<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
March 22, 2000
USA NETWORKS, INC.
(Exact Name of Registration business as Specified in Its Charter)
Delaware 0-20570 59-2712887
(State or other Jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification Number)
152 West 57th Street, New York, New York 10019
(Address, including zip code, of Principal Executive Offices)
(212) 314-7300
(Registrant's telephone number including area code)
<PAGE>
Item 5. Other Events.
On January 12, 2000, USA Networks, Inc. ("USAi") entered into a
definitive agreement to acquire Precision Response Corporation ("PRC"). The
audited consolidated financial statements of PRC as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999 are
filed herewith. In addition, the unaudited pro forma condensed combined
financial statements filed herewith have been prepared to give effect to the
acquisition by USAi of PRC as well as other transactions completed by USAi in
1999. The unaudited pro forma condensed combined financial statements filed
herewith are identical to the ones included in Amendment No. 1 to the
Registration Statement on Form S-4 (Registration No.: 333-30404), which
amendment was filed by USAi on March 3, 2000.
Item 7(c). Exhibits.
99.1 Audited Consolidated Financial Statements of PRC as of December 31,
1999 and 1998 and for each of the three years in the period ended
December 31, 1999.
99.2 Unaudited pro forma condensed combined financial statements at December
31, 1999 and for the year ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunder duly authorized.
Date: March 22, 2000
USA NETWORKS, INC.
By: /s/ Thomas J. Kuhn
------------------------------------------
Name: Thomas J. Kuhn
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT INDEX
99.1 Audited Consolidated Financial Statements of PRC as of December 31,
1999 and 1998 and for each of the three years in the period ended
December 31, 1999.
99.2 Unaudited pro forma condensed combined financial statements at December
31, 1999 and for the year ended December 31, 1999.
<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Precision Response Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Precision
Response Corporation and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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
January 26, 2000
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 2,067 $ 1,656
Accounts receivable, net of allowances of $2,411 and $8,225, in 1999 and 1998,
respectively ............................................................ 46,173 42,771
Income taxes receivable ...................................................... 199 215
Deferred income taxes ........................................................ 3,823 6,906
Prepaid expenses and other current assets .................................... 2,714 4,186
--------- ---------
Total current assets .................................................... 54,976 55,734
Property and equipment, net .................................................. 88,109 71,414
Deferred income taxes ........................................................ 3,713 5,516
Other assets ................................................................. 2,565 782
--------- ---------
Total assets ............................................................ $ 149,363 $ 133,446
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations ............................. $ 1,691 $ 2,510
Accounts payable ........................................................ 18,472 16,571
Restructuring accrual ................................................... 1,280 3,244
Accrued compensation expenses ........................................... 4,632 3,108
Other accrued expenses .................................................. 7,236 7,174
Customer deposits ....................................................... 377 1,108
--------- ---------
Total current liabilities ........................................... 33,688 33,715
Long-term obligations, less current maturities ............................... 23,425 16,916
Restructuring accrual ........................................................ 1,967 3,456
--------- ---------
Total liabilities ................................................... 59,080 54,087
--------- ---------
Commitments and contingencies (see Notes 7 and 15) ........................... -- --
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 21,794,400 and
21,549,000 issued and outstanding, respectively ......................... 218 215
Additional paid-in capital ................................................... 100,218 97,179
Accumulated deficit .......................................................... (9,744) (18,035)
Unearned compensation ........................................................ (409) --
--------- ---------
Total shareholders' equity .......................................... 90,283 79,359
--------- ---------
Total liabilities and shareholders' equity .......................... $ 149,363 $ 133,446
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues ............................................... $ 215,920 $ 175,173 $ 143,584
--------- --------- ---------
Operating expenses:
Cost of services ................................... 177,668 153,638 128,177
Selling, general and administrative expenses ........... 23,249 23,290 25,874
Restructuring and asset impairment charges ............. -- 13,583 11,591
--------- --------- ---------
Total operating expenses ........................... 200,917 190,511 165,642
--------- --------- ---------
Operating income (loss) ............................ 15,003 (15,338) (22,058)
Other income (expense):
Interest income .................................... 74 261 984
Interest expense ................................... (1,195) (1,050) (702)
--------- --------- ---------
Income (loss) before income tax provision (benefit) 13,882 (16,127) (21,776)
Income tax provision (benefit) ......................... 5,591 (5,938) (8,710)
--------- --------- ---------
Net income (loss) .................................. $ 8,291 $ (10,189) $ (13,066)
========= ========= =========
Net income (loss) per common share:
Basic .............................................. $ 0.38 $ (0.47) $ (0.61)
========= ========= =========
Diluted ............................................ $ 0.37 $ (0.47) $ (0.61)
========= ========= =========
Weighted average number of common shares outstanding:
Basic .............................................. 21,587 21,548 21,393
========= ========= =========
Diluted ............................................ 22,445 21,548 21,393
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS UNEARNED
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION TOTAL
-------- -------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
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
Net income .......................... -- -- -- 8,291 -- 8,291
Stock option grants ................. -- -- 486 -- (486) --
Exercise of employee stock options .. 246 3 1,862 -- -- 1,865
Tax effect on exercise of employee
stock options ....................... -- -- 691 -- -- 691
Amortization of unearned compensation -- -- -- -- 77 77
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 ........ 21,795 $ 218 $100,218 $ (9,744) $ (409) $ 90,283
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 8,291 $(10,189) (13,066)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 15,440 12,822 11,506
Provision for bad debts and sales allowances ......... 2,393 14,534 5,895
Amortization of unearned compensation ................ 77 108 344
Restructuring and asset impairment charges ........... -- 6,458 6,832
Other asset write-offs ............................... -- 5,392 --
Deferred income taxes ................................ 5,577 (6,037) (4,905)
Changes in operating assets and liabilities, excluding
effects of acquisition:
Accounts receivable .................................. (5,795) (30,165) (7,205)
Income taxes receivable .............................. 16 6,755 (6,970)
Prepaid expenses and other current assets ............ 1,472 (448) (4,048)
Other assets ......................................... (143) (247) 787
Accounts payable ..................................... 1,901 3,549 (3,761)
Restructuring accrual ................................ (3,453) 4,497 2,863
Accrued compensation expenses ........................ 1,524 (1,993) 1,023
Income taxes payable ................................. -- -- (3,297)
Other accrued expenses ............................... 62 815 3,748
Customer deposits .................................... (731) (2,846) 1,534
-------- -------- --------
Net cash provided by (used in) operating activities 26,631 3,005 (8,720)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (32,135) (24,883) (34,251)
Investment in unconsolidated affiliate .................. (1,640) -- --
Cash acquired in acquisition, net of cash paid .......... -- -- 192
-------- -------- --------
Net cash used in investing activities ............. (33,775) (24,883) (34,059)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds from revolving credit loan ................. 8,000 11,000 --
Payments on long-term obligations ....................... (2,310) (2,546) (2,615)
Proceeds from long-term obligations ..................... -- 4,000 --
Net proceeds from issuance of common stock .............. -- -- 49,386
Dividend paid ........................................... -- -- (174)
Proceeds from exercise of stock options ................. 1,865 -- --
-------- -------- --------
Net cash provided by financing activities ......... 7,555 12,454 46,597
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 411 (9,424) 3,818
Cash and cash equivalents at beginning of year ............. 1,656 11,080 7,262
-------- -------- --------
Cash and cash equivalents at end of year ................... $ 2,067 $ 1,656 $ 11,080
======== ======== ========
Supplemental cash flow information:
Cash paid for interest, including capital leases, net of
amounts capitalized ................................. $ 877 $ 893 $ 724
======== ======== ========
Cash paid for income taxes ............................. $ -- $ 215 $ 3,330
======== ======== ========
Supplemental schedule of non-cash investing
and financing activities:
Installment loans and capital lease obligations ..... $ -- $ -- $ 1,687
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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 outsourced customer care, utilizing a fully-integrated
mix of traditional call center and e-commerce customer care solutions and
services, to large corporations and high-growth Internet-focused companies.
