's tax basis in the common stock, and
thereafter as gain from the sale or exchange of such common stock. Certain U.S.
Holders (including individuals) may qualify, under appropriate circumstances,
for preferential rates of U.S. federal income taxation in respect of dividend
income. U.S. Holders that are corporations may be eligible for a
dividend-received deduction in respect of dividend distributions by us.
Sale or Other Taxable Dispositions of Common Stock
Upon the sale or other taxable disposition of our common stock, a U.S.
Holder generally will recognize gain or loss equal to the difference between (i)
the amount of cash and the fair market value of any property received upon the
sale or exchange and (ii) such U.S. Holder's adjusted tax basis in the common
stock. Such gain or loss generally will be capital gain or loss, and will be
long-term capital gain or loss if the U.S. Holder's holding period is more than
one year at the time of the sale or other taxable disposition. Certain U.S.
Holders (including individuals) can qualify for preferential rates of U.S.
federal income taxation in respect of long-term capital gains. The deductibility
of capital losses is subject to limitations under the Code.
38
U.S. Federal Income Tax Consequences to Non-U.S. Holders
Payment of Interest
Subject to the discussion below of backup withholding, interest paid on the
notes to a Non-U.S. Holder generally will not be subject to U.S. federal income
or withholding tax if:
(1) such interest is not effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Holder;
(2) the Non-U.S. Holder does not actually or constructively own 10% or more
of the total voting power of all classes of our stock entitled to vote within
the meaning of Section 871(h)(3) of the Code;
(3) the Non-U.S. Holder is not a controlled foreign corporation that is
related to us through stock ownership (for this purpose, the holder of notes
would be deemed to own the common stock into which the notes could be
converted); and
(4) (a) the Non-U.S. Holder, under penalty of perjury, certifies that such
Non-U.S. Holder is not a U.S. person (as defined in Section 7701(a)(3) of the
Code) and provides certain identifying information on the applicable IRS Form
W-8BEN (or successor form) or (b) the Non-U.S. Holder holds notes through
certain foreign intermediaries or certain foreign partnerships and the
certification requirements of applicable Treasury Regulations are satisfied.
(These certifications may also be provided by a qualified intermediary on behalf
of one or more beneficial owners (or other intermediaries), provided that such
intermediary has entered into a withholding agreement with the IRS and certain
other conditions are met.)
A Non-U.S. Holder that does not meet the foregoing requirements generally
will be subject to U.S. federal income tax withholding at a rate of 30% on
payments of interest on the notes, unless the interest is effectively connected
with the conduct of a U.S. trade or business of the Non-U.S. Holder or a lower
treaty rate applies and, in either case, the Non-U.S. Holder provides us with
proper certification on the applicable IRS Form W-8BEN (or successor form) as to
the holder's exemption from withholding. If the interest is effectively
connected with the conduct of a U.S. trade or business, the Non-U.S. Holder will
be subject to the U.S. federal income tax on the interest on a net income basis,
generally in the same manner as U.S. Holders. In addition, in the case of a
corporate Non-U.S. Holder, a branch profits tax equal to 30% (or lower
applicable treaty rate) may apply to interest that is effectively connected with
the conduct of a U.S. trade or business (subject to certain adjustments).
Sale or Other Taxable Dispositions of Notes or Common Stock
Subject to the discussion below on backup withholding, a Non-U.S. Holder
generally will not be subject to U.S. federal income or withholding tax on gain
recognized on the sale or other taxable disposition of a note, or of the common
stock received upon conversion of a note, unless:
(1) the gain is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder;
(2) the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more in the year of such sale or other taxable
disposition, and certain other requirements are met;
(3) the Non-U.S. Holder is subject to U.S. federal income tax pursuant to
the provisions of the Code applicable to certain U.S. expatriates; or
(4) if we have been at any time within the five-year period preceding such
sale or other taxable disposition (or within the Non-U.S. Holder's shorter
holding period for a note or common stock) a U.S. real property holding
corporation (a "USRPHC") within the meaning of Section 897(c)(2) of the Code.
39
We do not believe that we are or have been a USRPHC, although no assurance
can be made in this regard. If we were to become a USRPHC, then a Non-U.S.
Holder would not be subject to U.S. federal income tax in respect of gain on the
sale or other taxable disposition of our notes or common stock if (a) our stock
is regularly traded on an established securities market and (b) the Non-U.S.
