<PAGE>   1
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996
 
                                                     REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                             ---------------------
 
                            MEMBERWORKS INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                             ---------------------
 
<TABLE>
<S>                                 <C>                                 <C>
              DELAWARE                              7389                             06-1276882
  (STATE OR OTHER JURISDICTION OF       (PRIMARY STANDARD INDUSTRIAL              (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)       CLASSIFICATION CODE NUMBER)            IDENTIFICATION NUMBER)
</TABLE>
 
                             ---------------------
 
         680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT 06901
                                 (203) 324-7635
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                             ---------------------
 
                                GARY A. JOHNSON
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                            MEMBERWORKS INCORPORATED
                        680 WASHINGTON BLVD., SUITE 1100
                          STAMFORD, CONNECTICUT 06901
                                 (203) 324-7635
               (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
               NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                             ---------------------
 
                                   COPIES TO:
 
<TABLE>
<S>                                                  <C>
                MARK G. BORDEN, ESQ.                                 ALAN K. AUSTIN, ESQ.
            THOMAS L. BARRETTE, JR., ESQ.                           STEVEN V. BERNARD, ESQ.
                    HALE AND DORR                                     DAVID S. KIM, ESQ.
                   60 STATE STREET                             WILSON SONSINI GOODRICH & ROSATI
             BOSTON, MASSACHUSETTS 02109                           PROFESSIONAL CORPORATION
                   (617) 526-6000                                     650 PAGE MILL ROAD
                                                                  PALO ALTO, CALIFORNIA 94304
                                                                        (415) 493-9300
</TABLE>
 
                             ---------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
            As soon as practicable after the effective date hereof.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  / /
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  / / __________
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  / / __________
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  / /
                             ---------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<S>                                                 <C>                          <C>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
              TITLE OF EACH CLASS OF                 PROPOSED MAXIMUM AGGREGATE           AMOUNT OF
            SECURITIES TO BE REGISTERED                  OFFERING PRICE(1)             REGISTRATION FEE
<S>                                                 <C>                          <C>
- -------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share............         $60,000,000                    $20,690
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.
                             ---------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
                  SUBJECT TO COMPLETION, DATED AUGUST 21, 1996
 
                                      LOGO
 
                                               SHARES
 
                                  COMMON STOCK
 
     Of the             shares of Common Stock offered hereby,
shares are being sold by MemberWorks Incorporated ("MemberWorks" or the
"Company") and             shares are being sold by certain Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price will be between $          and $          per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price.
                            ------------------------
 
        THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" COMMENCING ON PAGE 6.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
          ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
             REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
 
<TABLE>
<S>                                 <C>              <C>              <C>              <C>
- -------------------------------------------------------------------------------------------------------
                                                       UNDERWRITING                      PROCEEDS TO
                                        PRICE TO      DISCOUNTS AND     PROCEEDS TO        SELLING
                                         PUBLIC        COMMISSIONS       COMPANY(1)      STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share..........................        $                $                $                $
- -------------------------------------------------------------------------------------------------------
Total(2)...........................        $                $                $                $
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Before deducting expenses payable by the Company, estimated at $900,000.
 
(2) The Selling Stockholders have granted the Underwriters a 30-day option to
    purchase up to an additional           shares of Common Stock solely to
    cover over-allotments, if any. See "Underwriting." If such option is
    exercised in full, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Selling Stockholders will be $          ,
    $          and $          , respectively.
                            ------------------------
 
     The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about             , 1996.
                            ------------------------
 
ROBERTSON, STEPHENS & COMPANY
 
                             HAMBRECHT & QUIST
 
                                                        PAINEWEBBER INCORPORATED
 
               The date of this Prospectus is             , 1996
<PAGE>   3
 
     THE COMPANY'S MEMBERSHIP SERVICE PROGRAMS CREATE A SYNERGISTIC RELATIONSHIP
AMONG MEMBERS, VENDORS, CLIENTS AND THE COMPANY.
 

                                    [CHART]

In this place appears a graphic depicting the exchange of economic and other
value between the Company and its members, service providers and clients. In
exchange for fees, the Company provides its members value-added membership
service programs. In exchange for marketing support, the Company's service
providers provide it with program support. In exchange for customer lists, the
Company pays royalties to its clients.

 
                            ------------------------
 
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
                                        2
<PAGE>   4
 
     NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
 
     UNTIL             , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Summary...............................................................................    4
Risk Factors..........................................................................    6
Use of Proceeds.......................................................................   14
Dividend Policy.......................................................................   14
Capitalization........................................................................   15
Dilution..............................................................................   16
Selected Consolidated Financial Information...........................................   17
Management's Discussion and Analysis of Financial Condition and Results of
  Operations..........................................................................   18
Business..............................................................................   25
Management............................................................................   37
Certain Transactions..................................................................   45
Principal and Selling Stockholders....................................................   46
Description of Capital Stock..........................................................   48
Shares Eligible for Future Sale.......................................................   51
Underwriting..........................................................................   53
Legal Matters.........................................................................   54
Experts...............................................................................   54
Additional Information................................................................   54
Index to Consolidated Financial Statements............................................  F-1
</TABLE>
 
                            ------------------------
 
     The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by its independent accountants, and with quarterly reports for the
first three quarters of each fiscal year containing unaudited consolidated
financial information.
 
     Countrywide Dental Program and HealthTrends are registered trademarks of
the Company. Connections, Your source for entertainment values; Countrywide
Dental and Health Program; Home PC Link; MoneyMaster; Official Sports
Connection; and Travel Arrangements are trademarks of the Company. This
Prospectus also includes trademarks and registered trademarks of other
companies.
 
     The Company was incorporated in Delaware on July 12, 1989. The Company's
principal executive offices are located at 680 Washington Blvd., Suite 1100,
Stamford, Connecticut 06901 and its telephone number is (203) 324-7635. In
August 1996, the Company changed its name from CardMember Publishing Corporation
to MemberWorks Incorporated.
 
                                        3
<PAGE>   5
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
 
                                  THE COMPANY
 
     MemberWorks Incorporated ("MemberWorks" or the "Company") is a leading
designer and provider of innovative membership service programs. The Company
addresses the needs of organizations seeking to leverage the expertise of an
outside provider in offering these programs. MemberWorks offers its programs to
increasingly sophisticated consumers seeking economy, efficiency and convenience
in their purchase of products and services. For participating vendors, the
programs provide the opportunity to reach a large number of demographically
attractive members at minimal incremental marketing cost. As of June 30, 1996,
the Company had approximately 40 client organizations and approximately 1.5
million members.
 
     The Company currently offers eight membership programs in broad lifestyle
areas such as health, dental, travel, entertainment, sports, financial, and
computers and software. The Company offers memberships primarily on an
individual basis. Individual memberships are marketed by the Company to
consumers listed in databases provided to it by clients. The Company analyzes
these client lists to identify likely members utilizing a sophisticated,
proprietary membership database system. Individual members pay fees directly to
the Company, while the Company incurs the marketing costs to solicit these
members and pays royalties to the clients on membership fees. The Company
solicits members for its programs primarily through third-party telemarketers
and to a lesser extent direct mail campaigns. Some of the Company's individual
memberships are available at retail stores and on-line through the World Wide
Web. Recently, the Company also began to offer memberships on a wholesale basis.
Wholesale memberships incorporate elements from the Company's eight membership
programs and are sold to client organizations who then market them to their
consumers.
 
     The Company distributes its programs almost exclusively through credit card
issuers. Currently, the Company has 36 credit card issuer clients to whom it
pays royalties, including 10 of the top 20 issuers of bank credit cards, such as
Household Credit Services, Inc. and Capital One Financial Corp., four of the top
five issuers of oil company credit cards, such as Shell Oil Company and Texaco
Credit Card Services, and the leading issuer of retail company credit cards,
Sears, Roebuck and Co.
 
     The Company has developed a consultative product development process which
it believes has allowed it to respond quickly and effectively to market demand
for new products. The Company believes it was the first membership services
company to introduce aggregated discount services in health, sports, financial
and, most recently, through Home PC Link, personal computers and software. The
Company also believes that its programs are innovative with respect to the
variety and quality of particular services, discounts and other features which
those programs offer.
 
     To achieve its objective of becoming the leading provider of innovative
membership programs, the Company intends to continue to develop innovative
service programs for broad markets, expand existing and develop new distribution
channels, maintain and build its renewal membership base, offer premium quality
services, develop and use innovative technical solutions, leverage and develop
multiple vendor partners, and pursue international opportunities.
 
                                        4
<PAGE>   6
 
                                  THE OFFERING
 
<TABLE>
<S>                                                         <C>
Common Stock offered by the Company.......................  shares
Common Stock offered by the Selling Stockholders..........  shares
Common Stock outstanding after the offering...............  shares(1)
Use of Proceeds...........................................  Redemption of redeemable
                                                            preferred stock and general
                                                            corporate purposes, including the
                                                            acquisition of new members,
                                                            program development, capital
                                                            expenditures and working capital.
Proposed Nasdaq National Market symbol....................  MBRS
</TABLE>
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED JUNE 30,
                                                                          -------------------------------
                                                                           1994        1995        1996
                                                                          -------     -------     -------
<S>                                                                       <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................  $25,830     $41,547     $57,012
Total expenses..........................................................   31,846      52,279      62,259
Net loss................................................................   (6,016)    (10,732)     (5,247)
Pro forma net loss per share(2).........................................                          $ (2.94)
Pro forma weighted average common and common equivalent shares
  outstanding(2)........................................................                            1,839
</TABLE>
 
<TABLE>
<CAPTION>
                                                                             JUNE 30, 1996
                                                            -----------------------------------------------
                                                                             PRO              PRO FORMA
                                                             ACTUAL        FORMA(3)       AS ADJUSTED(3)(4)
                                                            --------     ------------     -----------------
<S>                                                         <C>          <C>              <C>
BALANCE SHEET DATA:
Cash and cash equivalents...............................    $  4,312       $  4,312            $
Working capital (deficit)...............................     (10,561)       (10,561)
Total assets............................................      19,715         19,715
Deferred membership income, net.........................       8,416          8,416
Long-term obligations...................................       1,089          1,089
Redeemable preferred stock..............................      20,487          1,949
Total stockholders' equity (deficit)....................     (36,332)       (17,794)
</TABLE>
 
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
    1996. Excludes 177,467 shares of Common Stock issuable pursuant to stock
    options outstanding at June 30, 1996 (of which options to purchase 52,525
    shares were exercisable) at a weighted average exercise price of $18.89 per
    share, and 53,864 shares of Common Stock issuable upon the exercise of
    warrants outstanding at June 30, 1996 (all of which warrants were
    exercisable) at a weighted average exercise price of $9.29 per share. See
    "Capitalization," "Management -- Stock Plans," "Certain Transactions" and
    "Principal and Selling Stockholders." Also excludes 18,000 shares of Common
    Stock issuable upon exercise of options that may be granted to an executive
    officer of the Company upon achievement of certain performance goals prior
    to December 31, 1996. All such options will be exercisable at an exercise
    price of $20.00 per share and will vest ratably over a four-year period. See
    "Management -- Executive Compensation."
 
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
    of the computation of pro forma net loss per share and the shares used in
    computing pro forma net loss per share.
 
(3) Gives effect to the conversion of all outstanding shares of the Company's
    Class A Common Stock and Series A, Series B, Series C, Series D and Series H
    Preferred Stock into an aggregate of 1,675,311 shares of Common Stock.
 
(4) As adjusted to give effect to the sale of         shares of Common Stock
    offered by the Company hereby, at an assumed initial public offering price
    of $        per share, and the application of the estimated net proceeds
    therefrom, including the redemption of all outstanding shares of the
    Company's Series E and Series F Preferred Stock upon the closing of this
    offering. See "Use of Proceeds."
 
    Except as otherwise indicated, all information in this Prospectus (i)
reflects the conversion of all outstanding shares of the Company's Class B
Common Stock into an aggregate of 11,723 shares of Common Stock, effected in
August 1996; (ii) reflects the conversion of all outstanding shares of the
Company's Class A Common Stock and Series A, Series B, Series C, Series D and
Series H Preferred Stock into an aggregate of 1,675,311 shares of Common Stock
upon the closing of this offering; (iii) reflects the redemption of all
outstanding shares of the Company's Series E and Series F Preferred Stock upon
the closing of this offering; and (iv) assumes no exercise of the Underwriters'
over-allotment option. The Company's fiscal year ends on June 30 of each year.
 
                                        5
<PAGE>   7
 
                                  RISK FACTORS
 
     In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth in the following risk factors and elsewhere in this
Prospectus.
 
HISTORY OF LOSSES
 
     The Company has incurred significant operating losses since its inception.
As of June 30, 1996, the Company had an accumulated deficit of approximately
$38.3 million. For fiscal years 1996 and 1995, the Company incurred net losses
of approximately $5.2 million and $10.7 million, respectively. Because of
on-going costs in connection with obtaining new members, the Company expects to
continue to incur operating and net losses at least through fiscal 1997.
Although the Company has experienced revenue growth in recent periods, such
growth rates may not be sustainable and are not indicative of future operating
results. There can be no assurance that the Company will achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
DEPENDENCE ON CLIENTS; CLIENT CONCENTRATION
 
     The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. As a result, the Company's ability to
market a new program to an existing customer base or an existing program to a
new customer base is dependent on first obtaining approval from a client.
 
     Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including approximately 35.2% from customer lists provided by
Sears, Roebuck and Co. ("Sears"). These and other client relationships are
pursuant to contracts which may be terminated by the client upon 30 to 90 days'
notice without penalty. Upon such termination, the Company generally has the
right to continue its relationship with the client's customers that have become
program members for a specified period to substantially the same extent as prior
to the termination, but may not resolicit those members upon such members'
cancellation or non-renewal of the membership. Approximately 75% of the revenue
attributable to Sears for the year ended June 30, 1996 was generated pursuant to
a contract which also provides that, upon termination of the agreement for
default, Sears may prohibit the Company from renewing memberships and otherwise
cause the Company to terminate its relationship with existing members. Events
that constitute default include events outside the control of the Company,
including acts and omissions by the Company's third-party vendors. There can be
no assurance that one or more of the Company's key or other clients will not
terminate its relationship with the Company or that clients will provide
additional customer lists to the Company for use in further marketing new or
existing membership programs. In addition, the Company's agreement with one of
its key clients expires in September 1996, and there can be no assurance that
the client will renew such agreement on favorable terms, if at all. Termination
or expiration of a key client relationship could have a material adverse effect
on the future revenues from existing programs of which such client's customers
are members and on the Company's ability to further market new or existing
programs through such client.
 
     Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise be subject to binding arbitration. There can be
no assurance that,
 
                                        6
<PAGE>   8
 
upon exercise of such option, the Company would receive, as a result of
negotiation, arbitration or otherwise, revenue or net income commensurate with
the amount which the Company would receive if the option were not exercised.
Failure to receive a commensurate amount, and the loss of the ability to market
to the members of the program following exercise of the option, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in professional relationships, and such clients
may not be replaced on a timely basis, if at all. The loss of any client,
particularly a key client, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Distribution."
 
DEPENDENCE ON MEMBERSHIP RENEWALS
 
     The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During an initial annual membership term or renewal term, a member may
cancel his or her membership in the program, generally for a complete refund of
the membership fee for that period. Accordingly, the profitability of each of
the Company's programs depends on recurring and sustained membership renewals.
Renewal rates are inherently uncertain and are subject to several factors, many
of which are outside of the Company's control, including changing member
preferences, competitive price pressures, general economic conditions, customer
satisfaction and credit card holder turnover. There can be no assurance that a
particular program will generate sufficient renewals to become profitable or
that memberships, if renewed, will not be canceled. Failure of one or more of
the Company's programs to generate recurring and sustained membership renewals
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
 
FLUCTUATIONS IN OPERATING RESULTS
 
     The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of customer orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; the availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected revenues for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the
 
                                        7
<PAGE>   9
 
Company will not have an adverse effect upon the Company's results of
operations, particularly in quarters immediately following consummation of such
transactions, while the operations of the acquired business are being integrated
into the Company's operations.
 
     In addition, the Company is required to grant options to purchase up to
18,000 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $20.00 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise price and the trading price of the
Company's Common Stock on the date of the grant. The Company's agreement to
grant such options terminates on December 31, 1996.
 
     Due to the foregoing and other factors, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period to period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. It is also likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors, which, in turn, could have a severe
adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
INTENSE COMPETITION
 
     Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company to promote a program
if the services provided by the Company's program are similar to, or merely
overlap with, the services provided by an existing program of a competitor. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations which
offer benefit programs to their customers. There can be no assurance that the
Company's competitors will not increase their emphasis on programs similar to
those offered by the Company and more directly compete with the Company, that
new competitors will not enter the market, or that other businesses will not
themselves introduce competing programs. Many of the Company's current and
prospective competitors, including CUC, have substantially larger customer bases
and greater financial and other resources than the Company. There can be no
assurance that the Company's current or potential competitors will not provide
programs comparable or superior to those provided by the Company at lower
membership prices or adapt more quickly than the Company to evolving industry
trends or changing market requirements. In addition, alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced gross margins and loss of market share,
any of which could materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete effectively against current and future competitors. See
"Business -- Competition."
 
NEW PROGRAM INTRODUCTIONS
 
     The Company's business is substantially dependent on its ability to develop
and successfully introduce new programs which generate consumer interest.
Failure to introduce new programs in a timely manner could result in the
Company's competitors acquiring additional market share for a program in a
particular area of consumer interest. In addition, the introduction or
announcement of
 
                                        8
<PAGE>   10
 
new programs by the Company or by others could render existing programs
uncompetitive or obsolete, or result in a delay or decrease in orders for
existing programs as customers evaluate new programs or select the new programs
as an alternative to existing programs. Therefore, the announcement or
introduction of new programs by the Company or others, or the failure by the
Company to introduce new programs which have broad consumer appeal, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Membership Service Programs" and
"-- Competition."
 
DEPENDENCE ON VENDORS AND TELEMARKETERS
     The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing."
 
DEPENDENCE ON CREDIT CARD INDUSTRY
     The Company's future success is dependent in large part on continued demand
for the Company's programs from businesses within the industries served by the
Company. In particular, programs marketed through the Company's credit card
issuer clients accounted for substantially all of the Company's revenues in
fiscal 1996. A significant downturn in the credit card industry or a trend in
that industry to reduce or eliminate its use of membership programs would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company is obligated under the terms of
its agreement with credit card issuers and merchant processors under rules
promulgated by credit card associations such as Visa International and Master
Card to maintain certain standards of commercial conduct with respect to credit
card users. Violations of such standards could jeopardize the Company's ability
to sell its programs using such credit cards as the medium of commercial
exchange, which could have a material adverse effect on Company's business,
financial condition and results of operations. See "Business -- Distribution."
 
MANAGEMENT OF GROWTH
     The Company has recently experienced a period of rapid growth that has
placed significant demands on its management and other resources, and continued
growth, if any, could continue to place significant demands on such resources.
Net sales increased from approximately $9.4 million in fiscal 1992 to $57.0
million in fiscal 1996. In addition, the number of employees increased from 76
to approximately 400 during the same period. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
its work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations,
and the failure to support the Company's operations effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
     Although the Company has not historically generated significant
international revenues, the Company intends to attempt to penetrate
international markets. In order to successfully expand internationally, the
Company must establish foreign operations and hire additional personnel. This
will require significant management attention and financial resources and could
materially adversely affect the Company's operating margins. International sales
and operations are subject to numerous risks, including unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual
 
                                        9
<PAGE>   11
 
property rights, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
implementation of foreign exchange controls and potentially adverse tax
consequences. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition and
results of operations. See "Business -- Strategy" and "-- Sales and Marketing."
 
MEMBERSHIP PROGRAM INDUSTRY; NEGATIVE IMPACT OF COMPETING INDUSTRIES
 
     Providers of membership service programs compete for client marketing
budget dollars with other marketing activities and, in particular, other forms
of direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange via the World
Wide Web, will proliferate significantly in the foreseeable future. To the
extent such proliferation occurs, it could have a material adverse effect on the
demand for membership service programs. Furthermore, as the telemarketing
industry continues to grow, the effectiveness of telemarketing, which is the
Company's major means of marketing its programs, as a direct marketing tool may
decrease as a result of increased consumer resistance to telemarketing in
general. See "Business -- Industry Overview," "-- Sales and Marketing" and
"-- Competition."
 
FUTURE CAPITAL NEEDS
 
     The Company typically incurs high costs in the year a program is
introduced. Principal elements of these costs relate to hiring personnel,
developing program content, contracting with vendors, drafting, testing and
refining telemarketing scripts and creating membership kits for mailing to
potential new program members. The Company must incur costs to market programs
to each potential member, regardless of whether that individual actually becomes
a paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
RELIANCE ON COMPUTER AND COMMUNICATIONS SYSTEMS; TECHNOLOGY RISKS
 
     The Company's business is highly dependent on its computer and
telecommunications systems and any temporary or permanent loss of either system,
for whatever reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
technologies on which the Company is dependent to compete effectively and meet
its clients' needs are rapidly evolving and in many instances are characterized
by short product life cycles and/or innovation. As a result, the Company is
dependent on ongoing, significant investment in advanced computer and
telecommunications technology, including automated call distributors and digital
switches, and its ability to anticipate and adapt to technological shifts. There
can be no assurance that the Company will be successful in anticipating or
adapting to technological changes or in selecting and developing new and
enhanced technology on a timely basis. See "Business -- Technology."
 
DEPENDENCE ON TELEPHONE SERVICE
 
     The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone services provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the
 
                                       10
<PAGE>   12
 
Company. Additionally, limitations on the ability of telephone companies to
provide the Company with increased capacity that may be required in the future,
if any, could adversely affect the Company's business, financial condition and
results of operations. Rate increases imposed by these telephone companies will
increase the Company's operating expenses and could materially adversely affect
its business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company is highly dependent on the members of its management and
marketing staff, the loss of one or more of whom could have a material adverse
effect on the Company. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
managerial and marketing personnel, particularly as the Company expands its
activities. The Company faces significant competition for such personnel, and
there can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires for continued growth, if any. The failure to
hire and retain such personnel could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Management."
 
GOVERNMENT REGULATION; ADVERSE PUBLICITY
 
     The primary means which the Company uses to market its programs is
telemarketing. The telemarketing industry has become subject to an increasing
amount of Federal and state regulation as well as general public scrutiny in the
past several years. The Federal Telephone Consumer Protection Act of 1991 limits
the hours during which telemarketers may call consumers and prohibits the use of
automated telephone dialing equipment to call certain telephone numbers. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
telemarketing practices, and there can be no assurance that any such laws, if
enacted, will not adversely affect or limit the Company's current or future
operations. Compliance with these regulations is generally the responsibility of
the Company, and the Company could be subject to a variety of enforcement or
private actions for any failure to comply with such regulations. The Company's
provision of membership programs requires the Company to comply with certain
state regulations, changes in which could materially increase the Company's
operating costs associated with complying with such regulations. The risk of
non-compliance by the Company with any rules and regulations enforced by a
Federal or state consumer protection authority may subject the Company or its
management to fines or various forms of civil or criminal prosecution, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Also, the media often publicizes perceived
non-compliance with consumer protection regulations and violations of notions of
fair dealing with consumers, and the membership programs industry is susceptible
to preemptory charges by the media of regulatory noncompliance and unfair
dealing. Any such publicity is potentially damaging to the Company's reputation,
its client relationships and consumer acceptance and loyalty. See "Business --
Government Regulation."
 
     The Company believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it is offered. If this program were in the
future to be viewed by a Federal or any state insurance regulatory authority as
an insurance program, this would subject the Company to the regulatory authority
of such Federal or state insurance authority. The insurance industry currently
is one of the most heavily regulated industries in the United States. The
subjection of the Company to such regulatory authority would significantly
increase the Company's costs associated with regulatory compliance and
potentially cause the Company to terminate its Countrywide Dental Program in
particular states, either of which would materially adversely affect the
 
                                       11
<PAGE>   13
 
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not in the future become subject to
regulatory authority by the Federal or any state government as the result of its
Countrywide Dental Program. See "Business -- Membership Service Programs" and
"-- Government Regulation."
 
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiations between the Company, the
Selling Stockholders and the Representatives of the Underwriters. See
"Underwriting" for information relating to the method of determining the initial
public offering price. Factors such as fluctuations in the Company's operating
results, announcements of product or service innovations or new contracts by the
Company or its competitors, and market conditions for stocks of companies
similar to the Company and the condition of the capital markets generally could
have a significant impact on the market price of the Common Stock.
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
     Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon closing of this offering, based upon the number of shares
outstanding at June 30, 1996 and assuming no exercise after June 30, 1996 of
outstanding stock options or warrants, there will be           shares of Common
Stock of the Company outstanding. Of these shares, the           shares offered
hereby (          shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
("Rule 144") under the Securities Act ("Affiliates"). The remaining
shares of Common Stock are deemed "restricted securities" as that term is
defined in Rule 144. Of the restricted securities,           shares of Common
Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See
"Underwriting." Approximately           shares of Common Stock, which are not
subject to Lock-Up Agreements, will be eligible for sale in the public market in
accordance with Rule 144 or Rule 701 under the Securities Act beginning 90 days
after the date of this Prospectus. Upon expiration of the Lock-Up Agreements 181
days after the date of this Prospectus, approximately           additional
shares of Common Stock will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act. In addition, upon
expiration of Lock-Up Agreements, an additional           shares subject to
stock options outstanding, if exercised, will be eligible for sale pursuant to
Rule 701 unless sold pursuant to an effective registration statement under the
Securities Act. As of June 30, 1996 there were outstanding warrants to purchase
53,864 shares of Common Stock. These warrants contain net exercise provisions.
Accordingly, any shares issued upon net exercise will be eligible for sale
immediately upon expiration of Lock-Up Agreements pursuant to Rule 144. See
"Shares Eligible for Future Sale." In addition, after this offering, the holders
of approximately           shares of Common Stock and warrants to purchase an
aggregate of           shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to include in a
Company initiated registration such shares pursuant to the exercise of piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to raise additional capital. See "Description of Capital
Stock -- Registration Rights."
 
                                       12
<PAGE>   14
 
CONTROL BY DIRECTORS AND OFFICERS
 
     Upon completion of this offering, the Company's officers and directors and
their affiliates will beneficially own approximately           % of the
Company's outstanding Common Stock. As a practical matter, these stockholders,
if acting together, would have the ability to elect the Company's directors and
may have the ability to determine the outcome of corporate actions requiring
stockholder approval, irrespective of how other stockholders of the Company may
vote. This concentration of ownership also may have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
and Selling Stockholders."
 
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
 
     Excluding approximately $2.6 million designated to redeem the Company's
Series E and F Preferred Stock, the Company has not designated any specific use
for the net proceeds from the sale of Common Stock described in this Prospectus.
Rather, the Company expects to use the net proceeds for general corporate
purposes, including working capital. Consequently, the Board of Directors and
management of the Company will have significant discretion in applying the net
proceeds of this offering. See "Use of Proceeds."
 
ANTI-TAKEOVER PROVISIONS
 
     The Company's Restated Certificate of Incorporation (the "Charter")
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Charter provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least two-thirds of the
shares of capital stock of the Company entitled to vote. In addition, shares of
the Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Preferred Stock that may be issued in the
future. The Company has no present plans to issue any shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions, and other provisions of the Charter, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions."
 
DILUTION
 
     Purchasers of shares of Common Stock in this offering will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. To the extent that
outstanding options to purchase the Company's Common stock are exercised, there
will be further dilution. See "Dilution."
 
LACK OF DIVIDENDS
 
     The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
 
                                       13
<PAGE>   15
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the           shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $     per share (after deducting estimated underwriting discounts and
commissions and offering expenses) are estimated to be approximately $
million. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders.
 
     Approximately $2.6 million of the estimated net proceeds will be applied to
redeem all outstanding shares of Series E and Series F Preferred Stock,
including approximately $637,000 in accrued dividends and redemption premiums.
The remaining proceeds will be used for general corporate purposes, including
acquisition of new members, program development, capital expenditures and
working capital. A portion of the net proceeds may also be used for the
acquisition of businesses, services and technologies that are complementary to
those of the Company. The Company presently has no commitments or understandings
for any such acquisitions, and is not presently engaged in any discussions or
negotiations for any such acquisitions, and no portion of the net proceeds has
been allocated for any specific acquisition. Pending such uses, the Company
intends to invest the net proceeds from this offering in short-term
interest-bearing securities.
 
                                DIVIDEND POLICY
 
     The Company has not declared or paid any cash dividends to date and
anticipates that all of its earnings in the foreseeable future will be retained
for use in its business. The Company's future dividend policy will depend on the
Company's earnings, capital requirements, financial condition, requirements of
the financing agreements to which the Company is a party and other factors
considered relevant by the Board of Directors.
 
                                       14
<PAGE>   16
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company at June
30, 1996 on (i) an actual basis, (ii) a pro forma basis to give effect to the
conversion of all outstanding shares of the Company's Class A Common Stock and
Series A, Series B, Series C, Series D and Series H Preferred Stock into an
aggregate of 1,675,311 shares of Common Stock upon the closing of this offering,
and (iii) a pro forma as adjusted basis to reflect the issuance and sale by the
Company of           shares of Common Stock offered hereby at an assumed initial
public offering price of $     per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses, and the
application of the net proceeds therefrom, including the redemption of all
outstanding shares of the Company's Series E and Series F Preferred Stock upon
the closing of this offering. See "Use of Proceeds." This table should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                        JUNE 30, 1996
                                                           ---------------------------------------
                                                                                        PRO FORMA
                                                             ACTUAL       PRO FORMA    AS ADJUSTED
                                                           -----------   -----------   -----------
                                                                       (IN THOUSANDS)
<S>                                                        <C>           <C>           <C>
Deferred membership income, net..........................   $   8,416     $   8,416     $
Long-term obligations....................................       1,089         1,089
Redeemable Preferred Stock, $0.01 par value; actual:
  978,226 shares authorized, 978,226 shares issued and
  outstanding; pro forma: 978,226 shares authorized,
  80,536 shares issued and outstanding; pro forma as
  adjusted: no shares authorized, issued and
  outstanding ...........................................      20,487         1,949
Total stockholders' equity (deficit)(1):
  Preferred Stock, $0.01 par value; actual and pro forma:
  no shares authorized, issued and outstanding; pro forma
  as adjusted: 1,000,000 shares authorized, no shares
  issued and outstanding.................................          --            --
  Common Stock, $0.01 par value; 40,000,000 shares
  authorized; actual: 813,487 shares issued and
  outstanding; pro forma: 1,711,177 shares issued and
  outstanding; pro forma as adjusted:           shares
  issued and outstanding.................................           8            17
     Additional paid-in-capital..........................       2,253        20,782
     Accumulated deficit.................................     (38,320)      (38,320)
     Treasury Stock, 24,143 shares at cost...............        (273)         (273)
                                                             --------      --------
       Total stockholders' equity (deficit)..............     (36,332)      (17,794)
                                                             --------      --------
          Total capitalization (deficit).................   $  (6,340)    $  (6,340)    $
                                                             ========      ========      ========
</TABLE>
 
- ---------------
(1) Excludes 177,467 shares of Common Stock issuable pursuant to stock options
    outstanding at June 30, 1996 (of which options to purchase 52,525 shares
    were exercisable) at a weighted average exercise price of $18.89 per share
    and 53,864 shares of Class A Common Stock issuable upon exercise of warrants
    outstanding at June 30, 1996 (all of which warrants were exercisable) at a
    weighted average exercise price of $9.29 per share. See "Management -- Stock
    Plans." Also excludes 18,000 shares of Common Stock that may be granted to
    an executive officer of the Company upon achievement of certain performance
    goals prior to December 31, 1996. All of such options will be exercisable at
    an exercise price of $20.00 per share and will vest ratably over a four-year
    period. See "Management -- Executive Compensation."
 
                                       15
<PAGE>   17
 
                                    DILUTION
 
     The pro forma deficit in net tangible book value of the Company's Common
Stock as of June 30, 1996, was approximately $18,459,000, or $10.94 per share of
Common Stock. Pro forma net tangible book value per share of Common Stock
represents the amount of tangible assets (total assets less intangible assets)
of the Company reduced by the Company's total liabilities and the redemption
value of the Series E and Series F preferred stock, divided by the pro forma
number of shares of Common Stock outstanding assuming conversion of all
outstanding shares of Class A Common Stock and convertible preferred stock.
After giving effect to the sale by the Company of           shares of Common
Stock offered by the Company hereby (assuming an initial public offering price
of $     per share) and receipt of the net proceeds therefrom, the net tangible
book value of the Company at June 30, 1996 would have been approximately
          , or $     per share. This represents an immediate increase in pro
forma net tangible book value of $     per share to existing stockholders and an
immediate dilution of $     per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution:
 
<TABLE>
        <S>                                                      <C>          <C>
        Assumed initial public offering price per share........               $
          Pro forma net tangible book value per share as of
             June 30, 1996.....................................  $
          Increase per share attributable to new investors.....
                                                                 --------
        Pro forma net tangible book value per share after
          offering.............................................
                                                                              --------
        Dilution per share to new investors....................               $
                                                                              ========
</TABLE>
 
     The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average consideration paid per share
by the existing stockholders and by the new investors:
 
<TABLE>
<CAPTION>
                                      SHARES PURCHASED          TOTAL CONSIDERATION
                                   ----------------------     -----------------------   AVERAGE PRICE
                                     NUMBER       PERCENT       AMOUNT        PERCENT     PER SHARE
                                   ----------     -------     -----------     -------   -------------
<S>                                <C>            <C>         <C>             <C>       <C>
Existing stockholders(1).........   1,687,034           %     $18,773,700          %       $ 11.13
New investors(1).................                                                          $
                                      -------        ---         --------       ---
          Total..................                       %     $                    %
                                      =======        ===         ========       ===
</TABLE>
 
- ---------------
(1) Sales by the Selling Stockholders in this offering will cause the number of
    shares held by existing shareholders as of June 30, 1996 to be reduced to
              shares or      % of the total number of shares of Common Stock
    outstanding after this offering, and will increase the number of shares held
    by new investors to        or      % of the total number of shares of Common
    Stock outstanding after this offering. See "Principal and Selling
    Stockholders."
 
     The foregoing table assumes no exercise after June 30, 1996 of options or
warrants to purchase shares of Common Stock outstanding at the date of this
Prospectus. As of June 30, 1996, there were options outstanding to purchase an
aggregate of 177,467 shares of Common Stock at a weighted average exercise price
of $18.89 per share, and warrants outstanding to purchase an aggregate of 53,864
shares of Common Stock at a weighted average exercise price of $9.29 per share.
To the extent that outstanding options or warrants are exercised, there will be
further dilution to new investors. See "Management -- Stock Option Plans." The
foregoing table also excludes 18,000 shares of Common Stock issuable upon
exercise of options that may be granted to an executive officer of the Company
upon achievement of certain performance goals prior to December 31, 1996. All of
such options will be exercisable at an exercise price of $20.00 per share and
will vest ratably over a four-year vesting period. See "Management -- Executive
Compensation."
 
                                       16
<PAGE>   18
 
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
     The selected consolidated financial information set forth below for the
years ended June 30, 1992 and 1993, and the selected consolidated balance sheet
data as of June 30, 1992, 1993 and 1994 is derived from audited financial
statements which are not included in this Prospectus. The selected consolidated
financial information set forth below for each of the years ended June 30, 1994
(except as stated above), 1995 and 1996 is derived from audited consolidated
financial statements of the Company, which are included elsewhere in this
Prospectus. The selected consolidated financial information of the Company is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED JUNE 30,
                                        ----------------------------------------------------------
                                         1992         1993         1994         1995        1996
                                        -------     --------     --------     --------     -------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Revenues..............................  $ 9,414     $ 17,269     $ 25,830     $ 41,547     $57,012
Total expenses........................   13,879       21,527       31,846       52,279      62,259
                                        -------     --------     --------     --------     -------
Net loss..............................  $(4,465)    $ (4,258)    $ (6,016)    $(10,732)    $(5,247)
                                        =======     ========     ========     ========     =======
Pro forma net loss per share..........                                                     $ (2.94)
                                                                                           =======
Pro forma weighted average common and
  common equivalent shares
  outstanding.........................                                                       1,839
                                                                                           =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 JUNE 30,
                                        ----------------------------------------------------------
                                         1992         1993         1994         1995        1996
                                        -------     --------     --------     --------     -------
                                        (IN THOUSANDS)
<S>                                     <C>         <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............  $   463     $  1,017     $  2,566     $  5,323     $ 4,312
Working capital (deficit).............   (2,910)      (2,205)      (8,345)      (8,148)    (10,561)
Total assets..........................    5,146        5,789        9,521       11,396      19,715
Long-term obligations.................    2,863        4,338        3,731        8,065       1,089
Redeemable preferred stock............    4,573        5,216        6,096       10,926      20,487
Stockholders' equity (deficit)........   (8,841)     (12,737)     (18,627)     (30,367)    (36,332)
</TABLE>
 
                                       17
<PAGE>   19
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
 
OVERVIEW
 
     MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs. The
Company was founded in 1989 and had approximately 1.5 million members as of June
30, 1996. Membership service programs offer selected products and services from
a variety of vendors intended to enhance the existing relationships between
businesses and consumers. MemberWorks offers these programs to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. The membership programs which the Company
offers address such broad lifestyle needs as health and dental, travel,
entertainment, sports, personal finance and computers and software. The
Company's programs are marketed to credit card holders through arrangements with
its client organizations, including banks, retailers, major oil companies and
other credit card issuers. Such organizations include Household Credit Services,
Capital One Financial Corp. ("Capital One"), Sears, Shell Oil Company ("Shell")
and Texaco Credit Card Services ("Texaco").
 
     The Company divides its memberships into two categories, individual and
wholesale. Individual memberships consist of members who pay fees directly to
the Company. The Company pays the marketing costs to solicit individual members,
primarily using direct marketing techniques and customer lists provided by
client organizations. In the case of wholesale memberships, the Company sells
the membership service program to its client organization. The organization then
either re-sells the program to its customers or provides the program to them as
a benefit. In either wholesale case, the client is responsible for paying
periodic membership fees to the Company and incurs substantially all marketing
costs to solicit members. To date, substantially all of the Company's revenues
have been from individual memberships.
 
     The Company derives its revenues principally from annually renewable
membership fees. The annual membership fees for the Company's programs are
generally billed to subscribers via their credit card accounts and remitted to
the Company by a credit card processor. Upon receipt, the Company then pays
royalties to its client. In certain cases, membership fees are remitted to the
Company by the credit card issuer client, less royalties due the client. Annual
memberships are renewed automatically and continue in effect unless canceled by
the member. Revenues are presented net of expected cancellations.
 
     The Company receives full payment of annual fees at or near the beginning
of the applicable period, but recognizes revenue with respect to the payment
ratably over the membership period. Similarly, the costs associated with
soliciting each member (such as marketing, royalties and printing and mailing of
membership materials) are amortized ratably over the same period.
 
     The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During the course of an initial annual membership term or renewal term,
a member may cancel a membership in the program, generally for a complete refund
of the membership fee paid for that period. Accordingly, the profitability of
each of the Company's programs depends on recurring and sustained membership
renewals. The Company has focused its resources on developing, introducing and
expanding innovative new programs and, primarily as a result of this effort, it
has experienced net
 
                                       18
<PAGE>   20
 
losses since its inception. The Company expects these net losses to continue at
least through its current fiscal year.
 
     During December 1994, the Company discontinued its domestic discount coupon
book business and recorded a charge of $659,000 to operations, primarily to
write off unamortized goodwill of $166,000 and other assets of $461,000.
Effective June 30, 1995, the Company returned its domestic discount coupon book
operations, cash of $175,000 and net fixed assets of $14,000 to the former owner
of the business in exchange for the shares of Common Stock issued in the
original exchange. Fiscal 1995 consolidated operating results include revenues
of $556,000 and operating losses of $1.6 million, including the $659,000 charge
discussed above, attributable to the discontinued business.
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items on
the Company's consolidated statements of operations as a percentage of revenues:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30,
                                                              -----------------------------
                                                              1994        1995        1996
                                                              -----       -----       -----
    <S>                                                       <C>         <C>         <C>
    CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
      Revenues..............................................  100.0%      100.0%      100.0%
      Expenses:
         Operating..........................................   20.7        23.4        20.4
         Marketing..........................................   78.2        78.9        67.4
         General and administrative.........................   21.6        21.4        20.9
         Interest expense, net..............................    2.8         2.1         0.5
                                                              -----       -----       -----
      Total expenses........................................  123.3       125.8       109.2
                                                              -----       -----       -----
      Net loss..............................................  (23.3)%     (25.8)%      (9.2)%
                                                              =====       =====       =====
</TABLE>
 
YEARS ENDED JUNE 30, 1996 AND 1995
 
     Revenues.  Revenues increased 37.2% to $57.0 million in 1996 from $41.5
million in 1995 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.5 million members at June 30, 1996 from 1.1 million members at
June 30, 1995. The increase in the Company's membership base was due to an
increase in the members enrolled in existing programs and the introduction in
1996 of three new programs. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
 
     Revenue attributable to members solicited through Sears, Capital One and
Associates Credit Card Services, Inc. represented 35.2%, 10.5% and 15.6%,
respectively, of total revenues in 1996 and 41.0%, 9.0% and 16.1%, respectively,
of total revenues in 1995. Termination of any of these key relationships could
have a material adverse effect on the future revenue from existing programs of
which such client's customers are members and on the Company's ability to
further market new or existing programs through such clients.
 
     Operating Expenses.  Operating expenses consist of costs incurred in
servicing the Company's membership base, including personnel, telephone and
computer processing costs, as well as expenses associated with the production
and distribution of membership information kits. Operating expenses increased
19.8% to $11.6 million in 1996 from $9.7 million in 1995. The increase was due
principally to additional costs incurred to support the growth in the membership
base, partially offset by the absence of costs associated with the Company's
discount coupon business, which was discontinued in 1995. As a percentage of
revenues, operating expenses decreased to 20.4% in 1996 from 23.4% in 1995.
Excluding expenses associated with the discontinued discount coupon business,
operating expenses as a
 
                                       19
<PAGE>   21
 
percentage of revenues in 1995 would have been 20.7%. The decrease as a
percentage of revenues primarily resulted from increased efficiencies in the
Company's membership services operations. The Company commenced operations at
its new membership service facility in the quarter ended June 30, 1996 and,
primarily as a result, the Company expects operating expenses to increase as a
percentage of revenues in 1997.
 
     Marketing Expenses.  Marketing expenses consist of fees to telemarketers to
solicit potential members, royalties to clients, direct mail costs and other
solicitation expenses. Marketing expenses increased 17.1% to $38.4 million in
1996 from $32.8 million in 1995. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses decreased to
67.4% in 1996 from 78.9% in 1995. The decrease was due to lower per member
telemarketing costs, as well as the favorable effect of an increase in the
weighted average program fee and an increase in renewal revenues as a percentage
of total revenues.
 
     Membership solicitation costs consist of marketing costs and, to a lesser
extent, costs associated with the production and distribution of membership
information kits, and are amortized ratably over the membership period.
Membership solicitation costs increased 17.1% to $47.0 million in 1996 from
$40.1 million in 1995 primarily due to increased marketing efforts.
 