Through the integration of its teleservicing, e-commerce customer care services,
information technology, which includes database marketing and management, and
fulfillment capabilities, the Company is able to offer a total customer
relationship solution to meet its clients' needs.
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 5 - 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
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 period required to complete the asset. During
1999 and 1998, certain borrowings under the Company's revolving credit facility
(see Note 6- Credit Facilities and Long-Term Debt) were used to partially fund
the Company's PRISM Project (see Note 5- Property and Equipment) and other
internally developed or modified software, and the resulting interest costs
incurred have been capitalized. Total interest cost incurred during 1999 was
$1.8 million, of which $1.2 million was expensed and is included in the
accompanying 1999 Consolidated Statements of Operations, and the remaining $0.6
million was capitalized and is included in Property and equipment, net in the
accompanying Consolidated Balance Sheets. 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 $0.2
million was capitalized and is included in Property and equipment, net in the
accompanying Consolidated Balance Sheets. As each module of the PRISM Project
became operational or as other internally developed or modified software is
available for use, all associated capitalized costs, including capitalized
interest, is, or will begin to be, amortized on a straight-line basis over the
module's or software'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. Internet customer care and electronic message servicing are based on
hourly rates and on a transaction basis, respectively, or a combination of
charges thereof. 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. The Company exited the incentive-based teleservicing
program during 1998. 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 1999 or 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,
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 demands of 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 1999 or 1998 in
accordance with the provisions of SFAS No. 86. Amortization expense related to
externally marketed software development costs was $744,000 and $1,368,000 in
1998 and 1997, respectively. No amortization expense related to externally
marketed software development costs was recorded in 1999. 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 the Company's internal needs integral to the Company's
teleservicing or Internet-based programs. The Company capitalizes certain
internal and external costs directly associated with 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 1999 and 1998 relating to internal use
software in process was $3.1 million and $4.9 million, respectively, consisting
principally of software purchased from external vendors, and is included in
Property and equipment, net in the accompanying Consolidated Balance Sheets. In
addition, $10.1 million of software developed or modified for internal purposes
was available for use as of December 31, 1999 and is included in Property and
equipment, net in the accompanying Consolidated Balance Sheets (see Note 5-
Property and Equipment). As of December 31, 1998, no internal use software
development projects were ready for their intended uses with the exception of
the PRISM Project which is discussed in the following paragraph. 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 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
capitalized 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.
Capitalized 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 $12.8 million and $8.6 million as of
December 31, 1999 and 1998, respectively, and are included in Property and
equipment, net in the accompanying Consolidated Balance Sheets (see Note 5-
Property and Equipment). The PRISM Project has been implemented in phases with
certain systems or modules becoming functional at different
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
points in the project timeframe. As each module of the PRISM Project was
implemented, all associated capitalized costs began to be amortized on a
straight-line basis over the module's estimated useful life. As of December 31,
1999, all modules of the PRISM Project had been placed in service. Amortization
expense relating to the modules placed in service was approximately $1.3 million
and $100,000 in 1999 and 1998, respectively.
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 12- Stock-Based Compensation Plans).
ADVERTISING EXPENSES
Advertising expenses are charged to operations as incurred. During
1999, 1998 and 1997, advertising expenses were $477,000, $418,000 and $341,000,
respectively.
INCOME TAXES
The Company provides 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.
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 12- Stock-Based Compensation Plans).
2. PUBLIC OFFERINGS
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
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, consolidating and making
adjustments to certain call centers' workstation capacity and replacing certain
existing software programs utilized in its call center operations with new
customer interaction software reflective of advances in customer care
technology. 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.
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, approximately $704,000 and $1.0 million was accrued at
December 31, 1999 and 1998, respectively, and is included in Other accrued
expenses in the accompanying Consolidated Balance Sheets.
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, approximately
$3.2 million and $6.2 million is accrued as of December 31, 1999 and 1998,
respectively, 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.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, the Company had substantially completed its
restructuring and performance enhancing initiatives. During the fourth quarter
of 1998, the Company's exit of the incentive-based outbound teleservicing
program was completed and during the first quarter of 1999, the Company
completed its termination of certain designated employees. As of the end of the
fourth quarter of 1999, the Company had relocated all of the ongoing
teleservicing programs from one center and maintained reduced workstation
capacity in another center. Additionally, the Company implemented new customer
interaction software reflective of advances in customer care technology.
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 had been
delayed indefinitely and an across-the-board price reduction imposed by this
client. The 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 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 sought to shift its customer base to a more diversified
portfolio. 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 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. As of December
31, 1999, all accruals relating to Cost of services and Selling, general and
administrative expenses described above were fully utilized.
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
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, $57,000 is included in Restructuring accrual in the
Consolidated Balance Sheets, relating to facility consolidation costs associated
with the 1997 restructuring plan.
The Company initiated the restructuring and cost savings initiatives
during the third quarter of 1997 and during the fourth quarter of 1997 and
during 1998, the Company 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 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.