Holder did not own actually or constructively more than 5% of our common stock
at any time during the relevant period.
An individual Non-U.S. Holder described in (1) or (4) above will be subject
to U.S. federal income tax on the net gain derived from the sale or other
taxable disposition on a net income basis generally in the same manner as a U.S.
Holder. An individual Non-U.S. Holder described in (2) above will be subject to
a flat 30% U.S. federal income tax on the gain derived from the sale or other
taxable disposition, even though such holder is not considered a resident of the
United States. A Non-U.S. Holder that is a foreign corporation may be subject to
a branch profits tax on gain described in (1) or (4) above (subject to certain
adjustments).
Constructive Dividends
Adjustments to the conversion price of a note that increase a Non-U.S.
Holder's proportionate share of assets or earnings may in certain circumstances
result in a constructive dividend subject to a 30% U.S. federal withholding tax.
See "U.S. Holders -- Constructive Dividends" above.
Conversion of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on the conversion of a note into shares of common stock. To the extent a
Non-U.S. Holder receives cash in lieu of a fractional share on conversion, such
cash may give rise to gain that would be subject to the rules described above
with respect to the sale or other taxable disposition of a note or common stock.
To the extent a Non-U.S. Holder receives upon conversion common stock that is
attributable to accrued but unpaid interest, such common stock may give rise to
income that would be subject to the rules described above with respect to the
payments of interest to Non-U.S. Holders.
Dividends on Common Stock
Subject to the discussion below on backup withholding, dividends, if any,
paid on the common stock to a Non-U.S. Holder generally will be subject to a 30%
U.S. federal withholding tax, subject to reduction for Non-U.S. Holders eligible
for the benefits of certain income tax treaties. For this purpose, dividends may
include certain constructive dividends as discussed in "U.S. Holders --
Constructive Dividends" above. A Non-U.S. Holder who wishes to claim the
benefits of an applicable income tax treaty will be required to satisfy certain
certification and other requirements. If dividends on the common stock are
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States, then the dividend generally will be exempt
from the 30% U.S. federal withholding tax provided certain certification
requirements are met (generally by providing IRS Form W-8ECI), and the Non-U.S.
Holder generally will be subject to U.S. federal income tax on the dividends on
a net income basis, generally in the same manner as a U.S. Holder, unless an
applicable income tax treaty provides otherwise. In addition, if such Non-U.S.
Holder is a foreign corporation, it may also be subject to a branch profits tax
on such effectively-connected income at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Backup Withholding
A U.S. Holder of notes or common stock may be subject to "backup
withholding" with respect to certain "reportable payments," including interest
payments, dividend payments, principal payments on the notes and proceeds from
the sale or other disposition of the notes or common stock. These backup
withholding rules apply if the U.S. Holder, among other things, (i) fails to
furnish a social security number or other taxpayer identification number ("TIN")
certified under penalties of perjury, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividends or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such U.S. Holder
is not subject to backup withholding. Backup withholding will not apply,
however, with respect to payments made to certain U.S. Holders, including
corporations and tax-exempt organizations, provided their exemption from backup
withholding is properly established.
40
Any amount withheld from a payment to a U.S. Holder under the backup
withholding rules is creditable against the U.S. Holder's U.S. federal income
tax liability, or will otherwise be refundable provided the IRS is furnished
with the proper information.
Under current Treasury Regulations, backup withholding will not apply to
payments made by us or our agent to a Non-U.S. Holder if the Non-U.S. Holder
provides the certification described above under "Non-U.S. Holders -- Payment of
Interest," or otherwise establishes an exemption.
41
SELLING SECURITYHOLDERS
We originally issued the notes in a private placement on September 30,
2003. The notes were resold by the initial purchasers of the notes to qualified
institutional buyers under Rule 144A under the Securities Act of 1933, as
amended. Selling securityholders, including their transferees, pledges or donees
or their successors, may from time to time offer and sell any or all of the
notes and the common stock into which the notes are convertible pursuant to this
prospectus.
The table below sets forth the name of each selling securityholder, the
principal amounts of notes that may be offered by each selling securityholder
under this prospectus and the number of shares of common stock into which the
notes are convertible. Information about the selling securityholders may change
from time to time. Any changed information will be set forth in prospectus
supplements or post-effective amendments, as required.