     General and Administrative Expenses.  General and administrative expenses
consist of personnel and facilities expenses associated with the Company's
executive, sales, marketing, finance, product and account management functions.
General and administrative expenses increased 34.1% to $11.9 million in 1996
from $8.9 million in 1995. The increase was the result of hiring additional
personnel at all levels and the related increase in facilities costs, partially
offset by the absence of costs associated with the Company's discount coupon
business, which was discontinued in 1995. As a percentage of revenues, general
and administrative expenses decreased to 20.9% in 1996 from 21.4% in 1995.
Excluding general and administrative expenses associated with the discontinued
discount coupon business, general and administrative expenses increased as a
percentage of revenues to 20.9% in 1996 from 18.7% in 1995. The increase as a
percentage of revenues was primarily a result of hiring additional personnel in
the second half of fiscal 1996 and a related increase in facilities costs. The
Company expects general and administrative expenses will continue to increase as
a percentage of revenues in 1997 as the Company incurs full year expenses
associated with these costs.
 
     Interest Expense, Net.  Interest expense, net is primarily composed of
interest income from cash and cash equivalents, offset by financing charges
relating to notes payable, equipment leases and other debt. Interest expense,
net decreased to $310,000 in 1996 from $893,000 in 1995 as the result of lower
borrowings by the Company in 1996. The Company generally invests in short-term,
investment-grade, interest bearing securities. The amount of interest income
fluctuates based upon the amount of funds available for investment and
prevailing interest rates.
 
     Provision for Income Taxes.  The Company made no provision for income taxes
for the years ended June 30, 1996 and 1995 due to the net operating losses
incurred during those years. As of June 30, 1996, the Company had accumulated
net operating loss carry forwards of $17.7 million.
 
YEARS ENDED JUNE 30, 1995 AND 1994
 
     Revenues.  Revenues increased 60.8% to $41.5 million in 1995 from $25.8
million in 1994 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.1 million members at June 30, 1995 from 820,000 members at June
30, 1994. The increase in the Company's membership base was due to an increase
in the members enrolled in existing programs and the continued roll-out of a new
program introduced in 1994. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
 
                                       20
<PAGE>   22
 
     Revenue attributable to members solicited through Sears, Capital One and
Associates represented 41.0%, 9.0% and 16.1%, respectively, of total revenues in
1995 and 55.4%, 5.5% and 7.4%, respectively, of total revenues in 1994.
 
     Operating Expenses.  Operating expenses increased 81.2% to $9.7 million in
1995 from $5.4 million in 1994. The increase was due principally to additional
costs incurred to support the growth in the membership base. As a percentage of
revenues, operating expenses increased to 23.4% in 1995 from 20.7% in 1994.
Excluding the one-time write-off of $659,000 in costs in 1995 related to the
discontinuation of the Company's discount coupon business, operating expenses as
a percentage of revenues increased to 21.8% in 1995 from 20.7% in 1994. The
increase as a percentage of revenues primarily resulted from decreased
efficiency experienced in membership services operations which was necessary to
support the Company's rapid revenue growth.
 
     Marketing Expenses.  Marketing expenses increased 62.5% to $32.8 million in
1995 from $20.2 million in 1994. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses increased to
78.9% in 1995 from 78.2% in 1994. The increase as a percentage of revenues was
primarily due to higher per member telemarketing costs, partially offset by the
favorable effect of an increase in the weighted average program fee and an
increase in renewal revenues as a percentage of total revenues.
 
     Membership solicitation costs increased 40.3% to $40.1 million in 1995 from
$28.6 million in 1994 primarily due to increased marketing efforts.
 
     General and Administrative Expenses.  General and administrative expenses
increased 58.9% to $8.9 million in 1995 from $5.6 million in 1994. The increase
was primarily the result of hiring additional personnel at all levels and the
related increase in facilities costs. As a percentage of revenues, general and
administrative expenses decreased to 21.4% in 1995 from 21.6% in 1994.
 
     Interest Expense, Net.  Interest expense, net increased to $893,000 in 1995
from $712,000 in 1994 as a result of higher borrowings by the Company in 1995.
 
     Provision for Income Taxes.  The Company made no provision for income taxes
for the years ended June 30, 1995 and 1994 due to the net operating losses
incurred during those years.
 
SELECTED QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth certain unaudited quarterly consolidated
statements of operations data for each of the eight quarters in the period ended
June 30, 1996 and the percentage of the Company's revenues represented by each
item in the respective quarter. In the opinion of the Company's management, this
unaudited information has been prepared on a basis consistent with the audited
Consolidated Financial Statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein when read in
conjunction with the Consolidated Financial Statements and related Notes
thereto. The operating results for any quarter are not necessarily indicative of
results for any future period.
 
                                       21
<PAGE>   23
 
<TABLE>
<CAPTION>
                                                                       QUARTER ENDED
                           -----------------------------------------------------------------------------------------------------
                                           FISCAL YEAR 1995                                     FISCAL YEAR 1996
                           ------------------------------------------------     ------------------------------------------------
                           SEPT. 30,     DEC. 31,     MAR. 31,     JUNE 30,     SEPT. 30,     DEC. 31,     MAR. 31,     JUNE 30,
                             1994          1994         1995         1995         1995          1995         1996         1996
                           ---------     --------     --------     --------     ---------     --------     --------     --------
<S>                        <C>           <C>          <C>          <C>          <C>           <C>          <C>          <C>
                                                          (IN THOUSANDS, EXCEPT PERCENTAGE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues..................  $ 8,988      $ 9,884      $10,948      $11,727       $12,679      $14,089      $14,778      $15,466
                            -------      -------      -------      -------       -------      -------      -------      -------
Expenses:
  Operating...............    2,119        3,024        2,126        2,433         2,488        2,893        2,962        3,280
  Marketing...............    7,409        7,948        8,571        8,871         9,127        9,626        9,579       10,078
  General and
    administrative........    2,129        2,542        2,083        2,131         2,060        3,229        3,090        3,537
  Interest expense
    (income), net.........      181          237          232          243           300          (18 )          3           25
                            -------      -------      -------      -------       -------      -------      -------      -------
Total expenses............   11,838       13,751       13,012       13,678        13,975       15,730       15,634       16,920
                            -------      -------      -------      -------       -------      -------      -------      -------
Net loss..................  $(2,850)     $(3,867 )    $(2,064 )    $(1,951 )     $(1,296)     $(1,641 )    $  (856 )    $(1,454 )
                            =======      =======      =======      =======       =======      =======      =======      =======
PERCENTAGE OF TOTAL REVENUES:
Revenues..................    100.0%       100.0 %      100.0 %      100.0 %       100.0%       100.0 %      100.0 %      100.0 %
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Expenses:
  Operating...............     23.6         30.6         19.4         20.7          19.6         20.5         20.0         21.2
  Marketing...............     82.4         80.4         78.3         75.6          72.0         68.3         64.8         65.2
  General and
    administrative........     23.7         25.7         19.0         18.2          16.2         22.9         20.9         22.9
  Interest expense
    (income), net.........      2.0          2.4          2.2          2.1           2.4         (0.1 )        0.1          0.1
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Total expenses............    131.7        139.1        118.9        116.6         110.2        111.6        105.8        109.4
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Net loss..................    (31.7)%      (39.1 )%     (18.9 )%     (16.6 )%      (10.2)%      (11.6 )%      (5.8 )%      (9.4 )%
                           ========      ========     ========     ========     ========      ========     ========     ========
</TABLE>
 
     The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of client orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected sales for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the Company will not have
an adverse effect upon the Company's results operations, particularly in
quarters immediately following consummation of such transactions, while the
operations of the acquired business are being integrated into the Company's
operations.
 
     In addition, the Company is required to grant options to purchase up to
18,000 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $20.00 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise
 
                                       22
<PAGE>   24
 
price and the trading price of the Company's Common Stock on the date of the
grant. The Company's agreement to grant such options terminates on December 31,
1996.
 
     The Company believes that its quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period to period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. It
is also likely that in some future quarter the Company's operating results will
be below the expectations of public market analysts and investors, which, in
turn, could have a severe adverse affect on the price of the Company's Common
Stock.
 
     The Company's revenue has increased in each of the quarters presented
above. These increases have resulted primarily from an increase in the Company's
overall membership base. Operating expenses have varied quarter to quarter due
primarily to personnel expenses and other costs associated with providing
services for new members or anticipated new members. Operating expenses in the
quarter ended December 31, 1994 were relatively high as compared to other
quarters primarily due to the discontinuance in 1995 of the Company's domestic
discount coupon book business. Marketing expenses have generally increased in
each quarter due to increased marketing efforts and increasing royalties
associated with an expanding membership base. General and administrative
expenses have varied quarter to quarter due primarily to the hiring of
additional personnel, particularly in the last two quarters of fiscal 1996, and
facilities costs for physical expansion needed to support the Company's growth.
General and administrative expenses were lower in the quarters ended March 31,
June 30 and September 30, 1995 as compared to prior quarters primarily as a
result of the absence of general and administrative expenses associated with the
Company's discount coupon business which was discontinued in the quarter ended
December 31, 1994. General and administrative expenses in the quarter ended
December 31, 1995 were higher primarily due to higher legal, employee recruiting
and employee bonus expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, the Company has funded operations primarily through
private sales of securities. Total net proceeds from the sale of stock, warrants
and notes through June 30, 1996 was $25.0 million. In addition, the Company has
a $3.0 million bank line of credit. The line of credit bears interest at 1.5%
per annum plus the higher of the base commercial lending rate for the bank or
the Federal Funds Rate plus 0.5% per annum and expires in February 1997. At June
30, 1996, $10,000 was outstanding under the line of credit.
 
     Net cash provided by operating activities was $1,000 in 1996, net cash used
by operating activities was $3.5 million in 1995 and net cash provided by
operating activities was $600,000 in 1994. These results were attributable to
the Company's strategy to use substantially all of its available cash to fund
costs required to increase its membership base. The Company's capital
expenditures for 1996, 1995 and 1994 were $1.7 million, $500,000 and $700,000,
respectively. These expenditures were for acquisition of fixed assets required
to support the Company's growth over the period from 1994 to 1996.
 
     Accounts receivable includes $3.6 million of unbilled receivables as of
June 30, 1996 (none at June 30, 1995), which were billed and collected
subsequent to the balance sheet date, and arise in certain instances when the
Company elects to bill subsequent to, rather than upon, acceptance of
membership. The Company had cash and cash equivalents of $4.3 million as of June
30, 1996.
 
     The development and marketing of the Company's programs requires
significant expenditures, and the Company must incur costs to market programs to
each potential member, regardless of whether that individual actually becomes a
paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
 
                                       23
<PAGE>   25
 
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
 
     The Company believes that the net proceeds from this offering, together
with its cash balances following completion of the offering, funds generated
from operations, and borrowings available under the Company's bank credit
agreement, will be sufficient to meets its capital requirements for at least the
next 18 months.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
     In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The Company
adopted SFAS No. 121, with no effect on operations, in fiscal 1996.
 
     The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In fiscal 1997, the Company intends to adopt the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
 
                                       24
<PAGE>   26
 
                                    BUSINESS
 
     The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated on these forward-looking statements as a
result of certain factors, including those set forth under "Risk factors" and
elsewhere in this Prospectus.
 
     MemberWorks is a leading designer and provider of innovative membership
service programs. The Company addresses the needs of organizations seeking to
leverage the expertise of an outside provider in offering these programs.
MemberWorks offers its programs to increasingly sophisticated consumers seeking
economy, efficiency and convenience in their purchase of products and services.
For participating vendors, the programs provide the opportunity to reach a large
number of demographically attractive members at minimal incremental marketing
cost. The Company's programs are marketed to credit card holders through
arrangements with its client organizations including banks, retailers, major oil
companies and other credit card issuers. Such organizations include Household
Credit Services, Capital One, Sears, Shell and Texaco.
 
INDUSTRY BACKGROUND
 
     Businesses which sell services and products to consumers have substantially
increased the use of direct marketing techniques to reach their customers. The
estimated total consumer sales as a result of direct marketing in the United
States were approximately $600 billion in 1995. Membership service programs are
one of the fastest growing areas of direct marketing. Membership service
programs, if designed, marketed and managed effectively, can be of substantial
value to the consumers who become members of such programs, to the businesses
which market to consumers and to the client organizations, such as credit card
issuers, banks, insurance companies and others, which offer the programs to
their customers.
 
     Increasingly sophisticated consumers, such as dual income couples and
professionals, are faced with a growing number of products and services that are
advertised and offered through media ranging from network television to
traditional print media to the Internet. In addition, these consumers have
limited time in which to make informed and efficient purchasing decisions. A
well-designed membership service program provides value by allowing consumers to
make purchases more efficiently, conveniently and knowledgeably through access
to discounted products and services, information services and other types of
assistance.
 
     Businesses are seeking more cost-effective and efficient methods to reach
their customers than through the confusing array of traditional mass marketing
channels. In addition, businesses also are seeking to reach new customers,
strengthen relationships with existing customers and generate new, predictable
revenues, including royalties.
 
     Historically, a substantial number of the businesses which utilize
membership service programs have been issuers of credit cards. More recently,
however, other businesses, including retailers, resort operators, banks,
insurance companies and non-profit organizations have also begun to offer
service programs. In many cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource to companies which are able to apply advanced
database systems to capture, process and store consumer and market information,
are able to use their experience to provide effective programs, and are able to
realize economies of scale. In addition, businesses seeking to implement
membership service programs demand that the provider of those programs have the
expertise to continue to introduce innovative new programs and that the provider
have such resources as extensive vendor networks and experienced management
teams, in order to market programs quickly and successfully.
 
                                       25
<PAGE>   27
 
THE MEMBERWORKS SOLUTION
 
     MemberWorks designs and manages innovative membership programs providing
substantial benefits to member consumers, those organizations offering the
programs and vendors whose products and services are offered through the
programs. The Company addresses the needs of organizations seeking to leverage
the expertise of an outside provider in offering membership service programs. In
return for providing the Company with customer lists, the Company's clients
receive royalty payments typically ranging between 15% and 20% of all membership
fees. Clients also benefit because the programs are designed and managed to
strengthen the relationship between clients and their customers. In addition,
MemberWorks markets these programs of products and services to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. Members save time by telephonically
purchasing goods and services and obtaining useful information. Members also
benefit because the vendors agree to allow discounts for products and services
not generally available to non-members. MemberWorks offers participating vendors
the opportunity to reach a large number of demographically attractive members at
minimal incremental marketing cost.
 
     The Company maximizes its marketing effort by utilizing a proprietary
database management system to analyze the demographics of customer lists
provided by its clients in order to target specific consumers. MemberWorks is
able to introduce new programs, as well as improve existing programs, through
telemarketing rather than direct mail or other methods, thereby providing
clients with a rapid, inexpensive means to test and introduce new concepts.
 
     MemberWorks leverages its substantial base of approximately 40 client
organizations and approximately 1.5 million members to decrease its costs and to
pass economic benefits on to its clients and members. The Company's broad
membership base allows MemberWorks to render substantial discounts on its
vendors' products and services. Economies of scale also permit the Company to
maintain approximately 200 member service representatives on a 24 hour a day,
seven day a week basis. These representatives ensure that members receive
high-quality service and help build consumer loyalty with the Company's client
organizations.
 
STRATEGY
 
     The Company's objective is to become the leading provider of innovative
membership programs. Key elements of the Company's strategy are as follows:
 
     Continue to Develop Innovative Service Programs for Broad Markets.  The
Company intends to emphasize the development and rapid introduction of
innovative programs which address the lifestyle needs of large numbers of
people. The Company believes that this strategy will position it to further
penetrate its core membership market, both through existing clients and through
new clients who will find the Company's new and innovative programs to be
valuable to their own customers. For example, the Company believes that its Home
PC Link program, which provides consumers with valuable information regarding,
and purchasing access to, computer hardware, software and advisory services, is
the first such program offered. The Company believes that its health, sports and
financial programs also were the first of their kind when introduced.
 
     Expand and Develop Distribution Channels.  The Company will continue to
expand existing distribution channels and to seek new ones, including large and
small banks, retailers, oil companies, insurance companies, interactive computer
services and others. To date, the primary clients offering the Company's
membership service programs have been issuers of credit cards. The Company
believes that this distribution channel will continue to provide substantial
opportunities and, therefore, intends to continue to devote significant
resources to selling its membership service programs through credit card
issuers. As part of this strategy, the Company intends to continue to develop
service programs which can be easily modified to address the needs of a
particular channel of distribution.
 
                                       26
<PAGE>   28
 
     Maintain and Build a Recurring Revenue Base.  The Company seeks to reach
large numbers of members who will renew their membership regularly. The
percentage of the Company's revenues from renewing members increased from 35.9%
in fiscal 1994 to approximately 41.4% in fiscal 1996.
 
     Offer Premium Quality Services.  The Company intends to continue investing
significantly in its membership services system. For example, the Company has
developed a proprietary computer interface between its members, clients and
vendors which focuses on directing members to appropriate vendors of products
and services or the Company's membership services representatives for
assistance. Members can access the system 24 hours a day, 7 days a week. In
addition, the Company recently significantly expanded its membership service
capacity by opening its second membership service facility in Houston, Texas.
The Company also maintains and monitors relationships with over 50 vendors to
assure that those vendors are providing high quality products and services in
order to enhance the relationship between the consumer and the Company's client
offering the service program.
 
     Develop and Use Innovative Technical Solutions.  The Company intends to
continue its practice of developing and improving proprietary software designed
to coordinate with telemarketing vendors and to accelerate the delivery of new
member information kits and membership billings. Currently, the Company, through
its sophisticated membership database management system, can model and analyze
client lists to identify likely members. In addition, the Company's strategy
includes investing in state-of-the-art technology in other key areas of its
business, such as sophisticated call routing equipment for the Company's
membership service centers and advanced modeling techniques for use with the
customer databases provided to the Company by its clients.
 
     Leverage and Develop Multiple Vendor Partners.  The Company intends to
continue its practice of developing strong relationships with a wide variety of
vendors who provide services at substantial discounts, rather than providing
those services internally. The Company believes that its strengths are in
designing new service programs, marketing those service programs to consumers
and providing a high quality, member-friendly interface between the members and
the service providers. The Company outsources these products and services from
vendors instead of developing the infrastructure to integrate vertically for
each new program, thereby preserving program flexibility. As a result, the
Company is able to respond to and quickly develop new programs that address the
changing needs of its clients.
 
     Pursue International Opportunities.  The Company intends to seek
international clients, particularly in Canada, Mexico and Europe, in the near
future in order to further expand its client base. MemberWorks believes that,
for the same reasons that membership service programs are growing rapidly in the
United States, there is significant demand for such programs in foreign markets.
 
MEMBERSHIP SERVICE PROGRAMS
 
     The Company's eight membership service programs, which had approximately
1.5 million members as of June 30, 1996, offer unique and valuable services,
information and savings opportunities. The service programs are marketed under
the name of the program on behalf of the client and are designed and developed
to capitalize on the client's existing relationship with its customers or other
constituents. In general, membership fees, which may be payable monthly,
quarterly or annually depending on the program, ranged from approximately $40
per year to approximately $95 per year
 
                                       27
<PAGE>   29
 
during fiscal 1996. The Company can create customized service programs for
clients based on elements of its standard programs. Currently, the Company
markets the following eight programs:
 
<TABLE>
<CAPTION>
           TYPE OF SERVICE
             PROGRAM                             SERVICEMARK OR REGISTERED TRADEMARK
    <S>                                  <C>
         Health                          HealthTrends
         Dental                          Countrywide Dental Program
         Dental and Health               Countrywide Dental and Health Program
         Travel                          Travel Arrangements
         Entertainment                   Connections, Your source for entertainment values
         Sports                          Official Sports Connection
         Financial                       MoneyMaster
         Computers and
           Software                      Home PC Link
</TABLE>
 
     In general, members subscribe for renewable one-year memberships in the
Company's programs. When consumers agree to enroll in a program, they generally
receive a trial membership. During this time, the member may use the program's
services without obligation, as outlined in a membership brochure received by
mail along with a membership card and membership identification number. The
brochure outlines in detail the benefits which the service offers and contains
toll free numbers which may be called to access service benefits and
information. In the event that a consumer elects not to participate in the
service, he or she can call a toll free number during the trial period to cancel
the service without charge. If the membership is not canceled during the trial
period, the consumer is charged the annual membership fee. In the event that the
member does not cancel the membership after the initial membership term, he or
she generally receives a renewal kit in the mail in advance of each membership
year and is charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member is free to cancel
a membership in the program, generally for a complete refund of the membership
fee for that period.
 
     The Company offers its service programs to consumers through clients, such
as credit card issuers, who have an existing relationship with those consumers.
The client provides the Company with lists of consumers which the Company inputs
into its database management system to model, analyze and identify likely
members. The Company pays the client an annual royalty for initial and renewal
membership fees received by the Company from consumers provided to it by the
client. The royalties paid to clients by the Company typically range between 15%
and 20% of initial and renewal membership fees.
 
     The Company has developed a consultative product development process
coordinating the efforts of its sales and marketing group with those of its
client management group in order to anticipate client needs for new product
offerings. The Company's senior management works with both of these groups to
develop and refine new program concepts and then to introduce the new program.
An important factor in the Company's ability to develop innovative programs is
its emphasis on telemarketing, which allows it to obtain and analyze market
trend information quickly. The Company believes this method of product
development has allowed it to respond quickly and effectively to market demand
for new programs, as evidenced by the recent introduction of Home PC Link.
 
     The Company believes that it was the first membership company to introduce
aggregated discount services in the areas of health, sports, financial and
personal computer programs. The Company also believes that all of its programs
are innovative with respect to the variety and quality of particular services,
discounts and other features which those programs offer. By bundling and
reconfiguring various features of its standard programs, the Company can
customize a program to the particular needs and demands of its clients.
 
                                       28
<PAGE>   30
 
     The Company's standard programs contain the following features:
 
HealthTrends
 
     HealthTrends is a unique membership program for the health conscious
individual or family, providing convenient information and substantial savings
on quality health and personal care services and maintenance.
 
     Benefits include:
 
        - Substantial discounts on brand name eyewear and contact lenses
        - Savings on prescription drugs, quality vitamins and personal care
          products
        - A Physicians Directory
        - Quality brand name hearing aids at significant discounts
        - Choice of an annual subscription to a popular health magazine, such as
          Prevention or Walking, or a health reference source book
        - A health risk appraisal service and a health reference library
 
Countrywide Dental Program
 
     The Countrywide Dental Program ("CDP") consists of a network of independent
dentists in 45 states who have agreed to accept a reduced fee schedule for
subscribers in the program. CDP is not an insurance plan, but can be used with
any dental insurance program to reduce a member's insurance co-payments.
 
     Benefits include:
 
        - Annual oral exams and bitewing x-rays at minimal or no cost
        - A discount ranging from 20% to 30% below rates offered to non-members.
 
Countrywide Dental and Health Program
 
     The Countrywide Dental and Health Program offers a combination of benefits
from the Company's Countrywide Dental Program and HealthTrends services. This
combined service provides members and their families dental services at special
discounted rates in addition to substantial discounts on eyewear,
pharmaceuticals and hearing aids.
 
Travel Arrangements
 
     Travel Arrangements is a comprehensive discount travel program that offers
substantial savings and convenience on a broad range of business, leisure, and
vacation travel services.
 
     Benefits include:
 
        - Guaranteed lowest airfares
        - Discounts of up to 50% at select hotels nationwide
        - Automatic 5% credit card rebates on qualified travel
        - Exclusive discounts on travel booked through a full-service travel
          agency
        - Discounts on car rentals from national agencies
        - Personalized travel planning services
        - Discounts on travel accessories
        - Complimentary memberships to hotel and car rental priority clubs
        - 24-Hour message service center in the contiguous 48 States
 
                                       29
<PAGE>   31
 
Connections, Your source for entertainment values
 
     Connections, Your source for entertainment values is designed to provide
savings to members on a broad range of entertainment and leisure time activities
and contains a shopping service for substantial savings on a wide array of
merchandise.
 
     Benefits include:
 
        - Guaranteed lowest prices on over 50,000 brand-name entertainment
          products such as stereo equipment and televisions
        - Member only discounts on compact discs, movies, videos, and books
        - Discounts of up to 50% off the regular room rate at thousands of
          hotels nationwide
        - Discount admission to major amusement and theme parks and major
          attractions nationwide
        - Choice of an annual subscription to an entertainment magazine or a
          movie reference guide
        - Access to a toll-free activities hotline where members can learn about
          local events or events in an area they plan to visit
        - Discounts on movie theater tickets at major national cinemas, such as
          AMC, Loews Cineplex Odeon and General Cinema
        - Transmedia restaurant discount card
 
Official Sports Connection
 
     Official Sports Connection provides discounts on all types of sports and
athletic merchandise, apparel, and services.
 
     Benefits include:
 
        - Discounts on sports merchandise and apparel through major retail
          stores and popular sports catalogs
        - Savings on autographs, collectibles, personalized team scoreboards,
          and videos
        - Discounts on full-service sports event travel packages and premium
          tickets to sports events
        - Discounts of up to 50% off greens fees at participating golf courses,
          resorts, and driving ranges worldwide
        - Access to a toll-free sports event hotline
        - Choice of an annual subscription to a popular sports magazine or
          sports reference guide such as Football Digest, Inside Sports or
          Fodor's USA Today's Complete Four Sport Stadium Guide
 
MoneyMaster
 
     MoneyMaster helps members plan for and manage their personal finances,
taxes, insurance, and retirement planning. This service complements and can
integrate some of the benefits currently offered by the Company's financial
institution clients.
 
     Benefits include:
 
        - Discounts on tax preparation fees and an electronic filing service
        - Complimentary appraisal and discounts on competitively priced
          mortgages
        - Do-it-yourself retirement planning, will and estate planning kits with
          easy to understand guidelines
        - Choice of a complimentary annual subscription to a personal finance
          magazine such as Kiplinger's Personal Finance, Your Money or Worth, or
          a personal finance service reference guide
        - Reference library with articles and forms on financial topics
          including budgeting, credit management and investing
 
                                       30
<PAGE>   32
 
Home PC Link
 
     Home PC Link is the Company's newest program offering, introduced in August
1996. It offers a wide range of assistance to the first time computer purchaser
as well as to existing users seeking information on upgrading their systems and
enhancements.
 
     Benefits include:
 
        - Personal Computer ("PC") configuration and discount mail order service
        - PC registration and software upgrade service
        - PC tech support service
        - Product information and advisory service
        - Internet access kit
        - Shareware sampler, a CD-based catalog of software available for free
          and for purchase
        - Computer magazine and reference materials, including Family PC,
          Computer Life, or MacUser
 
WHOLESALE PROGRAMS
 
     In addition to marketing its programs directly to consumers through lists
provided by credit card issuers and other businesses and organizations, the
Company has begun to provide membership service programs on a wholesale basis.
Typically, the Company works with a wholesale client to incorporate elements
from one or more of its standard service programs in the design of a custom
program for the client. The client will then provide the membership in the
customized format to its customers as a value-added feature. The client pays the
Company the membership fees for the customers who receive the service program.
Because wholesale programs substantially eliminate any cost for the Company to
acquire new members, which results in substantially higher profit margins for
the Company, the Company usually will agree to provide membership in the service
program for periodic fees which are less than the Company's standard fees for
the program.
 
MEMBER SERVICE
 
     The Company believes that providing high quality service to its members is
extremely important in order to encourage memberships and to strengthen the
affinity of those members for the client which offered the service program.
Currently, the Company maintains two call centers, in Omaha, Nebraska and
Houston, Texas, with a total of approximately 200 membership service
representatives. The Company's service centers are available to members, toll
free, 24 hours a day, seven days a week. All new membership service
representatives are required to complete a two-week classroom training course
before beginning to take calls and attend on-the-job training thereafter.
Through both its training programs, its systems and its software, the Company
seeks to provide members with friendly, rapid and effective answers to
questions. The Company also works closely with its clients' customer service
staffs to ensure that their representatives are knowledgable in matters relating
to membership service programs offered by the Company.
 
TECHNOLOGY
 
     The Company has invested substantially in advanced management information
systems to allow it to operate its business more efficiently and productively.
Accordingly, the Company has developed proprietary software that is designed to
accept its clients' customer databases for review, analysis and modeling in
order to identify likely members. The Company receives new member information
from telemarketers on a daily basis, and the system routes that data to other
Company facilities for member fulfillment and allows the Company to mail member
information kits to new members very rapidly. The system also receives
confirmation of billing data from the Company's merchant processors on a regular
basis, permitting the Company to update the status of each member, including
member profile information.
 
                                       31
<PAGE>   33
 
     In providing quality service to its members, the Company's management
information system interacts with the Company's advanced call routing system to
prepare the Company's membership service representatives to better serve members
by displaying a member's profile prior to receiving the call. The Company's
telecommunications systems also monitor the performance quality of its
membership service representatives and other aspects of its business through
sophisticated reporting capabilities. In addition, the Company's marketing
experts use both the Company's proprietary systems and advanced systems from
outside vendors to review, analyze and model the demographics of lists of
prospective members supplied by clients, in order to determine which customers
are most likely to respond to an offer and retain their membership.
 
FULFILLMENT
 
     In most cases the products and services offered to members through the
Company's programs are provided directly to the members by independent vendors.
The Company evaluates and engages only those vendors which can cost-effectively
deliver high quality products and services. Vendors generally benefit by gaining
significant volume demand with minimal associated marketing expense.
Accordingly, vendors generally quote a discount price to gain access and
marketing exposure to the Company's membership base. The Company receives no
material payments from these vendors for rendering services to the Company's
members and, in certain cases, the Company pays its vendors a fee based on the
volume of members in the Company's program or based on other agreed upon
factors.
 
     The Company believes that the establishment of its vendor network can be
leveraged and represents a valuable corporate asset in that it can be used by
clients in a number of different distribution channels. For example, the Company
has developed and maintains a national network of in excess of 6,000 independent
dentists practicing in 45 states. The dentists have agreed to provide to Company
members dental services at considerable discounts, ranging from 20% to 30% below
rates offered to non-members. The Company believes that there is opportunity to
engage other users for the dental network and to increase its revenues from this
source with marginal associated incremental cost.
 
     The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
SALES AND MARKETING
 
     The Company solicits members for its programs primarily by direct marketing
methods, including telemarketing, which it outsources to third party
contractors. To a lesser extent the Company uses direct mail, either as a solo
piece mailed at its own expense or at its client's expense. Some of the
Company's individual memberships are available at retail stores and on-line to
interactive computer users through the World Wide Web. In fiscal 1996,
approximately 3.3 million membership kits were mailed, and approximately 22
million telephone calls were made.
 
     The Company primarily offers its programs to consumers listed in databases
provided to it by clients. The Company's proprietary software and systems permit
it to accept this information from a client in electronic form. Marketing
specialists at MemberWorks are then able to review, analyze and model the
information on the database in order to design and implement an effective
telemarketing program. In addition, the Company has recently begun to sell
service programs on a wholesale basis.
 
                                       32
<PAGE>   34
 
Under those programs, the Company does not pay for the marketing costs to
solicit memberships. Instead, the client offering the memberships is responsible
for marketing, usually with the assistance of the Company. In some cases, the
client may provide wholesale memberships to its customer free of charge and pay
the periodic membership fee to the Company for each customer membership. In
other cases, the client may charge a reduced fee to its customer.
 
     The Company's sales strategy is to establish and maintain long-term
relationships with those clients who offer its programs. The Company employs a
consultative sales process to understand and define client needs and to
determine how those needs can be addressed by the membership service programs
which the Company offers. MemberWorks seeks to build upon its existing customer
relationships by integrating and cross-selling its different membership service
programs. The term of the sales cycle for a new service program varies and can
be six months or more if the client is new to the Company. The Company's client
sales force currently consists of five executives and seven sales
representatives and support staff.
 
     The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone service provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the Company.
Additionally, limitations on the ability of telephone companies to provide the
Company with increased capacity that may be required in the future, if any,
could adversely affect the Company's business, financial condition and results
of operations. Rate increases imposed by these telephone companies will increase
the Company's operating expenses and could materially adversely affect its
business, financial condition and results of operations.
 
DISTRIBUTION
 
     Currently, MemberWorks distributes its programs almost exclusively through
credit card issuers. The Company arranges with client financial institutions,
retailers, oil companies and other credit card issuers to market membership
programs to such clients' individual account holders and customers. Clients
generally receive royalties on initial and renewal memberships typically ranging
between 15% and 20% of annual membership fees. The Company's contracts with
these clients typically grant the Company the right to continue providing
membership services directly to such clients' individual account holders even if
the client terminates the contract, provided that the client continues to
receive its commission. Currently, the Company has 36 credit card issuer clients
to whom it pays royalties, including 10 of the top 20 issuers of bank credit
cards, four of the top five issuers of oil company credit cards and a leading
issuer of retail company credit cards.
 
     The Company is also actively developing new distribution channels.
Recently, for example, the Company entered into an agreement to offer its
membership service programs through marketing programs at retail stores. In
addition, the Company has entered into a new arrangement with one of its credit
card issuer clients whose call centers receive numerous inbound calls from
cardholders. If the inbound caller meets certain criteria, the client's service
representative is instructed by the Company to offer the Company's membership
service programs to the caller. Access and information about several of the
Company's membership service programs are also available through home pages on
the World Wide Web.
 
     The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. As a result, the Company's ability to
market a new program to an existing customer base or an existing program to a
new customer base is dependent on first obtaining approval from a client.
 
     Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including 35.2% from customer lists provided by Sears. These
and other client relationships are pursuant to contracts which may be terminated
by the client upon 30 to 90 days' notice without penalty. Upon such termination,
 
                                       33
<PAGE>   35
 
the Company generally has the right to continue its relationship with the
client's customers that have become program members for a specified period to
substantially the same extent as prior to the termination, but may not resolicit
those members upon such member's cancellation or non-renewal of the member's
membership. Approximately 75% of the revenue attributable to Sears for the year
ended June 30, 1996 was generated pursuant to a contract which also provides
that, upon termination of the agreement for default, Sears may prohibit the
Company from renewing memberships and otherwise cause the Company to terminate
its relationship with existing members. Events that constitute default include
events outside the control of the Company, including acts and omissions by the
Company's third-party vendors. There can be no assurance that one or more of the
Company's key or other clients will not terminate its relationship with the
Company or that clients will provide additional customer lists to the Company
for use in further marketing new or existing membership programs.
 
     Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise subjected to binding arbitration. There can be
no assurance that, upon exercise of such option, the Company would receive, as a
result of negotiation, arbitration or otherwise, revenue or net income
commensurate with the amount which the Company would receive if the option were
not exercised. Failure to receive a commensurate amount, and the loss of the
ability to market to the members of the program following exercise of the
option, could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in personal relationships, and such clients may
not be replaced on a timely basis, if at all.
 
GOVERNMENT REGULATION
 
     The primary means which the Company uses to market its programs is
telemarketing. The telemarketing industry has become subject to an increasing
amount of Federal and state regulation as well as general public scrutiny in the
past several years. The Federal Telephone Consumer Protection Act of 1991 limits
the hours during which telemarketers may call consumers and prohibits the use of
automated telephone dialing equipment to call certain telephone numbers. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
telemarketing practices, and there can be no assurance that any such laws, if
enacted, will not adversely affect or limit the Company's current or future
operations. Compliance with these regulations is generally the responsibility of
the Company, and the Company could be subject to a variety of enforcement or
private actions for any failure to comply with such regulations. The Company's
provision of membership programs requires the Company to comply with certain
state regulations, changes in which could materially increase the Company's
operating costs associated with complying with such regulations. The risk of
noncompliance by the Company with any rules and regulations enforced by a
Federal or state consumer protection authority may subject the Company or its
management to fines or various forms of civil or criminal prosecution, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Also, the media often publicizes perceived
non-compliance with consumer protection regulations and violations of notions of
fair dealing with consumers, and the membership programs industry is susceptible
to peremptory charges by the media of regulatory noncompliance and unfair
dealing.
 
                                       34
<PAGE>   36
 
     The Company believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it is offered. If this program were in the
future to be viewed by a Federal or any state insurance regulatory authority as
an insurance program, this would subject the Company to the regulatory authority
of such Federal or state insurance authority. The insurance industry currently
is one of the most heavily regulated industries in the United States. The
subjection of the Company to such regulatory authority would significantly
increase the Company's costs associated with regulatory compliance and
potentially cause the Company to terminate its Countrywide Dental Program in
particular states, either of which would materially adversely affect the
Company's business, financial condition and results of operations.
 
COMPETITION
 
     Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company to promote a program
if the services provided by the Company's program are similar to, or merely
overlap with, the services provided by an existing program of a competitor. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations.
There can be no assurance that the Company's competitors will not increase their
emphasis on programs similar to those offered by the Company and more directly
compete with the Company, that new competitors will not enter the market, or
that other businesses will not themselves introduce competing programs.
 
     Many of the Company's current and prospective competitors, including CUC,
have substantially larger customer bases and greater financial and other
resources than the Company. There can be no assurance that the Company's current
or potential competitors will not provide programs comparable or superior to
those provided by the Company at lower membership prices or adapt more quickly
than the Company to evolving industry trends or changing market requirements. In
addition, alliances among competitors may emerge and rapidly acquire significant
market share. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete effectively
against current and future competitors.
 
     The Company believes that the principal competitive factors in the
membership services industry include the ability to identify, develop and offer
innovative service programs, the quality and breadth of service programs
offered, price and marketing expertise. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability to hire and retain employees, the development by
others of service programs that are competitive with the Company's service
programs, the price at which others offer comparable service programs and the
extent of the Company's competitors' responsiveness to customer needs.
 
     Providers of membership programs compete for client marketing budget
dollars with other marketing activities and, in particular, other forms of
direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange through the
World Wide Web, will proliferate significantly in the foreseeable
 
                                       35
<PAGE>   37
 
future. To the extent such proliferation occurs, it could have a material
adverse effect on the demand for membership programs. Furthermore, as the
telemarketing industry continues to grow, the effectiveness of telemarketing,
which is the Company's major means of marketing its programs, as a direct
marketing tool may decrease as a result of increased consumer resistance to
telemarketing in general.
 
EMPLOYEES
 
     As of June 30, 1996, the Company employed 349 persons on a full-time basis
and 47 on a part-time basis. None of the Company's employees are represented by
a labor union. The Company believes that its employee relations are good.
 
FACILITIES
 
     The Company leases space in Stamford, Connecticut, Omaha, Nebraska and
Houston, Texas. The Stamford office serves as the Company's headquarters. The
Omaha and Houston locations are primarily call centers for membership services
representatives, operations and telemarketing personnel. The Omaha location is
also the Company's main computer and telecommunications systems center and
contains member fulfillment and warehouse facilities.
 
     A summary of key information with respect to the Company's leased
facilities is as follows:
 
<TABLE>
<CAPTION>
                        LOCATION                      SQUARE FOOTAGE      LEASE EXPIRATION
    ------------------------------------------------  --------------     ------------------
    <S>                                               <C>                <C>
    Stamford, CT....................................      18,650         March 14, 2006
    Omaha, NE.......................................      19,800         June 30, 2000
    Omaha, NE.......................................      11,000         December 31, 1997
    Omaha, NE.......................................      16,400         December 31, 2000
    Houston, TX.....................................      26,000         July 31, 2006
</TABLE>
 
LEGAL PROCEEDINGS
 
     From time to time, the Company may be involved in litigation or in
settlement proceedings relating to claims arising out of its operations in the
normal course of business. Except as described below, the Company is not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, could have a material adverse affect on the
Company's business, financial conditions and results of operations.
 
     On June 29, 1995, Thomas J. St. Denis, a co-founder of the Company, filed a
complaint against the Company, Gary A. Johnson and Steven H. Levenherz, who are
executive officers of the Company, in Stamford, Connecticut Superior Court,
alleging various claims arising out of his termination on October 3, 1994 as
Executive Vice President and Chief Operating Officer of the Company. Mr. St.
Denis alleges wrongful termination, breach of fiduciary duty, fraudulent
inducement and certain other claims arising out of alleged accounting
irregularities in fiscal 1994. The complaint claims an unspecified amount of
compensatory and punitive damages and certain other costs. The Company has moved
to strike the complaint, and its motion is being considered by the court. If the
motion to strike is not allowed, the Company intends to contest the claims
alleged in the complaint vigorously, and to assert counterclaims against Mr. St.
Denis. Prolonged litigation arising from this complaint or an adverse
determination could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
                                       36
<PAGE>   38
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The executive officers and directors of the Company, and their respective
ages as of June 30, 1996, are as follows:
 
<TABLE>
<CAPTION>
            NAME              AGE                         POSITION
- ----------------------------  ---     ------------------------------------------------
<S>                           <C>     <C>
Gary A. Johnson.............  41      President and Chief Executive Officer, Director
Dennis P. Walker............  51      Executive Vice President, Director
James B. Duffy..............  42      Senior Vice President and Chief Financial
                                      Officer
David Schachne..............  35      Senior Vice President -- Marketing/Operations
Steven H. Levenherz.........  52      Senior Vice President -- Administration/Law
Stephen J. Clearman.........  45      Director
Alec L. Ellison.............  33      Director
Michael R. O'Brien..........  53      Director
Marc S. Tesler..............  50      Director
</TABLE>
 
     Gary A. Johnson, a co-founder of the Company, has served as President and
Chief Executive Officer and a Director of the Company since its inception. From
1987 to 1989, Mr. Johnson founded and served as President of American Target
Group Marketing, a marketer of membership services for magazine publishers. From
1983 to 1987, Mr. Johnson was Vice President of New Product Development and
Marketing for CUC, a membership program services marketing firm. From 1981 to
1983, Mr. Johnson was a Marketing Director of the Marketing Consulting Division
of General Electric. Mr. Johnson received a B.S. from Tufts University and an
M.B.A. from Harvard Business School.
 
     Dennis P. Walker, a co-founder of the Company, has served as Executive Vice
President and a Director of the Company since its inception. Prior to founding
MemberWorks, Mr. Walker founded and served as President of Walker Enterprises, a
direct marketing and credit card merchandising business from 1978 to 1988. Mr.
Walker received a B.A. from the University of Nebraska.
 
     James B. Duffy joined the Company as Senior Vice President and Chief
Financial Officer in June 1996. Prior to joining the Company, Mr. Duffy served
in various senior financial management positions, most recently as Senior Vice
President, Business Planning, at Merck Medco Managed Care, Inc., a prescription
benefit management company, from 1986 to November 1995. Mr. Duffy received a
B.B.A. from Pace University.
 
     David Schachne joined the Company as Senior Vice
President -- Marketing/Operations in 1990. Prior to joining the Company, Mr.
Schachne was Vice President of Sleep Technologies, Inc., a manufacturer and
wholesaler of home furnishing products. Mr. Schachne received a B.A. from the
State University of New York, Albany and his M.B.A. from Harvard Business
School.
 
     Steven H. Levenherz, Senior Vice President -- Administration/Law, joined
the Company in May 1993 and, through June 1996, served as Chief Financial
Officer. Prior to joining the Company, Mr. Levenherz was an independent
consultant in financial and mergers and acquisitions matters from 1992 through
1993 and, from 1990 to 1992, he served as Chief Financial Officer at Phoenix
Partners, a merchant banking firm. From 1987 to 1990 Mr. Levenherz served as
Senior Vice President of Financial Planning at Horsehead Industries, Inc., a
leveraged buy-out company. Mr. Levenherz received a B.B.A. from the Baruch
School of the City College of New York and a J.D. from the University of North
Carolina, Chapel Hill.
 