The following table sets forth the details and the cumulative activity
in the restructuring accrual during the year ended December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT BALANCE AT
DECEMBER 31, 1998 EXPENDITURES DECEMBER 31, 1999
----------------- ------------ -----------------
<S> <C> <C> <C>
Severance and other employee costs ...... $ 697 $ (697) $ --
Closure and consolidation of facilities
and related exit costs .................. 6,003 (2,756) 3,247
----------- ----------- -----------
Total restructuring accrual .......... 6,700 $ (3,453) 3,247
===========
Less current portion ................. (3,244) (1,280)
----------- -----------
Total restructuring accrual, long-term $ 3,456 $ 1,967
=========== ===========
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On June 15, 1999, the Company acquired 6,000,000 shares of common stock
of Global Reservation Systems, Inc. ("GRS"), currently representing an
approximate 16% ownership interest in GRS's successor (see below), for an
aggregate cost of $1.6 million. GRS (and its successor), a California
corporation, specializes in developing Internet-based travel products and
service systems. This equity investment in GRS has been accounted for using the
cost method and is included in Other assets in the accompanying Consolidated
Balance Sheet as of December 31, 1999.
In conjunction with this transaction, the Company also was issued a
warrant to purchase an aggregate of 3,000,000 shares of GRS common stock at an
exercise price equivalent to the lesser of (i) the lowest per share price of any
sales or issuances of GRS common stock (other than the sales or issuances
related to outstanding GRS options to purchase 6,065,391 shares or an additional
2,900,000 shares reserved by GRS for future issuances of options) that take
place up to the time of exercise or (ii) $0.85 per share, which exercise price
currently is $0.60 per share. The exercise price and/or number of shares
issuable upon exercising the warrant will be proportionately adjusted if
effected after any future
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock dividends, stock splits, combinations of stocks or issuance of stock in a
reclassification as defined in the agreement. The right to exercise the warrant,
in whole or in part, expires on June 15, 2002. In addition, the Company's
decision to exercise this warrant currently would require the consent of the
lender on its revolving credit facility and existing mortgage loan (see Note 6
- -- Credit Facilities and Long-Term Debt).
In January 2000, GRS reorganized itself by transferring all of its
assets and substantially all of its liabilities to a newly-formed California
corporation which retained the Global Reservation Systems name. All existing
shareholders, including the Company, retained the same relative interests in
this new corporation as they had in the predecessor corporation.
5. 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, 1999 DECEMBER 31, 1998 ESTIMATED
----------------------------------- ----------------------------------- USEFUL
OWNED LEASED TOTAL OWNED LEASED TOTAL LIVES
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Land .......................... $ 1,057 $ -- $ 1,057 $ 1,057 $ -- $ 1,057 N/A
Buildings and improvements .... 5,140 -- 5,140 4,878 -- 4,878 25 years
Telecommunications equipment
and software ............... 25,681 4,406 30,087 20,946 4,432 25,378 3-7 years
Computer equipment and software 63,538 5,429 68,967 33,768 5,523 39,291 3-5 years
Leasehold improvements ........ 14,064 -- 14,064 11,167 -- 11,167 *
Furniture and fixtures ........ 8,683 242 8,925 8,044 242 8,286 5-7 years
Vehicles ...................... 111 -- 111 111 -- 111 3 years
--------- --------- --------- --------- --------- ---------
118,274 10,077 128,351 79,971 10,197 90,168
Development in process ........ 5,360 -- 5,360 11,408 -- 11,408 N/A
--------- --------- --------- --------- --------- ---------
123,634 10,077 133,711 91,379 10,197 101,576
Less: accumulated depreciation
and amortization ........... (39,640) (5,962) (45,602) (25,943) (4,219) (30,162)
--------- --------- --------- --------- --------- ---------
$ 83,994 $ 4,115 $ 88,109 $ 65,436 $ 5,978 $ 71,414
========= ========= ========= ========= ========= =========
</TABLE>
* The lesser of the asset's estimated useful life or the lease term (see also
Note 7- Lease Commitments).
Depreciation and amortization expense amounted to $15,440,000,
$12,078,000 and $10,138,000 for 1999, 1998 and 1997, respectively.
As discussed in Note 1 - Operations and Significant Accounting
Policies, the Company capitalizes certain costs in connection with its PRISM
Project and software developed or modified for internal purposes, which will be
amortized when the project modules are implemented or software is available for
use. As of December 31, 1999, all modules of the PRISM Project had been placed
in service and are included within Computer equipment and software in the above
table in the amount of $12.8 million. Also included within Computer equipment
and software in the above table is $10.1 million of software developed or
modified for internal purposes, including IMA Advantage/Edge, that was available
for use as of December 31, 1999. Additionally, as of December 31, 1999, $3.1
million of internal use software in process, including the Company's Advanced
Communications Network project, is included within Development in process in the
above table.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the Company acquired a property (land and existing
building) in Sunrise, Florida. See also Note 6- Credit Facilities and Long-Term
Debt below. The building and related building improvements of $5.1 million as of
December 31, 1999 were not depreciated in 1999 or 1998 due to the fact that the
building was not occupied or utilized during this time. The property, beginning
in January 2000, is occupied and being utilized as a new customer interaction
center.
6. CREDIT FACILITIES AND LONG-TERM DEBT
On March 2, 1998, the Company entered into a three-year, $25.0 million
revolving credit facility, replacing its then existing $15.0 million revolving
credit facility. Effective June 30, 1999, the $25.0 million revolving credit
facility was amended to increase the amount available under the credit facility
to $35.0 million through January 31, 2000. The $25.0 million revolving credit
facility was further amended effective December 31, 1999 (the "Credit Facility")
to extend the $35.0 million amount available through February 29, 2000. In
addition, the amount available under the Credit Facility will be increased to
$50.0 million for the period of time between March 1, 2000 and June 30, 2000,
subject to certain limitations, as described below, and satisfactory completion
of the lender's audit of the Company's books and records and operations.
Effective as of July 1, 2000, the amount available under the Credit Facility
reverts back to $25.0 million. The December 31, 1999 amendment also extended the
maturity date of the Credit Facility to June 30, 2001. In accordance with the
terms of the amendment effective December 31, 1999, the Company paid the lender
on its Credit Facility a modification fee in the amount of $200,000 in January
2000, which will be amortized over the remaining life of the Credit Facility.
The terms of the amendment also require the Company to pay the lender on its
Credit Facility an additional fee in the amount of $250,000 on July 1, 2000, in
the event that USA Networks, Inc. has not completed its acquisition of the
Company by June 30, 2000. See Note 17 - Subsequent Event for a further
discussion of USA Network Inc.'s acquisition of the Company.
