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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 0-20941
PRECISION RESPONSE CORPORATION
(Exact name of Registrant as specified in its charter)
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FLORIDA
(State or other jurisdiction of 59-2194806
incorporation or organization) (I.R.S. Employer Identification No.)
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1505 N.W. 167TH STREET, MIAMI, FLORIDA 33169
(Address of principal executive offices)(Zip code)
(305) 816-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
ON MARCH 22, 1999, THE REGISTRANT HAD 21,549,000 OUTSTANDING SHARES OF
COMMON STOCK, $0.01 PAR VALUE, AND BASED UPON THE CLOSING MARKET PRICE OF THE
REGISTRANT'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON SUCH DATE, THE
AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT WAS APPROXIMATELY $42,216,750.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its
1999 Annual Meeting of Shareholders are incorporated by reference in Part III of
this report.
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INDEX
PART I.
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ITEM NO. PAGE
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1. Business.................................................... 3
2. Properties.................................................. 12
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security-Holders......... 13
PART II.
5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 14
6. Selected Financial Data..................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 31
8. Financial Statements and Supplementary Data................. 31
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 31
PART III.
10. Directors and Executive Officers of the Registrant.......... 31
11. Executive Compensation...................................... 32
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
13. Certain Relationships and Related Transactions.............. 32
PART IV.
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 32
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PART I.
ITEM 1. BUSINESS
GENERAL
Precision Response Corporation ("PRC" or the "Company") was incorporated in
the state of Florida in 1982 as a fulfillment company and is currently a leading
full-service provider of telephone-based customer service and marketing
solutions on an outsourced and cosourced basis to large corporations. Through
the integration of its teleservicing, Internet, database marketing and
management, and fulfillment capabilities, the Company is able to provide a
"one-stop" solution to meet its clients' needs. The Company believes that its
one-stop approach, combined with its sophisticated use of advanced technology,
provides a distinct competitive advantage in attracting clients seeking to
cost-effectively contact or service prospective and/or existing customers.
The Company is focused on attracting large corporate clients that have
significant customer service needs including database design and management,
substantial ongoing teleservicing, and electronic data processing. Typically,
the Company's customer care associates are dedicated to a specific PRC client.
The Company believes that the inbound (customer-initiated) segment of the
customer care industry possesses the greatest long-term growth potential and is,
therefore, concentrating its efforts primarily on that industry niche. The
Company's teleservicing activities principally involve inbound calls. In most
cases, outbound (PRC-initiated) calls are made to existing customers of a PRC
client or to respond to customer-initiated inquiries. In 1998, 86% of the
Company's revenues from teleservicing activities related to inbound calls.
During 1998, the Company began strategic initiatives to capitalize on the
extraordinary growth of Internet commerce by integrating Internet technologies
with current PRC products and services to, in effect, create multimedia
"customer interaction centers." PRC's technology, when fully implemented, will
allow its customer care associates to interact on a real-time basis with a
customer through voice or written transmissions via conventional telephone or
over the Internet, facsimile, e-mail and Worldwide Web or "text chat" sessions.
The Company's new and enhanced products and services which are being designed to
support Internet commerce and communications are a natural extension to the
Company's current teleservicing, database marketing and management and
fulfillment services. Assisting clients to improve the utility of Web-based and
e-mail commerce applications is a major business opportunity for the Company.
RECENT DEVELOPMENTS
On February 25, 1999, the Company announced the launch of a new corporate
division, prcnetcare.com, Inc. ("prcnetcare.com"), to capitalize on the expected
customer service opportunities related to the extraordinary growth of Internet
commerce. The division is dedicated to offering a variety of interactive
customer service communications, e-commerce and Internet customer care support.
The formation of prcnetcare.com and a currently projected total capital
commitment in excess of $6.0 million are key steps in the Company's continued
efforts to leverage its sophisticated technology capabilities and experience in
the teleservice customer care industry into a leadership position in
Internet-based customer service.
The division's Internet product offerings include InfiniteAccess and
Precision Resolution, both of which have been in development for over a year.
These offerings are significant enhancements to and expand upon certain Internet
services already being provided by the Company to several large corporations.
INFINITEACCESS products integrate clients' Internet-based customer care and
commerce activities with the Company's existing teleservicing, database
marketing and management and fulfillment services thereby, in effect,
transforming the Company's call centers into multimedia customer interaction
centers. Specifically, the Company is developing and will offer during 1999, the
following InfiniteAccess products and services:
PRC SMART MAIL is an electronic messaging service which reduces the cost
and time of processing large volumes of e-mail by providing automated answers
and interactive assistance.
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PRC WEB ON-LINE is a Web collaborative service which enables customer
care associates to simultaneously interact with clients' customers over the
telephone and the Web. This product complements Web-based self-service aids by
providing live associate assistance designed to answer questions asked by
customers or business partners. This service will also provide "text chat"
capabilities which enable interaction between customer care associates and
customers.
PRC INTERNET FULFILLMENT SERVICE provides e-mail and Web-based
fulfillment processes to service Internet commerce transactions or requests for
information such as brochures and other documents.
PRC HOST is a Web application hosting service and Web information
service which enables clients to conduct Web-based commerce without the
expenditure to establish and support Internet commerce technology infrastructure
and provides clients with Internet-related information and reports about their
business performance, including sales performance, customer feedback and market
analyses.
PRECISION RESOLUTION provides clients with solutions for record
standardization and error resolution for information transferred electronically
or over the Internet that functions on an automated, real-time basis. This
allows PRC to dynamically manage the people processes and workflow of highly
transactional databases. This system provides greater control, increased
productivity, enhanced quality, improved efficiency, reduced cycle times and
streamlined processes to users. During 1998 the product was enhanced to allow
Web-based transaction processing.
In addition to these product offerings, the Company has invested in a
state-of-the-art Internet protocol network and has formed key business
relationships with Lucent Technologies, Oracle Corporation, Sun Micro Systems
and Cisco, Inc. to develop future enhancements to its products.
INDUSTRY OVERVIEW
The traditional telephone-based customer service and marketing industry is
growing rapidly and quickly changing as multiple communication channels, such as
fax, e-mail and the Internet, are now available to customers. Today customers
are accessing information through these alternative methods as well as by the
telephone. Direct contact with customers via the telephone and electronically is
increasing as more companies realize its benefits, including high response
rates, low cost per transaction and direct interaction with customers, which
allow on-line access to detailed customer or product information and immediate
response to customer inquiries. The growth of the Internet has created an
expanded means of providing customer service, in addition to the telephone which
remains the principal means in the industry of providing customer care.
The Company expects that large companies increasingly will outsource their
customer care activities in order to focus internal resources on their core
competencies and to improve the quality and cost-effectiveness of their customer
service and marketing efforts by using the experience and specialized
capabilities of larger-scale teleservices and Internet-based customer care,
marketing and management providers. The Company also believes that organizations
with superior customer service and sophisticated advanced technology, such as
PRC, will particularly benefit from this outsourcing trend.
PRC believes that the long-term outlook for outsourcing customer service
and marketing is favorable. Along with an increase in traditional teleservicing
customer care, research indicates an expected 230% cumulative annual growth rate
in the number of on-line transactions over the next four years. The Company sees
customer care over the Internet as the next major trend in the industry.
BUSINESS STRATEGY
PRC's objective is to become the premier provider of interactive customer
communications between large corporations and their existing and prospective
customers. The Company's strategy for achieving this objective is to offer its
clients high-quality, fully integrated services that are customized to address
each client's unique
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needs and to improve the quality and cost-effectiveness of the client's customer
service and marketing operations. The Company seeks to implement this strategy
through the following:
"One-Stop" Solutions Through Fully Integrated Services
The Company's current integration of teleservices, information marketing
and management and fulfillment services as part of a one-stop solution provides
a cost-effective and efficient method for its clients to manage their growing
customer service and marketing needs. In addition, the Company is in the process
of integrating Internet communications as yet another part of the one-stop
solution. The Company is typically involved in all stages of formulating,
designing and implementing its clients' customer service and marketing programs.
PRC believes that this solution-oriented, value-added approach to addressing its
clients' needs distinguishes PRC from its competitors and plays a vital role in
the Company's ability to attract and retain clients.
Information Services Capabilities
Through the efforts of its information services and Internet application
groups, the Company is able to rapidly design, develop and implement application
software for each client's unique customer service and marketing programs. PRC
offers a wide array of services, including formulating, designing and
customizing teleservicing and electronic applications, programming, and
demographic and psychographic profiling. The information services group also
integrates the Company's centrally managed wide area network with the client's
management information systems, thereby enabling clients to access real-time
program information and obtain comprehensive trend analyses. As the needs of a
client evolve, PRC's information systems specialists work with the client to
modify their programs. The Company believes that the services provided by its
information systems specialists attract clients with long-term, complex customer
service and marketing needs.
Advanced Technology
The Company's sophisticated use of advanced technology enables it to
develop and deliver solutions to its clients' complex customer service and
marketing needs. PRC has developed a specialized component-based software
development strategy with related proprietary products for its traditional
teleservicing and fulfillment services. PRC has also developed InfiniteAccess,
PRC On-Line, Precision Resolution and other specialized software which
cost-effectively utilize the Company's hardware capabilities. PRC's
component-based software approach allows the Company's information services
group to build and to test customer interaction center applications much more
quickly than with conventional approaches. As a result, clients receive a
customer interaction center solution of superior quality. See "Operations
Overview -- Operations" and "Technology" below.
Long-Term Client Relationships
The Company seeks to develop long-term client relationships by becoming an
integral part of its clients' overall customer service and marketing efforts.
Dedicated client commitment teams, headed by a general manager and comprised of
representatives of the teleservices, Internet application, information services
and fulfillment operating groups, are assigned to and work closely with each
client to formulate, design, implement, and operate the client's program
throughout its term. In addition, the Company's customer care associates
typically are trained for and dedicated to only one client's program. This close
working relationship and continuity of personnel positions PRC as a strategic
partner with its clients.
Strong Commitment to Quality
PRC strives to achieve the highest quality standards in the industry. As of
March 9, 1999, approximately 98% of PRC's customer care associates are full-time
which the Company believes results in greater stability and quality in its
workforce. The Company has a rigorous screening process for new hires. All new
associates participate in extensive classroom and on-the-job training programs
lasting up to five weeks. After training,
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each associate's performance is monitored regularly through on-site supervision,
remote and on-site call monitoring, and on-line performance tracking. The
Company's client commitment team ensures that the Company fulfills its
commitments in connection with each client program in a timely manner. Because
PRC's services involve direct contact with its clients' customers, the Company's
commitment to quality is critical to its ability to attract and retain clients.
OPERATIONS OVERVIEW
PRC's operations are organized to effectively provide one-stop solutions
for its clients' customer service and marketing needs.
Management of Clients Through General Managers Teams. Each client program
is managed by a general manager who is dedicated to a single or a small group of
clients and is the sole point of contact for all matters related to the client's
program. The general manager's responsibility includes full operational,
financial and client relations functions. The general manager assembles a client
commitment team consisting of members from the teleservices, Internet
application, information services and fulfillment operating groups, which is
assigned responsibility for that program. This team works with the client to
formulate and design a customer service or marketing program tailored to achieve
that client's objectives. In implementing the program, the team is supported by
the human resources department which carefully selects the customer care
associates for that particular program. In addition, the quality assurance and
client commitment teams monitor the program to ensure that it is carried out in
accordance with specifications. The Company believes that its integrated team
approach and solution-oriented focus provide PRC with a distinct competitive
advantage.
Program Formulation and Design. PRC's client commitment teams work with
clients to formulate a customer service and marketing program suited to each
client's needs. The information services group uses its substantial expertise in
rapid application development and systems integration to help clients more
effectively target marketing programs, resulting in higher response rates and
profitability, and to design customer service programs which capture information
useful in the client's customer retention programs and other marketing efforts.
PRC offers a wide array of services, including formulating, designing and
customizing database architecture, programming, demographic and psychographic
profiling, and scripting.
Program Implementation. PRC's general manager teams work with the
teleservices, fulfillment, information services and Internet application
operating groups to implement the client's customer service and/or marketing
program.
Operations. Teleservicing operations involve direct communication with the
clients' customers through inbound or outbound calls. In 1998, teleservicing
activities accounted for 80% of the Company's total revenues. Of this amount,
86% related to inbound calls.
In handling inbound calls, the Company's customer service representatives
respond to a variety of customer requests, including inquiries, complaints,
direct mail responses and order processing. The customers typically call a
toll-free "800" number to request product or service information, place an order
for a product or service, or obtain assistance regarding a previous order or
purchase (including "help line" support). PRC's automated call distributors and
digital switches identify each inbound call by "800" number and route the call
to a PRC associate trained for that particular client's program. Simultaneously
with receipt of the call, the associate's computer screen displays customer,
product and service information relevant to the call.
PRC's outbound services include conducting customer satisfaction and
preference surveys and cross-selling client products, as well as providing
proactive customer management with the goal of increased sales and enhanced
customer retention. Almost all outbound calls are in response to
customer-initiated inquiries or are made to a client's existing customers. The
Company's outbound call management system utilizes predictive dialers which
automatically dial the telephone numbers, determine if a live connection is made
and present connected calls to a customer care associate who has been trained
specifically for that client's program. The customer's name, other information
about the customer and the program script simultaneously appear on
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the customer care associate's computer screen. The associate then uses the
script to take an order for the client's product or service or to request
information for addition to the client's database.
The Company's teleservicing operations are enhanced by the use of universal
workstation technology. Universal workstations allow the customer care associate
to handle either inbound or outbound calls as dictated by demand. From the
client's standpoint, universal workstations provide increased efficiencies by
allowing the customer care associate (for whose service the client generally
pays on an hourly basis) to be productive with either inbound or outbound calls.
Information obtained during a customer call by the PRC customer care
associate is captured by the Company's database marketing and management
systems. This information is used by PRC to ensure high quality performance and
to provide fulfillment services, if necessary. PRC's database marketing and
management technology also enables the Company to seamlessly connect with its
clients' systems and thus deliver on-line, real-time program information.
Fulfillment services include high-speed laser and electronic document
printing, lettershop and mechanical inserting, sorting, packaging and mailing
capabilities. While fulfillment services represent a relatively small portion of
the Company's revenues, they enable the Company to support full-service customer
service and marketing programs by managing and fulfilling requests for
literature, products and other specialty items and by permitting the rapid
distribution of client marketing information. Fulfillment services accounted for
11% of the Company's total revenues in 1998.
prcnetcare.com is a new division of PRC dedicated to interactive customer
communications, e-commerce and Internet customer care support. The division
currently has two-products: InfiniteAccess and Precision Resolution.
InfiniteAccess products integrate clients' Internet-based customer care and
commerce activities with the Company's existing teleservicing, database
marketing and management, and fulfillment services thereby, in effect,
transforming the Company's call centers into multimedia customer interaction
centers. Specifically, the Company is developing and will offer during 1999, the
following InfiniteAccess products and services:
PRC Smart Mail is an electronic messaging service which reduces the cost
and time of processing large volumes of e-mail by providing automated answers
and interactive assistance.
PRC Web On-Line is a Web collaborative service which enables customer care
associates to simultaneously interact with clients' customers over the telephone
and the Web. This product complements Web-based self-service aids by providing
live associate assistance designed to answer questions asked by customers or
business partners. This service will also provide "text chat" capabilities which
enable interaction between customer care associates and customers.
PRC Internet Fulfillment Service provides e-mail and Web-based fulfillment
processes to service Internet commerce transactions or requests for information
such as brochures and other documents.
PRC Host is a Web application hosting service and Web information service
which enables clients to conduct Web-based commerce without the expenditure to
establish and support Internet commerce technology infrastructure and provides
clients with Internet-related information and reports about their business
performance, including sales performance, customer feedback and market analyses.
Precision Resolution provides clients with solutions for record
standardization and error resolution for information transferred electronically
or over the Internet that functions on an automated, real-time basis. This
allows PRC to dynamically manage the people processes and workflow of highly
transactional databases. This system provides greater control, increased
productivity, enhanced quality, improved efficiency, reduced cycle times and
streamlined processes to users. It allows the Company to dynamically manage
higher volumes of repetitive processing work with increased efficiency, accuracy
and productivity. In 1998, the Company invested in new development to meet the
demands of clients for new functionality and to prepare the next generation of
the product. This significant reengineering process included a lower cost data
entry module, a task management engine, an inbound telephony link and imaging
component, and a Web-enabled application for remote input.
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Quality Assurance. PRC maintains its strong commitment to quality through
its quality assurance and client commitment teams. Within each of PRC's
operating departments, the quality assurance teams monitor performance to ensure
that the Company's services are delivered at a level of quality that meets both
the Company's and the client's standards. The client commitment team functions
on a Company-wide basis to audit the fulfillment of the Company's commitments to
each client program.
Client Reporting. Data derived from customer service and marketing
programs are a source of valuable information to PRC's clients in evaluating
ongoing programs and planning and designing future programs. PRC has developed
technologies and reporting procedures that effectively convert raw data gathered
during the course of the program into useful information upon which clients can
base strategic decisions and more effectively respond to customer needs and
inquiries. PRC's proprietary software product, PRC On-Line, allows clients to
monitor their teleservicing and Internet-based programs on-line, in real-time,
to obtain comprehensive trend analyses and to modify program parameters as
necessary. In addition, PRC provides clients with customized reports in printed
form, electronic mail, computer-to-computer transmission, disk, tape and
on-line.
TECHNOLOGY
Overview. PRC's sophisticated use of advanced technology enables the
Company to develop and deliver solutions for its clients' complex customer
service and marketing needs. The Company's information services and Internet
applications groups have developed the Company's call management and database
marketing and management systems. The information services group uses this
platform to design and implement application software for each client's program.
The Company believes that its platform is among the most advanced in the
industry and provides a competitive advantage in attracting new business.
The Company utilizes a UNIX-based open architecture system comprised of
multiple computer systems which, in conjunction with its rapid application tool
for user interface development, allows PRC to expand capacity from a PC-class
computer to a mainframe without rewriting software and provides flexibility in
designing applications tailored to the client's needs. In conjunction with the
Company's use of Oracle database applications and Windows/NT applications, the
UNIX-based open architecture system permits the Company to seamlessly interact
with many different types of client systems and allows an electronic link from
each call center's system to the Company's operational headquarters, resulting
in a centrally managed wide area network. PRC also utilizes computer-telephone
integration and universal workstation technologies as part of its wide area
network. All PRC hardware is supported by an uninterruptable power supply
designed for protection against outages or any data loss due to power
variations, as well as a diesel generator to assure an uninterrupted power
source. The Company believes that the integrity of client information is
adequately protected by its data security system and its off-site disaster
back-up storage facilities.
Component-Based Development. Component-based development refers to the
tools and techniques employed by the information services group to assemble
and/or modify software applications from reusable software "parts" as opposed to
building an application from scratch. PRC's component-based software approach
allows the Company's information services and Internet application groups to
build and test customer interaction center applications much more quickly than
with conventional approaches. As a result, clients receive a customer
interaction center solution of superior quality, while the Company reduces the
time and expense needed in the development of call center applications. The
primary benefit of component-based development is PRC's ability to respond
rapidly to new business opportunities and sustain its competitive advantage in
the industry. An ancillary result of component-based development is a reduction
in training time of customer care associates due to the creation of call center
applications that are more uniform in nature.
PRC On-Line. The Company's proprietary software application, PRC On-Line,
allows its clients to review their teleservicing and Internet-based programs
on-line, in real-time, to obtain comprehensive trend analyses and to modify
program parameters. The Company believes that the capabilities of its PRC
On-Line software application provide it with a significant competitive
advantage, particularly with large, sophisticated marketing-oriented companies.
The increased communication and control provided by PRC On-Line allows
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clients to utilize PRC's teleservicing or Internet-based services as a seamless
extension of their in-house marketing and customer services operations.
IMA Advantage/Edge. The Company is in the process of implementing IMA
Advantage/Edge, a third-party software product. The Company's implementation of
this product will complete a three-tiered software development strategy
consisting of component-based, custom built and off-the-shelf software
offerings. As of December 31, 1998, the Company had invested approximately $3.9
million in this application. Upon implementation, the Company believes that the
IMA Advantage/Edge product will provide the Company with pre-built,
off-the-shelf applications that will assist in rapid deployment, decreased
set-up and maintenance costs, increased sales opportunities and increased
capability to provide excellent customer sales and service. The Company
currently estimates that IMA Advantage/Edge will be fully implemented during the
second quarter of 1999.
MANAGEMENT INFORMATION SYSTEMS
During 1997, PRC initiated an entity-wide review of its management and
financial information systems. The review resulted in a decision to implement an
Enterprise Resource Planning ("ERP") solution, which will allow for all internal
systems (including those related to billing, payroll, client profitability
management, human resource management and general ledger) to be fully integrated
using a common platform.
The Company designated its ERP implementation as the PRISM Project. During
the first quarter of 1998, the Company began its implementation of the PRISM
Project. This project is a substantial undertaking for PRC. In order to allow
for a quick and efficient implementation, the Company is utilizing both internal
resources and outside consultants. The PRISM Project is being implemented in
phases with certain systems or modules becoming functional at different points
in the project timeframe. Full implementation is expected to be completed by the
third quarter of 1999 at an estimated total cost of approximately $13.0 million,
including software, hardware, consulting fees, training and internal resources.
The first modules of the PRISM Project, human resources/payroll, general ledger,
accounts receivable and accounts payable, were placed in service during the
fourth quarter of 1998. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Year 2000 Issue" for a discussion
of the impact and effect on the Company of the Year 2000 issue.
PERSONNEL AND TRAINING
PRC believes that its rigorous approach to hiring and training its
employees is a key component of its ability to provide high quality client and
customer service. The Company selects the locations for its call centers based
on demographic studies as an attempt to ensure the availability of an adequate
and qualified pool of potential employees. Its hiring procedures are designed to
ensure that only the most qualified candidates are offered employment. The
Company offers extensive classroom and on-the-job training programs for its
personnel, including instruction on the businesses of PRC's clients and proper
customer service techniques. Each new customer care associate receives up to
five weeks of training, which provides the skills training he or she needs to
work on a specific, dedicated client program. The Company offers a benefits
package to full-time customer care associates after three to six months of
employment. The Company believes that such a careful selection process results
in a high quality, dedicated work force. The Company also provides a full array
of management courses and materials designed to ensure that its operations and
administrative managers receive continuous and up-to-date training using the
latest trends and techniques.
As of March 9, 1999, the Company had approximately 5,100 full-time and 90
part-time employees, of which 4,140 of the full-time employees and 83 of the
part-time employees were customer care associates. The Company believes that its
percentage of full-time customer care associates is high relative to that of its
competitors, resulting in greater stability and quality in its workforce. None
of PRC's employees are subject to a collective bargaining agreement. The Company
considers its relations with its employees to generally be good.
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SALES AND MARKETING
The Company believes its reputation for providing high quality, one-stop
solutions has enabled it to obtain new business through requests for proposals,
client referrals and cross-selling opportunities to existing clients. In
addition, the Company's sales and marketing group actively pursues new business
opportunities by identifying companies and industries which can benefit from the
Company's services. Working with the information services and Internet
applications groups, the sales and marketing team is able to demonstrate to
prospective clients the Company's rapid application development and effective
systems integration capabilities to meet the proposed program objectives.
CLIENT RELATIONSHIPS
The Company seeks to develop and maintain long-term relationships with its
clients. PRC targets those companies which have the potential for generating
recurring revenues due to the magnitude of their customer service departments or
marketing programs. The Company believes that its clients view PRC as a
strategic partner and a valuable resource in formulating, designing and
implementing their customer service and marketing programs. During 1998, the
Company provided its services to approximately 60 clients in industries such as
telecommunications, transportation, consumer products, financial services and
food and beverage. The Company's ongoing clients include several business units
of AT&T, American Express, British Airways, Citibank, Conectiv Energy, DIRECTV,
GE Capital, Lucent Technologies, Pizza Hut, Ryder TRS, Taco Bell and The College
Entrance Examination Board. The Company's five largest clients accounted for 76%
of its total gross revenues for 1998. Revenues generated by the various business
units of AT&T, the Company's largest client, accounted for 45% of gross revenues
for 1998. Besides AT&T, Ameritech, representing 12% of gross revenues, was the
only other client that accounted for 10% or more of total gross revenues for
1998. At the end of the third quarter of 1998, the Company made a strategic
decision to exit the incentive-based outbound program with Ameritech. This
incentive-based program ended in the fourth quarter of 1998, and the first
quarter of 1999 saw the gradual wind down of the remaining programs with this
client. The Company's client relationship with Ameritech ended in March 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Overview and Basis of Presentation."
Although the Company enters into written contracts with its clients,
generally either party retains the right to terminate on varying periods of
prior notice. The contracts do not assure the Company will generate a specific
level of revenue or designate the Company as the exclusive service provider.
Contracts typically encompass all aspects of the Company's relationship with the
client, together with all applicable charges. The Company's teleservicing
charges are primarily based on a fixed hourly fee for dedicated service. The
Company has also generated teleservicing revenues under incentive-based
compensation agreements whereby the amount of revenue earned correlated to the
achievement of established targets. As described above, the Company made a
strategic decision to exit this type of business due to margin constraints and
to focus its efforts on more predictable and profitable programs going forward.
Charges for database marketing and management services are based on an
hourly rate or on the volume of information stored. Charges for fulfillment
services are typically assessed on a transaction basis, with an additional
charge for warehousing products for clients. The Company assesses separate
charges for program design, development and implementation, database design and
management, training or retraining of personnel, processing and access fees, and
account services, where appropriate.
Billing charges assessed by the Company for Internet customer care and
electronic message servicing will be based on hourly rates and on a transaction
basis, respectively, or a combination of charges thereof.
COMPETITION
The interactive customer communications industry in which PRC operates is
very competitive and highly fragmented. PRC's competitors range in size from
very small firms offering specialized applications and short-term projects to
large independent and international firms and the in-house operations of many
clients and potential clients. In-house interactive customer communications
organizations comprise the largest segment of the industry. The market includes
non-captive interactive customer service operations such as APAC TeleServices,
Convergys Corporation, SITEL, TeleSpectrum Worldwide, TeleTech Holdings and West
10
<PAGE> 11
TeleServices. In addition, some of PRC's services also compete with other forms
of direct marketing such as mailhouses, television, radio and on-line services.
PRC believes that the principal competitive factors in its industry are a
reputation for quality, sales and marketing results, price, technological
expertise and application, and the ability to promptly provide clients with
customized and creative solutions and approaches to their customer service and
marketing needs. The Company believes that it competes favorably with other
companies with respect to the foregoing factors for large-scale, ongoing
customer service and marketing programs where the principal competitive factor
is quality. The Company has not generally chosen to compete for high-volume
outbound marketing programs where the principal competitive factor is price.
Certain competitors may have capabilities and resources greater than the
Company's which might competitively disadvantage PRC in bidding for very large
programs.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the Federal and state
level. The rules of the Federal Communications Commission (the "FCC") under the
Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the
initiation of telephone solicitations to residential subscribers before 8:00
a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone
dialing equipment to call certain telephone numbers. In addition, the FCC rules
require telemarketers to have procedures in place to maintain lists of
residential customers who do not want to receive telephone solicitations and to
avoid making calls to those customers. The FCC rules also prohibit the use of
pre-recorded or artificial voice calls to consumers (with limited exceptions)
and advertising via telephone facsimile machines. The FCC, private individuals
and state attorneys general may seek both injunctive and monetary relief for
violation of these FCC rules. Monetary damages may be awarded for the greater of
actual damages or $1,500 per offense for willful violation of these rules.
The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC")
to issue regulations prohibiting misrepresentation in telephone sales. In August
1995, the FTC issued rules under the TCFAPA. These rules set forth disclosure
requirements for telemarketers when placing calls, prohibit deceptive
telemarketing acts or practices during solicitation, provide guidelines on
collecting payments by check and credit cards, provide restrictions on abusive
telephone solicitation practices and promulgate certain record keeping
requirements. The FTC, private individuals and state attorneys general may seek
both injunctive and monetary damages for violation of these FTC rules. Penalties
may range up to $10,000 for each intentional violation of these rules.
The Company believes that it is in compliance with the TCPA and FCC rules
thereunder and with the FTC's rules under the TCFAPA. The Company trains its
customer care associates to comply with the FTC and FCC rules and programs its
call management system to avoid telephone calls during restricted hours or to
individuals maintained on PRC's restricted "do-not-call" list.
Most states have enacted or are considering legislation to regulate
telephone solicitations. For example, some states require telemarketers to be
licensed by state regulatory agencies prior to soliciting purchasers within that
state. Additionally, telephone sales in certain states cannot be final unless a
written contract is delivered to and signed by the buyer and may be canceled
within three business days. At least one state also prohibits telemarketers from
requiring credit card payment and several other states require certain
telemarketers to obtain licenses and post bonds. Penalties for violation of
these state telemarketing regulations vary from state to state and include civil
as well as criminal penalties. From time to time, bills are introduced in
Congress which, if enacted, would regulate the use of credit information. In
addition, legislation could be introduced in the future with respect to the use
of the Internet, including regulations relating to its use in connection with
customer care and service. The Company cannot predict whether any of these types
of legislation will be enacted and what effect, if any, it would have on the
Company or its industry.
The industries served by the Company are also subject to varying degrees of
government regulation. The Company works closely with its clients and their
advisors to develop the scripts to be used by PRC in connection with making
customer contacts. The Company generally requires its clients to indemnify PRC
against claims and expenses arising with respect to the Company's services
performed on its clients' behalf. The Company has never been held responsible
for regulatory noncompliance by a client.
11
<PAGE> 12
ITEM 2. PROPERTIES
In 1998, in conjunction with the Company's restructuring and cost savings
initiatives announced during the third quarter of 1997, the Company completed
the consolidation of three administrative/corporate locations into available
space at one of its call centers in Miami, Florida. The Company still maintains
approximately 12,000 square feet of office space for its principal executive
offices in a separately leased facility in Miami, Florida, which terminates in
April 2000. The Company's fulfillment operations are located in a separate
leased facility in Miami, Florida, consisting of 47,577 square feet, the lease
for which expires in 2001, with a 5-year renewal option.
The Company is in the process of transitioning its traditional call centers
into customer interaction centers. The Company had eight call centers in
operation, of which three had multimedia capabilities, as of December 31, 1998
and eight call centers in operation as of December 31, 1997. One new call center
was opened in both the first and second quarters of 1997, while one small call
center in Miami was converted into administrative offices in the first quarter
of 1997 and another call center in Miami was closed during the third quarter of
1997 as part of the Company's restructuring plan. As of December 31, 1998, the
Company leased and operated the following call centers, all of which are located
in Florida:
<TABLE>
<CAPTION>
CURRENT
APPROXIMATE
NUMBER OF
LOCATION DATE OPENED WORKSTATIONS
- -------- -------------- ------------
<S> <C> <C>
Miami(1)................................................. July 1992 280
Miami Lakes(3)........................................... January 1996 490
Miami.................................................... April 1996 420
Orlando.................................................. June 1996 590
Margate(3)............................................... September 1996 520
Miami(2)(3).............................................. December 1996 990
Jacksonville............................................. February 1997 790
Margate (Coconut Creek).................................. April 1997 420
-----
4,500
=====
</TABLE>
- -------------------------
(1) The Company's principal executive offices are also located in this facility.