Because the selling securityholders may offer all or some portion of the
notes or the common stock into which the notes are convertible, we cannot
estimate the amount of notes or common stock that may be held by the selling
securityholders upon the completion of any sales. For information on the
procedure for sales by selling securityholders, read the disclosure under the
heading "Plan of Distribution" below.
Principal Amount
of Notes Number of
Beneficially Shares of
Owned Percentage Common Stock Percentage of
Name of That May Be of Notes That May Be Common Stock
Selling Securityholder(1) Sold(5) Outstanding Sold(2)(3) Outstanding(4)
---------------------------------------------------- --------------- ----------- ------------ ---------------
Alexandra Investment Management 4,000,000 4.44% 99,096 *
Alpine Associates 1,330,000 1.48% 32,949 *
Alpine Partners, L.P. 170,000 * 4,212 *
ATSF - Transamerica Convertible Securities 4,400,000 4.89% 109,005 1.07%
Aviator Fund Management 5,000,000 5.56% 123,870 1.22%
B.C. McCabe Foundation 200,000 * 4,955 *
BNP Paribas Equity Strategies SNC 1,995,000 2.22% 49,424 *
Citadel Equity Fund Ltd. 2,215,000 2.46% 54,874 *
Citadel Jackson Investment Fund Ltd. 285,000 * 7,061 *
Context Convertible Arbitrage Fund, LP. 2,250,000 2.50% 55,741 *
Context Convertible Arbitrage Offshore Ltd. 3,775,000 4.19% 93,521 *
CooperNeff Convertible Strategies Master
Fund, L.P. 2,004,000 2.23% 49,647 *
CSS, L.L.C. 2,000,000 2.22% 49,548 *
Drake Offshore Master Fund, Ltd 13,750,000 15.28% 340,641 3.35%
Fore Convertible Master Fund Ltd. 2,018,000 2.24% 49,994 *
Guggenheim Portfolio Company VIII, LLC
(Cayman) Ltd 585,000 * 14,493 *
Geode U.S. Convertible Arbitrage Fund, a
series of Geode Investors LLC 1,000,000 1.11% 24,774 *
Highbridge International LLC 4,750,000 5.28% 117,676 1.16%
IDEX - Transamerica Convertible Securities
Fund 2,600,000 2.89% 64,412 *
Intl. Truck & Engine Corp. Non-
Contributory Retirement Plan Trust 700,000 * 17,342 *
Intl. Truck & Engine Corp. Retirement Plan
for Salaried Employee's Trust 750,000 * 18,580 *
KBC Financial Products USA Inc. 4,700,000 5.22% 116,437 1.14%
KeySpan Foundation 90,000 * 2,230 *
LDG Limited 32,000 * 793 *
Lehman Brothers, Inc. 7,975,000 8.86% 197,572 1.94%
Lexington Vantage Fund c/o TQA Investors
LLC 8,000 * 198 *
42
Principal Amount
of Notes Number of
Beneficially Shares of
Owned Percentage Common Stock Percentage of
Name of That May Be of Notes That May Be Common Stock
Selling Securityholder(1) Sold(5) Outstanding Sold(2)(3) Outstanding(4)
---------------------------------------------------- --------------- ----------- ------------ ---------------
Lord Abbett Investment Trust - LA
Convertible Fund 490,000 * 12,139 *
Lydian Global Opportunities Master Fund
LTD 2,000,000 2.22% 49,548 *
Lyxor Context Fund Ltd 275,000 * 6,813 *
Lyxor Convertible Arbitrage Fund 133,000 * 3,295 *
Man Mac 1 Limited 585,000 * 14,493 *
Maystone Continuum Mater Fund, Ltd. 4,250,000 4.72% 105,289 1.03%
McMahan Securities Co. L.P. 1,250,000 1.39% 30,967 *
National Bank of Canada 350,000 * 8,671 *
National Bank of Canada c/o Lovell NBE
Securities, Inc. 3,000,000 3.33% 74,322 *
National Fuel & Gas Company Retirement
Plan 225,000 * 5,574 *
North Pole Capital Master Fund 3,000,000 3.33% 74,322 *
Oxford, Lord Abbett & Co. 1,545,000 1.72% 38,276 *
Royal Bank of Canada (Norshield) 350,000 * 8,671 *
Singlehedge U.S. Convertible Arbitrage
Fund 333,000 * 8,250 *
Sphinx Fund 15,000 * 372 *
Sterling Investment Company 500,000 * 12,387 *
Sturgeon Limited 285,000 * 7,061 *
Sunrise Partners Limited Partnership 7,250,000 8.06% 179,611 1.76%
TD Securities (USA) Inc. 2,664,000 2.96% 65,998 *
Total Fina Elf Finance USA, Inc. 250,000 * 6,193 *
TQA Master Fund, LTD c/o TQA Investors
LLC 372,000 * 9,216 *
TQA Master Plus Fund, LTD. c/o TQA
Investors LLC 440,000 * 10,901 *
TQA Special Opportunities Master Fund,
LTD. c/o TQA Investors LLC. 500,000 * 12,387 *
UBS AG London F/B/OPB 14,250,000 15.83% 353,028 3.47%
Univest Convertible Arbitrage Fund II Ltd
(Norshield) 250,000 * 6,193 *
Wachovia Bank, National Association 4,250,000 4.72% 105,289 1.03%