The Credit Facility is collateralized by all of the Company's owned and
hereafter acquired assets. The Company may borrow up to 80% of eligible accounts
receivable. 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"). Prior to December 31, 1999, the Company paid 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, of which the rate was 0.1875% per
annum at December 31, 1999. Effective December 31, 1999, the future fee on
unused commitments was increased to between 0.25% and 0.375% per annum. 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,
investments and acquisitions. At December 31, 1999, the outstanding balance of
the Credit Facility was $19.0 million ($5.0 million at 8.50% per annum, $5.2
million at 7.48% per annum, $4.0 million at 7.73% per annum, $2.5 million at
7.46% per annum and $2.3 million at 7.32% per annum) and is included in
Long-term obligations, less current maturities in the accompanying Consolidated
Balance Sheets. At December 31, 1999, the available balance under the terms of
the Credit Facility was $15.2 million. As of December 31, 1999, the Company was
in compliance with all financial debt covenants.
The Company also has secured a mortgage, as amended effective December
31, 1999, with the lender on its Credit Facility in connection with the
acquisition of a property (land and existing building) located in Sunrise,
Florida, which in January 2000 was opened as a customer interaction center by
the
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company. The mortgage loan is for $5.1 million, of which $4.0 million was
advanced at closing in 1998. The remaining $1.1 million available under the loan
is subject to the Company's completion of interior improvements to the property
by March 2, 2000. The amended mortgage note accrues interest payable quarterly
at the LIBOR rate plus 1.50% per annum, of which the interest rate was 7.33% per
annum at December 31, 1999. Principal payments are due quarterly, commencing on
January 31, 2000, based upon a 20-year amortization schedule, with a balloon
payment due at maturity on June 1, 2005. The amended mortgage loan is
cross-defaulted with and has terms substantially similar to the Credit Facility.
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 reconfigured the workstation capacity and utilized space 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, 1999 and is included in Long-term obligations, less
current maturities in the accompanying Consolidated Balance Sheets.
Long-term obligations as of December 31, 1999 and 1998 consisted of the
following (in thousands):
1999 1998
------- -------
Credit Facility .............................. $19,000 $11,000
Mortgage loan ................................ 4,000 4,000
Capital lease obligations .................... 1,616 3,926
Other long-term obligations .................. 500 500
------- -------
25,116 19,426
Less: current maturities ..................... 1,691 2,510
------- -------
Long-term obligations, less current maturities $23,425 $16,916
======= =======
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.
7. 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, as
of December 31, 1999, the Company had relocated all
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the ongoing teleservicing programs from the Margate-Coconut Creek facility
and maintained reduced workstation capacity in the Jacksonville center.
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 $6,224,000, $6,542,000 and $5,867,000 for 1999, 1998
and 1997, respectively.
On July 20, 1999, the Company executed a ten-year lease agreement with
Crossroads Business Park Associates (the "Landlord"), which includes options to
extend the initial term of the lease for an additional 15 years. The premises,
located in Plantation, Florida, will be the site of the Company's new principal
corporate offices. Certain terms of the new lease were amended on October 29,
1999, to provide for additional administrative space. The monthly base rent, as
amended, payable commencing on the earlier of (i) the fifteenth business day
immediately following the date that a certificate of occupancy or its equivalent
is issued permitting the Company to occupy the premises or (ii) March 15, 2000
for the initial space and April 15, 2000 for the additional space, will
initially be $54,775 per month, subject to 3% annual increases. The Company will
also pay its proportionate share of customary operating expenses of the office
building in which the Company's premises are located. Pursuant to the lease
agreement, as amended, the Landlord will pay the Company an improvement
allowance in the amount of $1.8 million. The Company has delivered a letter of
credit in the amount of $750,000 to the Landlord as security for the performance
of the Company's obligations under the lease agreement. The amount of such
letter of credit will decrease annually by $150,000.
In November 1999, the Company entered into a put/call agreement with
Presidential Suites, Ltd., a Florida limited partnership directly and indirectly
owned by the Company's chairman of the board ("Presidential"). Pursuant to such
agreement, the Company was granted the right to cause Presidential to assign
(and, in connection with such assignment, the Company would assume
Presidential's obligations accruing after such assignment with respect to), and
Presidential was granted the right to cause the Company to assume Presidential's
obligations accruing after such assumption with respect to (and, in connection
with such assumption, Presidential would assign), Presidential's interest in a
certain lease agreement for leased space consisting of approximately 3,388
rentable square feet ("Presidential Premises") and adjacent to the Company's new
leased premises located in Plantation, Florida, as discussed above. In the event
of the exercise of the Company or Presidential of this put/call right, the
Company would also purchase, and Presidential would convey, Presidential's
furniture, fixtures and equipment kept on the Presidential Premises ("FF&E"). In
connection with the assignment and assumption of the aforesaid lease for the
Presidential Premises and the conveyance of the FF&E, the Company would, among
other things, (i) pay to Presidential the unamortized portion (which is
amortizable over the initial term of the lease for the Presidential Premises) of
the sum of (a) the cost of the tenant improvements constructed on the
Presidential Premises in excess of the landlord's contribution in cash (and not
in the form of a rent credit), and (b) the cost of the FF&E, and (ii) provide a
substitute letter of credit to replace the then outstanding amount of
Presidential's letter of credit delivered to the landlord (the initial amount of
Presidential's letter of credit was $67,760). The base rental payable by
Presidential under the lease for the Presidential Premises is $49,126 per annum
(increasing by 3% per annum during the term) and the initial term of such lease
is ten years.
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 9 - Related Party Transactions, at December 31, 1999
are as follows (in thousands):
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
LEASES LEASES
------- -------
<S> <C> <C> <C>
2000 ..................................................... $ 1,575 $ 5,602
2001 ..................................................... 127 4,753
2002 ..................................................... -- 3,919
2003 ..................................................... -- 3,264
2004 ..................................................... -- 3,226
Thereafter ............................................... -- 48,624
------- -------
Total minimum lease payments ............................. 1,702 $69,388
=======
Less: amount representing interest .............................. 86
-------
Present value of net minimum lease payments under capital leases 1,616
Less: current maturities ........................................ 1,491
-------
Long-term obligations ........................................... $ 125
=======
</TABLE>
8. 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, information technology, 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, 1999, 1998 and 1997, the
Company's five largest clients accounted for approximately 69%, 76% and 64% of
gross revenues, respectively. As of December 31, 1999, 1998 and 1997,
approximately 64%, 68% and 68%, 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 1999, 1998 and 1997, certain clients individually accounted for
more than 10% of the Company's total gross revenues. The clients and their
related percentage and amount of total gross revenues (in thousands) were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
% Amount % Amount % Amount
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Company A.................. 42% $90,793 45% $80,559 38% $55,022
Company B.................. * * 12% $20,882 11% $15,139
</TABLE>
- ----------
* Accounted for less than 10% of total gross revenues for the year indicated.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
During 1996, but prior to the completion of the Company's 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.