     Stephen J. Clearman has been a Director of the Company since 1989. Since
1984, Mr. Clearman has been a general partner of Geocapital Partners, a venture
fund he co-founded. Mr. Clearman received a B.A. from Haverford College, an M.S.
from Columbia University and a J.D. from Harvard Law School. Mr. Clearman is
also a director of Expert Software, Inc. and Restor Industries, Inc.
 
                                       37
<PAGE>   39
 
     Alec L. Ellison has been a Director of the Company since 1989. Mr. Ellison
has served as Managing Director of Broadview Associates LLC, an investment bank,
since 1988. Prior to 1988, Mr. Ellison was affiliated with the Technology and
Emerging Growth Group of Morgan Stanley & Co. Incorporated, an investment
banking firm. Mr. Ellison holds a B.A. from Yale University and an M.B.A from
Harvard Business School, where he was a Baker Scholar.
 
     Michael R. O'Brien has been a Director of the Company since June 1996. Mr.
O'Brien founded Catalina Marketing, Inc. ("Catalina"), a direct marketing
company, in 1983, and served as Catalina's President until 1989 and as its
Chairman of the Board and Chief Executive Officer until 1992. Since 1992, Mr.
O'Brien has been Chairman Emeritus of, and a consultant to, Catalina. Prior to
founding Catalina, Mr. O'Brien was President of TRIM, Inc., a marketing research
and information company specializing in the utilization of scanner data.
Previously, he held various sales management positions with several consumer
product manufacturers, including the Liggett Group, Inc. Mr. O'Brien received a
B.A. from the University of Kansas.
 
     Marc S. Tesler has been a Director of the Company since January 1996. Since
July 1995, he has been a member of the general partner of Technology Crossover
Ventures, L.P., a private partnership specializing in information technology
investments. From 1982 to June 1995, Mr. Tesler served in various positions at
Chancellor Capital Management, an investment management firm, most recently as
head of its Alternative Asset Management Group. Mr. Tesler received his B.S.
from the University of Massachusetts and his M.B.A. from New York University.
 
     The Company is party to a Stockholders' Agreement dated December 28, 1990,
as amended, with certain of its stockholders, including certain of its executive
officers and entities affiliated with certain of its directors, pursuant to
which such stockholders agreed, subject to certain exceptions, to vote all
securities of the Company owned by them to elect as directors of the Company (i)
one person nominated by Chancellor Capital Management, Inc. ("Chancellor"), (ii)
one person nominated by Geocapital II, L.P. ("Geocapital"), (iii) Messrs.
Johnson, St. Denis and Walker (the "Founders"), and (iv) an independent director
designated by Chancellor, Geocapital and the Founders. The Stockholders'
Agreement will terminate by its terms upon the closing of this offering.
 
     Following this offering, the Board of Directors will be divided into three
classes, and each director will serve for a staggered three-year term. The Board
will consist of two Class I Directors (Messrs. Tesler and Ellison), two Class II
Directors (Messrs. Clearman and O'Brien) and two Class III Directors (Messrs.
Johnson and Walker). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors or
director of the same class whose terms are then expiring. The terms of the Class
I Directors, Class II Directors and Class III Directors expire upon the election
and qualification of successor directors at the annual meeting of stockholders
held during the calendar years 1997, 1998 and 1999, respectively. To the extent
there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal numbers of directors.
 
     Each officer serves at the discretion of the Board of Directors. The
Company does not have any existing employment agreements with any executive
officer. There are no family relationships among any of the directors and
executive officers of the Company.
 
BOARD COMMITTEES
 
     The Board of Directors has a Compensation Committee, currently composed of
Messrs. Clearman Ellison and Tesler which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to the
Company and administers and grants stock options pursuant to the Company's stock
option plans. The Board of Directors also has an Audit Committee, currently
composed of Messrs. Clearman, O'Brien and Tesler, which reviews the results and
scope of the audit and other services provided by the Company's independent
public accountant.
 
                                       38
<PAGE>   40
 
DIRECTOR COMPENSATION
 
     The Company's Directors do not receive any compensation for their services
on the Board of Directors or any committee thereof and are not reimbursed for
expenses incurred in connection with their attendance at Board or committee
meetings. However, non-employee directors have received options to purchase
shares of Common Stock pursuant to the 1995 Non-Employee Director Stock Option
Plan. See "-- Stock Plans."
 
LIMITATION OF LIABILITY AND INDEMNIFICATION
 
     The Company's Restated Certificate of Incorporation (the "Charter")
contains certain provisions permitted under the Delaware General Corporation Law
("DGCL") relating to the liability of directors. These provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty, except
in certain circumstances involving wrongful acts, such as the breach of a
director's duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, unlawful payments or
dividends or unlawful stock repurchases or redemptions or any transaction from
which the director derived an improper personal benefit. As a result, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of duty of care. Although stockholders may continue to seek
injunctive or other equitable relief for an alleged breach of fiduciary duty by
a director, stockholders may not have any effective remedy against the
challenged conduct if equitable remedies are not available. The Charter also
contains provisions indemnifying the directors and officers of the Company to
the fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
 
     The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
 
     There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent,
other than the lawsuit filed by Thomas J. St. Denis against the Company and two
of its executive officers. The Company has undertaken to defend the two
executive officers in this litigation. See "Business -- Legal Proceedings."
 
                                       39
<PAGE>   41
 
EXECUTIVE COMPENSATION
 
     Summary of Cash and Other Compensation
 
     The following table sets forth the compensation earned for the fiscal year
ended June 30, 1996 by the Company's Chief Executive Officer and three
additional executive officers (together with the Chief Executive Officer, the
"Named Executive Officers"), each of whom earned aggregate compensation for such
year in excess of $100,000.
 
<TABLE>
<CAPTION>
                                                                                    LONG-TERM
                                                                                   COMPENSATION
                                                                                      AWARDS
                                                                                   ------------
                                                                                    NUMBER OF
                                                           ANNUAL COMPENSATION      SECURITIES
                                                          ----------------------    UNDERLYING
              NAME AND PRINCIPAL POSITION                  SALARY         BONUS      OPTIONS
- --------------------------------------------------------  --------       -------   ------------
<S>                                                       <C>            <C>       <C>
Gary A. Johnson.........................................  $203,881       $51,550      15,000
  President and Chief Executive Officer
Dennis P. Walker........................................   197,802        40,378       5,000(1)
  Executive Vice President
David Schachne..........................................   149,025        36,625       2,000
  Senior Vice President -- Marketing/Operations
Steven H. Levenherz.....................................   160,485        22,088       3,000
  Senior Vice President -- Administration/Law
</TABLE>
 
- ---------------
(1) Mr. Walker entered into an agreement with the Company whereby the Company is
    required to grant options to purchase up to 20,000 shares of Common Stock to
    Mr. Walker for achievement of certain performance goals. Specifically, the
    Company will grant an option to purchase 2,000 shares of Common Stock for
    each new client, from a selected list of ten prospective large clients, he
    obtains for the Company prior to December 31, 1996. These options become
    exercisable over a four-year period, one quarter of such options vesting
    each 12 months commencing on the last day of the first 12-month period after
    the date of grant, at an exercise price of $20.00 per share. In April 1996,
    Mr. Walker was granted an option to purchase 2,000 shares of Common Stock
    pursuant to this agreement.
 
     Option Grants
 
     The following table sets forth certain information concerning grants of
stock options made during fiscal 1996 to each of the Named Executive Officers.
No stock appreciation rights were granted to the Named Executive Officers during
such year.
 
                                       40
<PAGE>   42
 
<TABLE>
<CAPTION>
                                           INDIVIDUAL GRANTS(1)                    POTENTIAL REALIZABLE
                          ------------------------------------------------------     VALUE AT ASSUMED
                          NUMBER OF    PERCENT OF TOTAL                            ANNUAL RATES OF STOCK
                          SECURITIES       OPTIONS                                  PRICE APPRECIATION
                          UNDERLYING      GRANTED TO      EXERCISE                  FOR OPTION TERM(2)
                           OPTIONS       EMPLOYEES IN     PRICE PER   EXPIRATION   ---------------------
          NAME             GRANTED       FISCAL YEAR      SHARE(3)       DATE         5%          10%
- ------------------------  ----------   ----------------   ---------   ----------   --------     --------
<S>                       <C>          <C>                <C>         <C>          <C>          <C>
Gary A. Johnson.........    15,000           20.4%         $ 20.00      7/31/05    $188,670     $478,110
Dennis P. Walker........     3,000            4.1%           20.00      7/31/05      37,734       95,622
                             2,000(4)         2.7%           20.00      4/30/06      57,734      115,622
David Schachne..........     2,000            2.7%           20.00      7/31/03      19,100       45,744
Steven H. Levenherz.....     3,000            4.1%           20.00      7/31/03      28,650       68,616
</TABLE>
 
- ---------------
(1) The option referenced in footnote (4) and options granted under the 1995
    Executive Officers' Stock Option Plan (the "1995 Plan") have a term of ten
    years, and options granted prior to December 31, 1995 under the Amended 1990
    Stock Option Plan (the "1990 Plan") have a term of eight years. These
    options are subject to earlier termination in certain events related to
    termination of employment. All such options become exercisable over a
    four-year period, one-quarter of such options vesting each 12 months
    commencing on the last day of the first 12-month period after the date of
    grant.
 
(2) In accordance with the rules of the Commission, the potential realizable
    values for such options shown in the table are reported net of the option
    exercise price and are based on assumed rates of stock price appreciation of
    5% and 10% compounded annually from the date the respective options were
    granted (based on the fair market value of the Common Stock on the date of
    the grant as determined by the Board of Directors) to their expiration date.
    These assumed rates of appreciation do not represent the Company's
    estimation or projection of the appreciation of shares of Common Stock of
    the Company.
 
(3) All options, other than the option referenced in footnote (4), were granted
    at an exercise price equal to the fair market value as determined by the
    Board of Directors of the Company on the date of grant.
 
(4) This option was granted pursuant to an agreement with the Company, whereby
    the Company will grant Mr. Walker an option to purchase 2,000 shares of
    Common Stock for each new client, from a selected list of certain
    prospective large clients, he obtains for the Company prior to December 31,
    1996. This option has an exercise price of $20.00 per share. See footnote
    (1) to the table appearing in "-- Summary of Cash and Other Compensation."
 
                                       41
<PAGE>   43
 
     Option Exercises and Holdings
 
     The following table sets forth certain information concerning the number
and value of unexercised stock options held as of June 30, 1996 by each of the
Named Executive Officers. No options were exercised by the Named Executive
Officers in fiscal 1996, and no stock appreciation rights were exercised or were
outstanding during and at the end of fiscal 1996.
 
<TABLE>
<CAPTION>
                                                 SHARES OF COMMON STOCK
                                                 UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED
                                                       OPTIONS AT             IN-THE-MONEY OPTIONS
                                                   FISCAL YEAR END(1)        AT FISCAL YEAR END(2)
                                               --------------------------  --------------------------
                     NAME                      EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
- ---------------------------------------------- -----------  -------------  -----------  -------------
<S>                                            <C>          <C>            <C>          <C>
Gary A. Johnson...............................    --            15,000      $  --         $ 150,000
Dennis P. Walker(3)...........................    --             5,000         --            50,000
David Schachne................................     9,000         6,500        172,275        92,885
Steven H. Levenherz...........................    15,126         8,041        282,554       124,166
</TABLE>
 
- ------------
(1) All options granted become exercisable over a four-year period, one-quarter
    of such options vesting each 12 months commencing on the last day of the
    first 12-month period after the date of grant.
 
(2) There was no public trading market for the Common Stock as of June 30, 1996.
    Accordingly, these values have been calculated on the basis of the fair
    market value of the Company's Common Stock of $30.00 at June 30, 1996, as
    determined by the Company's Board of Directors, minus the applicable per
    share exercise price.
 
(3) Of these shares, 2,000 are subject to an option which was granted pursuant
    to an agreement with the Company, whereby the Company will grant Mr. Walker
    an option to purchase 2,000 shares of Common Stock for each new client, from
    a selected list of certain prospective large clients, he obtains for the
    Company prior to December 31, 1996. This option has an exercise price of
    $20.00 per share. See footnote (1) to the table appearing in "-- Summary of
    Cash and Other Compensation."
 
STOCK PLANS
 
     Amended 1990 Stock Option Plan
 
     The Company's Amended 1990 Employee Incentive Stock Option Plan ("Amended
1990 Stock Option Plan") was adopted by the Board of Directors and approved by
the Company's stockholders in August 1990. The Amended 1990 Stock Option Plan
provides for the grant of (i) "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees and officers of the Company, and (ii) non-qualified stock options to
employees, consultants, directors and officers of the Company. Up to 180,000
shares of Common Stock are authorized for issuance under the Amended 1990 Stock
Option Plan. On August 13, 1996, the Board of Directors voted that, effective
upon the closing of this offering, no further options may be granted or issued
under the Amended 1990 Stock Option Plan.
 
     Options granted under the Amended 1990 Stock Option Plan are not
transferable by the optionholder except by will or by laws of descent and
distribution. Generally, no incentive stock option may be exercised by an
optionee under the Amended 1990 Stock Option Plan following termination of
employment. Options granted under the Amended 1990 Stock Option Plan expire not
more than ten years after the date of grant, except that options granted on or
before December 31, 1995 expire on the eighth anniversary of the date of grant.
Options granted under the Amended 1990 Stock Option Plan generally vest 25% on
the one-year anniversary of the date of grant, and an additional 25% each year
thereafter.
 
                                       42
<PAGE>   44
 
     As of June 30, 1996, options to purchase a total of 122,467 shares of
Common Stock at a weighted average exercise price of $15.53 per share were
outstanding under the Amended 1990 Stock Option Plan (of which options to
purchase 52,525 shares were exercisable as of such date), and options to
purchase 11,723 shares had been exercised at a weighted average exercise price
of $6.50 per share.
 
     1995 Executive Officers' Stock Option Plan
 
     In August 1995, the Company's Board of Directors approved the 1995 Stock
Option Plan (the "Executive Officers' Plan"), which provides for the grant of
options to purchase up to an aggregate of 50,000 Shares of Common Stock of the
Company to executive officers of the Company. The Executive Officers' Plan is
administered by the Compensation Committee of the Board of Directors.
 
     Under the Executive Officers' Plan, each executive officer of the Company
is eligible to receive an option to purchase shares of Common Stock. The
exercise price per share for all options granted under the Executive Officers'
Plan must equal the fair market value of the Common Stock on the date of grant.
The Executive Officers' Plan does not provide for any specific period over which
granted options vest. The term of each option is ten years from the date of
grant. In addition, the Executive Officers' Plan authorizes the Compensation
Committee to grant additional options to the Company's executive officers and to
determine the terms applicable to such options. Options may not be assigned or
transferred except by will or by the laws of descent and distribution and are
exercisable to the extent vested only while the optionee is serving as an
executive officer of the Company or within one year after the optionee ceases to
serve as an executive officer of the Company. Options to purchase 35,000 shares
have been granted to date under the Executive Officers' Plan.
 
     1995 Non-Employee Directors' Stock Option Plan
 
     In August 1995, the Company's Board of Directors adopted the 1995
Non-Employee Director Stock Option Plan (the "Director Plan"), which provides
for the grant of options to purchase a maximum of 25,000 shares of Common Stock
of the Company to non-employee directors of the Company. The Director Plan is
administered by the Compensation Committee of the Board of Directors.
 
     Under the Director Plan, each director of the Company who is not also an
employee or officer of the Company is eligible to receive an option to purchase
shares of Common Stock on the date such person is first elected to the Board of
Directors. The exercise price per share for all options granted under the
Director Plan will be equal to the fair market value of the Common Stock on the
date of grant. The options granted to a director are exercisable in four equal
annual installments, beginning on the first anniversary of the grant date,
provided that the optionee remains a director at such time. The term of each
option is ten years from the date of grant. In addition, the Director Plan
authorizes the Compensation Committee to grant additional options to
non-employee directors and to determine the terms applicable to such options.
Options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable to the extent vested only while the
optionee is serving as a director of the Company and within one year after the
optionee ceases to serve as a director of the Company. Options to purchase
20,000 shares have been granted to date under the Director Plan.
 
     1996 Stock Option Plan
 
     The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
No options have been granted under the 1996 Stock Option Plan. The 1996 Stock
Option Plan authorizes the issuance of up to a total of 250,000 shares of Common
Stock pursuant to the grant to employees of "incentive stock options" within the
meaning of the Code, and the grant of non-qualified stock options to employees,
consultants, officers or directors of the Company.
 
                                       43
<PAGE>   45
 
     The 1996 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, which has the authority to select the optionees and
determine the terms of the options granted, including (i) the number of shares
subject to each option, (ii) option exercise terms, (iii) the exercise price of
the option, (which in the case of an incentive stock option cannot be less than
the fair market value of the Common Stock on the date of grant), (iv) the
duration of the option, and (v) the time, manner and form of payment upon
exercise of an option. An option is not transferable by the optionholder except
by will or by laws of descent and distribution. Generally, no incentive stock
option may be exercised by an optionee more than three months following
termination of employment, unless termination is due to death or disability, in
which case the option is exercisable for a maximum of one year after such
termination.
 
     1996 Employee Stock Purchase Plan
 
     The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
The Purchase Plan authorizes the issuance of up to a total of 50,000 shares of
Common Stock to participating employees.
 
     All employees of the Company, including directors of the Company who are
employees, and who have been employed for more than 12 months are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock of
the Company or any subsidiary are not eligible to participate.
 
     On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount to be deducted by the Company from
such pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the Purchase
Plan, the option price is an amount equal to 85% of the fair market value per
share of the Common Stock on either the first day or the last day of the
Offering Period, whichever is lower. An employee may purchase, in any one
Offering Period, a number of shares the aggregate purchase price of which is up
to 10% of the employee's compensation for the immediately preceding six month
period divided by 85% of the market value of a share of Common Stock on the
commencement date of the Offering Period. The Compensation Committee may, in its
discretion, choose an Offering Period of 12 months or less for each of the
Offerings and choose a different Offering Period for each Offering.
 
     If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During fiscal 1996, all decisions relating to executive compensation were
made by the Compensation Committee, of which Messrs. Clearman and Ellison were
members. Neither of these individuals has served at any time as an officer or
employee of the Company. For a description of the transactions between the
Company and members of the Compensation Committee and entities affiliated with
such members, see "Certain Transactions." No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
 
                                       44
<PAGE>   46
 
                              CERTAIN TRANSACTIONS
 
     Since June 30, 1993, the Company has issued and sold, in private placement
transactions, shares of Class A Common Stock and Preferred Stock and warrants to
purchase Common Stock to the Company's executive officers, directors and
principal stockholders as follows:
 
<TABLE>
<CAPTION>
                                      NUMBER OF            NUMBER OF               NUMBER OF
                                      SHARES OF            SHARES OF               SHARES OF        CLASS A
                                       SERIES F             SERIES H                CLASS A       COMMON STOCK
          INVESTOR(1)             PREFERRED STOCK(2)   PREFERRED STOCK(3)       COMMON STOCK(2)     WARRANTS
- --------------------------------  ------------------   ------------------       ---------------   ------------
<S>                               <C>                  <C>                      <C>               <C>
Geocapital II, L.P. (4).........          4,794                   --                  4,794             975(5)
Marc S. Tesler(6)...............             --               73,189                     --           3,789(7)
Entities Affiliated with
  Chancellor....................         20,071               75,433                 20,071           7,988(8)
Entities Affiliated with Abbott
  Capital.......................         13,493                   --                 13,493           2,744(9)
</TABLE>
 
- ---------------
 
(1) Shares held by all affiliated persons and entities have been aggregated. See
    "Principal and Selling Stockholders" for more detail on shares held by these
    purchasers.
 
(2) On March 30, 1994 the Company sold a total of 38,358 shares of Series F
    Preferred Stock and 38,358 shares of Class A Common Stock for an aggregate
    purchase price of $1 million. The shares of Series F Preferred Stock will be
    redeemed by the Company upon closing this offering at $26.07 per share, plus
    (i) accrued and unpaid dividends thereon and (ii) a 6% redemption premium,
    if applicable. Approximately $24,700, $103,500 and $69,600 of dividends have
    accrued as of June 30, 1996 on shares of Series F Preferred Stock owned by
    Geocapital, and entities advised by Chancellor Capital Management Inc. and
    Abbott Capital Management, L.P., respectively.
 
(3) The per share purchase price for Series H Preferred Stock was $40.99.
 
(4) Stephen J. Clearman, a general partner of Geocapital II, L.P., is a director
    of the Company. Alec L. Ellison, a Managing Director of Broadview Associates
    LLC, which is an affiliate of Geocapital II, L.P., is a director of the
    Company.
 
(5) These warrants have an exercise price of $25.64 per share.
 
(6) Reflects shares owned by Technology Crossover Ventures, L.P. and Technology
    Crossover Ventures, C.V. (together, "Technology Crossover Ventures"). Marc
    S. Tesler, an affiliate of Technology Crossover Ventures, is a director of
    the Company.
 
(7) These warrants have an exercise price of $.01 per share.
 
(8) Of the 7,988 warrants, 4,082 are exercisable at $25.64 per share and 3,906
    are exercisable at $.01 per share.
 
(9) These warrants have an exercise price of $25.64 per share.
 
     On December 31, 1990, the Company issued promissory notes to two of its
founders, Gary A. Johnson and Thomas St. Denis, both in the amount of $133,333
and bearing interest payable monthly at the rate of 12% percent per annum. The
notes mature and all outstanding principal is payable in full on February 28,
1997. Currently, the Company's credit agreement with a third-party lender
requires that the entire principal amount of the notes remain outstanding.
 
     For a description of option grants to certain executive officers of the
Company, see "Management -- Executive Compensation."
 
     The Company believes that the terms of the foregoing transactions were no
less favorable to the Company than could have been obtained from unaffiliated
third parties. The Company intends to adopt a policy, effective following the
consummation of this offering, that all material transactions between the
Company and its officers, directors and other affiliates must (i) be approved by
a majority of the members of the Company's Board of Directors and by a majority
of the disinterested members of the Company's Board of Directors, and (ii) be on
terms that are no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
 
                                       45
<PAGE>   47
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors and Named
Executive Officers, (iii) each of the Selling Stockholders and (iv) all
directors and executive officers as a group.
 
<TABLE>
<CAPTION>
                                                                                             SHARES
                                                     SHARES BENEFICIALLY                  BENEFICIALLY
                                                       OWNED PRIOR TO                     OWNED AFTER
                                                         OFFERING(1)       NUMBER OF      OFFERING(1)
                                                     -------------------     SHARES     ----------------
       NAME AND ADDRESS OF BENEFICIAL OWNER          NUMBER      PERCENT    OFFERED     NUMBER   PERCENT
- ---------------------------------------------------  -------     -------   ----------   ------   -------
<S>                                                  <C>         <C>       <C>          <C>      <C>
  Chancellor Capital Management, Inc.(2)...........  261,684       15.4%
    1166 Avenue of the Americas
    New York, NY 10036
  Geocapital II, L.P.(3)...........................  386,035       22.9%
    One Bridge Plaza
    Fort Lee, NJ 07024
  Gary A. Johnson(4)...............................  228,750       13.5%
  Thomas St. Denis.................................  225,000       13.3%
  Dennis P. Walker(5)..............................  225,750       13.4%
  Abbott Capital Management, L.P.(6)...............  122,582        7.3%
    1330 Avenue of the Americas, Suite 2800
    New York, NY 10019
  Stephen J. Clearman(3)(7)........................  386,035       22.9%
  Alec L. Ellison(3)(8)............................  386,035       22.9%
  Marc S. Tesler(9)................................  76,978         4.6%
  Steven H. Levenherz(10)..........................  15,876        *
  David Schachne(11)...............................  16,250         1.0%
Other Selling Stockholders
All executive officers and directors, as a group
  (9 persons)(3)(4)(5)(7)(8)(9)(10)(11)............  949,639       55.1%
</TABLE>
 
- ------------
* Less than 1%.
 
 (1) The number of shares beneficially owned by each stockholder is determined
     under rules promulgated by the Securities and Exchange Commission, and the
     information is not necessarily indicative of beneficial ownership for any
     other purpose. Under such rules, shares of Common Stock subject to options
     or warrants exercisable within 60 days after June 30, 1996 are deemed to be
     outstanding for computing the percentage of the person or entity holding
     such options or warrants but are not deemed outstanding for computing
     percentage of any other person or entity. The inclusion herein of such
     shares, however, does not constitute an admission that the named
     stockholder is a direct or indirect beneficial owner of such shares. Unless
     otherwise indicated, each person or entity named in the table has sole
     voting power and investment power (or shares such power with his or her
     spouse) with respect to all shares of capital stock listed as owned by such
     person or entity.
 
 (2) Chancellor Capital Management, Inc. ("Chancellor") is the investment
     manager for various fiduciary client accounts, with full voting and
     investment, including dispositive, powers. Such client accounts and their
     respective share ownership are as follows: Howe & Co. as nominee for
     Northern Trust as trustee of Burnett Pension Trust; Howe & Co. as nominee
     for Northern Trust as trustee of Burnett Profit Sharing Trust; Focus & Co.;
     Focus & Co. for the benefit of Baxter Healthcare Corp.; Hank & Co. for the
     account of Citiventures Private Participation Ltd. II; Pitt & Co. for the
     account of GTE Pension Plan; and Parag Saxena. Each of the accounts owns
     3,865; 5,055; 6,608; 4,862; 187,537; 45,460; and 309 shares of Common
     Stock, respectively. Also includes
 
                                       46
<PAGE>   48
 
an aggregate of 7,988 shares of Common Stock issuable upon the exercise of
outstanding warrants held by such accounts that are presently exercisable.
 
 (3) Consists of 367,270 and 17,790 shares of Common Stock and 929 and 46 shares
     issuable upon the exercise of presently exercisable warrants held of record
     by Geocapital II, L.P. and Bernard Goldstein, respectively, both of which
     are part of an affiliated group of entities and individuals referred to,
     collectively, as Geocapital.
 
 (4) Includes 3,750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
     Includes 7,500 shares held in trust for the benefit of Mr. Johnson's
     children; Mr. Johnson disclaims beneficial ownership of such shares.
 
 (5) Includes 750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
     Includes an aggregate of 25,000 shares held in trust for the benefit of Mr.
     Walker's children; Mr. Walker disclaims beneficial ownership of such
     shares.
 
 (6) Includes 2,744 shares issuable upon the exercise of warrants presently
     exercisable.
 
 (7) Mr. Clearman is a general partner of Geocapital II, L.P., and as such may
     be deemed to be the beneficial owner of shares held by Geocapital. Mr.
     Clearman disclaims beneficial ownership of such shares except to the extent
     of his pecuniary interest in Geocapital.
 
 (8) Mr. Ellison is a Managing Director of Broadview Associates LLC, an
     affiliate of Geocapital II, L.P., and as such may be deemed to be the
     beneficial owner of shares held by Geocapital. Mr. Ellison disclaims
     beneficial ownership of such shares except to the extent of his pecuniary
     interest in Geocapital.
 
 (9) Consists of an aggregate of 73,189 shares of Common Stock and 3,789 shares
     issuable upon the exercise of warrants held of record by Technology
     Crossover Ventures, L.P. and Technology Crossover Ventures, C.V., of which
     Mr. Tesler is an affiliate. As a result, Mr. Tesler may be deemed to be the
     beneficial owner of such shares. Mr. Tesler disclaims beneficial ownership
     of such shares except to the extent of his pecuniary interest in such
     entities.
 
(10) Represents 15,876 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
 
(11) Includes 11,750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
 
                                       47
<PAGE>   49
 
                          DESCRIPTION OF CAPITAL STOCK
 
     Upon the closing of the offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.01 par value per
share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share.
 
COMMON STOCK
 
     As of June 30, 1996 there were 1,687,034 shares of Common Stock and
Preferred Stock convertible into Common Stock outstanding held by 39
stockholders of record. Based upon the number of shares outstanding as of June
30, 1996, assuming no exercise after June 30, 1996 of outstanding stock options
and warrants and giving effect to the issuance of the      shares of Common
Stock offered by the Company hereby, there will be      shares of Common Stock
outstanding upon the closing of this offering. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock. Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in this
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
 
WARRANTS
 
     As of June 30, 1996, the Company had issued warrants to purchase an
aggregate of 53,864 shares of Class A Common Stock with the following per share
exercise prices: 7,801 at $25.64; 20,337 at $14.75; and 25,726 at $0.01. These
warrants expire at various dates between March 1999 and August 2000.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue such shares of Preferred
Stock in one or more series. Each such series of Preferred Stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors. The Company has
no present plans to issue any shares of Preferred Stock. It is not possible to
state the effect of the authorization and issuance of any series of Preferred
Stock upon the rights of holders of Common Stock until the Board of Directors
determines the specific terms, rights and preferences of such a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock or impairing the liquidation rights of such shares without further
action by holders of Common Stock. In addition, under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities or the removal of incumbent
management, which could thereby depress the market price of the Company's Common
Stock.
 
                                       48
<PAGE>   50
 
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
 
     The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
 
     The Company's Restated Certificate of Incorporation (the "Charter")
provides for the division of the Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms. See
"Management -- Executive Officers and Directors." In addition, the Charter
provides that directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of capital stock of the corporation
entitled to vote. Under the Charter, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
 
     The Charter also provides that after the closing of this Offering, any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. The Charter further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Restated By-laws, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
 
     The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Charter requires the affirmative vote of
the holders of at least 75% of the shares of capital stock of the Company issued
and outstanding and entitled to vote to amend or repeal any of the foregoing
Charter provisions. The Restated By-laws also may be amended or repealed by a
majority vote of the Board of Directors subject to any limitations set forth in
the Restated By-laws. The 75% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders.
 
REGISTRATION RIGHTS
 
     Following this offering, the holders (the "Holders") of approximately
            shares of Common Stock and warrants to purchase approximately
            shares of Common Stock or their assignees (collectively, the
"Registrable Securities"), will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms of an
agreement between the
 
                                       49
<PAGE>   51
 
Company and the Holders, in the event the Company intends to register any of its
securities under the Securities Act the Holders shall be entitled to include
Registrable Securities in such registration. However, the managing underwriter
of any such offering may, under certain circumstances, exclude some or all of
such registrable Securities from such registration. The Holders also are
entitled, subject to certain conditions and limitations, to demand the Company
to register some or all of their Registrable Securities under the Securities
Act, provided that such demand may not be exercised more than once in any
twelve-month period or more than twice in the aggregate. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. If the Holders, by exercising their
demand registration rights, cause a large number of securities to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. Moreover, if the Company were to
include in a Company initiated registration shares held by the Holders pursuant
to exercise of their piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise additional capital.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
 
                                       50
<PAGE>   52
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon closing of this offering, based upon the number of shares outstanding
at June 30, 1996 and assuming no exercise after June 30, 1996 of outstanding
stock options or warrants, there will be           shares of Common Stock of the
Company outstanding. Of these shares, the           shares offered hereby will
be freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates") described below. The remaining
          shares of Common Stock are deemed "restricted securities" as that term
is defined in Rule 144. Of the restricted securities,           shares of Common
Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See
"Underwriting."
 
     Approximately           shares of Common Stock, which are not subject to
Lock-Up Agreements, will be eligible for sale in the public market in accordance
with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. Upon expiration of the Lock-Up Agreements 181 days
after the date of this Prospectus, approximately           additional shares of
Common Stock will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. In addition, upon expiration of
Lock-Up Agreements, an additional           shares subject to stock options
outstanding, if exercised, will be eligible for sale pursuant to Rule 701 unless
sold pursuant to an effective registration statement under the Securities Act.
As of June 30, 1996 there were outstanding warrants to purchase 53,864 shares of
Common Stock. These warrants contain net exercise provisions. Accordingly, any
shares issued upon net exercise will be eligible for sale immediately upon
expiration of lock-up agreements pursuant to Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least two
years from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately           shares immediately after this offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least three years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
 
     Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the Amended 1990 Stock Option Plan, the Executive Officers' Plan and the
Director Plan) are also restricted securities and, beginning 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
may be sold by stockholders other than Affiliates of the Company subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its two-year holding period requirement.
 
     The Company intends to file registration statements on Form S-8 under the
Act to register approximately 555,000 shares of Common Stock issuable under the
Amended 1990 Stock Option Plan, the Executive Officers' Plan, the Director Plan,
the 1996 Stock Option Plan and the Purchase Plan. The registration statements
are expected to be filed shortly after the effective date of the Registration
Statement of which this Prospectus is a part and will be effective upon filing.
Shares issued upon the exercise of stock options after the effective date of the
Form S-8 registration statements will be eligible
 
                                       51
<PAGE>   53
 
for resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-Up Agreements noted above.
 
     Prior to the offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. In addition, after this offering, the holders of
approximately           shares of Common Stock and warrants to purchase an
aggregate of           shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights." If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for the Company's Common Stock. If the
Company were to include shares in a Company-initiated registration pursuant to
the exercise of piggyback registration rights, sales of such shares may have an
adverse effect on the Company's ability to raise additional capital.
 
                                       52
<PAGE>   54
 
                                  UNDERWRITING
 
     The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and PaineWebber
Incorporated (the "Representatives"), have severally agreed with the Company and
the Selling Stockholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the numbers of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
 
<TABLE>
<CAPTION>
                                                                             NUMBER
                                       NAME                                 OF SHARES
        ------------------------------------------------------------------  ---------
        <S>                                                                 <C>
        Robertson, Stephens & Company LLC.................................
        Hambrecht & Quist LLC.............................................
        PaineWebber Incorporated..........................................
 
                                                                            ---------
                  Total...................................................
                                                                            =========
</TABLE>
 
     The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $          per share, of which $          may be reallowed to other
dealers. After the initial public offering, the offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of this Prospectus.
 
     The Selling Stockholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to           additional shares of Common Stock, at the same price
per share as the Company and Selling Stockholders will receive for the
          shares that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise this option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the           shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the          shares are being sold.
 
     The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
 
     Each officer and director of the Company, and certain other persons that
beneficially own or have dispositive power over substantially all of the shares
of the Company's Common Stock, have agreed with the Representatives for a period
of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to
certain exceptions, not of offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock, or
any securities convertible into or exchangeable for shares of Common Stock now
owned or hereafter acquired directly by such holders or with respect to which
they have or hereafter acquire the power of disposition, without the prior
written consent of Robertson, Stephens & Company LLC. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without prior written consent of Robertson, Stephens & Company LLC, subject to
certain exceptions, issue, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock, any
 
                                       53
<PAGE>   55
 
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the Company's sales of shares in this offering, the issuance of
Common Stock upon the exercise of outstanding options and the Company's issuance
of options and stock under the Amended 1990 Stock Option Plan, the 1995
Executive Officers' Stock Option Plan and the 1995 Non-Employee Directors' Stock
Option Plan.
 
     Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock is being determined through negotiations among the Company, the
Selling Stockholders and the Representatives. Among the factors considered in
such negotiations are prevailing market conditions, certain financial
information of the Company, market valuations of other companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
 
     The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
 
     Certain venture funds affiliated with Robertson, Stephens & Company LLC
beneficially owned 81,311 shares of Common Stock and warrants to purchase 316
shares of Common Stock as of June 30, 1996.
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
 
                                    EXPERTS
 
     The Consolidated Financial Statements of the Company as of June 30, 1996
and 1995, and for each of the three years in the period ended June 30, 1996
included in this Prospectus, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
 
                                       54
<PAGE>   56
 
                            MEMBERWORKS INCORPORATED
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Accountants.....................................................  F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995..............................  F-3
Consolidated Statements of Operations for each of the years in the three-year period
  ended June 30, 1996.................................................................  F-4
Consolidated Statements of Stockholders' Equity for each of the years in the
  three-year period ended June 30, 1996...............................................  F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
  ended June 30, 1996.................................................................  F-6
Notes to Consolidated Financial Statements............................................  F-7
</TABLE>
 
                                       F-1
<PAGE>   57
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
MemberWorks Incorporated
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
MemberWorks Incorporated and its subsidiaries at June 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
Price Waterhouse LLP
Stamford, Connecticut
July 25, 1996, except as to Note 15
 which is as of August 15, 1996
 
                                       F-2
<PAGE>   58
 
                            MEMBERWORKS INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                                        -----------------------
                                                          1995           1996
                                                        --------       --------
<S>                                                     <C>            <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents...........................  $  5,323       $  4,312
  Accounts receivable.................................     1,365          6,439
  Membership solicitations in process.................     2,252          3,474
  Prepaid membership materials........................       332          1,065
  Prepaid expenses....................................        90            204
                                                        --------       --------
          Total current assets........................     9,362         15,494
Fixed assets, net.....................................     1,782          3,261
Other assets..........................................       252            960
                                                        --------       --------
                                                        $ 11,396       $ 19,715
                                                        ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable.......................................  $    297       $    675           PRO
  Current maturities of capital lease obligations.....       205            316        FORMA AT
  Accounts payable....................................     7,879         10,433        JUNE 30,
  Accrued liabilities.................................     9,129         14,631          1996
                                                        --------       --------
          Total current liabilities...................    17,510         26,055       (UNAUDITED)
Deferred membership income, net.......................     5,262          8,416        (NOTE 16)
Long-term capital lease obligations...................       392            456
                                                                                      ----------
Notes payable.........................................     7,673            633
                                                        --------       --------
          Total liabilities...........................    30,837         35,560
Redeemable preferred stock............................    10,926         20,487            $   --
                                                        --------       --------
          Total liabilities and redeemable preferred
            stock.....................................    41,763         56,047
                                                        --------       --------
Commitments and contingencies (Note 8)
Stockholders' equity:
  Class A common stock, $.01 par value -- 1,779,175
     shares (1,464,191 shares in 1995) authorized;
     777,621 shares issued and outstanding............         8              8                --
  Class B common stock, $.01 par value -- 2,058,318
     shares (1,600,334 shares in 1995) authorized;
     35,866 shares (35,816 shares in 1995) issued and
     outstanding......................................        --             --                17
  Capital in excess of par value......................     1,737          2,253            20,782
  Accumulated deficit.................................   (31,839)       (38,320)          (38,857)
  Treasury stock, 24,143 shares at cost...............      (273)          (273)             (273)
                                                        --------       --------       -----------
          Total stockholders' equity (deficit)........   (30,367)       (36,332)         $(18,331)
                                                                                        =========
                                                        --------       --------
                                                        $ 11,396       $ 19,715
                                                        ========       ========
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-3
<PAGE>   59
 
                            MEMBERWORKS INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED JUNE 30,
                                                                   ----------------------------
                                                                    1994       1995      1996
                                                                   -------   --------   -------
<S>                                                                <C>       <C>        <C>
Revenues
  Membership fees................................................  $25,830   $ 41,547   $57,012
Expenses
  Operating......................................................    5,354      9,702    11,623
  Marketing......................................................   20,188     32,799    38,410
  General and administrative.....................................    5,592      8,885    11,916
  Interest expense, net..........................................      712        893       310
                                                                   -------   --------   -------
Total expenses...................................................   31,846     52,279    62,259
                                                                   -------   --------   -------
Loss before income taxes.........................................   (6,016)   (10,732)   (5,247)
Provision for income taxes.......................................       --         --        --
                                                                   -------   --------   -------
Net loss.........................................................  $(6,016)  $(10,732)  $(5,247)
                                                                   =======   ========   =======
Unaudited pro forma net loss per share...........................                       $ (2.94)
                                                                                        =======
Unaudited pro forma weighted average shares outstanding..........                         1,839
                                                                                        =======
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-4
<PAGE>   60
 
                            MEMBERWORKS INCORPORATED
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                       COMMON STOCK
                           ------------------------------------
                                CLASS A            CLASS B        CAPITAL IN
                           -----------------   ----------------   EXCESS OF    ACCUMULATED   TREASURY
                            SHARES    AMOUNT   SHARES    AMOUNT   PAR VALUE      DEFICIT      STOCK      TOTAL
                           ---------  ------   -------   ------   ----------   -----------   --------   --------
<S>                        <C>        <C>      <C>       <C>      <C>          <C>           <C>        <C>
Balance -- June 30,
  1993...................    739,263    $8      24,705    $ --      $1,074      $ (13,819)              $(12,737)
For the year ended June
  30, 1994:
Issuance of common
  stock..................     38,358    --         500      --         514                                   514
Preferred stock:
  Accretion of
     discount............                                                             (90)                   (90)
  Accretion to redemption
     value...............                                                            (193)                  (193)
  Accumulated dividends..                                                            (105)                  (105)
Net loss.................                                                          (6,016)                (6,016)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1994...................    777,621     8      25,205      --       1,588        (20,223)               (18,627)
For the year ended June
  30, 1995:
Issuance of common
  stock..................                       10,611      --          65                                    65
Issuance of warrants.....                                               --                                    --
Acquisition of treasury
  stock..................                                               84                    $ (273)       (189)
Preferred stock:
  Accretion of
     discount............                                                            (163)                  (163)
  Accretion to redemption
     value...............                                                            (297)                  (297)
  Accumulated dividends..                                                            (424)                  (424)
Net loss.................                                                         (10,732)               (10,732)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1995...................    777,621     8      35,816      --       1,737        (31,839)      (273)    (30,367)
For the year ended June
  30, 1996:
Issuance of common
  stock..................                           50      --           1                                     1
Issuance of warrants.....                                              515                                   515
Preferred stock:
  Accretion of
     discount............                                                            (219)                  (219)
  Accretion to redemption
     value...............                                                            (648)                  (648)
  Accumulated dividends..                                                            (367)                  (367)
  Net loss...............                                                          (5,247)                (5,247)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1996...................    777,621    $8      35,866    $ --      $2,253      $ (38,320)    $ (273)   $(36,332)
                             =======    ==      ======     ===      ======       ========       ====    ========
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-5
<PAGE>   61
 
                            MEMBERWORKS INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                             ----------------------------------
                                                               1994         1995         1996
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
OPERATING ACTIVITIES
  Net loss.................................................  $ (6,016)    $(10,732)    $ (5,247)
  Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
     Membership solicitation costs.........................   (28,600)     (40,120)     (46,979)
     Amortization of membership solicitation costs.........    22,053       36,092       43,097
     Deferred membership fees..............................     6,866        6,569        7,036
     Depreciation and amortization.........................       337          536          708
     Loss on sale of fixed assets..........................        --           --           38
     Write-off of discontinued product line assets.........        --          659           --
     Share of joint venture's losses.......................        28           52           51
     Write-off of deferred debt issuance costs.............        --           --          103
     Preferred stock redemption cost.......................        --           --          315
Change in assets and liabilities affecting operating cash
  flows:
  Accounts receivable......................................        71          659       (5,074)
  Membership solicitations in process......................    (1,199)         (58)      (1,222)
  Prepaid membership materials.............................      (139)          30         (733)
  Prepaid expenses.........................................       (73)          20         (114)
  Other assets.............................................      (323)         (40)        (252)
  Accounts payable.........................................     3,653          476        2,729
  Accrued liabilities......................................     3,980        2,381        5,545
                                                             --------     --------     --------
Net cash provided by (used in) operating activities........       638       (3,476)           1
                                                             --------     --------     --------
INVESTING ACTIVITIES
  Acquisition of fixed assets..............................      (744)        (519)      (1,740)
  Deposit on equipment.....................................        --           --         (539)
  Proceeds from sale of fixed assets.......................        --           --           15
  Investment in and advances to joint venture..............       (31)         (98)         (48)
                                                             --------     --------     --------
Net cash used in investing activities......................      (775)        (617)      (2,312)
                                                             --------     --------     --------
FINANCING ACTIVITIES
  Net proceeds from issuance of stock and warrants.........     1,005        4,012       12,887
  Redemption of preferred stock............................        --           --       (4,000)
  Purchase of treasury stock...............................        --           --         (175)
  Preferred stock dividends................................        --           --         (402)
  Proceeds from issuance of notes payable..................     1,000        6,860          502
  Debt issuance costs......................................        --         (273)        (117)
  Payments of notes payable................................      (206)      (3,603)      (7,164)
  Payments of capital lease obligations....................      (113)        (146)        (231)
                                                             --------     --------     --------
Net cash provided by financing activities..................     1,686        6,850        1,300
                                                             --------     --------     --------
Net increase (decrease) in cash and cash equivalents.......     1,549        2,757       (1,011)
Cash and cash equivalents at beginning of year.............     1,017        2,566        5,323
                                                             --------     --------     --------
Cash and cash equivalents at end of year...................  $  2,566     $  5,323     $  4,312
                                                             ========     ========     ========
</TABLE>
 
                 The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-6
<PAGE>   62
 
                            MEMBERWORKS INCORPORATED
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 -- NATURE OF BUSINESS
 
     MemberWorks Incorporated (the "Company") is a leading provider of
innovative membership service programs. The Company addresses the needs of
organizations seeking to leverage the expertise of an outside provider in
offering membership service programs. Membership service programs offer selected
products and services from a variety of vendors intended to enhance the existing
relationships between businesses and consumers.
 