(2) Certain administrative and operational departments are also located in this
facility.
(3) These centers have multimedia capabilities.
The leases for these facilities would generally expire between 2004 and
2022 assuming the Company's exercise of all renewal options (see Note 6 -- Lease
Commitments of the Notes to Consolidated Financial Statements). However, as a
result of the 1998 restructuring plan and continual assessment of the capacity
requirements in Jacksonville and Margate (Coconut Creek), the Company will
terminate the lease agreements relating to these locations no later than the
lease option dates in May 2002. Additionally, in connection with the 1998
restructuring plan, the Company expects to fully vacate the Margate (Coconut
Creek) facility and reduce its occupancy level of the Jacksonville facility
during 1999 (see Note 5 -- Credit Facilities and Long-Term Debt of the Notes to
Consolidated Financial Statements). The Company also leases additional
facilities and certain other real property incidental to its operations. The
Company believes that its existing facilities and other real property are
suitable and adequate for its current operations, but additional facilities may
be required to support growth. The Company further believes that suitable space
will be available as needed to expand its business on commercially reasonable
terms.
The Company acquired a facility in Sunrise, Florida, for which it secured a
mortgage during the second quarter of 1998. As a result, the Company owns land
and a building with a book value of approximately $5.9 million that is currently
unoccupied. The Company intends to maintain this property as a possible location
for new administrative offices or, should utilization levels warrant, as a new
call center. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and
Freeman Industrial Enterprises Corporation v. Precision Response Corporation,
Mark J. Gordon, David L. Epstein and Richard D. Mondre (Case No. 398-CV-1895-DJS
(D. Conn)), was filed in the Superior Court of the Judicial District of
Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed
by the Company to the United States District Court for the District of
Connecticut. This lawsuit alleges that the Company breached its contracts with
the plaintiffs by allegedly failing to pay all commissions relating to certain
clients whom the plaintiffs allegedly claim they procured for the Company. The
complaint also contains claims of breach of fiduciary duty, breach of covenant
of good faith and fair dealing, civil conspiracy, fraud/fraud in the inducement,
intentional infliction of emotional distress and violations of the Connecticut
Unfair Trade Practices Act. The plaintiffs seek actual, compensatory and
punitive damages, declaratory judgement that certain contracts are invalid due
to undue influence exercised upon plaintiffs or, in the alternative, recission
of such contracts, an accounting and interest, costs and attorneys' fees.
On November 16, 1998, the Company filed a motion (i) to dismiss for lack of
personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper
venue or, in the alternative, to transfer to the U.S. District Court for the
Southern District of Florida. On that same day, the Company filed a motion to
dismiss the complaint for failure to state a cause of action. Both motions are
currently pending before the Court.
On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice
this lawsuit against Richard Mondre, which dismissal has been approved by the
Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint,
asserting the same causes of action as in the original complaint, as well as a
claim for negligent misrepresentation.
The case is currently in the discovery stage. The Company believes that the
plaintiffs' allegations are totally without merit and intends to defend the
lawsuit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of the Company's security-holders
during the quarter ended December 31, 1998.
13
<PAGE> 14
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
The Company and certain selling shareholders completed the Company's
initial public offering, declared effective on July 16, 1996 (with an actual
closing date of July 22, 1996), of 4,600,000 shares of common stock at an
offering price of $14.50 per share (the "Initial Public Offering"). Prior to the
Initial Public Offering, the Company's common stock was not listed or quoted on
any organized market system. Since the Initial Public Offering, the common stock
of the Company is traded on the Nasdaq National Market under the symbol "PRRC."
The following table sets forth, for the calendar quarters indicated, the high
and low closing sale prices of the common stock as reported on the Nasdaq
National Market during such period:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First quarter............................................. $11 $ 7 5/8
Second quarter............................................ 9 3/4 5 7/16
Third quarter............................................. 8 9/16 3 3/4
Fourth quarter............................................ 8 7/8 4 1/4
1997
First quarter............................................. $36 $20 3/4
Second quarter............................................ 24 14 7/8
Third quarter............................................. 17 1/8 7 1/4
Fourth quarter............................................ 10 9/16 6 3/4
</TABLE>
As of March 22, 1999, there were 21,549,000 shares of the Company's common stock
outstanding held by approximately 69 holders of record. The Company estimates,
based upon information provided by the Company's transfer agent, that it has
approximately 3,000 beneficial owners of its common stock as of March 22, 1999.
DIVIDEND POLICY
The Company currently intends to retain future earnings to finance its
growth and development and therefore does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's revolving credit
facility prohibits the payment of cash dividends by the Company. Payment of any
future dividends will depend upon the future earnings and capital requirements
of the Company and other factors which the Company's Board of Directors
considers appropriate.
Prior to the consummation of the Initial Public Offering, the Company's
Board of Directors declared a cash dividend (the "Dividend") to the then current
shareholders of the Company of approximately $5,243,000. The Dividend was equal
to the Company's estimate of its cumulative taxable income, prior to the
Company's conversion from an S corporation to a C corporation and immediately
prior to the consummation of the Initial Public Offering to the extent such
taxable income had not previously been distributed. The Dividend was subject to
adjustment based upon actual cumulative taxable income as finally determined
based on the Company's final tax return as an S corporation. During the second
quarter of 1997, the Company's final tax return as an S corporation was
completed and filed. As a result, an additional $174,000 was paid to the
Company's existing shareholders prior to the Initial Public Offering as a final
distribution of the Company's accumulated taxable income prior to conversion to
C corporation status. No cash dividends were paid to the shareholders in 1998.
See Note 1 -- Operations and Significant Accounting Policies and Note
10 -- Capital Stock of the Notes to Consolidated Financial Statements.
14
<PAGE> 15
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not issue or sell any unregistered securities during the
quarter ended December 31, 1998, except that the Company granted options to
purchase 1,165,250 shares of Common Stock to 102 employees pursuant to the
Company's Amended and Restated 1996 Incentive Stock Plan. The exercise price of
the options range between $5.09 and $6.94 per share. These options have a term
of seven years and vest as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING RATE
- ---------------- ------------
<C> <S>
85,000 50% at grant date and 25% after 1 and 2 years
350,000 50% after 6 months, 17% after 1 and 2 years and 16% after 3
years
400,000 33 1/3% per year
330,250 20% per year
---------
1,165,250
=========
</TABLE>
The Company granted the foregoing stock options in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
of 1933, as amended.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data of the Company as of and for the
years ended 1994 through 1998 has been derived (except for Other Data) from the
audited consolidated financial statements of the Company. Such data is qualified
by reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements (the "Financial Statements") and the Notes to Consolidated
Financial Statements included elsewhere in this report. See also Note
15 -- Unaudited Quarterly Financial Data of the Notes to Consolidated Financial
Statements for certain financial information presented on a quarterly basis for
1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998(7) 1997(7) 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
(For the fiscal year):
REVENUES................................................. $ 175,173 $ 143,584 $ 97,637 $ 30,204 $ 14,998
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of services....................................... 153,638 128,177 71,345 21,212 10,190
Selling, general and administrative expenses........... 23,290 25,874 14,727 7,164 4,888
Restructuring and asset impairment charges............. 13,583 11,591 -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses........................... 190,511 165,642 86,072 28,376 15,078
---------- ---------- ---------- ---------- ----------
Operating (loss) income............................ $ (15,338) $ (22,058) $ 11,565 $ 1,828 $ (80)
========== ========== ========== ========== ==========
NET (LOSS) INCOME(1)..................................... $ (10,189) $ (13,066) $ 7,850 $ 1,456 $ (372)
========== ========== ========== ========== ==========
PROFORMA DATA (UNAUDITED)(1):
Income (loss) before proforma income taxes............. $ 10,877 $ 1,456 $ (372)
Proforma provision (benefit) for income taxes relating
to S corporation..................................... 4,358 619 (86)
---------- ---------- ----------
PROFORMA NET INCOME (LOSS)......................... $ 6,519 $ 837 $ (286)
========== ========== ==========
COMMON STOCK DATA(2):
Net loss per common share (diluted)...................... $ (0.47) $ (0.61)
Proforma net income per common share
(diluted)(1)(3)(4)(5).................................. $ 0.36 $ 0.05
Book value per share(5).................................. $ 3.68 $ 4.15 $ 2.65 $ 0.17 $ 0.09
Number of shares outstanding (at year-end)(5)............ 21,549,000 21,542,000 20,000,000 16,400,000 16,400,000
Weighted average number of common shares outstanding
(diluted)(3)........................................... 21,547,981 21,392,814 18,171,000 16,527,061 N/M
FINANCIAL POSITION(2):
(At year-end):
Working capital (deficit).............................. $ 22,019 $ 23,521 $ 11,849 $ 1,365 $ (1,423)
Current ratio.......................................... 1.65x 1.68x 1.40x 1.23x 0.73x
Property and equipment, net............................ $ 71,414 $ 63,301 $ 42,034 $ 5,284 $ 3,834
Total assets........................................... $ 133,446 $ 127,413 $ 88,415 $ 12,713 $ 7,737
Long-term obligations, less current maturities(6)...... $ 16,916 $ 3,493 $ 4,190 $ 3,924 $ 1,020
Shareholders' eqiuty................................... $ 79,359 $ 89,440 $ 52,950 $ 2,816 $ 1,473
OTHER DATA:
(At year-end):
Number of workstations................................. 4,500 4,500 3,220 550 320
Number of call centers................................. 8 8 8 2 2
</TABLE>
- -------------------------
(1) Prior to the Company's Initial Public Offering on July 16, 1996, the Company
was an S corporation and not subject to Federal and state corporate income
taxes. On July 16, 1996, the Company revoked its S election and changed its
tax status from an S corporation to a C corporation, recorded deferred
income taxes totaling $90,000 and began providing for Federal and state
corporate income taxes from and including that date. The summary of
operations data reflects a proforma provision (benefit) for income taxes as
if the Company were subject to Federal and state corporate income taxes for
all years. This proforma provision (benefit) for income taxes is computed
using a combined Federal and state tax rate of 37.6%. See Note 9 -- Income
Taxes of the Notes to Consolidated Financial Statements.
(2) Effective January 29, 1997 (the actual closing date was February 4, 1997),
the Company and certain selling shareholders completed a second equity
offering of 4,740,000 shares of common stock at an offering price of $35.125
per share (the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000
16
<PAGE> 17
shares were sold by the Company. See Note 2 -- Public Offerings of the Notes
to Consolidated Financial Statements.
(3) The actual weighted average number of common shares outstanding for the
years ended December 31, 1996 and 1995 were 18,013,115 and 16,400,000,
respectively, after giving effect to the stock splits effected by way of
share dividends discussed in note (5) below. However, as required by
generally accepted accounting principles, the weighted average number of
common shares outstanding has been increased by 127,061 shares (weighted for
the applicable period), which shares are not actually outstanding. This
number is equal to the number of shares which, when multiplied by $14.50 per
share (the price in the Initial Public Offering), would have been sufficient
to replace the amount of the Dividend in excess of proforma earnings for the
12 months ended June 30, 1996.
(4) Supplemental proforma net income per common share would have been $0.36 per
share and $0.06 per share for the years ended December 31, 1996 and 1995,
respectively, giving effect to the use of a portion of the net proceeds of
the Initial Public Offering to repay the Company's bank borrowings at
January 1, 1995, and assuming an increase in the weighted average number of
common shares outstanding to 18,285,311 and 16,729,131, respectively (based
on the price in the Initial Public Offering of $14.50 per share).
(5) Includes a retroactive adjustment for stock splits effected by way of share
dividends described more fully in Note 10 -- Capital Stock of the Notes to
Consolidated Financial Statements.
(6) Long-term obligations for 1998 consist of the outstanding balance of the
Company's revolving credit facility, mortgage loan payable to the lender on
the revolving credit facility, capital lease obligations and other long-term
obligations, all of which are described more fully in Note 5 -- Credit
Facilities and Long-Term Debt of the Notes to Consolidated Financial
Statements. Long-term obligations for 1997 and 1996 consist only of capital
lease obligations. For the years ended 1995 and 1994, long-term obligations
consist of capital lease obligations, a note payable to a bank and certain
installment loans. Fiscal 1995 also includes the outstanding balance of the
Company's revolving credit loan.
(7) Includes special charges of $22.1 million and $26.2 million before taxes in
1998 and 1997, respectively, described more fully in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Basis of Presentation" and Note
3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to
Consolidated Financial Statements.
N/M -- Not meaningful since past operations and capital structure are not
necessarily indicative of current and future operations and capital
structure.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with "Selected Financial
Data," the Financial Statements and the Notes to Consolidated Financial
Statements.
OVERVIEW AND BASIS OF PRESENTATION
The Company was incorporated in 1982 as a fulfillment company, expanding
its services to include database marketing and management beginning in 1984 and
to teleservices and customer care in 1988. In 1993, the Company initiated the
implementation of certain strategic measures to become a full-service provider
of integrated services in order to attract larger corporate clients with a
variety of ongoing telephone-based customer service and marketing needs. In
1998, the Company integrated these resources, products and services with
Internet technologies to introduce interactive customer communications. During
the last three years, the Company has invested over $100 million in systems,
facilities and equipment, including the capitalized value of all leased property
and equipment, to facilitate growth and enhance its technology capabilities.
The Company currently offers its customers single source, integrated
solutions for their teleservicing, Internet communications, database marketing
and management, and fulfillment needs. The Company's primary source of revenue
is teleservicing activities which are comprised of both inbound
(customer-initiated) and outbound (PRC-initiated) calls. Teleservicing revenues
are generally earned for providing services on a rate-per-hour basis. However,
beginning in the third quarter of 1997, the Company also generated teleservicing
revenues under incentive-based outbound compensation agreements whereby the
amount of revenue earned correlates to the achievement of established targets.
At the end of the third quarter of 1998, the Company made a strategic decision
to exit the incentive-based outbound programs, which was completed during the
fourth quarter of 1998. The majority of teleservicing revenues are derived from
inbound calls, which represented 86% of teleservicing revenues and 68% of total
revenues in 1998 and 80% of teleservicing revenues and 59% of total revenues in
1997. Inbound teleservicing consists mostly of longer-term customer care and
customer service programs which tend to be more predictable than other
teleservicing revenues. Outbound teleservicing and, in particular,
incentive-based outbound teleservicing, is driven by marketing programs which
change frequently relative to inbound programs. As such, outbound teleservicing
is subject to greater variation in operating results (see "Fluctuations in
Quarterly Results" below).
During 1998, the Company began strategic initiatives to capitalize on the
extraordinary growth of Internet commerce by integrating Internet technologies
with current PRC products and services to, in effect, create multimedia customer
interaction centers. While the Company began to offer certain Internet and e-
mail service capabilities during 1998, insignificant revenue was generated from
these activities. The Company has identified these capabilities as significant
business opportunities and is committing to investing in and expanding its
Internet and e-mail commerce services in order to enhance its offering of these
types of services within the customer interaction center concept.
Information services provided by the database marketing and management
group typically include the design, development and implementation of software
applications for use in a particular client program and the integration of the
Company's systems with those of its clients.
Fulfillment services include high-speed laser and electronic document
printing, lettershop and mechanical inserting, sorting, packaging and mailing
capabilities. While fulfillment services represent a relatively small portion of
the Company's total revenues, it is an important element in the Company's
overall marketing strategy of providing its customers with a "one-stop" solution
to their telephone-based and interactive customer service and marketing needs.
Prior to the Initial Public Offering of the Company's common stock, which
was declared effective on July 16, 1996 (the actual closing date was July 22,
1996), the Company elected for Federal and state income tax purposes to be
treated as an S corporation under the Internal Revenue Code and comparable state
tax
18
<PAGE> 19
laws. As a result, earnings of the Company were taxed for Federal and state
income tax purposes directly to the shareholders of the Company, rather than to
the Company. Immediately prior to the Initial Public Offering, the Company
revoked its S corporation election and converted from an S corporation to a C
corporation. The statements of operations data for 1994 through 1996 includes a
provision (benefit) for Federal and state income taxes as if the Company were
subject to Federal and state corporate income taxes for such years. The proforma
provision (benefit) was computed using a combined Federal and state tax rate of
37.6%. For further discussion of the Company's change in income tax status and
the Dividend paid to the Company's shareholders immediately prior to the Initial
Public Offering, see Note 1 -- Operations and Significant Accounting Policies
and Note 10 -- Capital Stock of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data, as a
percentage of revenues, for the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
SELECTED OPERATING RESULTS:
Revenues.................................................. 100.0% 100.0% 100.0%
Cost of services.......................................... 87.7 89.3 73.1
----- ----- -----
Gross margin........................................... 12.3 10.7 26.9
Selling, general and administrative expenses.............. 13.3 18.0 15.1
Restructuring and asset impairment charges................ 7.8 8.1 --
----- ----- -----
Operating (loss) income................................ (8.8)% (15.4)% 11.8%
===== ===== =====
</TABLE>
1998 VS. 1997
During the third quarter of 1998, the Company performed an extensive review
of its operations and existing available workstation capacity. Such review
focused on determining the needed workstation capacity appropriate and desirable
in light of several factors. These factors included the requirements for
servicing the Company's current, recently attained and anticipated new clients;
the Company's less than satisfactory operating results relative to a large
incentive-based, outbound teleservices program; and the Company's inability to
recruit, train and maintain an employee base relative to available workstations
in certain strained labor markets without paying premium wage rates not able to
be supported by the operating margins being generated.
As a result of this review, the Company initiated a restructuring and
performance enhancing initiatives plan designed to improve profit margins,
reduce its cost structure and adjust its infrastructure to significantly improve
efficiencies and performance in the utilization of its workstation capacity. The
Company expects to realize $2.1 million in annual savings from the consolidation
and reduction of call centers, $1.8 million in annual savings from a reduction
in overhead and administrative headcount resulting in the termination of nine
employees and the exiting of an incentive-based outbound program, $0.5 million
in annual savings from the replacement of existing call center software with new
customer interactive software reflective of advances in customer care technology
and $0.2 million in other annual cost savings initiatives mainly related to
termination of a facility maintenance contract. Therefore, once fully
implemented, the cost reductions are expected to result in annual savings of
approximately $4.6 million. The Company began to benefit from these cost savings
beginning in the fourth quarter of 1998; however, the full impact of the cost
savings initiatives will not be realized until all of these initiatives have
been completed, which is currently expected to be during the third quarter of
1999.
The Company's operating results for the fiscal year ended December 31, 1998
include the effects of a pre-tax non-recurring special charge of $22.1 million
recorded in conjunction with the implementation of the restructuring and
performance enhancing initiatives plan. Approximately $9.9 million, or 45%, of
the charge is for cash items, of which $7.2 million is accrued at December 31,
1998. These cash items are primarily for
19
<PAGE> 20
lease and other facility exit costs and, to a lesser extent, for payment of
severance and other employee-related costs. The special charge to earnings is
included in the following categories on the Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
AFTER-TAX
PRE-TAX DOLLAR PER SHARE
AMOUNT (DILUTED)
(IN MILLIONS) AMOUNT
--------------- ---------
<S> <C> <C>
Restructuring and asset impairment charges................. $13.6 $(0.39)
Cost of services........................................... 2.3 (0.07)
Selling, general and administrative expenses............... 6.2 (0.18)
----- ------
Total............................................... $22.1 $(0.64)
===== ======
</TABLE>
See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the
Notes to Consolidated Financial Statements for further discussion of the
non-recurring special charges.
REVENUES
During 1998, revenues increased by $31.6 million to $175.1 million, or 22%,
in comparison to the prior year. The principal components of revenues are
teleservicing activities, including account services (representing 80% of
revenues in 1998), and fulfillment services (representing 11% of revenues in
1998), with the balance primarily represented by information services. The
Company had approximately 4,500 workstations in operation as of both December
31, 1998 and 1997 (see "1997 vs. 1996 -- Revenues"). As of December 31, 1998 and
1997, the Company was operating at approximately 78% and 55%, respectively, of
full utilization of these workstations. In connection with its restructuring and
performance-enhancing initiatives plan, the Company plans to eliminate 800
workstations in two specific call centers. Absent the award of any significant
new business, the Company has no immediate plans for new call center/workstation
expansion and will reallocate existing site resources to meet capacity needs.
Although utilization will automatically increase with the reduction of
workstations, the Company continues to attempt to seek the award of additional
work from existing clients and pursue new client opportunities in order to
improve the utilization of its workstations.
During 1998, the Company generated several new client opportunities. The
Company commenced both customer care services and use of its proprietary,
automated error resolution system, Precision Resolution, for a large East
coast-based utility company. The Company also began a database, telemarketing
and fulfillment services program targeting information technology professionals
for an international manufacturer and provider of computer products and
services.
Teleservicing activities, including account services, accounted for the
majority of the revenue growth during 1998 with an increase of $34.6 million, or
33%, to $140.3 million in 1998. Major factors contributing to the increase in
teleservicing revenues were the addition of several new programs for existing
clients as well as the addition of new clients, principally in the utility,
computer products and services and financial services industries. Overall, new
client business accounted for $16.7 million, or 10%, of total revenues for 1998,
while revenues from the Company's largest client accounted for 45% of total
revenues, up from 38% for 1997. Generally, teleservicing revenues are earned on
a rate-per-hour basis. However, during 1998 and 1997, approximately 10% of total
revenues were earned under incentive-based compensation agreements.
Revenues from fulfillment services for 1998 were $18.8 million, an increase
of $4.1 million, or 28%, from the prior year. The increase is reflective of
fulfillment services provided in connection with the incentive-based outbound
teleservice program which was exited in the fourth quarter of 1998.
Revenues from information services for 1998 were $16.1 million, a decrease
of $7.2 million, or 31%, from 1997. The decrease was primarily attributable to
the transfers of teleservicing-based application software totaling $9.8 million
in 1997, compared with no such transfers in 1998, offset by an increase in
traditional information services revenues in 1998. Transfers of
teleservicing-based application software produce substantially higher margins
than other information services (which involve the development of unique,
individual customer-based applications). Due to the substantially higher margins
on these transfers, the Company's
20
<PAGE> 21
operating results can be significantly impacted based upon the Company effecting
these transactions in any period.
COST OF SERVICES
Cost of services generally include all direct and some indirect costs
incurred in connection with the Company's revenue-producing departments,
including, but not limited to, labor, telephone expenses directly related to
revenue-generating activities, equipment under operating leases used in the call
centers and fulfillment facility, direct overhead for all such operational
facilities, such as rent, security and insurance, and depreciation and
amortization of property and equipment used in operations. Cost of services,
excluding the impact of the restructuring and non-recurring special charges,
increased by $30.9 million, or 25.7%, to $151.3 million in 1998, principally as
a result of the growth in operations. Including the impact of the restructuring
and non-recurring special charges of $2.3 million in 1998 and $7.8 million in
1997, cost of services increased by $25.5 million, or 19.9%, to $153.6 million
in 1998.
Excluding the impact of restructuring and non-recurring special charges,
the increase in cost of services as a percentage of revenues from 83.8% in 1997
to 86.4% in 1998 is primarily attributable to the Company's expansion of its
infrastructure in 1997 and the resultant excess capacity together with lower
than expected yield on incentive-based programs and higher wage rates paid in
call centers in strained labor markets in 1998. Approximately 1,280 workstations
were added in two call centers opened during the first six months of 1997. The
opening of these new call centers, and the related increase in workstation
capacity, was carried out primarily in anticipation of providing increased
services to the Company's largest client. This increase in services did not
materialize leaving the Company with excess capacity and a higher than desired
fixed cost structure. Additionally, the Company's largest client instituted an
across-the-board price reduction in the third quarter of 1997. Cost of services
as a percentage of revenues, including the impact of the restructuring and
non-recurring special charges, decreased from 89.3% in 1997 to 87.7% in 1998.
Continued improvement in the utilization of workstation capacity is a key
component that is expected to enable the Company to reduce cost of services as a
percentage of revenues and achieve its gross margin percentage targets in the
future. As of December 31, 1998 and 1997, the Company was operating at
approximately 78% and 55%, respectively, of full utilization of workstations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") generally include the
costs of central services the Company provides to support and manage its
operations, including senior management, sales and marketing, human resources,
finance and management information systems functions. SG&A, excluding the impact
of the restructuring and non-recurring special charges, decreased $2.0 million,
or 10.4%, to $17.1 million in 1998. The decrease is indicative of the Company's
successful implementation of its cost-cutting initiatives associated with the
restructuring plans announced in the third quarters of 1997 and 1998 along with
management's efforts to postpone, or temporarily reduce, non-revenue-producing
expenditures, whenever possible. Including the impact of the restructuring and
non-recurring special charges of $6.2 million in 1998 and $6.8 million in 1997,
SG&A decreased by $2.6 million, or 10.0%, to $23.3 million in 1998.
As a percentage of revenues, excluding the impact of restructuring and
non-recurring special charges, SG&A decreased from 13.3% in 1997 to 9.8% in
1998. This decrease is a result of increased revenues during 1998 coupled with
the cost-cutting initiatives and the postponement or reduction of expenditures.
SG&A, as a percentage of revenues, including the impact of restructuring and
non-recurring special charges, decreased from 18.0% in 1997 to 13.3% in 1998.
INTEREST, NET
Interest expense, net of interest income and capitalized interest, was
$789,000 for 1998 compared to net interest income of $282,000 for 1997. During
1997, the Company generated interest income from the investment of a portion of
the net proceeds from the Second Equity Offering and had an absence of
borrowings
21
<PAGE> 22
under its revolving credit facility, while during 1998 the Company incurred
interest charges from borrowings on its revolving credit facility.
INCOME TAXES
The Company had a deferred tax asset of $12.4 million at December 31, 1998
and $6.4 million at December 31, 1997. The net deferred tax asset at December
31, 1998 is based upon expected utilization of net operating loss carryforwards
and reversal of certain temporary differences. Although realization is not
assured, the Company believes it is more likely than not that all of the net
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. The Company
will continue to review the assumptions used on a quarterly basis and make
adjustments as appropriate.
NET LOSS AND NET LOSS PER SHARE
For the fiscal year ended December 31, 1998, the net loss was $10.2 million
compared to the net loss of $13.1 million for the comparable period of 1997,
including the impact of the restructuring and non-recurring special charges as
set forth in the next paragraph. The net loss per share for 1998 was $0.47,
compared to the net loss per share of $0.61 in 1997, including the impact of the
restructuring and non-recurring special charges as set forth in the next
paragraph.
The net loss and net loss per share amounts associated with the
restructuring and non-recurring special charges were $13.8 million and $0.64,
respectively, for the fiscal year ended December 31, 1998, and $15.7 million and
$0.73, respectively, for the fiscal year ended December 31, 1997. See Note
3-Restructuring and Other Non-Recurring Special Charges of the Notes to
Consolidated Financial Statements for further discussion of the restructuring
and non-recurring special charges.
For the fiscal year ended December 31, 1998, excluding the impact of the
restructuring and non-recurring special charges, net income was $3.6 million
compared to net income of $2.6 million for the comparable period of 1997.
Excluding the impact of the restructuring and non-recurring special charges, net
income per share for 1998 was $0.17 compared to net income per share of $0.12
for 1997.
1997 VS. 1996
During the third quarter of 1997, the Company initiated an extensive and
systematic review of its operations and cost structure in response to
inefficiencies primarily resulting from the addition of capacity and
infrastructure to accommodate a contract for its largest client that has been
delayed indefinitely and an across-the-board price reduction imposed by this
client. This review focused on reducing operating expenses, increasing customer
service efficiencies and generally strengthening the Company's position to
provide telephone-based customer service and marketing solutions on an
outsourced and cosourced basis to large corporations.
As a result of this review, the Company announced a major restructuring and
cost reduction plan designed to reduce its cost structure and adjust its
infrastructure to significantly improve operating efficiencies and performance
as the Company seeks to shift its customer base to a more diversified portfolio.
22
<PAGE> 23
The Company's operating results for the fiscal year ended December 31, 1997
include the effects of a pre-tax non-recurring special charge of $26.2 million
recorded in conjunction with the implementation of the restructuring and cost
reduction plan. The special charge to earnings is included in the following
categories on the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
AFTER-TAX
PRE-TAX DOLLAR PER SHARE
AMOUNT (DILUTED)
(IN MILLIONS) AMOUNT
--------------- ---------
<S> <C> <C>
Restructuring and asset impairment charges............... $11.6 $(0.32)
Cost of services......................................... 7.8 (0.22)
Selling, general and administrative expenses............. 6.8 (0.19)
----- ------
Total............................................ $26.2 $(0.73)
===== ======
</TABLE>
See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the
Notes to Consolidated Financial Statements for further discussion of the
non-recurring special charges.
REVENUES
During 1997, revenues increased by $45.9 million, or 47%, in comparison to
the prior year. The principal components of revenues are teleservicing
activities, including account services (representing 74% of revenues in 1997),
and information services (representing 16% of revenues in 1997), with the
balance primarily represented by fulfillment services. Although the Company had
eight call centers in operation as of both December 31, 1997 and December 31,
1996, the composition of those eight call centers changed. One new call center
was opened in both the first and second quarters of 1997, while one small call
center was converted into administrative offices in the first quarter of 1997
and another call center was closed during the third quarter of 1997 as part of
the Company's restructuring plan. As a result of this change in composition,
workstation capacity increased from approximately 3,200 workstations as of
December 31, 1996 to approximately 4,500 workstations as of December 31, 1997.
However, for most of 1997, the Company's workstation capacity exceeded its
requirements for the level of business the Company experienced and, as of
December 31, 1997, approximately 1,100 workstations were not being utilized to
generate revenues.
Teleservicing activities, principally inbound services, accounted for the
majority of the revenue growth during 1997 with an increase of $40.1 million, or
61%, to $105.7 million in 1997. Major factors contributing to the increase in
teleservicing revenues were the addition of several new programs for existing
clients as well as the addition of new clients, principally in the
telecommunications service and equipment industries. Overall, new client
business accounted for $24.7 million, or 17%, of total revenues for 1997, while
revenues from the Company's largest client accounted for 38% of total revenues,
down from 68% for 1996. Generally, teleservicing revenues are earned on a
rate-per hour basis. However, during 1997, approximately 10% of total revenues
were earned under incentive-based compensation agreements.
