-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGWTv3NaR6CEyb/BbDaIVF64QPeMN8RerLhl8S9p1mC/xeiY0y17wCqMCU0j9f8L QS3bWcCeZ+75SBXCttn3RA== 0000950144-99-003749.txt : 19990402 0000950144-99-003749.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003749 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION RESPONSE CORP CENTRAL INDEX KEY: 0001013058 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 592194806 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20941 FILM NUMBER: 99581610 BUSINESS ADDRESS: STREET 1: 1525 N.W. 167TH ST CITY: MIAMI STATE: FL ZIP: 33169 BUSINESS PHONE: 3056264600 MAIL ADDRESS: STREET 1: 1525 N W 167TH ST CITY: MIAMI STATE: FL ZIP: 33169 10-K405 1 PRECISION RESPONSE CORP. 10-K405 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1998 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 0-20941 PRECISION RESPONSE CORPORATION (Exact name of Registrant as specified in its charter) FLORIDA (State or other jurisdiction of 59-2194806 incorporation or organization) (I.R.S. Employer Identification No.)
1505 N.W. 167TH STREET, MIAMI, FLORIDA 33169 (Address of principal executive offices)(Zip code) (305) 816-4600 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ON MARCH 22, 1999, THE REGISTRANT HAD 21,549,000 OUTSTANDING SHARES OF COMMON STOCK, $0.01 PAR VALUE, AND BASED UPON THE CLOSING MARKET PRICE OF THE REGISTRANT'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON SUCH DATE, THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $42,216,750. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's Definitive Proxy Statement for its 1999 Annual Meeting of Shareholders are incorporated by reference in Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INDEX PART I.
ITEM NO. PAGE - ------------ ---- 1. Business.................................................... 3 2. Properties.................................................. 12 3. Legal Proceedings........................................... 13 4. Submission of Matters to a Vote of Security-Holders......... 13 PART II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 14 6. Selected Financial Data..................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 31 8. Financial Statements and Supplementary Data................. 31 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 31 PART III. 10. Directors and Executive Officers of the Registrant.......... 31 11. Executive Compensation...................................... 32 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 32 13. Certain Relationships and Related Transactions.............. 32 PART IV. 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 32
2 3 PART I. ITEM 1. BUSINESS GENERAL Precision Response Corporation ("PRC" or the "Company") was incorporated in the state of Florida in 1982 as a fulfillment company and is currently a leading full-service provider of telephone-based customer service and marketing solutions on an outsourced and cosourced basis to large corporations. Through the integration of its teleservicing, Internet, database marketing and management, and fulfillment capabilities, the Company is able to provide a "one-stop" solution to meet its clients' needs. The Company believes that its one-stop approach, combined with its sophisticated use of advanced technology, provides a distinct competitive advantage in attracting clients seeking to cost-effectively contact or service prospective and/or existing customers. The Company is focused on attracting large corporate clients that have significant customer service needs including database design and management, substantial ongoing teleservicing, and electronic data processing. Typically, the Company's customer care associates are dedicated to a specific PRC client. The Company believes that the inbound (customer-initiated) segment of the customer care industry possesses the greatest long-term growth potential and is, therefore, concentrating its efforts primarily on that industry niche. The Company's teleservicing activities principally involve inbound calls. In most cases, outbound (PRC-initiated) calls are made to existing customers of a PRC client or to respond to customer-initiated inquiries. In 1998, 86% of the Company's revenues from teleservicing activities related to inbound calls. During 1998, the Company began strategic initiatives to capitalize on the extraordinary growth of Internet commerce by integrating Internet technologies with current PRC products and services to, in effect, create multimedia "customer interaction centers." PRC's technology, when fully implemented, will allow its customer care associates to interact on a real-time basis with a customer through voice or written transmissions via conventional telephone or over the Internet, facsimile, e-mail and Worldwide Web or "text chat" sessions. The Company's new and enhanced products and services which are being designed to support Internet commerce and communications are a natural extension to the Company's current teleservicing, database marketing and management and fulfillment services. Assisting clients to improve the utility of Web-based and e-mail commerce applications is a major business opportunity for the Company. RECENT DEVELOPMENTS On February 25, 1999, the Company announced the launch of a new corporate division, prcnetcare.com, Inc. ("prcnetcare.com"), to capitalize on the expected customer service opportunities related to the extraordinary growth of Internet commerce. The division is dedicated to offering a variety of interactive customer service communications, e-commerce and Internet customer care support. The formation of prcnetcare.com and a currently projected total capital commitment in excess of $6.0 million are key steps in the Company's continued efforts to leverage its sophisticated technology capabilities and experience in the teleservice customer care industry into a leadership position in Internet-based customer service. The division's Internet product offerings include InfiniteAccess and Precision Resolution, both of which have been in development for over a year. These offerings are significant enhancements to and expand upon certain Internet services already being provided by the Company to several large corporations. INFINITEACCESS products integrate clients' Internet-based customer care and commerce activities with the Company's existing teleservicing, database marketing and management and fulfillment services thereby, in effect, transforming the Company's call centers into multimedia customer interaction centers. Specifically, the Company is developing and will offer during 1999, the following InfiniteAccess products and services: PRC SMART MAIL is an electronic messaging service which reduces the cost and time of processing large volumes of e-mail by providing automated answers and interactive assistance. 3 4 PRC WEB ON-LINE is a Web collaborative service which enables customer care associates to simultaneously interact with clients' customers over the telephone and the Web. This product complements Web-based self-service aids by providing live associate assistance designed to answer questions asked by customers or business partners. This service will also provide "text chat" capabilities which enable interaction between customer care associates and customers. PRC INTERNET FULFILLMENT SERVICE provides e-mail and Web-based fulfillment processes to service Internet commerce transactions or requests for information such as brochures and other documents. PRC HOST is a Web application hosting service and Web information service which enables clients to conduct Web-based commerce without the expenditure to establish and support Internet commerce technology infrastructure and provides clients with Internet-related information and reports about their business performance, including sales performance, customer feedback and market analyses. PRECISION RESOLUTION provides clients with solutions for record standardization and error resolution for information transferred electronically or over the Internet that functions on an automated, real-time basis. This allows PRC to dynamically manage the people processes and workflow of highly transactional databases. This system provides greater control, increased productivity, enhanced quality, improved efficiency, reduced cycle times and streamlined processes to users. During 1998 the product was enhanced to allow Web-based transaction processing. In addition to these product offerings, the Company has invested in a state-of-the-art Internet protocol network and has formed key business relationships with Lucent Technologies, Oracle Corporation, Sun Micro Systems and Cisco, Inc. to develop future enhancements to its products. INDUSTRY OVERVIEW The traditional telephone-based customer service and marketing industry is growing rapidly and quickly changing as multiple communication channels, such as fax, e-mail and the Internet, are now available to customers. Today customers are accessing information through these alternative methods as well as by the telephone. Direct contact with customers via the telephone and electronically is increasing as more companies realize its benefits, including high response rates, low cost per transaction and direct interaction with customers, which allow on-line access to detailed customer or product information and immediate response to customer inquiries. The growth of the Internet has created an expanded means of providing customer service, in addition to the telephone which remains the principal means in the industry of providing customer care. The Company expects that large companies increasingly will outsource their customer care activities in order to focus internal resources on their core competencies and to improve the quality and cost-effectiveness of their customer service and marketing efforts by using the experience and specialized capabilities of larger-scale teleservices and Internet-based customer care, marketing and management providers. The Company also believes that organizations with superior customer service and sophisticated advanced technology, such as PRC, will particularly benefit from this outsourcing trend. PRC believes that the long-term outlook for outsourcing customer service and marketing is favorable. Along with an increase in traditional teleservicing customer care, research indicates an expected 230% cumulative annual growth rate in the number of on-line transactions over the next four years. The Company sees customer care over the Internet as the next major trend in the industry. BUSINESS STRATEGY PRC's objective is to become the premier provider of interactive customer communications between large corporations and their existing and prospective customers. The Company's strategy for achieving this objective is to offer its clients high-quality, fully integrated services that are customized to address each client's unique 4 5 needs and to improve the quality and cost-effectiveness of the client's customer service and marketing operations. The Company seeks to implement this strategy through the following: "One-Stop" Solutions Through Fully Integrated Services The Company's current integration of teleservices, information marketing and management and fulfillment services as part of a one-stop solution provides a cost-effective and efficient method for its clients to manage their growing customer service and marketing needs. In addition, the Company is in the process of integrating Internet communications as yet another part of the one-stop solution. The Company is typically involved in all stages of formulating, designing and implementing its clients' customer service and marketing programs. PRC believes that this solution-oriented, value-added approach to addressing its clients' needs distinguishes PRC from its competitors and plays a vital role in the Company's ability to attract and retain clients. Information Services Capabilities Through the efforts of its information services and Internet application groups, the Company is able to rapidly design, develop and implement application software for each client's unique customer service and marketing programs. PRC offers a wide array of services, including formulating, designing and customizing teleservicing and electronic applications, programming, and demographic and psychographic profiling. The information services group also integrates the Company's centrally managed wide area network with the client's management information systems, thereby enabling clients to access real-time program information and obtain comprehensive trend analyses. As the needs of a client evolve, PRC's information systems specialists work with the client to modify their programs. The Company believes that the services provided by its information systems specialists attract clients with long-term, complex customer service and marketing needs. Advanced Technology The Company's sophisticated use of advanced technology enables it to develop and deliver solutions to its clients' complex customer service and marketing needs. PRC has developed a specialized component-based software development strategy with related proprietary products for its traditional teleservicing and fulfillment services. PRC has also developed InfiniteAccess, PRC On-Line, Precision Resolution and other specialized software which cost-effectively utilize the Company's hardware capabilities. PRC's component-based software approach allows the Company's information services group to build and to test customer interaction center applications much more quickly than with conventional approaches. As a result, clients receive a customer interaction center solution of superior quality. See "Operations Overview -- Operations" and "Technology" below. Long-Term Client Relationships The Company seeks to develop long-term client relationships by becoming an integral part of its clients' overall customer service and marketing efforts. Dedicated client commitment teams, headed by a general manager and comprised of representatives of the teleservices, Internet application, information services and fulfillment operating groups, are assigned to and work closely with each client to formulate, design, implement, and operate the client's program throughout its term. In addition, the Company's customer care associates typically are trained for and dedicated to only one client's program. This close working relationship and continuity of personnel positions PRC as a strategic partner with its clients. Strong Commitment to Quality PRC strives to achieve the highest quality standards in the industry. As of March 9, 1999, approximately 98% of PRC's customer care associates are full-time which the Company believes results in greater stability and quality in its workforce. The Company has a rigorous screening process for new hires. All new associates participate in extensive classroom and on-the-job training programs lasting up to five weeks. After training, 5 6 each associate's performance is monitored regularly through on-site supervision, remote and on-site call monitoring, and on-line performance tracking. The Company's client commitment team ensures that the Company fulfills its commitments in connection with each client program in a timely manner. Because PRC's services involve direct contact with its clients' customers, the Company's commitment to quality is critical to its ability to attract and retain clients. OPERATIONS OVERVIEW PRC's operations are organized to effectively provide one-stop solutions for its clients' customer service and marketing needs. Management of Clients Through General Managers Teams. Each client program is managed by a general manager who is dedicated to a single or a small group of clients and is the sole point of contact for all matters related to the client's program. The general manager's responsibility includes full operational, financial and client relations functions. The general manager assembles a client commitment team consisting of members from the teleservices, Internet application, information services and fulfillment operating groups, which is assigned responsibility for that program. This team works with the client to formulate and design a customer service or marketing program tailored to achieve that client's objectives. In implementing the program, the team is supported by the human resources department which carefully selects the customer care associates for that particular program. In addition, the quality assurance and client commitment teams monitor the program to ensure that it is carried out in accordance with specifications. The Company believes that its integrated team approach and solution-oriented focus provide PRC with a distinct competitive advantage. Program Formulation and Design. PRC's client commitment teams work with clients to formulate a customer service and marketing program suited to each client's needs. The information services group uses its substantial expertise in rapid application development and systems integration to help clients more effectively target marketing programs, resulting in higher response rates and profitability, and to design customer service programs which capture information useful in the client's customer retention programs and other marketing efforts. PRC offers a wide array of services, including formulating, designing and customizing database architecture, programming, demographic and psychographic profiling, and scripting. Program Implementation. PRC's general manager teams work with the teleservices, fulfillment, information services and Internet application operating groups to implement the client's customer service and/or marketing program. Operations. Teleservicing operations involve direct communication with the clients' customers through inbound or outbound calls. In 1998, teleservicing activities accounted for 80% of the Company's total revenues. Of this amount, 86% related to inbound calls. In handling inbound calls, the Company's customer service representatives respond to a variety of customer requests, including inquiries, complaints, direct mail responses and order processing. The customers typically call a toll-free "800" number to request product or service information, place an order for a product or service, or obtain assistance regarding a previous order or purchase (including "help line" support). PRC's automated call distributors and digital switches identify each inbound call by "800" number and route the call to a PRC associate trained for that particular client's program. Simultaneously with receipt of the call, the associate's computer screen displays customer, product and service information relevant to the call. PRC's outbound services include conducting customer satisfaction and preference surveys and cross-selling client products, as well as providing proactive customer management with the goal of increased sales and enhanced customer retention. Almost all outbound calls are in response to customer-initiated inquiries or are made to a client's existing customers. The Company's outbound call management system utilizes predictive dialers which automatically dial the telephone numbers, determine if a live connection is made and present connected calls to a customer care associate who has been trained specifically for that client's program. The customer's name, other information about the customer and the program script simultaneously appear on 6 7 the customer care associate's computer screen. The associate then uses the script to take an order for the client's product or service or to request information for addition to the client's database. The Company's teleservicing operations are enhanced by the use of universal workstation technology. Universal workstations allow the customer care associate to handle either inbound or outbound calls as dictated by demand. From the client's standpoint, universal workstations provide increased efficiencies by allowing the customer care associate (for whose service the client generally pays on an hourly basis) to be productive with either inbound or outbound calls. Information obtained during a customer call by the PRC customer care associate is captured by the Company's database marketing and management systems. This information is used by PRC to ensure high quality performance and to provide fulfillment services, if necessary. PRC's database marketing and management technology also enables the Company to seamlessly connect with its clients' systems and thus deliver on-line, real-time program information. Fulfillment services include high-speed laser and electronic document printing, lettershop and mechanical inserting, sorting, packaging and mailing capabilities. While fulfillment services represent a relatively small portion of the Company's revenues, they enable the Company to support full-service customer service and marketing programs by managing and fulfilling requests for literature, products and other specialty items and by permitting the rapid distribution of client marketing information. Fulfillment services accounted for 11% of the Company's total revenues in 1998. prcnetcare.com is a new division of PRC dedicated to interactive customer communications, e-commerce and Internet customer care support. The division currently has two-products: InfiniteAccess and Precision Resolution. InfiniteAccess products integrate clients' Internet-based customer care and commerce activities with the Company's existing teleservicing, database marketing and management, and fulfillment services thereby, in effect, transforming the Company's call centers into multimedia customer interaction centers. Specifically, the Company is developing and will offer during 1999, the following InfiniteAccess products and services: PRC Smart Mail is an electronic messaging service which reduces the cost and time of processing large volumes of e-mail by providing automated answers and interactive assistance. PRC Web On-Line is a Web collaborative service which enables customer care associates to simultaneously interact with clients' customers over the telephone and the Web. This product complements Web-based self-service aids by providing live associate assistance designed to answer questions asked by customers or business partners. This service will also provide "text chat" capabilities which enable interaction between customer care associates and customers. PRC Internet Fulfillment Service provides e-mail and Web-based fulfillment processes to service Internet commerce transactions or requests for information such as brochures and other documents. PRC Host is a Web application hosting service and Web information service which enables clients to conduct Web-based commerce without the expenditure to establish and support Internet commerce technology infrastructure and provides clients with Internet-related information and reports about their business performance, including sales performance, customer feedback and market analyses. Precision Resolution provides clients with solutions for record standardization and error resolution for information transferred electronically or over the Internet that functions on an automated, real-time basis. This allows PRC to dynamically manage the people processes and workflow of highly transactional databases. This system provides greater control, increased productivity, enhanced quality, improved efficiency, reduced cycle times and streamlined processes to users. It allows the Company to dynamically manage higher volumes of repetitive processing work with increased efficiency, accuracy and productivity. In 1998, the Company invested in new development to meet the demands of clients for new functionality and to prepare the next generation of the product. This significant reengineering process included a lower cost data entry module, a task management engine, an inbound telephony link and imaging component, and a Web-enabled application for remote input. 7 8 Quality Assurance. PRC maintains its strong commitment to quality through its quality assurance and client commitment teams. Within each of PRC's operating departments, the quality assurance teams monitor performance to ensure that the Company's services are delivered at a level of quality that meets both the Company's and the client's standards. The client commitment team functions on a Company-wide basis to audit the fulfillment of the Company's commitments to each client program. Client Reporting. Data derived from customer service and marketing programs are a source of valuable information to PRC's clients in evaluating ongoing programs and planning and designing future programs. PRC has developed technologies and reporting procedures that effectively convert raw data gathered during the course of the program into useful information upon which clients can base strategic decisions and more effectively respond to customer needs and inquiries. PRC's proprietary software product, PRC On-Line, allows clients to monitor their teleservicing and Internet-based programs on-line, in real-time, to obtain comprehensive trend analyses and to modify program parameters as necessary. In addition, PRC provides clients with customized reports in printed form, electronic mail, computer-to-computer transmission, disk, tape and on-line. TECHNOLOGY Overview. PRC's sophisticated use of advanced technology enables the Company to develop and deliver solutions for its clients' complex customer service and marketing needs. The Company's information services and Internet applications groups have developed the Company's call management and database marketing and management systems. The information services group uses this platform to design and implement application software for each client's program. The Company believes that its platform is among the most advanced in the industry and provides a competitive advantage in attracting new business. The Company utilizes a UNIX-based open architecture system comprised of multiple computer systems which, in conjunction with its rapid application tool for user interface development, allows PRC to expand capacity from a PC-class computer to a mainframe without rewriting software and provides flexibility in designing applications tailored to the client's needs. In conjunction with the Company's use of Oracle database applications and Windows/NT applications, the UNIX-based open architecture system permits the Company to seamlessly interact with many different types of client systems and allows an electronic link from each call center's system to the Company's operational headquarters, resulting in a centrally managed wide area network. PRC also utilizes computer-telephone integration and universal workstation technologies as part of its wide area network. All PRC hardware is supported by an uninterruptable power supply designed for protection against outages or any data loss due to power variations, as well as a diesel generator to assure an uninterrupted power source. The Company believes that the integrity of client information is adequately protected by its data security system and its off-site disaster back-up storage facilities. Component-Based Development. Component-based development refers to the tools and techniques employed by the information services group to assemble and/or modify software applications from reusable software "parts" as opposed to building an application from scratch. PRC's component-based software approach allows the Company's information services and Internet application groups to build and test customer interaction center applications much more quickly than with conventional approaches. As a result, clients receive a customer interaction center solution of superior quality, while the Company reduces the time and expense needed in the development of call center applications. The primary benefit of component-based development is PRC's ability to respond rapidly to new business opportunities and sustain its competitive advantage in the industry. An ancillary result of component-based development is a reduction in training time of customer care associates due to the creation of call center applications that are more uniform in nature. PRC On-Line. The Company's proprietary software application, PRC On-Line, allows its clients to review their teleservicing and Internet-based programs on-line, in real-time, to obtain comprehensive trend analyses and to modify program parameters. The Company believes that the capabilities of its PRC On-Line software application provide it with a significant competitive advantage, particularly with large, sophisticated marketing-oriented companies. The increased communication and control provided by PRC On-Line allows 8 9 clients to utilize PRC's teleservicing or Internet-based services as a seamless extension of their in-house marketing and customer services operations. IMA Advantage/Edge. The Company is in the process of implementing IMA Advantage/Edge, a third-party software product. The Company's implementation of this product will complete a three-tiered software development strategy consisting of component-based, custom built and off-the-shelf software offerings. As of December 31, 1998, the Company had invested approximately $3.9 million in this application. Upon implementation, the Company believes that the IMA Advantage/Edge product will provide the Company with pre-built, off-the-shelf applications that will assist in rapid deployment, decreased set-up and maintenance costs, increased sales opportunities and increased capability to provide excellent customer sales and service. The Company currently estimates that IMA Advantage/Edge will be fully implemented during the second quarter of 1999. MANAGEMENT INFORMATION SYSTEMS During 1997, PRC initiated an entity-wide review of its management and financial information systems. The review resulted in a decision to implement an Enterprise Resource Planning ("ERP") solution, which will allow for all internal systems (including those related to billing, payroll, client profitability management, human resource management and general ledger) to be fully integrated using a common platform. The Company designated its ERP implementation as the PRISM Project. During the first quarter of 1998, the Company began its implementation of the PRISM Project. This project is a substantial undertaking for PRC. In order to allow for a quick and efficient implementation, the Company is utilizing both internal resources and outside consultants. The PRISM Project is being implemented in phases with certain systems or modules becoming functional at different points in the project timeframe. Full implementation is expected to be completed by the third quarter of 1999 at an estimated total cost of approximately $13.0 million, including software, hardware, consulting fees, training and internal resources. The first modules of the PRISM Project, human resources/payroll, general ledger, accounts receivable and accounts payable, were placed in service during the fourth quarter of 1998. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000 Issue" for a discussion of the impact and effect on the Company of the Year 2000 issue. PERSONNEL AND TRAINING PRC believes that its rigorous approach to hiring and training its employees is a key component of its ability to provide high quality client and customer service. The Company selects the locations for its call centers based on demographic studies as an attempt to ensure the availability of an adequate and qualified pool of potential employees. Its hiring procedures are designed to ensure that only the most qualified candidates are offered employment. The Company offers extensive classroom and on-the-job training programs for its personnel, including instruction on the businesses of PRC's clients and proper customer service techniques. Each new customer care associate receives up to five weeks of training, which provides the skills training he or she needs to work on a specific, dedicated client program. The Company offers a benefits package to full-time customer care associates after three to six months of employment. The Company believes that such a careful selection process results in a high quality, dedicated work force. The Company also provides a full array of management courses and materials designed to ensure that its operations and administrative managers receive continuous and up-to-date training using the latest trends and techniques. As of March 9, 1999, the Company had approximately 5,100 full-time and 90 part-time employees, of which 4,140 of the full-time employees and 83 of the part-time employees were customer care associates. The Company believes that its percentage of full-time customer care associates is high relative to that of its competitors, resulting in greater stability and quality in its workforce. None of PRC's employees are subject to a collective bargaining agreement. The Company considers its relations with its employees to generally be good. 9 10 SALES AND MARKETING The Company believes its reputation for providing high quality, one-stop solutions has enabled it to obtain new business through requests for proposals, client referrals and cross-selling opportunities to existing clients. In addition, the Company's sales and marketing group actively pursues new business opportunities by identifying companies and industries which can benefit from the Company's services. Working with the information services and Internet applications groups, the sales and marketing team is able to demonstrate to prospective clients the Company's rapid application development and effective systems integration capabilities to meet the proposed program objectives. CLIENT RELATIONSHIPS The Company seeks to develop and maintain long-term relationships with its clients. PRC targets those companies which have the potential for generating recurring revenues due to the magnitude of their customer service departments or marketing programs. The Company believes that its clients view PRC as a strategic partner and a valuable resource in formulating, designing and implementing their customer service and marketing programs. During 1998, the Company provided its services to approximately 60 clients in industries such as telecommunications, transportation, consumer products, financial services and food and beverage. The Company's ongoing clients include several business units of AT&T, American Express, British Airways, Citibank, Conectiv Energy, DIRECTV, GE Capital, Lucent Technologies, Pizza Hut, Ryder TRS, Taco Bell and The College Entrance Examination Board. The Company's five largest clients accounted for 76% of its total gross revenues for 1998. Revenues generated by the various business units of AT&T, the Company's largest client, accounted for 45% of gross revenues for 1998. Besides AT&T, Ameritech, representing 12% of gross revenues, was the only other client that accounted for 10% or more of total gross revenues for 1998. At the end of the third quarter of 1998, the Company made a strategic decision to exit the incentive-based outbound program with Ameritech. This incentive-based program ended in the fourth quarter of 1998, and the first quarter of 1999 saw the gradual wind down of the remaining programs with this client. The Company's client relationship with Ameritech ended in March 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview and Basis of Presentation." Although the Company enters into written contracts with its clients, generally either party retains the right to terminate on varying periods of prior notice. The contracts do not assure the Company will generate a specific level of revenue or designate the Company as the exclusive service provider. Contracts typically encompass all aspects of the Company's relationship with the client, together with all applicable charges. The Company's teleservicing charges are primarily based on a fixed hourly fee for dedicated service. The Company has also generated teleservicing revenues under incentive-based compensation agreements whereby the amount of revenue earned correlated to the achievement of established targets. As described above, the Company made a strategic decision to exit this type of business due to margin constraints and to focus its efforts on more predictable and profitable programs going forward. Charges for database marketing and management services are based on an hourly rate or on the volume of information stored. Charges for fulfillment services are typically assessed on a transaction basis, with an additional charge for warehousing products for clients. The Company assesses separate charges for program design, development and implementation, database design and management, training or retraining of personnel, processing and access fees, and account services, where appropriate. Billing charges assessed by the Company for Internet customer care and electronic message servicing will be based on hourly rates and on a transaction basis, respectively, or a combination of charges thereof. COMPETITION The interactive customer communications industry in which PRC operates is very competitive and highly fragmented. PRC's competitors range in size from very small firms offering specialized applications and short-term projects to large independent and international firms and the in-house operations of many clients and potential clients. In-house interactive customer communications organizations comprise the largest segment of the industry. The market includes non-captive interactive customer service operations such as APAC TeleServices, Convergys Corporation, SITEL, TeleSpectrum Worldwide, TeleTech Holdings and West 10 11 TeleServices. In addition, some of PRC's services also compete with other forms of direct marketing such as mailhouses, television, radio and on-line services. PRC believes that the principal competitive factors in its industry are a reputation for quality, sales and marketing results, price, technological expertise and application, and the ability to promptly provide clients with customized and creative solutions and approaches to their customer service and marketing needs. The Company believes that it competes favorably with other companies with respect to the foregoing factors for large-scale, ongoing customer service and marketing programs where the principal competitive factor is quality. The Company has not generally chosen to compete for high-volume outbound marketing programs where the principal competitive factor is price. Certain competitors may have capabilities and resources greater than the Company's which might competitively disadvantage PRC in bidding for very large programs. GOVERNMENT REGULATION Telephone sales practices are regulated at both the Federal and state level. The rules of the Federal Communications Commission (the "FCC") under the Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the initiation of telephone solicitations to residential subscribers before 8:00 a.m. or after 9:00 p.m., local time, and prohibit the use of automated telephone dialing equipment to call certain telephone numbers. In addition, the FCC rules require telemarketers to have procedures in place to maintain lists of residential customers who do not want to receive telephone solicitations and to avoid making calls to those customers. The FCC rules also prohibit the use of pre-recorded or artificial voice calls to consumers (with limited exceptions) and advertising via telephone facsimile machines. The FCC, private individuals and state attorneys general may seek both injunctive and monetary relief for violation of these FCC rules. Monetary damages may be awarded for the greater of actual damages or $1,500 per offense for willful violation of these rules. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentation in telephone sales. In August 1995, the FTC issued rules under the TCFAPA. These rules set forth disclosure requirements for telemarketers when placing calls, prohibit deceptive telemarketing acts or practices during solicitation, provide guidelines on collecting payments by check and credit cards, provide restrictions on abusive telephone solicitation practices and promulgate certain record keeping requirements. The FTC, private individuals and state attorneys general may seek both injunctive and monetary damages for violation of these FTC rules. Penalties may range up to $10,000 for each intentional violation of these rules. The Company believes that it is in compliance with the TCPA and FCC rules thereunder and with the FTC's rules under the TCFAPA. The Company trains its customer care associates to comply with the FTC and FCC rules and programs its call management system to avoid telephone calls during restricted hours or to individuals maintained on PRC's restricted "do-not-call" list. Most states have enacted or are considering legislation to regulate telephone solicitations. For example, some states require telemarketers to be licensed by state regulatory agencies prior to soliciting purchasers within that state. Additionally, telephone sales in certain states cannot be final unless a written contract is delivered to and signed by the buyer and may be canceled within three business days. At least one state also prohibits telemarketers from requiring credit card payment and several other states require certain telemarketers to obtain licenses and post bonds. Penalties for violation of these state telemarketing regulations vary from state to state and include civil as well as criminal penalties. From time to time, bills are introduced in Congress which, if enacted, would regulate the use of credit information. In addition, legislation could be introduced in the future with respect to the use of the Internet, including regulations relating to its use in connection with customer care and service. The Company cannot predict whether any of these types of legislation will be enacted and what effect, if any, it would have on the Company or its industry. The industries served by the Company are also subject to varying degrees of government regulation. The Company works closely with its clients and their advisors to develop the scripts to be used by PRC in connection with making customer contacts. The Company generally requires its clients to indemnify PRC against claims and expenses arising with respect to the Company's services performed on its clients' behalf. The Company has never been held responsible for regulatory noncompliance by a client. 11 12 ITEM 2. PROPERTIES In 1998, in conjunction with the Company's restructuring and cost savings initiatives announced during the third quarter of 1997, the Company completed the consolidation of three administrative/corporate locations into available space at one of its call centers in Miami, Florida. The Company still maintains approximately 12,000 square feet of office space for its principal executive offices in a separately leased facility in Miami, Florida, which terminates in April 2000. The Company's fulfillment operations are located in a separate leased facility in Miami, Florida, consisting of 47,577 square feet, the lease for which expires in 2001, with a 5-year renewal option. The Company is in the process of transitioning its traditional call centers into customer interaction centers. The Company had eight call centers in operation, of which three had multimedia capabilities, as of December 31, 1998 and eight call centers in operation as of December 31, 1997. One new call center was opened in both the first and second quarters of 1997, while one small call center in Miami was converted into administrative offices in the first quarter of 1997 and another call center in Miami was closed during the third quarter of 1997 as part of the Company's restructuring plan. As of December 31, 1998, the Company leased and operated the following call centers, all of which are located in Florida:
CURRENT APPROXIMATE NUMBER OF LOCATION DATE OPENED WORKSTATIONS - -------- -------------- ------------ Miami(1)................................................. July 1992 280 Miami Lakes(3)........................................... January 1996 490 Miami.................................................... April 1996 420 Orlando.................................................. June 1996 590 Margate(3)............................................... September 1996 520 Miami(2)(3).............................................. December 1996 990 Jacksonville............................................. February 1997 790 Margate (Coconut Creek).................................. April 1997 420 ----- 4,500 =====
- ------------------------- (1) The Company's principal executive offices are also located in this facility. (2) Certain administrative and operational departments are also located in this facility. (3) These centers have multimedia capabilities. The leases for these facilities would generally expire between 2004 and 2022 assuming the Company's exercise of all renewal options (see Note 6 -- Lease Commitments of the Notes to Consolidated Financial Statements). However, as a result of the 1998 restructuring plan and continual assessment of the capacity requirements in Jacksonville and Margate (Coconut Creek), the Company will terminate the lease agreements relating to these locations no later than the lease option dates in May 2002. Additionally, in connection with the 1998 restructuring plan, the Company expects to fully vacate the Margate (Coconut Creek) facility and reduce its occupancy level of the Jacksonville facility during 1999 (see Note 5 -- Credit Facilities and Long-Term Debt of the Notes to Consolidated Financial Statements). The Company also leases additional facilities and certain other real property incidental to its operations. The Company believes that its existing facilities and other real property are suitable and adequate for its current operations, but additional facilities may be required to support growth. The Company further believes that suitable space will be available as needed to expand its business on commercially reasonable terms. The Company acquired a facility in Sunrise, Florida, for which it secured a mortgage during the second quarter of 1998. As a result, the Company owns land and a building with a book value of approximately $5.9 million that is currently unoccupied. The Company intends to maintain this property as a possible location for new administrative offices or, should utilization levels warrant, as a new call center. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 12 13 ITEM 3. LEGAL PROCEEDINGS On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and Freeman Industrial Enterprises Corporation v. Precision Response Corporation, Mark J. Gordon, David L. Epstein and Richard D. Mondre (Case No. 398-CV-1895-DJS (D. Conn)), was filed in the Superior Court of the Judicial District of Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed by the Company to the United States District Court for the District of Connecticut. This lawsuit alleges that the Company breached its contracts with the plaintiffs by allegedly failing to pay all commissions relating to certain clients whom the plaintiffs allegedly claim they procured for the Company. The complaint also contains claims of breach of fiduciary duty, breach of covenant of good faith and fair dealing, civil conspiracy, fraud/fraud in the inducement, intentional infliction of emotional distress and violations of the Connecticut Unfair Trade Practices Act. The plaintiffs seek actual, compensatory and punitive damages, declaratory judgement that certain contracts are invalid due to undue influence exercised upon plaintiffs or, in the alternative, recission of such contracts, an accounting and interest, costs and attorneys' fees. On November 16, 1998, the Company filed a motion (i) to dismiss for lack of personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper venue or, in the alternative, to transfer to the U.S. District Court for the Southern District of Florida. On that same day, the Company filed a motion to dismiss the complaint for failure to state a cause of action. Both motions are currently pending before the Court. On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice this lawsuit against Richard Mondre, which dismissal has been approved by the Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint, asserting the same causes of action as in the original complaint, as well as a claim for negligent misrepresentation. The case is currently in the discovery stage. The Company believes that the plaintiffs' allegations are totally without merit and intends to defend the lawsuit vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of the Company's security-holders during the quarter ended December 31, 1998. 13 14 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK INFORMATION The Company and certain selling shareholders completed the Company's initial public offering, declared effective on July 16, 1996 (with an actual closing date of July 22, 1996), of 4,600,000 shares of common stock at an offering price of $14.50 per share (the "Initial Public Offering"). Prior to the Initial Public Offering, the Company's common stock was not listed or quoted on any organized market system. Since the Initial Public Offering, the common stock of the Company is traded on the Nasdaq National Market under the symbol "PRRC." The following table sets forth, for the calendar quarters indicated, the high and low closing sale prices of the common stock as reported on the Nasdaq National Market during such period:
HIGH LOW ---- --- 1998 First quarter............................................. $11 $ 7 5/8 Second quarter............................................ 9 3/4 5 7/16 Third quarter............................................. 8 9/16 3 3/4 Fourth quarter............................................ 8 7/8 4 1/4 1997 First quarter............................................. $36 $20 3/4 Second quarter............................................ 24 14 7/8 Third quarter............................................. 17 1/8 7 1/4 Fourth quarter............................................ 10 9/16 6 3/4
As of March 22, 1999, there were 21,549,000 shares of the Company's common stock outstanding held by approximately 69 holders of record. The Company estimates, based upon information provided by the Company's transfer agent, that it has approximately 3,000 beneficial owners of its common stock as of March 22, 1999. DIVIDEND POLICY The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's revolving credit facility prohibits the payment of cash dividends by the Company. Payment of any future dividends will depend upon the future earnings and capital requirements of the Company and other factors which the Company's Board of Directors considers appropriate. Prior to the consummation of the Initial Public Offering, the Company's Board of Directors declared a cash dividend (the "Dividend") to the then current shareholders of the Company of approximately $5,243,000. The Dividend was equal to the Company's estimate of its cumulative taxable income, prior to the Company's conversion from an S corporation to a C corporation and immediately prior to the consummation of the Initial Public Offering to the extent such taxable income had not previously been distributed. The Dividend was subject to adjustment based upon actual cumulative taxable income as finally determined based on the Company's final tax return as an S corporation. During the second quarter of 1997, the Company's final tax return as an S corporation was completed and filed. As a result, an additional $174,000 was paid to the Company's existing shareholders prior to the Initial Public Offering as a final distribution of the Company's accumulated taxable income prior to conversion to C corporation status. No cash dividends were paid to the shareholders in 1998. See Note 1 -- Operations and Significant Accounting Policies and Note 10 -- Capital Stock of the Notes to Consolidated Financial Statements. 14 15 RECENT SALES OF UNREGISTERED SECURITIES The Company did not issue or sell any unregistered securities during the quarter ended December 31, 1998, except that the Company granted options to purchase 1,165,250 shares of Common Stock to 102 employees pursuant to the Company's Amended and Restated 1996 Incentive Stock Plan. The exercise price of the options range between $5.09 and $6.94 per share. These options have a term of seven years and vest as follows:
NUMBER OF SHARES VESTING RATE - ---------------- ------------ 85,000 50% at grant date and 25% after 1 and 2 years 350,000 50% after 6 months, 17% after 1 and 2 years and 16% after 3 years 400,000 33 1/3% per year 330,250 20% per year --------- 1,165,250 =========
The Company granted the foregoing stock options in reliance upon the exemption from registration available under Section 4(2) of the Securities Act of 1933, as amended. 15 16 ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data of the Company as of and for the years ended 1994 through 1998 has been derived (except for Other Data) from the audited consolidated financial statements of the Company. Such data is qualified by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements (the "Financial Statements") and the Notes to Consolidated Financial Statements included elsewhere in this report. See also Note 15 -- Unaudited Quarterly Financial Data of the Notes to Consolidated Financial Statements for certain financial information presented on a quarterly basis for 1998 and 1997.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1998(7) 1997(7) 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS: (For the fiscal year): REVENUES................................................. $ 175,173 $ 143,584 $ 97,637 $ 30,204 $ 14,998 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES: Cost of services....................................... 153,638 128,177 71,345 21,212 10,190 Selling, general and administrative expenses........... 23,290 25,874 14,727 7,164 4,888 Restructuring and asset impairment charges............. 13,583 11,591 -- -- -- ---------- ---------- ---------- ---------- ---------- Total operating expenses........................... 190,511 165,642 86,072 28,376 15,078 ---------- ---------- ---------- ---------- ---------- Operating (loss) income............................ $ (15,338) $ (22,058) $ 11,565 $ 1,828 $ (80) ========== ========== ========== ========== ========== NET (LOSS) INCOME(1)..................................... $ (10,189) $ (13,066) $ 7,850 $ 1,456 $ (372) ========== ========== ========== ========== ========== PROFORMA DATA (UNAUDITED)(1): Income (loss) before proforma income taxes............. $ 10,877 $ 1,456 $ (372) Proforma provision (benefit) for income taxes relating to S corporation..................................... 4,358 619 (86) ---------- ---------- ---------- PROFORMA NET INCOME (LOSS)......................... $ 6,519 $ 837 $ (286) ========== ========== ========== COMMON STOCK DATA(2): Net loss per common share (diluted)...................... $ (0.47) $ (0.61) Proforma net income per common share (diluted)(1)(3)(4)(5).................................. $ 0.36 $ 0.05 Book value per share(5).................................. $ 3.68 $ 4.15 $ 2.65 $ 0.17 $ 0.09 Number of shares outstanding (at year-end)(5)............ 21,549,000 21,542,000 20,000,000 16,400,000 16,400,000 Weighted average number of common shares outstanding (diluted)(3)........................................... 21,547,981 21,392,814 18,171,000 16,527,061 N/M FINANCIAL POSITION(2): (At year-end): Working capital (deficit).............................. $ 22,019 $ 23,521 $ 11,849 $ 1,365 $ (1,423) Current ratio.......................................... 1.65x 1.68x 1.40x 1.23x 0.73x Property and equipment, net............................ $ 71,414 $ 63,301 $ 42,034 $ 5,284 $ 3,834 Total assets........................................... $ 133,446 $ 127,413 $ 88,415 $ 12,713 $ 7,737 Long-term obligations, less current maturities(6)...... $ 16,916 $ 3,493 $ 4,190 $ 3,924 $ 1,020 Shareholders' eqiuty................................... $ 79,359 $ 89,440 $ 52,950 $ 2,816 $ 1,473 OTHER DATA: (At year-end): Number of workstations................................. 4,500 4,500 3,220 550 320 Number of call centers................................. 8 8 8 2 2
- ------------------------- (1) Prior to the Company's Initial Public Offering on July 16, 1996, the Company was an S corporation and not subject to Federal and state corporate income taxes. On July 16, 1996, the Company revoked its S election and changed its tax status from an S corporation to a C corporation, recorded deferred income taxes totaling $90,000 and began providing for Federal and state corporate income taxes from and including that date. The summary of operations data reflects a proforma provision (benefit) for income taxes as if the Company were subject to Federal and state corporate income taxes for all years. This proforma provision (benefit) for income taxes is computed using a combined Federal and state tax rate of 37.6%. See Note 9 -- Income Taxes of the Notes to Consolidated Financial Statements. (2) Effective January 29, 1997 (the actual closing date was February 4, 1997), the Company and certain selling shareholders completed a second equity offering of 4,740,000 shares of common stock at an offering price of $35.125 per share (the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000 16 17 shares were sold by the Company. See Note 2 -- Public Offerings of the Notes to Consolidated Financial Statements. (3) The actual weighted average number of common shares outstanding for the years ended December 31, 1996 and 1995 were 18,013,115 and 16,400,000, respectively, after giving effect to the stock splits effected by way of share dividends discussed in note (5) below. However, as required by generally accepted accounting principles, the weighted average number of common shares outstanding has been increased by 127,061 shares (weighted for the applicable period), which shares are not actually outstanding. This number is equal to the number of shares which, when multiplied by $14.50 per share (the price in the Initial Public Offering), would have been sufficient to replace the amount of the Dividend in excess of proforma earnings for the 12 months ended June 30, 1996. (4) Supplemental proforma net income per common share would have been $0.36 per share and $0.06 per share for the years ended December 31, 1996 and 1995, respectively, giving effect to the use of a portion of the net proceeds of the Initial Public Offering to repay the Company's bank borrowings at January 1, 1995, and assuming an increase in the weighted average number of common shares outstanding to 18,285,311 and 16,729,131, respectively (based on the price in the Initial Public Offering of $14.50 per share). (5) Includes a retroactive adjustment for stock splits effected by way of share dividends described more fully in Note 10 -- Capital Stock of the Notes to Consolidated Financial Statements. (6) Long-term obligations for 1998 consist of the outstanding balance of the Company's revolving credit facility, mortgage loan payable to the lender on the revolving credit facility, capital lease obligations and other long-term obligations, all of which are described more fully in Note 5 -- Credit Facilities and Long-Term Debt of the Notes to Consolidated Financial Statements. Long-term obligations for 1997 and 1996 consist only of capital lease obligations. For the years ended 1995 and 1994, long-term obligations consist of capital lease obligations, a note payable to a bank and certain installment loans. Fiscal 1995 also includes the outstanding balance of the Company's revolving credit loan. (7) Includes special charges of $22.1 million and $26.2 million before taxes in 1998 and 1997, respectively, described more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview and Basis of Presentation" and Note 3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements. N/M -- Not meaningful since past operations and capital structure are not necessarily indicative of current and future operations and capital structure. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with "Selected Financial Data," the Financial Statements and the Notes to Consolidated Financial Statements. OVERVIEW AND BASIS OF PRESENTATION The Company was incorporated in 1982 as a fulfillment company, expanding its services to include database marketing and management beginning in 1984 and to teleservices and customer care in 1988. In 1993, the Company initiated the implementation of certain strategic measures to become a full-service provider of integrated services in order to attract larger corporate clients with a variety of ongoing telephone-based customer service and marketing needs. In 1998, the Company integrated these resources, products and services with Internet technologies to introduce interactive customer communications. During the last three years, the Company has invested over $100 million in systems, facilities and equipment, including the capitalized value of all leased property and equipment, to facilitate growth and enhance its technology capabilities. The Company currently offers its customers single source, integrated solutions for their teleservicing, Internet communications, database marketing and management, and fulfillment needs. The Company's primary source of revenue is teleservicing activities which are comprised of both inbound (customer-initiated) and outbound (PRC-initiated) calls. Teleservicing revenues are generally earned for providing services on a rate-per-hour basis. However, beginning in the third quarter of 1997, the Company also generated teleservicing revenues under incentive-based outbound compensation agreements whereby the amount of revenue earned correlates to the achievement of established targets. At the end of the third quarter of 1998, the Company made a strategic decision to exit the incentive-based outbound programs, which was completed during the fourth quarter of 1998. The majority of teleservicing revenues are derived from inbound calls, which represented 86% of teleservicing revenues and 68% of total revenues in 1998 and 80% of teleservicing revenues and 59% of total revenues in 1997. Inbound teleservicing consists mostly of longer-term customer care and customer service programs which tend to be more predictable than other teleservicing revenues. Outbound teleservicing and, in particular, incentive-based outbound teleservicing, is driven by marketing programs which change frequently relative to inbound programs. As such, outbound teleservicing is subject to greater variation in operating results (see "Fluctuations in Quarterly Results" below). During 1998, the Company began strategic initiatives to capitalize on the extraordinary growth of Internet commerce by integrating Internet technologies with current PRC products and services to, in effect, create multimedia customer interaction centers. While the Company began to offer certain Internet and e- mail service capabilities during 1998, insignificant revenue was generated from these activities. The Company has identified these capabilities as significant business opportunities and is committing to investing in and expanding its Internet and e-mail commerce services in order to enhance its offering of these types of services within the customer interaction center concept. Information services provided by the database marketing and management group typically include the design, development and implementation of software applications for use in a particular client program and the integration of the Company's systems with those of its clients. Fulfillment services include high-speed laser and electronic document printing, lettershop and mechanical inserting, sorting, packaging and mailing capabilities. While fulfillment services represent a relatively small portion of the Company's total revenues, it is an important element in the Company's overall marketing strategy of providing its customers with a "one-stop" solution to their telephone-based and interactive customer service and marketing needs. Prior to the Initial Public Offering of the Company's common stock, which was declared effective on July 16, 1996 (the actual closing date was July 22, 1996), the Company elected for Federal and state income tax purposes to be treated as an S corporation under the Internal Revenue Code and comparable state tax 18 19 laws. As a result, earnings of the Company were taxed for Federal and state income tax purposes directly to the shareholders of the Company, rather than to the Company. Immediately prior to the Initial Public Offering, the Company revoked its S corporation election and converted from an S corporation to a C corporation. The statements of operations data for 1994 through 1996 includes a provision (benefit) for Federal and state income taxes as if the Company were subject to Federal and state corporate income taxes for such years. The proforma provision (benefit) was computed using a combined Federal and state tax rate of 37.6%. For further discussion of the Company's change in income tax status and the Dividend paid to the Company's shareholders immediately prior to the Initial Public Offering, see Note 1 -- Operations and Significant Accounting Policies and Note 10 -- Capital Stock of the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS The following table sets forth certain statements of operations data, as a percentage of revenues, for the years indicated:
1998 1997 1996 ----- ----- ----- SELECTED OPERATING RESULTS: Revenues.................................................. 100.0% 100.0% 100.0% Cost of services.......................................... 87.7 89.3 73.1 ----- ----- ----- Gross margin........................................... 12.3 10.7 26.9 Selling, general and administrative expenses.............. 13.3 18.0 15.1 Restructuring and asset impairment charges................ 7.8 8.1 -- ----- ----- ----- Operating (loss) income................................ (8.8)% (15.4)% 11.8% ===== ===== =====
1998 VS. 1997 During the third quarter of 1998, the Company performed an extensive review of its operations and existing available workstation capacity. Such review focused on determining the needed workstation capacity appropriate and desirable in light of several factors. These factors included the requirements for servicing the Company's current, recently attained and anticipated new clients; the Company's less than satisfactory operating results relative to a large incentive-based, outbound teleservices program; and the Company's inability to recruit, train and maintain an employee base relative to available workstations in certain strained labor markets without paying premium wage rates not able to be supported by the operating margins being generated. As a result of this review, the Company initiated a restructuring and performance enhancing initiatives plan designed to improve profit margins, reduce its cost structure and adjust its infrastructure to significantly improve efficiencies and performance in the utilization of its workstation capacity. The Company expects to realize $2.1 million in annual savings from the consolidation and reduction of call centers, $1.8 million in annual savings from a reduction in overhead and administrative headcount resulting in the termination of nine employees and the exiting of an incentive-based outbound program, $0.5 million in annual savings from the replacement of existing call center software with new customer interactive software reflective of advances in customer care technology and $0.2 million in other annual cost savings initiatives mainly related to termination of a facility maintenance contract. Therefore, once fully implemented, the cost reductions are expected to result in annual savings of approximately $4.6 million. The Company began to benefit from these cost savings beginning in the fourth quarter of 1998; however, the full impact of the cost savings initiatives will not be realized until all of these initiatives have been completed, which is currently expected to be during the third quarter of 1999. The Company's operating results for the fiscal year ended December 31, 1998 include the effects of a pre-tax non-recurring special charge of $22.1 million recorded in conjunction with the implementation of the restructuring and performance enhancing initiatives plan. Approximately $9.9 million, or 45%, of the charge is for cash items, of which $7.2 million is accrued at December 31, 1998. These cash items are primarily for 19 20 lease and other facility exit costs and, to a lesser extent, for payment of severance and other employee-related costs. The special charge to earnings is included in the following categories on the Consolidated Statements of Operations:
AFTER-TAX PRE-TAX DOLLAR PER SHARE AMOUNT (DILUTED) (IN MILLIONS) AMOUNT --------------- --------- Restructuring and asset impairment charges................. $13.6 $(0.39) Cost of services........................................... 2.3 (0.07) Selling, general and administrative expenses............... 6.2 (0.18) ----- ------ Total............................................... $22.1 $(0.64) ===== ======
See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the non-recurring special charges. REVENUES During 1998, revenues increased by $31.6 million to $175.1 million, or 22%, in comparison to the prior year. The principal components of revenues are teleservicing activities, including account services (representing 80% of revenues in 1998), and fulfillment services (representing 11% of revenues in 1998), with the balance primarily represented by information services. The Company had approximately 4,500 workstations in operation as of both December 31, 1998 and 1997 (see "1997 vs. 1996 -- Revenues"). As of December 31, 1998 and 1997, the Company was operating at approximately 78% and 55%, respectively, of full utilization of these workstations. In connection with its restructuring and performance-enhancing initiatives plan, the Company plans to eliminate 800 workstations in two specific call centers. Absent the award of any significant new business, the Company has no immediate plans for new call center/workstation expansion and will reallocate existing site resources to meet capacity needs. Although utilization will automatically increase with the reduction of workstations, the Company continues to attempt to seek the award of additional work from existing clients and pursue new client opportunities in order to improve the utilization of its workstations. During 1998, the Company generated several new client opportunities. The Company commenced both customer care services and use of its proprietary, automated error resolution system, Precision Resolution, for a large East coast-based utility company. The Company also began a database, telemarketing and fulfillment services program targeting information technology professionals for an international manufacturer and provider of computer products and services. Teleservicing activities, including account services, accounted for the majority of the revenue growth during 1998 with an increase of $34.6 million, or 33%, to $140.3 million in 1998. Major factors contributing to the increase in teleservicing revenues were the addition of several new programs for existing clients as well as the addition of new clients, principally in the utility, computer products and services and financial services industries. Overall, new client business accounted for $16.7 million, or 10%, of total revenues for 1998, while revenues from the Company's largest client accounted for 45% of total revenues, up from 38% for 1997. Generally, teleservicing revenues are earned on a rate-per-hour basis. However, during 1998 and 1997, approximately 10% of total revenues were earned under incentive-based compensation agreements. Revenues from fulfillment services for 1998 were $18.8 million, an increase of $4.1 million, or 28%, from the prior year. The increase is reflective of fulfillment services provided in connection with the incentive-based outbound teleservice program which was exited in the fourth quarter of 1998. Revenues from information services for 1998 were $16.1 million, a decrease of $7.2 million, or 31%, from 1997. The decrease was primarily attributable to the transfers of teleservicing-based application software totaling $9.8 million in 1997, compared with no such transfers in 1998, offset by an increase in traditional information services revenues in 1998. Transfers of teleservicing-based application software produce substantially higher margins than other information services (which involve the development of unique, individual customer-based applications). Due to the substantially higher margins on these transfers, the Company's 20 21 operating results can be significantly impacted based upon the Company effecting these transactions in any period. COST OF SERVICES Cost of services generally include all direct and some indirect costs incurred in connection with the Company's revenue-producing departments, including, but not limited to, labor, telephone expenses directly related to revenue-generating activities, equipment under operating leases used in the call centers and fulfillment facility, direct overhead for all such operational facilities, such as rent, security and insurance, and depreciation and amortization of property and equipment used in operations. Cost of services, excluding the impact of the restructuring and non-recurring special charges, increased by $30.9 million, or 25.7%, to $151.3 million in 1998, principally as a result of the growth in operations. Including the impact of the restructuring and non-recurring special charges of $2.3 million in 1998 and $7.8 million in 1997, cost of services increased by $25.5 million, or 19.9%, to $153.6 million in 1998. Excluding the impact of restructuring and non-recurring special charges, the increase in cost of services as a percentage of revenues from 83.8% in 1997 to 86.4% in 1998 is primarily attributable to the Company's expansion of its infrastructure in 1997 and the resultant excess capacity together with lower than expected yield on incentive-based programs and higher wage rates paid in call centers in strained labor markets in 1998. Approximately 1,280 workstations were added in two call centers opened during the first six months of 1997. The opening of these new call centers, and the related increase in workstation capacity, was carried out primarily in anticipation of providing increased services to the Company's largest client. This increase in services did not materialize leaving the Company with excess capacity and a higher than desired fixed cost structure. Additionally, the Company's largest client instituted an across-the-board price reduction in the third quarter of 1997. Cost of services as a percentage of revenues, including the impact of the restructuring and non-recurring special charges, decreased from 89.3% in 1997 to 87.7% in 1998. Continued improvement in the utilization of workstation capacity is a key component that is expected to enable the Company to reduce cost of services as a percentage of revenues and achieve its gross margin percentage targets in the future. As of December 31, 1998 and 1997, the Company was operating at approximately 78% and 55%, respectively, of full utilization of workstations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") generally include the costs of central services the Company provides to support and manage its operations, including senior management, sales and marketing, human resources, finance and management information systems functions. SG&A, excluding the impact of the restructuring and non-recurring special charges, decreased $2.0 million, or 10.4%, to $17.1 million in 1998. The decrease is indicative of the Company's successful implementation of its cost-cutting initiatives associated with the restructuring plans announced in the third quarters of 1997 and 1998 along with management's efforts to postpone, or temporarily reduce, non-revenue-producing expenditures, whenever possible. Including the impact of the restructuring and non-recurring special charges of $6.2 million in 1998 and $6.8 million in 1997, SG&A decreased by $2.6 million, or 10.0%, to $23.3 million in 1998. As a percentage of revenues, excluding the impact of restructuring and non-recurring special charges, SG&A decreased from 13.3% in 1997 to 9.8% in 1998. This decrease is a result of increased revenues during 1998 coupled with the cost-cutting initiatives and the postponement or reduction of expenditures. SG&A, as a percentage of revenues, including the impact of restructuring and non-recurring special charges, decreased from 18.0% in 1997 to 13.3% in 1998. INTEREST, NET Interest expense, net of interest income and capitalized interest, was $789,000 for 1998 compared to net interest income of $282,000 for 1997. During 1997, the Company generated interest income from the investment of a portion of the net proceeds from the Second Equity Offering and had an absence of borrowings 21 22 under its revolving credit facility, while during 1998 the Company incurred interest charges from borrowings on its revolving credit facility. INCOME TAXES The Company had a deferred tax asset of $12.4 million at December 31, 1998 and $6.4 million at December 31, 1997. The net deferred tax asset at December 31, 1998 is based upon expected utilization of net operating loss carryforwards and reversal of certain temporary differences. Although realization is not assured, the Company believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company will continue to review the assumptions used on a quarterly basis and make adjustments as appropriate. NET LOSS AND NET LOSS PER SHARE For the fiscal year ended December 31, 1998, the net loss was $10.2 million compared to the net loss of $13.1 million for the comparable period of 1997, including the impact of the restructuring and non-recurring special charges as set forth in the next paragraph. The net loss per share for 1998 was $0.47, compared to the net loss per share of $0.61 in 1997, including the impact of the restructuring and non-recurring special charges as set forth in the next paragraph. The net loss and net loss per share amounts associated with the restructuring and non-recurring special charges were $13.8 million and $0.64, respectively, for the fiscal year ended December 31, 1998, and $15.7 million and $0.73, respectively, for the fiscal year ended December 31, 1997. See Note 3-Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the restructuring and non-recurring special charges. For the fiscal year ended December 31, 1998, excluding the impact of the restructuring and non-recurring special charges, net income was $3.6 million compared to net income of $2.6 million for the comparable period of 1997. Excluding the impact of the restructuring and non-recurring special charges, net income per share for 1998 was $0.17 compared to net income per share of $0.12 for 1997. 1997 VS. 1996 During the third quarter of 1997, the Company initiated an extensive and systematic review of its operations and cost structure in response to inefficiencies primarily resulting from the addition of capacity and infrastructure to accommodate a contract for its largest client that has been delayed indefinitely and an across-the-board price reduction imposed by this client. This review focused on reducing operating expenses, increasing customer service efficiencies and generally strengthening the Company's position to provide telephone-based customer service and marketing solutions on an outsourced and cosourced basis to large corporations. As a result of this review, the Company announced a major restructuring and cost reduction plan designed to reduce its cost structure and adjust its infrastructure to significantly improve operating efficiencies and performance as the Company seeks to shift its customer base to a more diversified portfolio. 22 23 The Company's operating results for the fiscal year ended December 31, 1997 include the effects of a pre-tax non-recurring special charge of $26.2 million recorded in conjunction with the implementation of the restructuring and cost reduction plan. The special charge to earnings is included in the following categories on the Consolidated Statements of Operations:
AFTER-TAX PRE-TAX DOLLAR PER SHARE AMOUNT (DILUTED) (IN MILLIONS) AMOUNT --------------- --------- Restructuring and asset impairment charges............... $11.6 $(0.32) Cost of services......................................... 7.8 (0.22) Selling, general and administrative expenses............. 6.8 (0.19) ----- ------ Total............................................ $26.2 $(0.73) ===== ======
See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the non-recurring special charges. REVENUES During 1997, revenues increased by $45.9 million, or 47%, in comparison to the prior year. The principal components of revenues are teleservicing activities, including account services (representing 74% of revenues in 1997), and information services (representing 16% of revenues in 1997), with the balance primarily represented by fulfillment services. Although the Company had eight call centers in operation as of both December 31, 1997 and December 31, 1996, the composition of those eight call centers changed. One new call center was opened in both the first and second quarters of 1997, while one small call center was converted into administrative offices in the first quarter of 1997 and another call center was closed during the third quarter of 1997 as part of the Company's restructuring plan. As a result of this change in composition, workstation capacity increased from approximately 3,200 workstations as of December 31, 1996 to approximately 4,500 workstations as of December 31, 1997. However, for most of 1997, the Company's workstation capacity exceeded its requirements for the level of business the Company experienced and, as of December 31, 1997, approximately 1,100 workstations were not being utilized to generate revenues. Teleservicing activities, principally inbound services, accounted for the majority of the revenue growth during 1997 with an increase of $40.1 million, or 61%, to $105.7 million in 1997. Major factors contributing to the increase in teleservicing revenues were the addition of several new programs for existing clients as well as the addition of new clients, principally in the telecommunications service and equipment industries. Overall, new client business accounted for $24.7 million, or 17%, of total revenues for 1997, while revenues from the Company's largest client accounted for 38% of total revenues, down from 68% for 1996. Generally, teleservicing revenues are earned on a rate-per hour basis. However, during 1997, approximately 10% of total revenues were earned under incentive-based compensation agreements. Revenues from information services for 1997 were $23.3 million, a decrease of $2.2 million, or 9%, from 1996. This decrease was primarily attributable to the performance of a $14.0 million non-recurring client project during 1996 offset by an increase of $6.8 million in teleservicing-based application software transfers and the overall growth in operations during 1997. Such transfers produce substantially higher margins than other information services (which involve the development of unique, individual customer-based applications). COST OF SERVICES Cost of services increased by $56.8 million, or 80%, to $128.2 million in 1997, principally as a result of the growth in operations and the absorption of $7.8 million in non-recurring special charges in conjunction with the Company's restructuring and cost-reduction initiatives. See Note 3 -Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the restructuring and non-recurring special charges. 23 24 The increase in cost of services as a percentage of revenues from 73.1% in 1996 to 89.3% for 1997 was primarily attributable to the Company's expansion of its infrastructure and operations and the resultant excess capacity together with lower than expected yield on incentive-based programs. This included increasing the number of workstations in anticipation of providing increased services to the Company's largest customer. This increase in services did not materialize leaving the Company with excess capacity for most of 1997 and a higher than desired cost structure during the second and third quarters of 1997. Additionally, the Company's largest client instituted an across-the-board price reduction in the third quarter of 1997. The Company's existing infrastructure was assessed and realigned for 1998 as part of the Company's restructuring and cost reduction plan initiatives previously discussed. However, in addition to these initiatives, a key component to enable the Company to reduce cost of services as a percentage of revenues and achieve its gross margin percentage targets in the future will be maximization of current capacity levels by increasing revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A increased $11.1 million, or 76%, to $25.9 million in 1997. This increase was primarily due to the increase in administrative salaries and benefits of approximately $5.8 million to support the Company's growth, along with an increase in the provision for the allowance for doubtful accounts of approximately $0.7 million to adequately provide a reserve for the Company's receivables following various charge-offs. The increase for 1997 also reflects the absorption of $6.8 million in non-recurring special charges in conjunction with the Company's restructuring and cost reduction initiatives. However, the Company did begin to see benefits from its cost reduction initiatives in the fourth quarter of 1997 as reflected by an improvement in SG&A expenses of $2.6 million over the same period of 1996. See Note 3 -- Restructuring and Other Non- Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the restructuring and non-recurring special charges. The increase in SG&A as a percentage of revenues from 15.1% in 1996 to 18.0% for 1997 reflects the effect of the Company taking a non-recurring special charge relative to the Company's expansion of its infrastructure to support the then expected continuing growth of the Company. A significant portion of this growth was to come from the Company's largest client. However, as mentioned above, this increase in services did not materialize leaving the Company with a higher than desired cost structure during the second and third quarters of 1997. Additionally, the Company's largest client instituted an across-the-board price reduction in the third quarter of 1997. The Company's SG&A cost structure was assessed and streamlined for 1998 as part of the Company's restructuring and cost reduction plan initiatives previously discussed. However, in addition to these initiatives, a key component to enable the Company to reduce its SG&A expenses as a percentage of revenues and achieve its operating margin percentage targets in the future will be maximization of current capacity levels by increasing revenues. INTEREST, NET Interest income, net of interest expense, was $282,000 for 1997 compared to net interest expense of $688,000 for 1996. This improvement primarily represents interest income generated during 1997 from the investment of a portion of the net proceeds from the Second Equity Offering and the absence of borrowings from the Company's existing credit facility during 1997. See Note 2 -- Public Offerings of the Notes to Consolidated Financial Statements. The proceeds from borrowings during 1996 were primarily obtained from the then existing revolving credit loan. INCOME TAXES Prior to the Initial Public Offering, the Company was an S corporation and, accordingly, was not subject to Federal and state income taxes. Therefore, the Consolidated Statement of Operations for the period January 1, 1996 through July 16, 1996 does not include a provision for Federal and state income taxes. The Company had a deferred tax asset of $6.4 million at December 31, 1997. Management believes that the Company will generate sufficient taxable income in the future such that it is more likely than not that this deferred tax asset will be realized. 24 25 NET LOSS AND NET LOSS PER SHARE For the fiscal year ended December 31, 1997, the net loss was $13.1 million, including the impact of the restructuring and non-recurring special charges as set forth in the next paragraph, compared to proforma net income of $6.5 million for the comparable period of 1996. The net loss per share (diluted) for 1997 was $0.61; including the impact of the restructuring and non-recurring special charges as set forth in the next paragraph, compared to proforma net income per share (diluted) of $0.36 in 1996. The net loss and net loss per share (diluted) amounts associated with the restructuring and non-recurring special charges were $15.7 million and $0.73, respectively, for the fiscal year ended December 31, 1997. See Note 3 -- Restructuring and Other Non-Recurring Special Charges of the Notes to Consolidated Financial Statements for further discussion of the restructuring and non-recurring special charges. Proforma net income for the period January 1, 1996 through July 16, 1996 includes a proforma provision for Federal and state income taxes as if the Company were subject to such taxes as a C corporation for that period. The Company was a C corporation throughout 1997; therefore, net income for the fiscal year ended December 31, 1997 includes the appropriate provision under such income tax status. LIQUIDITY AND CAPITAL RESOURCES During 1998 and 1997, the Company funded its operations and capital expenditures primarily through cash flows from operations, bank borrowings and capital lease financings. During 1997, the Company obtained additional liquidity from the net proceeds of the Second Equity Offering. Effective January 29, 1997 (the actual closing date was February 4, 1997), the Company and certain selling shareholders completed the Second Equity Offering at an offering price of $35.125 per share. Of the 4,740,000 shares of common stock sold, 1,500,000 shares were sold by the Company. Net proceeds to the Company from the Second Equity Offering in the amount of $49.2 million, after deducting $3.5 million in costs associated with the offering, have been used for call center expansion, other capital expenditures necessary to support the Company's growth, working capital and other general corporate purposes. On March 2, 1998, the Company entered into a new three-year, $25.0 million revolving credit facility (the "Credit Facility"), replacing its then existing $15.0 million revolving credit facility (see Note 5-Credit Facilities and Long-Term Debt of the Notes to Consolidated Financial Statements for discussion of prior revolving credit facility). The Company may borrow up to 80% of eligible accounts receivable. The Credit Facility is collateralized by all the Company's owned and hereafter acquired assets. The Credit Facility accrues interest at the Company's option at (i) the greater of the prime rate or the Federal funds rate plus 0.50% or (ii) the LIBOR rate plus a specified percentage (1.25% to 1.75%) based upon the ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company pays a fee of between 0.1875% and 0.25% per annum on unused commitments under the Credit Facility based upon the ratio of funded debt to EBITDA. The Company is required, under the terms of the Credit Facility, to maintain certain financial covenants and ratios, including minimum tangible net worth and funded debt to EBITDA and funded debt to capitalization ratios, to limit capital expenditures and additional indebtedness and is restricted, among other things, with respect to the declaration and payment of dividends, redemptions and acquisitions. At December 31, 1998, the outstanding balance of the Credit Facility was $11.0 million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and $2.5 million at 6.82% per annum). On May 29, 1998, the Company secured a mortgage with the lender on its Credit Facility to acquire a property (land and existing building) located in Sunrise, Florida. The Company had originally planned on securing a special leasing arrangement for this property as part of its call center development plans for 1997 and, to that end, expended approximately $2.1 million during 1997 for building improvements. However, the Company subsequently decided to acquire the property outright. The new mortgage loan was for $5.1 million, of which $4.0 million was advanced at closing. The remaining $1.1 million available under the new loan was subject to the Company's completion of future improvements to the property by November 25, 1998. The Company chose not to complete the improvements by this date; hence, the $1.1 million additional availability expired on November 25, 1998. The Company is currently negotiating with the lender on its Credit Facility to 25 26 extend the term of the additional funding for future improvements, although at this time no assurance can be given if such extension will be obtained. The mortgage note accrues interest, payable quarterly, at the LIBOR rate plus 1.50%, of which the interest rate was 6.7% per annum at December 31, 1998. Principal payments are due quarterly, based upon a 20-year amortization schedule and are expected to commence after consummation of the additional funding for future improvements, with a balloon payment due at maturity on June 1, 2005. The mortgage loan is cross-defaulted with and has terms substantially similar to the Credit Facility. Effective September 30, 1998, both the revolving credit agreement and mortgage loan agreement evidencing the Credit Facility and mortgage loan, respectively, were amended to modify two financial covenant and ratio definitions, the amount of the minimum tangible net worth and the fixed charge coverage ratio. At December 31, 1998, the Company had cash and cash equivalents of $1.7 million and total long-term obligations (including current maturities thereof) of $19.4 million. Net cash provided by operating activities was $3.0 million for 1998, while $8.7 million of net cash was used in operating activities in 1997 and $7.1 million of net cash was provided by operating activities in 1996. The decrease in cash used in operating activities from 1997 to 1998 was attributable to the Company's receipt of income tax refunds and the increase in net income after non-cash charges (depreciation and amortization, provision for bad debts and sales allowances, restructuring and asset impairment charges, and deferred income taxes) offset by the Company's investment in working capital items. The increase in net cash used between 1997 and 1996 is primarily attributable to the reduction in income (loss) before non-cash charges (depreciation and amortization, restructuring and asset impairment charges, and deferred income taxes). The Company's working capital as of December 31, 1998 and 1997 was $22.0 million and $23.5 million, respectively. Major factors contributing to the decrease in 1998 from 1997 were additional cash and cash equivalents as of December 31, 1997 due to net proceeds available from the Second Equity Offering and the significant income tax receivable at December 31, 1997. The decrease was also offset by increases in accounts receivable in 1998 and deferred current tax assets generated by the Company's net loss position for 1998. Net cash used in investing activities in the amounts of $24.9 million, $34.1 million and $35.5 million in 1998, 1997 and 1996, respectively, was principally for capital expenditures. Capital expenditures, including the capitalized value of property and equipment, were $24.9 million, $35.9 million and $43.8 million for 1998, 1997 and 1996, respectively. The major increases in capital expenditures for both 1997 and 1996 were telecommunications and computer equipment principally attributable to the large increase in the Company's total workstation capacity and leasehold improvements for the new call centers to house the additional workstations. In 1997, the Company opened one new call center in both the first and second quarters of 1997, while one small call center was converted into administrative offices in the first quarter of 1997 and another call center was closed during the third quarter of 1997 as part of the Company's restructuring plan with respect to the third quarter of 1997. As a result, workstation capacity increased from approximately 3,200 workstations as of December 31, 1996 to approximately 4,500 workstations as of December 31, 1997. During 1996, the Company increased its workstation capacity by approximately 2,670 workstations. The Company is currently in a situation of excess capacity and, in connection with its restructuring and performance enhancing incentives plan announced in the third quarter of 1998, the Company plans on eliminating 800 workstations in two specific call centers. Absent the award of any significant new business, the Company has no immediate plans for new call center/workstation expansion and will reallocate existing site resources to meet capacity needs as warranted. However, the Company had previously committed to a facility in Sunrise, Florida, which it acquired and for which it secured a mortgage during the second quarter of 1998 (see discussion above). As a result, the Company now owns land and a building with a book value of approximately $5.9 million. The Company intends to maintain this property as a possible location for new administrative offices or, should utilization levels warrant, as a new call center. Additional capital expenditures for 1998 relate primarily to the completion of the relocation and consolidation of administrative office space into unused space in an existing facility and costs incurred for the PRISM Project, Precision Resolution, InfiniteAccess and IMA Advantage/Edge, as discussed below. 