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation -- consolidation
 
     The consolidated financial statements include the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
 
Use of estimates
 
     The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
 
Fair value of financial instruments and concentration of credit risk
 
     All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments. The recorded
amounts of the Company's long-term debt also approximate fair value. See Note 10
for disclosure of the estimated fair value of the redeemable preferred stock.
 
     Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable from
financial and other card holder based institutions (clients of the Company)
whose card holders constitute the Company's membership base. These entities
include major banks, financial institutions, large oil companies and retailers
located in the United States.
 
Fixed assets
 
     Fixed assets and capital leases are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the lesser of the estimated productive lives
of the assets or the terms of the related leases, and range from three to ten
years. Maintenance and repair expenditures are charged to operations as
incurred.
 
Revenue recognition
 
     Membership fees are billed through clients of the Company to credit card
holders. Deferred membership fees are recorded, net of estimated cancellations,
when the trial period has elapsed. Deferred membership fees are amortized as
membership fees on a straight-line basis, over the remainder of the membership
period, generally twelve months.
 
     Accounts receivable includes $3,624,000 of unbilled receivables as of June
30, 1996 (none at June 30, 1995), which were billed and collected subsequent to
the balance sheet date, and arise in certain instances when the Company elects
to bill subsequent to, rather than upon, acceptance of membership.
 
                                       F-7
<PAGE>   63
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Membership service programs sponsored by three clients of the Company
accounted for 35.2%, 15.6% and 10.5%, respectively, of membership fees for the
fiscal year ended June 30, 1996.
 
Membership solicitation costs
 
     In accordance with the provisions of Statement of Position 93-7, "Reporting
on Advertising Costs," membership solicitation costs are deferred and charged to
operations as membership fees are recognized. Membership solicitation costs
relate directly to membership solicitations (direct response advertising costs),
and include telemarketing costs, royalties paid to clients, kits, printing,
postage and mailings. Membership solicitation costs are amortized ratably over
the corresponding period in which revenues are recognized. Membership
solicitation costs incurred to obtain a new member generally are less than the
initial membership fee. However, if membership solicitation costs were to exceed
the membership fee, an adjustment would be made to the extent of any impairment.
 
     Included in current assets in the accompanying consolidated balance sheets
at June 30, 1996 and 1995 are costs pertaining to membership solicitation
programs that were in process at year-end. These costs are accumulated over a
one month solicitation period and are transferred to deferred membership
solicitation costs when the membership begins.
 
Earnings per Share
 
     Unaudited pro forma net loss per share is determined by dividing net loss,
after adding back preferred stock dividends paid, by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include stock options, warrants and preferred
stock which will be converted into common stock upon the closing of the initial
public offering of the Company's common stock.
 
     The weighted average number of shares has been adjusted to reflect as
outstanding all common stock and common stock equivalents issued during the
twelve-month period preceding the anticipated initial public offering of the
Company's common stock using the treasury stock method, as well as the number of
shares which would be necessary in order to redeem Series E and F preferred
stock.
 
Cash and cash equivalents
 
     The Company considers highly liquid investment instruments with terms of
three months or less at the time of acquisition to be cash equivalents.
 
Income taxes
 
     Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The effect of
adopting FAS 109 was immaterial.
 
Impairment of long-lived assets
 
     In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (FAS 121). The Company adopted FAS 121, with no effect on
operations, in fiscal 1996.
 
                                       F-8
<PAGE>   64
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
Stock-based compensation
 
     The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted, except as noted in Note 12. In fiscal
1997, the Company intends to adopt the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
 
NOTE 3 -- DEFERRED MEMBERSHIP INCOME, NET
 
     Deferred membership income, net as of June 30 is comprised of the following
(in thousands):
 
<TABLE>
<CAPTION>
                                                                       1995         1996
                                                                     --------     --------
    <S>                                                              <C>          <C>
    Deferred membership fees.......................................  $ 23,592     $ 30,628
    Deferred membership solicitation costs.........................   (18,330)     (22,212)
                                                                       ------     --------
    Deferred membership income, net................................  $  5,262     $  8,416
                                                                       ======     ========
</TABLE>
 
     Amortization of deferred membership solicitation costs amounted to
$22,053,000, $36,092,000 and $43,097,000 for the years ended June 30, 1994, 1995
and 1996, respectively. Allowance for membership cancellations set forth in the
accompanying consolidated balance sheets as of June 30, 1995 and 1996 were
$6,765,000 and $10,117,000, respectively.
 
     Deferred membership income, net is classified as a non-current liability as
working capital will not be required as the amount represents deferred future
income.
 
NOTE 4 -- IMPAQ
 
     On May 18, 1992, the Company issued 24,143 shares of Class B common stock
valued at $273,000 in exchange for the net assets of IMPAQ Publishing
Corporation. During December 1994, the Company discontinued Impaq's domestic
discount coupon book business and recorded a charge of $659,000 to operations,
primarily to write off unamortized goodwill of $166,000 and other assets of
$461,000. Effective June 30, 1995, the Company returned Impaq's domestic
discount coupon book operations, cash of $175,000 and net fixed assets of
$14,000 to Impaq's former owner in exchange for the aforementioned originally
issued shares of Class B common stock. There was no gain or loss on this
transaction.
 
     Fiscal 1994 and 1995 consolidated results include Impaq revenues of
$333,000 and $556,000 and operating losses of $643,000 and $1,639,000
respectively, including in 1995 the $659,000 charge discussed above.
 
NOTE 5 -- JOINT VENTURE
 
     On November 1, 1993, the Company and a United Kingdom (UK) venture partner
completed the formation of R.S.V.P. Publishing Ltd. (R.S.V.P.), a corporate
joint venture based in the UK. The business of R.S.V.P. is to develop and market
a coupon book program and other enhancement services in the UK, Europe and
elsewhere. The financial position and results of operations of the venture are
immaterial.
 
     The Company's net investment in and advances to the venture of $177,000
have been reduced to $46,000 as of June 30, 1996 by its recorded share of the
venture's losses under the equity method of accounting of $28,000, $52,000,
$51,000 for the years ended June 30, 1994, 1995, 1996, respectively.
 
                                       F-9
<PAGE>   65
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 6 -- FIXED ASSETS
 
     Fixed assets are comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                     1995       1996
                                                                    ------     -------
        <S>                                                         <C>        <C>
        Computer and office equipment.............................  $2,447     $ 3,955
        Furniture and fixtures....................................     267         709
        Leasehold improvements....................................      11         113
                                                                    -------     ------
                                                                     2,725       4,777
        Accumulated depreciation and amortization.................    (943)     (1,516)
                                                                    -------     ------
                                                                    $1,782     $ 3,261
                                                                    =======     ======
</TABLE>
 
NOTE 7 -- NOTES PAYABLE
 
     Notes payable are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                      1995       1996
                                                                     ------     ------
        <S>                                                          <C>        <C>
        Bank Credit Agreement......................................  $6,850     $   10
        Stockholder notes payable..................................     267        267
        Equipment term loans.......................................     853      1,031
                                                                     ------     ------
                                                                      7,970      1,308
        Less current maturities....................................     297        675
                                                                     ------     ------
        Long-term notes payable....................................  $7,673     $  633
                                                                     ======     ======
</TABLE>
 
     On September 9, 1994, the Company entered into a $7,000,000 Bank Credit
Agreement extending to February 28, 1997. In conjunction with the Bank Credit
Agreement, the Company issued a warrant to acquire 20,000 shares of Class A
common stock at an exercise price of $15.00 per share, subject to adjustment for
dilution. The warrant is exercisable at any time prior to December 31, 1999. The
Company amended the Bank Credit Agreement as of September 28, 1995 and paid down
the outstanding balance to $10,000 with a portion of the proceeds from issuance
of Series H convertible preferred stock. Interest on borrowings under the Bank
Credit Agreement was at the bank's prime rate plus 3.5%, and there was a 1.0%
per annum commitment fee on the total facility.
 
     Effective April 9, 1996, the Bank Credit Agreement was amended and restated
to allow borrowings up to $3,000,000 through February 28, 1997. Borrowings under
the amended and restated facility accrue interest at 1.5% per annum plus the
higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. A commitment fee is charged based on the total
facility at the rate of 1% per annum. The credit agreement is secured by all of
the Company's assets, including the stock of its subsidiaries. In addition, the
founders of the Company have guaranteed the borrowings under the credit
agreement and have pledged their stock ownership in the Company as collateral.
 
     The Company has 12.0% notes totaling $267,000 payable to two Class A common
stockholders. Pursuant to the terms of the Bank Credit Agreement, the
stockholder notes are subordinate to the Bank Credit Agreement and their
maturity was extended to February 28, 1997.
 
     The Company has several equipment term loans extending to September 2001,
secured by certain computer equipment. Interest is at rates of 7.5% to 11.6%,
and principal is repayable monthly. The aggregate amount of payments related to
the equipment term loans is $398,000 in 1997, $436,000 in 1998, $190,000 in
1999, $5,000 in 2000 and $2,000 in 2001.
 
                                      F-10
<PAGE>   66
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     On March 30, 1994, the Company issued $1,000,000 of 10% convertible notes
due September 30, 1994 with warrants attached. The warrants are exercisable at
any time prior to March 30, 1999, and allow the holders to acquire up to 7,672
shares of Class A common stock based on an exercise price of $26.07, subject to
adjustment for dilution. The notes were paid on the due date.
 
     Interest expense in 1994, 1995 and 1996, as shown in the statement of
operations, is net of interest income of $10,000, $125,000 and $305,000,
respectively.
 
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
 
     The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Rent expense under operating leases was $409,000, $491,000, and
$733,000 for the fiscal years ended June 30, 1994, 1995 and 1996, respectively.
 
     During 1994, 1995 and 1996, the Company entered into capital leases of
certain computer equipment totaling $110,000, $68,000 and $406,000,
respectively, of capitalized cost. Lease amortization for the years ended June
30, 1994, 1995 and 1996 was $171,000, $163,000 and $194,000, respectively, and
is included in depreciation and amortization expense.
 
     The future minimum lease payments under capital leases (including present
value of net minimum lease payments) and operating leases as of June 30, 1996
are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                       CAPITAL     OPERATING
                               FISCAL YEAR                             LEASES       LEASES
    -----------------------------------------------------------------  -------     ---------
    <S>                                                                <C>         <C>
    1997.............................................................   $ 316       $   936
    1998.............................................................     316           988
    1999.............................................................     197           952
    2000.............................................................      56           947
    2001.............................................................       9           631
    Thereafter.......................................................      --         3,140
                                                                       -------     ---------
    Total minimum lease payments.....................................     894       $ 7,594
                                                                                   ========
    Less -- Amount representing interest.............................     122
                                                                       -------
    Present value of net minimum lease payments including current
      maturities of $316 with interest rates ranging from 6.9% to
      10.4%..........................................................   $ 772
                                                                        =====
</TABLE>
 
     The Company deposited $539,000 on certain telephone equipment which has a
purchase price of $725,000. The deposit is included in other assets at June 30,
1996. The equipment is installed at the Company's facilities and, upon
acceptance by the Company, a lease will be executed and the deposit refunded by
the lessor.
 
     In June 1995, a co-founder of the Company filed a complaint against the
Company and certain of its executive officers alleging various claims arising
out of his termination in October 1994 as Executive Vice President and Chief
Operating Officer of the Company. The former officer alleges wrongful
termination, breach of fiduciary duty, fraudulent inducement and certain other
claims arising out of alleged accounting irregularities in fiscal 1994. The
complaint claims an unspecified amount of compensatory and punitive damages and
certain other costs. The Company has moved to strike the complaint, and the
Company's motion is being considered by the court. If the motion to strike the
complaint is not allowed, the Company intends to contest the claims alleged in
the complaint vigorously, and intends to assert counter claims. At present, it
is not possible to predict the ultimate outcome or the range of possible loss,
if any, resulting from the resolution of this matter.
 
                                      F-11
<PAGE>   67
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 9 -- INCOME TAXES
 
     There was no current or deferred provision for income taxes for the years
ended June 30, 1994, 1995 and 1996. No current provision was required because
tax losses were incurred in those years.
 
     Deferred tax assets and liabilities result from differences in the basis of
assets and liabilities for tax and financial statement purposes. The tax effects
of the basis differences and net operating loss carryforwards, and the valuation
allowance established in accordance with FAS 109, are summarized below as of
June 30, 1995 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                                        1995        1996
                                                                      --------     -------
    <S>                                                               <C>          <C>
    Allowance for membership cancellations..........................  $  2,304     $ 3,361
    Deferred membership income, net.................................        14         713
    Other deferred tax assets.......................................       435         562
    Benefit of net operating loss carryforward......................     6,947       6,963
                                                                      --------     -------
              Total deferred tax assets.............................     9,700      11,599
    Less: Valuation allowance.......................................    (9,700)    (11,599)
                                                                      --------     -------
              Net deferred tax asset................................  $     --     $    --
                                                                      ========     =======
</TABLE>
 
     The valuation allowance for deferred tax assets as of July 1, 1994 was
$6,003,000. The net change in the valuation allowance for the years ended June
30, 1995 and 1996 were increases of $3,697,000 and $1,899,000, respectively.
 
     At June 30, 1996, the Company had federal net operating loss carryforwards
of $17,705,000. The Company's ability to use these losses to offset future
taxable income would be subject to limitations under the Internal Revenue Code
if certain changes in the Company's ownership occur. The tax basis net operating
loss carry forwards expire as follows (in thousands):
 
<TABLE>
<CAPTION>
                                    FISCAL YEAR                      AMOUNT
                ---------------------------------------------------  -------
                <S>                                                  <C>
                2005...............................................  $ 1,950
                2006...............................................    2,673
                2007...............................................    2,702
                2008...............................................    1,757
                2009...............................................    3,176
                2010...............................................    5,009
                2011...............................................      438
                                                                     -------
                                                                     $17,705
                                                                     =======
</TABLE>
 
     The Company also has state net operating loss carryforwards expiring at
various dates through June 30, 2001 available to reduce future state taxable
income.
 
                                      F-12
<PAGE>   68
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 10 -- REDEEMABLE PREFERRED STOCK
 
     The following table presents the authorized and outstanding shares of
preferred stock which must be redeemed other than at the Company's option, and
recorded values as of June 30, 1996 and 1995 (in thousands except share data):
 
<TABLE>
<CAPTION>
                                                   AT JUNE 30, 1996                   RECORDED VALUES
                                               ------------------------    GROSS        AT JUNE 30,
                                 FISCAL YEAR   AUTHORIZED   OUTSTANDING   PROCEEDS   -----------------
               ISSUE             OF ISSUANCE     SHARES       SHARES      RECEIVED    1995      1996
    ---------------------------  -----------   ----------   -----------   --------   -------   -------
    <S>                          <C>           <C>          <C>           <C>        <C>       <C>
    Series A...................      1990        225,000      225,000     $    750   $ 1,208   $ 1,490
    Series B...................      1991        218,818      218,818     $  2,000     2,173     2,422
    Series C...................      1992         88,339       88,339     $  1,000     1,029     1,117
    Series D...................      1992         48,383       48,383     $    750       750       780
    Series E...................      1993         42,178       42,178     $  1,000       877     1,072
    Series F...................      1994         38,358       38,358     $  1,000       684       877
    Series G...................      1995             --           --     $  4,000     4,205        --
    Series H...................      1996        317,150      317,150     $ 13,000        --    12,729
                                                                                     -------   -------
                                                                                     $10,926   $20,487
                                                                                     =======   =======
</TABLE>
 
     Series A, B, C, D and H preferred stock are convertible at any time into
Class A common stock at a conversion price per share (subject to adjustment for
dilution) of $3.33, $9.14, $11.32, $15.50 and $40.99, respectively, and
automatically convert into Class B common stock at the then effective conversion
price in the event of a qualified public offering.
 
     These series of preferred stock are redeemable at the holder's option, on
or after July 31, 2001, at a redemption value equal to the greater of the then
fair market value or the conversion price per share. The Series A, B, C, D and H
preferred stock were recorded at fair value at the date of issuance. The
difference between recorded fair value and redemption value in the year 2001 is
being accreted using the interest method. The fair value of the Company's Class
B common stock, which value was greater than the conversion price per share for
the Series A, B, C, and D preferred stock at June 30, 1996 and 1995, is
accordingly being used as the redemption value for purposes of calculating
accretion.
 
     As discussed in Note 12, warrants to acquire 10,000 shares of Class A
common stock at $0.01 per share were issued in conjunction with the issuance of
Series H preferred stock. As a result, the recorded value of the Series H
preferred stock was $12,800,000, reflecting a $200,000 discount attributable to
the warrants, which is being accreted through the exercise date using the
interest method. Additionally, the Company paid $114,000 of issuance costs in
connection with this offering, which was recorded as a reduction in net
proceeds, and is being accreted to the redemption date.
 
     The holders of Series A, B, C, D and H preferred stock are entitled to vote
(on a common stock equivalent basis) on all matters submitted to the
stockholders.
 
     Series E and F shares are mandatorily redeemable on April 30, 1998 and
April 30, 1999, respectively, at $23.71 and $26.07 per share, respectively, plus
all accumulated and unpaid dividends. The Company may be required to redeem all
or any portion of Series E and F upon change in ownership or in the event of a
qualified public offering at the redemption value per share plus all accumulated
and unpaid dividends. If redeemed at the option of the Company, the redemption
premium on Series E and F is 4% and 6%, respectively, through April 30, 1997 and
declines annually thereafter by 2% through the respective mandatory redemption
date. These series of preferred stock accrue dividends at a rate of 8% per
annum, compounded daily. At June 30, 1996 accumulated and unpaid dividends were
$288,000 and $198,000 on Series E and F preferred stock, respectively.
 
                                      F-13
<PAGE>   69
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     As further discussed in Note 11, Class A common stock was issued in
conjunction with the issuance of the Series E and F preferred stock. As a
result, the Series E and F redeemable preferred stock was recorded at discounts
of $522,000 and $491,000, respectively. The discounts recognized are being
accreted through the required redemption dates using the interest method.
 
     On September 28, 1994, the Company issued 40,000 of new Series G preferred
stock with attached warrants to acquire 40,000 shares of Class A common stock
for a total of $4,000,000. Preferred dividends on Series G preferred stock is 8%
per annum, payable quarterly in kind.
 
     On August 3, 1995, the Company redeemed 40,000 shares of issued and
outstanding Series G preferred stock and redeemed attached warrants to acquire
40,000 shares of Class A common stock of the Company issued September 28, 1994
for $4,000,000, and also paid the investor a preferred dividend in the amount of
$402,000. Additionally, the Company substituted 15,726 warrants to acquire Class
A common stock, exercisable at $0.01 per share, in exchange for the 40,000
warrants previously redeemed. As a result the substituted warrants issued were
accounted for at fair value of $315,000 and recorded as a charge to operations
as a cost of redeeming the preferred stock.
 
     Upon liquidation, dissolution or winding up of the Company, the holders of
Series E and F preferred stock are entitled to receive the applicable
liquidation value plus all accrued and unpaid dividends, prior to any
distribution to holders of Series A, B, C, D or H preferred stock or common
stock. Holders of Series A, B, C, D and H preferred are entitled to receive the
applicable liquidation value plus accrued, declared and unpaid dividends, if
any. If, in the event of liquidation, dissolution or winding up of the Company,
the Company's assets to be distributed among the holders of Series A, B, C, D,
and H preferred were insufficient, then the assets would be distributed ratably
to such holders based upon the aggregate applicable amounts that are owed.
 
     The holders of Series A, B, C, D and H preferred stock are entitled to
receive non-cumulative dividends if and when declared by the Company's Board of
Directors, subject to the prior and superior rights of Series E and F preferred
stock. The Company may not pay or declare a dividend to the holders of these
Series if at the time of or immediately following the dividend the Company has
failed to pay the full amount of dividends accrued on the Series E and F
preferred stock or to declare any dividend or make any distribution upon any
common stock.
 
     The redemption requirements for all issues of redeemable preferred stock
for the five years following June 30, 1996 are as follows: $0 in 1997,
$1,491,000 in 1998, $1,503,000 in 1999, and $0 in 2000 and 2001.
 
     The recorded value of the Company's redeemable preferred stock at June 30,
1996 was $20,487,000. In accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Market Value of
Financial Instruments," the Company estimates that fair value of the redeemable
preferred stock at June 30, 1996 was approximately $23,500,000. Estimated fair
value at June 30, 1996 was calculated based on the higher of the redemption
value of the redeemable preferred stock or the then fair value of the Company's
common stock, plus accumulated dividends, discounted to present value at an
appropriate rate of interest. This estimate is not necessarily indicative of the
amount the holders could realize in a current market exchange.
 
NOTE 11 -- COMMON STOCK
 
     Class A common stock and Class B common stock are entitled to one vote per
share on all matters voted on by the stockholders. Shares of Class A common
stock are convertible on a share for share basis into shares of Class B common
stock at the option of the holder and automatically convert upon the closing of
a qualified public offering. Class A common stock has preference rights over
Class B common stock in case of a liquidation, dissolution or winding up of the
Company.
 
                                      F-14
<PAGE>   70
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Dividends may be declared on Class A and B common stock subject to the
prior and superior rights of the preferred stock. The Company's Board of
Directors may not declare or pay a dividend to the holders of Class A or B
common stock, other than in the form of shares of common stock, unless the Board
simultaneously declares a dividend payable to the holders of Series A, B, C, D
and H preferred stock at the same rate (on an as-converted basis).
 
     In March 1994, 38,358 shares of Class A common stock were issued for
proceeds of $384, an amount equal to par value. These shares were issued in
connection with the Series F preferred stock offerings, and have been recorded
at fair value of $508,000 (see Note 10).
 
     In May 1993, 42,178 shares of Class A common stock were issued for proceeds
of $422, an amount equal to par value. These shares were issued in connection
with the Series E preferred stock offerings, and have been recorded at fair
value of $478,000 (see Note 10).
 
NOTE 12 -- STOCK OPTIONS AND WARRANTS
 
     Under the Amended 1990 Employee Incentive Stock Option Plan, the Board is
authorized to grant 180,000 incentive stock options, entitling certain employees
and officers to acquire shares of Class B common stock at a price per share
equal to fair market value at the date of grant. Options become exercisable over
a four year period and expire at the earlier of termination of employment or
eight years from date of grant (ten years for grants after December 31, 1995).
As of June 30, 1996 there were 45,810 options available for grant.
 
     During 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1995 Executive Officers' Stock Option Plan and the
1995 Non-Employee Directors' Stock Option Plan under which the Board is
authorized to grant 50,000 and 25,000 options, respectively, to acquire shares
of Class B common stock at a price per share equal to or greater than fair
market value at the date of grant. Under the Executive Officers' Stock Option
Plan, the Board can determine the date on which options vest and become
exercisable. Options become exercisable over a four year period under the
Non-Employee Directors' Stock Option Plan. As of June 30, 1996 there were 15,000
and 5,000 shares available for grant under the Executive Officers' Stock Option
Plan and the Non-Employee Directors' Stock Option Plan, respectively.
 
                                      F-15
<PAGE>   71
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Information with respect to shares under option under the plans is as
follows:
 
<TABLE>
<CAPTION>
                                                      OPTION PRICE
                                                        PER SHARE        OUTSTANDING     EXERCISABLE
                                                     ---------------     -----------     -----------
<S>                                                  <C>                 <C>             <C>
Balance -- June 30, 1993...........................  $3.33 - $11.32         61,167          11,937
  Granted..........................................      $13.25             26,450
  Became exercisable...............................  $3.33 - $11.32                         15,292
  Exercised........................................      $11.32               (500)           (500)
  Canceled.........................................  $11.32 - $13.25        (2,750)           (250)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1994...........................  $3.33 - $13.25         84,367          26,479
  Granted..........................................      $15.00             30,500
  Became exercisable...............................  $3.33 - $13.25                         19,405
  Exercised........................................  $3.33 - $13.25        (10,611)        (10,611)
  Canceled.........................................  $9.14 - $15.00        (13,739)           (865)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1995...........................  $3.33 - $15.00         90,517          34,408
  Granted..........................................  $20.00 - $30.00        93,700
  Became exercisable...............................  $9.14 - $20.00                         19,442
  Exercised........................................      $15.00                (50)            (50)
  Canceled.........................................  $13.25 - $20.00        (6,700)         (1,275)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1996...........................  $3.33 - $30.00        177,467          52,525
                                                     ==============      =========       =========
</TABLE>
 
     On March 30, 1994, a warrant was issued to acquire 7,672 shares of Class A
common stock at an exercise price of $26.07 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to March 30,
1999.
 
     On September 9, 1994, the Company issued a warrant in conjunction with the
Bank Credit Agreement to acquire 20,000 shares of Class A common stock at an
exercise price of $15.00 per share, subject to adjustment for dilution when
issued. The warrant is exercisable at any time prior to December 31, 1999.
 
     As discussed in Note 10, warrants to acquire 10,000 shares of Class A
common stock were issued in conjunction with the Series H preferred stock
offering. Each warrant is exercisable at $0.01 per share for a period of five
years from the issuance date. The warrants have been recorded at a fair value of
$200,000.
 
     The Company has an agreement with an executive officer, whereby the Company
is required to grant options to purchase up to 20,000 shares of Class B common
stock to the executive for achievement of certain performance goals.
Specifically, the Company will grant an option to purchase 2,000 shares of Class
B common stock for each new client, from a selected list of certain prospective
large clients, he obtains for the Company prior to December 31, 1996. These
options have a stated exercise price of $20.00 per share and vest ratably over a
four year period from date of grant. In 1996, the executive was granted an
option to purchase 2,000 shares of Class B common stock pursuant to this
agreement. Compensation expense in 1996 related to this grant was $3,000,
measured based on the excess of the fair value of the common stock of the
Company on the date of grant over the grant price. Compensation charges related
to future grants, if any, will be measured in the same manner and recognized
over the vesting period.
 
                                      F-16
<PAGE>   72
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 13 -- EMPLOYEE BENEFIT PLAN
 
     Effective April 1, 1996 the Company adopted a 401(k) profit sharing plan.
Employees of the Company are eligible to contribute to the plan once they have
completed one year of service and attained age 18. Employees may contribute up
to 15% of their compensation subject to certain limitations. The Company may
elect to make matching contributions or profit sharing contributions to the
plan. There were no Company contributions made for the year ended June 30, 1996.
 
NOTE 14 -- STATEMENT OF CASH FLOWS (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED JUNE 30,
                                                                    ----------------------
                                                                    1994     1995     1996
                                                                    ----     ----     ----
    <S>                                                             <C>      <C>      <C>
    Supplemental disclosure of cash flow information:
      Cash paid during the period for interest....................  $728     $896     $493
                                                                    ====     ====     ====
      Cash paid during the period for income taxes................  $ --     $ --     $ 45
                                                                    ====     ====     ====
    Supplemental schedule of noncash investing and financing
      activities:
      Capital lease obligation related to acquisition of fixed
         assets...................................................  $110     $ 68     $406
                                                                    ====     ====     ====
      Dividends accumulated on Series E, F and G preferred
         stock....................................................  $105     $424     $212
                                                                    ====     ====     ====
      Accretion of discount on Series E, F, G and H preferred
         stock....................................................  $ 90     $163     $219
                                                                    ====     ====     ====
      Accretion to redemption value on Series A, B, C, and D
         preferred stock..........................................  $193     $297     $648
                                                                    ====     ====     ====
      Issuance of warrants........................................  $ --     $ --     $200
                                                                    ====     ====     ====
</TABLE>
 
NOTE 15 -- SUBSEQUENT EVENTS
 
     On July 1, 1996, the Company granted 43,075 employee stock options with an
exercise price of $30.00 per share.
 
     On August 13, 1996, the Board of Directors approved a corporate name change
from CardMember Publishing Corporation to MemberWorks Incorporated.
 
     On August 15, 1996, the Company amended its certificate of incorporation to
increase the authorized number of shares of stock to 41,000,000. A total of
32,000,000 shares were designated as Common Stock, par value $0.01, 8,000,000
shares were designated as Class A common stock, par value $0.01 and 1,000,000
shares were designated as Preferred Stock, par value $0.01.
 
     On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class A common stock into Common Stock upon
the closing of the Company's initial public offering and the elimination of
Class A common stock.
 
     On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class B common stock into Common Stock.
 
     On August 13, 1996, the Board of Directors authorized the officers of the
Company to negotiate the terms of a proposed public offering of Common Stock of
the Company. In addition, the officers were authorized and directed to cause to
be prepared, executed and filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended, a Registration
Statement on Form S-1, including a preliminary prospectus included therein and
all exhibits thereto and any amendments or supplements thereto, relating to the
registration.
 
                                      F-17
<PAGE>   73
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     On August 13, 1996, the Company adopted an employee stock purchase plan
(the "1996 Employee Stock Purchase Plan"). The plan will be implemented with an
initial offering period commencing on the effective date of the offering. The
plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, at a price
equal to 85% of the price of the Common Stock of the Company reported by Nasdaq
at the commencement date of the Offering Period.
 
     On August 13, 1996, the Board of Directors approved the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan"), which becomes effective upon
the closing of the Company's initial public offering. The 1996 Stock Option Plan
authorizes the issuance of shares of Common Stock pursuant to the grant to
employees of incentive stock options and the grant of non-qualified stock
options to employees, consultants, officers or directors of the Company.
 
     The aggregate number of shares of Common Stock of the Company reserved for
both the 1996 Employee Stock Purchase Plan and the 1996 Stock Option Plan is
300,000.
 
     On August 13, 1996, the Board of Directors approved an amendment to the
Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock Option
Plan"). The Amended 1990 Stock Option Plan provides for the grant of "incentive
stock options" to employees and officers of the Company and non-qualified stock
options to employees, consultants, directors and officers of the Company. The
Company is authorized to grant up to 180,000 shares under the Amended 1990 Stock
Option Plan. The Board of Directors also voted that no further options may be
granted under the Amended 1990 Stock Option Plan effective upon the closing of
the initial public offering.
 
NOTE 16 -- PRO FORMA STOCKHOLDERS' EQUITY DATA AS OF JUNE 30, 1996 (UNAUDITED)
 
     The accompanying pro forma stockholders' equity data as of June 30, 1996
gives effect to the automatic conversion of all Series A, B, C, D and H
convertible preferred stock into Common Stock and the redemption of Series E and
F redeemable preferred stock for approximately $2,500,000 from application of a
portion of the proceeds of the Company's initial public offering described in
Note 15.
 
                                      F-18
<PAGE>   74

MEMBERWORKS SERVICE PROGRAMS AND DISTRIBUTION CHANNELS



<TABLE>
<CAPTION>
                                                     
                           Large    Retail    Oil    Small     Vacation      Retail                                    New
                           Banks    Cards     Cards  Banks      Owners       Stores      Interactive     Direct     Channels
- -------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>       <C>      <C>     <C>        <C>         <C>            <C>            <C>        <C>
Health                      x         x                x                                                    x          T 

Dental                      x         x                x                      T                             x          T 

Dental & Health             x         x                x                      T              x              x          T 

Travel                      x                          x         X                           X              x          T 

Entertainment               X                  X       X         X                           X              X          T

Sports                      X                  X       X                                     X              X          T

Financial                   X                  X                                             X              X          T

Computers and Software      X                                                                               X          T

New Service                 T                  T       T                                                               T

</TABLE>

X = Programs in place.
T = Testing of products that may or may not be offered to consumers.






<PAGE>   75
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
 
<TABLE>
    <S>                                                                        <C>
    SEC Registration Fee...................................................    $   20,690
    NASD Filing Fee........................................................         6,500
    Nasdaq National Market Listing Fee.....................................         6,500
    Blue Sky Fees and Expenses.............................................        20,000
    Transfer Agent and Registrar Fees......................................        10,000
    Accounting Fees and Expenses...........................................       275,000
    Legal Fees and Expenses................................................       275,000
    Printing and Mailing Expenses..........................................       150,000
    Miscellaneous..........................................................       136,310
                                                                               ----------
              Total........................................................    $  900,000
                                                                                =========
</TABLE>
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
 
     Article Ninth of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
 
     Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
 
                                      II-1
<PAGE>   76
 
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
 
     Article Ninth of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
 
     Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
 
     Under the Underwriting Agreement, the Underwriters are obligated, under
certain circumstances, to indemnify directors and officers of the Registrant
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     On March 30, 1994, the Registrant sold an aggregate of 38,358 shares of
Class A Common Stock and 38,358 shares of Series F Preferred Stock to accredited
investors for an aggregate purchase price of $1 million pursuant to Regulation D
of the Commission promulgated under the Securities Act ("Regulation D"). On
September 28, 1994, the Registrant sold an aggregate of 40,000 shares of Series
G Preferred Stock and warrants to acquire the same number of shares of Class A
Common Stock to accredited investors for an aggregate purchase price of $4
million pursuant to Regulation D. Effective August 3, 1995, all 40,000 shares of
Series G Preferred Stock and warrants acquired were redeemed by the Registrant
for an aggregate redemption amount of $4,000,400, plus a preferred dividend of
$401,611. Additionally, the Registrant substituted 15,726 warrants to acquire
Class A Common Stock, exercisable at $0.01 per share, for the warrants redeemed
by the Registrant. On August 3, August 15 and August 21, 1995, the Registrant
sold an aggregate of 317,150 shares of Series H Convertible Preferred Stock to
accredited investors for an aggregate purchase price of $12,999,979 pursuant to
Regulation D.
 
     On March 30, 1994, the Registrant issued a warrant to acquire 7,672 shares
of Class A Common Stock at an exercise of $26.07 per share, subject to
adjustment for dilution. On September 9, 1994, the Company issued a warrant in
conjunction with the Bank Credit Agreement to acquire 20,000 shares of Class A
Common Stock at an exercise price of $15.00 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to December
31, 1999. In connection with the redemption of 40,000 shares of Series G
Preferred Stock and attached warrants to acquire 40,000 shares of Series A
Preferred Stock, the Registrant issued warrants to acquire 15,726 shares of
Class A Common Stock, exercisable at $0.01 per share.
 
                                      II-2
<PAGE>   77
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (A) EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                         DESCRIPTION
- --------  -----------------------------------------------------------------------------------
<C>       <S>
      *1  Form of Underwriting Agreement.
    *3.1  Certificate of Incorporation of the Registrant, as amended.
    *3.2  Restated Certificate of Incorporation of the Registrant, to be filed upon closing
          of this offering.
     3.3  Restated By-laws of the Registrant.
      *4  Specimen Certificate for shares of Common Stock, $0.01 par value, of the
          Registrant.
      *5  Opinion of Hale and Dorr with respect to the validity of the securities being
          offered.
   *10.1  Amended 1990 Employee Incentive Stock Option Plan.
    10.2  1995 Executive Officers' Stock Option Plan.
    10.3  1995 Non-Employee Directors' Stock Option Plan.
   *10.4  1996 Stock Option Plan.
   *10.5  1996 Employee Stock Purchase Plan.
    10.6  401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
    10.7  Term Lease Master Agreement between IBM Credit Corporation and the Registrant,
          dated as of November 26, 1991.
    10.8  Master Lease Agreement between Bankers Leasing Association, Inc. and the
          Registrant, dated as of May 7, 1996.
   *10.9  Promissory Note between Thomas St. Denis and the Registrant, dated December 31,
          1990.
  *10.10  Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990.
     *11  Computation of unaudited pro forma net loss per share.
     *21  Subsidiaries of the Registrant.
   *23.1  Consent of Hale and Dorr (included in Exhibit 5).
    23.2  Consent of Price Waterhouse LLP.
      24  Power of Attorney (included on page II-5).
      27  Financial Data Schedule.
</TABLE>
 
- ---------------
* To be filed by amendment.
 
     (B) FINANCIAL STATEMENT SCHEDULES
 
     Schedule II -- Valuation and Qualifying Accounts
 
     All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
 
ITEM 17.  UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
 
                                      II-3
<PAGE>   78
 
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
 
     The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-4
<PAGE>   79
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on this 21st day of August, 1996.
 
                                          MemberWorks Incorporated
 
                                                 By: /s/  GARY A. JOHNSON
 
                                          --------------------------------------
                                                     Gary A. Johnson
                                          President, Chief Executive Officer and
                                                         Director
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of MemberWorks Incorporated,
hereby severally constitute and appoint Gary A. Johnson, James B. Duffy and
Steven H. Levenherz, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and posteffective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable MemberWorks Incorporated to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Registration
Statement and any and all amendments thereto or to any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b).
 
     Pursuant to the requirements of the Securities act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
              SIGNATURE                                 TITLE                        DATE
- -------------------------------------   -------------------------------------   ---------------
<C>                                     <S>                                     <C>
        /s/  GARY A. JOHNSON            President and Chief Executive Officer   August 21, 1996
- -------------------------------------     (Principal Executive Officer)
           Gary A. Johnson
        /s/  DENNIS P. WALKER           Executive Vice President and Director   August 21, 1996
- -------------------------------------
          Dennis P. Walker
         /s/  JAMES B. DUFFY            Chief Financial Officer (Principal      August 21, 1996
- -------------------------------------     Financial and Accounting Officer)
           James B. Duffy
      /s/  STEPHEN J. CLEARMAN          Director                                August 21, 1996
- -------------------------------------
         Stephen J. Clearman
        /s/  ALEC L. ELLISON            Director                                August 21, 1996
- -------------------------------------
           Alec L. Ellison
       /s/  MICHAEL R. O'BRIEN          Director                                August 21, 1996
- -------------------------------------
         Michael R. O'Brien
         /s/  MARC S. TESLER            Director                                August 21, 1996
- -------------------------------------
           Marc S. Tesler
</TABLE>
 
                                      II-5
<PAGE>   80
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                           COLUMN C
                                                 -----------------------------
                                   COLUMN B                ADDITIONS
                                  ----------     -----------------------------        COLUMN D         COLUMN E
            COLUMN A              BALANCE AT     CHARGED TO       CHARGED TO         -----------     -------------
- --------------------------------  BEGINNING      COSTS AND      OTHER ACCOUNTS       DEDUCTIONS       BALANCE AT
          DESCRIPTION             OF PERIOD       EXPENSES       -- DESCRIBE         -- DESCRIBE     END OF PERIOD
- --------------------------------  ----------     ----------     --------------       -----------     -------------
<S>                               <C>            <C>            <C>                  <C>             <C>
YEAR ENDED JUNE 30, 1996:
Allowance for cancellations.....  $6,765,000                     $ 61,264,000(A)     $57,912,000(B)   $10,117,000
Valuation allowance for deferred
  tax assets....................   9,700,000     $1,899,000                                            11,599,000
YEAR ENDED JUNE 30, 1995:
Allowance for cancellations.....   5,101,000                       46,667,000(A)      45,003,000(B)     6,765,000
Valuation allowance for deferred
  tax assets....................   6,003,000      3,697,000                                             9,700,000
YEAR ENDED JUNE 30, 1994:
Allowance for cancellations.....   2,650,000                       29,753,000(A)      27,302,000(B)     5,101,000
Valuation allowance for deferred
  tax assets....................   4,235,000      1,768,000                                             6,003,000
</TABLE>
 
- ---------------
(A) Charged to balance sheet account "Deferred membership income, net"
 
(B) Charges for refunds upon membership cancellations.
 
                                       S-1
<PAGE>   81
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                         DESCRIPTION
- --------  -----------------------------------------------------------------------------------
<C>       <S>
      *1  Form of Underwriting Agreement.
    *3.1  Certificate of Incorporation of the Registrant, as amended.
    *3.2  Restated Certificate of Incorporation of the Registrant, to be filed upon closing
          of this offering.
     3.3  Restated By-laws of the Registrant.
      *4  Specimen Certificate for shares of Common Stock, $     par value, of the
          Registrant.
      *5  Opinion of Hale and Dorr with respect to the validity of the securities being
          offered.
   *10.1  Amended 1990 Employee Incentive Stock Option Plan.
    10.2  1995 Executive Officers' Stock Option Plan.
    10.3  1995 Non-Employee Directors' Stock Option Plan.
   *10.4  1996 Stock Option Plan.
   *10.5  1996 Employee Stock Purchase Plan.
    10.6  401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
    10.7  Term Lease Master Agreement between IBM Credit Corporation and the Registrant,
          dated as of November 26, 1991.
    10.8  Master Lease Agreement between Bankers Leasing Association, Inc. and the
          Registrant, dated as of May 7, 1996.
   *10.9  Promissory Note between Thomas St. Denis and the Registrant, dated December 31,
          1990.
  *10.10  Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990.
     *11  Computation of unaudited pro forma net loss per share.
     *21  Subsidiaries of the Registrant.
   *23.1  Consent of Hale and Dorr (included in Exhibit 5).
    23.2  Consent of Price Waterhouse LLP.
      24  Power of Attorney (included on page II-5).
      27  Financial Data Schedule.
</TABLE>
 
- ---------------
* To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1 / MEMBERWORKS INCORPORATED", "secsgml_size_bytes": 313878}]
{"company-data": {"conformed-name": "MEMBERWORKS INC", "cik": "0001020996", "assigned-sic": "[]", "state-of-incorporation": "DE"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-10541", "film-number": "96618591"}, "business-address": {"street1": "680 WASHINGTON BLVD., SUITE 1100", "city": "STAMFORD", "state": "CT", "zip": "06901", "phone": "2033247635"}}
1
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996
 
                                                     REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                             ---------------------
 
                            MEMBERWORKS INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                             ---------------------
DELAWARE                              7389                             06-1276882
  (STATE OR OTHER JURISDICTION OF       (PRIMARY STANDARD INDUSTRIAL              (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)       CLASSIFICATION CODE NUMBER)            IDENTIFICATION NUMBER)
---------------------
 
         680 WASHINGTON BLVD.; SUITE 1100; STAMFORD, CONNECTICUT 06901
                                 (203) 324-7635
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                             ---------------------
 
                                GARY A. JOHNSON
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                            MEMBERWORKS INCORPORATED
                        680 WASHINGTON BLVD., SUITE 1100
                          STAMFORD, CONNECTICUT 06901
                                 (203) 324-7635
               (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
               NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
                             ---------------------
 
                                   COPIES TO:
MARK G. BORDEN, ESQ.                                 ALAN K. AUSTIN, ESQ.
            THOMAS L. BARRETTE, JR., ESQ.                           STEVEN V. BERNARD, ESQ.
                    HALE AND DORR                                     DAVID S. KIM, ESQ.
                   60 STATE STREET                             WILSON SONSINI GOODRICH & ROSATI
             BOSTON, MASSACHUSETTS 02109                           PROFESSIONAL CORPORATION
                   (617) 526-6000                                     650 PAGE MILL ROAD
                                                                  PALO ALTO, CALIFORNIA 94304
                                                                        (415) 493-9300
---------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
            As soon as practicable after the effective date hereof.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  / /
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  / / __________
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  / / __________
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  / /
                             ---------------------
 
                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF                 PROPOSED MAXIMUM AGGREGATE           AMOUNT OF
            SECURITIES TO BE REGISTERED                  OFFERING PRICE(1)             REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share............         $60,000,000                    $20,690
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.
                             ---------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
                  SUBJECT TO COMPLETION, DATED AUGUST 21, 1996
 
                                      LOGO
 
                                               SHARES
 
                                  COMMON STOCK
 
     Of the             shares of Common Stock offered hereby,
shares are being sold by MemberWorks Incorporated ("MemberWorks" or the
"Company") and             shares are being sold by certain Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price will be between $          and $          per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price.
                            ------------------------
 
        THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" COMMENCING ON PAGE 6.
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
          ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
             REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
                                                       UNDERWRITING                      PROCEEDS TO
                                        PRICE TO      DISCOUNTS AND     PROCEEDS TO        SELLING
                                         PUBLIC        COMMISSIONS       COMPANY(1)      STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share..........................        $                $                $                $
- -------------------------------------------------------------------------------------------------------
Total(2)...........................        $                $                $                $
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $900,000.
 