Revenues from information services for 1997 were $23.3 million, a decrease
of $2.2 million, or 9%, from 1996. This decrease was primarily attributable to
the performance of a $14.0 million non-recurring client project during 1996
offset by an increase of $6.8 million in teleservicing-based application
software transfers and the overall growth in operations during 1997. Such
transfers produce substantially higher margins than other information services
(which involve the development of unique, individual customer-based
applications).
COST OF SERVICES
Cost of services increased by $56.8 million, or 80%, to $128.2 million in
1997, principally as a result of the growth in operations and the absorption of
$7.8 million in non-recurring special charges in conjunction with the Company's
restructuring and cost-reduction initiatives. See Note 3 -Restructuring and
Other Non-Recurring Special Charges of the Notes to Consolidated Financial
Statements for further discussion of the restructuring and non-recurring special
charges.
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<PAGE> 24
The increase in cost of services as a percentage of revenues from 73.1% in
1996 to 89.3% for 1997 was primarily attributable to the Company's expansion of
its infrastructure and operations and the resultant excess capacity together
with lower than expected yield on incentive-based programs. This included
increasing the number of workstations in anticipation of providing increased
services to the Company's largest customer. This increase in services did not
materialize leaving the Company with excess capacity for most of 1997 and a
higher than desired cost structure during the second and third quarters of 1997.
Additionally, the Company's largest client instituted an across-the-board price
reduction in the third quarter of 1997. The Company's existing infrastructure
was assessed and realigned for 1998 as part of the Company's restructuring and
cost reduction plan initiatives previously discussed. However, in addition to
these initiatives, a key component to enable the Company to reduce cost of
services as a percentage of revenues and achieve its gross margin percentage
targets in the future will be maximization of current capacity levels by
increasing revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $11.1 million, or 76%, to $25.9 million in 1997. This
increase was primarily due to the increase in administrative salaries and
benefits of approximately $5.8 million to support the Company's growth, along
with an increase in the provision for the allowance for doubtful accounts of
approximately $0.7 million to adequately provide a reserve for the Company's
receivables following various charge-offs. The increase for 1997 also reflects
the absorption of $6.8 million in non-recurring special charges in conjunction
with the Company's restructuring and cost reduction initiatives. However, the
Company did begin to see benefits from its cost reduction initiatives in the
fourth quarter of 1997 as reflected by an improvement in SG&A expenses of $2.6
million over the same period of 1996. See Note 3 -- Restructuring and Other Non-
Recurring Special Charges of the Notes to Consolidated Financial Statements for
further discussion of the restructuring and non-recurring special charges.
The increase in SG&A as a percentage of revenues from 15.1% in 1996 to
18.0% for 1997 reflects the effect of the Company taking a non-recurring special
charge relative to the Company's expansion of its infrastructure to support the
then expected continuing growth of the Company. A significant portion of this
growth was to come from the Company's largest client. However, as mentioned
above, this increase in services did not materialize leaving the Company with a
higher than desired cost structure during the second and third quarters of 1997.
Additionally, the Company's largest client instituted an across-the-board price
reduction in the third quarter of 1997. The Company's SG&A cost structure was
assessed and streamlined for 1998 as part of the Company's restructuring and
cost reduction plan initiatives previously discussed. However, in addition to
these initiatives, a key component to enable the Company to reduce its SG&A
expenses as a percentage of revenues and achieve its operating margin percentage
targets in the future will be maximization of current capacity levels by
increasing revenues.
INTEREST, NET
Interest income, net of interest expense, was $282,000 for 1997 compared to
net interest expense of $688,000 for 1996. This improvement primarily represents
interest income generated during 1997 from the investment of a portion of the
net proceeds from the Second Equity Offering and the absence of borrowings from
the Company's existing credit facility during 1997. See Note 2 -- Public
Offerings of the Notes to Consolidated Financial Statements. The proceeds from
borrowings during 1996 were primarily obtained from the then existing revolving
credit loan.
INCOME TAXES
Prior to the Initial Public Offering, the Company was an S corporation and,
accordingly, was not subject to Federal and state income taxes. Therefore, the
Consolidated Statement of Operations for the period January 1, 1996 through July
16, 1996 does not include a provision for Federal and state income taxes.
The Company had a deferred tax asset of $6.4 million at December 31, 1997.
Management believes that the Company will generate sufficient taxable income in
the future such that it is more likely than not that this deferred tax asset
will be realized.
24
<PAGE> 25
NET LOSS AND NET LOSS PER SHARE
For the fiscal year ended December 31, 1997, the net loss was $13.1
million, including the impact of the restructuring and non-recurring special
charges as set forth in the next paragraph, compared to proforma net income of
$6.5 million for the comparable period of 1996. The net loss per share (diluted)
for 1997 was $0.61; including the impact of the restructuring and non-recurring
special charges as set forth in the next paragraph, compared to proforma net
income per share (diluted) of $0.36 in 1996.
The net loss and net loss per share (diluted) amounts associated with the
restructuring and non-recurring special charges were $15.7 million and $0.73,
respectively, for the fiscal year ended December 31, 1997. See Note
3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to
Consolidated Financial Statements for further discussion of the restructuring
and non-recurring special charges.
Proforma net income for the period January 1, 1996 through July 16, 1996
includes a proforma provision for Federal and state income taxes as if the
Company were subject to such taxes as a C corporation for that period. The
Company was a C corporation throughout 1997; therefore, net income for the
fiscal year ended December 31, 1997 includes the appropriate provision under
such income tax status.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and 1997, the Company funded its operations and capital
expenditures primarily through cash flows from operations, bank borrowings and
capital lease financings. During 1997, the Company obtained additional liquidity
from the net proceeds of the Second Equity Offering.
Effective January 29, 1997 (the actual closing date was February 4, 1997),
the Company and certain selling shareholders completed the Second Equity
Offering at an offering price of $35.125 per share. Of the 4,740,000 shares of
common stock sold, 1,500,000 shares were sold by the Company. Net proceeds to
the Company from the Second Equity Offering in the amount of $49.2 million,
after deducting $3.5 million in costs associated with the offering, have been
used for call center expansion, other capital expenditures necessary to support
the Company's growth, working capital and other general corporate purposes.
On March 2, 1998, the Company entered into a new three-year, $25.0 million
revolving credit facility (the "Credit Facility"), replacing its then existing
$15.0 million revolving credit facility (see Note 5-Credit Facilities and
Long-Term Debt of the Notes to Consolidated Financial Statements for discussion
of prior revolving credit facility). The Company may borrow up to 80% of
eligible accounts receivable. The Credit Facility is collateralized by all the
Company's owned and hereafter acquired assets. The Credit Facility accrues
interest at the Company's option at (i) the greater of the prime rate or the
Federal funds rate plus 0.50% or (ii) the LIBOR rate plus a specified percentage
(1.25% to 1.75%) based upon the ratio of funded debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The Company pays a
fee of between 0.1875% and 0.25% per annum on unused commitments under the
Credit Facility based upon the ratio of funded debt to EBITDA. The Company is
required, under the terms of the Credit Facility, to maintain certain financial
covenants and ratios, including minimum tangible net worth and funded debt to
EBITDA and funded debt to capitalization ratios, to limit capital expenditures
and additional indebtedness and is restricted, among other things, with respect
to the declaration and payment of dividends, redemptions and acquisitions. At
December 31, 1998, the outstanding balance of the Credit Facility was $11.0
million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and
$2.5 million at 6.82% per annum).
On May 29, 1998, the Company secured a mortgage with the lender on its
Credit Facility to acquire a property (land and existing building) located in
Sunrise, Florida. The Company had originally planned on securing a special
leasing arrangement for this property as part of its call center development
plans for 1997 and, to that end, expended approximately $2.1 million during 1997
for building improvements. However, the Company subsequently decided to acquire
the property outright. The new mortgage loan was for $5.1 million, of which $4.0
million was advanced at closing. The remaining $1.1 million available under the
new loan was subject to the Company's completion of future improvements to the
property by November 25, 1998. The Company chose not to complete the
improvements by this date; hence, the $1.1 million additional availability
expired on November 25, 1998. The Company is currently negotiating with the
lender on its Credit Facility to
25
<PAGE> 26
extend the term of the additional funding for future improvements, although at
this time no assurance can be given if such extension will be obtained. The
mortgage note accrues interest, payable quarterly, at the LIBOR rate plus 1.50%,
of which the interest rate was 6.7% per annum at December 31, 1998. Principal
payments are due quarterly, based upon a 20-year amortization schedule and are
expected to commence after consummation of the additional funding for future
improvements, with a balloon payment due at maturity on June 1, 2005. The
mortgage loan is cross-defaulted with and has terms substantially similar to the
Credit Facility.
Effective September 30, 1998, both the revolving credit agreement and
mortgage loan agreement evidencing the Credit Facility and mortgage loan,
respectively, were amended to modify two financial covenant and ratio
definitions, the amount of the minimum tangible net worth and the fixed charge
coverage ratio.
At December 31, 1998, the Company had cash and cash equivalents of $1.7
million and total long-term obligations (including current maturities thereof)
of $19.4 million. Net cash provided by operating activities was $3.0 million for
1998, while $8.7 million of net cash was used in operating activities in 1997
and $7.1 million of net cash was provided by operating activities in 1996. The
decrease in cash used in operating activities from 1997 to 1998 was attributable
to the Company's receipt of income tax refunds and the increase in net income
after non-cash charges (depreciation and amortization, provision for bad debts
and sales allowances, restructuring and asset impairment charges, and deferred
income taxes) offset by the Company's investment in working capital items. The
increase in net cash used between 1997 and 1996 is primarily attributable to the
reduction in income (loss) before non-cash charges (depreciation and
amortization, restructuring and asset impairment charges, and deferred income
taxes).
The Company's working capital as of December 31, 1998 and 1997 was $22.0
million and $23.5 million, respectively. Major factors contributing to the
decrease in 1998 from 1997 were additional cash and cash equivalents as of
December 31, 1997 due to net proceeds available from the Second Equity Offering
and the significant income tax receivable at December 31, 1997. The decrease was
also offset by increases in accounts receivable in 1998 and deferred current tax
assets generated by the Company's net loss position for 1998.
Net cash used in investing activities in the amounts of $24.9 million,
$34.1 million and $35.5 million in 1998, 1997 and 1996, respectively, was
principally for capital expenditures. Capital expenditures, including the
capitalized value of property and equipment, were $24.9 million, $35.9 million
and $43.8 million for 1998, 1997 and 1996, respectively. The major increases in
capital expenditures for both 1997 and 1996 were telecommunications and computer
equipment principally attributable to the large increase in the Company's total
workstation capacity and leasehold improvements for the new call centers to
house the additional workstations. In 1997, the Company opened one new call
center in both the first and second quarters of 1997, while one small call
center was converted into administrative offices in the first quarter of 1997
and another call center was closed during the third quarter of 1997 as part of
the Company's restructuring plan with respect to the third quarter of 1997. As a
result, workstation capacity increased from approximately 3,200 workstations as
of December 31, 1996 to approximately 4,500 workstations as of December 31,
1997. During 1996, the Company increased its workstation capacity by
approximately 2,670 workstations. The Company is currently in a situation of
excess capacity and, in connection with its restructuring and performance
enhancing incentives plan announced in the third quarter of 1998, the Company
plans on eliminating 800 workstations in two specific call centers. Absent the
award of any significant new business, the Company has no immediate plans for
new call center/workstation expansion and will reallocate existing site
resources to meet capacity needs as warranted. However, the Company had
previously committed to a facility in Sunrise, Florida, which it acquired and
for which it secured a mortgage during the second quarter of 1998 (see
discussion above). As a result, the Company now owns land and a building with a
book value of approximately $5.9 million. The Company intends to maintain this
property as a possible location for new administrative offices or, should
utilization levels warrant, as a new call center. Additional capital
expenditures for 1998 relate primarily to the completion of the relocation and
consolidation of administrative office space into unused space in an existing
facility and costs incurred for the PRISM Project, Precision Resolution,
InfiniteAccess and IMA Advantage/Edge, as discussed below.
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<PAGE> 27
During the first quarter of 1998, the Company began its implementation of
an Enterprise Resource Planning ("ERP") solution, which will allow for all
internal systems (including those related to billing, payroll, client
profitability management, human resource management and general ledger) to be
fully integrated into a common platform. The Company has designated its ERP
implementation as the PRISM Project. The PRISM Project is utilizing both
internal resources as well as outside consultants to allow for a quick and
efficient implementation. Full implementation, including software, hardware,
consulting fees, training and internal resources, will cost approximately $13.0
million and is expected to take place by the third quarter of 1999. The first
modules of the PRISM Project, human resources/payroll, general ledger, accounts
receivable and accounts payable, were placed in service during the fourth
quarter of 1998. A portion of these costs will be charged to earnings based upon
the provisions of AICPA Statement of Financial Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
See Note 1 -- Operations and Significant Accounting Policies and Note
4 -- Property and Equipment of the Notes to Consolidated Financial Statements.
In connection with the Company's new division, prcnetcare.com, described in
further detail in "Business -- Recent Developments," beginning in 1998 and
through the end of 1999, the Company currently expects to invest in excess of
$6.0 million in developing software products and technology infrastructure to
accommodate interactive customer communications. In addition, the full
implementation of IMA Advantage/Edge, described in further detail in
"Business -- Technology," is currently expected to cost approximately $5.0
million and is expected to take place during the second quarter of 1999.
Net cash provided by financing activities was $12.5 million, $46.6 million
and $35.4 million in 1998, 1997 and 1996, respectively. Financing activities for
1998 are principally comprised of net borrowings under the Company's Credit
Facility and proceeds from the mortgage loan for the Sunrise, Florida, property
discussed above. In 1997, the Company raised additional capital from the Second
Equity Offering and used a portion of the net proceeds provided by such offering
principally to fund anticipated workstation capacity growth. In 1996, the
Company raised additional capital from the Initial Public Offering and used a
portion of the net proceeds provided by such offering to retire the installment
loans from a bank, totaling $1.0 million, to pay the outstanding balance on its
then existing senior credit facility and to pay the Dividend. Borrowings during
1996 were primarily from its then existing senior credit facility and its
predecessor. See Note 5 -- Credit Facilities and Long-Term Debt of the Notes to
Consolidated Financial Statements.
The Company believes that funds generated from operations, available
borrowings under the Credit Facility and capital lease financings will be
sufficient to finance its planned capital expenditures at least through 1999.
The Company's long-term capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company expands its
business. To the extent that the funds generated from the sources described
above are insufficient to fund the Company's activities in the short or
long-term, the Company would need to raise additional funds through public or
private financing. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting operating and geographical segments and the type and
level of financial information to be discussed about those segments. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 131 in the current year and determined that it has one
reportable operating segment. See Note 7 -- Information About Services and
Significant Clients of the Notes to Consolidated Financial Statements.
In March 1998, the AICPA issued Statement of Financial Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs
incurred in the development of internal-use software and is effective for
financial statements for years beginning after December 15, 1998. The Company
adopted SOP 98-1 in the first quarter
27
<PAGE> 28
of 1998. See Note 1 -- Operations and Significant Accounting Policies and Note
4 -- Property and Equipment of the Notes to Consolidated Financial Statements.
YEAR 2000 ISSUE
The Year 2000 issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs, including those with embedded microprocessors, that may
not properly reflect or recognize the year 2000 and years thereafter. Because
many computers and computer applications define dates by the last two digits of
the year, "00" or other two-digit dates after the year 2000 may not be properly
identified as the year 2000 or the appropriate later year, but rather the year
1900 or a year between 1901 and 1999 (as the case may be). This error could
result in system and equipment failures or malfunctions causing disruption of
operations, including among others, a temporary inability to process calls,
transactions and information, or engage in similar normal business activities.
The Company has evaluated its installed computer systems, network elements,
software applications and other business systems that have time-sensitive
programs and has developed a plan to ensure their Year 2000 compliance. The
Company has established a Year 2000 Steering Committee that meets weekly to
monitor the progress and status of the Company's Year 2000 plan. The Company's
Year 2000 plan is divided into seven major sections: Internal Systems and
Equipment (business applications for accounting, administration, human resources
and other company-wide applications and office equipment, including
non-information technology infrastructure in which non-compliant software or
embedded microprocessors might exist); Hardware (Company-wide information
technology architecture); Software Packages (standard personal computer and
individual software packages, such as electronic spreadsheet and word processing
software); Application Tools and Products (products utilized by information
technology development organizations to develop and implement automated business
applications); Client Applications; Client Interfaces; and Third Party
Suppliers. In order to address the Year 2000 issue and the seven major sections
stated above, the Company's Year 2000 plan involves five phases: Planning and
Awareness Phase (developing a budget and project plan); Inventory and Assessment
Phase (identify systems and applications, assess risks and prioritize efforts);
Remediation Phase (repair, replace or retire non-compliant systems or
processes); Validation Phase (perform testing of systems and processes); and
Implementation Phase.
The following chart outlines, by major section, the phases of the Company's
Year 2000 plan that have been completed or if not yet completed, the current
estimated date of completion:
<TABLE>
<CAPTION>
PHASES
----------------------------------------------------------------
PLANNING INVENTORY
AND AND
MAJOR SECTION AWARENESS ASSESSMENT REMEDIATION VALIDATION IMPLEMENTATION
------------- --------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Internal Systems and Equipment...... Completed Completed 5/99 6/99 6/99
Hardware............................ Completed 5/99 3/99-6/99 6/99 6/99
Software Packages................... Completed 3/99-4/99 5/99-6/99 6/99 6/99
Application Tools and Products...... Completed Completed 3/99 4/99 6/99
Client Applications................. Completed 3/99 6/99 9/99 9/99
Client Interfaces................... Completed 3/99 4/99 9/99 9/99
Third Party Suppliers............... Completed 4/99 5/99 6/99 6/99
</TABLE>
Since the Year 2000 issue may also affect the systems and applications of
the Company's customers or suppliers, the Company has initiated formal
communications with its customers and suppliers to determine their overall Year
2000 readiness and the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. As part of its overall communication process, the Company has mailed
letters to all of its customers and suppliers in an effort to receive the
appropriate warranties and assurances that those parties are, or will be, Year
2000 compliant. Based upon the responses received from its customers and
suppliers, the Company will then determine if further assurances are necessary
or if the Company needs to take further action, including the incurrence of
additional costs and/or the creation of a contingency plan with regard to any
customer or supplier that the Company believes may not be Year 2000 compliant.
Although the Company currently does not anticipate any material adverse
28
<PAGE> 29
impact on its operations as a result of Year 2000 issues of its customers or
suppliers, no assurance can be given that the failure by one or more of its
major suppliers or customers to become Year 2000 compliant will not have a
material adverse impact on its operations, particularly since the Company is
still awaiting responses from such major suppliers and customers.
The Company, pursuant to the PRISM Project which was undertaken by the
Company for reasons unrelated to any Year 2000 issues, has expended
approximately $8.6 million of the estimated $13.0 million required to upgrade
and enhance its internal financial and administrative systems. An ancillary
benefit of the PRISM Project is that the resulting systems will be Year 2000
compliant with full implementation of all aspects of the PRISM Project expected
by the third quarter of 1999. Based upon its most recent assessment, the Company
has determined that the incremental cost of insuring that its remaining computer
systems and processes are Year 2000 compliant is expected to be approximately
$1.0-$1.5 million. This amount will be funded as part of the Company's budgeted
capital expenditures (see "Liquidity and Capital Resources"). Through December
31, 1998, the Company, exclusive of the PRISM Project, has spent approximately
$151,000 on the Year 2000 issue. These amounts do not include any costs
associated with the implementation of contingency plans, if required, which have
not yet been developed. A portion of the costs related to the PRISM project have
been, and will continue to be, charged to earnings as incurred based upon the
provisions of SOP 98-1 (see Note 1 -- Operations and Significant Accounting
Policies and Note 4 -- Property and Equipment of the Notes to Consolidated
Financial Statements). All incremental costs associated with the Year 2000 issue
are being expensed as incurred.
The extent of the Company's Year 2000 exposure, the costs of achieving Year
2000 compliance and the time period within which the Company believes it will
achieve its Year 2000 compliance are based on management's knowledge to date and
its best estimates to date. Although the Company expects its critical systems
and applications to be Year 2000 compliant prior to any anticipated impact on
its operations, there is no guarantee that these results will be achieved.
Specific factors that give rise to this uncertainty, as well as the timing and
cost of achieving Year 2000 compliance (if at all), include, but are not limited
to, availability and cost of personnel, failure to identify and correct all Year
2000 susceptible systems and applications, non-compliance by customers,
suppliers and other third parties whose systems and operations impact the
Company, and other similar uncertainties. A reasonably possible worst case
scenario might include the failure of third parties to provide services, such as
power and telecommunication services, or the loss of the Company's automated
call distributors or dialers which could, depending on its duration, result in a
material disruption to the Company's operations and its ability to generate
revenue.
The Company has not yet developed a contingency plan; however, the Company
will continue to assess the need for a formal contingency plan and make a
determination as to the nature and scope of its contingency plan, if required,
based on the progress of Year 2000 efforts by the Company and third parties by
June 1999.
IMPACT OF INFLATION
Inflation has not had a material impact upon operating results, and the
Company does not expect it to have such an impact in the future. To the extent
the Company experiences cost increases and is not able to increase its billing
rates to offset the costs, such cost increases must be recovered through
operating efficiencies and improved gross profit margins. However, there can be
no assurance that the Company's business will not be so affected by inflation or
that it will be able to absorb cost increases through operating efficiencies or
through billing rate adjustments to customers and remain competitive.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company experiences quarterly variations in revenues and operating
income principally as a result of the timing of clients' marketing campaigns and
customer service programs, the commencement of new contracts, changes in the
Company's revenue mix among its various services offered to clients, including
the percentage (if any) of services provided under incentive-based compensation
agreements, and the timing of additional operating expenses to acquire and
support new business. In addition, the completion or termination of a large
customer service program or the loss or delay in the implementation of a large
customer service
29
<PAGE> 30
program or in a transfer of teleservicing-based application software could cause
the Company to experience such quarterly variations.
Relative to revenue mix, due, for example, to the significantly higher
margins generated from revenue earned from the transfers of teleservicing-based
application software and to actual performance under incentive-based
compensation agreements, fluctuations in gross and operating margins may occur
whenever revenue mix or actual performance results fluctuate from quarter to
quarter. See Note 15 -- Unaudited Quarterly Financial Data of the Notes to
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning future events. When
used in this report, the words "believes," "estimates," "plans," "expects,"
"intends," "anticipates," and similar expressions as they relate to the Company
or its management are intended to identify forward-looking statements. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
related to and including, without limitation, the Company's effective and timely
initiation and development of new client relationships and programs, the
maintenance of existing client relationships and programs (particularly since
the Company's agreements with its clients generally do not assure the Company
will generate a specific level of revenue, do not designate the Company as the
exclusive service provider and are terminable on short notice), the effective
completion of the implementation of the Company's restructuring plan and
performance-enhancing initiatives, the achievement of satisfactory levels of
both gross and operating margins, the opening of new customer interaction
centers in accordance with strategic plans and in a timely and economic manner
consistent with existing capacity requirements, the ability of the Company to
hire, train and retain a sufficient labor force of qualified personnel at
competitive wage rates, the development and continued enhancement of
telecommunication, Internet, computer and information technologies and
operational and financial systems (including the successful and timely
completion of the implementation and installation of the PRISM Project), the
level of acceptance and increased utilization by existing and new clients of the
Company of Precision Resolution, InfiniteAccess and other Internet products and
services, technical difficulties or errors, problems or excessive costs incurred
by the Company in connection with the completion of the development,
implementation and/or future enhancement of InfiniteAccess, Precision Resolution
and/or IMA Advantage/Edge, and/or the integration of Internet technologies with
current PRC products and services to create customer interaction centers and the
success and acceptance by the Company's clients thereof, the failure of the
Company to cost-effectively develop new Internet services and products or to
maintain or enter into new strategic or key business relationships in connection
with the development and/or enhancement of its Internet offerings, the
over-estimation by the Company of the level of need and demand for customer
support and service through the use of the Internet, the ability of the Company
to hire, train and retain qualified technology and other personnel in connection
with its development, implementation and/or enhancement efforts and the
operations of prcnetcare.com, the compatibility of InfiniteAccess, Precision
Resolution and other Internet products and services with existing systems of the
Company's clients and the extent of the technical problems arising with respect
to obtaining such compatibility, the introduction of new competitive Internet
and other products and services in the Company's industry by other companies,
the achievement by the Company and its suppliers and customers of Year 2000
compliance in a timely and cost efficient manner, the anticipated growth in
industry trends towards outsourcing and cosourcing of telephone and
Internet-based marketing and customer service operations (particularly in the
telecommunications services and equipment, transportation, financial services,
utility, consumer products and food and beverage industries), changes in
competition and the forms of direct sales and marketing techniques, consumer
interest in, and use of, the Company's clients' products and services, general
economic conditions, costs of telephone services, financing and leasing of
equipment, the adequacy of cash flows from operations and available financing to
fund capital needs and future growth, changes in and additions to governmental
rules and regulations applicable to the Company, the realization of the
Company's net deferred tax asset and other risks set forth in this report, in
the Company's other filings with the Securities and Exchange Commission and in
the Company's press releases. These risks and uncertainties are beyond the
ability of the Company to control; in many cases, the Company
30
<PAGE> 31
cannot predict the risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk: The Company's exposure to market risk for changes in
interest rates relates primarily to its long-term debt. The Company's Credit
Facility and mortgage loan with the lender for the Credit Facility both bear
interest at variable rates, as discussed above under "Liquidity and Capital
Resources." The Company mitigates interest rate risk by continually monitoring
the interest rates.
The table below presents outstanding principal amounts and the related fair
values (in thousands), together with maturity dates as of December 31, 1998 and
the weighted average interest rates for the Company's long-term debt (including
current maturities thereof) subject to variable rates for the year then ended:
<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE
PRINCIPAL FAIR INTEREST MATURITY
AMOUNT VALUE RATE DATE
----------- ------- -------- -------------
<S> <C> <C> <C> <C>
Credit Facility (prime).......................... $ 3,300 $ 3,300 8.5% March 2, 2001
Credit Facility (LIBOR).......................... 7,700 7,700 6.8% March 2, 2001
Mortgage loan.................................... 4,000 4,000 7.0% June 1, 2005
------- -------
Total long-term debt subject to variable rates... $15,000 $15,000
======= =======
</TABLE>
Based on the borrowing rates available to the Company for debt with similar
terms and average maturities, the fair value of the Company's debt approximates
carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is set forth in the Company's Financial
Statements contained in this report. The Financial Statements can be found at
the pages in this report listed in the following index:
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public
Accountants -- PricewaterhouseCoopers LLP................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-2
For the years ended December 31, 1998, 1997 and 1996:
Consolidated Statements of Operations.................. F-3
Consolidated Statements of Shareholders' Equity........ F-4
Consolidated Statements of Cash Flows.................. F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the Securities and Exchange Commission (the "SEC") within 120 days of the
Company's 1998 fiscal year-end.
31
<PAGE> 32
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement to be filed
with the SEC within 120 days of the Company's 1998 fiscal year-end.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<S> <C>
1. Financial Statements
See Index to Financial Statements located in Item 8 of
this report.
2. Financial Statement Schedule
PAGE
---
Schedule II -- Valuation and Qualifying Accounts....... S-1
</TABLE>
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
3.1 Articles of Incorporation of Precision Response Corporation
(Exhibit 3.1 to Form S-1)*
3.2 Bylaws of Precision Response Corporation as amended on July
23, 1996 (incorporated by reference to Exhibit 3.2 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, File No. 0-20941) and as further
amended by Amendment to Article II, Section 6 of the Bylaws
of the Company effective on February 19, 1997 (incorporated
by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997,
File No. 0-20941)
9.1 Voting Trust Agreement, dated as of February 16, 1996,
between Richard Mondre and Mark Gordon (Exhibit 9.1 to Form
S-1)*
9.2 Voting Trust Agreement, dated as of February 16, 1996,
between Richard Mondre and David Epstein (Exhibit 9.2 to
Form S-1)*
9.3 A separate Amendment to Voting Trust Agreement, dated as of
December 27, 1996, for each of the Voting Trust Agreements
dated as of February 16, 1996 described in Exhibit numbers
9.1 and 9.2, hereto (incorporated by reference to Exhibit
9.5 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 333-18823), initially filed
on December 26, 1996)
10.1 Precision Response Corporation Amended and Restated 1996
Incentive Stock Plan as amended through May 15, 1997
(incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, File No. 0-20941)+
</TABLE>
32
<PAGE> 33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.2 Precision Response Corporation Amended and Restated 1996 Incentive
Stock Plan (as amended through June 12, 1998) (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, File No. 0-20941)+
10.3 Precision Response Corporation 1996 Nonemployee Director Stock Option
Plan (Exhibit 10.2 to Form S-1)*+
10.4 Precision Response Corporation Profit Sharing Plan (Exhibit 10.3 to
Form S-1)*+
10.5 Employment Agreement with Mark Gordon (Exhibit 10.4 to Form S-1)*+
10.6 Employment Agreement with David Epstein (Exhibit 10.5 to Form S-1)*+
10.7 Employment Agreement with Richard Mondre (Exhibit 10.6 to Form S-1)*+
10.8 Stock Purchase and Shareholder Agreement, dated February 16, 1996,
between Richard Mondre and Mark Gordon, as amended effective as of
February 16, 1996 (Exhibit 10.8 to Form S-1)*
10.9 Stock Purchase and Shareholder Agreement, dated February 16, 1996,
between Richard Mondre and David Epstein, as amended effective as of
February 16, 1996 (Exhibit 10.9 to Form S-1)*
10.10 Agreement, dated February 16, 1996, among Richard Mondre, Mark Gordon
and David Epstein (Exhibit 10.10 to Form S-1)*
10.11 Stockholder Agreement, dated May 10, 1996, between Mark Gordon and
David Epstein (Exhibits 10.14 to Form S-1)*
10.12 S Corporation Tax Allocation and Indemnification Agreement (Exhibit
10.15 to Form S-1)*
10.13 Form of Indemnification Agreement (Exhibit 10.17 to Form S-1)*
10.14 Net Lease, dated May 1, 1996, between MJG Properties, Inc. and
Precision Response Corporation (13180 N.W. 43rd Avenue lease) (Exhibit
10.18 to Form S-1)*
10.15 Net Lease, dated May 1, 1996, between MJG Properties, Inc. and
Precision Response Corporation (4250 N.W. 135th Street lease) (Exhibit
10.19 to Form S-1)*
10.16 Lease Agreement and Option to Purchase Real Property, dated January 23,
1996, between Burger King Corporation and Precision Response
Corporation (without schedules) (Exhibit 10.21 to Form S-1)*
10.17 Assignment of Lease, dated as of April 18, 1996, between Precision
Response Corporation and Deerwood Realty Partners, Ltd (Exhibit 10. 22
to Form S-1)*
10.18 Sublease, dated May 1, 1996, between Precision Response Corporation and
Deerwood Realty Partners, Ltd. (Exhibit 10.23 to Form S-1)*
10.19 Lease, dated January 25, 1996, between Donald V. Mariutto and Eugene L.
Mariutto, and Precision Response Corporation (Exhibit 10.24 to Form
S-1)*
10.20 Assignment of Lease, dated April 30, 1996, between Precision Response
Corporation and Deerwood Realty Partners, Ltd. (Exhibit 10.25 to Form
S-1)*
10.21 Sublease, dated May 1, 1996, between Precision Response Corporation and
Deerwood Realty Partners, Ltd. (Exhibit 10.26 to Form S-1)*
10.22 Registration Rights Agreement, dated May 15, 1996, between Precision
Response Corporation and Mark Gordon (Exhibit 10.27 to Form S-1)*
10.23 Registration Rights Agreement, dated May 15, 1996, between Precision
Response Corporation and David Epstein (Exhibit 10.28 to Form S-1)*
10.24 Employment Agreement with Richard N. Ferry, Jr. dated May 15, 1996*, as
amended by Amendment to Employment Agreement dated as of November 10,
1997 between the Company and Mr. Ferry (incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, File No. 0-20941)+
33
<PAGE> 34
10.25 Net Lease, dated May 1, 1996, between Deerwood Realty Partners, Ltd.
and Precision Response Corporation (Exhibit 10.30 to Form S-1)*
10.26 Employment Agreement with Paul M. O'Hara dated August 9, 1996
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File No.