Xavex-Convertible Arbitrage 7 Fund 73,000 * 1,808 *
Zurich Institutional Benchmarks Master
Fund, LTD. c/o TQA Investors LLC 60,000 * 1,486 *
Total (5) 90,000,000 100% 2,229,651 21.91%
* Less than 1%
(1) Also includes any sale of the notes and the underlying common stock by
pledgees, donees, transferees or other successors in interest that receive
such securities by pledge, gift, distribution or other non-sale related
transfer from the named selling securityholders. Information about other
selling securityholders will be set forth in prospectus supplements,
post-effective amendments or in other documents that we file from time to
time with the Securities and Exchange Commission that are incorporated by
reference in this prospectus, if required. See "Where You Can Find More
Information."
(2) Assumes conversion of all of the selling securityholder's notes at a
conversion rate of 24.7739 per note and a cash payment in lieu of the
issuance of any fractional share interest. However, this conversion rate is
subject to adjustment as described under "Description of the Notes --
Conversion Rights." As a result, the number of shares of common stock
issuable upon conversion of the notes may increase or decrease in the
future.
43
(3) Reflects rounding down of fractional common stock issuable to each selling
securityholder upon conversion of the notes.
(4) Calculated based on Rule 13d-3 of the Securities Exchange Act of 1934,
using 10,176,422 shares of common stock outstanding as of October 22, 2004.
In calculating this amount, we did not treat as outstanding the common
stock issuable upon conversion of notes.
(5) The figures in these columns are based on information supplied to us, as of
October 22, 2004, by the respective selling securityholders named in the
table. As of that date, these selling securityholders had supplied us with
information indicating that, collectively, they owned more than $90,000,000
aggregate principal amount of notes (which would be convertible into more
than 2,229,651 shares of common stock). We believe that this reflects that
one or more selling securityholders supplied us with information for
inclusion in the table and then sold their notes in transactions exempt
from the registration requirements of the Securities Act to persons who
also supplied us with information with respect to the same notes. However,
since this prospectus would not be applicable to any sale of notes after
they have been publicly sold utilizing the prospectus, no more than
$90,000,000 principal amount of notes, nor more than 2,229,651 shares of
common stock, could be sold utilizing this prospectus. Accordingly, the
$90,000,000 and 2,229,651 totals in these columns have been retained and
represent the maximum principal amount of notes and maximum number of
shares of common stock that could be sold hereunder.
None of the selling securityholders listed above has, or within the past
three years had, any position, office or any material relationship with us or
any of our affiliates.
To the extent that any of the selling securityholders identified above are
broker-dealers, they are deemed to be, under interpretations of the Securities
and Exchange Commission, "underwriters" within the meaning of the Securities
Act.
With respect to selling securityholders that are affiliates of
broker-dealers, we believe that such entities acquired their notes or underlying
common stock in the ordinary course of business and, at the time of the purchase
of the notes or the underlying common stock, such selling securityholders had no
agreements or understandings, directly or indirectly, with any person to
distribute the notes or underlying common stock. To the extent that we become
aware that such entities did not acquire their notes or underlying common stock
in the ordinary course of business or did have such an agreement or
understanding, we will file a post-effective amendment to the registration
statement of which this prospectus forms a part to designate such affiliate as
an "underwriter" within the meaning of the Securities Act.