(2) The Selling Stockholders have granted the Underwriters a 30-day option to
    purchase up to an additional           shares of Common Stock solely to
    cover over-allotments, if any. See "Underwriting." If such option is
    exercised in full, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Selling Stockholders will be $          ,
    $          and $          , respectively.
                            ------------------------
 
     The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about             , 1996.
                            ------------------------
 
ROBERTSON, STEPHENS & COMPANY
 
                             HAMBRECHT & QUIST
 
                                                        PAINEWEBBER INCORPORATED
 
               The date of this Prospectus is             , 1996
3
 
     THE COMPANY'S MEMBERSHIP SERVICE PROGRAMS CREATE A SYNERGISTIC RELATIONSHIP
AMONG MEMBERS, VENDORS, CLIENTS AND THE COMPANY.
 

                                    [CHART]

In this place appears a graphic depicting the exchange of economic and other
value between the Company and its members, service providers and clients. In
exchange for fees, the Company provides its members value-added membership
service programs. In exchange for marketing support, the Company's service
providers provide it with program support. In exchange for customer lists, the
Company pays royalties to its clients.

 
                            ------------------------
 
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
                                        2
4
 
     NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
 
     UNTIL             , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
                            ------------------------
 
                               TABLE OF CONTENTS
PAGE
                                                                                        ----
Summary...............................................................................    4
Risk Factors..........................................................................    6
Use of Proceeds.......................................................................   14
Dividend Policy.......................................................................   14
Capitalization........................................................................   15
Dilution..............................................................................   16
Selected Consolidated Financial Information...........................................   17
Management's Discussion and Analysis of Financial Condition and Results of
  Operations..........................................................................   18
Business..............................................................................   25
Management............................................................................   37
Certain Transactions..................................................................   45
Principal and Selling Stockholders....................................................   46
Description of Capital Stock..........................................................   48
Shares Eligible for Future Sale.......................................................   51
Underwriting..........................................................................   53
Legal Matters.........................................................................   54
Experts...............................................................................   54
Additional Information................................................................   54
Index to Consolidated Financial Statements............................................  F-1
------------------------
 
     The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by its independent accountants, and with quarterly reports for the
first three quarters of each fiscal year containing unaudited consolidated
financial information.
 
     Countrywide Dental Program and HealthTrends are registered trademarks of
the Company. Connections, Your source for entertainment values; Countrywide
Dental and Health Program; Home PC Link; MoneyMaster; Official Sports
Connection; and Travel Arrangements are trademarks of the Company. This
Prospectus also includes trademarks and registered trademarks of other
companies.
 
     The Company was incorporated in Delaware on July 12, 1989. The Company's
principal executive offices are located at 680 Washington Blvd., Suite 1100,
Stamford, Connecticut 06901 and its telephone number is (203) 324-7635. In
August 1996, the Company changed its name from CardMember Publishing Corporation
to MemberWorks Incorporated.
 
                                        3
5
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
 
                                  THE COMPANY
 
     MemberWorks Incorporated ("MemberWorks" or the "Company") is a leading
designer and provider of innovative membership service programs. The Company
addresses the needs of organizations seeking to leverage the expertise of an
outside provider in offering these programs. MemberWorks offers its programs to
increasingly sophisticated consumers seeking economy, efficiency and convenience
in their purchase of products and services. For participating vendors, the
programs provide the opportunity to reach a large number of demographically
attractive members at minimal incremental marketing cost. As of June 30, 1996,
the Company had approximately 40 client organizations and approximately 1.5
million members.
 
     The Company currently offers eight membership programs in broad lifestyle
areas such as health, dental, travel, entertainment, sports, financial, and
computers and software. The Company offers memberships primarily on an
individual basis. Individual memberships are marketed by the Company to
consumers listed in databases provided to it by clients. The Company analyzes
these client lists to identify likely members utilizing a sophisticated,
proprietary membership database system. Individual members pay fees directly to
the Company, while the Company incurs the marketing costs to solicit these
members and pays royalties to the clients on membership fees. The Company
solicits members for its programs primarily through third-party telemarketers
and to a lesser extent direct mail campaigns. Some of the Company's individual
memberships are available at retail stores and on-line through the World Wide
Web. Recently, the Company also began to offer memberships on a wholesale basis.
Wholesale memberships incorporate elements from the Company's eight membership
programs and are sold to client organizations who then market them to their
consumers.
 
     The Company distributes its programs almost exclusively through credit card
issuers. Currently, the Company has 36 credit card issuer clients to whom it
pays royalties, including 10 of the top 20 issuers of bank credit cards, such as
Household Credit Services, Inc. and Capital One Financial Corp., four of the top
five issuers of oil company credit cards, such as Shell Oil Company and Texaco
Credit Card Services, and the leading issuer of retail company credit cards,
Sears, Roebuck and Co.
 
     The Company has developed a consultative product development process which
it believes has allowed it to respond quickly and effectively to market demand
for new products. The Company believes it was the first membership services
company to introduce aggregated discount services in health, sports, financial
and, most recently, through Home PC Link, personal computers and software. The
Company also believes that its programs are innovative with respect to the
variety and quality of particular services, discounts and other features which
those programs offer.
 
     To achieve its objective of becoming the leading provider of innovative
membership programs, the Company intends to continue to develop innovative
service programs for broad markets, expand existing and develop new distribution
channels, maintain and build its renewal membership base, offer premium quality
services, develop and use innovative technical solutions, leverage and develop
multiple vendor partners, and pursue international opportunities.
 
                                        4
6
 
                                  THE OFFERING
Common Stock offered by the Company.......................  shares
Common Stock offered by the Selling Stockholders..........  shares
Common Stock outstanding after the offering...............  shares(1)
Use of Proceeds...........................................  Redemption of redeemable
                                                            preferred stock and general
                                                            corporate purposes, including the
                                                            acquisition of new members,
                                                            program development, capital
                                                            expenditures and working capital.
Proposed Nasdaq National Market symbol....................  MBRS
SUMMARY CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)
YEAR ENDED JUNE 30,
                                                                          -------------------------------
                                                                           1994        1995        1996
                                                                          -------     -------     -------
STATEMENT OF OPERATIONS DATA:
Revenues................................................................  $25,830     $41,547     $57,012
Total expenses..........................................................   31,846      52,279      62,259
Net loss................................................................   (6,016)    (10,732)     (5,247)
Pro forma net loss per share(2).........................................                          $ (2.94)
Pro forma weighted average common and common equivalent shares
  outstanding(2)........................................................                            1,839
JUNE 30, 1996
                                                            -----------------------------------------------
                                                                             PRO              PRO FORMA
                                                             ACTUAL        FORMA(3)       AS ADJUSTED(3)(4)
                                                            --------     ------------     -----------------
BALANCE SHEET DATA:
Cash and cash equivalents...............................    $  4,312       $  4,312            $
Working capital (deficit)...............................     (10,561)       (10,561)
Total assets............................................      19,715         19,715
Deferred membership income, net.........................       8,416          8,416
Long-term obligations...................................       1,089          1,089
Redeemable preferred stock..............................      20,487          1,949
Total stockholders' equity (deficit)....................     (36,332)       (17,794)
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
    1996. Excludes 177,467 shares of Common Stock issuable pursuant to stock
    options outstanding at June 30, 1996 (of which options to purchase 52,525
    shares were exercisable) at a weighted average exercise price of $18.89 per
    share, and 53,864 shares of Common Stock issuable upon the exercise of
    warrants outstanding at June 30, 1996 (all of which warrants were
    exercisable) at a weighted average exercise price of $9.29 per share. See
    "Capitalization," "Management -- Stock Plans," "Certain Transactions" and
    "Principal and Selling Stockholders." Also excludes 18,000 shares of Common
    Stock issuable upon exercise of options that may be granted to an executive
    officer of the Company upon achievement of certain performance goals prior
    to December 31, 1996. All such options will be exercisable at an exercise
    price of $20.00 per share and will vest ratably over a four-year period. See
    "Management -- Executive Compensation."
 
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
    of the computation of pro forma net loss per share and the shares used in
    computing pro forma net loss per share.
 
(3) Gives effect to the conversion of all outstanding shares of the Company's
    Class A Common Stock and Series A, Series B, Series C, Series D and Series H
    Preferred Stock into an aggregate of 1,675,311 shares of Common Stock.
 
(4) As adjusted to give effect to the sale of         shares of Common Stock
    offered by the Company hereby, at an assumed initial public offering price
    of $        per share, and the application of the estimated net proceeds
    therefrom, including the redemption of all outstanding shares of the
    Company's Series E and Series F Preferred Stock upon the closing of this
    offering. See "Use of Proceeds."
 
    Except as otherwise indicated, all information in this Prospectus (i)
reflects the conversion of all outstanding shares of the Company's Class B
Common Stock into an aggregate of 11,723 shares of Common Stock, effected in
August 1996; (ii) reflects the conversion of all outstanding shares of the
Company's Class A Common Stock and Series A, Series B, Series C, Series D and
Series H Preferred Stock into an aggregate of 1,675,311 shares of Common Stock
upon the closing of this offering; (iii) reflects the redemption of all
outstanding shares of the Company's Series E and Series F Preferred Stock upon
the closing of this offering; and (iv) assumes no exercise of the Underwriters'
over-allotment option. The Company's fiscal year ends on June 30 of each year.
 
                                        5
7
 
                                  RISK FACTORS
 
     In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth in the following risk factors and elsewhere in this
Prospectus.
 
HISTORY OF LOSSES
 
     The Company has incurred significant operating losses since its inception.
As of June 30, 1996, the Company had an accumulated deficit of approximately
$38.3 million. For fiscal years 1996 and 1995, the Company incurred net losses
of approximately $5.2 million and $10.7 million, respectively. Because of
on-going costs in connection with obtaining new members, the Company expects to
continue to incur operating and net losses at least through fiscal 1997.
Although the Company has experienced revenue growth in recent periods, such
growth rates may not be sustainable and are not indicative of future operating
results. There can be no assurance that the Company will achieve or maintain
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
DEPENDENCE ON CLIENTS; CLIENT CONCENTRATION
 
     The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. As a result, the Company's ability to
market a new program to an existing customer base or an existing program to a
new customer base is dependent on first obtaining approval from a client.
 
     Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including approximately 35.2% from customer lists provided by
Sears, Roebuck and Co. ("Sears"). These and other client relationships are
pursuant to contracts which may be terminated by the client upon 30 to 90 days'
notice without penalty. Upon such termination, the Company generally has the
right to continue its relationship with the client's customers that have become
program members for a specified period to substantially the same extent as prior
to the termination, but may not resolicit those members upon such members'
cancellation or non-renewal of the membership. Approximately 75% of the revenue
attributable to Sears for the year ended June 30, 1996 was generated pursuant to
a contract which also provides that, upon termination of the agreement for
default, Sears may prohibit the Company from renewing memberships and otherwise
cause the Company to terminate its relationship with existing members. Events
that constitute default include events outside the control of the Company,
including acts and omissions by the Company's third-party vendors. There can be
no assurance that one or more of the Company's key or other clients will not
terminate its relationship with the Company or that clients will provide
additional customer lists to the Company for use in further marketing new or
existing membership programs. In addition, the Company's agreement with one of
its key clients expires in September 1996, and there can be no assurance that
the client will renew such agreement on favorable terms, if at all. Termination
or expiration of a key client relationship could have a material adverse effect
on the future revenues from existing programs of which such client's customers
are members and on the Company's ability to further market new or existing
programs through such client.
 
     Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise be subject to binding arbitration. There can be
no assurance that,
 
                                        6
8
 
upon exercise of such option, the Company would receive, as a result of
negotiation, arbitration or otherwise, revenue or net income commensurate with
the amount which the Company would receive if the option were not exercised.
Failure to receive a commensurate amount, and the loss of the ability to market
to the members of the program following exercise of the option, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in professional relationships, and such clients
may not be replaced on a timely basis, if at all. The loss of any client,
particularly a key client, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Distribution."
 
DEPENDENCE ON MEMBERSHIP RENEWALS
 
     The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During an initial annual membership term or renewal term, a member may
cancel his or her membership in the program, generally for a complete refund of
the membership fee for that period. Accordingly, the profitability of each of
the Company's programs depends on recurring and sustained membership renewals.
Renewal rates are inherently uncertain and are subject to several factors, many
of which are outside of the Company's control, including changing member
preferences, competitive price pressures, general economic conditions, customer
satisfaction and credit card holder turnover. There can be no assurance that a
particular program will generate sufficient renewals to become profitable or
that memberships, if renewed, will not be canceled. Failure of one or more of
the Company's programs to generate recurring and sustained membership renewals
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
 
FLUCTUATIONS IN OPERATING RESULTS
 
     The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of customer orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; the availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected revenues for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the
 
                                        7
9
 
Company will not have an adverse effect upon the Company's results of
operations, particularly in quarters immediately following consummation of such
transactions, while the operations of the acquired business are being integrated
into the Company's operations.
 
     In addition, the Company is required to grant options to purchase up to
18,000 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $20.00 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise price and the trading price of the
Company's Common Stock on the date of the grant. The Company's agreement to
grant such options terminates on December 31, 1996.
 
     Due to the foregoing and other factors, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period to period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. It is also likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors, which, in turn, could have a severe
adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
INTENSE COMPETITION
 
     Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company to promote a program
if the services provided by the Company's program are similar to, or merely
overlap with, the services provided by an existing program of a competitor. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations which
offer benefit programs to their customers. There can be no assurance that the
Company's competitors will not increase their emphasis on programs similar to
those offered by the Company and more directly compete with the Company, that
new competitors will not enter the market, or that other businesses will not
themselves introduce competing programs. Many of the Company's current and
prospective competitors, including CUC, have substantially larger customer bases
and greater financial and other resources than the Company. There can be no
assurance that the Company's current or potential competitors will not provide
programs comparable or superior to those provided by the Company at lower
membership prices or adapt more quickly than the Company to evolving industry
trends or changing market requirements. In addition, alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced gross margins and loss of market share,
any of which could materially adversely affect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to compete effectively against current and future competitors. See
"Business -- Competition."
 
NEW PROGRAM INTRODUCTIONS
 
     The Company's business is substantially dependent on its ability to develop
and successfully introduce new programs which generate consumer interest.
Failure to introduce new programs in a timely manner could result in the
Company's competitors acquiring additional market share for a program in a
particular area of consumer interest. In addition, the introduction or
announcement of
 
                                        8
10
 
new programs by the Company or by others could render existing programs
uncompetitive or obsolete, or result in a delay or decrease in orders for
existing programs as customers evaluate new programs or select the new programs
as an alternative to existing programs. Therefore, the announcement or
introduction of new programs by the Company or others, or the failure by the
Company to introduce new programs which have broad consumer appeal, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Membership Service Programs" and
"-- Competition."
 
DEPENDENCE ON VENDORS AND TELEMARKETERS
     The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Sales and Marketing."
 
DEPENDENCE ON CREDIT CARD INDUSTRY
     The Company's future success is dependent in large part on continued demand
for the Company's programs from businesses within the industries served by the
Company. In particular, programs marketed through the Company's credit card
issuer clients accounted for substantially all of the Company's revenues in
fiscal 1996. A significant downturn in the credit card industry or a trend in
that industry to reduce or eliminate its use of membership programs would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company is obligated under the terms of
its agreement with credit card issuers and merchant processors under rules
promulgated by credit card associations such as Visa International and Master
Card to maintain certain standards of commercial conduct with respect to credit
card users. Violations of such standards could jeopardize the Company's ability
to sell its programs using such credit cards as the medium of commercial
exchange, which could have a material adverse effect on Company's business,
financial condition and results of operations. See "Business -- Distribution."
 
MANAGEMENT OF GROWTH
     The Company has recently experienced a period of rapid growth that has
placed significant demands on its management and other resources, and continued
growth, if any, could continue to place significant demands on such resources.
Net sales increased from approximately $9.4 million in fiscal 1992 to $57.0
million in fiscal 1996. In addition, the number of employees increased from 76
to approximately 400 during the same period. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
its work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's operations,
and the failure to support the Company's operations effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
     Although the Company has not historically generated significant
international revenues, the Company intends to attempt to penetrate
international markets. In order to successfully expand internationally, the
Company must establish foreign operations and hire additional personnel. This
will require significant management attention and financial resources and could
materially adversely affect the Company's operating margins. International sales
and operations are subject to numerous risks, including unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual
 
                                        9
11
 
property rights, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
implementation of foreign exchange controls and potentially adverse tax
consequences. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition and
results of operations. See "Business -- Strategy" and "-- Sales and Marketing."
 
MEMBERSHIP PROGRAM INDUSTRY; NEGATIVE IMPACT OF COMPETING INDUSTRIES
 
     Providers of membership service programs compete for client marketing
budget dollars with other marketing activities and, in particular, other forms
of direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange via the World
Wide Web, will proliferate significantly in the foreseeable future. To the
extent such proliferation occurs, it could have a material adverse effect on the
demand for membership service programs. Furthermore, as the telemarketing
industry continues to grow, the effectiveness of telemarketing, which is the
Company's major means of marketing its programs, as a direct marketing tool may
decrease as a result of increased consumer resistance to telemarketing in
general. See "Business -- Industry Overview," "-- Sales and Marketing" and
"-- Competition."
 
FUTURE CAPITAL NEEDS
 
     The Company typically incurs high costs in the year a program is
introduced. Principal elements of these costs relate to hiring personnel,
developing program content, contracting with vendors, drafting, testing and
refining telemarketing scripts and creating membership kits for mailing to
potential new program members. The Company must incur costs to market programs
to each potential member, regardless of whether that individual actually becomes
a paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
RELIANCE ON COMPUTER AND COMMUNICATIONS SYSTEMS; TECHNOLOGY RISKS
 
     The Company's business is highly dependent on its computer and
telecommunications systems and any temporary or permanent loss of either system,
for whatever reason, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
technologies on which the Company is dependent to compete effectively and meet
its clients' needs are rapidly evolving and in many instances are characterized
by short product life cycles and/or innovation. As a result, the Company is
dependent on ongoing, significant investment in advanced computer and
telecommunications technology, including automated call distributors and digital
switches, and its ability to anticipate and adapt to technological shifts. There
can be no assurance that the Company will be successful in anticipating or
adapting to technological changes or in selecting and developing new and
enhanced technology on a timely basis. See "Business -- Technology."
 
DEPENDENCE ON TELEPHONE SERVICE
 
     The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone services provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the
 
                                       10
12
 
Company. Additionally, limitations on the ability of telephone companies to
provide the Company with increased capacity that may be required in the future,
if any, could adversely affect the Company's business, financial condition and
results of operations. Rate increases imposed by these telephone companies will
increase the Company's operating expenses and could materially adversely affect
its business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company is highly dependent on the members of its management and
marketing staff, the loss of one or more of whom could have a material adverse
effect on the Company. In addition, the Company believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
managerial and marketing personnel, particularly as the Company expands its
activities. The Company faces significant competition for such personnel, and
there can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires for continued growth, if any. The failure to
hire and retain such personnel could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Management."
 
GOVERNMENT REGULATION; ADVERSE PUBLICITY
 
     The primary means which the Company uses to market its programs is
telemarketing. The telemarketing industry has become subject to an increasing
amount of Federal and state regulation as well as general public scrutiny in the
past several years. The Federal Telephone Consumer Protection Act of 1991 limits
the hours during which telemarketers may call consumers and prohibits the use of
automated telephone dialing equipment to call certain telephone numbers. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
telemarketing practices, and there can be no assurance that any such laws, if
enacted, will not adversely affect or limit the Company's current or future
operations. Compliance with these regulations is generally the responsibility of
the Company, and the Company could be subject to a variety of enforcement or
private actions for any failure to comply with such regulations. The Company's
provision of membership programs requires the Company to comply with certain
state regulations, changes in which could materially increase the Company's
operating costs associated with complying with such regulations. The risk of
non-compliance by the Company with any rules and regulations enforced by a
Federal or state consumer protection authority may subject the Company or its
management to fines or various forms of civil or criminal prosecution, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Also, the media often publicizes perceived
non-compliance with consumer protection regulations and violations of notions of
fair dealing with consumers, and the membership programs industry is susceptible
to preemptory charges by the media of regulatory noncompliance and unfair
dealing. Any such publicity is potentially damaging to the Company's reputation,
its client relationships and consumer acceptance and loyalty. See "Business --
Government Regulation."
 
     The Company believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it is offered. If this program were in the
future to be viewed by a Federal or any state insurance regulatory authority as
an insurance program, this would subject the Company to the regulatory authority
of such Federal or state insurance authority. The insurance industry currently
is one of the most heavily regulated industries in the United States. The
subjection of the Company to such regulatory authority would significantly
increase the Company's costs associated with regulatory compliance and
potentially cause the Company to terminate its Countrywide Dental Program in
particular states, either of which would materially adversely affect the
 
                                       11
13
 
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not in the future become subject to
regulatory authority by the Federal or any state government as the result of its
Countrywide Dental Program. See "Business -- Membership Service Programs" and
"-- Government Regulation."
 
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiations between the Company, the
Selling Stockholders and the Representatives of the Underwriters. See
"Underwriting" for information relating to the method of determining the initial
public offering price. Factors such as fluctuations in the Company's operating
results, announcements of product or service innovations or new contracts by the
Company or its competitors, and market conditions for stocks of companies
similar to the Company and the condition of the capital markets generally could
have a significant impact on the market price of the Common Stock.
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
     Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon closing of this offering, based upon the number of shares
outstanding at June 30, 1996 and assuming no exercise after June 30, 1996 of
outstanding stock options or warrants, there will be           shares of Common
Stock of the Company outstanding. Of these shares, the           shares offered
hereby (          shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
("Rule 144") under the Securities Act ("Affiliates"). The remaining
shares of Common Stock are deemed "restricted securities" as that term is
defined in Rule 144. Of the restricted securities,           shares of Common
Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See
"Underwriting." Approximately           shares of Common Stock, which are not
subject to Lock-Up Agreements, will be eligible for sale in the public market in
accordance with Rule 144 or Rule 701 under the Securities Act beginning 90 days
after the date of this Prospectus. Upon expiration of the Lock-Up Agreements 181
days after the date of this Prospectus, approximately           additional
shares of Common Stock will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act. In addition, upon
expiration of Lock-Up Agreements, an additional           shares subject to
stock options outstanding, if exercised, will be eligible for sale pursuant to
Rule 701 unless sold pursuant to an effective registration statement under the
Securities Act. As of June 30, 1996 there were outstanding warrants to purchase
53,864 shares of Common Stock. These warrants contain net exercise provisions.
Accordingly, any shares issued upon net exercise will be eligible for sale
immediately upon expiration of Lock-Up Agreements pursuant to Rule 144. See
"Shares Eligible for Future Sale." In addition, after this offering, the holders
of approximately           shares of Common Stock and warrants to purchase an
aggregate of           shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to include in a
Company initiated registration such shares pursuant to the exercise of piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to raise additional capital. See "Description of Capital
Stock -- Registration Rights."
 
                                       12
14
 
CONTROL BY DIRECTORS AND OFFICERS
 
     Upon completion of this offering, the Company's officers and directors and
their affiliates will beneficially own approximately           % of the
Company's outstanding Common Stock. As a practical matter, these stockholders,
if acting together, would have the ability to elect the Company's directors and
may have the ability to determine the outcome of corporate actions requiring
stockholder approval, irrespective of how other stockholders of the Company may
vote. This concentration of ownership also may have the effect of delaying or
preventing a change in control of the Company. See "Management" and "Principal
and Selling Stockholders."
 
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS
 
     Excluding approximately $2.6 million designated to redeem the Company's
Series E and F Preferred Stock, the Company has not designated any specific use
for the net proceeds from the sale of Common Stock described in this Prospectus.
Rather, the Company expects to use the net proceeds for general corporate
purposes, including working capital. Consequently, the Board of Directors and
management of the Company will have significant discretion in applying the net
proceeds of this offering. See "Use of Proceeds."
 
ANTI-TAKEOVER PROVISIONS
 
     The Company's Restated Certificate of Incorporation (the "Charter")
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Charter provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least two-thirds of the
shares of capital stock of the Company entitled to vote. In addition, shares of
the Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Preferred Stock that may be issued in the
future. The Company has no present plans to issue any shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions, and other provisions of the Charter, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions."
 
DILUTION
 
     Purchasers of shares of Common Stock in this offering will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. To the extent that
outstanding options to purchase the Company's Common stock are exercised, there
will be further dilution. See "Dilution."
 
LACK OF DIVIDENDS
 
     The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
 
                                       13
15
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the           shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $     per share (after deducting estimated underwriting discounts and
commissions and offering expenses) are estimated to be approximately $
million. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders.
 
     Approximately $2.6 million of the estimated net proceeds will be applied to
redeem all outstanding shares of Series E and Series F Preferred Stock,
including approximately $637,000 in accrued dividends and redemption premiums.
The remaining proceeds will be used for general corporate purposes, including
acquisition of new members, program development, capital expenditures and
working capital. A portion of the net proceeds may also be used for the
acquisition of businesses, services and technologies that are complementary to
those of the Company. The Company presently has no commitments or understandings
for any such acquisitions, and is not presently engaged in any discussions or
negotiations for any such acquisitions, and no portion of the net proceeds has
been allocated for any specific acquisition. Pending such uses, the Company
intends to invest the net proceeds from this offering in short-term
interest-bearing securities.
 
                                DIVIDEND POLICY
 
     The Company has not declared or paid any cash dividends to date and
anticipates that all of its earnings in the foreseeable future will be retained
for use in its business. The Company's future dividend policy will depend on the
Company's earnings, capital requirements, financial condition, requirements of
the financing agreements to which the Company is a party and other factors
considered relevant by the Board of Directors.
 
                                       14
16
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company at June
30, 1996 on (i) an actual basis, (ii) a pro forma basis to give effect to the
conversion of all outstanding shares of the Company's Class A Common Stock and
Series A, Series B, Series C, Series D and Series H Preferred Stock into an
aggregate of 1,675,311 shares of Common Stock upon the closing of this offering,
and (iii) a pro forma as adjusted basis to reflect the issuance and sale by the
Company of           shares of Common Stock offered hereby at an assumed initial
public offering price of $     per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses, and the
application of the net proceeds therefrom, including the redemption of all
outstanding shares of the Company's Series E and Series F Preferred Stock upon
the closing of this offering. See "Use of Proceeds." This table should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996
                                                           ---------------------------------------
                                                                                        PRO FORMA
                                                             ACTUAL       PRO FORMA    AS ADJUSTED
                                                           -----------   -----------   -----------
                                                                       (IN THOUSANDS)
Deferred membership income, net..........................   $   8,416     $   8,416     $
Long-term obligations....................................       1,089         1,089
Redeemable Preferred Stock, $0.01 par value; actual:
  978,226 shares authorized, 978,226 shares issued and
  outstanding; pro forma: 978,226 shares authorized,
  80,536 shares issued and outstanding; pro forma as
  adjusted: no shares authorized, issued and
  outstanding ...........................................      20,487         1,949
Total stockholders' equity (deficit)(1):
  Preferred Stock, $0.01 par value; actual and pro forma:
  no shares authorized, issued and outstanding; pro forma
  as adjusted: 1,000,000 shares authorized, no shares
  issued and outstanding.................................          --            --
  Common Stock, $0.01 par value; 40,000,000 shares
  authorized; actual: 813,487 shares issued and
  outstanding; pro forma: 1,711,177 shares issued and
  outstanding; pro forma as adjusted:           shares
  issued and outstanding.................................           8            17
     Additional paid-in-capital..........................       2,253        20,782
     Accumulated deficit.................................     (38,320)      (38,320)
     Treasury Stock, 24,143 shares at cost...............        (273)         (273)
                                                             --------      --------
       Total stockholders' equity (deficit)..............     (36,332)      (17,794)
                                                             --------      --------
          Total capitalization (deficit).................   $  (6,340)    $  (6,340)    $
                                                             ========      ========      ========
- ---------------
(1) Excludes 177,467 shares of Common Stock issuable pursuant to stock options
    outstanding at June 30, 1996 (of which options to purchase 52,525 shares
    were exercisable) at a weighted average exercise price of $18.89 per share
    and 53,864 shares of Class A Common Stock issuable upon exercise of warrants
    outstanding at June 30, 1996 (all of which warrants were exercisable) at a
    weighted average exercise price of $9.29 per share. See "Management -- Stock
    Plans." Also excludes 18,000 shares of Common Stock that may be granted to
    an executive officer of the Company upon achievement of certain performance
    goals prior to December 31, 1996. All of such options will be exercisable at
    an exercise price of $20.00 per share and will vest ratably over a four-year
    period. See "Management -- Executive Compensation."
 
                                       15
17
 
                                    DILUTION
 
     The pro forma deficit in net tangible book value of the Company's Common
Stock as of June 30, 1996, was approximately $18,459,000, or $10.94 per share of
Common Stock. Pro forma net tangible book value per share of Common Stock
represents the amount of tangible assets (total assets less intangible assets)
of the Company reduced by the Company's total liabilities and the redemption
value of the Series E and Series F preferred stock, divided by the pro forma
number of shares of Common Stock outstanding assuming conversion of all
outstanding shares of Class A Common Stock and convertible preferred stock.
After giving effect to the sale by the Company of           shares of Common
Stock offered by the Company hereby (assuming an initial public offering price
of $     per share) and receipt of the net proceeds therefrom, the net tangible
book value of the Company at June 30, 1996 would have been approximately
          , or $     per share. This represents an immediate increase in pro
forma net tangible book value of $     per share to existing stockholders and an
immediate dilution of $     per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution:
Assumed initial public offering price per share........               $
          Pro forma net tangible book value per share as of
             June 30, 1996.....................................  $
          Increase per share attributable to new investors.....
                                                                 --------
        Pro forma net tangible book value per share after
          offering.............................................
                                                                              --------
        Dilution per share to new investors....................               $
                                                                              ========
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average consideration paid per share
by the existing stockholders and by the new investors:
SHARES PURCHASED          TOTAL CONSIDERATION
                                   ----------------------     -----------------------   AVERAGE PRICE
                                     NUMBER       PERCENT       AMOUNT        PERCENT     PER SHARE
                                   ----------     -------     -----------     -------   -------------
Existing stockholders(1).........   1,687,034           %     $18,773,700          %       $ 11.13
New investors(1).................                                                          $
                                      -------        ---         --------       ---
          Total..................                       %     $                    %
                                      =======        ===         ========       ===
- ---------------
(1) Sales by the Selling Stockholders in this offering will cause the number of
    shares held by existing shareholders as of June 30, 1996 to be reduced to
              shares or      % of the total number of shares of Common Stock
    outstanding after this offering, and will increase the number of shares held
    by new investors to        or      % of the total number of shares of Common
    Stock outstanding after this offering. See "Principal and Selling
    Stockholders."
 
     The foregoing table assumes no exercise after June 30, 1996 of options or
warrants to purchase shares of Common Stock outstanding at the date of this
Prospectus. As of June 30, 1996, there were options outstanding to purchase an
aggregate of 177,467 shares of Common Stock at a weighted average exercise price
of $18.89 per share, and warrants outstanding to purchase an aggregate of 53,864
shares of Common Stock at a weighted average exercise price of $9.29 per share.
To the extent that outstanding options or warrants are exercised, there will be
further dilution to new investors. See "Management -- Stock Option Plans." The
foregoing table also excludes 18,000 shares of Common Stock issuable upon
exercise of options that may be granted to an executive officer of the Company
upon achievement of certain performance goals prior to December 31, 1996. All of
such options will be exercisable at an exercise price of $20.00 per share and
will vest ratably over a four-year vesting period. See "Management -- Executive
Compensation."
 
                                       16
18
 
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
     The selected consolidated financial information set forth below for the
years ended June 30, 1992 and 1993, and the selected consolidated balance sheet
data as of June 30, 1992, 1993 and 1994 is derived from audited financial
statements which are not included in this Prospectus. The selected consolidated
financial information set forth below for each of the years ended June 30, 1994
(except as stated above), 1995 and 1996 is derived from audited consolidated
financial statements of the Company, which are included elsewhere in this
Prospectus. The selected consolidated financial information of the Company is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
YEAR ENDED JUNE 30,
                                        ----------------------------------------------------------
                                         1992         1993         1994         1995        1996
                                        -------     --------     --------     --------     -------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Revenues..............................  $ 9,414     $ 17,269     $ 25,830     $ 41,547     $57,012
Total expenses........................   13,879       21,527       31,846       52,279      62,259
                                        -------     --------     --------     --------     -------
Net loss..............................  $(4,465)    $ (4,258)    $ (6,016)    $(10,732)    $(5,247)
                                        =======     ========     ========     ========     =======
Pro forma net loss per share..........                                                     $ (2.94)
                                                                                           =======
Pro forma weighted average common and
  common equivalent shares
  outstanding.........................                                                       1,839
                                                                                           =======
JUNE 30,
                                        ----------------------------------------------------------
                                         1992         1993         1994         1995        1996
                                        -------     --------     --------     --------     -------
                                        (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............  $   463     $  1,017     $  2,566     $  5,323     $ 4,312
Working capital (deficit).............   (2,910)      (2,205)      (8,345)      (8,148)    (10,561)
Total assets..........................    5,146        5,789        9,521       11,396      19,715
Long-term obligations.................    2,863        4,338        3,731        8,065       1,089
Redeemable preferred stock............    4,573        5,216        6,096       10,926      20,487
Stockholders' equity (deficit)........   (8,841)     (12,737)     (18,627)     (30,367)    (36,332)
17
19
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
 
OVERVIEW
 
     MemberWorks addresses the needs of organizations seeking to leverage the
expertise of an outside provider in offering membership service programs. The
Company was founded in 1989 and had approximately 1.5 million members as of June
30, 1996. Membership service programs offer selected products and services from
a variety of vendors intended to enhance the existing relationships between
businesses and consumers. MemberWorks offers these programs to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. The membership programs which the Company
offers address such broad lifestyle needs as health and dental, travel,
entertainment, sports, personal finance and computers and software. The
Company's programs are marketed to credit card holders through arrangements with
its client organizations, including banks, retailers, major oil companies and
other credit card issuers. Such organizations include Household Credit Services,
Capital One Financial Corp. ("Capital One"), Sears, Shell Oil Company ("Shell")
and Texaco Credit Card Services ("Texaco").
 
     The Company divides its memberships into two categories, individual and
wholesale. Individual memberships consist of members who pay fees directly to
the Company. The Company pays the marketing costs to solicit individual members,
primarily using direct marketing techniques and customer lists provided by
client organizations. In the case of wholesale memberships, the Company sells
the membership service program to its client organization. The organization then
either re-sells the program to its customers or provides the program to them as
a benefit. In either wholesale case, the client is responsible for paying
periodic membership fees to the Company and incurs substantially all marketing
costs to solicit members. To date, substantially all of the Company's revenues
have been from individual memberships.
 
     The Company derives its revenues principally from annually renewable
membership fees. The annual membership fees for the Company's programs are
generally billed to subscribers via their credit card accounts and remitted to
the Company by a credit card processor. Upon receipt, the Company then pays
royalties to its client. In certain cases, membership fees are remitted to the
Company by the credit card issuer client, less royalties due the client. Annual
memberships are renewed automatically and continue in effect unless canceled by
the member. Revenues are presented net of expected cancellations.
 
     The Company receives full payment of annual fees at or near the beginning
of the applicable period, but recognizes revenue with respect to the payment
ratably over the membership period. Similarly, the costs associated with
soliciting each member (such as marketing, royalties and printing and mailing of
membership materials) are amortized ratably over the same period.
 
     The Company generally incurs losses and negative cash flow during the
initial year of an individual membership program, as compared to renewal years,
due primarily to higher marketing costs associated with initial member
procurement. In addition, the Company experiences a higher percentage of
cancellations during the initial membership period as compared to renewal
periods. During the course of an initial annual membership term or renewal term,
a member may cancel a membership in the program, generally for a complete refund
of the membership fee paid for that period. Accordingly, the profitability of
each of the Company's programs depends on recurring and sustained membership
renewals. The Company has focused its resources on developing, introducing and
expanding innovative new programs and, primarily as a result of this effort, it
has experienced net
 
                                       18
20
 
losses since its inception. The Company expects these net losses to continue at
least through its current fiscal year.
 
     During December 1994, the Company discontinued its domestic discount coupon
book business and recorded a charge of $659,000 to operations, primarily to
write off unamortized goodwill of $166,000 and other assets of $461,000.
Effective June 30, 1995, the Company returned its domestic discount coupon book
operations, cash of $175,000 and net fixed assets of $14,000 to the former owner
of the business in exchange for the shares of Common Stock issued in the
original exchange. Fiscal 1995 consolidated operating results include revenues
of $556,000 and operating losses of $1.6 million, including the $659,000 charge
discussed above, attributable to the discontinued business.
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items on
the Company's consolidated statements of operations as a percentage of revenues:
YEAR ENDED JUNE 30,
                                                              -----------------------------
                                                              1994        1995        1996
                                                              -----       -----       -----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
      Revenues..............................................  100.0%      100.0%      100.0%
      Expenses:
         Operating..........................................   20.7        23.4        20.4
         Marketing..........................................   78.2        78.9        67.4
         General and administrative.........................   21.6        21.4        20.9
         Interest expense, net..............................    2.8         2.1         0.5
                                                              -----       -----       -----
      Total expenses........................................  123.3       125.8       109.2
                                                              -----       -----       -----
      Net loss..............................................  (23.3)%     (25.8)%      (9.2)%
                                                              =====       =====       =====
YEARS ENDED JUNE 30, 1996 AND 1995
 
     Revenues.  Revenues increased 37.2% to $57.0 million in 1996 from $41.5
million in 1995 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.5 million members at June 30, 1996 from 1.1 million members at
June 30, 1995. The increase in the Company's membership base was due to an
increase in the members enrolled in existing programs and the introduction in
1996 of three new programs. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
 
     Revenue attributable to members solicited through Sears, Capital One and
Associates Credit Card Services, Inc. represented 35.2%, 10.5% and 15.6%,
respectively, of total revenues in 1996 and 41.0%, 9.0% and 16.1%, respectively,
of total revenues in 1995. Termination of any of these key relationships could
have a material adverse effect on the future revenue from existing programs of
which such client's customers are members and on the Company's ability to
further market new or existing programs through such clients.
 
     Operating Expenses.  Operating expenses consist of costs incurred in
servicing the Company's membership base, including personnel, telephone and
computer processing costs, as well as expenses associated with the production
and distribution of membership information kits. Operating expenses increased
19.8% to $11.6 million in 1996 from $9.7 million in 1995. The increase was due
principally to additional costs incurred to support the growth in the membership
base, partially offset by the absence of costs associated with the Company's
discount coupon business, which was discontinued in 1995. As a percentage of
revenues, operating expenses decreased to 20.4% in 1996 from 23.4% in 1995.
Excluding expenses associated with the discontinued discount coupon business,
operating expenses as a
 
                                       19
21
 
percentage of revenues in 1995 would have been 20.7%. The decrease as a
percentage of revenues primarily resulted from increased efficiencies in the
Company's membership services operations. The Company commenced operations at
its new membership service facility in the quarter ended June 30, 1996 and,
primarily as a result, the Company expects operating expenses to increase as a
percentage of revenues in 1997.
 
     Marketing Expenses.  Marketing expenses consist of fees to telemarketers to
solicit potential members, royalties to clients, direct mail costs and other
solicitation expenses. Marketing expenses increased 17.1% to $38.4 million in
1996 from $32.8 million in 1995. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses decreased to
67.4% in 1996 from 78.9% in 1995. The decrease was due to lower per member
telemarketing costs, as well as the favorable effect of an increase in the
weighted average program fee and an increase in renewal revenues as a percentage
of total revenues.
 
     Membership solicitation costs consist of marketing costs and, to a lesser
extent, costs associated with the production and distribution of membership
information kits, and are amortized ratably over the membership period.
Membership solicitation costs increased 17.1% to $47.0 million in 1996 from
$40.1 million in 1995 primarily due to increased marketing efforts.
 
     General and Administrative Expenses.  General and administrative expenses
consist of personnel and facilities expenses associated with the Company's
executive, sales, marketing, finance, product and account management functions.
General and administrative expenses increased 34.1% to $11.9 million in 1996
from $8.9 million in 1995. The increase was the result of hiring additional
personnel at all levels and the related increase in facilities costs, partially
offset by the absence of costs associated with the Company's discount coupon
business, which was discontinued in 1995. As a percentage of revenues, general
and administrative expenses decreased to 20.9% in 1996 from 21.4% in 1995.
Excluding general and administrative expenses associated with the discontinued
discount coupon business, general and administrative expenses increased as a
percentage of revenues to 20.9% in 1996 from 18.7% in 1995. The increase as a
percentage of revenues was primarily a result of hiring additional personnel in
the second half of fiscal 1996 and a related increase in facilities costs. The
Company expects general and administrative expenses will continue to increase as
a percentage of revenues in 1997 as the Company incurs full year expenses
associated with these costs.
 
     Interest Expense, Net.  Interest expense, net is primarily composed of
interest income from cash and cash equivalents, offset by financing charges
relating to notes payable, equipment leases and other debt. Interest expense,
net decreased to $310,000 in 1996 from $893,000 in 1995 as the result of lower
borrowings by the Company in 1996. The Company generally invests in short-term,
investment-grade, interest bearing securities. The amount of interest income
fluctuates based upon the amount of funds available for investment and
prevailing interest rates.
 
     Provision for Income Taxes.  The Company made no provision for income taxes
for the years ended June 30, 1996 and 1995 due to the net operating losses
incurred during those years. As of June 30, 1996, the Company had accumulated
net operating loss carry forwards of $17.7 million.
 