26 27 During the first quarter of 1998, the Company began its implementation of an Enterprise Resource Planning ("ERP") solution, which will allow for all internal systems (including those related to billing, payroll, client profitability management, human resource management and general ledger) to be fully integrated into a common platform. The Company has designated its ERP implementation as the PRISM Project. The PRISM Project is utilizing both internal resources as well as outside consultants to allow for a quick and efficient implementation. Full implementation, including software, hardware, consulting fees, training and internal resources, will cost approximately $13.0 million and is expected to take place by the third quarter of 1999. The first modules of the PRISM Project, human resources/payroll, general ledger, accounts receivable and accounts payable, were placed in service during the fourth quarter of 1998. A portion of these costs will be charged to earnings based upon the provisions of AICPA Statement of Financial Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). See Note 1 -- Operations and Significant Accounting Policies and Note 4 -- Property and Equipment of the Notes to Consolidated Financial Statements. In connection with the Company's new division, prcnetcare.com, described in further detail in "Business -- Recent Developments," beginning in 1998 and through the end of 1999, the Company currently expects to invest in excess of $6.0 million in developing software products and technology infrastructure to accommodate interactive customer communications. In addition, the full implementation of IMA Advantage/Edge, described in further detail in "Business -- Technology," is currently expected to cost approximately $5.0 million and is expected to take place during the second quarter of 1999. Net cash provided by financing activities was $12.5 million, $46.6 million and $35.4 million in 1998, 1997 and 1996, respectively. Financing activities for 1998 are principally comprised of net borrowings under the Company's Credit Facility and proceeds from the mortgage loan for the Sunrise, Florida, property discussed above. In 1997, the Company raised additional capital from the Second Equity Offering and used a portion of the net proceeds provided by such offering principally to fund anticipated workstation capacity growth. In 1996, the Company raised additional capital from the Initial Public Offering and used a portion of the net proceeds provided by such offering to retire the installment loans from a bank, totaling $1.0 million, to pay the outstanding balance on its then existing senior credit facility and to pay the Dividend. Borrowings during 1996 were primarily from its then existing senior credit facility and its predecessor. See Note 5 -- Credit Facilities and Long-Term Debt of the Notes to Consolidated Financial Statements. The Company believes that funds generated from operations, available borrowings under the Credit Facility and capital lease financings will be sufficient to finance its planned capital expenditures at least through 1999. The Company's long-term capital requirements will depend on many factors, including, but not limited to, the rate at which the Company expands its business. To the extent that the funds generated from the sources described above are insufficient to fund the Company's activities in the short or long-term, the Company would need to raise additional funds through public or private financing. No assurance can be given that additional financing will be available or that, if available, it will be available on terms favorable to the Company. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting operating and geographical segments and the type and level of financial information to be discussed about those segments. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 in the current year and determined that it has one reportable operating segment. See Note 7 -- Information About Services and Significant Clients of the Notes to Consolidated Financial Statements. In March 1998, the AICPA issued Statement of Financial Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs incurred in the development of internal-use software and is effective for financial statements for years beginning after December 15, 1998. The Company adopted SOP 98-1 in the first quarter 27 28 of 1998. See Note 1 -- Operations and Significant Accounting Policies and Note 4 -- Property and Equipment of the Notes to Consolidated Financial Statements. YEAR 2000 ISSUE The Year 2000 issue affects the Company's installed computer systems, network elements, software applications and other business systems that have time-sensitive programs, including those with embedded microprocessors, that may not properly reflect or recognize the year 2000 and years thereafter. Because many computers and computer applications define dates by the last two digits of the year, "00" or other two-digit dates after the year 2000 may not be properly identified as the year 2000 or the appropriate later year, but rather the year 1900 or a year between 1901 and 1999 (as the case may be). This error could result in system and equipment failures or malfunctions causing disruption of operations, including among others, a temporary inability to process calls, transactions and information, or engage in similar normal business activities. The Company has evaluated its installed computer systems, network elements, software applications and other business systems that have time-sensitive programs and has developed a plan to ensure their Year 2000 compliance. The Company has established a Year 2000 Steering Committee that meets weekly to monitor the progress and status of the Company's Year 2000 plan. The Company's Year 2000 plan is divided into seven major sections: Internal Systems and Equipment (business applications for accounting, administration, human resources and other company-wide applications and office equipment, including non-information technology infrastructure in which non-compliant software or embedded microprocessors might exist); Hardware (Company-wide information technology architecture); Software Packages (standard personal computer and individual software packages, such as electronic spreadsheet and word processing software); Application Tools and Products (products utilized by information technology development organizations to develop and implement automated business applications); Client Applications; Client Interfaces; and Third Party Suppliers. In order to address the Year 2000 issue and the seven major sections stated above, the Company's Year 2000 plan involves five phases: Planning and Awareness Phase (developing a budget and project plan); Inventory and Assessment Phase (identify systems and applications, assess risks and prioritize efforts); Remediation Phase (repair, replace or retire non-compliant systems or processes); Validation Phase (perform testing of systems and processes); and Implementation Phase. The following chart outlines, by major section, the phases of the Company's Year 2000 plan that have been completed or if not yet completed, the current estimated date of completion:
PHASES ---------------------------------------------------------------- PLANNING INVENTORY AND AND MAJOR SECTION AWARENESS ASSESSMENT REMEDIATION VALIDATION IMPLEMENTATION ------------- --------- ---------- ----------- ---------- -------------- Internal Systems and Equipment...... Completed Completed 5/99 6/99 6/99 Hardware............................ Completed 5/99 3/99-6/99 6/99 6/99 Software Packages................... Completed 3/99-4/99 5/99-6/99 6/99 6/99 Application Tools and Products...... Completed Completed 3/99 4/99 6/99 Client Applications................. Completed 3/99 6/99 9/99 9/99 Client Interfaces................... Completed 3/99 4/99 9/99 9/99 Third Party Suppliers............... Completed 4/99 5/99 6/99 6/99
Since the Year 2000 issue may also affect the systems and applications of the Company's customers or suppliers, the Company has initiated formal communications with its customers and suppliers to determine their overall Year 2000 readiness and the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. As part of its overall communication process, the Company has mailed letters to all of its customers and suppliers in an effort to receive the appropriate warranties and assurances that those parties are, or will be, Year 2000 compliant. Based upon the responses received from its customers and suppliers, the Company will then determine if further assurances are necessary or if the Company needs to take further action, including the incurrence of additional costs and/or the creation of a contingency plan with regard to any customer or supplier that the Company believes may not be Year 2000 compliant. Although the Company currently does not anticipate any material adverse 28 29 impact on its operations as a result of Year 2000 issues of its customers or suppliers, no assurance can be given that the failure by one or more of its major suppliers or customers to become Year 2000 compliant will not have a material adverse impact on its operations, particularly since the Company is still awaiting responses from such major suppliers and customers. The Company, pursuant to the PRISM Project which was undertaken by the Company for reasons unrelated to any Year 2000 issues, has expended approximately $8.6 million of the estimated $13.0 million required to upgrade and enhance its internal financial and administrative systems. An ancillary benefit of the PRISM Project is that the resulting systems will be Year 2000 compliant with full implementation of all aspects of the PRISM Project expected by the third quarter of 1999. Based upon its most recent assessment, the Company has determined that the incremental cost of insuring that its remaining computer systems and processes are Year 2000 compliant is expected to be approximately $1.0-$1.5 million. This amount will be funded as part of the Company's budgeted capital expenditures (see "Liquidity and Capital Resources"). Through December 31, 1998, the Company, exclusive of the PRISM Project, has spent approximately $151,000 on the Year 2000 issue. These amounts do not include any costs associated with the implementation of contingency plans, if required, which have not yet been developed. A portion of the costs related to the PRISM project have been, and will continue to be, charged to earnings as incurred based upon the provisions of SOP 98-1 (see Note 1 -- Operations and Significant Accounting Policies and Note 4 -- Property and Equipment of the Notes to Consolidated Financial Statements). All incremental costs associated with the Year 2000 issue are being expensed as incurred. The extent of the Company's Year 2000 exposure, the costs of achieving Year 2000 compliance and the time period within which the Company believes it will achieve its Year 2000 compliance are based on management's knowledge to date and its best estimates to date. Although the Company expects its critical systems and applications to be Year 2000 compliant prior to any anticipated impact on its operations, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty, as well as the timing and cost of achieving Year 2000 compliance (if at all), include, but are not limited to, availability and cost of personnel, failure to identify and correct all Year 2000 susceptible systems and applications, non-compliance by customers, suppliers and other third parties whose systems and operations impact the Company, and other similar uncertainties. A reasonably possible worst case scenario might include the failure of third parties to provide services, such as power and telecommunication services, or the loss of the Company's automated call distributors or dialers which could, depending on its duration, result in a material disruption to the Company's operations and its ability to generate revenue. The Company has not yet developed a contingency plan; however, the Company will continue to assess the need for a formal contingency plan and make a determination as to the nature and scope of its contingency plan, if required, based on the progress of Year 2000 efforts by the Company and third parties by June 1999. IMPACT OF INFLATION Inflation has not had a material impact upon operating results, and the Company does not expect it to have such an impact in the future. To the extent the Company experiences cost increases and is not able to increase its billing rates to offset the costs, such cost increases must be recovered through operating efficiencies and improved gross profit margins. However, there can be no assurance that the Company's business will not be so affected by inflation or that it will be able to absorb cost increases through operating efficiencies or through billing rate adjustments to customers and remain competitive. FLUCTUATIONS IN QUARTERLY RESULTS The Company experiences quarterly variations in revenues and operating income principally as a result of the timing of clients' marketing campaigns and customer service programs, the commencement of new contracts, changes in the Company's revenue mix among its various services offered to clients, including the percentage (if any) of services provided under incentive-based compensation agreements, and the timing of additional operating expenses to acquire and support new business. In addition, the completion or termination of a large customer service program or the loss or delay in the implementation of a large customer service 29 30 program or in a transfer of teleservicing-based application software could cause the Company to experience such quarterly variations. Relative to revenue mix, due, for example, to the significantly higher margins generated from revenue earned from the transfers of teleservicing-based application software and to actual performance under incentive-based compensation agreements, fluctuations in gross and operating margins may occur whenever revenue mix or actual performance results fluctuate from quarter to quarter. See Note 15 -- Unaudited Quarterly Financial Data of the Notes to Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements (within the meaning of Section 21E. of the Securities Exchange Act of 1934, as amended), representing the Company's current expectations and beliefs concerning future events. When used in this report, the words "believes," "estimates," "plans," "expects," "intends," "anticipates," and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties related to and including, without limitation, the Company's effective and timely initiation and development of new client relationships and programs, the maintenance of existing client relationships and programs (particularly since the Company's agreements with its clients generally do not assure the Company will generate a specific level of revenue, do not designate the Company as the exclusive service provider and are terminable on short notice), the effective completion of the implementation of the Company's restructuring plan and performance-enhancing initiatives, the achievement of satisfactory levels of both gross and operating margins, the opening of new customer interaction centers in accordance with strategic plans and in a timely and economic manner consistent with existing capacity requirements, the ability of the Company to hire, train and retain a sufficient labor force of qualified personnel at competitive wage rates, the development and continued enhancement of telecommunication, Internet, computer and information technologies and operational and financial systems (including the successful and timely completion of the implementation and installation of the PRISM Project), the level of acceptance and increased utilization by existing and new clients of the Company of Precision Resolution, InfiniteAccess and other Internet products and services, technical difficulties or errors, problems or excessive costs incurred by the Company in connection with the completion of the development, implementation and/or future enhancement of InfiniteAccess, Precision Resolution and/or IMA Advantage/Edge, and/or the integration of Internet technologies with current PRC products and services to create customer interaction centers and the success and acceptance by the Company's clients thereof, the failure of the Company to cost-effectively develop new Internet services and products or to maintain or enter into new strategic or key business relationships in connection with the development and/or enhancement of its Internet offerings, the over-estimation by the Company of the level of need and demand for customer support and service through the use of the Internet, the ability of the Company to hire, train and retain qualified technology and other personnel in connection with its development, implementation and/or enhancement efforts and the operations of prcnetcare.com, the compatibility of InfiniteAccess, Precision Resolution and other Internet products and services with existing systems of the Company's clients and the extent of the technical problems arising with respect to obtaining such compatibility, the introduction of new competitive Internet and other products and services in the Company's industry by other companies, the achievement by the Company and its suppliers and customers of Year 2000 compliance in a timely and cost efficient manner, the anticipated growth in industry trends towards outsourcing and cosourcing of telephone and Internet-based marketing and customer service operations (particularly in the telecommunications services and equipment, transportation, financial services, utility, consumer products and food and beverage industries), changes in competition and the forms of direct sales and marketing techniques, consumer interest in, and use of, the Company's clients' products and services, general economic conditions, costs of telephone services, financing and leasing of equipment, the adequacy of cash flows from operations and available financing to fund capital needs and future growth, changes in and additions to governmental rules and regulations applicable to the Company, the realization of the Company's net deferred tax asset and other risks set forth in this report, in the Company's other filings with the Securities and Exchange Commission and in the Company's press releases. These risks and uncertainties are beyond the ability of the Company to control; in many cases, the Company 30 31 cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk: The Company's exposure to market risk for changes in interest rates relates primarily to its long-term debt. The Company's Credit Facility and mortgage loan with the lender for the Credit Facility both bear interest at variable rates, as discussed above under "Liquidity and Capital Resources." The Company mitigates interest rate risk by continually monitoring the interest rates. The table below presents outstanding principal amounts and the related fair values (in thousands), together with maturity dates as of December 31, 1998 and the weighted average interest rates for the Company's long-term debt (including current maturities thereof) subject to variable rates for the year then ended:
WEIGHTED OUTSTANDING AVERAGE PRINCIPAL FAIR INTEREST MATURITY AMOUNT VALUE RATE DATE ----------- ------- -------- ------------- Credit Facility (prime).......................... $ 3,300 $ 3,300 8.5% March 2, 2001 Credit Facility (LIBOR).......................... 7,700 7,700 6.8% March 2, 2001 Mortgage loan.................................... 4,000 4,000 7.0% June 1, 2005 ------- ------- Total long-term debt subject to variable rates... $15,000 $15,000 ======= =======
Based on the borrowing rates available to the Company for debt with similar terms and average maturities, the fair value of the Company's debt approximates carrying value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is set forth in the Company's Financial Statements contained in this report. The Financial Statements can be found at the pages in this report listed in the following index: INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants -- PricewaterhouseCoopers LLP................. F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-2 For the years ended December 31, 1998, 1997 and 1996: Consolidated Statements of Operations.................. F-3 Consolidated Statements of Shareholders' Equity........ F-4 Consolidated Statements of Cash Flows.................. F-5 Notes to Consolidated Financial Statements.................. F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the information set forth in the Company's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "SEC") within 120 days of the Company's 1998 fiscal year-end. 31 32 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information set forth in the Company's Definitive Proxy Statement to be filed with the SEC within 120 days of the Company's 1998 fiscal year-end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information set forth in the Company's Definitive Proxy Statement to be filed with the SEC within 120 days of the Company's 1998 fiscal year-end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information set forth in the Company's Definitive Proxy Statement to be filed with the SEC within 120 days of the Company's 1998 fiscal year-end. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. Financial Statements See Index to Financial Statements located in Item 8 of this report. 2. Financial Statement Schedule PAGE --- Schedule II -- Valuation and Qualifying Accounts....... S-1
3. Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 Articles of Incorporation of Precision Response Corporation (Exhibit 3.1 to Form S-1)* 3.2 Bylaws of Precision Response Corporation as amended on July 23, 1996 (incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 0-20941) and as further amended by Amendment to Article II, Section 6 of the Bylaws of the Company effective on February 19, 1997 (incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File No. 0-20941) 9.1 Voting Trust Agreement, dated as of February 16, 1996, between Richard Mondre and Mark Gordon (Exhibit 9.1 to Form S-1)* 9.2 Voting Trust Agreement, dated as of February 16, 1996, between Richard Mondre and David Epstein (Exhibit 9.2 to Form S-1)* 9.3 A separate Amendment to Voting Trust Agreement, dated as of December 27, 1996, for each of the Voting Trust Agreements dated as of February 16, 1996 described in Exhibit numbers 9.1 and 9.2, hereto (incorporated by reference to Exhibit 9.5 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 333-18823), initially filed on December 26, 1996) 10.1 Precision Response Corporation Amended and Restated 1996 Incentive Stock Plan as amended through May 15, 1997 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-20941)+
32 33 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.2 Precision Response Corporation Amended and Restated 1996 Incentive Stock Plan (as amended through June 12, 1998) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-20941)+ 10.3 Precision Response Corporation 1996 Nonemployee Director Stock Option Plan (Exhibit 10.2 to Form S-1)*+ 10.4 Precision Response Corporation Profit Sharing Plan (Exhibit 10.3 to Form S-1)*+ 10.5 Employment Agreement with Mark Gordon (Exhibit 10.4 to Form S-1)*+ 10.6 Employment Agreement with David Epstein (Exhibit 10.5 to Form S-1)*+ 10.7 Employment Agreement with Richard Mondre (Exhibit 10.6 to Form S-1)*+ 10.8 Stock Purchase and Shareholder Agreement, dated February 16, 1996, between Richard Mondre and Mark Gordon, as amended effective as of February 16, 1996 (Exhibit 10.8 to Form S-1)* 10.9 Stock Purchase and Shareholder Agreement, dated February 16, 1996, between Richard Mondre and David Epstein, as amended effective as of February 16, 1996 (Exhibit 10.9 to Form S-1)* 10.10 Agreement, dated February 16, 1996, among Richard Mondre, Mark Gordon and David Epstein (Exhibit 10.10 to Form S-1)* 10.11 Stockholder Agreement, dated May 10, 1996, between Mark Gordon and David Epstein (Exhibits 10.14 to Form S-1)* 10.12 S Corporation Tax Allocation and Indemnification Agreement (Exhibit 10.15 to Form S-1)* 10.13 Form of Indemnification Agreement (Exhibit 10.17 to Form S-1)* 10.14 Net Lease, dated May 1, 1996, between MJG Properties, Inc. and Precision Response Corporation (13180 N.W. 43rd Avenue lease) (Exhibit 10.18 to Form S-1)* 10.15 Net Lease, dated May 1, 1996, between MJG Properties, Inc. and Precision Response Corporation (4250 N.W. 135th Street lease) (Exhibit 10.19 to Form S-1)* 10.16 Lease Agreement and Option to Purchase Real Property, dated January 23, 1996, between Burger King Corporation and Precision Response Corporation (without schedules) (Exhibit 10.21 to Form S-1)* 10.17 Assignment of Lease, dated as of April 18, 1996, between Precision Response Corporation and Deerwood Realty Partners, Ltd (Exhibit 10. 22 to Form S-1)* 10.18 Sublease, dated May 1, 1996, between Precision Response Corporation and Deerwood Realty Partners, Ltd. (Exhibit 10.23 to Form S-1)* 10.19 Lease, dated January 25, 1996, between Donald V. Mariutto and Eugene L. Mariutto, and Precision Response Corporation (Exhibit 10.24 to Form S-1)* 10.20 Assignment of Lease, dated April 30, 1996, between Precision Response Corporation and Deerwood Realty Partners, Ltd. (Exhibit 10.25 to Form S-1)* 10.21 Sublease, dated May 1, 1996, between Precision Response Corporation and Deerwood Realty Partners, Ltd. (Exhibit 10.26 to Form S-1)* 10.22 Registration Rights Agreement, dated May 15, 1996, between Precision Response Corporation and Mark Gordon (Exhibit 10.27 to Form S-1)* 10.23 Registration Rights Agreement, dated May 15, 1996, between Precision Response Corporation and David Epstein (Exhibit 10.28 to Form S-1)* 10.24 Employment Agreement with Richard N. Ferry, Jr. dated May 15, 1996*, as amended by Amendment to Employment Agreement dated as of November 10, 1997 between the Company and Mr. Ferry (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-20941)+ 33 34 10.25 Net Lease, dated May 1, 1996, between Deerwood Realty Partners, Ltd. and Precision Response Corporation (Exhibit 10.30 to Form S-1)* 10.26 Employment Agreement with Paul M. O'Hara dated August 9, 1996 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-20941), as amended by Amendment to Employment Agreement dated as of November 10, 1997 between the Company and Mr. O'Hara (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-20941)+ 10.27 Independent Contractor Agreement, dated July 26, 1996, between Bernie Kosar, Jr. and Precision Response Corporation (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-20941) and Amendment to Stock Option Agreement effective as of July 26, 1996 between Bernie Kosar, Jr. and Precision Response Corporation (incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1 (File No. 333-18823), initially filed on December 26, 1996)+ 10.28 Employment Agreement with Bernie Kosar, Jr. dated February 19, 1997 (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-20941), as amended by Amendment to Employment Agreement dated as of October 1, 1997 between the Company and Mr. Kosar (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-20941)+ 10.29 Employment Agreement dated as of April 15, 1997 between the Company and Thomas C. Teper (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-20941)+ 10.30 Credit Agreement (with exhibits but without schedules) Dated as of March 2, 1998 among the Company, as the Borrower, NationsBank, N.A. and the other lenders that become signatories thereto, as the Banks, and NationsBank, N.A., as the Agent (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-20941) 10.31 First Amendment to Credit Agreement effective as of June 30, 1998 between the Company and NationsBank, N.A. (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-20941) 10.32 Second Amendment to Revolving Credit Agreement effective as of September 30, 1998 between the Company and NationsBank, N.A. (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-20941) 10.33 Mortgage Loan Agreement dated as of May 29, 1998 between the Company and NationsBank, N.A. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-20941) 10.34 Consolidated Renewal Promissory Note dated as of May 29, 1998 from the Company payable to the order of NationsBank, N.A. (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-20941) 10.35 First Amendment to Mortgage Loan Agreement effective as of June 30, 1998 between the Company and NationsBank, N.A. (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-20941) 10.36 Second Amendment to Mortgage Loan Agreement effective as of September 30, 1998 between the Company and NationsBank, N.A. (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-20941) 10.37 Confirmation letter dated December 1, 1998 from NationsBank, N.A. to the Company regarding definition of "fixed charge coverage ratio" (filed herewith) 34 35 10.38 Employment Agreement dated as of August 4, 1998 between the Company and Robert Tenzer (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-20941)+ 10.39 Employment Agreement dated as of October 6, 1998 between the Company and James R. Weber (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-20941)+ 10.40 Employment Agreement effective as of October 20, 1998 between the Company and Wesley T. O'Brien (filed herewith)+ 10.41 Letter agreement effective as of October 1, 1998 from the Company to and accepted by Bernard J. Kosar, Jr. (filed herewith)+ 23.1 Consent of PricewaterhouseCoopers LLP (filed herewith) 27.1 Financial Data Schedule (filed herewith) - ------------------------- * Previously filed and incorporated by reference to exhibit in the Company's Registration Statement on Form S-1, as amended (File No. 333-03209), initially filed on May 6, 1996 ("Form S-1"), as set forth after such agreement or document. + Indicates a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1998. 35 36 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRECISION RESPONSE CORPORATION (Registrant) By: /s/ PAUL M. O'HARA ------------------------------------ Paul M. O'Hara Executive Vice President -- Finance and Chief Financial Officer (Principal Financial Officer) Dated: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARK J. GORDON Chairman of the Board March 30, 1999 - ----------------------------------------------------- Mark J. Gordon /s/ DAVID L. EPSTEIN Chief Executive Officer and March 30, 1999 - ----------------------------------------------------- Director David L. Epstein (Principal Executive Officer) /s/ RICHARD D. MONDRE Executive Vice President, March 30, 1999 - ----------------------------------------------------- General Counsel, Secretary Richard D. Mondre and Director /s/ PAUL M. O'HARA Executive Vice President -- March 30, 1999 - ----------------------------------------------------- Finance and Chief Financial Paul M. O'Hara Officer /s/ THOMAS F. JENNINGS, JR. Vice President and Controller March 30, 1999 - ----------------------------------------------------- (Principal Accounting Thomas F. Jennings, Jr. Officer) /s/ BERNARD J. KOSAR, JR. Director March 30, 1999 - ----------------------------------------------------- Bernard J. Kosar, Jr. /s/ RICHARD N. KRINZMAN Director March 30, 1999 - ----------------------------------------------------- Richard N. Krinzman Director , 1999 - ----------------------------------------------------- Christian Mustad /s/ NEIL A. NATKOW Director March 30, 1999 - ----------------------------------------------------- Neil A. Natkow