0-20941), as amended by Amendment to Employment Agreement dated as of
November 10, 1997 between the Company and Mr. O'Hara (incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 0-20941)+
10.27 Independent Contractor Agreement, dated July 26, 1996, between Bernie
Kosar, Jr. and Precision Response Corporation (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, File No. 0-20941) and
Amendment to Stock Option Agreement effective as of July 26, 1996
between Bernie Kosar, Jr. and Precision Response Corporation
(incorporated by reference to Exhibit 10.33 to the Company's
Registration Statement on Form S-1 (File No. 333-18823), initially
filed on December 26, 1996)+
10.28 Employment Agreement with Bernie Kosar, Jr. dated February 19, 1997
(incorporated by reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File No.
0-20941), as amended by Amendment to Employment Agreement dated as of
October 1, 1997 between the Company and Mr. Kosar (incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 0-20941)+
10.29 Employment Agreement dated as of April 15, 1997 between the Company and
Thomas C. Teper (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, File No. 0-20941)+
10.30 Credit Agreement (with exhibits but without schedules) Dated as of
March 2, 1998 among the Company, as the Borrower, NationsBank, N.A. and
the other lenders that become signatories thereto, as the Banks, and
NationsBank, N.A., as the Agent (incorporated by reference to Exhibit
10.38 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 0-20941)
10.31 First Amendment to Credit Agreement effective as of June 30, 1998
between the Company and NationsBank, N.A. (incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, File No. 0-20941)
10.32 Second Amendment to Revolving Credit Agreement effective as of
September 30, 1998 between the Company and NationsBank, N.A.
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, File No.
0-20941)
10.33 Mortgage Loan Agreement dated as of May 29, 1998 between the Company
and NationsBank, N.A. (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, File No. 0-20941)
10.34 Consolidated Renewal Promissory Note dated as of May 29, 1998 from the
Company payable to the order of NationsBank, N.A. (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, File No. 0-20941)
10.35 First Amendment to Mortgage Loan Agreement effective as of June 30,
1998 between the Company and NationsBank, N.A. (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, File No. 0-20941)
10.36 Second Amendment to Mortgage Loan Agreement effective as of September
30, 1998 between the Company and NationsBank, N.A. (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, File No. 0-20941)
10.37 Confirmation letter dated December 1, 1998 from NationsBank, N.A. to
the Company regarding definition of "fixed charge coverage ratio"
(filed herewith)
34
<PAGE> 35
10.38 Employment Agreement dated as of August 4, 1998 between the Company and
Robert Tenzer (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, File No. 0-20941)+
10.39 Employment Agreement dated as of October 6, 1998 between the Company
and James R. Weber (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, File No. 0-20941)+
10.40 Employment Agreement effective as of October 20, 1998 between the
Company and Wesley T. O'Brien (filed herewith)+
10.41 Letter agreement effective as of October 1, 1998 from the Company to
and accepted by Bernard J. Kosar, Jr. (filed herewith)+
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
- -------------------------
* Previously filed and incorporated by reference to exhibit in the Company's
Registration Statement on Form S-1, as amended (File No. 333-03209), initially
filed on May 6, 1996 ("Form S-1"), as set forth after such agreement or
document.
+ Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRECISION RESPONSE CORPORATION
(Registrant)
By: /s/ PAUL M. O'HARA
------------------------------------
Paul M. O'Hara
Executive Vice President -- Finance
and Chief Financial Officer
(Principal Financial Officer)
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK J. GORDON Chairman of the Board March 30, 1999
- -----------------------------------------------------
Mark J. Gordon
/s/ DAVID L. EPSTEIN Chief Executive Officer and March 30, 1999
- ----------------------------------------------------- Director
David L. Epstein (Principal Executive Officer)
/s/ RICHARD D. MONDRE Executive Vice President, March 30, 1999
- ----------------------------------------------------- General Counsel, Secretary
Richard D. Mondre and Director
/s/ PAUL M. O'HARA Executive Vice President -- March 30, 1999
- ----------------------------------------------------- Finance and Chief Financial
Paul M. O'Hara Officer
/s/ THOMAS F. JENNINGS, JR. Vice President and Controller March 30, 1999
- ----------------------------------------------------- (Principal Accounting
Thomas F. Jennings, Jr. Officer)
/s/ BERNARD J. KOSAR, JR. Director March 30, 1999
- -----------------------------------------------------
Bernard J. Kosar, Jr.
/s/ RICHARD N. KRINZMAN Director March 30, 1999
- -----------------------------------------------------
Richard N. Krinzman
Director , 1999
- -----------------------------------------------------
Christian Mustad
/s/ NEIL A. NATKOW Director March 30, 1999
- -----------------------------------------------------
Neil A. Natkow
</TABLE>
36
<PAGE> 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Precision Response Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 and Item 14(a)(1) and (2) of this Form 10-K present
fairly, in all material respects, the financial position of Precision Response
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
February 17, 1999
F-1
<PAGE> 38
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,656 $ 11,080
Accounts receivable, net of allowances of $8,225 and
$2,864, in 1998 and 1997, respectively................. 42,771 31,289
Income taxes receivable................................... 215 6,970
Deferred income taxes..................................... 6,906 2,796
Prepaid expenses and other current assets................. 4,186 5,866
-------- --------
Total current assets.............................. 55,734 58,001
Property and equipment, net................................. 71,414 63,301
Deferred income taxes....................................... 5,516 3,589
Other assets................................................ 782 2,522
-------- --------
Total assets...................................... $133,446 $127,413
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations............... $ 2,510 $ 2,393
Accounts payable.......................................... 16,571 13,725
Restructuring accrual..................................... 3,244 2,863
Accrued compensation expenses............................. 3,108 5,101
Other accrued expenses.................................... 7,174 6,444
Customer deposits......................................... 1,108 3,954
-------- --------
Total current liabilities......................... 33,715 34,480
Long-term obligations, less current maturities.............. 16,916 3,493
Restructuring accrual....................................... 3,456 --
-------- --------
Total liabilities................................. 54,087 37,973
-------- --------
Commitments and contingencies (see Notes 6 and 14).......... -- --
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 shares
authorized; 21,549,000 and 21,542,000 issued and
outstanding, respectively.............................. 215 215
Additional paid-in capital................................ 97,179 97,179
Accumulated deficit....................................... (18,035) (7,846)
Unearned compensation..................................... -- (108)
-------- --------
Total shareholders' equity........................ 79,359 89,440
-------- --------
Total liabilities and shareholders' equity........ $133,446 $127,413
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 39
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1997
--------- --------- --------
<S> <C> <C> <C>
REVENUES.................................................... $175,173 $143,584 $97,637
-------- -------- -------
OPERATING EXPENSES:
Cost of services.......................................... 153,638 128,177 71,345
Selling, general and administrative expenses.............. 23,290 25,874 14,727
Restructuring and asset impairment charges................ 13,583 11,591 --
-------- -------- -------
Total operating expenses.......................... 190,511 165,642 86,072
-------- -------- -------
Operating (loss) income........................... (15,338) (22,058) 11,565
OTHER INCOME (EXPENSE):
Interest income........................................... 261 984 298
Interest expense.......................................... (1,050) (702) (986)
-------- -------- -------
(LOSS) INCOME BEFORE INCOME TAXES................. (16,127) (21,776) 10,877
Income tax (benefit) provision.............................. (5,938) (8,710) 3,027
-------- -------- -------
NET (LOSS) INCOME................................. $(10,189) $(13,066) $ 7,850
======== ======== =======
NET LOSS PER COMMON SHARE:
Basic..................................................... $ (0.47) $ (0.61)
======== ========
Diluted................................................... $ (0.47) $ (0.61)
======== ========
PROFORMA DATA (UNAUDITED):
Income before proforma income taxes....................... $10,877
Proforma provision for income taxes relating to S
corporation............................................ 4,358
-------
PROFORMA NET INCOME............................... $ 6,519
=======
PROFORMA NET INCOME PER COMMON SHARE:
Basic..................................................... $ 0.36
=======
Diluted................................................... $ 0.36
=======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 21,548 21,393 18,083
======== ======== =======
Diluted................................................... 21,548 21,393 18,171
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 40
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DUE FROM
--------------- PAID-IN EARNINGS SHAREHOLDERS, UNEARNED
SHARES AMOUNT CAPITAL (DEFICIT) NET COMPENSATION TOTAL
------ ------ ---------- --------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... 16,400 $164 $ 72 $ 2,787 $(207) $ -- $ 2,816
Net income.......................... -- -- -- 7,850 -- -- 7,850
Payment of dividends................ -- -- -- (5,243) -- -- (5,243)
Net repayments from Shareholders.... -- -- -- -- 207 -- 207
Issuance of common stock............ 3,600 36 47,045 -- -- -- 47,081
Stock option grants................. -- -- 691 -- -- (691) --
Amortization of unearned
compensation...................... -- -- -- -- -- 239 239
------ ---- ------- -------- ----- ----- --------
Balance at December 31, 1996.......... 20,000 200 47,808 5,394 -- (452) 52,950
Net loss............................ -- -- -- (13,066) -- -- (13,066)
Payment of dividend................. -- -- -- (174) -- -- (174)
Issuance of common stock............ 1,500 15 49,149 -- -- -- 49,164
Exercise of employee stock
options........................... 42 -- 222 -- -- -- 222
Amortization of unearned
compensation...................... -- -- -- -- -- 344 344
------ ---- ------- -------- ----- ----- --------
Balance at December 31, 1997.......... 21,542 215 97,179 (7,846) -- (108) 89,440
Net loss............................ -- -- -- (10,189) -- -- (10,189)
Exercise of employee stock
options........................... 7 -- -- -- -- -- --
Amortization of unearned
compensation...................... -- -- -- -- -- 108 108
------ ---- ------- -------- ----- ----- --------
Balance at December 31, 1998.......... 21,549 $215 $97,179 $(18,035) $ -- $ -- $ 79,359
====== ==== ======= ======== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 41
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......................................... $(10,189) $(13,066) $ 7,850
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 12,822 11,506 3,631
Provision for bad debts and sales allowances........... 14,534 5,895 5,215
Amortization of unearned compensation.................. 108 344 239
Restructuring and asset impairment charges............. 6,458 6,832 --
Other asset write-offs................................. 5,392 -- --
Deferred income taxes.................................. (6,037) (4,905) 172
Changes in operating assets and liabilities, excluding
effects of acquisition:
Accounts receivable.................................... (30,165) (7,205) (28,647)
Income taxes receivable................................ 6,755 (6,970) --
Prepaid expenses and other current assets.............. (448) (4,048) (2,545)
Other assets........................................... (247) 787 (1,195)
Accounts payable....................................... 3,549 (3,761) 15,163
Restructuring accrual.................................. 4,497 2,863 --
Accrued compensation expenses.......................... (1,993) 1,023 2,751
Income taxes payable................................... -- (3,297) 1,645
Other accrued expenses................................. 815 3,748 944
Customer deposits...................................... (2,846) 1,534 1,864
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 3,005 (8,720) 7,087
-------- -------- --------
INVESTING ACTIVITIES:
Cash acquired in acquisition, net of cash paid............ -- 192 --
Purchases of property and equipment....................... (24,883) (34,251) (35,483)
-------- -------- --------
Net cash used in investing activities............. (24,883) (34,059) (35,483)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds (payments) from revolving credit loan........ 11,000 -- (2,996)
Proceeds from long-term obligations....................... 4,000 -- --
Payments on long-term obligations......................... (2,546) (2,615) (3,658)
Net proceeds from issuance of common stock................ -- 49,386 47,081
Dividend paid............................................. -- (174) (5,243)
Net payments from shareholders............................ -- -- 207
-------- -------- --------
Net cash provided by financing activities......... 12,454 46,597 35,391
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (9,424) 3,818 6,995
Cash and cash equivalents at beginning of year.............. 11,080 7,262 267
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 1,656 $ 11,080 $ 7,262
======== ======== ========
Supplemental cash flow information:
Cash paid for interest, including capital leases, net of
amounts capitalized.................................... $ 893 $ 724 $ 964
======== ======== ========
Cash paid for income taxes................................ $ 215 $ 3,330 $ 1,210
======== ======== ========
Supplemental schedule of non-cash investing and financing
activities:
Installment loans and capital lease obligations........... $ -- $ 1,687 $ 8,362
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 42
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Precision Response Corporation and subsidiaries (the "Company") is a
full-service provider of teleservices, Internet customer communications,
database marketing and management, and fulfillment services on an outsourced and
cosourced basis to large corporations. The Company currently operates 4,500
workstations in eight call centers, of which three have multimedia capabilities,
all located in Florida.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the allowance for doubtful
accounts and sales allowances, the valuation allowance on net deferred tax
assets, the useful lives of property and equipment, and accrued expenses. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less on their
acquisition date are considered cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the Federally-insured limits.
Property and Equipment
Property and equipment, including expenditures for major improvements, is
stated at cost less accumulated depreciation and amortization. Repairs and
maintenance are expensed as incurred. Depreciation and amortization is
determined using the straight-line method over the estimated useful lives of the
respective assets or, in relation to leasehold improvements and property under
capital leases, over the lesser of the asset's estimated useful life or the
lease term (see Note 4 -- Property and Equipment).
Upon the sale, retirement or other disposition of assets, the related cost
and accumulated depreciation or amortization is eliminated from the accounts.
Any resulting gains or losses from disposals are included in the Consolidated
Statements of Operations.
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (see Note 3 -- Restructuring and Other Non-Recurring
Special Charges).
Capitalized Interest
The Company capitalizes certain interest costs recognized on borrowings as
part of the historical cost of acquiring or producing certain assets in
accordance with Statement of Financial Accounting Standards No. 34,
Capitalization of Interest Cost. The amount capitalized is an allocation of the
interest cost incurred during the
F-6
<PAGE> 43
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period required to complete the asset. During 1998, certain borrowings under the
Company's revolving credit facility (see Note 5 -- Credit Facilities and
Long-Term Debt) were used to partially fund the Company's PRISM Project (see
Note 4 -- Property and Equipment), and the resulting interest costs incurred
have been capitalized. Total interest cost incurred during 1998 was $1.3
million, of which $1.1 million was expensed and is included in the accompanying
1998 Consolidated Statements of Operations, and the remaining $200,000 was
capitalized and is included in Property and equipment, net in the accompanying
Consolidated Balance Sheets. As each module of the PRISM Project is implemented,
all associated capitalized costs, including capitalized interest, will begin to
be amortized on a straight-line basis over the module's estimated useful life.
Revenue Recognition
The Company recognizes revenues as services are performed. Teleservicing
charges are primarily based on a fixed hourly fee for dedicated service.
Beginning in the third quarter of 1997, the Company also generated teleservicing
revenues under incentive-based compensation agreements whereby the amount of
revenue earned correlates to the achievement of established targets. Charges for
database marketing and management services are based on an hourly rate or on the
volume of information stored. Charges for fulfillment services are typically
assessed on a transaction basis, with an additional charge for warehousing
products for customers.
Revenues earned from the transfers of software by the Company are generally
recognized when the software has been shipped, payment is due within one year,
collectibility is probable and there are no significant obligations remaining.
No such revenues were recognized in 1998.
Software Development Costs
The Company capitalized costs related to the development of certain
software products integral to the Company's teleservicing programs and recent
business process reengineering, which were either for internal use or with an
objective of being marketed externally. Capitalized software development costs
were reported at the lower of unamortized cost or net realizable value based
upon future use on a product-by-product basis. In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed ("SFAS No. 86"),
capitalization of these software development costs began when technological
feasibility had been established and ended when the product was available for
general use in the Company's teleservicing programs. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future demand for teleservicing programs, estimated economic
life and changes in software and hardware technologies.
Commencing upon initial product release, capitalized software costs were
amortized on an individual product basis using the straight-line method over the
estimated economic life of the product or three years. The amount of externally
marketed software development costs capitalized in 1997 was $1,660,000. No
software development costs were incurred during 1998 in accordance with the
provisions of SFAS No. 86. Amortization expense related to externally marketed
software development costs was $744,000, $1,368,000 and $154,000 in 1998, 1997
and 1996, respectively. Externally marketed software development costs, net of
accumulated amortization, in the amount of $1,987,000 as of December 31, 1997 is
included in Other assets in the accompanying Consolidated Balance Sheets. In
conjunction with the Company's restructuring plan during the third quarter of
1998, the remaining unamortized balance of software development costs in the
amount of $1,243,000 was written off (see Note 3 -- Restructuring and Other
Non-Recurring Special Charges).
In accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"), the
Company capitalizes acquired and internally developed or modified software
solely to meet its internal needs integral to the Company's teleservicing or
Internet-based programs. The Company capitalizes certain internal and external
costs directly associated with
F-7
<PAGE> 44
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
developing or modifying the internal use software, which begins with the
application development stage and ends when the project is substantially
complete and ready for its intended use. The amount of costs capitalized in 1998
relating to internal use software in process was $4.9 million, consisting
principally of software purchased from external vendors, and is included in
Property and equipment, net in the accompanying Consolidated Balance Sheets (see
Note 4 -- Property and Equipment). As of December 31, 1998, no internal use
software development projects were ready for their intended uses and, therefore,
no amortization cost related to this software is included in the accompanying
Consolidated Statements of Operations. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
teleservicing program demand or Internet-based program demand, estimated
economic life and changes in software and hardware technologies.
In addition, in accordance with Emerging Issues Task Force 97-13,
Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project that Combines Business Process Reengineering and Information
Technology Transformation, and the provisions of SOP 98-1, the Company began
capitalizing certain costs incurred in the enhancement of internal financial and
operating systems associated with its initiative to implement an Enterprise
Resource Planning solution, which the Company designated the PRISM Project.
Costs incurred on the PRISM Project, consisting principally of software
purchased from Oracle Corporation, outside consultant fees and, to a lesser
extent, payroll and payroll-related costs for employees directly associated with
the PRISM Project, were $8.6 million as of December 31, 1998 and are included in
Property and equipment, net in the accompanying Consolidated Balance Sheets (see
Note 4 -- Property and Equipment). The PRISM Project is being implemented in
phases with certain systems or modules becoming functional at different points
in the project timeframe. Of the total $8.6 million, $5.5 million represents
PRISM Project modules still in the application development stage and $3.1
million represents the PRISM Project modules that were placed in service during
the fourth quarter of 1998. Amortization expense relating to the modules placed
in service (human resources/payroll, accounts receivable, accounts payable and
general ledger) was approximately $100,000 in 1998. Full implementation of all
aspects of the PRISM Project is expected by the third quarter of 1999. As each
module of the PRISM Project is implemented, all associated capitalized costs
will begin to be amortized on a straight-line basis over the module's estimated
useful life.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation expense for qualified and non-qualified
stock options granted under the Company's stock option plans is generally
measured as the difference between the quoted market price of the Company's
stock at the date of grant and the amount an employee must pay to acquire the
stock. For options granted to other than employees in exchange for goods or
services, compensation cost is measured at fair value in accordance with SFAS
123 (see Note 11 -- Stock-Based Compensation Plans).
Advertising Expenses
Advertising expenses are charged to operations as incurred. During 1998,
1997 and 1996, advertising expenses were $418,000, $341,000 and $464,000,
respectively.
F-8
<PAGE> 45
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Beginning July 16, 1996, the Company began providing for deferred income
taxes under the asset and liability method for financial accounting and
reporting for income taxes. Deferred tax assets and liabilities are determined
based on the differences between the financial statements carrying amounts and
the tax bases of existing assets and liabilities using the enacted statutory tax
rates in effect for the year in which the differences are expected to reverse.
Prior to the initial public offering of the Company's common stock
completed in July 1996 (the "Initial Public Offering") (see Note 2 -- Public
Offerings), the Company included its income and expenses with those of its
shareholders for Federal and state income tax purposes (an S corporation
election). Accordingly, the Consolidated Statement of Operations for the period
from January 1, 1996 through July 15, 1996 does not include a provision for
Federal or state income taxes. The proforma data in the Consolidated Statements
of Operations for 1996 include a provision for Federal and state income taxes as
if the Company were subject to Federal and state corporate income taxes as a C
corporation. This proforma provision is computed using a combined Federal and
state tax rate of 37.6%.
In connection with the Initial Public Offering, the Company converted from
an S corporation to a C corporation effective July 16, 1996. Upon termination of
the S corporation election, deferred income taxes in the amount of $90,000
became a net liability of the Company with a corresponding non-recurring expense
in the Consolidated Statement of Operations for 1996 (see Note 9 -- Income
Taxes). Deferred taxes resulting from the termination of the S corporation
relate primarily to accounts receivable, other accrued expenses and property and
equipment.
Earnings Per Common Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128"), which supersedes
Accounting Principles Board Opinion No. 15, Earnings Per Share. Basic earnings
per common share calculations are determined by dividing earnings available to
common shareholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share calculations are
determined by dividing earnings available to common shareholders by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the year (all related to outstanding stock options discussed
in Note 11 -- Stock-Based Compensation Plans). SFAS No. 128 had no impact on the
Company's reported primary earnings per share for 1996.
Proforma Net Income Per Common Share
Proforma net income per common share amounts are computed based on net
income on a proforma basis, after considering the Company's change in tax
status, and the weighted average number of common shares outstanding during each
year after retroactive adjustment for stock splits effected by way of share
dividends (see Note 10 -- Capital Stock).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting operating and geographical segments and the type and
level of financial information to be discussed about those segments. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS No. 131 in the current year and determined that it has one
reportable operating segment. See Note 7 -- Information About Services and
Significant Clients.
F-9
<PAGE> 46
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the AICPA issued Statement of Financial Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs
incurred in the development of internal-use software and is effective for
financial statements for years beginning after December 15, 1998. The Company
adopted SOP 98-1 in the first quarter of 1998. See Note 1 -- Operations and
Significant Accounting Policies -- Software Development Costs and Note
4 -- Property and Equipment.
2. PUBLIC OFFERINGS
Effective July 16, 1996, the Company completed the Initial Public Offering
of its common stock (the actual closing date was July 22, 1996) in which the
Company and certain selling shareholders sold 4,600,000 shares of common stock
at an offering price of $14.50 per share. Of the 4,600,000 shares, 3,600,000
shares were sold by the Company. Net proceeds to the Company, after deducting
$5.1 million in costs associated with the offering, were $47.1 million. A
portion of the net proceeds was used to repay the outstanding balance of $12.8
million on the Company's existing revolving credit facility, various installment
loans totaling $1.0 million and to pay a distribution of S corporation earnings
to the Company's current shareholders at that time estimated at $5.2 million
(the "Dividend"). The balance of the net proceeds was used for general corporate
purposes, including call center expansion and working capital.
Effective January 29, 1997 (the actual closing date was February 4, 1997),
the Company and certain selling shareholders completed a second equity offering
of 4,740,000 shares of common stock at an offering price of $35.125 per share
(the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000 shares were
sold by the Company. Net proceeds to the Company from the Second Equity Offering
in the amount of $49.2 million, after deducting $3.5 million in costs associated
with the offering, have been used for call center expansion, other capital
expenditures necessary to support the Company's growth, working capital and
other general corporate purposes.
3. RESTRUCTURING AND OTHER NON-RECURRING SPECIAL CHARGES
During the third quarter of 1998, the Company performed an extensive review
of its operations and existing available workstation capacity. Such review
focused on determining the needed workstation capacity appropriate and desirable
in light of several factors. These factors included the requirements for
servicing the Company's current, recently attained, and anticipated new clients;
the Company's less than satisfactory operating results relative to a large
incentive-based, outbound teleservices program; and, the Company's inability to
recruit, train and maintain an employee base relative to available workstations
in certain strained labor markets without paying premium wage rates not able to
be supported by the operating margins being generated.
As a result of this review, the Company initiated a restructuring and
performance enhancing initiatives plan which centered on exiting the
incentive-based outbound teleservicing program and making adjustments to certain
call centers' workstation capacity. Additionally, the Company decided to replace
certain existing software programs utilized in its call center operations with
new customer interaction software reflective of advances in customer care
technology. The workstation capacity adjustments relate primarily to strained
labor markets in two areas where the Company had available workstation capacity
of approximately 900 workstations in each area. The Company will adjust the call
center capacity in each of these two markets to approximately 500 workstations
by reducing the size of its center in one of the markets and consolidating its
two existing centers in the other market into a single center. In connection
with the Company's decision to exit the incentive-based outbound teleservicing
program and to make call center capacity adjustments, certain reductions in
overhead and administrative headcount were also made resulting in the
termination of nine employees.
F-10
<PAGE> 47
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In adopting this plan, the Company recorded restructuring and other
non-recurring special charges of $22.1 million before taxes with an after-tax
impact of $13.8 million. This pre-tax amount is allocated as follows in the
Consolidated Statements of Operations for the year ended December 31, 1998:
$13.6 million to Restructuring and asset impairment charges (as further
described in the next paragraph); $2.3 million to Cost of services (of which
$700,000 represents cash items and $1.6 million represents non-cash items)
related principally to the write-off of teleservicing software that the Company
decided to replace with new customer interaction software reflective of advances
in customer care technology; and $6.2 million to Selling, general and
administrative expenses (of which $2.1 million represents cash items and $4.1
million represents non-cash items) principally for asset impairments of $4.1
million related to the plan to exit an incentive-based outbound teleservicing
program, $1.5 million related to increases in the provisions for certain accrued
liabilities, and $600,000 related to severance and other employee costs incurred
during the development of the performance enhancing initiatives plan. Of the
total $8.5 million in Cost of services and Selling, general and administrative
expenses described above, $7.5 million was funded during 1998 and the remaining
$1.0 million was accrued at December 31, 1998 and is included in Other accrued
expenses in the accompanying Consolidated Balance Sheets. The Company initiated
the restructuring and performance enhancing initiatives during the third quarter
of 1998 and continued with implementation in the fourth quarter. The Company
expects to be substantially completed during the third quarter of 1999.
Implementation includes the relocation and consolidation of teleservicing
programs to effectuate the closing of one call center and the reduction in size
of another call center, the completion of implementation of the new customer
interaction software reflective of advances in customer care technology,
termination of designated employees, and exploration and realization of
opportunities to divest unused facilities.
Amounts included in Restructuring and asset impairment charges in the
Consolidated Statements of Operations for the year ended December 31, 1998
include cash items such as severance and other employee-related costs of $1.0
million and lease and other facility exit costs associated with the reduction of
workstation capacity of $6.1 million. Of the total $7.1 million, $900,000 was
funded during 1998 and the remaining $6.2 million is accrued as of December 31,
1998 as part of the restructuring accrual. Non-cash restructuring and asset
impairment charges of $6.5 million are primarily related to the write-off of
leasehold improvements and telephone and computer equipment associated with the
reduction in workstation capacity.
During the third quarter of 1997, the Company initiated an extensive and
systematic review of its operations and cost structure in response to
inefficiencies primarily resulting from the addition of capacity and
infrastructure to accommodate a contract for its largest client that has been
delayed indefinitely and an across-the-board price reduction imposed by this
client. The review focused on reducing operating expenses, increasing customer
service efficiencies and generally strengthening the Company's position to
provide telephone-based customer service and marketing solutions on an
outsourced and cosourced basis to large corporations.
This review of the Company's operations focused primarily on operational
and organization structures and systems, client profitability and facilities
rationalization. As a result of this review, the Company initiated a plan to
consolidate three administrative locations into unused space in an existing
facility, to reduce overhead and administrative headcount by 10%, to consolidate
and reorganize various functional departments and to integrate and enhance its
financial and operating systems. The headcount reductions resulted in the
termination of approximately 150 employees primarily in the areas of
teleservicing, information services and administration. Payment of substantially
all termination benefits took place during the fourth quarter of 1997 during
which time actual employee terminations occurred.
In adopting this plan, the Company recorded a non-recurring special charge
of $26.2 million before taxes with an after-tax impact of $15.7 million. This
amount is allocated as follows in the Consolidated Statements of Operations for
the year ended December 31, 1997: $11.6 million to Restructuring and asset
impairment charges (as further described in the next paragraph); $7.8 million to
Cost of services (of which $6.6 million
F-11
<PAGE> 48
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represented cash items and $1.2 million represented non-cash items) related
principally to significant, non-capitalizable start-up and other costs incurred
in expanding and improving the Company's ability to provide certain types of
teleservicing and fulfillment services which it had previously been providing
only on a limited basis (these costs primarily related to development of systems
applications and training modules as well as actual employee training); and $6.8
million to Selling, general and administrative expenses (of which $6.7 million
represented cash items and $100,000 represented non-cash items) principally for
non-recurring operating expenses including $4.8 million of costs associated with
the development of the Company's restructuring and cost reduction initiatives,
increases in the provisions for certain accrued liabilities totaling $1.9
million and various balance sheet write-offs totaling $100,000. Of the total
$14.6 million in Cost of services and Selling, general and administrative
expenses described above, $11.4 million was funded during 1997 and the remaining
$3.2 million was accrued at December 31, 1997 and is included in Other accrued
expenses in the accompanying Consolidated Balance Sheets. The Company initiated
the restructuring and cost savings initiatives during the third quarter of 1997
and, since September 30, 1997, the Company had terminated designated employees
and reorganized its operational and administrative management structure in
connection with the restructuring and cost savings plan. The Company also
completed the relocation and consolidation of administrative office space into
unused space at an existing facility. Additionally, the Company also continued
its attempts to divest unused facilities. This included termination in February
1998 of a lease for an unused facility whose landlord is a corporation that is
wholly owned by the Company's Chairman of the Board. In consideration of a
termination payment of approximately $82,000, the landlord relieved the Company
of its future lease commitments totaling approximately $161,000. The Company
believes that the amount of the termination payment was no less favorable to it
than could have been negotiated from an unaffiliated party. The Company's
implementation throughout 1998 was substantially completed prior to the
Company's initiation of additional restructuring and performance enhancing
initiatives described above.