YEARS ENDED JUNE 30, 1995 AND 1994
 
     Revenues.  Revenues increased 60.8% to $41.5 million in 1995 from $25.8
million in 1994 due to an increase in the Company's membership base and an
increase in the weighted average program fee. The Company's membership base
increased to 1.1 million members at June 30, 1995 from 820,000 members at June
30, 1994. The increase in the Company's membership base was due to an increase
in the members enrolled in existing programs and the continued roll-out of a new
program introduced in 1994. The increase in the weighted average program fee was
due to an increase in the percentage of members enrolled in programs with higher
fees and an increase in the initial and renewal fees for certain programs.
 
                                       20
22
 
     Revenue attributable to members solicited through Sears, Capital One and
Associates represented 41.0%, 9.0% and 16.1%, respectively, of total revenues in
1995 and 55.4%, 5.5% and 7.4%, respectively, of total revenues in 1994.
 
     Operating Expenses.  Operating expenses increased 81.2% to $9.7 million in
1995 from $5.4 million in 1994. The increase was due principally to additional
costs incurred to support the growth in the membership base. As a percentage of
revenues, operating expenses increased to 23.4% in 1995 from 20.7% in 1994.
Excluding the one-time write-off of $659,000 in costs in 1995 related to the
discontinuation of the Company's discount coupon business, operating expenses as
a percentage of revenues increased to 21.8% in 1995 from 20.7% in 1994. The
increase as a percentage of revenues primarily resulted from decreased
efficiency experienced in membership services operations which was necessary to
support the Company's rapid revenue growth.
 
     Marketing Expenses.  Marketing expenses increased 62.5% to $32.8 million in
1995 from $20.2 million in 1994. The increase was due primarily to increased
telemarketing costs and increased royalty expense as a result of a larger
membership base. As a percentage of revenues, marketing expenses increased to
78.9% in 1995 from 78.2% in 1994. The increase as a percentage of revenues was
primarily due to higher per member telemarketing costs, partially offset by the
favorable effect of an increase in the weighted average program fee and an
increase in renewal revenues as a percentage of total revenues.
 
     Membership solicitation costs increased 40.3% to $40.1 million in 1995 from
$28.6 million in 1994 primarily due to increased marketing efforts.
 
     General and Administrative Expenses.  General and administrative expenses
increased 58.9% to $8.9 million in 1995 from $5.6 million in 1994. The increase
was primarily the result of hiring additional personnel at all levels and the
related increase in facilities costs. As a percentage of revenues, general and
administrative expenses decreased to 21.4% in 1995 from 21.6% in 1994.
 
     Interest Expense, Net.  Interest expense, net increased to $893,000 in 1995
from $712,000 in 1994 as a result of higher borrowings by the Company in 1995.
 
     Provision for Income Taxes.  The Company made no provision for income taxes
for the years ended June 30, 1995 and 1994 due to the net operating losses
incurred during those years.
 
SELECTED QUARTERLY RESULTS OF OPERATIONS
 
     The following table sets forth certain unaudited quarterly consolidated
statements of operations data for each of the eight quarters in the period ended
June 30, 1996 and the percentage of the Company's revenues represented by each
item in the respective quarter. In the opinion of the Company's management, this
unaudited information has been prepared on a basis consistent with the audited
Consolidated Financial Statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein when read in
conjunction with the Consolidated Financial Statements and related Notes
thereto. The operating results for any quarter are not necessarily indicative of
results for any future period.
 
                                       21
23
QUARTER ENDED
                           -----------------------------------------------------------------------------------------------------
                                           FISCAL YEAR 1995                                     FISCAL YEAR 1996
                           ------------------------------------------------     ------------------------------------------------
                           SEPT. 30,     DEC. 31,     MAR. 31,     JUNE 30,     SEPT. 30,     DEC. 31,     MAR. 31,     JUNE 30,
                             1994          1994         1995         1995         1995          1995         1996         1996
                           ---------     --------     --------     --------     ---------     --------     --------     --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues..................  $ 8,988      $ 9,884      $10,948      $11,727       $12,679      $14,089      $14,778      $15,466
                            -------      -------      -------      -------       -------      -------      -------      -------
Expenses:
  Operating...............    2,119        3,024        2,126        2,433         2,488        2,893        2,962        3,280
  Marketing...............    7,409        7,948        8,571        8,871         9,127        9,626        9,579       10,078
  General and
    administrative........    2,129        2,542        2,083        2,131         2,060        3,229        3,090        3,537
  Interest expense
    (income), net.........      181          237          232          243           300          (18 )          3           25
                            -------      -------      -------      -------       -------      -------      -------      -------
Total expenses............   11,838       13,751       13,012       13,678        13,975       15,730       15,634       16,920
                            -------      -------      -------      -------       -------      -------      -------      -------
Net loss..................  $(2,850)     $(3,867 )    $(2,064 )    $(1,951 )     $(1,296)     $(1,641 )    $  (856 )    $(1,454 )
                            =======      =======      =======      =======       =======      =======      =======      =======
PERCENTAGE OF TOTAL REVENUES:
Revenues..................    100.0%       100.0 %      100.0 %      100.0 %       100.0%       100.0 %      100.0 %      100.0 %
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Expenses:
  Operating...............     23.6         30.6         19.4         20.7          19.6         20.5         20.0         21.2
  Marketing...............     82.4         80.4         78.3         75.6          72.0         68.3         64.8         65.2
  General and
    administrative........     23.7         25.7         19.0         18.2          16.2         22.9         20.9         22.9
  Interest expense
    (income), net.........      2.0          2.4          2.2          2.1           2.4         (0.1 )        0.1          0.1
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Total expenses............    131.7        139.1        118.9        116.6         110.2        111.6        105.8        109.4
                           ---------     --------     --------     --------     ---------     --------     --------     --------
Net loss..................    (31.7)%      (39.1 )%     (18.9 )%     (16.6 )%      (10.2)%      (11.6 )%      (5.8 )%      (9.4 )%
                           ========      ========     ========     ========     ========      ========     ========     ========
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Factors which affect the Company's financial
results include: the timing and cancellation of client orders; the Company's
ability to introduce new programs on a timely basis; the introduction of
programs by the Company's competitors; market acceptance of the Company's and
its clients' programs; the timing of investments in program development;
personnel changes; the demand for membership programs generally; the mix of
programs offered by the Company; unanticipated service interruptions; increased
costs associated with expansion of operations; availability of vendors to
support offered programs; the rate of renewal by existing members of programs;
the level of enthusiasm for health and fitness, travel, entertainment and
leisure activities, and other lifestyle elements underlying the Company's
programs; and competitive pressures on selling prices. Many of these factors are
beyond the Company's control. Because the Company determines its expenditure
levels in advance of each quarter, the Company's ability to reduce costs quickly
in response to any revenue shortfall is limited, and thus operating results
would be adversely affected if projected sales for a given quarter are not
achieved. The Company incurs significant start-up costs in advance of the
offering of a new program, including costs associated with hiring and training
additional personnel, program development and distributing membership kits. In
addition, any delay in the offering of the program, by the Company, its clients
or otherwise, or slower than anticipated consumer acceptance of such program,
could increase the Company's cost of revenues in a given period. There also can
be no assurance that future acquisitions, if any, by the Company will not have
an adverse effect upon the Company's results operations, particularly in
quarters immediately following consummation of such transactions, while the
operations of the acquired business are being integrated into the Company's
operations.
 
     In addition, the Company is required to grant options to purchase up to
18,000 shares of Common Stock to an executive officer upon achievement of
certain performance goals, which options shall be exercisable at an exercise
price of $20.00 per share. To the extent that such options are granted, the
Company will incur compensation expense ratably over the four-year vesting
period in an aggregate amount equal to the number of options granted multiplied
by the difference between the exercise
 
                                       22
24
 
price and the trading price of the Company's Common Stock on the date of the
grant. The Company's agreement to grant such options terminates on December 31,
1996.
 
     The Company believes that its quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period to period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. It
is also likely that in some future quarter the Company's operating results will
be below the expectations of public market analysts and investors, which, in
turn, could have a severe adverse affect on the price of the Company's Common
Stock.
 
     The Company's revenue has increased in each of the quarters presented
above. These increases have resulted primarily from an increase in the Company's
overall membership base. Operating expenses have varied quarter to quarter due
primarily to personnel expenses and other costs associated with providing
services for new members or anticipated new members. Operating expenses in the
quarter ended December 31, 1994 were relatively high as compared to other
quarters primarily due to the discontinuance in 1995 of the Company's domestic
discount coupon book business. Marketing expenses have generally increased in
each quarter due to increased marketing efforts and increasing royalties
associated with an expanding membership base. General and administrative
expenses have varied quarter to quarter due primarily to the hiring of
additional personnel, particularly in the last two quarters of fiscal 1996, and
facilities costs for physical expansion needed to support the Company's growth.
General and administrative expenses were lower in the quarters ended March 31,
June 30 and September 30, 1995 as compared to prior quarters primarily as a
result of the absence of general and administrative expenses associated with the
Company's discount coupon business which was discontinued in the quarter ended
December 31, 1994. General and administrative expenses in the quarter ended
December 31, 1995 were higher primarily due to higher legal, employee recruiting
and employee bonus expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, the Company has funded operations primarily through
private sales of securities. Total net proceeds from the sale of stock, warrants
and notes through June 30, 1996 was $25.0 million. In addition, the Company has
a $3.0 million bank line of credit. The line of credit bears interest at 1.5%
per annum plus the higher of the base commercial lending rate for the bank or
the Federal Funds Rate plus 0.5% per annum and expires in February 1997. At June
30, 1996, $10,000 was outstanding under the line of credit.
 
     Net cash provided by operating activities was $1,000 in 1996, net cash used
by operating activities was $3.5 million in 1995 and net cash provided by
operating activities was $600,000 in 1994. These results were attributable to
the Company's strategy to use substantially all of its available cash to fund
costs required to increase its membership base. The Company's capital
expenditures for 1996, 1995 and 1994 were $1.7 million, $500,000 and $700,000,
respectively. These expenditures were for acquisition of fixed assets required
to support the Company's growth over the period from 1994 to 1996.
 
     Accounts receivable includes $3.6 million of unbilled receivables as of
June 30, 1996 (none at June 30, 1995), which were billed and collected
subsequent to the balance sheet date, and arise in certain instances when the
Company elects to bill subsequent to, rather than upon, acceptance of
membership. The Company had cash and cash equivalents of $4.3 million as of June
30, 1996.
 
     The development and marketing of the Company's programs requires
significant expenditures, and the Company must incur costs to market programs to
each potential member, regardless of whether that individual actually becomes a
paying member. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business, particularly if it experiences a reduction
in revenues for a prolonged period or if it faces substantial unexpected capital
requirements. To the extent that such cash resources are insufficient to fund
the Company's activities, additional funds will be required. There can be no
 
                                       23
25
 
assurance that additional financing will be available on reasonable terms or at
all. If additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders would occur.
 
     The Company believes that the net proceeds from this offering, together
with its cash balances following completion of the offering, funds generated
from operations, and borrowings available under the Company's bank credit
agreement, will be sufficient to meets its capital requirements for at least the
next 18 months.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
     In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The Company
adopted SFAS No. 121, with no effect on operations, in fiscal 1996.
 
     The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In fiscal 1997, the Company intends to adopt the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
 
                                       24
26
 
                                    BUSINESS
 
     The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated on these forward-looking statements as a
result of certain factors, including those set forth under "Risk factors" and
elsewhere in this Prospectus.
 
     MemberWorks is a leading designer and provider of innovative membership
service programs. The Company addresses the needs of organizations seeking to
leverage the expertise of an outside provider in offering these programs.
MemberWorks offers its programs to increasingly sophisticated consumers seeking
economy, efficiency and convenience in their purchase of products and services.
For participating vendors, the programs provide the opportunity to reach a large
number of demographically attractive members at minimal incremental marketing
cost. The Company's programs are marketed to credit card holders through
arrangements with its client organizations including banks, retailers, major oil
companies and other credit card issuers. Such organizations include Household
Credit Services, Capital One, Sears, Shell and Texaco.
 
INDUSTRY BACKGROUND
 
     Businesses which sell services and products to consumers have substantially
increased the use of direct marketing techniques to reach their customers. The
estimated total consumer sales as a result of direct marketing in the United
States were approximately $600 billion in 1995. Membership service programs are
one of the fastest growing areas of direct marketing. Membership service
programs, if designed, marketed and managed effectively, can be of substantial
value to the consumers who become members of such programs, to the businesses
which market to consumers and to the client organizations, such as credit card
issuers, banks, insurance companies and others, which offer the programs to
their customers.
 
     Increasingly sophisticated consumers, such as dual income couples and
professionals, are faced with a growing number of products and services that are
advertised and offered through media ranging from network television to
traditional print media to the Internet. In addition, these consumers have
limited time in which to make informed and efficient purchasing decisions. A
well-designed membership service program provides value by allowing consumers to
make purchases more efficiently, conveniently and knowledgeably through access
to discounted products and services, information services and other types of
assistance.
 
     Businesses are seeking more cost-effective and efficient methods to reach
their customers than through the confusing array of traditional mass marketing
channels. In addition, businesses also are seeking to reach new customers,
strengthen relationships with existing customers and generate new, predictable
revenues, including royalties.
 
     Historically, a substantial number of the businesses which utilize
membership service programs have been issuers of credit cards. More recently,
however, other businesses, including retailers, resort operators, banks,
insurance companies and non-profit organizations have also begun to offer
service programs. In many cases, these businesses lack the core competency to
successfully design, market and manage membership programs. As a result, these
businesses seek to outsource to companies which are able to apply advanced
database systems to capture, process and store consumer and market information,
are able to use their experience to provide effective programs, and are able to
realize economies of scale. In addition, businesses seeking to implement
membership service programs demand that the provider of those programs have the
expertise to continue to introduce innovative new programs and that the provider
have such resources as extensive vendor networks and experienced management
teams, in order to market programs quickly and successfully.
 
                                       25
27
 
THE MEMBERWORKS SOLUTION
 
     MemberWorks designs and manages innovative membership programs providing
substantial benefits to member consumers, those organizations offering the
programs and vendors whose products and services are offered through the
programs. The Company addresses the needs of organizations seeking to leverage
the expertise of an outside provider in offering membership service programs. In
return for providing the Company with customer lists, the Company's clients
receive royalty payments typically ranging between 15% and 20% of all membership
fees. Clients also benefit because the programs are designed and managed to
strengthen the relationship between clients and their customers. In addition,
MemberWorks markets these programs of products and services to increasingly
sophisticated consumers seeking economy, efficiency and convenience in their
selection of products and services. Members save time by telephonically
purchasing goods and services and obtaining useful information. Members also
benefit because the vendors agree to allow discounts for products and services
not generally available to non-members. MemberWorks offers participating vendors
the opportunity to reach a large number of demographically attractive members at
minimal incremental marketing cost.
 
     The Company maximizes its marketing effort by utilizing a proprietary
database management system to analyze the demographics of customer lists
provided by its clients in order to target specific consumers. MemberWorks is
able to introduce new programs, as well as improve existing programs, through
telemarketing rather than direct mail or other methods, thereby providing
clients with a rapid, inexpensive means to test and introduce new concepts.
 
     MemberWorks leverages its substantial base of approximately 40 client
organizations and approximately 1.5 million members to decrease its costs and to
pass economic benefits on to its clients and members. The Company's broad
membership base allows MemberWorks to render substantial discounts on its
vendors' products and services. Economies of scale also permit the Company to
maintain approximately 200 member service representatives on a 24 hour a day,
seven day a week basis. These representatives ensure that members receive
high-quality service and help build consumer loyalty with the Company's client
organizations.
 
STRATEGY
 
     The Company's objective is to become the leading provider of innovative
membership programs. Key elements of the Company's strategy are as follows:
 
     Continue to Develop Innovative Service Programs for Broad Markets.  The
Company intends to emphasize the development and rapid introduction of
innovative programs which address the lifestyle needs of large numbers of
people. The Company believes that this strategy will position it to further
penetrate its core membership market, both through existing clients and through
new clients who will find the Company's new and innovative programs to be
valuable to their own customers. For example, the Company believes that its Home
PC Link program, which provides consumers with valuable information regarding,
and purchasing access to, computer hardware, software and advisory services, is
the first such program offered. The Company believes that its health, sports and
financial programs also were the first of their kind when introduced.
 
     Expand and Develop Distribution Channels.  The Company will continue to
expand existing distribution channels and to seek new ones, including large and
small banks, retailers, oil companies, insurance companies, interactive computer
services and others. To date, the primary clients offering the Company's
membership service programs have been issuers of credit cards. The Company
believes that this distribution channel will continue to provide substantial
opportunities and, therefore, intends to continue to devote significant
resources to selling its membership service programs through credit card
issuers. As part of this strategy, the Company intends to continue to develop
service programs which can be easily modified to address the needs of a
particular channel of distribution.
 
                                       26
28
 
     Maintain and Build a Recurring Revenue Base.  The Company seeks to reach
large numbers of members who will renew their membership regularly. The
percentage of the Company's revenues from renewing members increased from 35.9%
in fiscal 1994 to approximately 41.4% in fiscal 1996.
 
     Offer Premium Quality Services.  The Company intends to continue investing
significantly in its membership services system. For example, the Company has
developed a proprietary computer interface between its members, clients and
vendors which focuses on directing members to appropriate vendors of products
and services or the Company's membership services representatives for
assistance. Members can access the system 24 hours a day, 7 days a week. In
addition, the Company recently significantly expanded its membership service
capacity by opening its second membership service facility in Houston, Texas.
The Company also maintains and monitors relationships with over 50 vendors to
assure that those vendors are providing high quality products and services in
order to enhance the relationship between the consumer and the Company's client
offering the service program.
 
     Develop and Use Innovative Technical Solutions.  The Company intends to
continue its practice of developing and improving proprietary software designed
to coordinate with telemarketing vendors and to accelerate the delivery of new
member information kits and membership billings. Currently, the Company, through
its sophisticated membership database management system, can model and analyze
client lists to identify likely members. In addition, the Company's strategy
includes investing in state-of-the-art technology in other key areas of its
business, such as sophisticated call routing equipment for the Company's
membership service centers and advanced modeling techniques for use with the
customer databases provided to the Company by its clients.
 
     Leverage and Develop Multiple Vendor Partners.  The Company intends to
continue its practice of developing strong relationships with a wide variety of
vendors who provide services at substantial discounts, rather than providing
those services internally. The Company believes that its strengths are in
designing new service programs, marketing those service programs to consumers
and providing a high quality, member-friendly interface between the members and
the service providers. The Company outsources these products and services from
vendors instead of developing the infrastructure to integrate vertically for
each new program, thereby preserving program flexibility. As a result, the
Company is able to respond to and quickly develop new programs that address the
changing needs of its clients.
 
     Pursue International Opportunities.  The Company intends to seek
international clients, particularly in Canada, Mexico and Europe, in the near
future in order to further expand its client base. MemberWorks believes that,
for the same reasons that membership service programs are growing rapidly in the
United States, there is significant demand for such programs in foreign markets.
 
MEMBERSHIP SERVICE PROGRAMS
 
     The Company's eight membership service programs, which had approximately
1.5 million members as of June 30, 1996, offer unique and valuable services,
information and savings opportunities. The service programs are marketed under
the name of the program on behalf of the client and are designed and developed
to capitalize on the client's existing relationship with its customers or other
constituents. In general, membership fees, which may be payable monthly,
quarterly or annually depending on the program, ranged from approximately $40
per year to approximately $95 per year
 
                                       27
29
 
during fiscal 1996. The Company can create customized service programs for
clients based on elements of its standard programs. Currently, the Company
markets the following eight programs:
TYPE OF SERVICE
             PROGRAM                             SERVICEMARK OR REGISTERED TRADEMARK
Health                          HealthTrends
         Dental                          Countrywide Dental Program
         Dental and Health               Countrywide Dental and Health Program
         Travel                          Travel Arrangements
         Entertainment                   Connections, Your source for entertainment values
         Sports                          Official Sports Connection
         Financial                       MoneyMaster
         Computers and
           Software                      Home PC Link
In general, members subscribe for renewable one-year memberships in the
Company's programs. When consumers agree to enroll in a program, they generally
receive a trial membership. During this time, the member may use the program's
services without obligation, as outlined in a membership brochure received by
mail along with a membership card and membership identification number. The
brochure outlines in detail the benefits which the service offers and contains
toll free numbers which may be called to access service benefits and
information. In the event that a consumer elects not to participate in the
service, he or she can call a toll free number during the trial period to cancel
the service without charge. If the membership is not canceled during the trial
period, the consumer is charged the annual membership fee. In the event that the
member does not cancel the membership after the initial membership term, he or
she generally receives a renewal kit in the mail in advance of each membership
year and is charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member is free to cancel
a membership in the program, generally for a complete refund of the membership
fee for that period.
 
     The Company offers its service programs to consumers through clients, such
as credit card issuers, who have an existing relationship with those consumers.
The client provides the Company with lists of consumers which the Company inputs
into its database management system to model, analyze and identify likely
members. The Company pays the client an annual royalty for initial and renewal
membership fees received by the Company from consumers provided to it by the
client. The royalties paid to clients by the Company typically range between 15%
and 20% of initial and renewal membership fees.
 
     The Company has developed a consultative product development process
coordinating the efforts of its sales and marketing group with those of its
client management group in order to anticipate client needs for new product
offerings. The Company's senior management works with both of these groups to
develop and refine new program concepts and then to introduce the new program.
An important factor in the Company's ability to develop innovative programs is
its emphasis on telemarketing, which allows it to obtain and analyze market
trend information quickly. The Company believes this method of product
development has allowed it to respond quickly and effectively to market demand
for new programs, as evidenced by the recent introduction of Home PC Link.
 
     The Company believes that it was the first membership company to introduce
aggregated discount services in the areas of health, sports, financial and
personal computer programs. The Company also believes that all of its programs
are innovative with respect to the variety and quality of particular services,
discounts and other features which those programs offer. By bundling and
reconfiguring various features of its standard programs, the Company can
customize a program to the particular needs and demands of its clients.
 
                                       28
30
 
     The Company's standard programs contain the following features:
 
HealthTrends
 
     HealthTrends is a unique membership program for the health conscious
individual or family, providing convenient information and substantial savings
on quality health and personal care services and maintenance.
 
     Benefits include:
 
        - Substantial discounts on brand name eyewear and contact lenses
        - Savings on prescription drugs, quality vitamins and personal care
          products
        - A Physicians Directory
        - Quality brand name hearing aids at significant discounts
        - Choice of an annual subscription to a popular health magazine, such as
          Prevention or Walking, or a health reference source book
        - A health risk appraisal service and a health reference library
 
Countrywide Dental Program
 
     The Countrywide Dental Program ("CDP") consists of a network of independent
dentists in 45 states who have agreed to accept a reduced fee schedule for
subscribers in the program. CDP is not an insurance plan, but can be used with
any dental insurance program to reduce a member's insurance co-payments.
 
     Benefits include:
 
        - Annual oral exams and bitewing x-rays at minimal or no cost
        - A discount ranging from 20% to 30% below rates offered to non-members.
 
Countrywide Dental and Health Program
 
     The Countrywide Dental and Health Program offers a combination of benefits
from the Company's Countrywide Dental Program and HealthTrends services. This
combined service provides members and their families dental services at special
discounted rates in addition to substantial discounts on eyewear,
pharmaceuticals and hearing aids.
 
Travel Arrangements
 
     Travel Arrangements is a comprehensive discount travel program that offers
substantial savings and convenience on a broad range of business, leisure, and
vacation travel services.
 
     Benefits include:
 
        - Guaranteed lowest airfares
        - Discounts of up to 50% at select hotels nationwide
        - Automatic 5% credit card rebates on qualified travel
        - Exclusive discounts on travel booked through a full-service travel
          agency
        - Discounts on car rentals from national agencies
        - Personalized travel planning services
        - Discounts on travel accessories
        - Complimentary memberships to hotel and car rental priority clubs
        - 24-Hour message service center in the contiguous 48 States
 
                                       29
31
 
Connections, Your source for entertainment values
 
     Connections, Your source for entertainment values is designed to provide
savings to members on a broad range of entertainment and leisure time activities
and contains a shopping service for substantial savings on a wide array of
merchandise.
 
     Benefits include:
 
        - Guaranteed lowest prices on over 50,000 brand-name entertainment
          products such as stereo equipment and televisions
        - Member only discounts on compact discs, movies, videos, and books
        - Discounts of up to 50% off the regular room rate at thousands of
          hotels nationwide
        - Discount admission to major amusement and theme parks and major
          attractions nationwide
        - Choice of an annual subscription to an entertainment magazine or a
          movie reference guide
        - Access to a toll-free activities hotline where members can learn about
          local events or events in an area they plan to visit
        - Discounts on movie theater tickets at major national cinemas, such as
          AMC, Loews Cineplex Odeon and General Cinema
        - Transmedia restaurant discount card
 
Official Sports Connection
 
     Official Sports Connection provides discounts on all types of sports and
athletic merchandise, apparel, and services.
 
     Benefits include:
 
        - Discounts on sports merchandise and apparel through major retail
          stores and popular sports catalogs
        - Savings on autographs, collectibles, personalized team scoreboards,
          and videos
        - Discounts on full-service sports event travel packages and premium
          tickets to sports events
        - Discounts of up to 50% off greens fees at participating golf courses,
          resorts, and driving ranges worldwide
        - Access to a toll-free sports event hotline
        - Choice of an annual subscription to a popular sports magazine or
          sports reference guide such as Football Digest, Inside Sports or
          Fodor's USA Today's Complete Four Sport Stadium Guide
 
MoneyMaster
 
     MoneyMaster helps members plan for and manage their personal finances,
taxes, insurance, and retirement planning. This service complements and can
integrate some of the benefits currently offered by the Company's financial
institution clients.
 
     Benefits include:
 
        - Discounts on tax preparation fees and an electronic filing service
        - Complimentary appraisal and discounts on competitively priced
          mortgages
        - Do-it-yourself retirement planning, will and estate planning kits with
          easy to understand guidelines
        - Choice of a complimentary annual subscription to a personal finance
          magazine such as Kiplinger's Personal Finance, Your Money or Worth, or
          a personal finance service reference guide
        - Reference library with articles and forms on financial topics
          including budgeting, credit management and investing
 
                                       30
32
 
Home PC Link
 
     Home PC Link is the Company's newest program offering, introduced in August
1996. It offers a wide range of assistance to the first time computer purchaser
as well as to existing users seeking information on upgrading their systems and
enhancements.
 
     Benefits include:
 
        - Personal Computer ("PC") configuration and discount mail order service
        - PC registration and software upgrade service
        - PC tech support service
        - Product information and advisory service
        - Internet access kit
        - Shareware sampler, a CD-based catalog of software available for free
          and for purchase
        - Computer magazine and reference materials, including Family PC,
          Computer Life, or MacUser
 
WHOLESALE PROGRAMS
 
     In addition to marketing its programs directly to consumers through lists
provided by credit card issuers and other businesses and organizations, the
Company has begun to provide membership service programs on a wholesale basis.
Typically, the Company works with a wholesale client to incorporate elements
from one or more of its standard service programs in the design of a custom
program for the client. The client will then provide the membership in the
customized format to its customers as a value-added feature. The client pays the
Company the membership fees for the customers who receive the service program.
Because wholesale programs substantially eliminate any cost for the Company to
acquire new members, which results in substantially higher profit margins for
the Company, the Company usually will agree to provide membership in the service
program for periodic fees which are less than the Company's standard fees for
the program.
 
MEMBER SERVICE
 
     The Company believes that providing high quality service to its members is
extremely important in order to encourage memberships and to strengthen the
affinity of those members for the client which offered the service program.
Currently, the Company maintains two call centers, in Omaha, Nebraska and
Houston, Texas, with a total of approximately 200 membership service
representatives. The Company's service centers are available to members, toll
free, 24 hours a day, seven days a week. All new membership service
representatives are required to complete a two-week classroom training course
before beginning to take calls and attend on-the-job training thereafter.
Through both its training programs, its systems and its software, the Company
seeks to provide members with friendly, rapid and effective answers to
questions. The Company also works closely with its clients' customer service
staffs to ensure that their representatives are knowledgable in matters relating
to membership service programs offered by the Company.
 
TECHNOLOGY
 
     The Company has invested substantially in advanced management information
systems to allow it to operate its business more efficiently and productively.
Accordingly, the Company has developed proprietary software that is designed to
accept its clients' customer databases for review, analysis and modeling in
order to identify likely members. The Company receives new member information
from telemarketers on a daily basis, and the system routes that data to other
Company facilities for member fulfillment and allows the Company to mail member
information kits to new members very rapidly. The system also receives
confirmation of billing data from the Company's merchant processors on a regular
basis, permitting the Company to update the status of each member, including
member profile information.
 
                                       31
33
 
     In providing quality service to its members, the Company's management
information system interacts with the Company's advanced call routing system to
prepare the Company's membership service representatives to better serve members
by displaying a member's profile prior to receiving the call. The Company's
telecommunications systems also monitor the performance quality of its
membership service representatives and other aspects of its business through
sophisticated reporting capabilities. In addition, the Company's marketing
experts use both the Company's proprietary systems and advanced systems from
outside vendors to review, analyze and model the demographics of lists of
prospective members supplied by clients, in order to determine which customers
are most likely to respond to an offer and retain their membership.
 
FULFILLMENT
 
     In most cases the products and services offered to members through the
Company's programs are provided directly to the members by independent vendors.
The Company evaluates and engages only those vendors which can cost-effectively
deliver high quality products and services. Vendors generally benefit by gaining
significant volume demand with minimal associated marketing expense.
Accordingly, vendors generally quote a discount price to gain access and
marketing exposure to the Company's membership base. The Company receives no
material payments from these vendors for rendering services to the Company's
members and, in certain cases, the Company pays its vendors a fee based on the
volume of members in the Company's program or based on other agreed upon
factors.
 
     The Company believes that the establishment of its vendor network can be
leveraged and represents a valuable corporate asset in that it can be used by
clients in a number of different distribution channels. For example, the Company
has developed and maintains a national network of in excess of 6,000 independent
dentists practicing in 45 states. The dentists have agreed to provide to Company
members dental services at considerable discounts, ranging from 20% to 30% below
rates offered to non-members. The Company believes that there is opportunity to
engage other users for the dental network and to increase its revenues from this
source with marginal associated incremental cost.
 
     The Company depends on independent vendors to provide most program products
and services to members and on telemarketers to market its programs to
prospective members. The vendors and telemarketers operate pursuant to
agreements with the Company that may be terminated by the vendor or telemarketer
with limited prior notice. There can be no assurance that, in the event a vendor
or telemarketer ceases operations, or terminates, breaches or chooses not to
renew its agreement with the Company, a replacement vendor or telemarketer could
be retained on a timely basis, if at all. In addition, vendors and telemarketers
are independent contractors and the level and quality of services provided is
outside the control of the Company. Any service interruptions, delays or quality
problems could result in customer dissatisfaction and membership cancellations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
SALES AND MARKETING
 
     The Company solicits members for its programs primarily by direct marketing
methods, including telemarketing, which it outsources to third party
contractors. To a lesser extent the Company uses direct mail, either as a solo
piece mailed at its own expense or at its client's expense. Some of the
Company's individual memberships are available at retail stores and on-line to
interactive computer users through the World Wide Web. In fiscal 1996,
approximately 3.3 million membership kits were mailed, and approximately 22
million telephone calls were made.
 
     The Company primarily offers its programs to consumers listed in databases
provided to it by clients. The Company's proprietary software and systems permit
it to accept this information from a client in electronic form. Marketing
specialists at MemberWorks are then able to review, analyze and model the
information on the database in order to design and implement an effective
telemarketing program. In addition, the Company has recently begun to sell
service programs on a wholesale basis.
 
                                       32
34
 
Under those programs, the Company does not pay for the marketing costs to
solicit memberships. Instead, the client offering the memberships is responsible
for marketing, usually with the assistance of the Company. In some cases, the
client may provide wholesale memberships to its customer free of charge and pay
the periodic membership fee to the Company for each customer membership. In
other cases, the client may charge a reduced fee to its customer.
 
     The Company's sales strategy is to establish and maintain long-term
relationships with those clients who offer its programs. The Company employs a
consultative sales process to understand and define client needs and to
determine how those needs can be addressed by the membership service programs
which the Company offers. MemberWorks seeks to build upon its existing customer
relationships by integrating and cross-selling its different membership service
programs. The term of the sales cycle for a new service program varies and can
be six months or more if the client is new to the Company. The Company's client
sales force currently consists of five executives and seven sales
representatives and support staff.
 
     The Company markets and services its programs primarily telephonically, and
accordingly, its business is highly dependent on telephone service provided by
various local and long distance telephone companies. Any significant
interruption in telephone services could adversely affect the Company.
Additionally, limitations on the ability of telephone companies to provide the
Company with increased capacity that may be required in the future, if any,
could adversely affect the Company's business, financial condition and results
of operations. Rate increases imposed by these telephone companies will increase
the Company's operating expenses and could materially adversely affect its
business, financial condition and results of operations.
 
DISTRIBUTION
 
     Currently, MemberWorks distributes its programs almost exclusively through
credit card issuers. The Company arranges with client financial institutions,
retailers, oil companies and other credit card issuers to market membership
programs to such clients' individual account holders and customers. Clients
generally receive royalties on initial and renewal memberships typically ranging
between 15% and 20% of annual membership fees. The Company's contracts with
these clients typically grant the Company the right to continue providing
membership services directly to such clients' individual account holders even if
the client terminates the contract, provided that the client continues to
receive its commission. Currently, the Company has 36 credit card issuer clients
to whom it pays royalties, including 10 of the top 20 issuers of bank credit
cards, four of the top five issuers of oil company credit cards and a leading
issuer of retail company credit cards.
 
     The Company is also actively developing new distribution channels.
Recently, for example, the Company entered into an agreement to offer its
membership service programs through marketing programs at retail stores. In
addition, the Company has entered into a new arrangement with one of its credit
card issuer clients whose call centers receive numerous inbound calls from
cardholders. If the inbound caller meets certain criteria, the client's service
representative is instructed by the Company to offer the Company's membership
service programs to the caller. Access and information about several of the
Company's membership service programs are also available through home pages on
the World Wide Web.
 
     The Company obtains substantially all of the information necessary to the
Company's marketing efforts from customer lists supplied by its clients. Clients
provide the lists to the Company for use in marketing a single, specific program
which has been pre-approved by the client. As a result, the Company's ability to
market a new program to an existing customer base or an existing program to a
new customer base is dependent on first obtaining approval from a client.
 
     Approximately 61.3% of the Company's revenues for the year ended June 30,
1996 was attributable to members solicited from the customer lists provided by
three key clients, including 35.2% from customer lists provided by Sears. These
and other client relationships are pursuant to contracts which may be terminated
by the client upon 30 to 90 days' notice without penalty. Upon such termination,
 
                                       33
35
 
the Company generally has the right to continue its relationship with the
client's customers that have become program members for a specified period to
substantially the same extent as prior to the termination, but may not resolicit
those members upon such member's cancellation or non-renewal of the member's
membership. Approximately 75% of the revenue attributable to Sears for the year
ended June 30, 1996 was generated pursuant to a contract which also provides
that, upon termination of the agreement for default, Sears may prohibit the
Company from renewing memberships and otherwise cause the Company to terminate
its relationship with existing members. Events that constitute default include
events outside the control of the Company, including acts and omissions by the
Company's third-party vendors. There can be no assurance that one or more of the
Company's key or other clients will not terminate its relationship with the
Company or that clients will provide additional customer lists to the Company
for use in further marketing new or existing membership programs.
 
     Approximately 25% of the revenue attributable to Sears for the year ended
June 30, 1996 was generated pursuant to a contract which grants Sears the
option, exercisable at any time, to assume the obligations of the Company under
a specified membership program in exchange for a fee or commission per member.
The agreement provides that the fee or commission shall be negotiated by the
Company and Sears, or otherwise subjected to binding arbitration. There can be
no assurance that, upon exercise of such option, the Company would receive, as a
result of negotiation, arbitration or otherwise, revenue or net income
commensurate with the amount which the Company would receive if the option were
not exercised. Failure to receive a commensurate amount, and the loss of the
ability to market to the members of the program following exercise of the
option, could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Client relationships generally take six months or more to develop and are
based in part on professional relationships and the reputation of the Company's
management and marketing personnel. As a result, client relationships may be
adversely affected by events beyond the Company's control, such as departures of
key personnel and alterations in personal relationships, and such clients may
not be replaced on a timely basis, if at all.
 
GOVERNMENT REGULATION
 
     The primary means which the Company uses to market its programs is
telemarketing. The telemarketing industry has become subject to an increasing
amount of Federal and state regulation as well as general public scrutiny in the
past several years. The Federal Telephone Consumer Protection Act of 1991 limits
the hours during which telemarketers may call consumers and prohibits the use of
automated telephone dialing equipment to call certain telephone numbers. The
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and
Federal Trade Commission ("FTC") regulations promulgated thereunder, prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent telemarketing activities that
constitute "unfair or deceptive acts or practices." Additionally, some states
have enacted laws and others are considering enacting laws targeted directly at
telemarketing practices, and there can be no assurance that any such laws, if
enacted, will not adversely affect or limit the Company's current or future
operations. Compliance with these regulations is generally the responsibility of
the Company, and the Company could be subject to a variety of enforcement or
private actions for any failure to comply with such regulations. The Company's
provision of membership programs requires the Company to comply with certain
state regulations, changes in which could materially increase the Company's
operating costs associated with complying with such regulations. The risk of
noncompliance by the Company with any rules and regulations enforced by a
Federal or state consumer protection authority may subject the Company or its
management to fines or various forms of civil or criminal prosecution, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Also, the media often publicizes perceived
non-compliance with consumer protection regulations and violations of notions of
fair dealing with consumers, and the membership programs industry is susceptible
to peremptory charges by the media of regulatory noncompliance and unfair
dealing.
 
                                       34
36
 
     The Company believes that its Countrywide Dental Program currently is not
considered to constitute an insurance program either by Federal or any state
insurance regulatory authority where it is offered. If this program were in the
future to be viewed by a Federal or any state insurance regulatory authority as
an insurance program, this would subject the Company to the regulatory authority
of such Federal or state insurance authority. The insurance industry currently
is one of the most heavily regulated industries in the United States. The
subjection of the Company to such regulatory authority would significantly
increase the Company's costs associated with regulatory compliance and
potentially cause the Company to terminate its Countrywide Dental Program in
particular states, either of which would materially adversely affect the
Company's business, financial condition and results of operations.
 
COMPETITION
 
     Competition in the membership services market for clients, such as credit
card issuers, is intense. Several of the Company's competitors offer membership
programs which provide services similar to, or which directly compete with,
those provided by the Company. Because contracts between clients and program
providers are often exclusive with respect to a particular service, potential
clients may be prohibited from contracting with the Company to promote a program
if the services provided by the Company's program are similar to, or merely
overlap with, the services provided by an existing program of a competitor. Most
of the Company's clients provide, either directly or through third parties,
programs offered by the Company's competitors, and the Company's agreement with
Sears, its principal client, permits Sears to offer its customers programs that
directly compete with those offered by the Company. Competition for new members
is also intense, particularly as the market becomes saturated with customers who
are already members of competing programs. The Company's principal competitor is
CUC International Inc. ("CUC"). The Company's other competitors include large
retailers, travel agencies, financial institutions and other organizations.
There can be no assurance that the Company's competitors will not increase their
emphasis on programs similar to those offered by the Company and more directly
compete with the Company, that new competitors will not enter the market, or
that other businesses will not themselves introduce competing programs.
 
     Many of the Company's current and prospective competitors, including CUC,
have substantially larger customer bases and greater financial and other
resources than the Company. There can be no assurance that the Company's current
or potential competitors will not provide programs comparable or superior to
those provided by the Company at lower membership prices or adapt more quickly
than the Company to evolving industry trends or changing market requirements. In
addition, alliances among competitors may emerge and rapidly acquire significant
market share. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete effectively
against current and future competitors.
 
     The Company believes that the principal competitive factors in the
membership services industry include the ability to identify, develop and offer
innovative service programs, the quality and breadth of service programs
offered, price and marketing expertise. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability to hire and retain employees, the development by
others of service programs that are competitive with the Company's service
programs, the price at which others offer comparable service programs and the
extent of the Company's competitors' responsiveness to customer needs.
 
     Providers of membership programs compete for client marketing budget
dollars with other marketing activities and, in particular, other forms of
direct marketing activities, such as direct mail. In recent years, there have
been significant advances in new forms of direct marketing, such as the
development of interactive shopping and data collection through television, the
Internet and other media. Many industry experts predict that electronic
interactive commerce, such as shopping and information exchange through the
World Wide Web, will proliferate significantly in the foreseeable
 
                                       35
37
 
future. To the extent such proliferation occurs, it could have a material
adverse effect on the demand for membership programs. Furthermore, as the
telemarketing industry continues to grow, the effectiveness of telemarketing,
which is the Company's major means of marketing its programs, as a direct
marketing tool may decrease as a result of increased consumer resistance to
telemarketing in general.
 
EMPLOYEES
 
     As of June 30, 1996, the Company employed 349 persons on a full-time basis
and 47 on a part-time basis. None of the Company's employees are represented by
a labor union. The Company believes that its employee relations are good.
 
FACILITIES
 
     The Company leases space in Stamford, Connecticut, Omaha, Nebraska and
Houston, Texas. The Stamford office serves as the Company's headquarters. The
Omaha and Houston locations are primarily call centers for membership services
representatives, operations and telemarketing personnel. The Omaha location is
also the Company's main computer and telecommunications systems center and
contains member fulfillment and warehouse facilities.
 
     A summary of key information with respect to the Company's leased
facilities is as follows:
LOCATION                      SQUARE FOOTAGE      LEASE EXPIRATION
    ------------------------------------------------  --------------     ------------------
Stamford, CT....................................      18,650         March 14, 2006
    Omaha, NE.......................................      19,800         June 30, 2000
    Omaha, NE.......................................      11,000         December 31, 1997
    Omaha, NE.......................................      16,400         December 31, 2000
    Houston, TX.....................................      26,000         July 31, 2006
LEGAL PROCEEDINGS
 
     From time to time, the Company may be involved in litigation or in
settlement proceedings relating to claims arising out of its operations in the
normal course of business. Except as described below, the Company is not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, could have a material adverse affect on the
Company's business, financial conditions and results of operations.
 
     On June 29, 1995, Thomas J. St. Denis, a co-founder of the Company, filed a
complaint against the Company, Gary A. Johnson and Steven H. Levenherz, who are
executive officers of the Company, in Stamford, Connecticut Superior Court,
alleging various claims arising out of his termination on October 3, 1994 as
Executive Vice President and Chief Operating Officer of the Company. Mr. St.
Denis alleges wrongful termination, breach of fiduciary duty, fraudulent
inducement and certain other claims arising out of alleged accounting
irregularities in fiscal 1994. The complaint claims an unspecified amount of
compensatory and punitive damages and certain other costs. The Company has moved
to strike the complaint, and its motion is being considered by the court. If the
motion to strike is not allowed, the Company intends to contest the claims
alleged in the complaint vigorously, and to assert counterclaims against Mr. St.
Denis. Prolonged litigation arising from this complaint or an adverse
determination could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
                                       36
38
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The executive officers and directors of the Company, and their respective
ages as of June 30, 1996, are as follows:
NAME              AGE                         POSITION
- ----------------------------  ---     ------------------------------------------------
Gary A. Johnson.............  41      President and Chief Executive Officer, Director
Dennis P. Walker............  51      Executive Vice President, Director
James B. Duffy..............  42      Senior Vice President and Chief Financial
                                      Officer
David Schachne..............  35      Senior Vice President -- Marketing/Operations
Steven H. Levenherz.........  52      Senior Vice President -- Administration/Law
Stephen J. Clearman.........  45      Director
Alec L. Ellison.............  33      Director
Michael R. O'Brien..........  53      Director
Marc S. Tesler..............  50      Director
Gary A. Johnson, a co-founder of the Company, has served as President and
Chief Executive Officer and a Director of the Company since its inception. From
1987 to 1989, Mr. Johnson founded and served as President of American Target
Group Marketing, a marketer of membership services for magazine publishers. From
1983 to 1987, Mr. Johnson was Vice President of New Product Development and
Marketing for CUC, a membership program services marketing firm. From 1981 to
1983, Mr. Johnson was a Marketing Director of the Marketing Consulting Division
of General Electric. Mr. Johnson received a B.S. from Tufts University and an
M.B.A. from Harvard Business School.
 