36 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Precision Response Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 8 and Item 14(a)(1) and (2) of this Form 10-K present fairly, in all material respects, the financial position of Precision Response Corporation and subsidiaries at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Miami, Florida February 17, 1999 F-1 38 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,656 $ 11,080 Accounts receivable, net of allowances of $8,225 and $2,864, in 1998 and 1997, respectively................. 42,771 31,289 Income taxes receivable................................... 215 6,970 Deferred income taxes..................................... 6,906 2,796 Prepaid expenses and other current assets................. 4,186 5,866 -------- -------- Total current assets.............................. 55,734 58,001 Property and equipment, net................................. 71,414 63,301 Deferred income taxes....................................... 5,516 3,589 Other assets................................................ 782 2,522 -------- -------- Total assets...................................... $133,446 $127,413 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations............... $ 2,510 $ 2,393 Accounts payable.......................................... 16,571 13,725 Restructuring accrual..................................... 3,244 2,863 Accrued compensation expenses............................. 3,108 5,101 Other accrued expenses.................................... 7,174 6,444 Customer deposits......................................... 1,108 3,954 -------- -------- Total current liabilities......................... 33,715 34,480 Long-term obligations, less current maturities.............. 16,916 3,493 Restructuring accrual....................................... 3,456 -- -------- -------- Total liabilities................................. 54,087 37,973 -------- -------- Commitments and contingencies (see Notes 6 and 14).......... -- -- Shareholders' equity: Common stock, $0.01 par value; 100,000,000 shares authorized; 21,549,000 and 21,542,000 issued and outstanding, respectively.............................. 215 215 Additional paid-in capital................................ 97,179 97,179 Accumulated deficit....................................... (18,035) (7,846) Unearned compensation..................................... -- (108) -------- -------- Total shareholders' equity........................ 79,359 89,440 -------- -------- Total liabilities and shareholders' equity........ $133,446 $127,413 ======== ========
The accompanying notes are an integral part of these financial statements. F-2 39 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1997 --------- --------- -------- REVENUES.................................................... $175,173 $143,584 $97,637 -------- -------- ------- OPERATING EXPENSES: Cost of services.......................................... 153,638 128,177 71,345 Selling, general and administrative expenses.............. 23,290 25,874 14,727 Restructuring and asset impairment charges................ 13,583 11,591 -- -------- -------- ------- Total operating expenses.......................... 190,511 165,642 86,072 -------- -------- ------- Operating (loss) income........................... (15,338) (22,058) 11,565 OTHER INCOME (EXPENSE): Interest income........................................... 261 984 298 Interest expense.......................................... (1,050) (702) (986) -------- -------- ------- (LOSS) INCOME BEFORE INCOME TAXES................. (16,127) (21,776) 10,877 Income tax (benefit) provision.............................. (5,938) (8,710) 3,027 -------- -------- ------- NET (LOSS) INCOME................................. $(10,189) $(13,066) $ 7,850 ======== ======== ======= NET LOSS PER COMMON SHARE: Basic..................................................... $ (0.47) $ (0.61) ======== ======== Diluted................................................... $ (0.47) $ (0.61) ======== ======== PROFORMA DATA (UNAUDITED): Income before proforma income taxes....................... $10,877 Proforma provision for income taxes relating to S corporation............................................ 4,358 ------- PROFORMA NET INCOME............................... $ 6,519 ======= PROFORMA NET INCOME PER COMMON SHARE: Basic..................................................... $ 0.36 ======= Diluted................................................... $ 0.36 ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic..................................................... 21,548 21,393 18,083 ======== ======== ======= Diluted................................................... 21,548 21,393 18,171 ======== ======== =======
The accompanying notes are an integral part of these financial statements. F-3 40 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED DUE FROM --------------- PAID-IN EARNINGS SHAREHOLDERS, UNEARNED SHARES AMOUNT CAPITAL (DEFICIT) NET COMPENSATION TOTAL ------ ------ ---------- --------- ------------- ------------ -------- Balance at December 31, 1995.......... 16,400 $164 $ 72 $ 2,787 $(207) $ -- $ 2,816 Net income.......................... -- -- -- 7,850 -- -- 7,850 Payment of dividends................ -- -- -- (5,243) -- -- (5,243) Net repayments from Shareholders.... -- -- -- -- 207 -- 207 Issuance of common stock............ 3,600 36 47,045 -- -- -- 47,081 Stock option grants................. -- -- 691 -- -- (691) -- Amortization of unearned compensation...................... -- -- -- -- -- 239 239 ------ ---- ------- -------- ----- ----- -------- Balance at December 31, 1996.......... 20,000 200 47,808 5,394 -- (452) 52,950 Net loss............................ -- -- -- (13,066) -- -- (13,066) Payment of dividend................. -- -- -- (174) -- -- (174) Issuance of common stock............ 1,500 15 49,149 -- -- -- 49,164 Exercise of employee stock options........................... 42 -- 222 -- -- -- 222 Amortization of unearned compensation...................... -- -- -- -- -- 344 344 ------ ---- ------- -------- ----- ----- -------- Balance at December 31, 1997.......... 21,542 215 97,179 (7,846) -- (108) 89,440 Net loss............................ -- -- -- (10,189) -- -- (10,189) Exercise of employee stock options........................... 7 -- -- -- -- -- -- Amortization of unearned compensation...................... -- -- -- -- -- 108 108 ------ ---- ------- -------- ----- ----- -------- Balance at December 31, 1998.......... 21,549 $215 $97,179 $(18,035) $ -- $ -- $ 79,359 ====== ==== ======= ======== ===== ===== ========
The accompanying notes are an integral part of these financial statements. F-4 41 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES: Net (loss) income......................................... $(10,189) $(13,066) $ 7,850 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 12,822 11,506 3,631 Provision for bad debts and sales allowances........... 14,534 5,895 5,215 Amortization of unearned compensation.................. 108 344 239 Restructuring and asset impairment charges............. 6,458 6,832 -- Other asset write-offs................................. 5,392 -- -- Deferred income taxes.................................. (6,037) (4,905) 172 Changes in operating assets and liabilities, excluding effects of acquisition: Accounts receivable.................................... (30,165) (7,205) (28,647) Income taxes receivable................................ 6,755 (6,970) -- Prepaid expenses and other current assets.............. (448) (4,048) (2,545) Other assets........................................... (247) 787 (1,195) Accounts payable....................................... 3,549 (3,761) 15,163 Restructuring accrual.................................. 4,497 2,863 -- Accrued compensation expenses.......................... (1,993) 1,023 2,751 Income taxes payable................................... -- (3,297) 1,645 Other accrued expenses................................. 815 3,748 944 Customer deposits...................................... (2,846) 1,534 1,864 -------- -------- -------- Net cash provided by (used in) operating activities...................................... 3,005 (8,720) 7,087 -------- -------- -------- INVESTING ACTIVITIES: Cash acquired in acquisition, net of cash paid............ -- 192 -- Purchases of property and equipment....................... (24,883) (34,251) (35,483) -------- -------- -------- Net cash used in investing activities............. (24,883) (34,059) (35,483) -------- -------- -------- FINANCING ACTIVITIES: Net proceeds (payments) from revolving credit loan........ 11,000 -- (2,996) Proceeds from long-term obligations....................... 4,000 -- -- Payments on long-term obligations......................... (2,546) (2,615) (3,658) Net proceeds from issuance of common stock................ -- 49,386 47,081 Dividend paid............................................. -- (174) (5,243) Net payments from shareholders............................ -- -- 207 -------- -------- -------- Net cash provided by financing activities......... 12,454 46,597 35,391 -------- -------- -------- Net (decrease) increase in cash and cash equivalents........ (9,424) 3,818 6,995 Cash and cash equivalents at beginning of year.............. 11,080 7,262 267 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 1,656 $ 11,080 $ 7,262 ======== ======== ======== Supplemental cash flow information: Cash paid for interest, including capital leases, net of amounts capitalized.................................... $ 893 $ 724 $ 964 ======== ======== ======== Cash paid for income taxes................................ $ 215 $ 3,330 $ 1,210 ======== ======== ======== Supplemental schedule of non-cash investing and financing activities: Installment loans and capital lease obligations........... $ -- $ 1,687 $ 8,362 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 42 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Precision Response Corporation and subsidiaries (the "Company") is a full-service provider of teleservices, Internet customer communications, database marketing and management, and fulfillment services on an outsourced and cosourced basis to large corporations. The Company currently operates 4,500 workstations in eight call centers, of which three have multimedia capabilities, all located in Florida. Principles of Consolidation The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates consist primarily of the allowance for doubtful accounts and sales allowances, the valuation allowance on net deferred tax assets, the useful lives of property and equipment, and accrued expenses. Actual results could differ from those estimates. Cash and Cash Equivalents Highly liquid investments with a maturity of three months or less on their acquisition date are considered cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the Federally-insured limits. Property and Equipment Property and equipment, including expenditures for major improvements, is stated at cost less accumulated depreciation and amortization. Repairs and maintenance are expensed as incurred. Depreciation and amortization is determined using the straight-line method over the estimated useful lives of the respective assets or, in relation to leasehold improvements and property under capital leases, over the lesser of the asset's estimated useful life or the lease term (see Note 4 -- Property and Equipment). Upon the sale, retirement or other disposition of assets, the related cost and accumulated depreciation or amortization is eliminated from the accounts. Any resulting gains or losses from disposals are included in the Consolidated Statements of Operations. Long-Lived Assets The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (see Note 3 -- Restructuring and Other Non-Recurring Special Charges). Capitalized Interest The Company capitalizes certain interest costs recognized on borrowings as part of the historical cost of acquiring or producing certain assets in accordance with Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost. The amount capitalized is an allocation of the interest cost incurred during the F-6 43 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period required to complete the asset. During 1998, certain borrowings under the Company's revolving credit facility (see Note 5 -- Credit Facilities and Long-Term Debt) were used to partially fund the Company's PRISM Project (see Note 4 -- Property and Equipment), and the resulting interest costs incurred have been capitalized. Total interest cost incurred during 1998 was $1.3 million, of which $1.1 million was expensed and is included in the accompanying 1998 Consolidated Statements of Operations, and the remaining $200,000 was capitalized and is included in Property and equipment, net in the accompanying Consolidated Balance Sheets. As each module of the PRISM Project is implemented, all associated capitalized costs, including capitalized interest, will begin to be amortized on a straight-line basis over the module's estimated useful life. Revenue Recognition The Company recognizes revenues as services are performed. Teleservicing charges are primarily based on a fixed hourly fee for dedicated service. Beginning in the third quarter of 1997, the Company also generated teleservicing revenues under incentive-based compensation agreements whereby the amount of revenue earned correlates to the achievement of established targets. Charges for database marketing and management services are based on an hourly rate or on the volume of information stored. Charges for fulfillment services are typically assessed on a transaction basis, with an additional charge for warehousing products for customers. Revenues earned from the transfers of software by the Company are generally recognized when the software has been shipped, payment is due within one year, collectibility is probable and there are no significant obligations remaining. No such revenues were recognized in 1998. Software Development Costs The Company capitalized costs related to the development of certain software products integral to the Company's teleservicing programs and recent business process reengineering, which were either for internal use or with an objective of being marketed externally. Capitalized software development costs were reported at the lower of unamortized cost or net realizable value based upon future use on a product-by-product basis. In accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed ("SFAS No. 86"), capitalization of these software development costs began when technological feasibility had been established and ended when the product was available for general use in the Company's teleservicing programs. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future demand for teleservicing programs, estimated economic life and changes in software and hardware technologies. Commencing upon initial product release, capitalized software costs were amortized on an individual product basis using the straight-line method over the estimated economic life of the product or three years. The amount of externally marketed software development costs capitalized in 1997 was $1,660,000. No software development costs were incurred during 1998 in accordance with the provisions of SFAS No. 86. Amortization expense related to externally marketed software development costs was $744,000, $1,368,000 and $154,000 in 1998, 1997 and 1996, respectively. Externally marketed software development costs, net of accumulated amortization, in the amount of $1,987,000 as of December 31, 1997 is included in Other assets in the accompanying Consolidated Balance Sheets. In conjunction with the Company's restructuring plan during the third quarter of 1998, the remaining unamortized balance of software development costs in the amount of $1,243,000 was written off (see Note 3 -- Restructuring and Other Non-Recurring Special Charges). In accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"), the Company capitalizes acquired and internally developed or modified software solely to meet its internal needs integral to the Company's teleservicing or Internet-based programs. The Company capitalizes certain internal and external costs directly associated with F-7 44 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) developing or modifying the internal use software, which begins with the application development stage and ends when the project is substantially complete and ready for its intended use. The amount of costs capitalized in 1998 relating to internal use software in process was $4.9 million, consisting principally of software purchased from external vendors, and is included in Property and equipment, net in the accompanying Consolidated Balance Sheets (see Note 4 -- Property and Equipment). As of December 31, 1998, no internal use software development projects were ready for their intended uses and, therefore, no amortization cost related to this software is included in the accompanying Consolidated Statements of Operations. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future teleservicing program demand or Internet-based program demand, estimated economic life and changes in software and hardware technologies. In addition, in accordance with Emerging Issues Task Force 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation, and the provisions of SOP 98-1, the Company began capitalizing certain costs incurred in the enhancement of internal financial and operating systems associated with its initiative to implement an Enterprise Resource Planning solution, which the Company designated the PRISM Project. Costs incurred on the PRISM Project, consisting principally of software purchased from Oracle Corporation, outside consultant fees and, to a lesser extent, payroll and payroll-related costs for employees directly associated with the PRISM Project, were $8.6 million as of December 31, 1998 and are included in Property and equipment, net in the accompanying Consolidated Balance Sheets (see Note 4 -- Property and Equipment). The PRISM Project is being implemented in phases with certain systems or modules becoming functional at different points in the project timeframe. Of the total $8.6 million, $5.5 million represents PRISM Project modules still in the application development stage and $3.1 million represents the PRISM Project modules that were placed in service during the fourth quarter of 1998. Amortization expense relating to the modules placed in service (human resources/payroll, accounts receivable, accounts payable and general ledger) was approximately $100,000 in 1998. Full implementation of all aspects of the PRISM Project is expected by the third quarter of 1999. As each module of the PRISM Project is implemented, all associated capitalized costs will begin to be amortized on a straight-line basis over the module's estimated useful life. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation expense for qualified and non-qualified stock options granted under the Company's stock option plans is generally measured as the difference between the quoted market price of the Company's stock at the date of grant and the amount an employee must pay to acquire the stock. For options granted to other than employees in exchange for goods or services, compensation cost is measured at fair value in accordance with SFAS 123 (see Note 11 -- Stock-Based Compensation Plans). Advertising Expenses Advertising expenses are charged to operations as incurred. During 1998, 1997 and 1996, advertising expenses were $418,000, $341,000 and $464,000, respectively. F-8 45 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes Beginning July 16, 1996, the Company began providing for deferred income taxes under the asset and liability method for financial accounting and reporting for income taxes. Deferred tax assets and liabilities are determined based on the differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities using the enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Prior to the initial public offering of the Company's common stock completed in July 1996 (the "Initial Public Offering") (see Note 2 -- Public Offerings), the Company included its income and expenses with those of its shareholders for Federal and state income tax purposes (an S corporation election). Accordingly, the Consolidated Statement of Operations for the period from January 1, 1996 through July 15, 1996 does not include a provision for Federal or state income taxes. The proforma data in the Consolidated Statements of Operations for 1996 include a provision for Federal and state income taxes as if the Company were subject to Federal and state corporate income taxes as a C corporation. This proforma provision is computed using a combined Federal and state tax rate of 37.6%. In connection with the Initial Public Offering, the Company converted from an S corporation to a C corporation effective July 16, 1996. Upon termination of the S corporation election, deferred income taxes in the amount of $90,000 became a net liability of the Company with a corresponding non-recurring expense in the Consolidated Statement of Operations for 1996 (see Note 9 -- Income Taxes). Deferred taxes resulting from the termination of the S corporation relate primarily to accounts receivable, other accrued expenses and property and equipment. Earnings Per Common Share During 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"), which supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share. Basic earnings per common share calculations are determined by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing earnings available to common shareholders by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year (all related to outstanding stock options discussed in Note 11 -- Stock-Based Compensation Plans). SFAS No. 128 had no impact on the Company's reported primary earnings per share for 1996. Proforma Net Income Per Common Share Proforma net income per common share amounts are computed based on net income on a proforma basis, after considering the Company's change in tax status, and the weighted average number of common shares outstanding during each year after retroactive adjustment for stock splits effected by way of share dividends (see Note 10 -- Capital Stock). New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting operating and geographical segments and the type and level of financial information to be discussed about those segments. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 in the current year and determined that it has one reportable operating segment. See Note 7 -- Information About Services and Significant Clients. F-9 46 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In March 1998, the AICPA issued Statement of Financial Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for capitalization of certain costs incurred in the development of internal-use software and is effective for financial statements for years beginning after December 15, 1998. The Company adopted SOP 98-1 in the first quarter of 1998. See Note 1 -- Operations and Significant Accounting Policies -- Software Development Costs and Note 4 -- Property and Equipment. 2. PUBLIC OFFERINGS Effective July 16, 1996, the Company completed the Initial Public Offering of its common stock (the actual closing date was July 22, 1996) in which the Company and certain selling shareholders sold 4,600,000 shares of common stock at an offering price of $14.50 per share. Of the 4,600,000 shares, 3,600,000 shares were sold by the Company. Net proceeds to the Company, after deducting $5.1 million in costs associated with the offering, were $47.1 million. A portion of the net proceeds was used to repay the outstanding balance of $12.8 million on the Company's existing revolving credit facility, various installment loans totaling $1.0 million and to pay a distribution of S corporation earnings to the Company's current shareholders at that time estimated at $5.2 million (the "Dividend"). The balance of the net proceeds was used for general corporate purposes, including call center expansion and working capital. Effective January 29, 1997 (the actual closing date was February 4, 1997), the Company and certain selling shareholders completed a second equity offering of 4,740,000 shares of common stock at an offering price of $35.125 per share (the "Second Equity Offering"). Of the 4,740,000 shares, 1,500,000 shares were sold by the Company. Net proceeds to the Company from the Second Equity Offering in the amount of $49.2 million, after deducting $3.5 million in costs associated with the offering, have been used for call center expansion, other capital expenditures necessary to support the Company's growth, working capital and other general corporate purposes. 3. RESTRUCTURING AND OTHER NON-RECURRING SPECIAL CHARGES During the third quarter of 1998, the Company performed an extensive review of its operations and existing available workstation capacity. Such review focused on determining the needed workstation capacity appropriate and desirable in light of several factors. These factors included the requirements for servicing the Company's current, recently attained, and anticipated new clients; the Company's less than satisfactory operating results relative to a large incentive-based, outbound teleservices program; and, the Company's inability to recruit, train and maintain an employee base relative to available workstations in certain strained labor markets without paying premium wage rates not able to be supported by the operating margins being generated. As a result of this review, the Company initiated a restructuring and performance enhancing initiatives plan which centered on exiting the incentive-based outbound teleservicing program and making adjustments to certain call centers' workstation capacity. Additionally, the Company decided to replace certain existing software programs utilized in its call center operations with new customer interaction software reflective of advances in customer care technology. The workstation capacity adjustments relate primarily to strained labor markets in two areas where the Company had available workstation capacity of approximately 900 workstations in each area. The Company will adjust the call center capacity in each of these two markets to approximately 500 workstations by reducing the size of its center in one of the markets and consolidating its two existing centers in the other market into a single center. In connection with the Company's decision to exit the incentive-based outbound teleservicing program and to make call center capacity adjustments, certain reductions in overhead and administrative headcount were also made resulting in the termination of nine employees. F-10 47 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In adopting this plan, the Company recorded restructuring and other non-recurring special charges of $22.1 million before taxes with an after-tax impact of $13.8 million. This pre-tax amount is allocated as follows in the Consolidated Statements of Operations for the year ended December 31, 1998: $13.6 million to Restructuring and asset impairment charges (as further described in the next paragraph); $2.3 million to Cost of services (of which $700,000 represents cash items and $1.6 million represents non-cash items) related principally to the write-off of teleservicing software that the Company decided to replace with new customer interaction software reflective of advances in customer care technology; and $6.2 million to Selling, general and administrative expenses (of which $2.1 million represents cash items and $4.1 million represents non-cash items) principally for asset impairments of $4.1 million related to the plan to exit an incentive-based outbound teleservicing program, $1.5 million related to increases in the provisions for certain accrued liabilities, and $600,000 related to severance and other employee costs incurred during the development of the performance enhancing initiatives plan. Of the total $8.5 million in Cost of services and Selling, general and administrative expenses described above, $7.5 million was funded during 1998 and the remaining $1.0 million was accrued at December 31, 1998 and is included in Other accrued expenses in the accompanying Consolidated Balance Sheets. The Company initiated the restructuring and performance enhancing initiatives during the third quarter of 1998 and continued with implementation in the fourth quarter. The Company expects to be substantially completed during the third quarter of 1999. Implementation includes the relocation and consolidation of teleservicing programs to effectuate the closing of one call center and the reduction in size of another call center, the completion of implementation of the new customer interaction software reflective of advances in customer care technology, termination of designated employees, and exploration and realization of opportunities to divest unused facilities. Amounts included in Restructuring and asset impairment charges in the Consolidated Statements of Operations for the year ended December 31, 1998 include cash items such as severance and other employee-related costs of $1.0 million and lease and other facility exit costs associated with the reduction of workstation capacity of $6.1 million. Of the total $7.1 million, $900,000 was funded during 1998 and the remaining $6.2 million is accrued as of December 31, 1998 as part of the restructuring accrual. Non-cash restructuring and asset impairment charges of $6.5 million are primarily related to the write-off of leasehold improvements and telephone and computer equipment associated with the reduction in workstation capacity. During the third quarter of 1997, the Company initiated an extensive and systematic review of its operations and cost structure in response to inefficiencies primarily resulting from the addition of capacity and infrastructure to accommodate a contract for its largest client that has been delayed indefinitely and an across-the-board price reduction imposed by this client. The review focused on reducing operating expenses, increasing customer service efficiencies and generally strengthening the Company's position to provide telephone-based customer service and marketing solutions on an outsourced and cosourced basis to large corporations. This review of the Company's operations focused primarily on operational and organization structures and systems, client profitability and facilities rationalization. As a result of this review, the Company initiated a plan to consolidate three administrative locations into unused space in an existing facility, to reduce overhead and administrative headcount by 10%, to consolidate and reorganize various functional departments and to integrate and enhance its financial and operating systems. The headcount reductions resulted in the termination of approximately 150 employees primarily in the areas of teleservicing, information services and administration. Payment of substantially all termination benefits took place during the fourth quarter of 1997 during which time actual employee terminations occurred. In adopting this plan, the Company recorded a non-recurring special charge of $26.2 million before taxes with an after-tax impact of $15.7 million. This amount is allocated as follows in the Consolidated Statements of Operations for the year ended December 31, 1997: $11.6 million to Restructuring and asset impairment charges (as further described in the next paragraph); $7.8 million to Cost of services (of which $6.6 million F-11 48 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) represented cash items and $1.2 million represented non-cash items) related principally to significant, non-capitalizable start-up and other costs incurred in expanding and improving the Company's ability to provide certain types of teleservicing and fulfillment services which it had previously been providing only on a limited basis (these costs primarily related to development of systems applications and training modules as well as actual employee training); and $6.8 million to Selling, general and administrative expenses (of which $6.7 million represented cash items and $100,000 represented non-cash items) principally for non-recurring operating expenses including $4.8 million of costs associated with the development of the Company's restructuring and cost reduction initiatives, increases in the provisions for certain accrued liabilities totaling $1.9 million and various balance sheet write-offs totaling $100,000. Of the total $14.6 million in Cost of services and Selling, general and administrative expenses described above, $11.4 million was funded during 1997 and the remaining $3.2 million was accrued at December 31, 1997 and is included in Other accrued expenses in the accompanying Consolidated Balance Sheets. The Company initiated the restructuring and cost savings initiatives during the third quarter of 1997 and, since September 30, 1997, the Company had terminated designated employees and reorganized its operational and administrative management structure in connection with the restructuring and cost savings plan. The Company also completed the relocation and consolidation of administrative office space into unused space at an existing facility. Additionally, the Company also continued its attempts to divest unused facilities. This included termination in February 1998 of a lease for an unused facility whose landlord is a corporation that is wholly owned by the Company's Chairman of the Board. In consideration of a termination payment of approximately $82,000, the landlord relieved the Company of its future lease commitments totaling approximately $161,000. The Company believes that the amount of the termination payment was no less favorable to it than could have been negotiated from an unaffiliated party. The Company's implementation throughout 1998 was substantially completed prior to the Company's initiation of additional restructuring and performance enhancing initiatives described above. Amounts included in Restructuring and asset impairment charges in the Consolidated Statements of Operations for the year ended December 31, 1997 include cash items such as severance and other employee costs of $2.1 million and lease obligations and other exit costs associated with the consolidation of three administrative locations into an existing facility and the closing of one small, unused call center of $2.6 million. Non-cash restructuring and asset impairment charges of $6.9 million are primarily related to the write-off of leasehold improvements associated with the administrative facility consolidation and closing along with the cost to fully amortize redundant systems that are not deemed recoverable in light of the aforementioned changes with the Company's largest client. At December 31, 1998, $500,000 is included in Restructuring accrual in the Consolidated Balance Sheets, relating to facility consolidation costs associated with the 1997 restructuring plan. The following table sets forth the details and the cumulative activity in the restructuring accrual during the year ended December 31, 1998 (in thousands):