Amounts included in Restructuring and asset impairment charges in the
Consolidated Statements of Operations for the year ended December 31, 1997
include cash items such as severance and other employee costs of $2.1 million
and lease obligations and other exit costs associated with the consolidation of
three administrative locations into an existing facility and the closing of one
small, unused call center of $2.6 million. Non-cash restructuring and asset
impairment charges of $6.9 million are primarily related to the write-off of
leasehold improvements associated with the administrative facility consolidation
and closing along with the cost to fully amortize redundant systems that are not
deemed recoverable in light of the aforementioned changes with the Company's
largest client. At December 31, 1998, $500,000 is included in Restructuring
accrual in the Consolidated Balance Sheets, relating to facility consolidation
costs associated with the 1997 restructuring plan.
The following table sets forth the details and the cumulative activity in
the restructuring accrual during the year ended December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
1997 ADDITIONS EXPENDITURES 1998
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Severance and other employee costs............... $ 482 $1,057 $ (842) $ 697
Closure and consolidation of facilities
and related exit costs......................... 2,381 6,075 (2,453) 6,003
------ ------ ------- -------
Total restructuring accrual............ $2,863 $7,132 $(3,295) 6,700
====== ====== =======
Less: current portion.................. (3,244)
-------
Total restructuring accrual,
long-term............................ $ 3,456
=======
</TABLE>
F-12
<PAGE> 49
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of both owned property and property
under capital leases, the details of which are set forth below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 ESTIMATED
----------------------------- ----------------------------- USEFUL
OWNED LEASED TOTAL OWNED LEASED TOTAL LIVES
-------- ------- -------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Land............................................ $ 1,057 $ -- $ 1,057 $ -- $ -- $ -- N/A
Buildings and improvements...................... 4,878 -- 4,878 -- -- -- N/A
Telecommunications equipment and software....... 20,946 4,432 25,378 20,823 4,500 25,323 3-7 years
Computer equipment and software................. 33,768 5,523 39,291 27,902 5,720 33,622 3-5 years
Leasehold improvements.......................... 11,167 -- 11,167 11,843 -- 11,843 *
Furniture and fixtures.......................... 8,044 242 8,286 7,706 242 7,948 5-7 years
Vehicles........................................ 111 -- 111 239 70 309 3 years
-------- ------- -------- -------- ------- --------
79,971 10,197 90,168 68,513 10,532 79,045
Development in process.......................... 11,408 -- 11,408 457 -- 457 N/A
-------- ------- -------- -------- ------- --------
91,379 10,197 101,576 68,970 10,532 79,502
Less: accumulated depreciation and
amortization.............................. (28,368) (1,794) (30,162) (13,631) (2,570) (16,201)
-------- ------- -------- -------- ------- --------
$ 63,011 $ 8,403 $ 71,414 $ 55,339 $ 7,962 $ 63,301
======== ======= ======== ======== ======= ========
</TABLE>
- -------------------------
* The lesser of the asset's estimated useful life or the lease term (see also
Note 6 -- Lease Commitments).
Depreciation and amortization expense amounted to $12,078,000, $10,138,000
and $3,477,000 for 1998, 1997 and 1996, respectively.
As discussed in Note 1 -- Operations and Significant Accounting Policies,
the Company capitalizes certain costs in connection with internal use software
and business process reengineering (PRISM Project) which will be amortized when
the software is available for use or project modules are implemented. As of
December 31, 1998, $4.9 million, related to internal use software in process,
and $5.5 million, related to the PRISM Project modules not yet implemented, are
included in Development in process in the above table. In addition, $3.1 million
related to the PRISM Project modules operational as of December 31, 1998, are
included in Computer equipment and software in the above table.
During 1998, the Company acquired a property (land and existing building)
in Sunrise, Florida, which will be used as a possible location for new
administrative offices or, should utilization levels warrant, as a new call
center. See also Note 5 -- Credit Facilities and Long-Term Debt. The building
and related building improvements of $4.9 million as of December 31, 1998 were
not depreciated in 1998 due to the building not being occupied or utilized
during 1998.
5. CREDIT FACILITIES AND LONG-TERM DEBT
On May 1, 1996, the Company entered into a three-year senior revolving
credit facility (the "Senior Revolving Facility") which provided for revolving
loans in an aggregate principal amount not to exceed $15.0 million. The Company
was able to borrow up to 85% of eligible accounts receivable. The Senior
Revolving Facility was primarily collateralized by accounts receivable. Based
upon eligible accounts receivable and no outstanding borrowings under the Senior
Revolving Facility as of December 31, 1997, availability thereunder was $15.0
million as of December 31, 1997. The Senior Revolving Facility accrued interest
at the Company's option at the prime rate plus 0.5% or the LIBOR rate plus 3.0%.
The Company paid a fee of 0.25% per annum on unused commitments under the Senior
Revolving Facility.
On March 2, 1998, the Company entered into a new three-year, $25.0 million
revolving credit facility (the "Credit Facility"), replacing the Senior
Revolving Facility. The Company may borrow up to 80% of eligible accounts
receivable. The Credit Facility is collateralized by all of the Company's owned
and hereafter acquired assets. The Credit Facility accrues interest at the
Company's option at (i) the greater of the prime rate or the Federal funds rate
plus 0.50% or (ii) the LIBOR rate plus a specified percentage (1.25% to 1.75%)
F-13
<PAGE> 50
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based upon the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The Company pays a fee of between
0.1875% and 0.25% per annum on unused commitments under the Credit Facility
based upon the ratio of funded debt to EBITDA. The Company is required, under
the terms of the Credit Facility, to maintain certain financial covenants and
ratios, including minimum tangible net worth and funded debt to EBITDA and
funded debt to capitalization ratios, to limit capital expenditures and
additional indebtedness and is restricted, among other things, with respect to
the declaration and payment of dividends, redemptions and acquisitions. At
December 31, 1998, the outstanding balance of the Credit Facility was $11.0
million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and
$2.5 million at 6.82% per annum) and is included in Long-term obligations, less
current maturities in the accompanying Consolidated Balance Sheets. At December
31, 1998, the available balance under the terms of the Credit Facility was $14.0
million for which the applicable unused commitment fee was at the rate of
0.1875%.
On May 29, 1998, the Company secured a mortgage with the lender on its
Credit Facility to acquire a property (land and existing building) located in
Sunrise, Florida. The Company had originally planned on securing a special
leasing arrangement for this property as part of its call center development
plans for 1997 and, to that end, expended approximately $2.1 million during 1997
for building improvements. However, the Company subsequently decided to acquire
the property outright. The new mortgage loan was for $5.1 million, of which $4.0
million was advanced at closing. The remaining $1.1 million available under the
new loan was subject to the Company's completion of future improvements to the
property by November 25, 1998. The Company chose not to complete the
improvements by this date; hence, the $1.1 million additional availability
expired on November 25, 1998. The Company is currently negotiating with the
lender on its Credit Facility to extend the term of the additional funding for
future improvements, although at this time no assurance can be given if such
extension will be obtained. The mortgage note accrues interest payable
quarterly, at the LIBOR rate plus 1.50%, of which the interest rate was 6.7% per
annum at December 31, 1998. Principal payments are due quarterly, based upon a
20-year amortization schedule and are expected to commence after consummation of
the additional funding for future improvements, with a balloon payment due at
maturity on June 1, 2005. The mortgage loan is cross-defaulted with and has
terms substantially similar to the Credit Facility.
Effective September 30, 1998, both the revolving credit agreement and
mortgage loan agreement evidencing the Credit Facility and mortgage loan,
respectively, were amended to modify two financial covenant and ratio
definitions, the amount of the minimum tangible net worth and the fixed charge
coverage ratio. As of December 31, 1998, the Company was in compliance with all
financial debt covenants.
Effective May 1997, the Company entered into a ten-year agreement to lease
its operating facility located in Jacksonville, Florida. The terms of the lease
included a construction allowance payment of approximately $1.0 million made by
the lessor to the Company on commencement of the lease and in return the Company
was obligated to make improvements to the facility. The lease agreement also
specifies that if the Company terminates the lease agreement prior to its full
term, it is required to refund the lessor the $1.0 million on a pro-rata basis.
In connection with the restructuring plan adopted in the third quarter of 1998
(see Note 3 -- Restructuring and Other Non-Recurring Special Charges), the
Company will reduce the size of the Jacksonville facility during 1999 and,
therefore, will terminate the Jacksonville lease agreement at the lease option
date in May 2002, which will represent only five years of the specified ten year
lease term. As such, the Company will be obligated to refund the lessor 50% of
the $1.0 million construction allowance, or $500,000, upon termination of the
lease. The $500,000 was accrued at December 31, 1998 and is included in
Long-term obligations, less current maturities in the accompanying Consolidated
Balance Sheets.
F-14
<PAGE> 51
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term obligations as of December 31, 1998 and 1997 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Credit Facility............................................. $11,000 $ --
Mortgage loan............................................... 4,000 --
Capital lease obligations................................... 3,926 5,886
Other long-term obligations................................. 500 --
------- ------
19,426 5,886
Less: current maturities.................................... (2,510) (2,393)
------- ------
Long-term obligations, less current maturities.............. $16,916 $3,493
======= ======
</TABLE>
Based on the borrowing rates available to the Company for debt with similar
terms and average maturities, the fair value of the Company's debt approximates
carrying value.
6. LEASE COMMITMENTS
The Company's operations are conducted in leased facilities which have
initial terms generally ranging from two to ten years. The leases for these
facilities would generally expire between 2004 and 2022 assuming the Company's
exercise of all renewal options. However, as a result of the 1998 restructuring
plan and continual assessment of the capacity requirements in Jacksonville and
Margate (Coconut Creek), the Company will terminate the lease agreements
relating to these locations no later than the lease option dates in May 2002.
However, prior to such terminations, the Company will fully vacate the Margate
(Coconut Creek) facility and reduce its occupancy level at the Jacksonville
facility during 1999.
The Company also has certain equipment leases which have terms of up to
five years, of which the latest expiration date occurs in 2001. Rent expense
under operating leases was $6,542,000, $5,867,000 and $3,347,000 for 1998, 1997
and 1996, respectively.
Future minimum lease payments under capital and operating leases, including
all renewal periods, and the annual rentals due on the related party leases
discussed in Note 8 -- Related Party Transactions, at December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ------- ---------
<S> <C> <C>
1999................................................... $2,597 $ 6,162
2000................................................... 1,575 4,864
2001................................................... 127 4,011
2002................................................... -- 2,800
2003................................................... -- 2,128
Thereafter............................................. -- 29,736
------ -------
Total minimum lease payments........................... 4,299 $49,701
=======
Less: amount representing interest.......................... (373)
------
Present value of net minimum lease payments under capital
leases.................................................... 3,926
Less: current maturities.................................... (2,310)
------
Long-term obligations....................................... $1,616
======
</TABLE>
F-15
<PAGE> 52
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INFORMATION ABOUT SERVICES AND SIGNIFICANT CLIENTS
The Company has one reportable operating segment: developing and delivering
solutions to its clients' customer service and marketing needs utilizing
teleservices, e-mail and the Internet, database marketing and management,
electronic data processing and fulfillment services.
A significant portion of the Company's business is dependent upon several
large clients. For the years ended December 31, 1998, 1997 and 1996, the
Company's five largest clients accounted for approximately 76%, 64% and 81% of
revenues, respectively. As of December 31, 1998, 1997 and 1996, approximately
68%, 68% and 69%, respectively, of the Company's accounts receivable were from
the five largest clients. Accounts receivable represents the Company's greatest
concentration of credit risk and is subject to the financial condition of its
largest clients. The Company does not require collateral or other security to
support clients' receivables. The Company conducts periodic reviews of its
clients' financial condition and vendor payment practices to minimize collection
risks on trade accounts receivable.
During 1998, 1997 and 1996, certain clients individually accounted for more
than 10% of the Company's total revenues. The clients and their related
percentage and amount of total revenues (in thousands) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
% AMOUNT % AMOUNT % AMOUNT
--- ------- --- ------- --- -------
<S> <C> <C> <C> <C> <C> <C>
Company A......................... 45% $80,559 38% $55,022 68% $66,000
Company B......................... 12% $20,882 11% $15,139 * *
</TABLE>
- -------------------------
* Accounted for less than 10% of total revenues for the year indicated.
8. RELATED PARTY TRANSACTIONS
During 1996, but prior to the completion of the Initial Public Offering,
the Company entered into various lease agreements for certain real property with
a corporation that is wholly-owned by the Company's Chairman of the Board
providing for aggregate annual rentals of approximately $288,000. Rent expense
under these leases was $293,000, $275,000 and $264,000 for 1998, 1997 and 1996,
respectively. The primary lease term is five years with a renewal option for an
additional five-year period. In accordance with the Company's 1997 restructuring
plan, one of the lease agreements was terminated by the Company, and a
termination payment of approximately $82,000 was made in February 1998. The
Company also subleases another facility and a parking lot and leases an
additional parking lot from a partnership jointly owned by certain of its
shareholders. These subleases expire in January 2002 and the lease expires in
June 2001, with annual rentals aggregating approximately $222,000.
The Company elected the majority owner of one of its customers to its Board
of Directors in October 1996. Sales commissions on revenues generated from
various other customers were paid to this director. Total commissions and fees
earned by this director were approximately $68,000 for 1996. This individual
also served as an executive officer of the Company effective from January 2,
1997 through September 30, 1998. He currently remains a director and employee of
the Company.
The Company paid approximately $198,000 and $200,000 in 1998 and 1997,
respectively, in fees to charter an aircraft in connection with business travel
for the Company's personnel. The aircraft is owned by an entity of which the
Company's Chairman of the Board is the sole shareholder.
F-16
<PAGE> 53
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
As described in Note 1 -- Operations and Significant Accounting Policies,
on July 16, 1996, the Company converted from an S corporation to a C corporation
and adopted the asset and liability method of accounting for income taxes. As a
result of such conversion, actual income taxes reflected in the Consolidated
Statements of Operations for 1996 are representative of the period from and
including July 16, 1996.
The components of the income tax (benefit) provision for the years ended
December 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $(3,805) $2,438
State................................................. -- -- 417
------- ------- ------
-- (3,805) 2,855
------- ------- ------
Deferred:
Federal............................................... (5,068) (3,632) 147
State................................................. (870) (1,273) 25
------- ------- ------
(5,938) (4,905) 172
------- ------- ------
$(5,938) $(8,710) $3,027
======= ======= ======
</TABLE>
A reconciliation of the difference between the actual income tax provision
and income taxes computed at the U.S. Federal statutory tax rate for the years
ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
U.S. Federal statutory tax rate applied to pre-tax
income................................................... $(5,644) $(7,622) $3,807
State income taxes, net of Federal benefit................. (577) (790) 287
Nondeductible expenses and other, net...................... 283 (298) 99
Deferred income taxes recorded due to change in tax
status................................................... -- -- 90
Income not subject to taxation at the corporate level due
to S corporation election................................ -- -- (1,256)
------- ------- ------
Income tax (benefit) provision........................ $(5,938) $(8,710) $3,027
======= ======= ======
</TABLE>
The significant components of the net deferred tax asset (liability) as of
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Allowances and reserves................................... $ 9,898 $2,811
Net operating loss and tax credit carryforwards........... 10,043 6,530
Other..................................................... 174 85
------- ------
20,115 9,426
Deferred tax liability:
Property and equipment.................................... 7,693 3,041
------- ------
Net deferred tax asset................................. $12,422 $6,385
======= ======
</TABLE>
The net deferred tax asset in the amount of $12.4 million as of December
31, 1998 is based upon expected utilization of net operating loss ("NOL")
carryforwards and reversal of certain temporary
F-17
<PAGE> 54
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
differences. Although realization is not assured, the Company believes it is
more likely than not that all of the net deferred tax asset will be realized in
the future. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. The Company will continue to review the
assumptions used on a quarterly basis and make adjustments as appropriate.
The Company has a Federal NOL carryforward of approximately $23.5 million
and a state NOL carryforward of approximately $34.5 million, both of which will
begin to expire in 2012.
10. CAPITAL STOCK
On May 1, 1996, the Company's shareholders approved an increase in the
number of authorized shares of common stock from 100 shares to 100 million
shares and a reduction in the par value per share of common stock from $1.00 to
$0.01. The Company also authorized 25 million shares, par value $0.01, of
preferred stock, the terms of which have not yet been determined. The Company
has no present plans to issue any preferred stock.
On May 31, 1996, the Company declared a share dividend of an aggregate of
12,734,900 shares of common stock, $0.01 par value, immediately payable to its
shareholders of record in order to effect the equivalent of a 127,350-for-1
stock split to increase the number of shares of common stock outstanding from
100 shares to 12,735,000 shares. On June 20, 1996, the Company declared a share
dividend of an aggregate total of 3,665,000 shares of common stock, $0.01 par
value, immediately payable to its shareholders of record in order to effect the
equivalent of a 1.287789556-for-1 stock split to increase the number of shares
of common stock outstanding from 12,735,000 shares to 16,400,000 shares.
Shareholders' equity has been restated to give retroactive recognition to the
stock splits in prior years by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the splits. All
applicable share and per share data have been adjusted for the stock splits.
Prior to the consummation of the Initial Public Offering, the Company's
Board of Directors declared the Dividend payable in cash to the then current
shareholders of the Company of approximately $5,243,000. The Dividend was equal
to the Company's then estimate of its cumulative taxable income prior to the
conversion to a C corporation to the extent such taxable income had not
previously been distributed. During the second quarter of 1997, the Company's
final tax return as an S corporation was completed and filed. As a result, an
additional $174,000 was paid to the Company's existing shareholders prior to the
Initial Public Offering as a final distribution of the Company's accumulated
taxable income prior to conversion to C corporation status.
11. STOCK-BASED COMPENSATION PLANS
On May 31, 1996, the Company adopted the 1996 Incentive Stock Plan (the
"Employee Stock Plan") and the 1996 Non-employee Director Stock Option Plan (the
"Director Stock Plan"; together with the Employee Stock Plan, the "Stock
Plans"). Officers, key employees and certain non-employee consultants may be
granted stock options, stock appreciation rights, stock awards, performance
shares and performance units under the Employee Stock Plan. Participation in the
Director Stock Plan is limited to members of the Company's Board of Directors
who are not salaried officers or employees of the Company. The Company
originally reserved 1,931,684 shares of common stock for issuance under the
Employee Stock Plan and 96,584 shares of common stock for issuance under the
Director Stock Plan, after giving effect to the previously described stock
splits by way of share dividends, and subject in each case to further
anti-dilution adjustments. At the Company's annual meeting of shareholders on
May 15, 1997, the total number of shares reserved for issuance under the
Employee Stock Plan was increased to 3,000,000, and at the Company's annual
meeting of shareholders on June 12, 1998, the total number of shares reserved
under the Employee Stock Plan was increased to 4,000,000.
F-18
<PAGE> 55
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the establishment of a compensation committee (the "Committee") of
the Board of Directors, the Employee Stock Plan was administered by the Board of
Directors of the Company. The Board of Directors or the Committee are authorized
to determine, among other things, the key employees to whom, and the times at
which, options and other benefits are to be granted, the number of shares
subject to each option, the applicable vesting schedule and the exercise price.
The Board of Directors or the Committee also determines the treatment to be
afforded to a participant in the Employee Stock Plan in the event of termination
of employment for any reason, including death, disability or retirement. Under
the Employee Stock Plan, the maximum term of an incentive stock option is 10
years and the maximum term of a non-qualified stock option is 15 years.
Incentive stock options under the Employee Stock Plan are required to be granted
at an exercise price equal to that of 100% of the fair market value at the date
of grant. Non-qualified options under the Employee Stock Plan are required to be
granted at an exercise price not less than 85% of the fair market value at the
date of grant, except for options covering up to 50,000 shares which may be
granted at an exercise price equal to or in excess of par value (or $0.01 per
share) (the "$0.01 Options"). With the exception of the $0.01 Options covering
21,000 shares, non-qualified options granted under the Employee Stock Plan
through December 31, 1998 have been granted at 100% of the fair market value at
the date of grant.
The Director Stock Plan provides for annual grants of non-qualified stock
options to each non-employee director of the Company. The options allow such
directors to annually purchase up to 2,500 shares of common stock at an exercise
price equal to the fair market value of the common stock on the date of grant.
These options will have a term of ten years and vest in equal installments over
three years. Stock options to purchase 7,500, 7,500 and 5,000 shares at exercise
prices ranging between $6.32 and $43.00 per share were granted under the
Director Stock Plan during 1998, 1997 and 1996, respectively.
On July 16, 1996, an executive officer of the Company was granted a
non-qualified stock option to purchase 21,000 shares of common stock at an
exercise price of $0.01 per share under the Employee Stock Plan. In accordance
with APB 25, the difference between the fair market value of the common stock
and the exercise price, which amounted to $304,290, was recorded as unearned
compensation (a separate component of shareholders' equity) and is being
recognized over the related three-year vesting period. Amortization of the
unearned compensation recorded in the accompanying Consolidated Financial
Statements in accordance with APB 25 resulted in compensation expense of
$41,000, $111,000 and $152,000 for 1998, 1997 and 1996, respectively.
During 1996, two then non-employee consultants were granted options under
the Employee Stock Plan to purchase an aggregate total of 85,000 shares of
common stock at various exercise prices equal to 100% of the fair market values
at the dates of grant. Pursuant to the application of SFAS No. 123 in accounting
for these non-employee stock options, the Company recorded $387,000 in unearned
compensation, which is being amortized ratably over the related vesting periods.
Amortization of the unearned compensation recorded in the accompanying
Consolidated Financial Statements in accordance with SFAS No. 123 resulted in
compensation expense of $67,000, $233,000 and $87,000 for 1998, 1997 and 1996,
respectively.
In late November 1997, the Company offered each employee, who had
previously been granted options to purchase the Company's stock, the opportunity
to change the option price, date of grant and vesting period effective December
5, 1997 (the "Repricing"). Under the terms of the Repricing, all previously
granted stock options would be cancelled, including any vested options, and the
employee would be granted the same number of options at the fair market value of
the Company's common stock on December 5, 1997, which was $7.875 per share. The
new grants would generally vest on a straight-line basis on each of the first
five anniversaries from the new date of grant. At the time of the offer, the
Company had approximately 170 employees who had been granted options to purchase
the Company's common stock since the Company's Initial Public Offering with
option prices ranging from $14.50 to $43.00. The Repricing plan was accepted by
approximately 125 eligible Company employees with respect to 925,000 outstanding
stock options.
F-19
<PAGE> 56
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, during the fourth quarter of 1997, three executive officers
of the Company had certain of their existing stock options repriced. Options
covering a total of 646,000 shares of common stock were repriced, with 310,000
shares having a new exercise price of $7.41 per share and 336,000 shares having
a new exercise price of $6.88 per share. As part of the repricing, certain of
these stock options provided for a new vesting schedule. Options covering
254,000 shares now vest 50% on the original date of grant of the options with an
additional 25% vesting on each of the first two anniversaries from the original
date of grant, and options covering 336,000 shares now vest 50% six months from
the repricing date of grant with an additional approximately 16-2/3% vesting on
each of the first three anniversaries from the repricing date of grant.
During the second quarter of 1998, the Company repriced options to purchase
100,000 shares of common stock previously issued to an employee. The exercise
price of the options was reduced from $17.625 per share to $8.00 per share, the
fair market value of the Company's common stock on the date of repricing. The
repriced options were fully vested on the date of repricing and are exercisable
through May 4, 2007.
The fair value of each option grant under the Company's Stock Plans is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Expected volatility.......................... 73.0% 78.3% 15.0%
5.92%-
Risk-free interest rate...................... 4.1%-5.9% 5.92%-6.81% 6.74%
Dividend yield............................... 0.0% 0.0% 0.0%
1-10
Expected life................................ years 7 years 3-8 years
</TABLE>
A summary of the status of the Company's Stock Plans as of December 31,
1998, 1997 and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE EXERCISE
NUMBER OF PRICE
OPTIONS PER OPTION
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996.............................. -- $ --
Granted:
Pursuant to the Initial Public Offering(1)............. 272,000 13.38(2)
Subsequent to the Initial Public Offering.............. 651,000 31.83
Exercised................................................. -- --
Forfeited................................................. (18,250) 14.50
----------
Outstanding at December 31, 1996............................ 904,750 26.63
Granted................................................... 3,667,750(3) 12.40
Exercised................................................. (42,000) 7.02
Forfeited................................................. (1,865,117)(3) 25.34
----------
Outstanding at December 31, 1997............................ 2,665,383 8.26
Granted................................................... 1,663,750(4) 6.60
Exercised................................................. (7,000) 0.01
Forfeited................................................. (481,483)(4) 10.06
----------
Outstanding at December 31, 1998............................ 3,840,650 7.39
==========
</TABLE>
- -------------------------
(1) No stock options were initially granted upon adoption of the Company's Stock
Plans but rather initially as a result of the Initial Public Offering, with
the effective date of such offering (July 16, 1996) representing the grant
date for these stock options.
F-20
<PAGE> 57
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes the $0.01 Options covering 21,000 shares, which were granted on
July 16, 1996. The remainder of these stock options were granted at an
exercise price of $14.50 per share.
(3) Includes 925,000 shares cancelled and then subsequently re-granted as part
of the Repricing and 646,000 shares cancelled and then subsequently
re-granted in the fourth quarter of 1997 as part of a repricing of three
executive officers' stock options at exercise prices ranging between $6.88
and $7.41 per share.
(4) Includes 100,000 shares cancelled and, then, subsequently re-granted in the
second quarter of 1998 as part of a repricing of an employee's stock options
at an exercise price of $8.00 per share.
The number of options exercisable at December 31, 1998, 1997 and 1996, was
1,243,759, 225,464 and 5,000, respectively. The per share weighted-average fair
value of stock options granted during 1998, 1997 and 1996 was $4.30, $9.53 and
$10.49, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
- ------------------------ ----------------- ------------ --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01(1)............... 7,000 4.54 $ 0.01 -- $ --
$4.69 to $6.875........ 1,216,000 7.13 6.19 502,114 6.72
$6.94.................. 730,250 6.01 6.94 -- --
$7.41.................. 445,000 5.40 7.41 341,248 7.41
$7.88(2)............... 1,040,750 5.95 7.88 240,116 7.88
$8.00 to $16.00........ 364,150 6.19 8.28 129,450 8.26
$21.125 to $43.00...... 37,500 3.25 34.05 30,831 34.98
--------- ---------
$0.01 to $43.00........ 3,840,650 6.27 7.39 1,243,759 7.99
========= =========
</TABLE>
- -------------------------
(1) As noted herein, the Employee Stock Plan provides for options covering up to
50,000 shares which may be granted at an exercise price equal to or in
excess of par value (or $0.01 per share).
(2) Represents the exercise price under the Repricing plan.
Had compensation cost for the Company's Stock Plans been determined based
on the fair value at the grant dates for awards under the Stock Plans consistent
with the method prescribed by SFAS No. 123, the Company's net (loss) income and
net (loss) income per share (diluted) in 1998, 1997 and 1996 would have been
reduced to the proforma amounts indicated below (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997 1996(1)
-------- -------- -------
<S> <C> <C> <C>
Net (loss) income:
As reported........................................ $(10,189) $(13,066) $6,519
Proforma........................................... (14,733) (18,474) 5,913
Diluted net (loss) income per common share:
As reported........................................ $ (0.47) $ (0.61) $ 0.36
Proforma........................................... (0.68) (0.86) 0.33
</TABLE>
- -------------------------
(1) In 1996, net income and diluted net income per common share are computed on
a proforma basis and include a provision for Federal and state income taxes
as if the Company were a C corporation for the entire year pursuant to its
change in income tax status from an S corporation to a C corporation. For
further details, see Note 1 -- Operations and Significant Accounting
Policies.
F-21
<PAGE> 58
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. The Company anticipates that additional awards
will be granted in future years.
12. EARNINGS PER SHARE
The following reconciles the numerators and denominators of the basic and
diluted earnings per share ("EPS") computations (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -----------------------
PRO
FORMA
NET PER NET PER NET PER
LOSS SHARES SHARE LOSS SHARES SHARE INCOME SHARES SHARE
-------- ------ ------ -------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS:
(Loss) income available to
common shareholders......... $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61) $6,519 18,083 $0.36
EFFECT OF DILUTIVE SECURITIES:
Stock options(1).............. -- -- -- -- -- -- -- 88 --
-------- ------ ------ -------- ------ ------ ------ ------ -----
DILUTED EPS:
(Loss) income available to
common shareholders and
assumed exercises........... $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61) $6,519 18,171 $0.36
======== ====== ====== ======== ====== ====== ====== ====== =====
</TABLE>
- -------------------------
(1) The effect of 71,679 and 178,684 shares of potential common stock were
anti-dilutive in 1998 and 1997, respectively.
13. RETIREMENT PLANS
The Company has adopted a profit sharing plan (the "Profit Sharing Plan")
which covers substantially all employees who have been employed with the Company
for at least two years and are at least 21 years of age. Under the terms of the
Profit Sharing Plan, the Company makes elective contributions to the Profit
Sharing Plan, the allocation of which to employees is based on relative salary.
Effective January 1, 1997, the Company amended the Profit Sharing Plan to
include certain 401(k) savings plan features (as amended, the "Profit
Sharing/401(k) Plan"). Under the provisions of the Profit Sharing/401(k) Plan,
employees meeting certain eligibility requirements may contribute a maximum of
15% of pre-tax gross wages, subject to certain restrictions imposed pursuant to
the Internal Revenue Code. Company contributions are at the discretion of its
Board of Directors. Vesting occurs over a six-year period at the rate of 20% per
year, beginning after the second year of service. The Company accrued a
contribution of $85,000 to the Profit Sharing/401(k) Plan during 1998. The
Company did not contribute to the Profit Sharing/401(k) Plan or the Profit
Sharing Plan during 1997 or 1996.
14. CONTINGENCIES
On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and
Freeman Industrial Enterprises Corporation v. Precision Response Corporation;
Mark Gordon; David L. Epstein; and Richard Mondre (Case No. 398-CV-1895-DJS (D.