     Dennis P. Walker, a co-founder of the Company, has served as Executive Vice
President and a Director of the Company since its inception. Prior to founding
MemberWorks, Mr. Walker founded and served as President of Walker Enterprises, a
direct marketing and credit card merchandising business from 1978 to 1988. Mr.
Walker received a B.A. from the University of Nebraska.
 
     James B. Duffy joined the Company as Senior Vice President and Chief
Financial Officer in June 1996. Prior to joining the Company, Mr. Duffy served
in various senior financial management positions, most recently as Senior Vice
President, Business Planning, at Merck Medco Managed Care, Inc., a prescription
benefit management company, from 1986 to November 1995. Mr. Duffy received a
B.B.A. from Pace University.
 
     David Schachne joined the Company as Senior Vice
President -- Marketing/Operations in 1990. Prior to joining the Company, Mr.
Schachne was Vice President of Sleep Technologies, Inc., a manufacturer and
wholesaler of home furnishing products. Mr. Schachne received a B.A. from the
State University of New York, Albany and his M.B.A. from Harvard Business
School.
 
     Steven H. Levenherz, Senior Vice President -- Administration/Law, joined
the Company in May 1993 and, through June 1996, served as Chief Financial
Officer. Prior to joining the Company, Mr. Levenherz was an independent
consultant in financial and mergers and acquisitions matters from 1992 through
1993 and, from 1990 to 1992, he served as Chief Financial Officer at Phoenix
Partners, a merchant banking firm. From 1987 to 1990 Mr. Levenherz served as
Senior Vice President of Financial Planning at Horsehead Industries, Inc., a
leveraged buy-out company. Mr. Levenherz received a B.B.A. from the Baruch
School of the City College of New York and a J.D. from the University of North
Carolina, Chapel Hill.
 
     Stephen J. Clearman has been a Director of the Company since 1989. Since
1984, Mr. Clearman has been a general partner of Geocapital Partners, a venture
fund he co-founded. Mr. Clearman received a B.A. from Haverford College, an M.S.
from Columbia University and a J.D. from Harvard Law School. Mr. Clearman is
also a director of Expert Software, Inc. and Restor Industries, Inc.
 
                                       37
39
 
     Alec L. Ellison has been a Director of the Company since 1989. Mr. Ellison
has served as Managing Director of Broadview Associates LLC, an investment bank,
since 1988. Prior to 1988, Mr. Ellison was affiliated with the Technology and
Emerging Growth Group of Morgan Stanley & Co. Incorporated, an investment
banking firm. Mr. Ellison holds a B.A. from Yale University and an M.B.A from
Harvard Business School, where he was a Baker Scholar.
 
     Michael R. O'Brien has been a Director of the Company since June 1996. Mr.
O'Brien founded Catalina Marketing, Inc. ("Catalina"), a direct marketing
company, in 1983, and served as Catalina's President until 1989 and as its
Chairman of the Board and Chief Executive Officer until 1992. Since 1992, Mr.
O'Brien has been Chairman Emeritus of, and a consultant to, Catalina. Prior to
founding Catalina, Mr. O'Brien was President of TRIM, Inc., a marketing research
and information company specializing in the utilization of scanner data.
Previously, he held various sales management positions with several consumer
product manufacturers, including the Liggett Group, Inc. Mr. O'Brien received a
B.A. from the University of Kansas.
 
     Marc S. Tesler has been a Director of the Company since January 1996. Since
July 1995, he has been a member of the general partner of Technology Crossover
Ventures, L.P., a private partnership specializing in information technology
investments. From 1982 to June 1995, Mr. Tesler served in various positions at
Chancellor Capital Management, an investment management firm, most recently as
head of its Alternative Asset Management Group. Mr. Tesler received his B.S.
from the University of Massachusetts and his M.B.A. from New York University.
 
     The Company is party to a Stockholders' Agreement dated December 28, 1990,
as amended, with certain of its stockholders, including certain of its executive
officers and entities affiliated with certain of its directors, pursuant to
which such stockholders agreed, subject to certain exceptions, to vote all
securities of the Company owned by them to elect as directors of the Company (i)
one person nominated by Chancellor Capital Management, Inc. ("Chancellor"), (ii)
one person nominated by Geocapital II, L.P. ("Geocapital"), (iii) Messrs.
Johnson, St. Denis and Walker (the "Founders"), and (iv) an independent director
designated by Chancellor, Geocapital and the Founders. The Stockholders'
Agreement will terminate by its terms upon the closing of this offering.
 
     Following this offering, the Board of Directors will be divided into three
classes, and each director will serve for a staggered three-year term. The Board
will consist of two Class I Directors (Messrs. Tesler and Ellison), two Class II
Directors (Messrs. Clearman and O'Brien) and two Class III Directors (Messrs.
Johnson and Walker). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors or
director of the same class whose terms are then expiring. The terms of the Class
I Directors, Class II Directors and Class III Directors expire upon the election
and qualification of successor directors at the annual meeting of stockholders
held during the calendar years 1997, 1998 and 1999, respectively. To the extent
there is an increase in the number of directors, additional directorships
resulting therefrom will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal numbers of directors.
 
     Each officer serves at the discretion of the Board of Directors. The
Company does not have any existing employment agreements with any executive
officer. There are no family relationships among any of the directors and
executive officers of the Company.
 
BOARD COMMITTEES
 
     The Board of Directors has a Compensation Committee, currently composed of
Messrs. Clearman Ellison and Tesler which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to the
Company and administers and grants stock options pursuant to the Company's stock
option plans. The Board of Directors also has an Audit Committee, currently
composed of Messrs. Clearman, O'Brien and Tesler, which reviews the results and
scope of the audit and other services provided by the Company's independent
public accountant.
 
                                       38
40
 
DIRECTOR COMPENSATION
 
     The Company's Directors do not receive any compensation for their services
on the Board of Directors or any committee thereof and are not reimbursed for
expenses incurred in connection with their attendance at Board or committee
meetings. However, non-employee directors have received options to purchase
shares of Common Stock pursuant to the 1995 Non-Employee Director Stock Option
Plan. See "-- Stock Plans."
 
LIMITATION OF LIABILITY AND INDEMNIFICATION
 
     The Company's Restated Certificate of Incorporation (the "Charter")
contains certain provisions permitted under the Delaware General Corporation Law
("DGCL") relating to the liability of directors. These provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty, except
in certain circumstances involving wrongful acts, such as the breach of a
director's duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, unlawful payments or
dividends or unlawful stock repurchases or redemptions or any transaction from
which the director derived an improper personal benefit. As a result, the
Company and its stockholders may be unable to obtain monetary damages from a
director for breach of duty of care. Although stockholders may continue to seek
injunctive or other equitable relief for an alleged breach of fiduciary duty by
a director, stockholders may not have any effective remedy against the
challenged conduct if equitable remedies are not available. The Charter also
contains provisions indemnifying the directors and officers of the Company to
the fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
 
     The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.
 
     There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent,
other than the lawsuit filed by Thomas J. St. Denis against the Company and two
of its executive officers. The Company has undertaken to defend the two
executive officers in this litigation. See "Business -- Legal Proceedings."
 
                                       39
41
 
EXECUTIVE COMPENSATION
 
     Summary of Cash and Other Compensation
 
     The following table sets forth the compensation earned for the fiscal year
ended June 30, 1996 by the Company's Chief Executive Officer and three
additional executive officers (together with the Chief Executive Officer, the
"Named Executive Officers"), each of whom earned aggregate compensation for such
year in excess of $100,000.
LONG-TERM
                                                                                   COMPENSATION
                                                                                      AWARDS
                                                                                   ------------
                                                                                    NUMBER OF
                                                           ANNUAL COMPENSATION      SECURITIES
                                                          ----------------------    UNDERLYING
              NAME AND PRINCIPAL POSITION                  SALARY         BONUS      OPTIONS
- --------------------------------------------------------  --------       -------   ------------
Gary A. Johnson.........................................  $203,881       $51,550      15,000
  President and Chief Executive Officer
Dennis P. Walker........................................   197,802        40,378       5,000(1)
  Executive Vice President
David Schachne..........................................   149,025        36,625       2,000
  Senior Vice President -- Marketing/Operations
Steven H. Levenherz.....................................   160,485        22,088       3,000
  Senior Vice President -- Administration/Law
- ---------------
(1) Mr. Walker entered into an agreement with the Company whereby the Company is
    required to grant options to purchase up to 20,000 shares of Common Stock to
    Mr. Walker for achievement of certain performance goals. Specifically, the
    Company will grant an option to purchase 2,000 shares of Common Stock for
    each new client, from a selected list of ten prospective large clients, he
    obtains for the Company prior to December 31, 1996. These options become
    exercisable over a four-year period, one quarter of such options vesting
    each 12 months commencing on the last day of the first 12-month period after
    the date of grant, at an exercise price of $20.00 per share. In April 1996,
    Mr. Walker was granted an option to purchase 2,000 shares of Common Stock
    pursuant to this agreement.
 
     Option Grants
 
     The following table sets forth certain information concerning grants of
stock options made during fiscal 1996 to each of the Named Executive Officers.
No stock appreciation rights were granted to the Named Executive Officers during
such year.
 
                                       40
42
INDIVIDUAL GRANTS(1)                    POTENTIAL REALIZABLE
                          ------------------------------------------------------     VALUE AT ASSUMED
                          NUMBER OF    PERCENT OF TOTAL                            ANNUAL RATES OF STOCK
                          SECURITIES       OPTIONS                                  PRICE APPRECIATION
                          UNDERLYING      GRANTED TO      EXERCISE                  FOR OPTION TERM(2)
                           OPTIONS       EMPLOYEES IN     PRICE PER   EXPIRATION   ---------------------
          NAME             GRANTED       FISCAL YEAR      SHARE(3)       DATE         5%          10%
- ------------------------  ----------   ----------------   ---------   ----------   --------     --------
Gary A. Johnson.........    15,000           20.4%         $ 20.00      7/31/05    $188,670     $478,110
Dennis P. Walker........     3,000            4.1%           20.00      7/31/05      37,734       95,622
                             2,000(4)         2.7%           20.00      4/30/06      57,734      115,622
David Schachne..........     2,000            2.7%           20.00      7/31/03      19,100       45,744
Steven H. Levenherz.....     3,000            4.1%           20.00      7/31/03      28,650       68,616
- ---------------
(1) The option referenced in footnote (4) and options granted under the 1995
    Executive Officers' Stock Option Plan (the "1995 Plan") have a term of ten
    years, and options granted prior to December 31, 1995 under the Amended 1990
    Stock Option Plan (the "1990 Plan") have a term of eight years. These
    options are subject to earlier termination in certain events related to
    termination of employment. All such options become exercisable over a
    four-year period, one-quarter of such options vesting each 12 months
    commencing on the last day of the first 12-month period after the date of
    grant.
 
(2) In accordance with the rules of the Commission, the potential realizable
    values for such options shown in the table are reported net of the option
    exercise price and are based on assumed rates of stock price appreciation of
    5% and 10% compounded annually from the date the respective options were
    granted (based on the fair market value of the Common Stock on the date of
    the grant as determined by the Board of Directors) to their expiration date.
    These assumed rates of appreciation do not represent the Company's
    estimation or projection of the appreciation of shares of Common Stock of
    the Company.
 
(3) All options, other than the option referenced in footnote (4), were granted
    at an exercise price equal to the fair market value as determined by the
    Board of Directors of the Company on the date of grant.
 
(4) This option was granted pursuant to an agreement with the Company, whereby
    the Company will grant Mr. Walker an option to purchase 2,000 shares of
    Common Stock for each new client, from a selected list of certain
    prospective large clients, he obtains for the Company prior to December 31,
    1996. This option has an exercise price of $20.00 per share. See footnote
    (1) to the table appearing in "-- Summary of Cash and Other Compensation."
 
                                       41
43
 
     Option Exercises and Holdings
 
     The following table sets forth certain information concerning the number
and value of unexercised stock options held as of June 30, 1996 by each of the
Named Executive Officers. No options were exercised by the Named Executive
Officers in fiscal 1996, and no stock appreciation rights were exercised or were
outstanding during and at the end of fiscal 1996.
SHARES OF COMMON STOCK
                                                 UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED
                                                       OPTIONS AT             IN-THE-MONEY OPTIONS
                                                   FISCAL YEAR END(1)        AT FISCAL YEAR END(2)
                                               --------------------------  --------------------------
                     NAME                      EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
- ---------------------------------------------- -----------  -------------  -----------  -------------
Gary A. Johnson...............................    --            15,000      $  --         $ 150,000
Dennis P. Walker(3)...........................    --             5,000         --            50,000
David Schachne................................     9,000         6,500        172,275        92,885
Steven H. Levenherz...........................    15,126         8,041        282,554       124,166
- ------------
(1) All options granted become exercisable over a four-year period, one-quarter
    of such options vesting each 12 months commencing on the last day of the
    first 12-month period after the date of grant.
 
(2) There was no public trading market for the Common Stock as of June 30, 1996.
    Accordingly, these values have been calculated on the basis of the fair
    market value of the Company's Common Stock of $30.00 at June 30, 1996, as
    determined by the Company's Board of Directors, minus the applicable per
    share exercise price.
 
(3) Of these shares, 2,000 are subject to an option which was granted pursuant
    to an agreement with the Company, whereby the Company will grant Mr. Walker
    an option to purchase 2,000 shares of Common Stock for each new client, from
    a selected list of certain prospective large clients, he obtains for the
    Company prior to December 31, 1996. This option has an exercise price of
    $20.00 per share. See footnote (1) to the table appearing in "-- Summary of
    Cash and Other Compensation."
 
STOCK PLANS
 
     Amended 1990 Stock Option Plan
 
     The Company's Amended 1990 Employee Incentive Stock Option Plan ("Amended
1990 Stock Option Plan") was adopted by the Board of Directors and approved by
the Company's stockholders in August 1990. The Amended 1990 Stock Option Plan
provides for the grant of (i) "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees and officers of the Company, and (ii) non-qualified stock options to
employees, consultants, directors and officers of the Company. Up to 180,000
shares of Common Stock are authorized for issuance under the Amended 1990 Stock
Option Plan. On August 13, 1996, the Board of Directors voted that, effective
upon the closing of this offering, no further options may be granted or issued
under the Amended 1990 Stock Option Plan.
 
     Options granted under the Amended 1990 Stock Option Plan are not
transferable by the optionholder except by will or by laws of descent and
distribution. Generally, no incentive stock option may be exercised by an
optionee under the Amended 1990 Stock Option Plan following termination of
employment. Options granted under the Amended 1990 Stock Option Plan expire not
more than ten years after the date of grant, except that options granted on or
before December 31, 1995 expire on the eighth anniversary of the date of grant.
Options granted under the Amended 1990 Stock Option Plan generally vest 25% on
the one-year anniversary of the date of grant, and an additional 25% each year
thereafter.
 
                                       42
44
 
     As of June 30, 1996, options to purchase a total of 122,467 shares of
Common Stock at a weighted average exercise price of $15.53 per share were
outstanding under the Amended 1990 Stock Option Plan (of which options to
purchase 52,525 shares were exercisable as of such date), and options to
purchase 11,723 shares had been exercised at a weighted average exercise price
of $6.50 per share.
 
     1995 Executive Officers' Stock Option Plan
 
     In August 1995, the Company's Board of Directors approved the 1995 Stock
Option Plan (the "Executive Officers' Plan"), which provides for the grant of
options to purchase up to an aggregate of 50,000 Shares of Common Stock of the
Company to executive officers of the Company. The Executive Officers' Plan is
administered by the Compensation Committee of the Board of Directors.
 
     Under the Executive Officers' Plan, each executive officer of the Company
is eligible to receive an option to purchase shares of Common Stock. The
exercise price per share for all options granted under the Executive Officers'
Plan must equal the fair market value of the Common Stock on the date of grant.
The Executive Officers' Plan does not provide for any specific period over which
granted options vest. The term of each option is ten years from the date of
grant. In addition, the Executive Officers' Plan authorizes the Compensation
Committee to grant additional options to the Company's executive officers and to
determine the terms applicable to such options. Options may not be assigned or
transferred except by will or by the laws of descent and distribution and are
exercisable to the extent vested only while the optionee is serving as an
executive officer of the Company or within one year after the optionee ceases to
serve as an executive officer of the Company. Options to purchase 35,000 shares
have been granted to date under the Executive Officers' Plan.
 
     1995 Non-Employee Directors' Stock Option Plan
 
     In August 1995, the Company's Board of Directors adopted the 1995
Non-Employee Director Stock Option Plan (the "Director Plan"), which provides
for the grant of options to purchase a maximum of 25,000 shares of Common Stock
of the Company to non-employee directors of the Company. The Director Plan is
administered by the Compensation Committee of the Board of Directors.
 
     Under the Director Plan, each director of the Company who is not also an
employee or officer of the Company is eligible to receive an option to purchase
shares of Common Stock on the date such person is first elected to the Board of
Directors. The exercise price per share for all options granted under the
Director Plan will be equal to the fair market value of the Common Stock on the
date of grant. The options granted to a director are exercisable in four equal
annual installments, beginning on the first anniversary of the grant date,
provided that the optionee remains a director at such time. The term of each
option is ten years from the date of grant. In addition, the Director Plan
authorizes the Compensation Committee to grant additional options to
non-employee directors and to determine the terms applicable to such options.
Options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable to the extent vested only while the
optionee is serving as a director of the Company and within one year after the
optionee ceases to serve as a director of the Company. Options to purchase
20,000 shares have been granted to date under the Director Plan.
 
     1996 Stock Option Plan
 
     The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
No options have been granted under the 1996 Stock Option Plan. The 1996 Stock
Option Plan authorizes the issuance of up to a total of 250,000 shares of Common
Stock pursuant to the grant to employees of "incentive stock options" within the
meaning of the Code, and the grant of non-qualified stock options to employees,
consultants, officers or directors of the Company.
 
                                       43
45
 
     The 1996 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, which has the authority to select the optionees and
determine the terms of the options granted, including (i) the number of shares
subject to each option, (ii) option exercise terms, (iii) the exercise price of
the option, (which in the case of an incentive stock option cannot be less than
the fair market value of the Common Stock on the date of grant), (iv) the
duration of the option, and (v) the time, manner and form of payment upon
exercise of an option. An option is not transferable by the optionholder except
by will or by laws of descent and distribution. Generally, no incentive stock
option may be exercised by an optionee more than three months following
termination of employment, unless termination is due to death or disability, in
which case the option is exercisable for a maximum of one year after such
termination.
 
     1996 Employee Stock Purchase Plan
 
     The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in August 1996, and becomes effective upon the closing of this offering.
The Purchase Plan authorizes the issuance of up to a total of 50,000 shares of
Common Stock to participating employees.
 
     All employees of the Company, including directors of the Company who are
employees, and who have been employed for more than 12 months are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock of
the Company or any subsidiary are not eligible to participate.
 
     On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount to be deducted by the Company from
such pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the Purchase
Plan, the option price is an amount equal to 85% of the fair market value per
share of the Common Stock on either the first day or the last day of the
Offering Period, whichever is lower. An employee may purchase, in any one
Offering Period, a number of shares the aggregate purchase price of which is up
to 10% of the employee's compensation for the immediately preceding six month
period divided by 85% of the market value of a share of Common Stock on the
commencement date of the Offering Period. The Compensation Committee may, in its
discretion, choose an Offering Period of 12 months or less for each of the
Offerings and choose a different Offering Period for each Offering.
 
     If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During fiscal 1996, all decisions relating to executive compensation were
made by the Compensation Committee, of which Messrs. Clearman and Ellison were
members. Neither of these individuals has served at any time as an officer or
employee of the Company. For a description of the transactions between the
Company and members of the Compensation Committee and entities affiliated with
such members, see "Certain Transactions." No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
 
                                       44
46
 
                              CERTAIN TRANSACTIONS
 
     Since June 30, 1993, the Company has issued and sold, in private placement
transactions, shares of Class A Common Stock and Preferred Stock and warrants to
purchase Common Stock to the Company's executive officers, directors and
principal stockholders as follows:
NUMBER OF            NUMBER OF               NUMBER OF
                                      SHARES OF            SHARES OF               SHARES OF        CLASS A
                                       SERIES F             SERIES H                CLASS A       COMMON STOCK
          INVESTOR(1)             PREFERRED STOCK(2)   PREFERRED STOCK(3)       COMMON STOCK(2)     WARRANTS
- --------------------------------  ------------------   ------------------       ---------------   ------------
Geocapital II, L.P. (4).........          4,794                   --                  4,794             975(5)
Marc S. Tesler(6)...............             --               73,189                     --           3,789(7)
Entities Affiliated with
  Chancellor....................         20,071               75,433                 20,071           7,988(8)
Entities Affiliated with Abbott
  Capital.......................         13,493                   --                 13,493           2,744(9)
- ---------------
 
(1) Shares held by all affiliated persons and entities have been aggregated. See
    "Principal and Selling Stockholders" for more detail on shares held by these
    purchasers.
 
(2) On March 30, 1994 the Company sold a total of 38,358 shares of Series F
    Preferred Stock and 38,358 shares of Class A Common Stock for an aggregate
    purchase price of $1 million. The shares of Series F Preferred Stock will be
    redeemed by the Company upon closing this offering at $26.07 per share, plus
    (i) accrued and unpaid dividends thereon and (ii) a 6% redemption premium,
    if applicable. Approximately $24,700, $103,500 and $69,600 of dividends have
    accrued as of June 30, 1996 on shares of Series F Preferred Stock owned by
    Geocapital, and entities advised by Chancellor Capital Management Inc. and
    Abbott Capital Management, L.P., respectively.
 
(3) The per share purchase price for Series H Preferred Stock was $40.99.
 
(4) Stephen J. Clearman, a general partner of Geocapital II, L.P., is a director
    of the Company. Alec L. Ellison, a Managing Director of Broadview Associates
    LLC, which is an affiliate of Geocapital II, L.P., is a director of the
    Company.
 
(5) These warrants have an exercise price of $25.64 per share.
 
(6) Reflects shares owned by Technology Crossover Ventures, L.P. and Technology
    Crossover Ventures, C.V. (together, "Technology Crossover Ventures"). Marc
    S. Tesler, an affiliate of Technology Crossover Ventures, is a director of
    the Company.
 
(7) These warrants have an exercise price of $.01 per share.
 
(8) Of the 7,988 warrants, 4,082 are exercisable at $25.64 per share and 3,906
    are exercisable at $.01 per share.
 
(9) These warrants have an exercise price of $25.64 per share.
 
     On December 31, 1990, the Company issued promissory notes to two of its
founders, Gary A. Johnson and Thomas St. Denis, both in the amount of $133,333
and bearing interest payable monthly at the rate of 12% percent per annum. The
notes mature and all outstanding principal is payable in full on February 28,
1997. Currently, the Company's credit agreement with a third-party lender
requires that the entire principal amount of the notes remain outstanding.
 
     For a description of option grants to certain executive officers of the
Company, see "Management -- Executive Compensation."
 
     The Company believes that the terms of the foregoing transactions were no
less favorable to the Company than could have been obtained from unaffiliated
third parties. The Company intends to adopt a policy, effective following the
consummation of this offering, that all material transactions between the
Company and its officers, directors and other affiliates must (i) be approved by
a majority of the members of the Company's Board of Directors and by a majority
of the disinterested members of the Company's Board of Directors, and (ii) be on
terms that are no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
 
                                       45
47
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors and Named
Executive Officers, (iii) each of the Selling Stockholders and (iv) all
directors and executive officers as a group.
SHARES
                                                     SHARES BENEFICIALLY                  BENEFICIALLY
                                                       OWNED PRIOR TO                     OWNED AFTER
                                                         OFFERING(1)       NUMBER OF      OFFERING(1)
                                                     -------------------     SHARES     ----------------
       NAME AND ADDRESS OF BENEFICIAL OWNER          NUMBER      PERCENT    OFFERED     NUMBER   PERCENT
- ---------------------------------------------------  -------     -------   ----------   ------   -------
Chancellor Capital Management, Inc.(2)...........  261,684       15.4%
    1166 Avenue of the Americas
    New York, NY 10036
  Geocapital II, L.P.(3)...........................  386,035       22.9%
    One Bridge Plaza
    Fort Lee, NJ 07024
  Gary A. Johnson(4)...............................  228,750       13.5%
  Thomas St. Denis.................................  225,000       13.3%
  Dennis P. Walker(5)..............................  225,750       13.4%
  Abbott Capital Management, L.P.(6)...............  122,582        7.3%
    1330 Avenue of the Americas, Suite 2800
    New York, NY 10019
  Stephen J. Clearman(3)(7)........................  386,035       22.9%
  Alec L. Ellison(3)(8)............................  386,035       22.9%
  Marc S. Tesler(9)................................  76,978         4.6%
  Steven H. Levenherz(10)..........................  15,876        *
  David Schachne(11)...............................  16,250         1.0%
Other Selling Stockholders
All executive officers and directors, as a group
  (9 persons)(3)(4)(5)(7)(8)(9)(10)(11)............  949,639       55.1%
- ------------
* Less than 1%.
 
 (1) The number of shares beneficially owned by each stockholder is determined
     under rules promulgated by the Securities and Exchange Commission, and the
     information is not necessarily indicative of beneficial ownership for any
     other purpose. Under such rules, shares of Common Stock subject to options
     or warrants exercisable within 60 days after June 30, 1996 are deemed to be
     outstanding for computing the percentage of the person or entity holding
     such options or warrants but are not deemed outstanding for computing
     percentage of any other person or entity. The inclusion herein of such
     shares, however, does not constitute an admission that the named
     stockholder is a direct or indirect beneficial owner of such shares. Unless
     otherwise indicated, each person or entity named in the table has sole
     voting power and investment power (or shares such power with his or her
     spouse) with respect to all shares of capital stock listed as owned by such
     person or entity.
 
 (2) Chancellor Capital Management, Inc. ("Chancellor") is the investment
     manager for various fiduciary client accounts, with full voting and
     investment, including dispositive, powers. Such client accounts and their
     respective share ownership are as follows: Howe & Co. as nominee for
     Northern Trust as trustee of Burnett Pension Trust; Howe & Co. as nominee
     for Northern Trust as trustee of Burnett Profit Sharing Trust; Focus & Co.;
     Focus & Co. for the benefit of Baxter Healthcare Corp.; Hank & Co. for the
     account of Citiventures Private Participation Ltd. II; Pitt & Co. for the
     account of GTE Pension Plan; and Parag Saxena. Each of the accounts owns
     3,865; 5,055; 6,608; 4,862; 187,537; 45,460; and 309 shares of Common
     Stock, respectively. Also includes
 
                                       46
48
 
an aggregate of 7,988 shares of Common Stock issuable upon the exercise of
outstanding warrants held by such accounts that are presently exercisable.
 
 (3) Consists of 367,270 and 17,790 shares of Common Stock and 929 and 46 shares
     issuable upon the exercise of presently exercisable warrants held of record
     by Geocapital II, L.P. and Bernard Goldstein, respectively, both of which
     are part of an affiliated group of entities and individuals referred to,
     collectively, as Geocapital.
 
 (4) Includes 3,750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
     Includes 7,500 shares held in trust for the benefit of Mr. Johnson's
     children; Mr. Johnson disclaims beneficial ownership of such shares.
 
 (5) Includes 750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
     Includes an aggregate of 25,000 shares held in trust for the benefit of Mr.
     Walker's children; Mr. Walker disclaims beneficial ownership of such
     shares.
 
 (6) Includes 2,744 shares issuable upon the exercise of warrants presently
     exercisable.
 
 (7) Mr. Clearman is a general partner of Geocapital II, L.P., and as such may
     be deemed to be the beneficial owner of shares held by Geocapital. Mr.
     Clearman disclaims beneficial ownership of such shares except to the extent
     of his pecuniary interest in Geocapital.
 
 (8) Mr. Ellison is a Managing Director of Broadview Associates LLC, an
     affiliate of Geocapital II, L.P., and as such may be deemed to be the
     beneficial owner of shares held by Geocapital. Mr. Ellison disclaims
     beneficial ownership of such shares except to the extent of his pecuniary
     interest in Geocapital.
 
 (9) Consists of an aggregate of 73,189 shares of Common Stock and 3,789 shares
     issuable upon the exercise of warrants held of record by Technology
     Crossover Ventures, L.P. and Technology Crossover Ventures, C.V., of which
     Mr. Tesler is an affiliate. As a result, Mr. Tesler may be deemed to be the
     beneficial owner of such shares. Mr. Tesler disclaims beneficial ownership
     of such shares except to the extent of his pecuniary interest in such
     entities.
 
(10) Represents 15,876 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
 
(11) Includes 11,750 shares issuable upon the exercise of outstanding options
     presently exercisable or exercisable within 60 days after June 30, 1996.
 
                                       47
49
 
                          DESCRIPTION OF CAPITAL STOCK
 
     Upon the closing of the offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.01 par value per
share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share.
 
COMMON STOCK
 
     As of June 30, 1996 there were 1,687,034 shares of Common Stock and
Preferred Stock convertible into Common Stock outstanding held by 39
stockholders of record. Based upon the number of shares outstanding as of June
30, 1996, assuming no exercise after June 30, 1996 of outstanding stock options
and warrants and giving effect to the issuance of the      shares of Common
Stock offered by the Company hereby, there will be      shares of Common Stock
outstanding upon the closing of this offering. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding Preferred Stock. Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in this
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
 
WARRANTS
 
     As of June 30, 1996, the Company had issued warrants to purchase an
aggregate of 53,864 shares of Class A Common Stock with the following per share
exercise prices: 7,801 at $25.64; 20,337 at $14.75; and 25,726 at $0.01. These
warrants expire at various dates between March 1999 and August 2000.
 
PREFERRED STOCK
 
     The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue such shares of Preferred
Stock in one or more series. Each such series of Preferred Stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors. The Company has
no present plans to issue any shares of Preferred Stock. It is not possible to
state the effect of the authorization and issuance of any series of Preferred
Stock upon the rights of holders of Common Stock until the Board of Directors
determines the specific terms, rights and preferences of such a series of
Preferred Stock. However, such effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock or impairing the liquidation rights of such shares without further
action by holders of Common Stock. In addition, under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities or the removal of incumbent
management, which could thereby depress the market price of the Company's Common
Stock.
 
                                       48
50
 
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
 
     The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
 
     The Company's Restated Certificate of Incorporation (the "Charter")
provides for the division of the Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms. See
"Management -- Executive Officers and Directors." In addition, the Charter
provides that directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of capital stock of the corporation
entitled to vote. Under the Charter, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
 
     The Charter also provides that after the closing of this Offering, any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. The Charter further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Restated By-laws, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
 
     The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Charter requires the affirmative vote of
the holders of at least 75% of the shares of capital stock of the Company issued
and outstanding and entitled to vote to amend or repeal any of the foregoing
Charter provisions. The Restated By-laws also may be amended or repealed by a
majority vote of the Board of Directors subject to any limitations set forth in
the Restated By-laws. The 75% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders.
 
REGISTRATION RIGHTS
 
     Following this offering, the holders (the "Holders") of approximately
            shares of Common Stock and warrants to purchase approximately
            shares of Common Stock or their assignees (collectively, the
"Registrable Securities"), will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms of an
agreement between the
 
                                       49
51
 
Company and the Holders, in the event the Company intends to register any of its
securities under the Securities Act the Holders shall be entitled to include
Registrable Securities in such registration. However, the managing underwriter
of any such offering may, under certain circumstances, exclude some or all of
such registrable Securities from such registration. The Holders also are
entitled, subject to certain conditions and limitations, to demand the Company
to register some or all of their Registrable Securities under the Securities
Act, provided that such demand may not be exercised more than once in any
twelve-month period or more than twice in the aggregate. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. If the Holders, by exercising their
demand registration rights, cause a large number of securities to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. Moreover, if the Company were to
include in a Company initiated registration shares held by the Holders pursuant
to exercise of their piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise additional capital.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
 
                                       50
52
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon closing of this offering, based upon the number of shares outstanding
at June 30, 1996 and assuming no exercise after June 30, 1996 of outstanding
stock options or warrants, there will be           shares of Common Stock of the
Company outstanding. Of these shares, the           shares offered hereby will
be freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates") described below. The remaining
          shares of Common Stock are deemed "restricted securities" as that term
is defined in Rule 144. Of the restricted securities,           shares of Common
Stock are subject to certain lock-up agreements (the "Lock-Up Agreements"). See
"Underwriting."
 
     Approximately           shares of Common Stock, which are not subject to
Lock-Up Agreements, will be eligible for sale in the public market in accordance
with Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
date of this Prospectus. Upon expiration of the Lock-Up Agreements 181 days
after the date of this Prospectus, approximately           additional shares of
Common Stock will be available for sale in the public market, subject to the
provisions of Rule 144 under the Securities Act. In addition, upon expiration of
Lock-Up Agreements, an additional           shares subject to stock options
outstanding, if exercised, will be eligible for sale pursuant to Rule 701 unless
sold pursuant to an effective registration statement under the Securities Act.
As of June 30, 1996 there were outstanding warrants to purchase 53,864 shares of
Common Stock. These warrants contain net exercise provisions. Accordingly, any
shares issued upon net exercise will be eligible for sale immediately upon
expiration of lock-up agreements pursuant to Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least two
years from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately           shares immediately after this offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least three years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
 
     Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the Amended 1990 Stock Option Plan, the Executive Officers' Plan and the
Director Plan) are also restricted securities and, beginning 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
may be sold by stockholders other than Affiliates of the Company subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its two-year holding period requirement.
 
     The Company intends to file registration statements on Form S-8 under the
Act to register approximately 555,000 shares of Common Stock issuable under the
Amended 1990 Stock Option Plan, the Executive Officers' Plan, the Director Plan,
the 1996 Stock Option Plan and the Purchase Plan. The registration statements
are expected to be filed shortly after the effective date of the Registration
Statement of which this Prospectus is a part and will be effective upon filing.
Shares issued upon the exercise of stock options after the effective date of the
Form S-8 registration statements will be eligible
 
                                       51
53
 
for resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-Up Agreements noted above.
 
     Prior to the offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. In addition, after this offering, the holders of
approximately           shares of Common Stock and warrants to purchase an
aggregate of           shares of Common Stock will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration. See "Description of Capital
Stock -- Registration Rights." If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for the Company's Common Stock. If the
Company were to include shares in a Company-initiated registration pursuant to
the exercise of piggyback registration rights, sales of such shares may have an
adverse effect on the Company's ability to raise additional capital.
 
                                       52
54
 
                                  UNDERWRITING
 
     The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and PaineWebber
Incorporated (the "Representatives"), have severally agreed with the Company and
the Selling Stockholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the numbers of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
NUMBER
                                       NAME                                 OF SHARES
        ------------------------------------------------------------------  ---------
Robertson, Stephens & Company LLC.................................
        Hambrecht & Quist LLC.............................................
        PaineWebber Incorporated..........................................
 
                                                                            ---------
                  Total...................................................
                                                                            =========
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $          per share, of which $          may be reallowed to other
dealers. After the initial public offering, the offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of this Prospectus.
 
     The Selling Stockholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to           additional shares of Common Stock, at the same price
per share as the Company and Selling Stockholders will receive for the
          shares that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise this option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the           shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the          shares are being sold.
 
     The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
 
     Each officer and director of the Company, and certain other persons that
beneficially own or have dispositive power over substantially all of the shares
of the Company's Common Stock, have agreed with the Representatives for a period
of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to
certain exceptions, not of offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock, or
any securities convertible into or exchangeable for shares of Common Stock now
owned or hereafter acquired directly by such holders or with respect to which
they have or hereafter acquire the power of disposition, without the prior
written consent of Robertson, Stephens & Company LLC. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without prior written consent of Robertson, Stephens & Company LLC, subject to
certain exceptions, issue, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock, any
 
                                       53
55
 
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the Company's sales of shares in this offering, the issuance of
Common Stock upon the exercise of outstanding options and the Company's issuance
of options and stock under the Amended 1990 Stock Option Plan, the 1995
Executive Officers' Stock Option Plan and the 1995 Non-Employee Directors' Stock
Option Plan.
 
     Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock is being determined through negotiations among the Company, the
Selling Stockholders and the Representatives. Among the factors considered in
such negotiations are prevailing market conditions, certain financial
information of the Company, market valuations of other companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
 
     The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
 
     Certain venture funds affiliated with Robertson, Stephens & Company LLC
beneficially owned 81,311 shares of Common Stock and warrants to purchase 316
shares of Common Stock as of June 30, 1996.
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
 
                                    EXPERTS
 
     The Consolidated Financial Statements of the Company as of June 30, 1996
and 1995, and for each of the three years in the period ended June 30, 1996
included in this Prospectus, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
 
                                       54
56
 
                            MEMBERWORKS INCORPORATED
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
                                                                                        ----
Report of Independent Accountants.....................................................  F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995..............................  F-3
Consolidated Statements of Operations for each of the years in the three-year period
  ended June 30, 1996.................................................................  F-4
Consolidated Statements of Stockholders' Equity for each of the years in the
  three-year period ended June 30, 1996...............................................  F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
  ended June 30, 1996.................................................................  F-6
Notes to Consolidated Financial Statements............................................  F-7
F-1
57
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
MemberWorks Incorporated
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
MemberWorks Incorporated and its subsidiaries at June 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
 
Price Waterhouse LLP
Stamford, Connecticut
July 25, 1996, except as to Note 15
 which is as of August 15, 1996
 
                                       F-2
58
 
                            MEMBERWORKS INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
JUNE 30,
                                                        -----------------------
                                                          1995           1996
                                                        --------       --------
ASSETS
Current assets:
  Cash and cash equivalents...........................  $  5,323       $  4,312
  Accounts receivable.................................     1,365          6,439
  Membership solicitations in process.................     2,252          3,474
  Prepaid membership materials........................       332          1,065
  Prepaid expenses....................................        90            204
                                                        --------       --------
          Total current assets........................     9,362         15,494
Fixed assets, net.....................................     1,782          3,261
Other assets..........................................       252            960
                                                        --------       --------
                                                        $ 11,396       $ 19,715
                                                        ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable.......................................  $    297       $    675           PRO
  Current maturities of capital lease obligations.....       205            316        FORMA AT
  Accounts payable....................................     7,879         10,433        JUNE 30,
  Accrued liabilities.................................     9,129         14,631          1996
                                                        --------       --------
          Total current liabilities...................    17,510         26,055       (UNAUDITED)
Deferred membership income, net.......................     5,262          8,416        (NOTE 16)
Long-term capital lease obligations...................       392            456
                                                                                      ----------
Notes payable.........................................     7,673            633
                                                        --------       --------
          Total liabilities...........................    30,837         35,560
Redeemable preferred stock............................    10,926         20,487            $   --
                                                        --------       --------
          Total liabilities and redeemable preferred
            stock.....................................    41,763         56,047
                                                        --------       --------
Commitments and contingencies (Note 8)
Stockholders' equity:
  Class A common stock, $.01 par value -- 1,779,175
     shares (1,464,191 shares in 1995) authorized;
     777,621 shares issued and outstanding............         8              8                --
  Class B common stock, $.01 par value -- 2,058,318
     shares (1,600,334 shares in 1995) authorized;
     35,866 shares (35,816 shares in 1995) issued and
     outstanding......................................        --             --                17
  Capital in excess of par value......................     1,737          2,253            20,782
  Accumulated deficit.................................   (31,839)       (38,320)          (38,857)
  Treasury stock, 24,143 shares at cost...............      (273)          (273)             (273)
                                                        --------       --------       -----------
          Total stockholders' equity (deficit)........   (30,367)       (36,332)         $(18,331)
                                                                                        =========
                                                        --------       --------
                                                        $ 11,396       $ 19,715
                                                        ========       ========
The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-3
59
 
                            MEMBERWORKS INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
                                                                   ----------------------------
                                                                    1994       1995      1996
                                                                   -------   --------   -------
Revenues
  Membership fees................................................  $25,830   $ 41,547   $57,012
Expenses
  Operating......................................................    5,354      9,702    11,623
  Marketing......................................................   20,188     32,799    38,410
  General and administrative.....................................    5,592      8,885    11,916
  Interest expense, net..........................................      712        893       310
                                                                   -------   --------   -------
Total expenses...................................................   31,846     52,279    62,259
                                                                   -------   --------   -------
Loss before income taxes.........................................   (6,016)   (10,732)   (5,247)
Provision for income taxes.......................................       --         --        --
                                                                   -------   --------   -------
Net loss.........................................................  $(6,016)  $(10,732)  $(5,247)
                                                                   =======   ========   =======
Unaudited pro forma net loss per share...........................                       $ (2.94)
                                                                                        =======
Unaudited pro forma weighted average shares outstanding..........                         1,839
                                                                                        =======
The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-4
60
 
                            MEMBERWORKS INCORPORATED
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
                           ------------------------------------
                                CLASS A            CLASS B        CAPITAL IN
                           -----------------   ----------------   EXCESS OF    ACCUMULATED   TREASURY
                            SHARES    AMOUNT   SHARES    AMOUNT   PAR VALUE      DEFICIT      STOCK      TOTAL
                           ---------  ------   -------   ------   ----------   -----------   --------   --------
Balance -- June 30,
  1993...................    739,263    $8      24,705    $ --      $1,074      $ (13,819)              $(12,737)
For the year ended June
  30, 1994:
Issuance of common
  stock..................     38,358    --         500      --         514                                   514
Preferred stock:
  Accretion of
     discount............                                                             (90)                   (90)
  Accretion to redemption
     value...............                                                            (193)                  (193)
  Accumulated dividends..                                                            (105)                  (105)
Net loss.................                                                          (6,016)                (6,016)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1994...................    777,621     8      25,205      --       1,588        (20,223)               (18,627)
For the year ended June
  30, 1995:
Issuance of common
  stock..................                       10,611      --          65                                    65
Issuance of warrants.....                                               --                                    --
Acquisition of treasury
  stock..................                                               84                    $ (273)       (189)
Preferred stock:
  Accretion of
     discount............                                                            (163)                  (163)
  Accretion to redemption
     value...............                                                            (297)                  (297)
  Accumulated dividends..                                                            (424)                  (424)
Net loss.................                                                         (10,732)               (10,732)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1995...................    777,621     8      35,816      --       1,737        (31,839)      (273)    (30,367)
For the year ended June
  30, 1996:
Issuance of common
  stock..................                           50      --           1                                     1
Issuance of warrants.....                                              515                                   515
Preferred stock:
  Accretion of
     discount............                                                            (219)                  (219)
  Accretion to redemption
     value...............                                                            (648)                  (648)
  Accumulated dividends..                                                            (367)                  (367)
  Net loss...............                                                          (5,247)                (5,247)
                                        --
                             -------            ------     ---      ------       --------       ----    --------
Balance -- June 30,
  1996...................    777,621    $8      35,866    $ --      $2,253      $ (38,320)    $ (273)   $(36,332)
                             =======    ==      ======     ===      ======       ========       ====    ========
The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-5
61
 
                            MEMBERWORKS INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
YEAR ENDED JUNE 30,
                                                             ----------------------------------
                                                               1994         1995         1996
                                                             --------     --------     --------
OPERATING ACTIVITIES
  Net loss.................................................  $ (6,016)    $(10,732)    $ (5,247)
  Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
     Membership solicitation costs.........................   (28,600)     (40,120)     (46,979)
     Amortization of membership solicitation costs.........    22,053       36,092       43,097
     Deferred membership fees..............................     6,866        6,569        7,036
     Depreciation and amortization.........................       337          536          708
     Loss on sale of fixed assets..........................        --           --           38
     Write-off of discontinued product line assets.........        --          659           --
     Share of joint venture's losses.......................        28           52           51
     Write-off of deferred debt issuance costs.............        --           --          103
     Preferred stock redemption cost.......................        --           --          315
Change in assets and liabilities affecting operating cash
  flows:
  Accounts receivable......................................        71          659       (5,074)
  Membership solicitations in process......................    (1,199)         (58)      (1,222)
  Prepaid membership materials.............................      (139)          30         (733)
  Prepaid expenses.........................................       (73)          20         (114)
  Other assets.............................................      (323)         (40)        (252)
  Accounts payable.........................................     3,653          476        2,729
  Accrued liabilities......................................     3,980        2,381        5,545
                                                             --------     --------     --------
Net cash provided by (used in) operating activities........       638       (3,476)           1
                                                             --------     --------     --------
INVESTING ACTIVITIES
  Acquisition of fixed assets..............................      (744)        (519)      (1,740)
  Deposit on equipment.....................................        --           --         (539)
  Proceeds from sale of fixed assets.......................        --           --           15
  Investment in and advances to joint venture..............       (31)         (98)         (48)
                                                             --------     --------     --------
Net cash used in investing activities......................      (775)        (617)      (2,312)
                                                             --------     --------     --------
FINANCING ACTIVITIES
  Net proceeds from issuance of stock and warrants.........     1,005        4,012       12,887
  Redemption of preferred stock............................        --           --       (4,000)
  Purchase of treasury stock...............................        --           --         (175)
  Preferred stock dividends................................        --           --         (402)
  Proceeds from issuance of notes payable..................     1,000        6,860          502
  Debt issuance costs......................................        --         (273)        (117)
  Payments of notes payable................................      (206)      (3,603)      (7,164)
  Payments of capital lease obligations....................      (113)        (146)        (231)
                                                             --------     --------     --------
Net cash provided by financing activities..................     1,686        6,850        1,300
                                                             --------     --------     --------
Net increase (decrease) in cash and cash equivalents.......     1,549        2,757       (1,011)
Cash and cash equivalents at beginning of year.............     1,017        2,566        5,323
                                                             --------     --------     --------
Cash and cash equivalents at end of year...................  $  2,566     $  5,323     $  4,312
                                                             ========     ========     ========
The accompanying notes are an integral part of
                    these consolidated financial statements.
 