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, the
Company terminated one of the lease agreements and a termination payment of
approximately $82,000 was made in February 1998. Rent expense under these leases
was $284,000, $287,000 and $275,000 for 1999, 1998 and 1997, respectively. 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. The sublease on the facility expires in January 2004, the sublease
on the parking lot expires in January 2002 and the additional parking lot lease
expires in June 2001, with combined annual rentals aggregating approximately
$250,000.
The Company paid approximately $385,000, $198,000 and $200,000 in 1999,
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.
During 1999 and 1998 the Company funded a portion of the life insurance
premiums payable with respect to up to three split-dollar life insurance
policies owned by the Mark Gordon Family Trust. The amounts paid by the Company
are reimbursable to the Company without interest upon the death of the Company's
Chairman of the Board, the surrender of the policies or the termination of the
arrangement. This obligation is secured by the benefits payable under the
insurance policies. The aggregate amount outstanding for these premiums as of
December 31, 1999 and 1998 was approximately $167,000 and $140,000,
respectively, and is included in Other Assets in the accompanying Consolidated
Balance Sheets.
During 1999 the Company also funded a portion of the life insurance
premiums payable with respect to three split-dollar life insurance policies
owned by three separate trusts for the benefit of the family of the Company's
chief executive officer. The amounts paid by the Company are reimbursable to the
Company without interest upon, under one policy, the death of the chief
executive officer, and under the other two policies, the death of the last to
die of the chief executive officer and his spouse, the surrender of the policies
or the termination of the arrangement; provided, however, that, in the event
that prior to such time the chief executive officer's employment with the
Company is terminated in certain circumstances (including, without limitation,
as a result of his disability, without cause or constructive termination), the
amounts paid by the Company will not be reimbursed. This obligation is secured
by the benefits payable under the insurance policies. The aggregate amount
outstanding for these premiums as of December 31, 1999 was approximately $34,000
and is included in Other Assets in the accompanying Consolidated Balance Sheet.
The Company's executive vice president, general counsel and secretary
(and who is also a director of the Company) was a partner of a certain law firm
until immediately prior to joining the Company in March 1996, and remained "Of
Counsel" to such law firm after joining the Company. Prior to February 1, 1998,
such law firm had acted as the Company's regular outside legal counsel. As of
February 1, 1998, a successor law firm commenced serving as the Company's
regular outside counsel. The Company's executive vice president, general counsel
and secretary is currently "Of Counsel" to such successor law firm. The total
fees and costs paid by the Company to the aforementioned law firm and the
successor law firm in 1999 were approximately $44,000 and $558,000,
respectively, and in 1998
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were approximately $98,000 and $468,000, respectively. The Company believes that
the fees paid to these law firms are no less favorable than could be obtained
from other comparable law firms in the area.
In July 1998 the Company engaged a law firm to represent it in
connection with governmental relations matters. A director of the Company is a
shareholder and director of such law firm. Pursuant to such engagement, such law
firm received a retainer of $25,000 in 1998 and received legal fees from the
Company in the amount of $30,000 and $12,500 in 1999 and 1998, respectively. The
engagement is terminable at any time by either party.
10. INCOME TAXES
As described in Note 1 - Operations and Significant Accounting
Policies, the Company provides for deferred income taxes under the asset and
liability method for financial accounting and reporting for income taxes.
The components of the income tax provision (benefit) for the years
ended December 31, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
------- ------- -------
Current:
Federal ...... $ 14 $ -- $(3,805)
State ........ -- -- --
------- ------- -------
14 -- (3,805)
------- ------- -------
Deferred:
Federal ...... 4,760 (5,068) (3,632)
State ........ 817 (870) (1,273)
------- ------- -------
5,577 (5,938) (4,905)
------- ------- -------
$ 5,591 $(5,938) $(8,710)
======= ======= =======
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, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
------- ------- -------
U.S. Federal statutory tax rate applied to
pre-tax income(loss) ................... $ 4,859 $(5,644) $(7,622)
State income taxes, net of Federal benefit 539 (577) (790)
Nondeductible expenses and other, net .... 193 283 (298)
------- ------- -------
Income tax provision (benefit) ...... $ 5,591 $(5,938) $(8,710)
======= ======= =======
The significant components of the net deferred tax asset as of December
31, 1999 and 1998 are as follows (in thousands):
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998
------- -------
Deferred tax assets:
Allowances and reserves ....................... $ 8,059 $ 9,898
Net operating loss and tax credit carryforwards 9,177 10,043
Other ......................................... 143 174
------- -------
17,379 20,115
Deferred tax liability:
Property and equipment ........................ 9,843 7,693
------- -------
Net deferred tax asset .................. $ 7,536 $12,422
======= =======
The net deferred tax asset in the amount of $7.5 million as of December
31, 1999 is based upon expected utilization of net operating loss ("NOL")
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 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 $18.6
million and a state NOL carryforward of approximately $31.6 million, both of
which will begin to expire in 2012.
11. CAPITAL STOCK
The Company has authorized 100 million shares, par value $0.01, of
common stock. The Company has 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.
Prior to the consummation of the Company's Initial Public Offering, the
Company's Board of Directors declared a dividend payable in cash to the then
current shareholders of the Company of approximately $5,243,000 (the
"Dividend"). 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.
12. 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, June 12, 1998, and June 21, 1999, the total number of shares
reserved for issuance under the
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Plan was increased to 3,000,000, 4,000,000 and 4,750,000,
respectively. In addition, at the Company's annual meeting of shareholders on
June 21, 1999, the total number of shares reserved under the Director Stock Plan
was increased to 300,000.
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,
retirement or change in control. 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 and options to purchase an aggregate of
500,000 shares which were granted at an exercise price of approximately 94% of
the fair market value at the date of grant, non-qualified options granted under
the Employee Stock Plan through December 31, 1999 have been granted at an
exercise price not less than 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. At the Company's
annual meeting of shareholders on June 21, 1999, the Director Stock Plan was
amended and restated in its entirety (the "Restated Director Stock Plan"). The
Restated Director Stock Plan increased the number of nonqualified stock options
automatically awarded to each non-employee director upon re-election from 2,500
shares to 5,000 shares of common stock at an exercise price equal to the fair
market value of the common stock on the date of grant. However, the Restated
Director Stock Plan provided for the award of 15,000 nonqualified stock options
to each non-employee director re-elected at the June 21, 1999 meeting in lieu of
the 5,000 annual grant. The purpose of the exception was to retroactively adjust
the aggregate number of options previously awarded to the existing non-employee
directors to be more consistent with the initial and annual awards under the
Restated Director Stock Plan. In addition, the Restated Director Stock Plan
authorized the Board, in its sole discretion, to grant to a non-employee
director at the time of his or her initial election as a director of the Company
nonqualified stock options in excess of the 5,000 shares of common stock
automatically granted on initial election to the Board of Directors up to and
not exceeding 50,000 shares. The options granted to each non-employee director
will have a term of ten years and vest, in the case of options granted under the
Director Stock Plan, in equal installments over three years and, in the case of
options granted under the Restated Director Stock Plan, in full after the first
anniversary of the date the option is granted. Stock options to purchase 45,000
shares at an exercise price of $5.53 per share were granted under the Restated
Director Stock Plan during 1999. Stock options to purchase 7,500 shares at an
exercise price of $6.32 per share during 1998 and 7,500 shares at exercise
prices ranging between $21.125 and $33.75 per share during 1997 were granted
under the Director Stock Plan.