Conn)), was filed in the Superior Court of the Judicial District of
Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed
by the Company to the United States District Court for the District of
Connecticut. This lawsuit alleges that the Company breached its contracts with
the plaintiffs by allegedly failing to pay all commissions relating to certain
clients whom the plaintiffs allegedly claim they procured for the Company. The
complaint also contains claims of breach of fiduciary duty, breach of covenant
of good faith and fair dealing, civil conspiracy, fraud/fraud in the
F-22
<PAGE> 59
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inducement, intentional infliction of emotional distress and violations of the
Connecticut Unfair Trade Practices Act. The plaintiffs seek actual, compensatory
and punitive damages, declaratory judgement that certain contracts are invalid
due to undue influence exercised upon plaintiffs or, in the alternative,
recission of such contracts, an accounting and interest, costs and attorneys'
fees.
On November 16, 1998, the Company filed a motion (i) to dismiss for lack of
personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper
venue or, in the alternative, to transfer to the U.S. District Court for the
Southern District of Florida. On that same day, the Company filed a motion to
dismiss the complaint for failure to state a cause of action. Both motions are
currently pending before the Court.
On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice
this lawsuit against Richard Mondre, which dismissal has been approved by the
Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint,
asserting the same causes of actions as in the original complaint, as well as a
claim for negligent misrepresentation.
The case is currently in the discovery stage. The Company believes that the
plaintiffs' allegations are totally without merit and intends to defend the
lawsuit vigorously. A provision for legal defense costs has been reflected in
the accompanying Consolidated Financial Statements under Other accrued expenses
and Selling, general and administrative expenses which management believes is
adequate based on available information. No other provisions have been reflected
since management is unable, at this time, to predict the ultimate outcome of
this matter.
15. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................................... $40,535 $43,379 $44,978 $46,281
Gross profit........................................... 4,025 6,157 4,437 6,916
Operating income (loss)................................ 705 1,727 (19,880)(1) 2,110
Net income (loss)...................................... 373 829 (12,604) 1,213
Basic earnings (loss) per common share................. 0.02 0.04 (0.58) 0.06
Diluted earnings (loss) per common share............... 0.02 0.04 (0.58) 0.06
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................................... $38,015 $35,963 $32,002 $37,604
Gross profit (loss).................................... 10,518 6,669 (5,835) 4,055
Operating income (loss)................................ 5,315 599 (28,440)(1) 468
Net income (loss)...................................... 3,291 475 (17,067) 235
Basic earnings (loss) per common share................. 0.16 0.02 (0.79) 0.01
Diluted earnings (loss) per common share............... 0.16 0.02 (0.79) 0.01
</TABLE>
- -------------------------
(1) Includes non-recurring special charges of $22.1 million before taxes in 1998
and $26.2 million before taxes in 1997 as part of the Company's
restructuring and cost reduction initiatives (see Note 3 -- Restructuring
and Other Non-Recurring Special Charges).
F-23
<PAGE> 60
PRECISION RESPONSE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES(1) DEDUCTIONS(2) BALANCE
----------- --------- ----------- ------------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts and sales
allowances.................................... $2,864 $14,534 $9,173 $8,225
Year ended December 31, 1997:
Allowance for doubtful accounts and sales
allowances.................................... 2,650 5,895 5,681 2,864
Year ended December 31, 1996:
Allowance for doubtful accounts and sales
allowances.................................... 60 5,215 2,625 2,650
</TABLE>
- -------------------------
(1) Amounts charged to bad debt expense and sales credits were $4,314 and
$10,220 in 1998, respectively, $448 and $5,447 in 1997, respectively, and
$2,105 and $3,110 in 1996, respectively.
(2) Deductions represent customer accounts written-off and sales credits.
S-1
<PAGE> 61
PRECISION RESPONSE CORPORATION
INDEX TO EXHIBITS FILED HEREWITH
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C> <C>
10.37 -- Confirmation letter dated December 1, 1998 from NationsBank,
N.A. to the Company regarding definition of "fixed charge
coverage ratio"
10.40 -- Employment Agreement effective as of October 20, 1998
between the Company and Wesley T. O'Brien
10.41 -- Letter agreement effective as of October 1, 1998 from the
Company to and accepted by Bernard J. Kosar, Jr.
23.1 -- Consent of PricewaterhouseCoopers LLP
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.37
NationsBank
Commercial Banking
100 Southeast 2nd Street, 15th Floor
Miami, FL 33131
Fax 305 533-2681
NATIONSBANK
December 1, 1998
Precision Response Corporation
1505 N.W. 167th Street
Miami, Florida 33165
Attention: Mr. Joseph E. Gillis
Vice President and Treasurer
RE: (1) SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT DATED AS OF
SEPTEMBER 30, 1998
(2) SECOND AMENDMENT TO MORTGAGE LOAN AGREEMENT DATED AS OF
SEPTEMBER 30, 1998
Dear Mr. Gillis:
Pursuant to our telephone conversations, this letter will confirm that the
definition of "Fixed Charge Coverage Ratio" which appears in the Second
Amendment to Revolving Credit Agreement and in the Second Amendment to
Mortgage Loan Agreement inadvertently omitted reference to the Harland
Debt. The correct definition is as follows (previously omitted words are
underlined):
6.03 FIXED CHARGE COVERAGE RATIO. Permit the ratio of (a) the sum of EBITDA
for any Four-Quarter Period plus Rents Expense for such Four-Quarter
Period to (b) the sum of interest expense for such Four-Quarter Period
plus Rents Expense for such Four-Quarter Period plus income tax
expense for such Four-Quarter Period plus 20% of Funded Debt (BUT
EXCLUDING THE HARLAND DEBT) outstanding as of the last day of the
applicable Four-Quarter Period PLUS THE CURRENT MATURITIES OF THE
HARLAND DEBT to be less than 1.80 to 1.00 as of the last day of each
Four-Quarter Period.
Very truly yours,
NATIONSBANK, N.A.
/s/ Charles E. Porter
-----------------------------
Charles E. Porter
Senior Vice President
<PAGE> 1
EXHIBIT 10.40
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated effective as of October 20, 1998, by and
between PRECISION RESPONSE CORPORATION, a corporation organized and existing
under the laws of the State of Florida (hereinafter referred to as "Employer"),
and WESLEY T. O'BRIEN (hereinafter referred to as "Employee").
W I T N E S S E T H:
WHEREAS, Employer is a Florida corporation engaged in the
teleservicing, database management and marketing and fulfillment business;
WHEREAS, Employer desires to employ Employee upon the terms and
conditions set forth below and Employee desires to accept such employment upon
such terms and conditions; and
WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to Employee's
employment by Employer.
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT
Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon the terms and conditions set forth in this
Employment Agreement.
2. TERM
Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Employment Agreement shall commence as of the date hereof
and shall continue until 5:00, p.m., December 31, 2001 (the "Initial Employment
Term"), with the Initial Employment Term to be automatically renewed and
extended for consecutive additional one year periods unless, at least sixty (60)
days prior to the expiration of the Initial Employment Term or any one year
renewal period thereof, either party hereto delivers to the other party hereto
written notice of such party's termination of this Employment Agreement at the
expiration of the Initial Employment Term or any one year renewal period thereof
(as the case may be). The Initial Employment Term together with any or all one
year renewal periods thereof are hereinafter collectively referred to as the
"Employment Term".
<PAGE> 2
3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES
Employee represents and warrants to Employer that Employee is
free to accept employment with Employer as contemplated herein and has no other
written or oral obligations or commitments of any kind or nature which would in
any way interfere with Employee's acceptance of employment pursuant to the terms
hereof or the full performance of Employee's obligations hereunder or the
exercise of Employee's best efforts in Employee's employment hereunder or which
would otherwise pose any conflict of interest.
4. DUTIES AND EXTENT OF SERVICES
A. DUTIES. Employee's duties and responsibilities hereunder
shall be those reasonably assigned to Employee from time to time by Employer,
consistent with the following: Employee shall, subject to his initial election
by the Employer's Board of Directors, serve as Employer's President and Chief
Operating Officer, and shall, subject to the direction from time to time of
Employer's Chairman of the Board or Chief Executive Officer, have responsibility
to oversee and supervise all activities relating to Employer's day-to-day
operations including those related to teleservices, database management services
and marketing and fulfillment services. Employee shall report directly to
Employer's Chief Executive Officer. Employee agrees to devote Employee's full
and exclusive business time, skill, attention and energy to perform the duties
and responsibilities properly assigned to Employee hereunder or pursuant hereto
to the best of his abilities. However, Employee may devote a reasonable amount
of his time to civic, community or charitable activities and, with the prior
written approval of the Chairman of the Board or Chief Executive Officer of
Employer, to serve as a director of other corporations and undertake other
activities not expressly mentioned in this paragraph. Employee may invest his
personal assets as he deems appropriate so long as such investments (i) are
passive investments, (ii) are not invested in any business which is a direct or
indirect competitor of Employer (subject to the proviso in clause (ii)(B) of
Section 11 hereof) and (iii) do not interfere with Employee's performance of the
duties and responsibilities assigned to him pursuant to this Employment
Agreement.
B. RULES AND REGULATIONS. Employee agrees to abide by the
rules and regulations of Employer promulgated by Employer from time to time with
respect and applicable to Employer's senior executives generally, provided that
copies of such rules and regulations are provided to Employee. Such rules and
regulations are all hereby incorporated by reference and made a part of this
Employment Agreement.
2
<PAGE> 3
C. PLACE OF SERVICE. Employee shall render his services
initially in northern Miami-Dade County, Florida, and shall not be obligated to
maintain his office in any place other than northern Miami-Dade County (i.e.,
not any further south in Miami-Dade County than the location of Employer's
executive offices as of the date of this Employment Agreement), Broward County
or Palm Beach County, Florida; provided, however, that Employee shall be
obligated to travel as necessary to fulfill his duties and responsibilities, and
Employee understands that such travel may, during certain periods, be extensive.
5. COMPENSATION
A. BASE COMPENSATION. Subject to the provisions of Section 9
of this Employment Agreement, Employer shall pay salary to Employee ("Salary")
at a rate of $350,000 per annum through the expiration of the Employment Term
unless otherwise mutually agreed in writing by the parties hereto. Employer may
decide, in its sole discretion, to increase (but not to decrease) the Salary at
any time during the Employment Term. Salary shall be payable in accordance with
Employer's normal payroll practices for its employees and shall be subject to
payroll deductions and tax withholdings in accordance with Employer's usual
practices and as required by law.
B. BONUS COMPENSATION. Employee shall receive an annual bonus
in an amount not to exceed seventy-five percent (75%) of the Salary paid to
Employee with respect to the year to which the bonus relates, the actual amount
of which shall be determined by the Compensation Committee of the Board of
Directors of Employer in its sole and absolute discretion (the "Bonus Amount").
Subject to the provisions regarding payment upon termination or expiration of
employment set forth in Section 9 hereof, each annual Bonus Amount shall be paid
on or before March 31 of each year of the Employment Term. The Bonus Amount
payable on or before each March 31 shall be based upon the operating results of
Employer and Employee's performance during the calendar year (or the portion
thereof in which Employee was employed hereunder) immediately preceding such
March 31. Each Bonus Amount shall be subject to payroll deductions and tax
withholdings in accordance with Employer's usual payroll practices and as
required by law.
C. FAIR MARKET VALUE STOCK OPTIONS. Employer acknowledges that
as of the date of this Employment Agreement Employer has granted to Employee
stock options (the "FMV Stock Options") to acquire 350,000 shares of Employer's
common stock, par value $.01 per share, pursuant to the Precision Response
Corporation Amended and Restated 1996 Incentive Stock Plan (the "Plan") and a
Stock Option Agreement in the form attached as
3
<PAGE> 4
Exhibit "A" to this Employment Agreement. Employer represents that there are
sufficient shares of Employer's common stock, par value $.01 per share, reserved
by Employer for issuance under the Plan to fulfill Employer's obligation to
issue such shares upon exercise of all of the FMV Stock Options, and that
Employer will use its best efforts to register and thereafter have such shares
continue to be registered with the Securities and Exchange Commission on Form
S-8 (or such other applicable registration form).
6. FRINGE BENEFITS AND EXPENSES
A. EMPLOYEE BENEFITS. Employee shall be entitled to such
benefits and fringe benefits (such as health, dental, life and disability
insurance) as are made available by Employer from time to time, in Employer's
sole discretion, to Employer's senior executives generally.
B. EXPENSES. Employer shall reimburse Employee for Employee's
reasonable out-of-pocket costs and expenses incurred in connection with the
performance of Employee's duties and responsibilities hereunder, subject to
Employee's presentation of appropriate documentation and, if requested,
justification therefor.
C. AUTOMOBILE. Employer shall provide to Employee an
automobile allowance of $850.00 per month during the Employment Term in order to
defray Employee's automobile expenses incurred in the performance of his duties,
but shall not be obligated to provide Employee with an automobile.
D. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. Employer will
endeavor to maintain Employer's directors' and officers' liability insurance at
least at the same level of coverage as in effect as of the date hereof.
7. VACATIONS
Employee shall be entitled to four (4) weeks vacation each
full year of the Employment Term (prorated for any partial year), with full
compensation, which, to the extent unused, may be carried over from year to year
up to an aggregate of eight (8) weeks vacation in any full year of the
Employment Term, provided that the use of any such carried over vacation in any
year does not substantially interfere with Employee's performance of his duties
and responsibilities assigned to him pursuant to this Employment Agreement.
Employee shall not be entitled to be compensated for any unused vacation days
upon termination of employment. The periods during which Employee will be absent
from
4
<PAGE> 5
work for vacation shall be at the reasonable discretion of Employer.
8. FACILITIES
Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, supplies and personnel as are
reasonably necessary for Employee's performance of Employee's duties and
responsibilities under this Employment Agreement.
9. TERMINATION OF EMPLOYMENT
A. TERMINATION EVENTS. Employee's employment under this
Employment Agreement may be terminated by Employer only as follows: with or
without Cause (as hereinafter defined), effective upon the delivery of written
notice to Employee; upon Employee's death; or upon Employee becoming Disabled
(as hereinafter defined) and receiving written notice of termination from
Employer to that effect within ninety (90) days after being deemed Disabled.
Employee may terminate Employee's employment under this Employment Agreement
without being in breach hereunder by giving written notification of (i)
Employee's resignation to Employer which shall specify a resignation date no
earlier than ninety (90) days following the date of delivery of such notice of
resignation or (ii) Constructive Termination (as hereinafter defined) of
Employee's employment under this Employment Agreement (subject to the provisions
of Section 9.B. hereof relating to Constructive Termination). Employee's
employment under this Employment Agreement shall be terminated upon expiration
of the Employment Term pursuant to Section 2 hereof.
B. DEFINITIONS OF CAUSE, DISABLED AND CONSTRUCTIVE
TERMINATION. For purposes of this Employment Agreement, "Cause" shall mean: (i)
commission of a felony, or commission of acts of fraud, embezzlement, or the
like; (ii) habitual drunkenness during business hours or at Employer's premises;
(iii) use of illicit drugs during business hours or at Employer's premises; (iv)
abandonment of employment duties (other than by reason of death or becoming
Disabled); (v) gross negligence in the performance of employment duties; or (vi)
material breach by Employee of this Employment Agreement which, if curable, is
not cured by Employee within thirty (30) days following Employee's receipt of
written notice thereof (such notice shall specify in reasonable detail the
nature of the material breach and the curative steps, if curable, required to be
taken). Employee shall be deemed "Disabled" for purposes of this Employment
Agreement (a) if Employee is unable, due to physical, mental or emotional
illness or injury, to perform substantially all of Employee's duties and
responsibilities for
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Employer for a continuous period of one hundred and twenty (120) days, or (b) if
Employee is adjudicated as an incompetent or has a guardian appointed to handle
Employee's affairs. If clause (a) above applies, Employee shall be deemed
Disabled on the last day of the 120 day period. If clause (b) above applies,
Employee shall be deemed Disabled on the date of adjudication as an incompetent
or the appointment of the guardian, whichever occurs first. For purposes of this
Employment Agreement, "Constructive Termination" shall mean: (x) Employer has
delegated to another or others a material portion of Employee's duties or
responsibilities provided for in Section 4.A. hereof (and shall include, without
limitation, removal of Employee from the office of President or Chief Operating
Officer, even if Employee's day-to-day duties are to remain substantially the
same), other than for Cause, and Employer fails to confirm in writing, and
implement, the reinstatement of such material portion of Employee's duties and
responsibilities and/or offices to Employee within thirty (30) days after
receipt by each of the Chairman of the Board and Chief Executive Officer of
Employer of Employee's written notice of protest (as provided in the next
sentence), (y) Employer attempts, without Employee's prior written consent, to
relocate Employee's office outside the location specified in Section 4.C.
hereof, or (z) the position of Chairman of the Board or Chief Executive Officer
of Employer becomes vacant for any reason and the vacancy is filled by a person
other than Mark J. Gordon, David Epstein, Employee or another person not an
employee of Employer immediately prior to becoming the Chairman of the Board or
Chief Executive Officer of Employer. In the event of Constructive Termination of
Employee's employment under this Employment Agreement, Employee may terminate
Employee's employment, provided that he has given written notice of protest to
each of the Chairman of the Board and Chief Executive Officer of Employer within
thirty (30) days of the occurrence of the event causing the Constructive
Termination setting forth the manner in which the Constructive Termination has
occurred (and such Constructive Termination is not timely corrected, as provided
in the case of a Constructive Termination under clause (x) of the preceding
sentence).
C. EFFECT OF TERMINATION FOR CAUSE OR EMPLOYEE'S RESIGNATION.
In the event that Employee's employment under this Employment Agreement is
terminated by Employer with Cause, or because Employee resigns from Employee's
employment, Employer shall pay to Employee, within thirty (30) days following
the date of such termination or resignation, (i) the Salary, if any, accrued and
unpaid through the date of such termination or resignation, and (ii) if the
Bonus Amount of Employee for the prior year has been declared by Employer, but
not yet paid to Employee, the Bonus Amount for such prior year, and shall pay
and provide to Employee the amounts and items payable and to be provided under
Section 6
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through the date of such termination or resignation; and Employee shall not be
entitled to any other compensation, remuneration or other sums provided for in
this Employment Agreement or to which Employee might otherwise be entitled
hereunder or at law or in equity.
D. COMPENSATION UPON DEATH OR DISABILITY. Upon the death of
Employee, or termination of employment because Employee is Disabled, Employer
shall pay to Employee, Employee's legal guardian or the legal representative of
Employee's estate (or heir as designated by the legal representative of
Employee's estate at such time), within thirty (30) days following the date of
Employee's death or termination, the Salary and Bonus Amount, if any, accrued
and unpaid through the date of termination and shall pay and provide to
Employee, Employee's legal guardian or the legal representative of Employee's
estate the amounts and items payable and to be provided under Section 6 through
the date of such termination; and Employee (or such legal guardian, legal
representative or any heirs) shall not be entitled to any other compensation,
remuneration or other sums provided for in this Employment Agreement or to which
Employee might otherwise be entitled hereunder or at law or in equity (except
with respect to benefits which become payable under any employee benefit plans
of Employer as a result of Employee's death or disability). In the event that
death or termination of employment as a result of Employee becoming Disabled
occurs during a year and prior to any Bonus Amount of Employee being declared by
Employer for such year, the Bonus Amount under this Subsection D. for such
partial year of employment shall be prorated through the date of such death or
termination based upon the prior year's Bonus Amount.
E. COMPENSATION UPON TERMINATION WITHOUT CAUSE OR CONSTRUCTIVE
TERMINATION OR EXPIRATION. In the event that Employer (or its successor)
terminates Employee's employment under this Employment Agreement without Cause
(other than in connection with a Change in Control (as hereinafter defined) as
provided in Subsection F. below), Employee terminates his employment as a result
of the occurrence of a Constructive Termination to the extent and in the manner
permitted hereunder or upon expiration of the Employment Term pursuant to the
terms of Section 2, Employee's sole and exclusive compensation and remedy
hereunder shall be to receive from Employer, and Employer shall pay to Employee,
(i) the amount of Salary and Bonus Amount, if any, accrued and unpaid through
the date of termination or expiration, and the amounts and items payable or to
be provided under Section 6 through the date of termination or expiration,
payable within thirty (30) days following the date of termination or expiration
of employment, and (ii) (A) in the case of termination without Cause or
Constructive Termination, an amount in cash equal to the sum of (1) the Salary
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<PAGE> 8
that Employee would have received during the greater of (x) the one year period
following the date of such termination of Employee's employment and (y) the
remainder of the Initial Term (if such termination occurs during the Initial
Term) and (2) $175,000 or (B) in the case of expiration of the Employment Term
pursuant to Section 2 hereof as a result of Employer delivering to Employee a
written notice of termination of this Employment Agreement and provided that
Employer has not elected, as provided under Section 11, to waive Employee's
obligation to comply with his covenants under Subsection (ii) of Section 11, an
amount in cash equal to the Salary for one (1) full year. Such cash amount
payable under clauses (A) or (B) above shall be payable one-half (1/2) within
thirty (30) days following the date of termination of employment or expiration
and the balance (the other one-half (1/2)) payable in equal consecutive monthly
installments over the period that Employee was entitled to be paid the Salary
under clauses (A) or (B) above (as the case may be), with the first such
installment payable sixty (60) days following the date of termination of
employment or expiration and each subsequent installment payable on the same day
of each successive month until payment is made in full. In the event that
termination of employment without Cause, as a result of Constructive Termination
or upon expiration of this Employment Agreement occurs during a year and prior
to any Bonus Amount of Employee being declared by Employer for such year, the
Bonus Amount under this Subsection E. for such partial year of employment shall
be prorated through the date of such termination based upon the prior year's
Bonus Amount.
F. COMPENSATION UPON A CHANGE IN CONTROL. Notwithstanding the
provisions of Subsection E. above, in the event that (i) Employer (or its
successor) terminates Employee's employment under this Employment Agreement
without Cause within one hundred eighty (180) days after a Change in Control (as
hereinafter defined), (ii) Employee terminates his employment to the extent and
in the manner permitted under this Employment Agreement as a result of the
occurrence of a Constructive Termination within one hundred eighty (180) days
after a Change in Control or (iii) Employer (or its successor)(but not Employee)
delivers to Employee a written notice of termination pursuant to Section 2
terminating this Employment Agreement at the expiration of the Employment Term
and such expiration occurs within one hundred eighty (180) days after a Change
in Control, and subject to and limited by the provisions of Subsection G. below,
Employee's sole and exclusive compensation and remedy hereunder shall be to
receive from Employer (or its successor), and Employer (or its successor) shall
pay to Employee within thirty (30) days following the date of termination of
employment or expiration, (a) the amount of Salary and Bonus Amount, if any,
accrued and unpaid through the date of termination of employment or expiration,
and the amounts and items payable or
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<PAGE> 9
to be provided under Section 6 through the date of termination of employment or
expiration, and (b) a lump sum severance payment in cash equal to 2.99 times an
amount equal to the average of the sum of the annual Salary and Bonus Amount
paid to Employee each year during the Employment Term. For purposes of this
Subsection F., (1) a "Change in Control" means that (x) neither Mark Gordon (for
these purposes, counting all common stock directly or indirectly beneficially
owned by Mark Gordon's Affiliates) nor David Epstein (for these purposes,
counting all common stock directly or indirectly beneficially owned by David
Epstein's Affiliates) beneficially owns at least 10% of the issued and
outstanding common stock of Employer (or its successor); (y) neither Mark Gordon
(for these purposes, counting all common stock directly or indirectly
beneficially owned by Mark Gordon's Affiliates) nor David Epstein (for these
purposes, counting all common stock directly or indirectly beneficially owned by
David Epstein's Affiliates) is the stockholder of Employer (or its successor)
beneficially owning the highest number of issued and outstanding shares of
common stock of Employer (or its successor); provided, however, that no Change
in Control shall be deemed to have occurred under this clause (y) if, but only
for so long as, the person(s) owning the highest number of issued and
outstanding shares of common stock of Employer (or its successor) have otherwise
agreed not to exercise the material rights and powers concomitant with such
ownership or (z) neither Mark Gordon nor David Epstein occupies the position of
Chairman of the Board, Chief Executive Officer or President of Employer (or its
successor); (2) "Affiliate" means, with respect to Mark Gordon or David Epstein,
an immediate family member of his, a trust principally for his benefit and/or
the benefit of his family members and/or lineal descendants, or a family limited
partnership or any other entity the direct or indirect beneficial or pecuniary
owners of which are principally him, his immediate family members and/or trusts
or other entities principally for the benefit of him, his family members and/or
lineal descendants; and (3) "Immediate family members" mean, with respect to
Mark Gordon or David Epstein, his spouse, children, parents, siblings or other
lineal descendants. For purposes of clause (a) of this Subsection F., but
subject to and limited by the provisions of Subsection G. below, any Bonus
Amount for a partial year of employment shall be prorated through the date of
such termination or expiration(based upon the prior year's Bonus Amount, if any)
and for purposes of clause (a) or clause (b) of this Subsection F., if Employee
has not previously earned a Bonus Amount under this Employment Agreement, the
Bonus Amount shall be deemed to be $262,500. Nothing in this Subsection F. shall
be deemed to limit Employee's rights as provided under Subsection E. with
respect to a termination without Cause or Constructive Termination or expiration
of this Employment Agreement occurring after the 180-day period referred to
above in this Subsection F.
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G. LIMITATIONS ON SEVERANCE PAYMENTS. Notwithstanding anything
to the contrary contained in this Employment Agreement, if any payments under
Subsection F. above are to be made as a result of a Change in Control, and such
Change in Control constitutes a change in the ownership or effective control of
Employer (within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and the regulations issued thereunder), the
amount so payable shall be reduced to the extent necessary so that in all events
the aggregate amount of the present value of all such payments under Subsection
F. above and the value of any other compensation, consideration or benefit
received by Employee that would be deemed to be a "parachute payment" as defined
under Section 280G(b)(2)(A)(i) (without regard to Section 280G(b)(2)(A)(ii))
including, without limitation, the acceleration of the exercise of any stock
options in respect of such Change in Control (determined in accordance with Code
Section 280G(d)(4)), computed on the date of such Change in Control, (a) shall
not exceed 2.99 times Employee's average annual compensation which is includible
in Employee's gross income (for federal income tax purposes) during the most
recent five taxable years (or such shorter period in which Employee has been
employed by Employer (or its successor)) ending before that date on which such
Change in Control occurs, and (b) shall in no event result in an "excess
parachute payment" as defined under Section 280G.
H. KEY-MAN INSURANCE. In the event that Employer has obtained
or obtains a key-man insurance policy (the "Policy") on the life of Employee,
Employer shall be the sole owner thereof and all proceeds payable in respect
thereof shall be the property solely of Employer. In the event that Employee's
employment terminates for any reason other than Employee's death, Employee may
request that the Policy be assigned to Employee by giving written notice to
Employer to that effect. Subject to obtaining any requisite consent from the
insurer, Employer shall, if Employee has so requested, assign the Policy to
Employee subject to Employee's reimbursement to Employer of any premiums paid by
Employer which relate to any period following the date of termination of
Employee's employment, and the cash value, if any, of the Policy. In the event
that Employer desires to obtain any such Policy, Employee shall fully cooperate
in Employer's efforts, including submitting to medical exams and tests and
executing and delivering applications and information statements.
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
A. CONFIDENTIAL INFORMATION. Employee acknowledges that
Employee has been informed by Employer of Employer's policy to maintain as
secret and confidential all information and materials relating to (i) the
financial condition, operations, business and
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interests of Employer, (ii) the systems, know-how, records, products, services,
cost information, inventions, computer software programs, marketing and sales
techniques and/or programs, methods, methodologies, manuals, lists and other
trade secrets from time to time acquired, sold, developed, maintained and/or
used by Employer, and (iii) the nature and terms of Employer's relationships
with its clients, suppliers, lenders, underwriters, vendors, consultants,
independent contractors, attorneys, accountants and employees (all such
information and materials being hereinafter collectively referred to as
"Confidential Information"). Employee further acknowledges that such
Confidential Information is of great value to Employer and has been developed by
Employer as a result of substantial effort and expense. Therefore, Employee
understands that it is reasonably necessary to protect Employer's good will,
trade secrets and business interests that Employee agree and, accordingly,
Employee does hereby agree, that Employee will not directly or indirectly
(except where authorized by the Board of Directors, Chairman of the Board or
Chief Executive Officer of Employer for the benefit of Employer and/or as
required in the course of employment) at any time hereafter divulge or disclose
for any purpose to any persons, firms, corporations or other entities
(hereinafter referred to collectively as "Third Parties"), or use or cause or
authorize any Third Parties to use, any such Confidential Information, except as
otherwise required by law.
B. EMPLOYER'S MATERIALS. In accordance with the foregoing,
Employee furthermore agrees that (i) Employee will at no time retain or remove
from the premises of Employer any products, prototypes, drawings, notebooks,
software programs or discs, tapes or similar containers of software, manuals,
data, books, records, materials or documents of any kind or description of
Employer or related to its business for any purpose unconnected with the
performance of Employee's duties with Employer and (ii) upon the cessation or
termination of Employee's employment with Employer for any reason, Employee
shall forthwith deliver or cause to be delivered up to Employer any and all
drawings, notebooks, software programs or discs, tapes or similar containers of
software, manuals, data, books, records, materials and other documents and
materials in Employee's possession or under Employee's control relating to any
Confidential Information or any other material or thing which is the property of
Employer.
11. COVENANT-NOT-TO-COMPETE
In view of (a) the Confidential Information to be obtained by
or disclosed to Employee, and (b) the consideration payable to Employee under
this Employment Agreement, and as a material inducement to Employer to enter
into this Employment Agreement, Employee covenants and agrees that, (i) for as
long as
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Employee is employed by Employer and for a period of 24 months after the date
Employee ceases for any reason to be employed by Employer, Employee shall not,
directly or indirectly, (A) sell any products or services sold or offered by
Employer to any person or entity who is or was a client of Employer at any time
prior to the date hereof and for or to whom Employer is performing services or
selling products or for or to whom Employer has performed services or sold
products at any time during the one-year period ending on Employee's termination
of employment or (B) solicit the services of, or hire, directly or indirectly,
whether on Employee's own behalf or on behalf of others, any managerial or
executive employee, account manager, programmer, information services employee
(including, without limitation, network or other information services operation
employee) or database management or marketing employee of Employer who was or is
employed by Employer at any time during the two-year period ending on the date
of termination of Employee's employment, and (ii) for as long as Employee is
employed by Employer and thereafter for the Severance Period (as hereinafter
defined), Employee shall not, directly or indirectly, (A) sell any products or
services sold or offered by Employer to any person or entity who becomes a
client of Employer at any time on or after the date hereof and for or to whom
Employer is performing services or selling products or for or to whom Employer
has performed services or sold products at any time during the one-year period
ending on Employee's termination of employment or (B) engage in any venture,
enterprise, activity or business, passively or actively, as an owner,
consultant, adviser, participant, employee, agent or in any other capacity,
competitive with the business of Employer anywhere within the continental United
States; provided, however, that nothing in this Section 11 shall prohibit
Employee from owning as a passive investor beneficially and/or of record less
than 5% of the outstanding equity securities of any entity whose equity
securities are registered under the Securities Exchange Act of 1934, as amended,
or are listed for trading on any United States or foreign stock exchange.