ACCRUAL ACCRUAL BALANCE AT BALANCE AT DECEMBER 31, DECEMBER 31, 1997 ADDITIONS EXPENDITURES 1998 ------------ --------- ------------ ------------ Severance and other employee costs............... $ 482 $1,057 $ (842) $ 697 Closure and consolidation of facilities and related exit costs......................... 2,381 6,075 (2,453) 6,003 ------ ------ ------- ------- Total restructuring accrual............ $2,863 $7,132 $(3,295) 6,700 ====== ====== ======= Less: current portion.................. (3,244) ------- Total restructuring accrual, long-term............................ $ 3,456 =======
F-12 49 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of both owned property and property under capital leases, the details of which are set forth below (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 ESTIMATED ----------------------------- ----------------------------- USEFUL OWNED LEASED TOTAL OWNED LEASED TOTAL LIVES -------- ------- -------- -------- ------- -------- ---------- Land............................................ $ 1,057 $ -- $ 1,057 $ -- $ -- $ -- N/A Buildings and improvements...................... 4,878 -- 4,878 -- -- -- N/A Telecommunications equipment and software....... 20,946 4,432 25,378 20,823 4,500 25,323 3-7 years Computer equipment and software................. 33,768 5,523 39,291 27,902 5,720 33,622 3-5 years Leasehold improvements.......................... 11,167 -- 11,167 11,843 -- 11,843 * Furniture and fixtures.......................... 8,044 242 8,286 7,706 242 7,948 5-7 years Vehicles........................................ 111 -- 111 239 70 309 3 years -------- ------- -------- -------- ------- -------- 79,971 10,197 90,168 68,513 10,532 79,045 Development in process.......................... 11,408 -- 11,408 457 -- 457 N/A -------- ------- -------- -------- ------- -------- 91,379 10,197 101,576 68,970 10,532 79,502 Less: accumulated depreciation and amortization.............................. (28,368) (1,794) (30,162) (13,631) (2,570) (16,201) -------- ------- -------- -------- ------- -------- $ 63,011 $ 8,403 $ 71,414 $ 55,339 $ 7,962 $ 63,301 ======== ======= ======== ======== ======= ========
- ------------------------- * The lesser of the asset's estimated useful life or the lease term (see also Note 6 -- Lease Commitments). Depreciation and amortization expense amounted to $12,078,000, $10,138,000 and $3,477,000 for 1998, 1997 and 1996, respectively. As discussed in Note 1 -- Operations and Significant Accounting Policies, the Company capitalizes certain costs in connection with internal use software and business process reengineering (PRISM Project) which will be amortized when the software is available for use or project modules are implemented. As of December 31, 1998, $4.9 million, related to internal use software in process, and $5.5 million, related to the PRISM Project modules not yet implemented, are included in Development in process in the above table. In addition, $3.1 million related to the PRISM Project modules operational as of December 31, 1998, are included in Computer equipment and software in the above table. During 1998, the Company acquired a property (land and existing building) in Sunrise, Florida, which will be used as a possible location for new administrative offices or, should utilization levels warrant, as a new call center. See also Note 5 -- Credit Facilities and Long-Term Debt. The building and related building improvements of $4.9 million as of December 31, 1998 were not depreciated in 1998 due to the building not being occupied or utilized during 1998. 5. CREDIT FACILITIES AND LONG-TERM DEBT On May 1, 1996, the Company entered into a three-year senior revolving credit facility (the "Senior Revolving Facility") which provided for revolving loans in an aggregate principal amount not to exceed $15.0 million. The Company was able to borrow up to 85% of eligible accounts receivable. The Senior Revolving Facility was primarily collateralized by accounts receivable. Based upon eligible accounts receivable and no outstanding borrowings under the Senior Revolving Facility as of December 31, 1997, availability thereunder was $15.0 million as of December 31, 1997. The Senior Revolving Facility accrued interest at the Company's option at the prime rate plus 0.5% or the LIBOR rate plus 3.0%. The Company paid a fee of 0.25% per annum on unused commitments under the Senior Revolving Facility. On March 2, 1998, the Company entered into a new three-year, $25.0 million revolving credit facility (the "Credit Facility"), replacing the Senior Revolving Facility. The Company may borrow up to 80% of eligible accounts receivable. The Credit Facility is collateralized by all of the Company's owned and hereafter acquired assets. The Credit Facility accrues interest at the Company's option at (i) the greater of the prime rate or the Federal funds rate plus 0.50% or (ii) the LIBOR rate plus a specified percentage (1.25% to 1.75%) F-13 50 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) based upon the ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company pays a fee of between 0.1875% and 0.25% per annum on unused commitments under the Credit Facility based upon the ratio of funded debt to EBITDA. The Company is required, under the terms of the Credit Facility, to maintain certain financial covenants and ratios, including minimum tangible net worth and funded debt to EBITDA and funded debt to capitalization ratios, to limit capital expenditures and additional indebtedness and is restricted, among other things, with respect to the declaration and payment of dividends, redemptions and acquisitions. At December 31, 1998, the outstanding balance of the Credit Facility was $11.0 million ($3.3 million at 7.75% per annum, $5.2 million at 6.56% per annum and $2.5 million at 6.82% per annum) and is included in Long-term obligations, less current maturities in the accompanying Consolidated Balance Sheets. At December 31, 1998, the available balance under the terms of the Credit Facility was $14.0 million for which the applicable unused commitment fee was at the rate of 0.1875%. On May 29, 1998, the Company secured a mortgage with the lender on its Credit Facility to acquire a property (land and existing building) located in Sunrise, Florida. The Company had originally planned on securing a special leasing arrangement for this property as part of its call center development plans for 1997 and, to that end, expended approximately $2.1 million during 1997 for building improvements. However, the Company subsequently decided to acquire the property outright. The new mortgage loan was for $5.1 million, of which $4.0 million was advanced at closing. The remaining $1.1 million available under the new loan was subject to the Company's completion of future improvements to the property by November 25, 1998. The Company chose not to complete the improvements by this date; hence, the $1.1 million additional availability expired on November 25, 1998. The Company is currently negotiating with the lender on its Credit Facility to extend the term of the additional funding for future improvements, although at this time no assurance can be given if such extension will be obtained. The mortgage note accrues interest payable quarterly, at the LIBOR rate plus 1.50%, of which the interest rate was 6.7% per annum at December 31, 1998. Principal payments are due quarterly, based upon a 20-year amortization schedule and are expected to commence after consummation of the additional funding for future improvements, with a balloon payment due at maturity on June 1, 2005. The mortgage loan is cross-defaulted with and has terms substantially similar to the Credit Facility. Effective September 30, 1998, both the revolving credit agreement and mortgage loan agreement evidencing the Credit Facility and mortgage loan, respectively, were amended to modify two financial covenant and ratio definitions, the amount of the minimum tangible net worth and the fixed charge coverage ratio. As of December 31, 1998, the Company was in compliance with all financial debt covenants. Effective May 1997, the Company entered into a ten-year agreement to lease its operating facility located in Jacksonville, Florida. The terms of the lease included a construction allowance payment of approximately $1.0 million made by the lessor to the Company on commencement of the lease and in return the Company was obligated to make improvements to the facility. The lease agreement also specifies that if the Company terminates the lease agreement prior to its full term, it is required to refund the lessor the $1.0 million on a pro-rata basis. In connection with the restructuring plan adopted in the third quarter of 1998 (see Note 3 -- Restructuring and Other Non-Recurring Special Charges), the Company will reduce the size of the Jacksonville facility during 1999 and, therefore, will terminate the Jacksonville lease agreement at the lease option date in May 2002, which will represent only five years of the specified ten year lease term. As such, the Company will be obligated to refund the lessor 50% of the $1.0 million construction allowance, or $500,000, upon termination of the lease. The $500,000 was accrued at December 31, 1998 and is included in Long-term obligations, less current maturities in the accompanying Consolidated Balance Sheets. F-14 51 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term obligations as of December 31, 1998 and 1997 consisted of the following (in thousands):
1998 1997 ------- ------ Credit Facility............................................. $11,000 $ -- Mortgage loan............................................... 4,000 -- Capital lease obligations................................... 3,926 5,886 Other long-term obligations................................. 500 -- ------- ------ 19,426 5,886 Less: current maturities.................................... (2,510) (2,393) ------- ------ Long-term obligations, less current maturities.............. $16,916 $3,493 ======= ======
Based on the borrowing rates available to the Company for debt with similar terms and average maturities, the fair value of the Company's debt approximates carrying value. 6. LEASE COMMITMENTS The Company's operations are conducted in leased facilities which have initial terms generally ranging from two to ten years. The leases for these facilities would generally expire between 2004 and 2022 assuming the Company's exercise of all renewal options. However, as a result of the 1998 restructuring plan and continual assessment of the capacity requirements in Jacksonville and Margate (Coconut Creek), the Company will terminate the lease agreements relating to these locations no later than the lease option dates in May 2002. However, prior to such terminations, the Company will fully vacate the Margate (Coconut Creek) facility and reduce its occupancy level at the Jacksonville facility during 1999. The Company also has certain equipment leases which have terms of up to five years, of which the latest expiration date occurs in 2001. Rent expense under operating leases was $6,542,000, $5,867,000 and $3,347,000 for 1998, 1997 and 1996, respectively. Future minimum lease payments under capital and operating leases, including all renewal periods, and the annual rentals due on the related party leases discussed in Note 8 -- Related Party Transactions, at December 31, 1998 are as follows (in thousands):
CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES - ------------------------ ------- --------- 1999................................................... $2,597 $ 6,162 2000................................................... 1,575 4,864 2001................................................... 127 4,011 2002................................................... -- 2,800 2003................................................... -- 2,128 Thereafter............................................. -- 29,736 ------ ------- Total minimum lease payments........................... 4,299 $49,701 ======= Less: amount representing interest.......................... (373) ------ Present value of net minimum lease payments under capital leases.................................................... 3,926 Less: current maturities.................................... (2,310) ------ Long-term obligations....................................... $1,616 ======
F-15 52 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INFORMATION ABOUT SERVICES AND SIGNIFICANT CLIENTS The Company has one reportable operating segment: developing and delivering solutions to its clients' customer service and marketing needs utilizing teleservices, e-mail and the Internet, database marketing and management, electronic data processing and fulfillment services. A significant portion of the Company's business is dependent upon several large clients. For the years ended December 31, 1998, 1997 and 1996, the Company's five largest clients accounted for approximately 76%, 64% and 81% of revenues, respectively. As of December 31, 1998, 1997 and 1996, approximately 68%, 68% and 69%, respectively, of the Company's accounts receivable were from the five largest clients. Accounts receivable represents the Company's greatest concentration of credit risk and is subject to the financial condition of its largest clients. The Company does not require collateral or other security to support clients' receivables. The Company conducts periodic reviews of its clients' financial condition and vendor payment practices to minimize collection risks on trade accounts receivable. During 1998, 1997 and 1996, certain clients individually accounted for more than 10% of the Company's total revenues. The clients and their related percentage and amount of total revenues (in thousands) were as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- % AMOUNT % AMOUNT % AMOUNT --- ------- --- ------- --- ------- Company A......................... 45% $80,559 38% $55,022 68% $66,000 Company B......................... 12% $20,882 11% $15,139 * *
- ------------------------- * Accounted for less than 10% of total revenues for the year indicated. 8. RELATED PARTY TRANSACTIONS During 1996, but prior to the completion of the Initial Public Offering, the Company entered into various lease agreements for certain real property with a corporation that is wholly-owned by the Company's Chairman of the Board providing for aggregate annual rentals of approximately $288,000. Rent expense under these leases was $293,000, $275,000 and $264,000 for 1998, 1997 and 1996, respectively. The primary lease term is five years with a renewal option for an additional five-year period. In accordance with the Company's 1997 restructuring plan, one of the lease agreements was terminated by the Company, and a termination payment of approximately $82,000 was made in February 1998. The Company also subleases another facility and a parking lot and leases an additional parking lot from a partnership jointly owned by certain of its shareholders. These subleases expire in January 2002 and the lease expires in June 2001, with annual rentals aggregating approximately $222,000. The Company elected the majority owner of one of its customers to its Board of Directors in October 1996. Sales commissions on revenues generated from various other customers were paid to this director. Total commissions and fees earned by this director were approximately $68,000 for 1996. This individual also served as an executive officer of the Company effective from January 2, 1997 through September 30, 1998. He currently remains a director and employee of the Company. The Company paid approximately $198,000 and $200,000 in 1998 and 1997, respectively, in fees to charter an aircraft in connection with business travel for the Company's personnel. The aircraft is owned by an entity of which the Company's Chairman of the Board is the sole shareholder. F-16 53 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES As described in Note 1 -- Operations and Significant Accounting Policies, on July 16, 1996, the Company converted from an S corporation to a C corporation and adopted the asset and liability method of accounting for income taxes. As a result of such conversion, actual income taxes reflected in the Consolidated Statements of Operations for 1996 are representative of the period from and including July 16, 1996. The components of the income tax (benefit) provision for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 ------- ------- ------ Current: Federal............................................... $ -- $(3,805) $2,438 State................................................. -- -- 417 ------- ------- ------ -- (3,805) 2,855 ------- ------- ------ Deferred: Federal............................................... (5,068) (3,632) 147 State................................................. (870) (1,273) 25 ------- ------- ------ (5,938) (4,905) 172 ------- ------- ------ $(5,938) $(8,710) $3,027 ======= ======= ======
A reconciliation of the difference between the actual income tax provision and income taxes computed at the U.S. Federal statutory tax rate for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 ------- ------- ------ U.S. Federal statutory tax rate applied to pre-tax income................................................... $(5,644) $(7,622) $3,807 State income taxes, net of Federal benefit................. (577) (790) 287 Nondeductible expenses and other, net...................... 283 (298) 99 Deferred income taxes recorded due to change in tax status................................................... -- -- 90 Income not subject to taxation at the corporate level due to S corporation election................................ -- -- (1,256) ------- ------- ------ Income tax (benefit) provision........................ $(5,938) $(8,710) $3,027 ======= ======= ======
The significant components of the net deferred tax asset (liability) as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------- ------ Deferred tax assets: Allowances and reserves................................... $ 9,898 $2,811 Net operating loss and tax credit carryforwards........... 10,043 6,530 Other..................................................... 174 85 ------- ------ 20,115 9,426 Deferred tax liability: Property and equipment.................................... 7,693 3,041 ------- ------ Net deferred tax asset................................. $12,422 $6,385 ======= ======
The net deferred tax asset in the amount of $12.4 million as of December 31, 1998 is based upon expected utilization of net operating loss ("NOL") carryforwards and reversal of certain temporary F-17 54 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) differences. Although realization is not assured, the Company believes it is more likely than not that all of the net deferred tax asset will be realized in the future. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company will continue to review the assumptions used on a quarterly basis and make adjustments as appropriate. The Company has a Federal NOL carryforward of approximately $23.5 million and a state NOL carryforward of approximately $34.5 million, both of which will begin to expire in 2012. 10. CAPITAL STOCK On May 1, 1996, the Company's shareholders approved an increase in the number of authorized shares of common stock from 100 shares to 100 million shares and a reduction in the par value per share of common stock from $1.00 to $0.01. The Company also authorized 25 million shares, par value $0.01, of preferred stock, the terms of which have not yet been determined. The Company has no present plans to issue any preferred stock. On May 31, 1996, the Company declared a share dividend of an aggregate of 12,734,900 shares of common stock, $0.01 par value, immediately payable to its shareholders of record in order to effect the equivalent of a 127,350-for-1 stock split to increase the number of shares of common stock outstanding from 100 shares to 12,735,000 shares. On June 20, 1996, the Company declared a share dividend of an aggregate total of 3,665,000 shares of common stock, $0.01 par value, immediately payable to its shareholders of record in order to effect the equivalent of a 1.287789556-for-1 stock split to increase the number of shares of common stock outstanding from 12,735,000 shares to 16,400,000 shares. Shareholders' equity has been restated to give retroactive recognition to the stock splits in prior years by reclassifying from retained earnings to common stock the par value of the additional shares arising from the splits. All applicable share and per share data have been adjusted for the stock splits. Prior to the consummation of the Initial Public Offering, the Company's Board of Directors declared the Dividend payable in cash to the then current shareholders of the Company of approximately $5,243,000. The Dividend was equal to the Company's then estimate of its cumulative taxable income prior to the conversion to a C corporation to the extent such taxable income had not previously been distributed. During the second quarter of 1997, the Company's final tax return as an S corporation was completed and filed. As a result, an additional $174,000 was paid to the Company's existing shareholders prior to the Initial Public Offering as a final distribution of the Company's accumulated taxable income prior to conversion to C corporation status. 11. STOCK-BASED COMPENSATION PLANS On May 31, 1996, the Company adopted the 1996 Incentive Stock Plan (the "Employee Stock Plan") and the 1996 Non-employee Director Stock Option Plan (the "Director Stock Plan"; together with the Employee Stock Plan, the "Stock Plans"). Officers, key employees and certain non-employee consultants may be granted stock options, stock appreciation rights, stock awards, performance shares and performance units under the Employee Stock Plan. Participation in the Director Stock Plan is limited to members of the Company's Board of Directors who are not salaried officers or employees of the Company. The Company originally reserved 1,931,684 shares of common stock for issuance under the Employee Stock Plan and 96,584 shares of common stock for issuance under the Director Stock Plan, after giving effect to the previously described stock splits by way of share dividends, and subject in each case to further anti-dilution adjustments. At the Company's annual meeting of shareholders on May 15, 1997, the total number of shares reserved for issuance under the Employee Stock Plan was increased to 3,000,000, and at the Company's annual meeting of shareholders on June 12, 1998, the total number of shares reserved under the Employee Stock Plan was increased to 4,000,000. F-18 55 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Prior to the establishment of a compensation committee (the "Committee") of the Board of Directors, the Employee Stock Plan was administered by the Board of Directors of the Company. The Board of Directors or the Committee are authorized to determine, among other things, the key employees to whom, and the times at which, options and other benefits are to be granted, the number of shares subject to each option, the applicable vesting schedule and the exercise price. The Board of Directors or the Committee also determines the treatment to be afforded to a participant in the Employee Stock Plan in the event of termination of employment for any reason, including death, disability or retirement. Under the Employee Stock Plan, the maximum term of an incentive stock option is 10 years and the maximum term of a non-qualified stock option is 15 years. Incentive stock options under the Employee Stock Plan are required to be granted at an exercise price equal to that of 100% of the fair market value at the date of grant. Non-qualified options under the Employee Stock Plan are required to be granted at an exercise price not less than 85% of the fair market value at the date of grant, except for options covering up to 50,000 shares which may be granted at an exercise price equal to or in excess of par value (or $0.01 per share) (the "$0.01 Options"). With the exception of the $0.01 Options covering 21,000 shares, non-qualified options granted under the Employee Stock Plan through December 31, 1998 have been granted at 100% of the fair market value at the date of grant. The Director Stock Plan provides for annual grants of non-qualified stock options to each non-employee director of the Company. The options allow such directors to annually purchase up to 2,500 shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant. These options will have a term of ten years and vest in equal installments over three years. Stock options to purchase 7,500, 7,500 and 5,000 shares at exercise prices ranging between $6.32 and $43.00 per share were granted under the Director Stock Plan during 1998, 1997 and 1996, respectively. On July 16, 1996, an executive officer of the Company was granted a non-qualified stock option to purchase 21,000 shares of common stock at an exercise price of $0.01 per share under the Employee Stock Plan. In accordance with APB 25, the difference between the fair market value of the common stock and the exercise price, which amounted to $304,290, was recorded as unearned compensation (a separate component of shareholders' equity) and is being recognized over the related three-year vesting period. Amortization of the unearned compensation recorded in the accompanying Consolidated Financial Statements in accordance with APB 25 resulted in compensation expense of $41,000, $111,000 and $152,000 for 1998, 1997 and 1996, respectively. During 1996, two then non-employee consultants were granted options under the Employee Stock Plan to purchase an aggregate total of 85,000 shares of common stock at various exercise prices equal to 100% of the fair market values at the dates of grant. Pursuant to the application of SFAS No. 123 in accounting for these non-employee stock options, the Company recorded $387,000 in unearned compensation, which is being amortized ratably over the related vesting periods. Amortization of the unearned compensation recorded in the accompanying Consolidated Financial Statements in accordance with SFAS No. 123 resulted in compensation expense of $67,000, $233,000 and $87,000 for 1998, 1997 and 1996, respectively. In late November 1997, the Company offered each employee, who had previously been granted options to purchase the Company's stock, the opportunity to change the option price, date of grant and vesting period effective December 5, 1997 (the "Repricing"). Under the terms of the Repricing, all previously granted stock options would be cancelled, including any vested options, and the employee would be granted the same number of options at the fair market value of the Company's common stock on December 5, 1997, which was $7.875 per share. The new grants would generally vest on a straight-line basis on each of the first five anniversaries from the new date of grant. At the time of the offer, the Company had approximately 170 employees who had been granted options to purchase the Company's common stock since the Company's Initial Public Offering with option prices ranging from $14.50 to $43.00. The Repricing plan was accepted by approximately 125 eligible Company employees with respect to 925,000 outstanding stock options. F-19 56 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additionally, during the fourth quarter of 1997, three executive officers of the Company had certain of their existing stock options repriced. Options covering a total of 646,000 shares of common stock were repriced, with 310,000 shares having a new exercise price of $7.41 per share and 336,000 shares having a new exercise price of $6.88 per share. As part of the repricing, certain of these stock options provided for a new vesting schedule. Options covering 254,000 shares now vest 50% on the original date of grant of the options with an additional 25% vesting on each of the first two anniversaries from the original date of grant, and options covering 336,000 shares now vest 50% six months from the repricing date of grant with an additional approximately 16-2/3% vesting on each of the first three anniversaries from the repricing date of grant. During the second quarter of 1998, the Company repriced options to purchase 100,000 shares of common stock previously issued to an employee. The exercise price of the options was reduced from $17.625 per share to $8.00 per share, the fair market value of the Company's common stock on the date of repricing. The repriced options were fully vested on the date of repricing and are exercisable through May 4, 2007. The fair value of each option grant under the Company's Stock Plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996 --------- ----------- ----------- Expected volatility.......................... 73.0% 78.3% 15.0% 5.92%- Risk-free interest rate...................... 4.1%-5.9% 5.92%-6.81% 6.74% Dividend yield............................... 0.0% 0.0% 0.0% 1-10 Expected life................................ years 7 years 3-8 years