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
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
separate component of shareholders' equity) and was recognized over the related
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 and $111,000 for 1998 and 1997,
respectively. As of December 31, 1998, the related unearned compensation was
fully amortized.
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 123 in accounting for
these non-employee stock options, the Company recorded $387,000 in unearned
compensation, which was amortized ratably over the related vesting periods.
Amortization of the unearned compensation recorded in the accompanying
Consolidated Financial Statements in accordance with SFAS 123 resulted in
compensation expense of $67,000 and $233,000 for 1998 and 1997, respectively. As
of December 31, 1998, the related unearned compensation was fully amortized.
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.
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.
These options were cancelled during 1999 as a result of this employees voluntary
termination.
During 1999, a non-employee consultant was granted options on two
occasions under the Employee Stock Plan to purchase an aggregate total of 50,000
shares of common stock at exercise prices equal to 100% of the fair market
values at the dates of grant. Pursuant to the application of SFAS 123 in
accounting for these non-employee stock options, the Company recorded $329,000
in unearned compensation, which is being amortized ratably over the related
vesting periods. Amortization of the
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unearned compensation recorded in the accompanying Consolidated Financial
Statements in accordance with SFAS 123 resulted in compensation expense of
$50,000 for 1999.
Also during 1999, two employees of the Company were each granted
non-qualified stock options to purchase 250,000 shares of common stock at an
exercise price of $5.1875 per share, which represented 94% of the fair market
value at the date of grant, 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 $157,000, was recorded as unearned
compensation (a separate component of shareholders' equity) and is being
recognized over the related vesting period. Amortization of the unearned
compensation recorded in the accompanying Consolidated Financial Statements in
accordance with APB 25 resulted in compensation expense of $27,000 for 1999.
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 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -------
<S> <C> <C> <C>
Expected volatility................. 76.7% 73.0% 78.3%
Risk-free interest rate............. 4.6%-6.6% 4.1%-5.9% 5.92%-6.81%
Dividend yield...................... 0.0% 0.0% 0.0%
Expected life....................... 4-10 years 1-10 years 7 years
</TABLE>
A summary of the status of the Company's Stock Plans as of December 31,
1999, 1998 and 1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE PER
OPTIONS OPTION
<S> <C> <C>
Outstanding at January 1, 1997 . 904,750 $ 26.63
Granted ..................... 3,667,750 (1) 12.40
Exercised ................... (42,000) 7.02
Forfeited ................... (1,865,117) (1) 25.34
---------
Outstanding at December 31, 1997 2,665,383 8.26
Granted ..................... 1,663,750 (2) 6.60
Exercised ................... (7,000) 0.01
Forfeited ................... (481,483) (2) 10.06
---------
Outstanding at December 31, 1998 3,840,650 7.39
Granted ..................... 1,108,222 8.99
Exercised ................... (245,400) 7.60
Forfeited ................... (426,100) 9.59
---------
Outstanding at December 31, 1999 4,277,372 $ 7.60
=========
</TABLE>
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------
(1) 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.
(2) 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, 1999, 1998 and 1997
was 2,021,921, 1,243,759 and 225,464, respectively. The per share
weighted-average fair value of stock options granted during 1999, 1998 and 1997
was $6.77, $4.30 and $9.53, respectively.
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
RANGE OF EXERCISE PRICES NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE AT EXERCISE
1999 LIFE (YEARS) PRICE DECEMBER 31, 1999 PRICE
- ---------------------------- ----------------- ------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
$0.01 (1) 7,000 3.54 $ 0.01 7,000 $ 0.01
$4.06 to $6.32 1,190,500 6.30 5.21 388,849 5.35
$6.875 to $6.94 1,377,800 4.91 6.91 745,775 6.89
$7.41 to $7.7188 426,600 4.70 7.43 401,600 7.41
$7.875 (2) 606,250 5.41 7.88 275,249 7.88
$8.0313 to $16.00 508,000 5.93 9.34 193,450 8.24
$21.125 to $43.00 161,222 7.01 25.32 9,998 34.17
----------- ----------- -------
$0.01 to $43.00 4,277,372 5.54 7.60 2,021,921 7.07
=========== ===========
</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 123, the Company's net income
(loss) and net income (loss) per share (diluted) in 1999, 1998 and 1997 would
have been reduced to the proforma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported ........................... $ 8,291 $ (10,189) $ (13,066)
Proforma .............................. 4,835 (14,733) (18,474)
Diluted net income (loss) per common share:
As reported ........................... $ 0.37 $ (0.47) $ (0.61)
Proforma .............................. 0.22 (0.68) (0.86)
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. The Company anticipates that additional awards
will be granted in future years.
13. 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):
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ----------------------------- -----------------------------
Net Per Net Per Net Per
Income Shares Share Loss Shares Share Loss Shares Share
-------- -------- ----- -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Income (loss) available to
common shareholders ...... $ 8,291 21,587 $0.38 $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61)
EFFECT OF DILUTIVE SECURITIES:
Stock options(1) ........... -- 858 (0.01) -- -- -- -- -- --
-------- -------- ----- -------- -------- ------ -------- -------- ------
DILUTED EPS:
Income (loss) available to
common shareholders and
assumed exercises ........ $ 8,291 22,445 $0.37 $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61)
======== ======== ===== ======== ======== ====== ======== ======== ======
</TABLE>
(1) The effect of 71,679 and 178,684 shares of potential common stock were
anti-dilutive in 1998 and 1997, respectively.
14. 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 $100,000, $85,000 and $45,000 to the Profit Sharing/401(k) Plan
during 1999, 1998 and 1997, respectively.
15. CONTINGENCIES
On or about August 26, 1998 a lawsuit was filed in Connecticut,
captioned Henry E. Freeman and Freeman Industrial Enterprises Corporation v.
Precision Response Corporation, Mark J. Gordon and David L. Epstein (Case No.