Employee acknowledges that the business of Employer is national in scope, that
one can effectively compete with such business from anywhere in the continental
United States, and that, therefore, such geographical area of restriction is
reasonable in the circumstances to protect Employer's trade secrets and other
legitimate business interests. For purposes of this Section 11, the "Severance
Period" shall mean: (x) in the case of either termination of Employee's
employment as a result of Employee becoming Disabled or a termination of
Employee's employment with Cause or as a result of the resignation of employment
by Employee, a period of 12 months after the termination date of Employee's
employment with Employer; (y) in the case of termination of Employee's
employment without Cause or as a result of the occurrence of a Constructive
Termination, the greater of (1) a
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period of 12 months after the termination date of Employee's employment with
Employer or (2) the remainder of the Initial Term (if such termination occurs
during the Initial Term); and (z) in the case of the expiration of the
Employment Term and in the event that either (1) Employer has not advised
Employee in writing at least 60 days prior to the expiration of the Employment
Term of the election of Employer, in its sole discretion, to waive Employee's
obligation to comply with his covenants under clause (ii) above upon the
expiration of the Employment Term or (2) the expiration of the Employment Term
is the result of Employee delivering to Employer pursuant to Section 2 the
written notice of Employee's termination of this Employment Agreement, a period
of 12 months after the expiration of the Employment Term.
12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 AND 11
Employee covenants and agrees that if Employee shall violate
or breach any of Employee's covenants or agreements provided for in Section 10
or 11 hereof, Employer shall be entitled to an accounting and repayment of all
profits, compensation, commissions, remunerations and benefits which Employee
directly or indirectly has realized and realizes as a result of, growing out of
or in connection with any such violation or breach. In addition, in the event of
a breach or violation or threatened or imminent breach or violation of any
provisions of Section 10 or 11 hereof, Employer shall be entitled to a temporary
and permanent injunction or any other appropriate decree of specific performance
or equitable relief from a court of competent jurisdiction in order to prevent,
prohibit or restrain any such breach or violation or threatened or imminent
breach or violation by Employee. Employer shall be entitled to such injunctive
or other equitable relief in addition to any ascertainable damages which are
suffered, together with reasonable attorneys' and paralegals' fees and costs and
other costs incurred in connection with any such litigation, both before and at
trial and at all tribunal levels. It is understood that resort by Employer to
such injunctive or other equitable relief shall not be deemed to waive or to
limit in any respect any other rights or remedies which Employer may have with
respect to such breach or violation.
13. REASONABLENESS OF RESTRICTIONS
A. REASONABLENESS. Employee acknowledges that any breach or
violation of Section 10 or 11 hereof will cause irreparable injury and damage
and incalculable harm to Employer and that it would be very difficult or
impossible to measure all of the damages resulting from any such breach or
violation. Employee further acknowledges that Employee has carefully read and
considered the provisions of Sections 10, 11 and 12 hereof and,
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having done so, agrees that the restrictions and remedies set forth in such
Sections (including, but not limited to, the time period, geographical and types
of restrictions imposed) are fair and reasonable and are reasonably required for
the protection of the business, trade secrets, interests and good will of
Employer.
B. SEVERABILITY. Employee understands and intends that each
provision and restriction agreed to by Employee in Sections 10, 11 and 12 hereof
shall be construed as separate and divisible from every other provision and
restriction. In the event that any one of the provisions of, or restrictions in,
Sections 10, 11 and/or 12 hereof shall be held to be invalid or unenforceable,
and is not reformed by a court of competent jurisdiction (which a court, in lieu
of striking a provision entirely, is urged by the parties to do), the remaining
provisions thereof and restrictions therein shall nevertheless continue to be
valid and enforceable as though the invalid or unenforceable provisions or
restrictions had not been included. In the event that any such provision
relating to time period, geographical and/or type of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum or
permissible time period, geographical or type of restriction such court deems
reasonable and enforceable, said time period, geographical and/or type of
restriction shall be deemed to become and shall thereafter be the maximum time
period or geographical area and/or type of restriction which such court deems
reasonable and enforceable.
C. SURVIVABILITY. The restrictions, acknowledgments, covenants
and agreements of Employee set forth in Sections 10, 11, 12 and 13 of this
Employment Agreement shall survive any termination of this Employment Agreement
or of Employee's employment (for any reason, including expiration of the
Employment Term).
D. DEFINITION OF EMPLOYER. For purposes of Sections 10, 11, 12
and 13 of this Employment Agreement, the term "Employer" includes the Employer
and any parent corporation of Employer and all subsidiaries of Employer and its
parent corporation (if any).
14. LAW APPLICABLE
This Employment Agreement shall be governed by and construed
pursuant to the laws of the State of Florida.
15. NOTICES
Any notices required or permitted to be given pursuant to this
Employment Agreement shall be sufficient if in writing, and
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delivered personally, by commercial courier service or sent by certified mail,
return receipt requested, and sent to Employer's executive offices, to the
attention of the Chief Executive Officer, if mailed to Employer, and to
Employee's then current residence, if mailed to Employee, and shall be effective
only upon actual receipt by the party to whom it is given.
16. SUCCESSION
This Employment Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective legal representatives,
heirs, assignees and/or successors in interest of any kind whatever; PROVIDED,
HOWEVER, that Employee acknowledges and agrees that Employee cannot assign or
delegate any of Employee's rights, duties, responsibilities or obligations
hereunder to any other person or entity. Employer shall have the right to assign
its rights and delegate its duties under this Employment Agreement, provided
that, in the event of any such assignment other than in connection with a
merger, consolidation or similar reorganization or the sale of all or
substantially all of the assets of Employer (or its successor), Employer shall
remain liable for all of its obligations hereunder.
17. ENTIRE AGREEMENT
This Employment Agreement, together with the Stock Option
Agreement and Indemnification Agreement, both of even date herewith between
Employer and Employee, constitute the entire final agreement between the parties
with respect to, and supersedes any and all prior and contemporaneous agreements
between the parties hereto both oral and written concerning, the subject matter
hereof and may not be amended, modified or terminated except by a writing signed
by the parties hereto.
18. SEVERABILITY
If any provision of this Employment Agreement shall be held to
be invalid or unenforceable, and is not reformed by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision and shall not in any way affect or render invalid or unenforceable any
other provision of this Employment Agreement, and this Employment Agreement
shall be carried out as if such invalid or unenforceable provision were not
herein contained.
19. NO WAIVER
A waiver of any breach or violation of any term, provision or
covenant herein contained shall not be deemed a continuing waiver or a waiver of
any future or past breach or violation. No oral waiver shall be binding.
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20. ATTORNEYS' FEES
In the event that either of the parties to this Employment
Agreement institutes suit against the other party to this Employment Agreement
to enforce or declare any of their respective rights hereunder, the prevailing
party in such action shall be entitled to recover from the other party all
reasonable costs thereof, including reasonable attorneys' and paralegals' fees
and costs incurred before and at trial and at all tribunal levels, and whether
or not suit or any other proceeding is instituted.
21. COUNTERPARTS
This Employment Agreement may be executed in counterparts,
each of which shall be an original, but both of which together shall constitute
one and the same instrument.
22. INDEPENDENT COUNSEL
THE PARTIES HEREBY ACKNOWLEDGE THAT EACH OF THEM HAS RETAINED
AND WAS REPRESENTED VIGOROUSLY BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO, AND
IN CONNECTION WITH ALL STAGES OF THE NEGOTIATION, PREPARATION AND EXECUTION OF,
THIS EMPLOYMENT AGREEMENT. EMPLOYER WAS REPRESENTED BY BILZIN SUMBERG DUNN PRICE
& AXELROD LLP AND EMPLOYEE BY KELLEY DRYE & WARREN LLP.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on
the day and year first above written.
EMPLOYER:
PRECISION RESPONSE CORPORATION, a
Florida corporation
By: /s/ MARK J. GORDON
---------------------------------
Mark J. Gordon
Chairman of the Board
EMPLOYEE:
/s/ WESLEY T. O'BRIEN
-------------------------------------
WESLEY T. O'BRIEN
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EXHIBIT A
PRECISION RESPONSE CORPORATION
STOCK OPTION AGREEMENT
Agreement dated as of the 20th day of October, 1998 (the "Date of
Grant") between Precision Response Corporation, a Florida corporation (and,
collectively with its subsidiaries, if any, the "Company") with its principal
office at 1505 N.W. 167th Street, Miami, Florida 33169, and Wesley T. O'Brien,
at the address set forth beneath such person's signature on the signature page
of this Agreement ("Optionee").
1. GRANT OF OPTIONS
The Company grants to Optionee, on the terms and conditions
set forth below, options (the "Options") to purchase up to 350,000 shares
(individually a "Share" and collectively the "Shares") of Precision Response
Corporation common stock (the "Common Stock"), par value $.01 per share, for a
price of $5.50 per Share (the "Option Price"), subject to adjustment as provided
in Paragraph 3 below. Subject to the limitation set forth in the Precision
Response Corporation Amended and Restated 1996 Incentive Stock Plan (the
"Plan"), a copy of which is attached hereto and incorporated herein by
reference, that the aggregate Fair Market Value (as defined in the Plan and as
determined as of the time the option is granted) of the shares of Common Stock
with respect to which Incentive Stock Options (as defined in and pursuant to the
Plan) are exercisable for the first time by a participant during any calendar
year (under all option plans of the Company) shall not exceed $100,000, the
Options shall be designated as Incentive Stock Options to the maximum extent
permitted by law and under the Plan. To the extent that the number of Options
which vest in any calendar year pursuant to the vesting schedule set forth below
exceeds the number which may properly be designated as Incentive Stock Options
pursuant to applicable law or under the Plan, such excess number of Options
shall, pursuant to the provisions of Section 6(e) of the Plan, be designated as
Nonqualified Stock Options (as defined in and pursuant to the Plan).
2. TERMS AND CONDITIONS OF OPTIONS
(a) OPTION PRICE
Subject to paragraph 3 hereof, the Option Price shall
be as set forth in Section 1 above.
(b) VESTING OF OPTIONS
Subject to such further limitations as are provided
for herein, the Options shall vest, if at all (and be exercisable once vested)
in the following amounts:
<PAGE> 18
PERIOD FROM PERCENTAGE OF
DATE OF GRANT OPTIONS VESTED (%)
- ------------- ------------------
Six (6) months from Date of Grant 50%
One (1) year from Date of Grant 67%
Two (2) years from Date of Grant 84%
Three (3) years from Date of Grant 100%
Notwithstanding the vesting schedule set forth above, Optionee shall
become immediately 100% vested in all outstanding Options upon, and may exercise
such Options subject to the time frames set forth in subparagraph (e) below
after, (i) a Change in Control (as defined in that certain Employment Agreement
dated effective as of October 20, 1998, by and between Optionee and the Company
(the "Employment Agreement")) or (ii) Optionee's termination of employment (A)
by the Company without Cause (as defined in the Employment Agreement) or (B) by
Optionee to the extent and in the manner permitted under the Employment
Agreement as a result of the occurrence of a Constructive Termination (as
defined in the Employment Agreement). Subject to the accelerated vesting
provided in the previous sentence, Optionee shall not become vested in any
Options subsequent to the termination of his employment regardless of any
exercise period provided in subparagraph (e) below.
(c) TERM OF OPTIONS
The Options may be exercised by Optionee in whole or
in part from time to time, but only during the period beginning on the date of
this Agreement and ending on October 19, 2005, subject in all cases, however, to
subparagraphs (b) and (e) of this paragraph 2, paragraph 3 and the other
provisions of this Agreement and the Plan.
(d) NON-TRANSFERABILITY OF OPTIONS
Options shall not be transferable by Optionee other
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Internal Revenue Code of
1986, as amended (the "Code"), or Title I of the Employment Retirement Income
Security Act, or the rules thereunder, and, except with respect to a qualified
domestic relations order as aforesaid, may be exercised during Optionee's
lifetime only by Optionee. If any Options are exercised after Optionee's death,
the Company may require evidence reasonably satisfactory to it of the
appointment and qualification of Optionee's personal representatives and their
authority and of the right of any heir or distributee to exercise such Options.
(e) TERMINATION OF EMPLOYMENT
Subject to the vesting requirements set forth in
Section 2(b) above, if Optionee's employment with the Company terminates, the
unexercised portion of any of the Options granted under this Agreement shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
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<PAGE> 19
(1) The expiration of seven (7) years from the Date
of Grant;
(2) The expiration of three months from the date of
termination of Optionee's employment (other than a termination described in
subparagraph (3), (4) or (5) below); PROVIDED, that, if Optionee shall die
during such three-month period, the time of termination of the unexpired portion
of any such Option shall be determined under the provision of subparagraph (4)
below;
(3) The expiration of one year from the date of
termination of the employment of an Optionee due to his becoming Disabled (as
defined in the Employment Agreement);
(4) The expiration of eighteen (18) months following
the issuance of letters testamentary or letters of administration to the
personal representative, executor or administrator of a deceased Optionee, if
Optionee's death occurs either during his employment by the Company or during
the three-month period following the date of termination of such employment
(other than a termination described in subparagraph (5) below), but in no event
later than two years after Optionee's death;
(5) The date of termination of Optionee's employment
by the Company if Optionee has been discharged for Cause.
Neither this Agreement nor any Option granted hereunder shall confer on
Optionee any right to continue in the Company's employ, or limit in any respect
the Company's right (in the absence of a specific written agreement to the
contrary) to terminate Optionee's employment at any time with or without Cause.
(f) EXERCISE OF OPTIONS
Subject to the limitations set forth herein and the
provisions hereof, the Options may be exercised only by written notice to the
Company, at its principal business office or such other office as the Committee
may from time to time direct, which shall contain provisions consistent with the
provisions of the Plan as the Committee may from time to time prescribe and
shall specify the number of optioned Shares being purchased. Not less than one
hundred (100) shares may be purchased at any one time upon exercise of the
Options unless the number purchased is the total number then purchasable under
this Agreement. Subsequent to the grant of any Options which are not immediately
exercisable in full, the Committee, at any time before complete termination of
such Options, may accelerate the time or times at which such Options may be
exercised in whole or in part. Any notice of exercise of Options shall be
accompanied by payment of the full purchase price for the Shares being
purchased: (i) by check payable to the Company; or (ii) with the prior consent
of the Committee, by tendering previously acquired shares of Common Stock having
a fair market value (determined as of the date such Options are exercised and in
the same manner as the Fair Market Value of the Option Price is determined under
the Plan) equal to all of the purchase price; or (iii) by any combination of (i)
and (ii). The Company shall have no obligation to deliver the Shares being
purchased pursuant to the exercise of any Options, in whole
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<PAGE> 20
or in part, until the aforesaid payment in full of the purchase price therefor
is received by the Company.
(g) ISSUANCE OF SHARES
The exercise of Options granted hereunder is subject
to the condition that if at any time the listing, registration or qualification
of the Shares covered by the Options upon any securities exchange or under any
state or federal law is necessary as a condition of or in connection with the
purchase or delivery of Shares, the delivery of any or all Shares pursuant to
exercise of the Options may be withheld unless and until such listing,
registration or qualification shall have been effected. Optionee agrees to
comply with any and all legal requirements relating to Optionee's resale or
other disposition of any Shares acquired under this Agreement. Unless the Shares
are registered for sale under an effective registration statement under the
Securities Act of 1933, as amended, and applicable state securities laws, the
Committee may require, as a condition of exercise of any Options, that Optionee
represent, in writing, that the Shares received upon exercise of the Options are
being acquired for investment and not with a view to distribution and agree that
the Shares will not be disposed of except pursuant to an effective registration
statement under the Securities Act of 1933, as amended, and only after any
required qualifications under applicable state securities laws, unless the
Company shall have received an opinion of counsel satisfactory to the Company
that such disposition is exempt from such registration and qualification. In
such case, there may be endorsed on certificates representing Shares issued upon
the exercise of Options such legends referring to the foregoing representations
or any applicable restrictions on resale as the Committee, in its discretion,
shall deem reasonably appropriate, as well as place such stop transfer orders
with its registrar and transfer agent as it deems reasonably appropriate.
(h) RIGHTS AS A SHAREHOLDER
Optionee shall acquire none of the rights of a
shareholder of the Company under this Agreement unless and until certificates
for such Shares are issued to Optionee upon the exercise of Options.
(i) SIX-MONTH HOLDING PERIOD
Optionee acknowledges that in no event may any Shares
acquired upon exercise of any Options be sold or otherwise disposed of until
after six (6) months have elapsed from the Date of Grant except, in the event of
Optionee's death during such period, for a sale by the executors or
administrators of Optionee's estate relying on Rule 16a-2(d)(1)(i) of the
Securities Exchange Act of 1934, as amended.
3. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
In the event of any stock split, stock dividend,
reclassification or recapitalization which changes the character or amount of
the Company's outstanding Common Stock while any portion of any Options
theretofore granted pursuant to this Agreement are outstanding but unexercised,
the Committee shall make such adjustments in the character and number of Shares
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<PAGE> 21
subject to such Options and in the Option Price as shall be equitable and
appropriate in order to make such Options, as nearly as may be practicable,
equivalent to such Options immediately prior to such change; PROVIDED, however,
that no such adjustment shall give any Optionee any additional benefits under
this Agreement; and PROVIDED FURTHER, that, if any such adjustment is made by
reason of a transaction described in section 424(a) of the Code, it shall be
made so as to conform to the requirements of that section and the regulations
thereunder.
If any transaction (other than a change specified in the
preceding paragraph) described in section 424(a) of the Code affects the
Company's Common Stock subject to any unexercised Option theretofore granted
hereunder (hereinafter for purposes of this paragraph 3 referred to as the "old
option"), the Committee or any surviving or acquiring corporation may take such
action as it deems appropriate, and in conformity with the requirements of that
section and the regulations thereunder, to substitute a new option for the old
option, in order to make the new option, as nearly as may be practicable,
equivalent to the old option, or to assume the old option.
If any such change or transaction shall occur, the number and
kind of Shares to be issued upon the exercise of any Options shall be adjusted
to give effect thereto.
4. OPTIONEE BOUND BY PLAN
Optionee hereby acknowledges receipt of a copy of the Plan and
agrees to be bound by the terms and provisions thereof, regardless of whether
such provisions have been set forth in this Agreement. In the event of any
conflict between this Agreement and the Plan, the Plan shall govern.
5. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of Shares
subject to Options may be commingled with any other corporate funds and used for
any corporate purpose.
6. GENERAL
(a) Any communication in connection with this Agreement shall
be deemed duly given when delivered in person or mailed by certified or
registered mail, return receipt requested, to Optionee at his or her address
listed on the signature page hereof or such other address of which Optionee
shall have advised by similar notice, or to the Company or Committee at the
Company's then executive offices.
(b) This Agreement sets forth the parties' final and entire
agreement with respect to its subject matter, may not be changed or terminated
orally and shall be governed by and construed in accordance with the internal
law of the State of Florida. This Agreement shall bind and inure to the benefit
of Optionee, and his heirs, distributees and personal and legal representatives,
and the Company and its successors and assigns.
(c) As a condition of the granting of the Options hereunder,
Optionee agrees for Optionee and Optionee's heirs, distributees and personal and
legal representatives, that any dispute
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<PAGE> 22
or disagreement which may arise under or as a result of or pursuant to this
Agreement shall be determined and resolved by the Committee in its reasonable
discretion, and any interpretation by the Committee of the terms of this
Agreement or the Plan shall be final, binding and conclusive.
(d) Wherever from the context it appears appropriate, each
term stated in either the singular or the plural shall include the singular and
the plural, and pronouns stated in the masculine, the feminine or the neuter
gender shall include the masculine, feminine and neuter.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
OPTIONEE: PRECISION RESPONSE CORPORATION,
a Florida corporation
By:
- ------------------------------- -----------------------------------
WESLEY T. O'BRIEN Mark J. Gordon, Chairman of the Board
17849 Fieldbrook Circle
Boca Raton, Florida 33496
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<PAGE> 23
PRECISION RESPONSE CORPORATION
AMENDED AND RESTATED 1996 INCENTIVE STOCK PLAN1
1. PURPOSE. The PRECISION RESPONSE CORPORATION Amended and Restated
1996 Incentive Stock Plan (the "Plan") is intended to provide incentives which
will attract and retain highly competent persons as officers and key employees
of PRECISION RESPONSE CORPORATION and its subsidiaries (the "Company"), as well
as independent contractors providing consulting or advisory services to the
Company, by providing them opportunities to acquire the Company's common stock,
$.01 value per share ("Common Shares") or to receive monetary payments based on
the value of such shares pursuant to the Awards described in Paragraph 4 below.
2. ADMINISTRATION. Prior to the date, if any, upon which the Company
becomes subject to the Securities Exchange Act of 1934 (the "Act"), the Plan
shall be administered by the Board of Directors of the Company (the "Board") or
a committee appointed by the Board. After the date, if any, upon which the
Company becomes subject to the Act, the Plan will be administered by the
Compensation Committee (the administrator of the Plan, initially the Board and
thereafter the Compensation Committee, if and when the Company becomes subject
to the Act, shall be referred to hereinafter as the "Committee") appointed by
the Board from among its members PROVIDED, HOWEVER, that, on and after November
1, 1996 (the "Effective Date") as long as Common Shares are registered under the
Act, members of the Committee must each qualify as a "non-employee director"
within the meaning of Securities and Exchange Commission Regulation ss.
240.16b-3. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause), and appoint new members in substitution therefor, and fill
vacancies however caused; provided, however, that at no time shall a Committee
of less than two members of the Board administer the Plan, and provided further,
that all members of the Committee on and after the Effective Date must be
"non-employee directors." The Committee is authorized, subject to the provisions
of the Plan, to establish such rules and regulations as it deems necessary for
the proper administration of the Plan and to make such determinations and
interpretations and to take such action in connection with the Plan and any
Awards (as hereinafter defined) granted hereunder as it deems necessary or
advisable. All determinations and interpretations made by the Board and
Committee shall be binding and conclusive on all participants and their legal
representatives. No member of the Board, no member of the Committee and no
employee of the Company shall be liable for any act or failure to act hereunder,
by any other member or employee or by any agent to whom duties in connection
with the administration of this Plan have been delegated or, except in
circumstances involving such person's bad faith, gross negligence or fraud, for
any act or failure to act by the member or employee.
- ------------
(1) As amended through June 12, 1998
<PAGE> 24
3. PARTICIPANTS. Participants will consist of such officers and key
employees or prospective key employees (conditioned upon, and effective not
earlier than his becoming an employee) of the Company, and independent
contractors providing consulting or advisory services to the Company, as the
Committee in its sole discretion determines to be significantly responsible for
the success and future growth and profitability of the Company and whom the
Committee may designate from time to time to receive Awards under the Plan.
Designation of a participant in any year shall not require the Committee to
designate such person to receive an Award in any other year or, once designated,
to receive the same type or amount of Awards as granted to the participant in
any year. The Committee shall consider such factors as it deems pertinent in
selecting participants and in determining the type and amount of their
respective Awards.
4. TYPES OF AWARDS. Awards under the Plan may be granted in any one or
a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Shares, and (e) Performance Units, all as described
below (collectively "Awards").
5. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for
issuance under the Plan an aggregate of 4,000,000 Common Shares, which may be
authorized but unissued shares. Any shares subject to Stock Options or Stock
Appreciation Rights or issued under such options or rights or as Stock Awards
may thereafter be subject to new options, rights or awards under this Plan if
there is a lapse, expiration or termination of any such options or rights prior
to issuance of the shares or the payment of the equivalent or if shares are
issued under such options or rights or as such awards and thereafter are
reacquired by the Company pursuant to rights reserved by the Company upon
issuance thereof.
6. STOCK OPTIONS. Stock Options will consist of awards from the
Company, in the form of agreements, which will enable the holder to purchase a
specific number of Common Shares, at set terms and at a fixed purchase price.
Stock Options may be "incentive stock options" ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or Stock Options which do not constitute Incentive Stock
Options ("Nonqualified Stock Options"). The Committee will have the authority to
grant to any participant one or more Incentive Stock Options, Nonqualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). Each Stock Option shall be subject to such terms and
conditions consistent with the Plan as the Committee may impose from time to
time, subject to the following limitations:
(a) EXERCISE PRICE. Each Stock Option granted hereunder shall
have such per- share exercise price as the Committee may determine at the date
of grant provided, however, that the per-share exercise price for Incentive
Stock Options shall not be less than 100% of the Fair Market Value (as
hereinafter defined) of the Common Shares on the date the option is granted and
provided further that the per-share exercise price for Nonqualified Stock
Options shall not be less than 85% of the Fair Market Value of the Common Shares
on the date the option is granted. Notwithstanding
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<PAGE> 25
the foregoing, the Committee may grant Nonqualified Stock Options for up to
50,000 Common Shares for a per-share exercise price equal to and/or in excess of
$.01 per share.
(b) PAYMENT OF EXERCISE PRICE. The option exercise price may
be paid by check or, in the discretion of the Committee, by the delivery of
Common Shares of the Company then owned by the participant or a combination of
methods of payment; provided, however, that option agreements may provide that
payment of the exercise price by delivery of Common Shares of the Company then
owned by the participant may be made only if such payment does not result in a
charge to earnings for financial accounting purposes as determined by the
Committee. In the discretion of the Committee, if Common Shares are readily
tradeable on a national securities exchange or other market system at the time
of option exercise, payment may also be made by delivering a properly executed
exercise notice to the Company together with a copy of irrevocable instructions
to a broker to deliver promptly to the Company the amount of sale or loan
proceeds to pay the exercise price. To facilitate the foregoing, the Company may
enter into agreements for coordinated procedures with one or more brokerage
firms.
(c) EXERCISE PERIOD. Stock Options granted under the Plan will
be exercisable at such times and subject to such terms and conditions as shall
be determined by the Committee. In addition, Nonqualified Stock Options shall
not be exercisable later than fifteen years after the date they are granted and
Incentive Stock Options shall not be exercisable later than ten years after the
date they are granted. All Stock Options shall terminate at such earlier times
and upon such conditions or circumstances as the Committee shall in its
discretion set forth in such option at the date of grant.
(d) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock
Options may be granted only to participants who are employees of the Company or
one of its subsidiaries (within the meaning of Section 424(f) of the Code) at
the date of grant. The aggregate Fair Market Value (determined as of the time
the option is granted) of the Common Shares with respect to which Incentive
Stock Options are exercisable for the first time by a participant during any
calendar year (under all option plans of the Company) shall not exceed $100,000.
Incentive Stock Options may not be granted to any participant who, at the time
of grant, owns stock possessing (after the application of the attribution rules
of Section 424(d) of the Code) more than 10% of the total combined voting power
of all classes of stock of the Company, unless the option price is fixed at not
less than 110% of the Fair Market Value of the Common Shares on the date of
grant and the exercise of such option is prohibited by its terms after the
expiration of five years from the date of grant of such option.
(e) REDESIGNATION AS NONQUALIFIED STOCK OPTIONS. Options
designated as Incentive Stock Options that fail to continue to meet the
requirements of Section 422 of the Code shall be redesignated as Nonqualified
Stock Options for Federal income tax purposes automatically without further
action by the Committee on the date of such failure to continue to meet the
requirements of Section 422 of the Code.
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<PAGE> 26
(f) LIMITATION OF RIGHTS IN SHARES. The recipient of a Stock
Option shall not be deemed for any purpose to be a shareholder of the Company
with respect to any of the shares subject thereto except to the extent that the
Stock Option shall have been exercised and, in addition, a certificate shall
have been issued and delivered to the participant.
7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
grant Stock Appreciation Rights to the holders of any Stock Options granted
hereunder. In addition, Stock Appreciation Rights may be granted independently
of and without relation to Stock Options. Each Stock Appreciation Right shall be
subject to such terms and conditions consistent with the Plan as the Committee
shall impose from time to time, including the following:
(a) A Stock Appreciation Right relating to a Nonqualified
Stock Option may be made part of such option at the time of its grant or at any
time thereafter up to six months prior to its expiration, and a Stock
Appreciation Right relating to an Incentive Stock Option may be made part of
such option only at the time of its grant.
(b) Each Stock Appreciation Right will entitle the holder to
elect in lieu of exercising the Stock Option to receive the appreciation in the
Fair Market Value of the shares subject thereto up to the date the right is
exercised. In the case of a right issued in relation to a Stock Option, such
appreciation shall be measured from not less than the option price and in the
case of a right issued independently of any Stock Option, such appreciation
shall be measured from not less than 85% of the Fair Market Value of the Common
Shares on the date the right is granted. Payment of such appreciation shall be
made in cash or in Common Shares, or a combination thereof, as set forth in the
Award, but no Stock Appreciation Right shall entitle the holder to receive, upon
exercise thereof, more than the number of Common Shares (or cash of equal value)
with respect to which the right is granted.
(c) Each Stock Appreciation Right will be exercisable at the
times and to the extent set forth therein, but no Stock Appreciation Right may
be exercisable earlier than six months after the date it was granted or later
than the earlier of (i) the term of the related Stock Option, if any, or (ii)
fifteen years after it was granted. Exercise of a Stock Appreciation Right shall
reduce the number of shares issuable under the Plan (and the related Stock
Option, if any) by the number of shares with respect to which the right is
exercised.
8. STOCK AWARDS. Stock Awards will consist of Common Shares transferred
to participants without other payment therefor or payment at less than Fair
Market Value as additional compensation for services to the Company. Stock
Awards shall be subject to such terms and conditions as the Committee determines
appropriate, including, without limitation, restrictions on the sale or other
disposition of such shares and rights of the Company to reacquire such shares
for no consideration upon termination of the participant's employment within
specified periods. The Committee may require the participant to deliver a duly
signed stock power, endorsed in blank, relating to the Common Shares covered by
such an Award. The Committee may also require that
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<PAGE> 27
the stock certificates evidencing such shares be held in custody until the
restrictions thereon shall have lapsed. The participant shall have, with respect
to the Common Shares subject to a Stock Award, all of the rights of a holder of
Common Shares of the Company, including the right to receive dividends and to
vote the shares.
9. PERFORMANCE SHARES.
(a) Performance Shares may be awarded either alone or in
addition to other Awards granted under this Plan and shall consist of the right
to receive Common Shares or cash of an equivalent value at the end of a
specified Performance Period (defined below). The Committee shall determine the
participants to whom and the time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded to any person, the
duration of the period (the "Performance Period") during which, and the
conditions under which, receipt of the Common Shares will be deferred, and the
other terms and conditions of the Award in addition to those set forth in this
Section 9. The Committee may condition the grant of Performance Shares upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine.