A summary of the status of the Company's Stock Plans as of December 31, 1998, 1997 and 1996 and changes during the years then ended is presented below:
WEIGHTED- AVERAGE EXERCISE NUMBER OF PRICE OPTIONS PER OPTION ---------- ---------------- Outstanding at January 1, 1996.............................. -- $ -- Granted: Pursuant to the Initial Public Offering(1)............. 272,000 13.38(2) Subsequent to the Initial Public Offering.............. 651,000 31.83 Exercised................................................. -- -- Forfeited................................................. (18,250) 14.50 ---------- Outstanding at December 31, 1996............................ 904,750 26.63 Granted................................................... 3,667,750(3) 12.40 Exercised................................................. (42,000) 7.02 Forfeited................................................. (1,865,117)(3) 25.34 ---------- Outstanding at December 31, 1997............................ 2,665,383 8.26 Granted................................................... 1,663,750(4) 6.60 Exercised................................................. (7,000) 0.01 Forfeited................................................. (481,483)(4) 10.06 ---------- Outstanding at December 31, 1998............................ 3,840,650 7.39 ==========
- ------------------------- (1) No stock options were initially granted upon adoption of the Company's Stock Plans but rather initially as a result of the Initial Public Offering, with the effective date of such offering (July 16, 1996) representing the grant date for these stock options. F-20 57 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Includes the $0.01 Options covering 21,000 shares, which were granted on July 16, 1996. The remainder of these stock options were granted at an exercise price of $14.50 per share. (3) Includes 925,000 shares cancelled and then subsequently re-granted as part of the Repricing and 646,000 shares cancelled and then subsequently re-granted in the fourth quarter of 1997 as part of a repricing of three executive officers' stock options at exercise prices ranging between $6.88 and $7.41 per share. (4) Includes 100,000 shares cancelled and, then, subsequently re-granted in the second quarter of 1998 as part of a repricing of an employee's stock options at an exercise price of $8.00 per share. The number of options exercisable at December 31, 1998, 1997 and 1996, was 1,243,759, 225,464 and 5,000, respectively. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $4.30, $9.53 and $10.49, respectively. The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- ----------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE - ------------------------ ----------------- ------------ --------- ----------------- --------- $0.01(1)............... 7,000 4.54 $ 0.01 -- $ -- $4.69 to $6.875........ 1,216,000 7.13 6.19 502,114 6.72 $6.94.................. 730,250 6.01 6.94 -- -- $7.41.................. 445,000 5.40 7.41 341,248 7.41 $7.88(2)............... 1,040,750 5.95 7.88 240,116 7.88 $8.00 to $16.00........ 364,150 6.19 8.28 129,450 8.26 $21.125 to $43.00...... 37,500 3.25 34.05 30,831 34.98 --------- --------- $0.01 to $43.00........ 3,840,650 6.27 7.39 1,243,759 7.99 ========= =========
- ------------------------- (1) As noted herein, the Employee Stock Plan provides for options covering up to 50,000 shares which may be granted at an exercise price equal to or in excess of par value (or $0.01 per share). (2) Represents the exercise price under the Repricing plan. Had compensation cost for the Company's Stock Plans been determined based on the fair value at the grant dates for awards under the Stock Plans consistent with the method prescribed by SFAS No. 123, the Company's net (loss) income and net (loss) income per share (diluted) in 1998, 1997 and 1996 would have been reduced to the proforma amounts indicated below (in thousands, except per share data):
1998 1997 1996(1) -------- -------- ------- Net (loss) income: As reported........................................ $(10,189) $(13,066) $6,519 Proforma........................................... (14,733) (18,474) 5,913 Diluted net (loss) income per common share: As reported........................................ $ (0.47) $ (0.61) $ 0.36 Proforma........................................... (0.68) (0.86) 0.33
- ------------------------- (1) In 1996, net income and diluted net income per common share are computed on a proforma basis and include a provision for Federal and state income taxes as if the Company were a C corporation for the entire year pursuant to its change in income tax status from an S corporation to a C corporation. For further details, see Note 1 -- Operations and Significant Accounting Policies. F-21 58 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effects of applying SFAS No. 123 in this proforma disclosure are not indicative of future amounts. The Company anticipates that additional awards will be granted in future years. 12. EARNINGS PER SHARE The following reconciles the numerators and denominators of the basic and diluted earnings per share ("EPS") computations (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1998 1997 1996 -------------------------- -------------------------- ----------------------- PRO FORMA NET PER NET PER NET PER LOSS SHARES SHARE LOSS SHARES SHARE INCOME SHARES SHARE -------- ------ ------ -------- ------ ------ ------ ------ ----- BASIC EPS: (Loss) income available to common shareholders......... $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61) $6,519 18,083 $0.36 EFFECT OF DILUTIVE SECURITIES: Stock options(1).............. -- -- -- -- -- -- -- 88 -- -------- ------ ------ -------- ------ ------ ------ ------ ----- DILUTED EPS: (Loss) income available to common shareholders and assumed exercises........... $(10,189) 21,548 $(0.47) $(13,066) 21,393 $(0.61) $6,519 18,171 $0.36 ======== ====== ====== ======== ====== ====== ====== ====== =====
- ------------------------- (1) The effect of 71,679 and 178,684 shares of potential common stock were anti-dilutive in 1998 and 1997, respectively. 13. RETIREMENT PLANS The Company has adopted a profit sharing plan (the "Profit Sharing Plan") which covers substantially all employees who have been employed with the Company for at least two years and are at least 21 years of age. Under the terms of the Profit Sharing Plan, the Company makes elective contributions to the Profit Sharing Plan, the allocation of which to employees is based on relative salary. Effective January 1, 1997, the Company amended the Profit Sharing Plan to include certain 401(k) savings plan features (as amended, the "Profit Sharing/401(k) Plan"). Under the provisions of the Profit Sharing/401(k) Plan, employees meeting certain eligibility requirements may contribute a maximum of 15% of pre-tax gross wages, subject to certain restrictions imposed pursuant to the Internal Revenue Code. Company contributions are at the discretion of its Board of Directors. Vesting occurs over a six-year period at the rate of 20% per year, beginning after the second year of service. The Company accrued a contribution of $85,000 to the Profit Sharing/401(k) Plan during 1998. The Company did not contribute to the Profit Sharing/401(k) Plan or the Profit Sharing Plan during 1997 or 1996. 14. CONTINGENCIES On or about August 26, 1998 a lawsuit, captioned Henry E. Freeman and Freeman Industrial Enterprises Corporation v. Precision Response Corporation; Mark Gordon; David L. Epstein; and Richard Mondre (Case No. 398-CV-1895-DJS (D. Conn)), was filed in the Superior Court of the Judicial District of Stamford/Norwalk in the state of Connecticut. The lawsuit has since been removed by the Company to the United States District Court for the District of Connecticut. This lawsuit alleges that the Company breached its contracts with the plaintiffs by allegedly failing to pay all commissions relating to certain clients whom the plaintiffs allegedly claim they procured for the Company. The complaint also contains claims of breach of fiduciary duty, breach of covenant of good faith and fair dealing, civil conspiracy, fraud/fraud in the F-22 59 PRECISION RESPONSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) inducement, intentional infliction of emotional distress and violations of the Connecticut Unfair Trade Practices Act. The plaintiffs seek actual, compensatory and punitive damages, declaratory judgement that certain contracts are invalid due to undue influence exercised upon plaintiffs or, in the alternative, recission of such contracts, an accounting and interest, costs and attorneys' fees. On November 16, 1998, the Company filed a motion (i) to dismiss for lack of personal jurisdiction as to Richard Mondre and (ii) to dismiss for improper venue or, in the alternative, to transfer to the U.S. District Court for the Southern District of Florida. On that same day, the Company filed a motion to dismiss the complaint for failure to state a cause of action. Both motions are currently pending before the Court. On January 6, 1999, the plaintiffs voluntarily dismissed with prejudice this lawsuit against Richard Mondre, which dismissal has been approved by the Court. On or about February 12, 1999, the plaintiffs filed an Amended Complaint, asserting the same causes of actions as in the original complaint, as well as a claim for negligent misrepresentation. The case is currently in the discovery stage. The Company believes that the plaintiffs' allegations are totally without merit and intends to defend the lawsuit vigorously. A provision for legal defense costs has been reflected in the accompanying Consolidated Financial Statements under Other accrued expenses and Selling, general and administrative expenses which management believes is adequate based on available information. No other provisions have been reflected since management is unable, at this time, to predict the ultimate outcome of this matter. 15. UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL 1998 ----------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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
FISCAL 1997 ----------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues............................................... $38,015 $35,963 $32,002 $37,604 Gross profit (loss).................................... 10,518 6,669 (5,835) 4,055 Operating income (loss)................................ 5,315 599 (28,440)(1) 468 Net income (loss)...................................... 3,291 475 (17,067) 235 Basic earnings (loss) per common share................. 0.16 0.02 (0.79) 0.01 Diluted earnings (loss) per common share............... 0.16 0.02 (0.79) 0.01
- ------------------------- (1) Includes non-recurring special charges of $22.1 million before taxes in 1998 and $26.2 million before taxes in 1997 as part of the Company's restructuring and cost reduction initiatives (see Note 3 -- Restructuring and Other Non-Recurring Special Charges). F-23 60 PRECISION RESPONSE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
ADDITIONS CHARGED TO BEGINNING COSTS AND ENDING DESCRIPTION BALANCE EXPENSES(1) DEDUCTIONS(2) BALANCE ----------- --------- ----------- ------------- ------- Year ended December 31, 1998: Allowance for doubtful accounts and sales allowances.................................... $2,864 $14,534 $9,173 $8,225 Year ended December 31, 1997: Allowance for doubtful accounts and sales allowances.................................... 2,650 5,895 5,681 2,864 Year ended December 31, 1996: Allowance for doubtful accounts and sales allowances.................................... 60 5,215 2,625 2,650
- ------------------------- (1) Amounts charged to bad debt expense and sales credits were $4,314 and $10,220 in 1998, respectively, $448 and $5,447 in 1997, respectively, and $2,105 and $3,110 in 1996, respectively. (2) Deductions represent customer accounts written-off and sales credits. S-1 61 PRECISION RESPONSE CORPORATION INDEX TO EXHIBITS FILED HEREWITH
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.37 -- Confirmation letter dated December 1, 1998 from NationsBank, N.A. to the Company regarding definition of "fixed charge coverage ratio" 10.40 -- Employment Agreement effective as of October 20, 1998 between the Company and Wesley T. O'Brien 10.41 -- Letter agreement effective as of October 1, 1998 from the Company to and accepted by Bernard J. Kosar, Jr. 23.1 -- Consent of PricewaterhouseCoopers LLP 27.1 -- Financial Data Schedule
EX-10.37 2 CONFIRMATION LETTER W/NATIONSBANK 12/1/98 1 EXHIBIT 10.37 NationsBank Commercial Banking 100 Southeast 2nd Street, 15th Floor Miami, FL 33131 Fax 305 533-2681 NATIONSBANK December 1, 1998 Precision Response Corporation 1505 N.W. 167th Street Miami, Florida 33165 Attention: Mr. Joseph E. Gillis Vice President and Treasurer RE: (1) SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT DATED AS OF SEPTEMBER 30, 1998 (2) SECOND AMENDMENT TO MORTGAGE LOAN AGREEMENT DATED AS OF SEPTEMBER 30, 1998 Dear Mr. Gillis: Pursuant to our telephone conversations, this letter will confirm that the definition of "Fixed Charge Coverage Ratio" which appears in the Second Amendment to Revolving Credit Agreement and in the Second Amendment to Mortgage Loan Agreement inadvertently omitted reference to the Harland Debt. The correct definition is as follows (previously omitted words are underlined): 6.03 FIXED CHARGE COVERAGE RATIO. Permit the ratio of (a) the sum of EBITDA for any Four-Quarter Period plus Rents Expense for such Four-Quarter Period to (b) the sum of interest expense for such Four-Quarter Period plus Rents Expense for such Four-Quarter Period plus income tax expense for such Four-Quarter Period plus 20% of Funded Debt (BUT EXCLUDING THE HARLAND DEBT) outstanding as of the last day of the applicable Four-Quarter Period PLUS THE CURRENT MATURITIES OF THE HARLAND DEBT to be less than 1.80 to 1.00 as of the last day of each Four-Quarter Period. Very truly yours, NATIONSBANK, N.A. /s/ Charles E. Porter ----------------------------- Charles E. Porter Senior Vice President EX-10.40 3 EMPLOYMENT AGREEMENT 10/20/98 W/WESLEY O'BRIEN 1 EXHIBIT 10.40 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated effective as of October 20, 1998, by and between PRECISION RESPONSE CORPORATION, a corporation organized and existing under the laws of the State of Florida (hereinafter referred to as "Employer"), and WESLEY T. O'BRIEN (hereinafter referred to as "Employee"). W I T N E S S E T H: WHEREAS, Employer is a Florida corporation engaged in the teleservicing, database management and marketing and fulfillment business; WHEREAS, Employer desires to employ Employee upon the terms and conditions set forth below and Employee desires to accept such employment upon such terms and conditions; and WHEREAS, Employer and Employee desire to set forth in writing the terms and conditions of their agreements and understandings with respect to Employee's employment by Employer. NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT Employer hereby employs Employee, and Employee hereby accepts employment by Employer, upon the terms and conditions set forth in this Employment Agreement. 2. TERM Subject to the provisions for earlier termination set forth in Section 9 hereof, this Employment Agreement shall commence as of the date hereof and shall continue until 5:00, p.m., December 31, 2001 (the "Initial Employment Term"), with the Initial Employment Term to be automatically renewed and extended for consecutive additional one year periods unless, at least sixty (60) days prior to the expiration of the Initial Employment Term or any one year renewal period thereof, either party hereto delivers to the other party hereto written notice of such party's termination of this Employment Agreement at the expiration of the Initial Employment Term or any one year renewal period thereof (as the case may be). The Initial Employment Term together with any or all one year renewal periods thereof are hereinafter collectively referred to as the "Employment Term". 2 3. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES Employee represents and warrants to Employer that Employee is free to accept employment with Employer as contemplated herein and has no other written or oral obligations or commitments of any kind or nature which would in any way interfere with Employee's acceptance of employment pursuant to the terms hereof or the full performance of Employee's obligations hereunder or the exercise of Employee's best efforts in Employee's employment hereunder or which would otherwise pose any conflict of interest. 4. DUTIES AND EXTENT OF SERVICES A. DUTIES. Employee's duties and responsibilities hereunder shall be those reasonably assigned to Employee from time to time by Employer, consistent with the following: Employee shall, subject to his initial election by the Employer's Board of Directors, serve as Employer's President and Chief Operating Officer, and shall, subject to the direction from time to time of Employer's Chairman of the Board or Chief Executive Officer, have responsibility to oversee and supervise all activities relating to Employer's day-to-day operations including those related to teleservices, database management services and marketing and fulfillment services. Employee shall report directly to Employer's Chief Executive Officer. Employee agrees to devote Employee's full and exclusive business time, skill, attention and energy to perform the duties and responsibilities properly assigned to Employee hereunder or pursuant hereto to the best of his abilities. However, Employee may devote a reasonable amount of his time to civic, community or charitable activities and, with the prior written approval of the Chairman of the Board or Chief Executive Officer of Employer, to serve as a director of other corporations and undertake other activities not expressly mentioned in this paragraph. Employee may invest his personal assets as he deems appropriate so long as such investments (i) are passive investments, (ii) are not invested in any business which is a direct or indirect competitor of Employer (subject to the proviso in clause (ii)(B) of Section 11 hereof) and (iii) do not interfere with Employee's performance of the duties and responsibilities assigned to him pursuant to this Employment Agreement. B. RULES AND REGULATIONS. Employee agrees to abide by the rules and regulations of Employer promulgated by Employer from time to time with respect and applicable to Employer's senior executives generally, provided that copies of such rules and regulations are provided to Employee. Such rules and regulations are all hereby incorporated by reference and made a part of this Employment Agreement. 2 3 C. PLACE OF SERVICE. Employee shall render his services initially in northern Miami-Dade County, Florida, and shall not be obligated to maintain his office in any place other than northern Miami-Dade County (i.e., not any further south in Miami-Dade County than the location of Employer's executive offices as of the date of this Employment Agreement), Broward County or Palm Beach County, Florida; provided, however, that Employee shall be obligated to travel as necessary to fulfill his duties and responsibilities, and Employee understands that such travel may, during certain periods, be extensive. 5. COMPENSATION A. BASE COMPENSATION. Subject to the provisions of Section 9 of this Employment Agreement, Employer shall pay salary to Employee ("Salary") at a rate of $350,000 per annum through the expiration of the Employment Term unless otherwise mutually agreed in writing by the parties hereto. Employer may decide, in its sole discretion, to increase (but not to decrease) the Salary at any time during the Employment Term. Salary shall be payable in accordance with Employer's normal payroll practices for its employees and shall be subject to payroll deductions and tax withholdings in accordance with Employer's usual practices and as required by law. B. BONUS COMPENSATION. Employee shall receive an annual bonus in an amount not to exceed seventy-five percent (75%) of the Salary paid to Employee with respect to the year to which the bonus relates, the actual amount of which shall be determined by the Compensation Committee of the Board of Directors of Employer in its sole and absolute discretion (the "Bonus Amount"). Subject to the provisions regarding payment upon termination or expiration of employment set forth in Section 9 hereof, each annual Bonus Amount shall be paid on or before March 31 of each year of the Employment Term. The Bonus Amount payable on or before each March 31 shall be based upon the operating results of Employer and Employee's performance during the calendar year (or the portion thereof in which Employee was employed hereunder) immediately preceding such March 31. Each Bonus Amount shall be subject to payroll deductions and tax withholdings in accordance with Employer's usual payroll practices and as required by law. C. FAIR MARKET VALUE STOCK OPTIONS. Employer acknowledges that as of the date of this Employment Agreement Employer has granted to Employee stock options (the "FMV Stock Options") to acquire 350,000 shares of Employer's common stock, par value $.01 per share, pursuant to the Precision Response Corporation Amended and Restated 1996 Incentive Stock Plan (the "Plan") and a Stock Option Agreement in the form attached as 3 4 Exhibit "A" to this Employment Agreement. Employer represents that there are sufficient shares of Employer's common stock, par value $.01 per share, reserved by Employer for issuance under the Plan to fulfill Employer's obligation to issue such shares upon exercise of all of the FMV Stock Options, and that Employer will use its best efforts to register and thereafter have such shares continue to be registered with the Securities and Exchange Commission on Form S-8 (or such other applicable registration form). 6. FRINGE BENEFITS AND EXPENSES A. EMPLOYEE BENEFITS. Employee shall be entitled to such benefits and fringe benefits (such as health, dental, life and disability insurance) as are made available by Employer from time to time, in Employer's sole discretion, to Employer's senior executives generally. B. EXPENSES. Employer shall reimburse Employee for Employee's reasonable out-of-pocket costs and expenses incurred in connection with the performance of Employee's duties and responsibilities hereunder, subject to Employee's presentation of appropriate documentation and, if requested, justification therefor. C. AUTOMOBILE. Employer shall provide to Employee an automobile allowance of $850.00 per month during the Employment Term in order to defray Employee's automobile expenses incurred in the performance of his duties, but shall not be obligated to provide Employee with an automobile. D. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. Employer will endeavor to maintain Employer's directors' and officers' liability insurance at least at the same level of coverage as in effect as of the date hereof. 7. VACATIONS Employee shall be entitled to four (4) weeks vacation each full year of the Employment Term (prorated for any partial year), with full compensation, which, to the extent unused, may be carried over from year to year up to an aggregate of eight (8) weeks vacation in any full year of the Employment Term, provided that the use of any such carried over vacation in any year does not substantially interfere with Employee's performance of his duties and responsibilities assigned to him pursuant to this Employment Agreement. Employee shall not be entitled to be compensated for any unused vacation days upon termination of employment. The periods during which Employee will be absent from 4 5 work for vacation shall be at the reasonable discretion of Employer. 8. FACILITIES Employer shall provide and maintain (or cause to be provided and maintained) such facilities, equipment, supplies and personnel as are reasonably necessary for Employee's performance of Employee's duties and responsibilities under this Employment Agreement. 9. TERMINATION OF EMPLOYMENT A. TERMINATION EVENTS. Employee's employment under this Employment Agreement may be terminated by Employer only as follows: with or without Cause (as hereinafter defined), effective upon the delivery of written notice to Employee; upon Employee's death; or upon Employee becoming Disabled (as hereinafter defined) and receiving written notice of termination from Employer to that effect within ninety (90) days after being deemed Disabled. Employee may terminate Employee's employment under this Employment Agreement without being in breach hereunder by giving written notification of (i) Employee's resignation to Employer which shall specify a resignation date no earlier than ninety (90) days following the date of delivery of such notice of resignation or (ii) Constructive Termination (as hereinafter defined) of Employee's employment under this Employment Agreement (subject to the provisions of Section 9.B. hereof relating to Constructive Termination). Employee's employment under this Employment Agreement shall be terminated upon expiration of the Employment Term pursuant to Section 2 hereof. B. DEFINITIONS OF CAUSE, DISABLED AND CONSTRUCTIVE TERMINATION. For purposes of this Employment Agreement, "Cause" shall mean: (i) commission of a felony, or commission of acts of fraud, embezzlement, or the like; (ii) habitual drunkenness during business hours or at Employer's premises; (iii) use of illicit drugs during business hours or at Employer's premises; (iv) abandonment of employment duties (other than by reason of death or becoming Disabled); (v) gross negligence in the performance of employment duties; or (vi) material breach by Employee of this Employment Agreement which, if curable, is not cured by Employee within thirty (30) days following Employee's receipt of written notice thereof (such notice shall specify in reasonable detail the nature of the material breach and the curative steps, if curable, required to be taken). Employee shall be deemed "Disabled" for purposes of this Employment Agreement (a) if Employee is unable, due to physical, mental or emotional illness or injury, to perform substantially all of Employee's duties and responsibilities for 5 6 Employer for a continuous period of one hundred and twenty (120) days, or (b) if Employee is adjudicated as an incompetent or has a guardian appointed to handle Employee's affairs. If clause (a) above applies, Employee shall be deemed Disabled on the last day of the 120 day period. If clause (b) above applies, Employee shall be deemed Disabled on the date of adjudication as an incompetent or the appointment of the guardian, whichever occurs first. For purposes of this Employment Agreement, "Constructive Termination" shall mean: (x) Employer has delegated to another or others a material portion of Employee's duties or responsibilities provided for in Section 4.A. hereof (and shall include, without limitation, removal of Employee from the office of President or Chief Operating Officer, even if Employee's day-to-day duties are to remain substantially the same), other than for Cause, and Employer fails to confirm in writing, and implement, the reinstatement of such material portion of Employee's duties and responsibilities and/or offices to Employee within thirty (30) days after receipt by each of the Chairman of the Board and Chief Executive Officer of Employer of Employee's written notice of protest (as provided in the next sentence), (y) Employer attempts, without Employee's prior written consent, to relocate Employee's office outside the location specified in Section 4.C. hereof, or (z) the position of Chairman of the Board or Chief Executive Officer of Employer becomes vacant for any reason and the vacancy is filled by a person other than Mark J. Gordon, David Epstein, Employee or another person not an employee of Employer immediately prior to becoming the Chairman of the Board or Chief Executive Officer of Employer. In the event of Constructive Termination of Employee's employment under this Employment Agreement, Employee may terminate Employee's employment, provided that he has given written notice of protest to each of the Chairman of the Board and Chief Executive Officer of Employer within thirty (30) days of the occurrence of the event causing the Constructive Termination setting forth the manner in which the Constructive Termination has occurred (and such Constructive Termination is not timely corrected, as provided in the case of a Constructive Termination under clause (x) of the preceding sentence). C. EFFECT OF TERMINATION FOR CAUSE OR EMPLOYEE'S RESIGNATION. In the event that Employee's employment under this Employment Agreement is terminated by Employer with Cause, or because Employee resigns from Employee's employment, Employer shall pay to Employee, within thirty (30) days following the date of such termination or resignation, (i) the Salary, if any, accrued and unpaid through the date of such termination or resignation, and (ii) if the Bonus Amount of Employee for the prior year has been declared by Employer, but not yet paid to Employee, the Bonus Amount for such prior year, and shall pay and provide to Employee the amounts and items payable and to be provided under Section 6 6 7 through the date of such termination or resignation; and Employee shall not be entitled to any other compensation, remuneration or other sums provided for in this Employment Agreement or to which Employee might otherwise be entitled hereunder or at law or in equity. D. COMPENSATION UPON DEATH OR DISABILITY. Upon the death of Employee, or termination of employment because Employee is Disabled, Employer shall pay to Employee, Employee's legal guardian or the legal representative of Employee's estate (or heir as designated by the legal representative of Employee's estate at such time), within thirty (30) days following the date of Employee's death or termination, the Salary and Bonus Amount, if any, accrued and unpaid through the date of termination and shall pay and provide to Employee, Employee's legal guardian or the legal representative of Employee's estate the amounts and items payable and to be provided under Section 6 through the date of such termination; and Employee (or such legal guardian, legal representative or any heirs) shall not be entitled to any other compensation, remuneration or other sums provided for in this Employment Agreement