3:98-CV-1895-AVC (D. Conn.)). It is currently pending in 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 Amended 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, negligent misrepresentation 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, recission of such contracts,
an accounting and interest, costs and attorneys' fees. The Company has filed a
motion to dismiss the Amended Complaint for failure to state a cause of action,
which is currently pending before the Court.
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
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
defense costs has been accrued and is included in Other accrued expenses in the
accompanying Consolidated Balance Sheets 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.
On or about November 5, 1999 a lawsuit, captioned JOSEPH P. RIANO V.
PRECISION RESPONSE CORPORATION; PRCNETCARE.COM, INC.; MARK J. GORDON; AND DAVID
L. EPSTEIN (Case No. 99-25774 CA 10), was filed in the Circuit Court of the
Eleventh Judicial Circuit in and for Miami Dade-County, Florida. This lawsuit
alleges that PRC misappropriated the plaintiff's alleged trade secret. The
plaintiff asserts a statutory claim against all defendants under the Florida
Uniform Trade Secrets Act, Chapter 688, Florida Statutes. The plaintiff also
asserts a claim against Precision Response Corporation ("PRC") that it breached
a contract entered into with the plaintiff to keep certain information
confidential. In addition, the plaintiff asserts claims for conversion against
all of the defendants and for conspiracy to commit conversion against the
individual defendants. The plaintiff also asserts a claim for unjust enrichment
against PRC and prcnetcare.com, Inc. ("prcnetcare.com"). The plaintiff's
complaint seeks an unspecified amount of compensatory damages, including all
profits earned by the defendants as a result of their conduct, exemplary
damages, attorneys' fees, interests and costs. The plaintiff also seeks an
accounting and entry of an injunction preventing PRC and prcnetcare.com from
continuing to misappropriate the plaintiff's alleged trade secret.
On January 28, 2000, the court entered an order denying the defendants'
motion to dismiss, with the exception of conspiracy claims against the corporate
defendants, which were dismissed by agreement of counsel. An answer and
affirmative defenses have been filed on behalf of all defendants. The Company
believes that the plaintiff's allegations are totally without merit and intends
to defend the lawsuit vigorously.
16. UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1999
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ........................ $46,248 $50,090 $57,006 $62,576
Gross profit .................... 7,317 8,655 10,431 11,849
Operating income ................ 2,447 2,984 4,283 5,289
Net income ...................... 1,238 1,696 2,392 2,965
Basic earnings per common share . 0.06 0.08 0.11 0.14
Diluted earnings per common share 0.06 0.08 0.11 0.13
<PAGE>
PRECISION RESPONSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
- ----------
(1) Includes non-recurring special charges of $22.1 million before taxes in 1998
as part of the Company's restructuring and cost reduction initiatives (see Note
3 - Restructuring and Other Non-Recurring Special Charges).
17. SUBSEQUENT EVENT
On January 12, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, USA Networks, Inc.
("USAi"), a Delaware corporation, and P Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of USAi ("Newco"), pursuant to which
Newco would be merged with and into the Company, with the Company remaining as
the surviving corporation in the merger. Upon and subject to consummation of the
merger, each share of the Company's common stock would be converted into 1.08
shares of USAi common stock (taking into account the two-for-one stock split of
USAi common stock to be effected on February 24, 2000 as to USAi common
shareholders as of February 10, 2000). Consummation of the Merger Agreement is
subject to certain terms, conditions and termination rights specified in the
Merger Agreement. In particular, the Company may elect to terminate the Merger
Agreement if the volume-weighted average sales price per share of USAi common
stock on the twenty consecutive trading days ending on the second full trading
day prior to the Company's special meeting of shareholders (to be convened to
take action upon the Merger Agreement) is less than $18.52 (taking into account
the above-described USAi two-for-one stock split). If the Company makes such
election, USAi may, however, elect, in its sole discretion, to increase the
exchange ratio at that time so that the Company's shareholders receive $20.00
worth of USAi common stock for each share of the Company's common stock, in
which case the Company's termination election will be deemed to be rescinded. In
addition, the merger is subject to approval or expiration or earlier termination
of any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and the approval of shareholders of the Company holding
a majority of outstanding shares of common stock, as well as other customary
closing conditions. The merger is currently expected to close by June 2000.
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements have been prepared to give effect to the acquisition by USA Networks,
Inc. ("USAi") of Precision Response Corporation ("PRC") as well as other
transactions completed by USAi in 1999. The acquisition of PRC will be accounted
for under the purchase method of accounting. The other transactions made by USAi
in 1999 include:
(1) the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of two
entities which operate Hotel Reservations Network on May 10,
1999; and
(2) the acquisition of October Films, in which Universal owned a
majority interest, and the domestic film distribution and
development business of Universal previously operated by
Polygram Filmed Entertainment, Inc. on May 28, 1999.
The pro forma combined condensed financial statements reflect some
assumptions regarding the transactions and are based on the historical financial
statements of USAi and PRC. The combined condensed financial statements,
including the notes accompanying them, are qualified in their entirety by
reference to, and should be read in conjunction with, USAi's and PRC's audited
financial statements, including the notes accompanying them.
The pro forma combined condensed balance sheet as of December 31, 1999
gives effect to the acquisition of PRC as if it had occurred on December 31,
1999.
The pro forma combined condensed statement of operations for the year
ended December 31, 1999 reflects USAi's and PRC's audited statements of
operations for the year ended December 31, 1999, adjusted for the pro forma
effects of the acquisition of PRC, as well as the completion of the other USAi
transactions listed above, as if such transactions had occurred as of January 1,
1999.
USAi is in the process of evaluating the fair value of PRC's assets
acquired and liabilities assumed in order to make a final allocation of the
excess purchase price, including allocation to intangibles other than goodwill.
Accordingly, the purchase accounting information is preliminary and has been
made solely for the purpose of developing such unaudited pro forma combined
condensed financial information.
The pro forma combined condensed balance sheet and statement of
operations are presented for illustrative purposes only. They are not
necessarily indicative of the results of operations or financial position which
actually would have been reported had these transactions occurred as of December
31, 1999 or as of January 1, 1999, nor are they necessarily indicative of USAi's
future financial results of operations.