(b) Performance Shares awarded pursuant to this Section 9
shall be subject to the following terms and conditions:
(i) Unless otherwise determined by the
Committee at the time of the grant of the Award, amounts equal to any
dividends declared during the Performance Period with respect to the
number of Common Shares covered by a Performance Share Award will not
be paid to the participant.
(ii) Subject to the provisions of the
Performance Share Award and this Plan, at the expiration of the
Performance Period, share certificates and/or cash of an equivalent
value (as the Committee may determine) shall be delivered to the
participant, or his or her legal representative, in a number equal to
the vested shares covered by the Performance Share Award.
(iii) Subject to the applicable provisions
of the Performance Share Award and this Plan, upon termination of a
participant's employment with the Company for any reason during the
Performance Period for a given Performance Share Award, the Performance
Shares in question will vest or be forfeited in accordance with the
terms and conditions established by the Committee.
10. PERFORMANCE UNITS.
(a) Performance Units may be awarded either alone or in
addition to other Awards granted under this Plan and shall consist of the right
to receive a fixed dollar amount, payable in cash
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<PAGE> 28
or Common Shares or a combination of both. The Committee shall determine the
participants to whom and the time or times at which Performance Units shall be
awarded, the duration of Performance Units to be awarded to any person, the
duration of the period (the "Performance Cycle") during which, and the
conditions under which, a participant's right to Performance Units will be
vested, the ability of participants to defer the receipt of payment of such
Performance Units, and the other terms and conditions of the Award in addition
to those set forth in this Section 10. The Committee may condition the vesting
of Performance Units upon the attainment of specified performance goals or such
other factors or criteria as the Committee shall determine.
(b) The Performance Units awarded pursuant to this Section 10
shall be subject to the following terms and conditions:
(i) At the expiration of the Performance
Cycle, the Committee shall determine the extent to which the
performance goals have been achieved, and the percentage of the
Performance Units of each participant that have vested.
(ii) Subject to the applicable provisions of
the Performance Unit Award and this Plan, at the expiration of the
Performance Cycle, cash and/or share certificates of an equivalent
value (as the Committee may determine) shall be delivered to the
participant, or his or her legal representative, in payment of the
vested Performance Units covered by the Performance Unit Award.
(iii) Subject to the applicable provisions
of the Performance Unit Award and this Plan, upon termination of a
participant's employment with the Company for any reason during the
Performance Cycle for a given Performance Unit Award, the Performance
Units in question will vest or be forfeited in accordance with the
terms and conditions established by the Committee.
11. ADJUSTMENT PROVISIONS.
(a) If the Company shall at any time change the number of
issued Common Shares without new consideration to the Company (such as by stock
dividend, stock split, recapitalization, reorganization, exchange of shares,
liquidation, combination or other change in corporate structure affecting the
Common Shares) or make a distribution of cash or property which has a
substantial impact on the value of issued Common Shares, the total number of
shares available for Awards under this Plan shall be appropriately adjusted and
the number of shares covered by each outstanding Award and the reference price
or Fair Market Value for each outstanding Award shall be adjusted so that the
net value of such Award shall not be changed.
(b) In the case of any sale of assets, merger, consolidation,
combination or other corporate reorganization or restructuring of the Company
with or into another corporation which results in the outstanding Common Shares
being converted into or exchanged for different securities,
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<PAGE> 29
cash or other property, or any combination thereof (an "Acquisition"), subject
to the provisions of this Plan and any limitation applicable to the Award:
(i) any participant to whom a Stock Option
has been granted shall have the right thereafter and during the term of
the Stock Option to receive upon exercise thereof the Acquisition
Consideration (as defined below) receivable upon the Acquisition by a
holder of the number of Common Shares which might have been obtained
upon exercise of the Stock Option or portion thereof, as the case may
be, immediately prior to the Acquisition;
(ii) any participant to whom a Stock
Appreciation Right has been granted shall have the right thereafter and
during the term of such right to receive upon exercise thereof the
difference on the exercise date between the aggregate Fair Market Value
of the Acquisition Consideration receivable upon such acquisition by a
holder of the number of Common Shares which are covered by such right
and the aggregate reference price of such right; and
(iii) any participant to whom Performance
Shares or Performance Units have been awarded shall have the right
thereafter and during the term of the Award, upon fulfillment of the
terms of the Award, to receive on the date or dates set forth in the
Award, the Acquisition Consideration receivable upon the Acquisition by
a holder of the number of Common Shares which are covered by the Award.
The term "Acquisition Consideration" shall mean the kind and amount of
securities, cash or other property or any combination thereof
receivable in respect of one Common Share upon consummation of an
Acquisition.
(c) Notwithstanding any other provision of this Plan, the
Committee may authorize the issuance, continuation or assumption of Awards or
provide for other equitable adjustments after changes in the Common Shares
resulting from any other merger, consolidation, sale of assets, acquisition of
property or stock, recapitalization, reorganization or similar occurrence upon
such terms and conditions as it may deem equitable and appropriate.
(d) In the event that another corporation or business entity
is being acquired by the Company, and the Company assumes outstanding employee
stock options and/or stock appreciation rights and/or the obligation to make
future grants of options or rights to employees of the acquired entity, the
aggregate number of Common Shares available for Awards under this Plan shall be
increased accordingly.
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<PAGE> 30
12. NONTRANSFERABILITY.
(a) Each Award granted under the Plan to a participant shall
not be transferable by him otherwise than required by law or by will or the laws
of descent and distribution, and shall be exercisable, during his lifetime, only
by him. In the event of the death of a participant while the participant is
rendering services to the Company, each Stock Option or Stock Appreciation Right
theretofore granted to him shall be exercisable during such period after his
death as the Committee shall in its discretion set forth in such option or right
at the date of grant (but not beyond the stated duration of the option or right)
and then only:
(i) By the executor or administrator of the estate of
the deceased participant or the person or persons to whom the deceased
participant's rights under the Stock Option or Stock Appreciation Right
shall pass by will or the laws of descent and distribution; and
(ii) To the extent that the deceased participant was
entitled to do so at the date of his death.
(b) Notwithstanding Section 12(a), in the discretion of the
Committee, Awards granted hereunder may be transferred to members of the
participant's immediate family (which for purposes of this Plan shall be limited
to the participant's children, grandchildren and spouse), or to one or more
trusts for the benefit of such immediate family members or partnerships in which
such immediate family members and/or trusts are the only partners, but only if
the Award expressly so provides.
13. OTHER PROVISIONS. Awards under the Plan may also be subject to such
other provisions (whether or not applicable to any other Awards under the Plan)
as the Committee determines appropriate, including without limitation,
provisions for the installment purchase of Common Shares under Stock Options,
provisions for the installment exercise of Stock Appreciation Rights, provisions
to assist the participant in financing the acquisition of Common Shares,
provisions for the forfeiture of, or restrictions on resale or other disposition
of, Shares acquired under any form of Award, provisions for the acceleration of
exercisability or vesting of Awards in the event of a change of control of the
Company or other reasons, provisions for the payment of the value of Awards to
participants in the event of a change of control of the Company or other
reasons, or provisions to comply with Federal and state securities laws, or
setting forth understandings or conditions as to the participant's employment in
addition to those specifically provided for under the Plan.
14. FAIR MARKET VALUE. For purposes of this Plan and any Awards
hereunder, Fair Market value of Common Shares shall be the mean between the
highest and lowest sale prices for the Company's Common Shares as reported on
the NASDAQ National Market (or such other consolidated transaction reporting
system on which such Common Shares are primarily traded) on
8
<PAGE> 31
the date immediately preceding the date of grant (or on the next preceding
trading date if Common Shares were not traded on the date immediately preceding
the date of grant), provided, however, that if the Company's Common Shares are
not at any time readily tradeable on a national securities exchange or other
market system, Fair Market Value shall mean the amount determined in good faith
by the Committee as the fair market value of the Common Shares of the Company.
15. WITHHOLDING. All payments or distributions made pursuant to the
Plan shall be net of any amounts required to be withheld pursuant to applicable
federal, state and local tax withholding requirements. If the Company proposes
or is required to distribute Common Shares pursuant to the Plan, it may require
the recipient to remit to it an amount sufficient to satisfy such tax
withholding requirements prior to the delivery of any certificates for such
Common Shares. The Committee may, in its discretion and subject to such rules as
it may adopt, permit an optionee or Award or right holder to pay all or a
portion of the federal, state and local withholding taxes arising in connection
with (a) the exercise of a Nonqualified Stock Option or a Stock Appreciation
Right, (b) the receipt or vesting of Stock Awards, or (c) the receipt of Common
Shares upon the expiration of the Performance Period or the Performance Cycle,
respectively, with respect to any Performance Shares or Performance Units, by
electing to have the Company withhold Common Shares having a Fair Market Value
equal to the amount to be withheld.
16. TENURE. A participant's right, if any, to continue to serve the
Company as an officer, employee, independent contractor, or otherwise, shall not
be enlarged or otherwise affected by such individual's designation as a
participant under the Plan, nor shall this Plan in any way interfere with the
right of the Company, subject to the terms of any separate employment agreement
to the contrary, at any time to terminate such employment or to increase or
decrease the compensation of the participant from the rate in existence at the
time of the grant of an Award.
17. DURATION, AMENDMENT AND TERMINATION. No Award shall be granted
after May 30, 2006 (the "Expiration Date"); provided, however, that the terms
and conditions applicable to any Award granted prior to such date may thereafter
be amended or modified by mutual agreement between the Company and the
participant or such other persons as may then have an interest therein. Also, by
mutual agreement between the Company and a participant hereunder, under this
Plan or under any other present or future plan of the Company, Awards may be
granted to such participant in substitution and exchange for, and in
cancellation of, any Awards previously granted such participant under this Plan,
or any other present or future plan of the Company. The Board may amend the Plan
from time to time or terminate the Plan at any time. However, no action
authorized by this Section 17 shall reduce the amount of any existing Award or
change the terms and conditions thereof without the participant's consent. The
approval of the Company's shareholders will be required for any amendment to the
Plan which would (i) change the class of persons eligible for the grant of Stock
Options, as specified in Section 3 or otherwise materially modify the
requirements as to eligibility for participation in the Plan, (ii) increase the
maximum number of shares subject to Stock Options, as specified in Section 5
(unless made pursuant to the provisions of Section 11) or (iii) materially
increase the benefits accruing to participants under the Plan, within the
meaning of
9
<PAGE> 32
Rule 16b-3 promulgated under Act. With respect to persons subject to Section 16
of the Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Act. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. Moreover, in the event the Plan does not include a
provision required by Rule 16b-3 to be stated therein, such provision (other
than one relating to eligibility requirements, or the price and amount of
Awards) shall be deemed automatically to be incorporated by reference into the
Plan insofar as participants subject to Section 16 of the Act are concerned.
18. GOVERNING LAW. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the State of
Florida (regardless of the law that might otherwise govern under applicable
Florida principles of conflict of laws).
19. SHAREHOLDER APPROVAL. The Plan was adopted by the Board of the
Company and approved by the Company's shareholders on May 31, 1996.
20. BOARD AMENDMENT. Section 2 of the Plan was amended by action taken
by the Board of the Company on February 19, 1997, which amendment did not
require approval of the shareholders of the Company.
21. SHAREHOLDERS AMENDMENTS. Section 5 of the Plan was amended to
increase the number of Common Shares reserved for issuance under the Plan (a) to
3,000,000 Common Shares by action taken by the Board on February 19, 1997, which
amendment was approved by the shareholders of the Company at the Company's
annual meeting of shareholders held on May 15, 1997, and (b) to 4,000,000 Common
Shares by action taken by the Board on March 12, 1998, which amendment was
approved by the shareholders of the Company at the Company's annual meeting of
shareholders held on June 12, 1998.
10
<PAGE> 1
Exhibit 10.41
PRECISION RESPONSE CORPORATION
1505 N.W. 167th Street
Miami, Florida 33169
(305) 626-4600
Fax (305) 626-4650
October 1, 1998
Mr. Bernard J. Kosar, Jr.
Precision Response Corporation
1505 N.W. 167th Street
Miami, Florida 33169
Dear Bernie:
This letter agreement (this "Agreement") sets forth the understanding
of the conversations we have had regarding your employment relationship with
Precision Response Corporation, a Florida corporation ("Employer"), and
supersedes and replaces in its entirety that certain Employment Agreement dated
as of February 19, 1997, as amended by that certain Amendment to Employment
Agreement dated as of October 1, 1997, between Employer and you (as amended, the
"Former Agreement").
As of this time, although we are terminating the Former Agreement,
Employer wishes you to stay in the continued employment of Employer with reduced
responsibilities and we understand that you ("Employee") wish to remain in the
employ of Employer. Your continued employment will be subject to the terms and
conditions set forth herein.
The terms and conditions of our continued relationship shall be as
follows:
1. TERM. Subject to Section 5.A, Employee's term of employment shall
continue until 5:00, p.m., March 31, 2000 (the "Employment Term").
2. DUTIES. Employee's duties and responsibilities hereunder shall be
those reasonably assigned to Employee from time to time by the Employer's
Chairman of the Board or Chief Executive Officer. Employer shall, unless and
until otherwise determined by Employer, serve as a senior advisor to Employer
and shall attend to matters as determined by Employer, which may include, but
not be limited to, advising the executives of Employer on general sales, client
matters and other business related matters, participating in client relations
and engaging in, and supporting and advising the Employer's sales group on, the
generation of new client prospects and new clients. Employee shall report
directly to Employer's Chief Executive Officer or as otherwise directed from
time to time by Employer's Chairman of the Board or Chief Executive Officer.
Notwithstanding the
<PAGE> 2
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 2
foregoing, Employee shall be free to engage in other remunerative activities
during the Employment Term so long as such activities do not interfere with
Employee's duties to Employer hereunder.
3. COMPENSATION.
A. SALARY. Subject to the provisions of this Agreement,
Employer shall pay salary ("Salary") to Employee in an aggregate amount of
$75,000 per annum during the Employment Term, which Salary shall be earned
ratably over the Employment Term. Salary shall be payable in accordance with
Employer's normal payroll practices for its employees and shall be subject to
payroll deductions and tax withholdings in accordance with Employer's usual
practices and as required by law.
B. COMMISSION. If solely and directly as a result of
Employee's introduction to decision-makers at a company and material
facilitation efforts thereafter (and not (i) as a result of a lead from, or at
the direction of, Employer or any of its other employees, or (ii) from Employee
assisting or advising any other employees of the Employer), Employer enters into
an agreement with such company on or after the date hereof (an "Applicable
Customer") to perform services ("Employer Services"), Employee shall be entitled
to the commission (the "Commission Amount") described below so long as Employee
remains employed by Employer hereunder, provided, however, that, notwithstanding
anything to the contrary herein, in no event shall any Commission Amount be
payable to Employee with respect to any Applicable Customer for a period in
excess of one year, and, accordingly, all calculations of the Commission Amount
under this Section 3.B. shall exclude Adjusted Gross Sales (as hereinafter
defined) from any Applicable Customer after a period of one year. The Commission
Amount payable to Employee shall equal one and one-half percent (1 1/2%) of
Adjusted Gross Sales derived by Employer from performance of Employer Services,
in all cases, which are actually collected by Employer each month from
Applicable Customers. Adjusted Gross Sales means, with respect to each month,
the total revenues collected that month from Applicable Customers, less only (a)
credits and refunds given to Applicable Customers such month, (b) amounts
collected by Employer from Applicable Customers to pay sales, use or similar
taxes, (c) amounts collected by Employer from Applicable Customers for postage,
freight and delivery charges, (d) any amounts or costs collected which are
associated with telecommunications charges and (e) amounts collected by Employer
from Applicable Customers to pay for equipment or other items purchased by
Employer to provide Employer services to such Applicable Customers, excluding
any mark-up above Employer's cost thereof charged such Applicable Customers
which mark-up shall be included in total revenues for purposes of calculating
Adjusted Gross Sales. The Commission Amount shall be payable monthly on or
before the end of the month following the month in which the Adjusted Gross
Sales as to which it relates has been collected. Notwithstanding anything to the
contrary hereunder, should Employee's employment hereunder terminate, Employer's
obligation to pay the Commission Amount shall automatically terminate and, as of
such time, Employee shall be entitled
<PAGE> 3
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 3
to no further Commission Amount except for the Commission Amount earned on
Adjusted Gross Sales collected by Employer prior to the end of the calendar
month in which Employee's employment hereunder has terminated; provided,
however, that, if Employee's employment hereunder is terminated by Employer
without cause, Employee shall be entitled to the Commission Amount earned on
Adjusted Gross Sales collected by Employer for a period ending on the earlier to
occur of (i) March 31, 2000 and (ii) the last day of the calendar month which
falls one (1) year after the end of the calendar month in which Employee's
employment hereunder has been terminated by Employer without cause, unless
Employee and Employer shall mutually agree upon a lump sum amount to be paid to
Employee at the time of any such termination in lieu of payment of any future
Commission Amount. The Commission Amount shall be subject to payroll deductions
and tax withholdings in accordance with Employer's usual payroll practices and
as required by law.
C. CANCELLATION PAYMENT. In consideration of Employee agreeing
to the cancellation of the Former Agreement, Employee shall receive a
cancellation payment (the "Cancellation Payment") in the aggregate amount of
$400,000, subject to adjustment by subtracting from such Cancellation Payment
the amount of any salary paid to Employee from October 1, 1998 through April 30,
1999 at a rate in excess of $75,000 per annum. The Cancellation Payment shall be
payable (subject to the aforesaid reduction for any excess salary payment) on or
prior to April 30, 1999. The Cancellation Payment shall be subject to payroll
deductions and tax withholdings in accordance with Employer's usual payroll
practices and as required by law.
D. STOCK OPTIONS. Each stock option agreement between Employee
and Employer, as and to the extent as previously amended, shall remain in full
force and effect in accordance with its terms and unchanged by this Agreement.
4. FRINGE BENEFITS AND EXPENSES.
A. EMPLOYEE BENEFITS. Employee shall be entitled to such
benefits and fringe benefits (such as individual and family health, dental, life
and disability insurance) as are made available by Employer from time to time,
in Employer's sole discretion, to all other similarly-situated employees
generally; provided, however, that Employee shall not be entitled to any
vacation.
B. EXPENSES. Employer shall reimburse Employee for Employee's
reasonable out-of-pocket costs and expenses incurred in connection with the
performance of Employee's duties and responsibilities hereunder, subject to
Employee's presentation of appropriate documentation and, if requested,
justification therefor, and provided that the types and amounts of expenses
incurred are consistent with, in Employer's judgment, Employer's policies and
practices.
<PAGE> 4
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 4
5. TERMINATION.
A. TERMINATION EVENTS. Employee's employment under this
Agreement may be terminated by Employer only as follows: with or without Cause
(as hereinafter defined), effective upon the delivery of written notice to
Employee; upon Employee's death; or upon Employee becoming Disabled (as
hereinafter defined) and receiving written notice of termination from Employer
to that effect. Employee may terminate Employee's employment under this
Agreement without being in breach hereunder by giving written notification of
Employee's resignation to Employer which shall specify a resignation date no
earlier than ninety (90) days following the date of delivery of such notice of
resignation.
B. DEFINITIONS OF CAUSE AND DISABLED. For purposes of this
Agreement, "Cause" shall mean and include: (i) commission of a felony, or
commission of acts of fraud, dishonesty, or the like; (ii) habitual drunkenness
during business hours or at Employer's premises; (iii) illicit use of drugs
during business hours or at Employer's premises; (iv) abandonment of employment
duties; (v) negligence in the performance of employment duties; (vi) an act or
omission on the part of Employee not directed by Employer which results in or
contributes to Employer being sanctioned or penalized by any governmental or
quasi-governmental authority or body, or any stock exchange or body regulating
or governing publicly-traded companies (including the NASD); (vii)
insubordination; or (viii) breach by Employee of this Agreement which, if
curable, is not cured by Employee within ten (10) days following Employee's
receipt of written notice thereof. Employee shall be deemed "Disabled" for
purposes of this Agreement (a) if, in the reasonable judgment of Employer,
Employee is unable, due to physical, mental or emotional illness or injury, to
perform substantially all of Employee's duties and responsibilities for Employer
for a continuous period of ninety (90) days, or (b) if Employee is adjudicated
as an incompetent or has a guardian appointed to handle Employee's affairs.
C. EFFECT OF TERMINATION FOR CAUSE OR EMPLOYEE'S RESIGNATION.
In the event that Employee's employment under this Agreement is terminated by
Employer with Cause, or because Employee resigns from or quits Employee's
employment, Employer shall pay to Employee, within thirty (30) days following
the date of such termination or resignation, the Salary, if any, accrued and
unpaid through the date of termination; and, except for the payment of any
unpaid portion of (i) the Cancellation Payment as and when due as set forth in
Section 3.C. or (ii) the accrued and unpaid Commission Amount to the extent set
forth in Section 3.B., Employee shall not be entitled to any other compensation,
remuneration or other sums provided for in this Agreement or to which Employee
might otherwise be entitled hereunder or at law or in equity.
D. COMPENSATION UPON DEATH OR DISABILITY. Upon the death of
Employee, or termination of employment because Employee is Disabled, Employer
shall pay to Employee,
<PAGE> 5
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 5
Employee's legal guardian or the legal representative of Employee's estate (or
heir as designated by the legal representative of Employee's estate at such
time), within thirty (30) days following the date of Employee's death or
termination, the Salary, if any, accrued and unpaid through the date of
termination; and, except for the payment of any unpaid portion of (i) the
Cancellation Payment as and when due as set forth in Section 3.C. or (ii) the
accrued and unpaid Commission Amount to the extent set forth in Section 3.B.,
Employee (or such legal guardian, legal representative or any heirs) shall not
be entitled to any other compensation, remuneration or other sums provided for
in this Agreement or to which Employee might otherwise be entitled hereunder or
at law or in equity.
E. COMPENSATION UPON TERMINATION WITHOUT CAUSE. In the event
that Employer terminates Employee's employment under this Agreement without
Cause, Employee's sole and exclusive compensation and remedy hereunder shall be
to receive from Employer, and Employer shall pay and/or provide: (i) the amount
of Salary, if any, accrued and unpaid through the date of termination; (ii) the
amount of any unpaid portion of the Cancellation Payment as and when due as set
forth in Section 3.C.; and (iii) the Commission Amount to the extent set forth
in Section 3.B.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. Employee acknowledges that
Employee had been informed by Employer at the time of his original employment of
Employer's policy to maintain as secret and confidential all information and
materials relating to (i) the financial condition, operations, business and
interests of Employer, (ii) the systems, technology, know-how, records,
products, services, cost or pricing information, inventions, computer software
programs, marketing and sales techniques and/or programs, methods,
methodologies, manuals, lists and other trade secrets from time to time
acquired, sold, developed, maintained and/or used by Employer, and (iii) the
nature and terms of Employer's relationships with its clients, suppliers,
lenders, underwriters, vendors, consultants, independent contractors, attorneys,
accountants and employees (all such information and materials being hereinafter
collectively referred to as "Confidential Information"). Employee further
acknowledges that such Confidential Information is of great value to Employer
and has been developed by Employer as a result of substantial effort and
expense. Therefore, Employee understands that it is reasonably necessary to
protect Employer's good will, trade secrets and legitimate business interests
that Employee agree and, accordingly, Employee does hereby agree, that Employee
will not directly or indirectly (except where authorized by the Board of
Directors, Chairman of the Board or Chief Executive Officer of Employer for the
benefit of Employer) at any time hereafter divulge or disclose for any purpose
to any persons, firms, corporations or other entities (hereinafter referred to
collectively as "Third Parties"), or use or cause or authorize any Third Parties
to use, any such Confidential Information, except as otherwise required by law.
Any software, technology, know-how, trade secrets or intellectual property
rights of any kind developed by Employee during the period of his employment
with Employer which in any way relate or have
<PAGE> 6
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 6
application or value to Employer's business shall be the property, as between
Employee and Employer, solely of Employer.
B. EMPLOYER'S MATERIALS. In accordance with the foregoing,
Employee furthermore agrees that (i) Employee will at no time retain or remove
from the premises of Employer any products, prototypes, drawings, notebooks,
software programs or discs, tapes or similar containers of software, manuals,
data, books, records, materials or documents of any kind or description for any
purpose unconnected with the strict performance of Employee's duties with
Employer and (ii) upon the cessation or termination of Employee's employment
with Employer for any reason, Employee shall forthwith deliver or cause to be
delivered to Employer any and all drawings, notebooks, software programs or
discs, tapes or similar containers of software, manuals, data, books, records,
materials and other documents and materials in Employee's possession or under
Employee's control relating to any Confidential Information or any other
material or thing which is the property of Employer.
7. COVENANT-NOT-TO-COMPETE. In view of (A) the Confidential Information
known to and to be obtained by or disclosed to or previously disclosed to
Employee, (B) the substantial consideration (including, without limitation, the
Cancellation Payment) paid and payable to Employee under this Agreement, (C) as
a material inducement to Employer to enter into this Agreement, and (D) for
other good and valuable considerations (including, without limitation, the
termination of Employee's obligations and agreements under Section 11 of the
Former Agreement), Employee covenants and agrees that, for as long as Employee
is employed by Employer and for a period of two (2) years after the date
Employee ceases for any reason to be employed by Employer, Employee shall not,
directly or indirectly, (A) solicit the services of, or hire, directly or
indirectly, whether on Employee's own behalf or on behalf of others, any
managerial or executive employee, account manager, member of Employers' sales,
marketing, customer service or client relations group or programmer or other
information services or data base management personnel of Employer who is
employed by Employer or any of its affiliates as of or following the date of
termination of Employee's employment, or (B) engage in any venture, enterprise,
activity or business, passively or actively, as an owner, or as a consultant,
adviser, independent contractor, participant, employee or agent in a capacity
relating to marketing, advertising, promotional activities, client relations,
customer service or sales, competitive with the business of Employer anywhere
within the continental United States other than and excluding any business
performing the services provided by Employer solely for its own internal use.
Employee acknowledges that the business of Employer is national in scope, that
one can effectively compete with such business from anywhere in the continental
United States, and that, therefore, such geographical area of restriction is
reasonable in the circumstances to protect Employer's trade secrets, goodwill
and other legitimate business interests.
<PAGE> 7
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 7
8. ENFORCEMENT. Employee covenants and agrees that if Employee shall
violate or breach any of Employee's covenants or agreements provided for in
Section 6 or 7, Employer shall be entitled to an accounting and repayment of all
profits, compensation, commissions, remunerations and benefits which Employee
directly or indirectly has realized and realizes as a result of, growing out of
or in connection with any such violation or breach. In addition, in the event of
a breach or violation or threatened or imminent breach or violation of any
provisions of Section 6 or 7, Employer shall be entitled to a temporary and
permanent injunction or any other appropriate decree of specific performance or
equitable relief (without being required to post bond or other security, to the
extent permitted by applicable law) from a court of competent jurisdiction in
order to prevent, prohibit or restrain any such breach or violation or
threatened or imminent breach or violation by Employee and/or by any Third
Parties. Employer shall be entitled to such injunctive or other equitable relief
in addition to any ascertainable damages which are suffered, together with
reasonable attorneys' and paralegals' fees and costs and other costs incurred in
connection with any such litigation, both before and at trial and at all
tribunal levels. It is understood that resort by Employer to such injunctive or
other equitable relief shall not be deemed to waive or to limit in any respect
any other rights or remedies which Employer may have with respect to such breach
or violation.
9. RESIGNATION. Employee hereby resigns, effective as of the date of
this Agreement, as an executive officer of Employer.
10. MISCELLANEOUS.
A. This Agreement shall be governed by and construed pursuant
to the laws of the State of Florida.
B. Any notices required or permitted to be given pursuant to
this Agreement shall be sufficient if in writing, and delivered personally, by
commercial courier service or sent by certified mail, return receipt requested,
and sent to Employer's executive offices, to the attention of the Chief
Executive Officer, if mailed to Employer, and to Employee's then current
residence, if mailed to Employee.
C. This Agreement constitutes the entire final agreement
between the parties with respect to, and supersedes any and all prior and
contemporaneous agreements (including, but not limited to, the Former Agreement)
between the parties hereto, both oral and written, concerning the subject matter
hereof and may not be amended, modified or terminated except by a writing signed
by the parties hereto. The parties mutually acknowledge and agree that the
Former Agreement is hereby terminated and of no further force or effect
whatsoever.
<PAGE> 8
Mr. Bernard J. Kosar, Jr.
October 1, 1998
Page 8
D. If any provision of this Agreement shall be held to be
invalid or unenforceable, and is not reformed by a court of competent
jurisdiction, such invalidity or unenforceability shall attach only to such
provision and shall not in any way affect or render invalid or unenforceable any
other provision of this Agreement, and this Agreement shall be carried out as if
such invalid or unenforceable provision were not herein contained.
E. A waiver of any breach or violation of any term, provision
or covenant herein contained shall not be deemed a continuing waiver or a waiver
of any future or past breach or violation. No oral waiver shall be binding.
F. This Agreement may be executed in counterparts, each of
which shall be an original, but both of which together shall constitute one and
the same instrument.
G. Employer strongly recommends to Employee that Employee
retain independent legal counsel to advise Employee with respect to this
Agreement before Employee signs it.
If you agree that this Agreement correctly sets forth the current
understanding and agreement of employment between Employee and Employer, please
sign by your name below and return this letter to me.
PRECISION RESPONSE CORPORATION, a Florida
corporation
By: /s/ David L. Epstein
-----------------------------------------
David L. Epstein, Chief Executive Officer
AGREED TO AND ACCEPTED BY:
/s/ Bernard J. Kosar, Jr.
- ------------------------------------
BERNARD J. KOSAR, JR.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Precision Response Corporation on Form S-8 (File No. 333-19651) of our report
dated February 17, 1999, on our audits of the consolidated financial statements
and financial statement schedule of Precision Response Corporation as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996, which report is included in this annual report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
March 30, 1999
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,656
<SECURITIES> 0
<RECEIVABLES> 50,996
<ALLOWANCES> 8,225
<INVENTORY> 0
<CURRENT-ASSETS> 55,734
<PP&E> 101,576
<DEPRECIATION> 30,162
<TOTAL-ASSETS> 133,446
<CURRENT-LIABILITIES> 33,715
<BONDS> 16,916
0
0
<COMMON> 215
<OTHER-SE> 79,144
<TOTAL-LIABILITY-AND-EQUITY> 133,446
<SALES> 0
<TOTAL-REVENUES> 175,173
<CGS> 0
<TOTAL-COSTS> 153,638
<OTHER-EXPENSES> 22,339
<LOSS-PROVISION> 14,534
<INTEREST-EXPENSE> 1,050
<INCOME-PRETAX> (16,127)
<INCOME-TAX> (5,938)
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> (10,189)
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