Only selling securityholders identified above who beneficially own the
notes set forth opposite each such selling securityholder's name in the
foregoing table on the effective date of the registration statement, of which
this prospectus forms a part, may sell such securities pursuant to the
registration statement. Prior to any use of this prospectus in connection with
an offering of the notes or the underlying common stock by any holder not
identified above, the name and aggregate amount of notes beneficially owned by
the selling securityholder intending to sell such notes or the underlying common
stock and the aggregate amount of notes or the number of shares of the
underlying common stock to be offered will be set forth in prospectus
supplements or post-effective amendments. The prospectus, supplement or
post-effective amendment will also disclose whether any selling securityholder
has held any position or office with, has been employed by or otherwise has had
a material relationship with us during the three years prior to the date of the
prospectus if such information has not been disclosed herein.
44
PLAN OF DISTRIBUTION
The notes and the underlying common stock are being registered to permit
the resale of such securities by the holders of them from time to time after the
date of this prospectus. We will not receive any of the proceeds from the sale
by the selling securityholders of the notes and common stock.
The selling securityholders may offer and sell the notes and the common
stock into which the notes are convertible from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. Such
sales may be effected by a variety of methods, including the following:
o in market transactions;
o in privately negotiated transactions;
o through the writing of options;
o in a block trade in which a broker-dealer will attempt to sell a block
of securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o if we agree to it prior to the distribution, through one or more
underwriters on a firm commitment or best-efforts basis;
o through broker-dealers, which may act as agents or principals;
o directly to one or more purchasers;
o through agents; or
o in any combination of the above or by any other legally available
means.
The notes originally issued in the private placement are eligible for
trading on the PORTAL market. However, notes sold pursuant to this prospectus
will no longer be eligible for trading on the PORTAL market. Accordingly, no
assurance can be given as to the development of liquidity or any trading market
for the notes.
If a material arrangement with any underwriter, broker, dealer or other
agent is entered into for the sale of any notes and the common stock into which
the notes are convertible through a secondary distribution or a purchase by a
broker or dealer, or if other material changes are made in the plan of
distribution of the notes and the common stock into which the notes are
convertible, a prospectus supplement will be filed, if necessary, under the
Securities Act disclosing the material terms and conditions of such arrangement.
The underwriter or underwriters with respect to an underwritten offering of
notes and the common stock into which the notes are convertible and the other
material terms and conditions of the underwriting will be set forth in a
prospectus supplement relating to such offering and, if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of the prospectus supplement. In connection with the sale of the notes
and the common stock into which the notes are convertible, underwriters will
receive compensation in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of notes and underlying common
stock for whom they may act as agent. Underwriters may sell to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters or commissions from the
purchasers for whom they may act as agent.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes or the underlying common
stock by the selling securityholders. Selling securityholders may decide not to
sell all or a portion of the notes or the underlying common stock offered by
them pursuant to this prospectus or may decide not to sell notes or the
underlying common stock under this prospectus. In addition, any selling
securityholder may transfer, devise or give the notes or the underlying common
stock by other means not described in this prospectus. Any notes or underlying
common stock covered by this prospectus that qualify for sale pursuant to Rule
144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A
rather than pursuant to this prospectus.
45
The selling securityholders and any underwriters, broker-dealers or agents
participating in the distribution of the notes and the common stock into which
the notes are convertible may be deemed to be "underwriters" within the meaning
of the Securities Act, and any profit on the sale of the notes or common stock
by the selling securityholders and any commissions received by any such
underwriters, broker-dealers or agents may be deemed to be underwriting
commissions under the Securities Act. If the selling securityholders were deemed
to be underwriters, the selling securityholders may be subject to statutory
liabilities including, but not limited to, those of Sections 11, 12 and 17 of
the Securities Act and Rule 10b-5 under the Exchange Act.
The selling securityholders and any other person participating in the
distribution will be subject to the Exchange Act and the rules and regulations
under the Exchange Act, including, without limitation, Regulation M, which may
limit the timing of purchases and sales of any of the notes and the common stock
into which the notes are convertible by the selling securityholders and any
other relevant person. Furthermore, Regulation M may restrict the ability of any
person engaged in the distribution of the notes and the common stock into which
the notes are convertible to engage in market-making activities with respect to
the particular notes and the common stock into which the notes are convertible
being distributed. All of the above may affect the marketability of the notes
and the common stock into which the notes are convertible and the ability of any
person or entity to engage in market-making activities with respect to the notes
and the common stock into which the notes are convertible.
Under the registration rights agreement, we and the selling securityholders
will each indemnify the other against certain liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection with these liabilities.
We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the notes and the underlying common stock to
the public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by
Shearman & Sterling LLP, New York.