                                       F-6
62
 
                            MEMBERWORKS INCORPORATED
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 -- NATURE OF BUSINESS
 
     MemberWorks Incorporated (the "Company") is a leading provider of
innovative membership service programs. The Company addresses the needs of
organizations seeking to leverage the expertise of an outside provider in
offering membership service programs. Membership service programs offer selected
products and services from a variety of vendors intended to enhance the existing
relationships between businesses and consumers.
 
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation -- consolidation
 
     The consolidated financial statements include the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
 
Use of estimates
 
     The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
 
Fair value of financial instruments and concentration of credit risk
 
     All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments. The recorded
amounts of the Company's long-term debt also approximate fair value. See Note 10
for disclosure of the estimated fair value of the redeemable preferred stock.
 
     Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable from
financial and other card holder based institutions (clients of the Company)
whose card holders constitute the Company's membership base. These entities
include major banks, financial institutions, large oil companies and retailers
located in the United States.
 
Fixed assets
 
     Fixed assets and capital leases are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the lesser of the estimated productive lives
of the assets or the terms of the related leases, and range from three to ten
years. Maintenance and repair expenditures are charged to operations as
incurred.
 
Revenue recognition
 
     Membership fees are billed through clients of the Company to credit card
holders. Deferred membership fees are recorded, net of estimated cancellations,
when the trial period has elapsed. Deferred membership fees are amortized as
membership fees on a straight-line basis, over the remainder of the membership
period, generally twelve months.
 
     Accounts receivable includes $3,624,000 of unbilled receivables as of June
30, 1996 (none at June 30, 1995), which were billed and collected subsequent to
the balance sheet date, and arise in certain instances when the Company elects
to bill subsequent to, rather than upon, acceptance of membership.
 
                                       F-7
63
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Membership service programs sponsored by three clients of the Company
accounted for 35.2%, 15.6% and 10.5%, respectively, of membership fees for the
fiscal year ended June 30, 1996.
 
Membership solicitation costs
 
     In accordance with the provisions of Statement of Position 93-7, "Reporting
on Advertising Costs," membership solicitation costs are deferred and charged to
operations as membership fees are recognized. Membership solicitation costs
relate directly to membership solicitations (direct response advertising costs),
and include telemarketing costs, royalties paid to clients, kits, printing,
postage and mailings. Membership solicitation costs are amortized ratably over
the corresponding period in which revenues are recognized. Membership
solicitation costs incurred to obtain a new member generally are less than the
initial membership fee. However, if membership solicitation costs were to exceed
the membership fee, an adjustment would be made to the extent of any impairment.
 
     Included in current assets in the accompanying consolidated balance sheets
at June 30, 1996 and 1995 are costs pertaining to membership solicitation
programs that were in process at year-end. These costs are accumulated over a
one month solicitation period and are transferred to deferred membership
solicitation costs when the membership begins.
 
Earnings per Share
 
     Unaudited pro forma net loss per share is determined by dividing net loss,
after adding back preferred stock dividends paid, by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include stock options, warrants and preferred
stock which will be converted into common stock upon the closing of the initial
public offering of the Company's common stock.
 
     The weighted average number of shares has been adjusted to reflect as
outstanding all common stock and common stock equivalents issued during the
twelve-month period preceding the anticipated initial public offering of the
Company's common stock using the treasury stock method, as well as the number of
shares which would be necessary in order to redeem Series E and F preferred
stock.
 
Cash and cash equivalents
 
     The Company considers highly liquid investment instruments with terms of
three months or less at the time of acquisition to be cash equivalents.
 
Income taxes
 
     Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The effect of
adopting FAS 109 was immaterial.
 
Impairment of long-lived assets
 
     In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (FAS 121). The Company adopted FAS 121, with no effect on
operations, in fiscal 1996.
 
                                       F-8
64
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
Stock-based compensation
 
     The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted, except as noted in Note 12. In fiscal
1997, the Company intends to adopt the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
 
NOTE 3 -- DEFERRED MEMBERSHIP INCOME, NET
 
     Deferred membership income, net as of June 30 is comprised of the following
(in thousands):
1995         1996
                                                                     --------     --------
Deferred membership fees.......................................  $ 23,592     $ 30,628
    Deferred membership solicitation costs.........................   (18,330)     (22,212)
                                                                       ------     --------
    Deferred membership income, net................................  $  5,262     $  8,416
                                                                       ======     ========
Amortization of deferred membership solicitation costs amounted to
$22,053,000, $36,092,000 and $43,097,000 for the years ended June 30, 1994, 1995
and 1996, respectively. Allowance for membership cancellations set forth in the
accompanying consolidated balance sheets as of June 30, 1995 and 1996 were
$6,765,000 and $10,117,000, respectively.
 
     Deferred membership income, net is classified as a non-current liability as
working capital will not be required as the amount represents deferred future
income.
 
NOTE 4 -- IMPAQ
 
     On May 18, 1992, the Company issued 24,143 shares of Class B common stock
valued at $273,000 in exchange for the net assets of IMPAQ Publishing
Corporation. During December 1994, the Company discontinued Impaq's domestic
discount coupon book business and recorded a charge of $659,000 to operations,
primarily to write off unamortized goodwill of $166,000 and other assets of
$461,000. Effective June 30, 1995, the Company returned Impaq's domestic
discount coupon book operations, cash of $175,000 and net fixed assets of
$14,000 to Impaq's former owner in exchange for the aforementioned originally
issued shares of Class B common stock. There was no gain or loss on this
transaction.
 
     Fiscal 1994 and 1995 consolidated results include Impaq revenues of
$333,000 and $556,000 and operating losses of $643,000 and $1,639,000
respectively, including in 1995 the $659,000 charge discussed above.
 
NOTE 5 -- JOINT VENTURE
 
     On November 1, 1993, the Company and a United Kingdom (UK) venture partner
completed the formation of R.S.V.P. Publishing Ltd. (R.S.V.P.), a corporate
joint venture based in the UK. The business of R.S.V.P. is to develop and market
a coupon book program and other enhancement services in the UK, Europe and
elsewhere. The financial position and results of operations of the venture are
immaterial.
 
     The Company's net investment in and advances to the venture of $177,000
have been reduced to $46,000 as of June 30, 1996 by its recorded share of the
venture's losses under the equity method of accounting of $28,000, $52,000,
$51,000 for the years ended June 30, 1994, 1995, 1996, respectively.
 
                                       F-9
65
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 6 -- FIXED ASSETS
 
     Fixed assets are comprised of the following (in thousands):
1995       1996
                                                                    ------     -------
Computer and office equipment.............................  $2,447     $ 3,955
        Furniture and fixtures....................................     267         709
        Leasehold improvements....................................      11         113
                                                                    -------     ------
                                                                     2,725       4,777
        Accumulated depreciation and amortization.................    (943)     (1,516)
                                                                    -------     ------
                                                                    $1,782     $ 3,261
                                                                    =======     ======
NOTE 7 -- NOTES PAYABLE
 
     Notes payable are summarized as follows (in thousands):
1995       1996
                                                                     ------     ------
Bank Credit Agreement......................................  $6,850     $   10
        Stockholder notes payable..................................     267        267
        Equipment term loans.......................................     853      1,031
                                                                     ------     ------
                                                                      7,970      1,308
        Less current maturities....................................     297        675
                                                                     ------     ------
        Long-term notes payable....................................  $7,673     $  633
                                                                     ======     ======
On September 9, 1994, the Company entered into a $7,000,000 Bank Credit
Agreement extending to February 28, 1997. In conjunction with the Bank Credit
Agreement, the Company issued a warrant to acquire 20,000 shares of Class A
common stock at an exercise price of $15.00 per share, subject to adjustment for
dilution. The warrant is exercisable at any time prior to December 31, 1999. The
Company amended the Bank Credit Agreement as of September 28, 1995 and paid down
the outstanding balance to $10,000 with a portion of the proceeds from issuance
of Series H convertible preferred stock. Interest on borrowings under the Bank
Credit Agreement was at the bank's prime rate plus 3.5%, and there was a 1.0%
per annum commitment fee on the total facility.
 
     Effective April 9, 1996, the Bank Credit Agreement was amended and restated
to allow borrowings up to $3,000,000 through February 28, 1997. Borrowings under
the amended and restated facility accrue interest at 1.5% per annum plus the
higher of the base commercial lending rate for the bank or the Federal Funds
Rate plus 0.5% per annum. A commitment fee is charged based on the total
facility at the rate of 1% per annum. The credit agreement is secured by all of
the Company's assets, including the stock of its subsidiaries. In addition, the
founders of the Company have guaranteed the borrowings under the credit
agreement and have pledged their stock ownership in the Company as collateral.
 
     The Company has 12.0% notes totaling $267,000 payable to two Class A common
stockholders. Pursuant to the terms of the Bank Credit Agreement, the
stockholder notes are subordinate to the Bank Credit Agreement and their
maturity was extended to February 28, 1997.
 
     The Company has several equipment term loans extending to September 2001,
secured by certain computer equipment. Interest is at rates of 7.5% to 11.6%,
and principal is repayable monthly. The aggregate amount of payments related to
the equipment term loans is $398,000 in 1997, $436,000 in 1998, $190,000 in
1999, $5,000 in 2000 and $2,000 in 2001.
 
                                      F-10
66
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     On March 30, 1994, the Company issued $1,000,000 of 10% convertible notes
due September 30, 1994 with warrants attached. The warrants are exercisable at
any time prior to March 30, 1999, and allow the holders to acquire up to 7,672
shares of Class A common stock based on an exercise price of $26.07, subject to
adjustment for dilution. The notes were paid on the due date.
 
     Interest expense in 1994, 1995 and 1996, as shown in the statement of
operations, is net of interest income of $10,000, $125,000 and $305,000,
respectively.
 
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
 
     The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Rent expense under operating leases was $409,000, $491,000, and
$733,000 for the fiscal years ended June 30, 1994, 1995 and 1996, respectively.
 
     During 1994, 1995 and 1996, the Company entered into capital leases of
certain computer equipment totaling $110,000, $68,000 and $406,000,
respectively, of capitalized cost. Lease amortization for the years ended June
30, 1994, 1995 and 1996 was $171,000, $163,000 and $194,000, respectively, and
is included in depreciation and amortization expense.
 
     The future minimum lease payments under capital leases (including present
value of net minimum lease payments) and operating leases as of June 30, 1996
are as follows (in thousands):
CAPITAL     OPERATING
                               FISCAL YEAR                             LEASES       LEASES
    -----------------------------------------------------------------  -------     ---------
1997.............................................................   $ 316       $   936
    1998.............................................................     316           988
    1999.............................................................     197           952
    2000.............................................................      56           947
    2001.............................................................       9           631
    Thereafter.......................................................      --         3,140
                                                                       -------     ---------
    Total minimum lease payments.....................................     894       $ 7,594
                                                                                   ========
    Less -- Amount representing interest.............................     122
                                                                       -------
    Present value of net minimum lease payments including current
      maturities of $316 with interest rates ranging from 6.9% to
      10.4%..........................................................   $ 772
                                                                        =====
The Company deposited $539,000 on certain telephone equipment which has a
purchase price of $725,000. The deposit is included in other assets at June 30,
1996. The equipment is installed at the Company's facilities and, upon
acceptance by the Company, a lease will be executed and the deposit refunded by
the lessor.
 
     In June 1995, a co-founder of the Company filed a complaint against the
Company and certain of its executive officers alleging various claims arising
out of his termination in October 1994 as Executive Vice President and Chief
Operating Officer of the Company. The former officer alleges wrongful
termination, breach of fiduciary duty, fraudulent inducement and certain other
claims arising out of alleged accounting irregularities in fiscal 1994. The
complaint claims an unspecified amount of compensatory and punitive damages and
certain other costs. The Company has moved to strike the complaint, and the
Company's motion is being considered by the court. If the motion to strike the
complaint is not allowed, the Company intends to contest the claims alleged in
the complaint vigorously, and intends to assert counter claims. At present, it
is not possible to predict the ultimate outcome or the range of possible loss,
if any, resulting from the resolution of this matter.
 
                                      F-11
67
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 9 -- INCOME TAXES
 
     There was no current or deferred provision for income taxes for the years
ended June 30, 1994, 1995 and 1996. No current provision was required because
tax losses were incurred in those years.
 
     Deferred tax assets and liabilities result from differences in the basis of
assets and liabilities for tax and financial statement purposes. The tax effects
of the basis differences and net operating loss carryforwards, and the valuation
allowance established in accordance with FAS 109, are summarized below as of
June 30, 1995 and 1996 (in thousands):
1995        1996
                                                                      --------     -------
Allowance for membership cancellations..........................  $  2,304     $ 3,361
    Deferred membership income, net.................................        14         713
    Other deferred tax assets.......................................       435         562
    Benefit of net operating loss carryforward......................     6,947       6,963
                                                                      --------     -------
              Total deferred tax assets.............................     9,700      11,599
    Less: Valuation allowance.......................................    (9,700)    (11,599)
                                                                      --------     -------
              Net deferred tax asset................................  $     --     $    --
                                                                      ========     =======
The valuation allowance for deferred tax assets as of July 1, 1994 was
$6,003,000. The net change in the valuation allowance for the years ended June
30, 1995 and 1996 were increases of $3,697,000 and $1,899,000, respectively.
 
     At June 30, 1996, the Company had federal net operating loss carryforwards
of $17,705,000. The Company's ability to use these losses to offset future
taxable income would be subject to limitations under the Internal Revenue Code
if certain changes in the Company's ownership occur. The tax basis net operating
loss carry forwards expire as follows (in thousands):
FISCAL YEAR                      AMOUNT
                ---------------------------------------------------  -------
2005...............................................  $ 1,950
                2006...............................................    2,673
                2007...............................................    2,702
                2008...............................................    1,757
                2009...............................................    3,176
                2010...............................................    5,009
                2011...............................................      438
                                                                     -------
                                                                     $17,705
                                                                     =======
The Company also has state net operating loss carryforwards expiring at
various dates through June 30, 2001 available to reduce future state taxable
income.
 
                                      F-12
68
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 10 -- REDEEMABLE PREFERRED STOCK
 
     The following table presents the authorized and outstanding shares of
preferred stock which must be redeemed other than at the Company's option, and
recorded values as of June 30, 1996 and 1995 (in thousands except share data):
AT JUNE 30, 1996                   RECORDED VALUES
                                               ------------------------    GROSS        AT JUNE 30,
                                 FISCAL YEAR   AUTHORIZED   OUTSTANDING   PROCEEDS   -----------------
               ISSUE             OF ISSUANCE     SHARES       SHARES      RECEIVED    1995      1996
    ---------------------------  -----------   ----------   -----------   --------   -------   -------
Series A...................      1990        225,000      225,000     $    750   $ 1,208   $ 1,490
    Series B...................      1991        218,818      218,818     $  2,000     2,173     2,422
    Series C...................      1992         88,339       88,339     $  1,000     1,029     1,117
    Series D...................      1992         48,383       48,383     $    750       750       780
    Series E...................      1993         42,178       42,178     $  1,000       877     1,072
    Series F...................      1994         38,358       38,358     $  1,000       684       877
    Series G...................      1995             --           --     $  4,000     4,205        --
    Series H...................      1996        317,150      317,150     $ 13,000        --    12,729
                                                                                     -------   -------
                                                                                     $10,926   $20,487
                                                                                     =======   =======
Series A, B, C, D and H preferred stock are convertible at any time into
Class A common stock at a conversion price per share (subject to adjustment for
dilution) of $3.33, $9.14, $11.32, $15.50 and $40.99, respectively, and
automatically convert into Class B common stock at the then effective conversion
price in the event of a qualified public offering.
 
     These series of preferred stock are redeemable at the holder's option, on
or after July 31, 2001, at a redemption value equal to the greater of the then
fair market value or the conversion price per share. The Series A, B, C, D and H
preferred stock were recorded at fair value at the date of issuance. The
difference between recorded fair value and redemption value in the year 2001 is
being accreted using the interest method. The fair value of the Company's Class
B common stock, which value was greater than the conversion price per share for
the Series A, B, C, and D preferred stock at June 30, 1996 and 1995, is
accordingly being used as the redemption value for purposes of calculating
accretion.
 
     As discussed in Note 12, warrants to acquire 10,000 shares of Class A
common stock at $0.01 per share were issued in conjunction with the issuance of
Series H preferred stock. As a result, the recorded value of the Series H
preferred stock was $12,800,000, reflecting a $200,000 discount attributable to
the warrants, which is being accreted through the exercise date using the
interest method. Additionally, the Company paid $114,000 of issuance costs in
connection with this offering, which was recorded as a reduction in net
proceeds, and is being accreted to the redemption date.
 
     The holders of Series A, B, C, D and H preferred stock are entitled to vote
(on a common stock equivalent basis) on all matters submitted to the
stockholders.
 
     Series E and F shares are mandatorily redeemable on April 30, 1998 and
April 30, 1999, respectively, at $23.71 and $26.07 per share, respectively, plus
all accumulated and unpaid dividends. The Company may be required to redeem all
or any portion of Series E and F upon change in ownership or in the event of a
qualified public offering at the redemption value per share plus all accumulated
and unpaid dividends. If redeemed at the option of the Company, the redemption
premium on Series E and F is 4% and 6%, respectively, through April 30, 1997 and
declines annually thereafter by 2% through the respective mandatory redemption
date. These series of preferred stock accrue dividends at a rate of 8% per
annum, compounded daily. At June 30, 1996 accumulated and unpaid dividends were
$288,000 and $198,000 on Series E and F preferred stock, respectively.
 
                                      F-13
69
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     As further discussed in Note 11, Class A common stock was issued in
conjunction with the issuance of the Series E and F preferred stock. As a
result, the Series E and F redeemable preferred stock was recorded at discounts
of $522,000 and $491,000, respectively. The discounts recognized are being
accreted through the required redemption dates using the interest method.
 
     On September 28, 1994, the Company issued 40,000 of new Series G preferred
stock with attached warrants to acquire 40,000 shares of Class A common stock
for a total of $4,000,000. Preferred dividends on Series G preferred stock is 8%
per annum, payable quarterly in kind.
 
     On August 3, 1995, the Company redeemed 40,000 shares of issued and
outstanding Series G preferred stock and redeemed attached warrants to acquire
40,000 shares of Class A common stock of the Company issued September 28, 1994
for $4,000,000, and also paid the investor a preferred dividend in the amount of
$402,000. Additionally, the Company substituted 15,726 warrants to acquire Class
A common stock, exercisable at $0.01 per share, in exchange for the 40,000
warrants previously redeemed. As a result the substituted warrants issued were
accounted for at fair value of $315,000 and recorded as a charge to operations
as a cost of redeeming the preferred stock.
 
     Upon liquidation, dissolution or winding up of the Company, the holders of
Series E and F preferred stock are entitled to receive the applicable
liquidation value plus all accrued and unpaid dividends, prior to any
distribution to holders of Series A, B, C, D or H preferred stock or common
stock. Holders of Series A, B, C, D and H preferred are entitled to receive the
applicable liquidation value plus accrued, declared and unpaid dividends, if
any. If, in the event of liquidation, dissolution or winding up of the Company,
the Company's assets to be distributed among the holders of Series A, B, C, D,
and H preferred were insufficient, then the assets would be distributed ratably
to such holders based upon the aggregate applicable amounts that are owed.
 
     The holders of Series A, B, C, D and H preferred stock are entitled to
receive non-cumulative dividends if and when declared by the Company's Board of
Directors, subject to the prior and superior rights of Series E and F preferred
stock. The Company may not pay or declare a dividend to the holders of these
Series if at the time of or immediately following the dividend the Company has
failed to pay the full amount of dividends accrued on the Series E and F
preferred stock or to declare any dividend or make any distribution upon any
common stock.
 
     The redemption requirements for all issues of redeemable preferred stock
for the five years following June 30, 1996 are as follows: $0 in 1997,
$1,491,000 in 1998, $1,503,000 in 1999, and $0 in 2000 and 2001.
 
     The recorded value of the Company's redeemable preferred stock at June 30,
1996 was $20,487,000. In accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Market Value of
Financial Instruments," the Company estimates that fair value of the redeemable
preferred stock at June 30, 1996 was approximately $23,500,000. Estimated fair
value at June 30, 1996 was calculated based on the higher of the redemption
value of the redeemable preferred stock or the then fair value of the Company's
common stock, plus accumulated dividends, discounted to present value at an
appropriate rate of interest. This estimate is not necessarily indicative of the
amount the holders could realize in a current market exchange.
 
NOTE 11 -- COMMON STOCK
 
     Class A common stock and Class B common stock are entitled to one vote per
share on all matters voted on by the stockholders. Shares of Class A common
stock are convertible on a share for share basis into shares of Class B common
stock at the option of the holder and automatically convert upon the closing of
a qualified public offering. Class A common stock has preference rights over
Class B common stock in case of a liquidation, dissolution or winding up of the
Company.
 
                                      F-14
70
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Dividends may be declared on Class A and B common stock subject to the
prior and superior rights of the preferred stock. The Company's Board of
Directors may not declare or pay a dividend to the holders of Class A or B
common stock, other than in the form of shares of common stock, unless the Board
simultaneously declares a dividend payable to the holders of Series A, B, C, D
and H preferred stock at the same rate (on an as-converted basis).
 
     In March 1994, 38,358 shares of Class A common stock were issued for
proceeds of $384, an amount equal to par value. These shares were issued in
connection with the Series F preferred stock offerings, and have been recorded
at fair value of $508,000 (see Note 10).
 
     In May 1993, 42,178 shares of Class A common stock were issued for proceeds
of $422, an amount equal to par value. These shares were issued in connection
with the Series E preferred stock offerings, and have been recorded at fair
value of $478,000 (see Note 10).
 
NOTE 12 -- STOCK OPTIONS AND WARRANTS
 
     Under the Amended 1990 Employee Incentive Stock Option Plan, the Board is
authorized to grant 180,000 incentive stock options, entitling certain employees
and officers to acquire shares of Class B common stock at a price per share
equal to fair market value at the date of grant. Options become exercisable over
a four year period and expire at the earlier of termination of employment or
eight years from date of grant (ten years for grants after December 31, 1995).
As of June 30, 1996 there were 45,810 options available for grant.
 
     During 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1995 Executive Officers' Stock Option Plan and the
1995 Non-Employee Directors' Stock Option Plan under which the Board is
authorized to grant 50,000 and 25,000 options, respectively, to acquire shares
of Class B common stock at a price per share equal to or greater than fair
market value at the date of grant. Under the Executive Officers' Stock Option
Plan, the Board can determine the date on which options vest and become
exercisable. Options become exercisable over a four year period under the
Non-Employee Directors' Stock Option Plan. As of June 30, 1996 there were 15,000
and 5,000 shares available for grant under the Executive Officers' Stock Option
Plan and the Non-Employee Directors' Stock Option Plan, respectively.
 
                                      F-15
71
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     Information with respect to shares under option under the plans is as
follows:
OPTION PRICE
                                                        PER SHARE        OUTSTANDING     EXERCISABLE
                                                     ---------------     -----------     -----------
Balance -- June 30, 1993...........................  $3.33 - $11.32         61,167          11,937
  Granted..........................................      $13.25             26,450
  Became exercisable...............................  $3.33 - $11.32                         15,292
  Exercised........................................      $11.32               (500)           (500)
  Canceled.........................................  $11.32 - $13.25        (2,750)           (250)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1994...........................  $3.33 - $13.25         84,367          26,479
  Granted..........................................      $15.00             30,500
  Became exercisable...............................  $3.33 - $13.25                         19,405
  Exercised........................................  $3.33 - $13.25        (10,611)        (10,611)
  Canceled.........................................  $9.14 - $15.00        (13,739)           (865)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1995...........................  $3.33 - $15.00         90,517          34,408
  Granted..........................................  $20.00 - $30.00        93,700
  Became exercisable...............................  $9.14 - $20.00                         19,442
  Exercised........................................      $15.00                (50)            (50)
  Canceled.........................................  $13.25 - $20.00        (6,700)         (1,275)
                                                     ---------------     -----------     -----------
Balance -- June 30, 1996...........................  $3.33 - $30.00        177,467          52,525
                                                     ==============      =========       =========
On March 30, 1994, a warrant was issued to acquire 7,672 shares of Class A
common stock at an exercise price of $26.07 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to March 30,
1999.
 
     On September 9, 1994, the Company issued a warrant in conjunction with the
Bank Credit Agreement to acquire 20,000 shares of Class A common stock at an
exercise price of $15.00 per share, subject to adjustment for dilution when
issued. The warrant is exercisable at any time prior to December 31, 1999.
 
     As discussed in Note 10, warrants to acquire 10,000 shares of Class A
common stock were issued in conjunction with the Series H preferred stock
offering. Each warrant is exercisable at $0.01 per share for a period of five
years from the issuance date. The warrants have been recorded at a fair value of
$200,000.
 
     The Company has an agreement with an executive officer, whereby the Company
is required to grant options to purchase up to 20,000 shares of Class B common
stock to the executive for achievement of certain performance goals.
Specifically, the Company will grant an option to purchase 2,000 shares of Class
B common stock for each new client, from a selected list of certain prospective
large clients, he obtains for the Company prior to December 31, 1996. These
options have a stated exercise price of $20.00 per share and vest ratably over a
four year period from date of grant. In 1996, the executive was granted an
option to purchase 2,000 shares of Class B common stock pursuant to this
agreement. Compensation expense in 1996 related to this grant was $3,000,
measured based on the excess of the fair value of the common stock of the
Company on the date of grant over the grant price. Compensation charges related
to future grants, if any, will be measured in the same manner and recognized
over the vesting period.
 
                                      F-16
72
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
NOTE 13 -- EMPLOYEE BENEFIT PLAN
 
     Effective April 1, 1996 the Company adopted a 401(k) profit sharing plan.
Employees of the Company are eligible to contribute to the plan once they have
completed one year of service and attained age 18. Employees may contribute up
to 15% of their compensation subject to certain limitations. The Company may
elect to make matching contributions or profit sharing contributions to the
plan. There were no Company contributions made for the year ended June 30, 1996.
 
NOTE 14 -- STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30,
                                                                    ----------------------
                                                                    1994     1995     1996
                                                                    ----     ----     ----
Supplemental disclosure of cash flow information:
      Cash paid during the period for interest....................  $728     $896     $493
                                                                    ====     ====     ====
      Cash paid during the period for income taxes................  $ --     $ --     $ 45
                                                                    ====     ====     ====
    Supplemental schedule of noncash investing and financing
      activities:
      Capital lease obligation related to acquisition of fixed
         assets...................................................  $110     $ 68     $406
                                                                    ====     ====     ====
      Dividends accumulated on Series E, F and G preferred
         stock....................................................  $105     $424     $212
                                                                    ====     ====     ====
      Accretion of discount on Series E, F, G and H preferred
         stock....................................................  $ 90     $163     $219
                                                                    ====     ====     ====
      Accretion to redemption value on Series A, B, C, and D
         preferred stock..........................................  $193     $297     $648
                                                                    ====     ====     ====
      Issuance of warrants........................................  $ --     $ --     $200
                                                                    ====     ====     ====
NOTE 15 -- SUBSEQUENT EVENTS
 
     On July 1, 1996, the Company granted 43,075 employee stock options with an
exercise price of $30.00 per share.
 
     On August 13, 1996, the Board of Directors approved a corporate name change
from CardMember Publishing Corporation to MemberWorks Incorporated.
 
     On August 15, 1996, the Company amended its certificate of incorporation to
increase the authorized number of shares of stock to 41,000,000. A total of
32,000,000 shares were designated as Common Stock, par value $0.01, 8,000,000
shares were designated as Class A common stock, par value $0.01 and 1,000,000
shares were designated as Preferred Stock, par value $0.01.
 
     On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class A common stock into Common Stock upon
the closing of the Company's initial public offering and the elimination of
Class A common stock.
 
     On August 13, 1996, the Board of Directors authorized the automatic
reclassification and conversion of Class B common stock into Common Stock.
 
     On August 13, 1996, the Board of Directors authorized the officers of the
Company to negotiate the terms of a proposed public offering of Common Stock of
the Company. In addition, the officers were authorized and directed to cause to
be prepared, executed and filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended, a Registration
Statement on Form S-1, including a preliminary prospectus included therein and
all exhibits thereto and any amendments or supplements thereto, relating to the
registration.
 
                                      F-17
73
 
                            MEMBERWORKS INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (CONTINUED)
 
     On August 13, 1996, the Company adopted an employee stock purchase plan
(the "1996 Employee Stock Purchase Plan"). The plan will be implemented with an
initial offering period commencing on the effective date of the offering. The
plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, at a price
equal to 85% of the price of the Common Stock of the Company reported by Nasdaq
at the commencement date of the Offering Period.
 
     On August 13, 1996, the Board of Directors approved the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan"), which becomes effective upon
the closing of the Company's initial public offering. The 1996 Stock Option Plan
authorizes the issuance of shares of Common Stock pursuant to the grant to
employees of incentive stock options and the grant of non-qualified stock
options to employees, consultants, officers or directors of the Company.
 
     The aggregate number of shares of Common Stock of the Company reserved for
both the 1996 Employee Stock Purchase Plan and the 1996 Stock Option Plan is
300,000.
 
     On August 13, 1996, the Board of Directors approved an amendment to the
Company's 1990 Employee Incentive Stock Option Plan ("Amended 1990 Stock Option
Plan"). The Amended 1990 Stock Option Plan provides for the grant of "incentive
stock options" to employees and officers of the Company and non-qualified stock
options to employees, consultants, directors and officers of the Company. The
Company is authorized to grant up to 180,000 shares under the Amended 1990 Stock
Option Plan. The Board of Directors also voted that no further options may be
granted under the Amended 1990 Stock Option Plan effective upon the closing of
the initial public offering.
 
NOTE 16 -- PRO FORMA STOCKHOLDERS' EQUITY DATA AS OF JUNE 30, 1996 (UNAUDITED)
 
     The accompanying pro forma stockholders' equity data as of June 30, 1996
gives effect to the automatic conversion of all Series A, B, C, D and H
convertible preferred stock into Common Stock and the redemption of Series E and
F redeemable preferred stock for approximately $2,500,000 from application of a
portion of the proceeds of the Company's initial public offering described in
Note 15.
 
                                      F-18
74

MEMBERWORKS SERVICE PROGRAMS AND DISTRIBUTION CHANNELS
Large    Retail    Oil    Small     Vacation      Retail                                    New
                           Banks    Cards     Cards  Banks      Owners       Stores      Interactive     Direct     Channels
- -------------------------------------------------------------------------------------------------------------------------------
Health                      x         x                x                                                    x          T 

Dental                      x         x                x                      T                             x          T 

Dental & Health             x         x                x                      T              x              x          T 

Travel                      x                          x         X                           X              x          T 

Entertainment               X                  X       X         X                           X              X          T

Sports                      X                  X       X                                     X              X          T

Financial                   X                  X                                             X              X          T

Computers and Software      X                                                                               X          T

New Service                 T                  T       T                                                               T
X = Programs in place.
T = Testing of products that may or may not be offered to consumers.
75
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
SEC Registration Fee...................................................    $   20,690
    NASD Filing Fee........................................................         6,500
    Nasdaq National Market Listing Fee.....................................         6,500
    Blue Sky Fees and Expenses.............................................        20,000
    Transfer Agent and Registrar Fees......................................        10,000
    Accounting Fees and Expenses...........................................       275,000
    Legal Fees and Expenses................................................       275,000
    Printing and Mailing Expenses..........................................       150,000
    Miscellaneous..........................................................       136,310
                                                                               ----------
              Total........................................................    $  900,000
                                                                                =========
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
 
     Article Ninth of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
 
     Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
 
                                      II-1
76
 
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
 
     Article Ninth of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
 
     Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
 
     Under the Underwriting Agreement, the Underwriters are obligated, under
certain circumstances, to indemnify directors and officers of the Registrant
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.
 
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
     On March 30, 1994, the Registrant sold an aggregate of 38,358 shares of
Class A Common Stock and 38,358 shares of Series F Preferred Stock to accredited
investors for an aggregate purchase price of $1 million pursuant to Regulation D
of the Commission promulgated under the Securities Act ("Regulation D"). On
September 28, 1994, the Registrant sold an aggregate of 40,000 shares of Series
G Preferred Stock and warrants to acquire the same number of shares of Class A
Common Stock to accredited investors for an aggregate purchase price of $4
million pursuant to Regulation D. Effective August 3, 1995, all 40,000 shares of
Series G Preferred Stock and warrants acquired were redeemed by the Registrant
for an aggregate redemption amount of $4,000,400, plus a preferred dividend of
$401,611. Additionally, the Registrant substituted 15,726 warrants to acquire
Class A Common Stock, exercisable at $0.01 per share, for the warrants redeemed
by the Registrant. On August 3, August 15 and August 21, 1995, the Registrant
sold an aggregate of 317,150 shares of Series H Convertible Preferred Stock to
accredited investors for an aggregate purchase price of $12,999,979 pursuant to
Regulation D.
 
     On March 30, 1994, the Registrant issued a warrant to acquire 7,672 shares
of Class A Common Stock at an exercise of $26.07 per share, subject to
adjustment for dilution. On September 9, 1994, the Company issued a warrant in
conjunction with the Bank Credit Agreement to acquire 20,000 shares of Class A
Common Stock at an exercise price of $15.00 per share, subject to adjustment for
dilution when issued. The warrant is exercisable at any time prior to December
31, 1999. In connection with the redemption of 40,000 shares of Series G
Preferred Stock and attached warrants to acquire 40,000 shares of Series A
Preferred Stock, the Registrant issued warrants to acquire 15,726 shares of
Class A Common Stock, exercisable at $0.01 per share.
 
                                      II-2
77
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (A) EXHIBITS
EXHIBIT
  NO.                                         DESCRIPTION
- --------  -----------------------------------------------------------------------------------
*1  Form of Underwriting Agreement.
    *3.1  Certificate of Incorporation of the Registrant, as amended.
    *3.2  Restated Certificate of Incorporation of the Registrant, to be filed upon closing
          of this offering.
     3.3  Restated By-laws of the Registrant.
      *4  Specimen Certificate for shares of Common Stock, $0.01 par value, of the
          Registrant.
      *5  Opinion of Hale and Dorr with respect to the validity of the securities being
          offered.
   *10.1  Amended 1990 Employee Incentive Stock Option Plan.
    10.2  1995 Executive Officers' Stock Option Plan.
    10.3  1995 Non-Employee Directors' Stock Option Plan.
   *10.4  1996 Stock Option Plan.
   *10.5  1996 Employee Stock Purchase Plan.
    10.6  401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
    10.7  Term Lease Master Agreement between IBM Credit Corporation and the Registrant,
          dated as of November 26, 1991.
    10.8  Master Lease Agreement between Bankers Leasing Association, Inc. and the
          Registrant, dated as of May 7, 1996.
   *10.9  Promissory Note between Thomas St. Denis and the Registrant, dated December 31,
          1990.
  *10.10  Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990.
     *11  Computation of unaudited pro forma net loss per share.
     *21  Subsidiaries of the Registrant.
   *23.1  Consent of Hale and Dorr (included in Exhibit 5).
    23.2  Consent of Price Waterhouse LLP.
      24  Power of Attorney (included on page II-5).
      27  Financial Data Schedule.
- ---------------
* To be filed by amendment.
 
     (B) FINANCIAL STATEMENT SCHEDULES
 
     Schedule II -- Valuation and Qualifying Accounts
 
     All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
 
ITEM 17.  UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
 
                                      II-3
78
 
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
 
     The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-4
79
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on this 21st day of August, 1996.
 
                                          MemberWorks Incorporated
 
                                                 By: /s/  GARY A. JOHNSON
 
                                          --------------------------------------
                                                     Gary A. Johnson
                                          President, Chief Executive Officer and
                                                         Director
 
                        POWER OF ATTORNEY AND SIGNATURES
 
     We, the undersigned officers and directors of MemberWorks Incorporated,
hereby severally constitute and appoint Gary A. Johnson, James B. Duffy and
Steven H. Levenherz, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and posteffective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable MemberWorks Incorporated to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Registration
Statement and any and all amendments thereto or to any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b).
 
     Pursuant to the requirements of the Securities act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE                                 TITLE                        DATE
- -------------------------------------   -------------------------------------   ---------------
/s/  GARY A. JOHNSON            President and Chief Executive Officer   August 21, 1996
- -------------------------------------     (Principal Executive Officer)
           Gary A. Johnson
        /s/  DENNIS P. WALKER           Executive Vice President and Director   August 21, 1996
- -------------------------------------
          Dennis P. Walker
         /s/  JAMES B. DUFFY            Chief Financial Officer (Principal      August 21, 1996
- -------------------------------------     Financial and Accounting Officer)
           James B. Duffy
      /s/  STEPHEN J. CLEARMAN          Director                                August 21, 1996
- -------------------------------------
         Stephen J. Clearman
        /s/  ALEC L. ELLISON            Director                                August 21, 1996
- -------------------------------------
           Alec L. Ellison
       /s/  MICHAEL R. O'BRIEN          Director                                August 21, 1996
- -------------------------------------
         Michael R. O'Brien
         /s/  MARC S. TESLER            Director                                August 21, 1996
- -------------------------------------
           Marc S. Tesler
II-5
80
 
                       VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
                                                 -----------------------------
                                   COLUMN B                ADDITIONS
                                  ----------     -----------------------------        COLUMN D         COLUMN E
            COLUMN A              BALANCE AT     CHARGED TO       CHARGED TO         -----------     -------------
- --------------------------------  BEGINNING      COSTS AND      OTHER ACCOUNTS       DEDUCTIONS       BALANCE AT
          DESCRIPTION             OF PERIOD       EXPENSES       -- DESCRIBE         -- DESCRIBE     END OF PERIOD
- --------------------------------  ----------     ----------     --------------       -----------     -------------
YEAR ENDED JUNE 30, 1996:
Allowance for cancellations.....  $6,765,000                     $ 61,264,000(A)     $57,912,000(B)   $10,117,000
Valuation allowance for deferred
  tax assets....................   9,700,000     $1,899,000                                            11,599,000
YEAR ENDED JUNE 30, 1995:
Allowance for cancellations.....   5,101,000                       46,667,000(A)      45,003,000(B)     6,765,000
Valuation allowance for deferred
  tax assets....................   6,003,000      3,697,000                                             9,700,000
YEAR ENDED JUNE 30, 1994:
Allowance for cancellations.....   2,650,000                       29,753,000(A)      27,302,000(B)     5,101,000
Valuation allowance for deferred
  tax assets....................   4,235,000      1,768,000                                             6,003,000
- ---------------
(A) Charged to balance sheet account "Deferred membership income, net"
 
(B) Charges for refunds upon membership cancellations.
 
                                       S-1
81
 
                                 EXHIBIT INDEX
EXHIBIT
  NO.                                         DESCRIPTION
- --------  -----------------------------------------------------------------------------------
*1  Form of Underwriting Agreement.
    *3.1  Certificate of Incorporation of the Registrant, as amended.
    *3.2  Restated Certificate of Incorporation of the Registrant, to be filed upon closing
          of this offering.
     3.3  Restated By-laws of the Registrant.
      *4  Specimen Certificate for shares of Common Stock, $     par value, of the
          Registrant.
      *5  Opinion of Hale and Dorr with respect to the validity of the securities being
          offered.
   *10.1  Amended 1990 Employee Incentive Stock Option Plan.
    10.2  1995 Executive Officers' Stock Option Plan.
    10.3  1995 Non-Employee Directors' Stock Option Plan.
   *10.4  1996 Stock Option Plan.
   *10.5  1996 Employee Stock Purchase Plan.
    10.6  401(k) Profit Sharing Plan of the Registrant, dated April 1, 1996.
    10.7  Term Lease Master Agreement between IBM Credit Corporation and the Registrant,
          dated as of November 26, 1991.
    10.8  Master Lease Agreement between Bankers Leasing Association, Inc. and the
          Registrant, dated as of May 7, 1996.
   *10.9  Promissory Note between Thomas St. Denis and the Registrant, dated December 31,
          1990.
  *10.10  Promissory Note between Gary Johnson and the Registrant, dated December 31, 1990.
     *11  Computation of unaudited pro forma net loss per share.
     *21  Subsidiaries of the Registrant.
   *23.1  Consent of Hale and Dorr (included in Exhibit 5).
    23.2  Consent of Price Waterhouse LLP.
      24  Power of Attorney (included on page II-5).
      27  Financial Data Schedule.
- ---------------
* To be filed by amendment.