Share and per share amounts have been adjusted to reflect USAi's
two-for-one stock split which became effective on February 24, 2000 for holders
of record as of February 10, 2000.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
USAI PRC ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments ....................... $ 424,239 $ 2,067 $ (10,000)(1) $ 416,306
Accounts and notes receivable, net .................... 454,341 46,372 500,713
Inventories, net ...................................... 470,844 470,844
Other ................................................. 39,031 6,537 45,568
----------- ----------- ----------- -----------
Total current assets ............................... 1,388,455 54,976 (10,000) 1,433,431
Property, plant and equipment, net .................... 356,631 88,109 444,740
Intangible assets including goodwill, net ............. 6,831,487 625,233 (1) 7,456,720
Cable distribution fees, net .......................... 130,988 130,988
Long-term investments and notes receivable ............ 147,631 147,631
Advance to Universal .................................. 163,814 163,814
Inventories, net ...................................... 166,477 166,477
Deferred charges and other ............................ 67,669 6,278 73,947
----------- ----------- ----------- -----------
Total assets ....................................... $ 9,253,152 $ 149,363 $ 615,233 $10,017,748
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt .................. $ 10,801 $ 1,691 $ -- $ 12,492
Accounts payable, accrued and other current liabilities 286,929 18,472 305,401
Obligations for program rights and film costs ......... 272,945 272,945
Deferred revenue ...................................... 83,811 83,811
Amounts due under acquisition agreement ............... 17,500 17,500
Cable distribution fees payable ....................... 43,993 43,993
Deferred income taxes ................................. 4,050 4,050
Other accrued liabilities ............................. 311,724 13,525 325,249
----------- ----------- ----------- -----------
Total current liabilities .......................... 1,031,753 33,688 1,065,441
Long-term debt ........................................ 574,979 23,425 598,404
Obligation for program rights and film costs .......... 262,810 262,810
Other long-term liabilities ........................... 121,815 1,967 123,782
Minority interest ..................................... 4,492,066 4,492,066
Stockholders' equity .................................. 2,769,729 90,283 705,516 (1) 3,475,245
(90,283)(2)
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity ......... $ 9,253,152 $ 149,363 $ 615,233 $10,017,748
=========== =========== =========== ===========
</TABLE>
<PAGE>
USA NETWORKS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER USAi PRO PRO FORMA
TRANS- FORMA ADJUST- PRO FORMA
USAi ACTIONS(3) COMBINED PRC MENTS COMBINED
----------- ------------ -------------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES......................... $ 3,235,761 $ 54,988 $ 3,290,749 $ 215,920 $ - $ 3,506,669
Operating costs and expenses.........
Cost of sales........................ 1,867,486 41,232 1,908,718 163,000 - 2,071,718
Other costs.......................... 795,458 9,067 804,525 22,477 - 827,002
Amortization of cable
distribution fees ................. 26,680 - 26,680 - - 26,680
Depreciation and amortization........ 333,117 9,758 342,875 15,440 31,262 (4) 389,577
----------- ------------ -------------- ----------- ------- -----------
Total operating costs and expenses... 3,022,741 60,057 3,082,798 200,917 31,262 3,314,977
----------- ------------ -------------- ----------- ------- -----------
Operating income..................... 213,020 (5,069) 207,951 15,003 (31,262) 191,692
Interest income (expense), net....... (47,948) (3,610) (51,558) (1,121) - (52,679)
Gain on sale of securities........... 89,721 - 89,721 - - 89,721
Miscellaneous........................ 5,779 (2) 5,777 - - 5,777
----------- ------------ -------------- ----------- ------- -----------
Earnings before income taxes and 260,572 (8,681) 251,891 13,882 (31,262) 234,511
minority interest.................
Income tax (expense) benefit......... (90,906) 2,574 (88,332) (5,591) (1,488) (5) (95,411)
Minority interest.................... (197,297) - (197,297) - 15,534 (6) (181,763)
----------- ------------ -------------- ----------- ------- -----------
NET EARNINGS (LOSS).................. $ (27,631) $ (6,107) $ (33,738) $ 8,291 $(17,216) $ (42,663)
=========== ============ ============== =========== ======== ===========
Net earnings (loss) per common share
Basic........................... $ (0.08) $ (0.12)
========== ==========
Diluted......................... $ (0.08) $ (0.12)
========== ==========
Weighted average shares
outstanding....................... 327,816 351,898
========== ==========
Weighted average diluted shares
outstanding....................... 327,816 351,898
========== ==========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(in thousands, except share data)
(1) Acquisition costs and the preliminary determination of the unallocated
excess of merger costs over net assets acquired are set forth below:
Value of shares of USAi common stock to be issued and
assumption of "in the money" stock options ........ $704,766
Estimated transaction costs .......................... 750
--------
Total acquisition costs .............................. 705,516
Less: net assets acquired (reduced by fee to be paid
by PRC to investment advisors in conjunction with
the acquisition by USAi) .......................... 80,283
========
Unallocated excess of acquisition cost over net assets
acquired preliminarily allocated to goodwill ...... $625,233
========
In conjunction with the closing of the acquisition, PRC will pay its investment
advisor a fee of approximately $10,000 that will reduce the net assets acquired
by USAi. The amount has been reflected in the pro forma balance sheet as a
reduction of cash.
The fair value of shares of USAi common stock of $26.18 per share was determined
by taking an average of the opening and closing price of USAi common stock for a
short period just before and just after the terms of the transaction were agreed
to by the parties and announced to the public. The purchase price was increased
by the difference in the $26.18 per share multiplied by the conversion ratio and
the average exercise price of outstanding PRC options multiplied by the number
of outstanding PRC options.
(2) Reflects elimination of the PRC historical equity.
(3) Reflects the pro forma results of other transactions completed by USAi
in 1999. The transactions include the acquisition of substantially all
of the assets and assumption of substantially all of the liabilities of
two entities that operated the Hotel Reservations Network on May 10,
1999 and the acquisition of October Films and the domestic film
distribution and development business previously operated by Polygram
Filmed Entertainment on May 28, 1999. The acquisitions were accounted
for under the purchase method of accounting. See USAi's Form 10-K for
the year ended December 31, 1999 for more information on these
transactions. The acquisitions of Hotel Reservations Network and of
October Films and Polygram Filmed Entertainment resulted in additional
pro forma goodwill amortization of $9.5 million in 1999.
(4) Reflects additional amortization expense resulting from the increase in
goodwill and other intangible assets due to the transaction. The
unallocated excess of acquisition costs over net assets acquired has
been preliminarily allocated to goodwill, which is being amortized over
20 years. In connection with finalizing the purchase price allocation,
USAi is currently evaluating the fair value of assets acquired and
liabilities assumed. Using this information, USAi will make a final
allocation of the purchase price, including allocation to intangibles
other than goodwill. Accordingly, the purchase accounting information
is preliminary.
(5) Represents the related income tax effect of the PRC transaction.
<PAGE>
(6) Represents the net reduction in minority interest expense of USAi, as
PRC will become a subsidiary of USANi LLC, a non-wholly owned
subsidiary of USAi. The net reduction in minority interest expense
results from the pro forma loss of PRC and from the increase in
ownership percentage of USANi LLC by USAi as a result of the
contribution of PRC to USANi LLC in exchange for USANi LLC shares.