EXPERTS
The financial statements incorporated in this prospectus by reference to
the Annual Report on Form 10-K for the year ended June 30, 2004 has been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent registered public 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.
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.
46
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, 2004. 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, any filings made by us after the
date of the registration statement and prior to the effectiveness of the
registration statement 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 (excluding any information furnished pursuant to Item 2.02 or Item 7.01
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, 2004 filed
on September 13, 2004.
o Our Quarterly Report on Form 10-Q for the fiscal quarter ending
September 30, 2004 filed on November 9, 2004.
o Our Current Reports on Form 8-K filed on September 10, 2004, October
12, 2004, October 20, 2004 and November 8, 2004.
o The audited consolidated financial statements of Lavalife Inc. for the
years ended September 30, 2003 and 2002, attached as Exhibit 99.2 to
our Current Report on Form 8-K filed on March 26, 2004.
o Our Proxy Statement on Schedule 14A filed on October 28, 2004.
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
Any statement contained in a document incorporated by reference, or deemed
to be incorporated by reference, in this prospectus shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference in this prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
Statements contained in this prospectus as to the contents of any contract or
other document referred to in this prospectus do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
47
PART II
Information Not Required In Prospectus
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the
registrant in connection with the issuance and distribution of the notes and
underlying common stock being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the SEC
registration fee.
Securities and Exchange Commission registration fee.............. $7,281
Accountant's fees and expenses................................... $60,000
Legal fees and expenses.......................................... $300,000
Printing fees and expenses....................................... $60,000
Trustee's fees and expenses...................................... $13,000
NASDAQ listing fees.............................................. $22,297
----------
Total...................................................... $462,578
==========
Item 15. 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.
48
Item 16. 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.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a)(1) 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 in the registration statement. Notwithstanding the
foregoing, any increase or 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% 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;
provided, however, that the undertakings set forth in clauses (i) and
(ii) above do not apply if the information required to be included in
a post-effective amendment by those clauses is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in this registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) 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.
49
(c) 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.
(d) 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.
50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
certify that we have reasonable grounds to believe that we meet all of the
requirements for filing on Form S-3 and have 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 November 12, 2004.
MEMBERWORKS INCORPORATED
By: /s/ Gary A. Johnson
-------------------
Gary A. Johnson
President, Chief Executive Officer and
Director
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 November 12, 2004.
Signature Title
--------- -----
/s/ Gary A. Johnson
--------------------------------- President, Chief Executive Officer and
Gary A. Johnson Director
/s/ James B. Duffy
--------------------------------- Executive Vice President and Chief
James B. Duffy Financial Officer
*
--------------------------------- Director
Alec L. Ellison
* Director
---------------------------------
Scott N. Flanders
* Director
---------------------------------
Robert Kamerschen
* Director
---------------------------------
Michael T. McClorey
* Director
---------------------------------
Edward M. Stern
* Director
---------------------------------
Marc S. Tesler
* By:/s/ James B. Duffy Attorney-in-Fact
---------------------------------
James B. Duffy
51
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).
4.1* Indenture dated as of September 30, 2003 between MemberWorks
Incorporated and Deutsche Bank Trust Company Americas, Trustee
relating to the 5.50% Convertible Senior Subordinated Notes due
2010, including the form of notes. (filed as Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q, Registration No.
333-10541, filed on November, 13 2003 and incorporated herein by
reference).
4.2* Registration Rights Agreement dated as of September 30, 2003
between MemberWorks Incorporated and Lehman Brothers Inc. and
CIBC World Markets Corp (filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q, Registration No. 333-10541 filed
on November 13, 2003 and incorporated herein by reference).
4.3* Amended and Restated Registration Rights Agreement, dated
September 9, 1994 between MemberWorks Incorporated and Brown
Brothers Harriman & Co. (filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-1, Registration No. 333-10541,
filed on October 18, 1996 and incorporated herein by reference).
4.4* Registration Rights Agreement dated as of September 20, 1995
among MemberWorks Incorporated and the Stockholders set forth on
Schedule I thereto. (Filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-1, Registration No. 333-10541,
filed on October 18, 1996 incorporated herein by reference).
5.1* Opinion of Shearman & Sterling LLP
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of PricewaterhouseCoopers LLP, as independent registered
public accounting firm.
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 Deutsche Bank Trust Company Americas.
------------------
* Previously filed
52