or to which Employee might otherwise be entitled hereunder or at law or in equity (except with respect to benefits which become payable under any employee benefit plans of Employer as a result of Employee's death or disability). In the event that death or termination of employment as a result of Employee becoming Disabled occurs during a year and prior to any Bonus Amount of Employee being declared by Employer for such year, the Bonus Amount under this Subsection D. for such partial year of employment shall be prorated through the date of such death or termination based upon the prior year's Bonus Amount. E. COMPENSATION UPON TERMINATION WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION OR EXPIRATION. In the event that Employer (or its successor) terminates Employee's employment under this Employment Agreement without Cause (other than in connection with a Change in Control (as hereinafter defined) as provided in Subsection F. below), Employee terminates his employment as a result of the occurrence of a Constructive Termination to the extent and in the manner permitted hereunder or upon expiration of the Employment Term pursuant to the terms of Section 2, Employee's sole and exclusive compensation and remedy hereunder shall be to receive from Employer, and Employer shall pay to Employee, (i) the amount of Salary and Bonus Amount, if any, accrued and unpaid through the date of termination or expiration, and the amounts and items payable or to be provided under Section 6 through the date of termination or expiration, payable within thirty (30) days following the date of termination or expiration of employment, and (ii) (A) in the case of termination without Cause or Constructive Termination, an amount in cash equal to the sum of (1) the Salary 7 8 that Employee would have received during the greater of (x) the one year period following the date of such termination of Employee's employment and (y) the remainder of the Initial Term (if such termination occurs during the Initial Term) and (2) $175,000 or (B) in the case of expiration of the Employment Term pursuant to Section 2 hereof as a result of Employer delivering to Employee a written notice of termination of this Employment Agreement and provided that Employer has not elected, as provided under Section 11, to waive Employee's obligation to comply with his covenants under Subsection (ii) of Section 11, an amount in cash equal to the Salary for one (1) full year. Such cash amount payable under clauses (A) or (B) above shall be payable one-half (1/2) within thirty (30) days following the date of termination of employment or expiration and the balance (the other one-half (1/2)) payable in equal consecutive monthly installments over the period that Employee was entitled to be paid the Salary under clauses (A) or (B) above (as the case may be), with the first such installment payable sixty (60) days following the date of termination of employment or expiration and each subsequent installment payable on the same day of each successive month until payment is made in full. In the event that termination of employment without Cause, as a result of Constructive Termination or upon expiration of this Employment Agreement occurs during a year and prior to any Bonus Amount of Employee being declared by Employer for such year, the Bonus Amount under this Subsection E. for such partial year of employment shall be prorated through the date of such termination based upon the prior year's Bonus Amount. F. COMPENSATION UPON A CHANGE IN CONTROL. Notwithstanding the provisions of Subsection E. above, in the event that (i) Employer (or its successor) terminates Employee's employment under this Employment Agreement without Cause within one hundred eighty (180) days after a Change in Control (as hereinafter defined), (ii) Employee terminates his employment to the extent and in the manner permitted under this Employment Agreement as a result of the occurrence of a Constructive Termination within one hundred eighty (180) days after a Change in Control or (iii) Employer (or its successor)(but not Employee) delivers to Employee a written notice of termination pursuant to Section 2 terminating this Employment Agreement at the expiration of the Employment Term and such expiration occurs within one hundred eighty (180) days after a Change in Control, and subject to and limited by the provisions of Subsection G. below, Employee's sole and exclusive compensation and remedy hereunder shall be to receive from Employer (or its successor), and Employer (or its successor) shall pay to Employee within thirty (30) days following the date of termination of employment or expiration, (a) the amount of Salary and Bonus Amount, if any, accrued and unpaid through the date of termination of employment or expiration, and the amounts and items payable or 8 9 to be provided under Section 6 through the date of termination of employment or expiration, and (b) a lump sum severance payment in cash equal to 2.99 times an amount equal to the average of the sum of the annual Salary and Bonus Amount paid to Employee each year during the Employment Term. For purposes of this Subsection F., (1) a "Change in Control" means that (x) neither Mark Gordon (for these purposes, counting all common stock directly or indirectly beneficially owned by Mark Gordon's Affiliates) nor David Epstein (for these purposes, counting all common stock directly or indirectly beneficially owned by David Epstein's Affiliates) beneficially owns at least 10% of the issued and outstanding common stock of Employer (or its successor); (y) neither Mark Gordon (for these purposes, counting all common stock directly or indirectly beneficially owned by Mark Gordon's Affiliates) nor David Epstein (for these purposes, counting all common stock directly or indirectly beneficially owned by David Epstein's Affiliates) is the stockholder of Employer (or its successor) beneficially owning the highest number of issued and outstanding shares of common stock of Employer (or its successor); provided, however, that no Change in Control shall be deemed to have occurred under this clause (y) if, but only for so long as, the person(s) owning the highest number of issued and outstanding shares of common stock of Employer (or its successor) have otherwise agreed not to exercise the material rights and powers concomitant with such ownership or (z) neither Mark Gordon nor David Epstein occupies the position of Chairman of the Board, Chief Executive Officer or President of Employer (or its successor); (2) "Affiliate" means, with respect to Mark Gordon or David Epstein, an immediate family member of his, a trust principally for his benefit and/or the benefit of his family members and/or lineal descendants, or a family limited partnership or any other entity the direct or indirect beneficial or pecuniary owners of which are principally him, his immediate family members and/or trusts or other entities principally for the benefit of him, his family members and/or lineal descendants; and (3) "Immediate family members" mean, with respect to Mark Gordon or David Epstein, his spouse, children, parents, siblings or other lineal descendants. For purposes of clause (a) of this Subsection F., but subject to and limited by the provisions of Subsection G. below, any Bonus Amount for a partial year of employment shall be prorated through the date of such termination or expiration(based upon the prior year's Bonus Amount, if any) and for purposes of clause (a) or clause (b) of this Subsection F., if Employee has not previously earned a Bonus Amount under this Employment Agreement, the Bonus Amount shall be deemed to be $262,500. Nothing in this Subsection F. shall be deemed to limit Employee's rights as provided under Subsection E. with respect to a termination without Cause or Constructive Termination or expiration of this Employment Agreement occurring after the 180-day period referred to above in this Subsection F. 9 10 G. LIMITATIONS ON SEVERANCE PAYMENTS. Notwithstanding anything to the contrary contained in this Employment Agreement, if any payments under Subsection F. above are to be made as a result of a Change in Control, and such Change in Control constitutes a change in the ownership or effective control of Employer (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations issued thereunder), the amount so payable shall be reduced to the extent necessary so that in all events the aggregate amount of the present value of all such payments under Subsection F. above and the value of any other compensation, consideration or benefit received by Employee that would be deemed to be a "parachute payment" as defined under Section 280G(b)(2)(A)(i) (without regard to Section 280G(b)(2)(A)(ii)) including, without limitation, the acceleration of the exercise of any stock options in respect of such Change in Control (determined in accordance with Code Section 280G(d)(4)), computed on the date of such Change in Control, (a) shall not exceed 2.99 times Employee's average annual compensation which is includible in Employee's gross income (for federal income tax purposes) during the most recent five taxable years (or such shorter period in which Employee has been employed by Employer (or its successor)) ending before that date on which such Change in Control occurs, and (b) shall in no event result in an "excess parachute payment" as defined under Section 280G. H. KEY-MAN INSURANCE. In the event that Employer has obtained or obtains a key-man insurance policy (the "Policy") on the life of Employee, Employer shall be the sole owner thereof and all proceeds payable in respect thereof shall be the property solely of Employer. In the event that Employee's employment terminates for any reason other than Employee's death, Employee may request that the Policy be assigned to Employee by giving written notice to Employer to that effect. Subject to obtaining any requisite consent from the insurer, Employer shall, if Employee has so requested, assign the Policy to Employee subject to Employee's reimbursement to Employer of any premiums paid by Employer which relate to any period following the date of termination of Employee's employment, and the cash value, if any, of the Policy. In the event that Employer desires to obtain any such Policy, Employee shall fully cooperate in Employer's efforts, including submitting to medical exams and tests and executing and delivering applications and information statements. 10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION A. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee has been informed by Employer of Employer's policy to maintain as secret and confidential all information and materials relating to (i) the financial condition, operations, business and 10 11 interests of Employer, (ii) the systems, know-how, records, products, services, cost information, inventions, computer software programs, marketing and sales techniques and/or programs, methods, methodologies, manuals, lists and other trade secrets from time to time acquired, sold, developed, maintained and/or used by Employer, and (iii) the nature and terms of Employer's relationships with its clients, suppliers, lenders, underwriters, vendors, consultants, independent contractors, attorneys, accountants and employees (all such information and materials being hereinafter collectively referred to as "Confidential Information"). Employee further acknowledges that such Confidential Information is of great value to Employer and has been developed by Employer as a result of substantial effort and expense. Therefore, Employee understands that it is reasonably necessary to protect Employer's good will, trade secrets and business interests that Employee agree and, accordingly, Employee does hereby agree, that Employee will not directly or indirectly (except where authorized by the Board of Directors, Chairman of the Board or Chief Executive Officer of Employer for the benefit of Employer and/or as required in the course of employment) at any time hereafter divulge or disclose for any purpose to any persons, firms, corporations or other entities (hereinafter referred to collectively as "Third Parties"), or use or cause or authorize any Third Parties to use, any such Confidential Information, except as otherwise required by law. B. EMPLOYER'S MATERIALS. In accordance with the foregoing, Employee furthermore agrees that (i) Employee will at no time retain or remove from the premises of Employer any products, prototypes, drawings, notebooks, software programs or discs, tapes or similar containers of software, manuals, data, books, records, materials or documents of any kind or description of Employer or related to its business for any purpose unconnected with the performance of Employee's duties with Employer and (ii) upon the cessation or termination of Employee's employment with Employer for any reason, Employee shall forthwith deliver or cause to be delivered up to Employer any and all drawings, notebooks, software programs or discs, tapes or similar containers of software, manuals, data, books, records, materials and other documents and materials in Employee's possession or under Employee's control relating to any Confidential Information or any other material or thing which is the property of Employer. 11. COVENANT-NOT-TO-COMPETE In view of (a) the Confidential Information to be obtained by or disclosed to Employee, and (b) the consideration payable to Employee under this Employment Agreement, and as a material inducement to Employer to enter into this Employment Agreement, Employee covenants and agrees that, (i) for as long as 11 12 Employee is employed by Employer and for a period of 24 months after the date Employee ceases for any reason to be employed by Employer, Employee shall not, directly or indirectly, (A) sell any products or services sold or offered by Employer to any person or entity who is or was a client of Employer at any time prior to the date hereof and for or to whom Employer is performing services or selling products or for or to whom Employer has performed services or sold products at any time during the one-year period ending on Employee's termination of employment or (B) solicit the services of, or hire, directly or indirectly, whether on Employee's own behalf or on behalf of others, any managerial or executive employee, account manager, programmer, information services employee (including, without limitation, network or other information services operation employee) or database management or marketing employee of Employer who was or is employed by Employer at any time during the two-year period ending on the date of termination of Employee's employment, and (ii) for as long as Employee is employed by Employer and thereafter for the Severance Period (as hereinafter defined), Employee shall not, directly or indirectly, (A) sell any products or services sold or offered by Employer to any person or entity who becomes a client of Employer at any time on or after the date hereof and for or to whom Employer is performing services or selling products or for or to whom Employer has performed services or sold products at any time during the one-year period ending on Employee's termination of employment or (B) engage in any venture, enterprise, activity or business, passively or actively, as an owner, consultant, adviser, participant, employee, agent or in any other capacity, competitive with the business of Employer anywhere within the continental United States; provided, however, that nothing in this Section 11 shall prohibit Employee from owning as a passive investor beneficially and/or of record less than 5% of the outstanding equity securities of any entity whose equity securities are registered under the Securities Exchange Act of 1934, as amended, or are listed for trading on any United States or foreign stock exchange. Employee acknowledges that the business of Employer is national in scope, that one can effectively compete with such business from anywhere in the continental United States, and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect Employer's trade secrets and other legitimate business interests. For purposes of this Section 11, the "Severance Period" shall mean: (x) in the case of either termination of Employee's employment as a result of Employee becoming Disabled or a termination of Employee's employment with Cause or as a result of the resignation of employment by Employee, a period of 12 months after the termination date of Employee's employment with Employer; (y) in the case of termination of Employee's employment without Cause or as a result of the occurrence of a Constructive Termination, the greater of (1) a 12 13 period of 12 months after the termination date of Employee's employment with Employer or (2) the remainder of the Initial Term (if such termination occurs during the Initial Term); and (z) in the case of the expiration of the Employment Term and in the event that either (1) Employer has not advised Employee in writing at least 60 days prior to the expiration of the Employment Term of the election of Employer, in its sole discretion, to waive Employee's obligation to comply with his covenants under clause (ii) above upon the expiration of the Employment Term or (2) the expiration of the Employment Term is the result of Employee delivering to Employer pursuant to Section 2 the written notice of Employee's termination of this Employment Agreement, a period of 12 months after the expiration of the Employment Term. 12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 AND 11 Employee covenants and agrees that if Employee shall violate or breach any of Employee's covenants or agreements provided for in Section 10 or 11 hereof, Employer shall be entitled to an accounting and repayment of all profits, compensation, commissions, remunerations and benefits which Employee directly or indirectly has realized and realizes as a result of, growing out of or in connection with any such violation or breach. In addition, in the event of a breach or violation or threatened or imminent breach or violation of any provisions of Section 10 or 11 hereof, Employer shall be entitled to a temporary and permanent injunction or any other appropriate decree of specific performance or equitable relief from a court of competent jurisdiction in order to prevent, prohibit or restrain any such breach or violation or threatened or imminent breach or violation by Employee. Employer shall be entitled to such injunctive or other equitable relief in addition to any ascertainable damages which are suffered, together with reasonable attorneys' and paralegals' fees and costs and other costs incurred in connection with any such litigation, both before and at trial and at all tribunal levels. It is understood that resort by Employer to such injunctive or other equitable relief shall not be deemed to waive or to limit in any respect any other rights or remedies which Employer may have with respect to such breach or violation. 13. REASONABLENESS OF RESTRICTIONS A. REASONABLENESS. Employee acknowledges that any breach or violation of Section 10 or 11 hereof will cause irreparable injury and damage and incalculable harm to Employer and that it would be very difficult or impossible to measure all of the damages resulting from any such breach or violation. Employee further acknowledges that Employee has carefully read and considered the provisions of Sections 10, 11 and 12 hereof and, 13 14 having done so, agrees that the restrictions and remedies set forth in such Sections (including, but not limited to, the time period, geographical and types of restrictions imposed) are fair and reasonable and are reasonably required for the protection of the business, trade secrets, interests and good will of Employer. B. SEVERABILITY. Employee understands and intends that each provision and restriction agreed to by Employee in Sections 10, 11 and 12 hereof shall be construed as separate and divisible from every other provision and restriction. In the event that any one of the provisions of, or restrictions in, Sections 10, 11 and/or 12 hereof shall be held to be invalid or unenforceable, and is not reformed by a court of competent jurisdiction (which a court, in lieu of striking a provision entirely, is urged by the parties to do), the remaining provisions thereof and restrictions therein shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable provisions or restrictions had not been included. In the event that any such provision relating to time period, geographical and/or type of restriction shall be declared by a court of competent jurisdiction to exceed the maximum or permissible time period, geographical or type of restriction such court deems reasonable and enforceable, said time period, geographical and/or type of restriction shall be deemed to become and shall thereafter be the maximum time period or geographical area and/or type of restriction which such court deems reasonable and enforceable. C. SURVIVABILITY. The restrictions, acknowledgments, covenants and agreements of Employee set forth in Sections 10, 11, 12 and 13 of this Employment Agreement shall survive any termination of this Employment Agreement or of Employee's employment (for any reason, including expiration of the Employment Term). D. DEFINITION OF EMPLOYER. For purposes of Sections 10, 11, 12 and 13 of this Employment Agreement, the term "Employer" includes the Employer and any parent corporation of Employer and all subsidiaries of Employer and its parent corporation (if any). 14. LAW APPLICABLE This Employment Agreement shall be governed by and construed pursuant to the laws of the State of Florida. 15. NOTICES Any notices required or permitted to be given pursuant to this Employment Agreement shall be sufficient if in writing, and 14 15 delivered personally, by commercial courier service or sent by certified mail, return receipt requested, and sent to Employer's executive offices, to the attention of the Chief Executive Officer, if mailed to Employer, and to Employee's then current residence, if mailed to Employee, and shall be effective only upon actual receipt by the party to whom it is given. 16. SUCCESSION This Employment Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, heirs, assignees and/or successors in interest of any kind whatever; PROVIDED, HOWEVER, that Employee acknowledges and agrees that Employee cannot assign or delegate any of Employee's rights, duties, responsibilities or obligations hereunder to any other person or entity. Employer shall have the right to assign its rights and delegate its duties under this Employment Agreement, provided that, in the event of any such assignment other than in connection with a merger, consolidation or similar reorganization or the sale of all or substantially all of the assets of Employer (or its successor), Employer shall remain liable for all of its obligations hereunder. 17. ENTIRE AGREEMENT This Employment Agreement, together with the Stock Option Agreement and Indemnification Agreement, both of even date herewith between Employer and Employee, constitute the entire final agreement between the parties with respect to, and supersedes any and all prior and contemporaneous agreements between the parties hereto both oral and written concerning, the subject matter hereof and may not be amended, modified or terminated except by a writing signed by the parties hereto. 18. SEVERABILITY If any provision of this Employment Agreement shall be held to be invalid or unenforceable, and is not reformed by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to such provision and shall not in any way affect or render invalid or unenforceable any other provision of this Employment Agreement, and this Employment Agreement shall be carried out as if such invalid or unenforceable provision were not herein contained. 19. NO WAIVER A waiver of any breach or violation of any term, provision or covenant herein contained shall not be deemed a continuing waiver or a waiver of any future or past breach or violation. No oral waiver shall be binding. 15 16 20. ATTORNEYS' FEES In the event that either of the parties to this Employment Agreement institutes suit against the other party to this Employment Agreement to enforce or declare any of their respective rights hereunder, the prevailing party in such action shall be entitled to recover from the other party all reasonable costs thereof, including reasonable attorneys' and paralegals' fees and costs incurred before and at trial and at all tribunal levels, and whether or not suit or any other proceeding is instituted. 21. COUNTERPARTS This Employment Agreement may be executed in counterparts, each of which shall be an original, but both of which together shall constitute one and the same instrument. 22. INDEPENDENT COUNSEL THE PARTIES HEREBY ACKNOWLEDGE THAT EACH OF THEM HAS RETAINED AND WAS REPRESENTED VIGOROUSLY BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO, AND IN CONNECTION WITH ALL STAGES OF THE NEGOTIATION, PREPARATION AND EXECUTION OF, THIS EMPLOYMENT AGREEMENT. EMPLOYER WAS REPRESENTED BY BILZIN SUMBERG DUNN PRICE & AXELROD LLP AND EMPLOYEE BY KELLEY DRYE & WARREN LLP. IN WITNESS WHEREOF, the undersigned have hereunto set their hands on the day and year first above written. EMPLOYER: PRECISION RESPONSE CORPORATION, a Florida corporation By: /s/ MARK J. GORDON --------------------------------- Mark J. Gordon Chairman of the Board EMPLOYEE: /s/ WESLEY T. O'BRIEN ------------------------------------- WESLEY T. O'BRIEN 16 17 EXHIBIT A PRECISION RESPONSE CORPORATION STOCK OPTION AGREEMENT Agreement dated as of the 20th day of October, 1998 (the "Date of Grant") between Precision Response Corporation, a Florida corporation (and, collectively with its subsidiaries, if any, the "Company") with its principal office at 1505 N.W. 167th Street, Miami, Florida 33169, and Wesley T. O'Brien, at the address set forth beneath such person's signature on the signature page of this Agreement ("Optionee"). 1. GRANT OF OPTIONS The Company grants to Optionee, on the terms and conditions set forth below, options (the "Options") to purchase up to 350,000 shares (individually a "Share" and collectively the "Shares") of Precision Response Corporation common stock (the "Common Stock"), par value $.01 per share, for a price of $5.50 per Share (the "Option Price"), subject to adjustment as provided in Paragraph 3 below. Subject to the limitation set forth in the Precision Response Corporation Amended and Restated 1996 Incentive Stock Plan (the "Plan"), a copy of which is attached hereto and incorporated herein by reference, that the aggregate Fair Market Value (as defined in the Plan and as determined as of the time the option is granted) of the shares of Common Stock with respect to which Incentive Stock Options (as defined in and pursuant to the Plan) are exercisable for the first time by a participant during any calendar year (under all option plans of the Company) shall not exceed $100,000, the Options shall be designated as Incentive Stock Options to the maximum extent permitted by law and under the Plan. To the extent that the number of Options which vest in any calendar year pursuant to the vesting schedule set forth below exceeds the number which may properly be designated as Incentive Stock Options pursuant to applicable law or under the Plan, such excess number of Options shall, pursuant to the provisions of Section 6(e) of the Plan, be designated as Nonqualified Stock Options (as defined in and pursuant to the Plan). 2. TERMS AND CONDITIONS OF OPTIONS (a) OPTION PRICE Subject to paragraph 3 hereof, the Option Price shall be as set forth in Section 1 above. (b) VESTING OF OPTIONS Subject to such further limitations as are provided for herein, the Options shall vest, if at all (and be exercisable once vested) in the following amounts: 18 PERIOD FROM PERCENTAGE OF DATE OF GRANT OPTIONS VESTED (%) - ------------- ------------------ Six (6) months from Date of Grant 50% One (1) year from Date of Grant 67% Two (2) years from Date of Grant 84% Three (3) years from Date of Grant 100% Notwithstanding the vesting schedule set forth above, Optionee shall become immediately 100% vested in all outstanding Options upon, and may exercise such Options subject to the time frames set forth in subparagraph (e) below after, (i) a Change in Control (as defined in that certain Employment Agreement dated effective as of October 20, 1998, by and between Optionee and the Company (the "Employment Agreement")) or (ii) Optionee's termination of employment (A) by the Company without Cause (as defined in the Employment Agreement) or (B) by Optionee to the extent and in the manner permitted under the Employment Agreement as a result of the occurrence of a Constructive Termination (as defined in the Employment Agreement). Subject to the accelerated vesting provided in the previous sentence, Optionee shall not become vested in any Options subsequent to the termination of his employment regardless of any exercise period provided in subparagraph (e) below. (c) TERM OF OPTIONS The Options may be exercised by Optionee in whole or in part from time to time, but only during the period beginning on the date of this Agreement and ending on October 19, 2005, subject in all cases, however, to subparagraphs (b) and (e) of this paragraph 2, paragraph 3 and the other provisions of this Agreement and the Plan. (d) NON-TRANSFERABILITY OF OPTIONS Options shall not be transferable by Optionee other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended (the "Code"), or Title I of the Employment Retirement Income Security Act, or the rules thereunder, and, except with respect to a qualified domestic relations order as aforesaid, may be exercised during Optionee's lifetime only by Optionee. If any Options are exercised after Optionee's death, the Company may require evidence reasonably satisfactory to it of the appointment and qualification of Optionee's personal representatives and their authority and of the right of any heir or distributee to exercise such Options. (e) TERMINATION OF EMPLOYMENT Subject to the vesting requirements set forth in Section 2(b) above, if Optionee's employment with the Company terminates, the unexercised portion of any of the Options granted under this Agreement shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: 2 19 (1) The expiration of seven (7) years from the Date of Grant; (2) The expiration of three months from the date of termination of Optionee's employment (other than a termination described in subparagraph (3), (4) or (5) below); PROVIDED, that, if Optionee shall die during such three-month period, the time of termination of the unexpired portion of any such Option shall be determined under the provision of subparagraph (4) below; (3) The expiration of one year from the date of termination of the employment of an Optionee due to his becoming Disabled (as defined in the Employment Agreement); (4) The expiration of eighteen (18) months following the issuance of letters testamentary or letters of administration to the personal representative, executor or administrator of a deceased Optionee, if Optionee's death occurs either during his employment by the Company or during the three-month period following the date of termination of such employment (other than a termination described in subparagraph (5) below), but in no event later than two years after Optionee's death; (5) The date of termination of Optionee's employment by the Company if Optionee has been discharged for Cause. Neither this Agreement nor any Option granted hereunder shall confer on Optionee any right to continue in the Company's employ, or limit in any respect the Company's right (in the absence of a specific written agreement to the contrary) to terminate Optionee's employment at any time with or without Cause. (f) EXERCISE OF OPTIONS Subject to the limitations set forth herein and the provisions hereof, the Options may be exercised only by written notice to the Company, at its principal business office or such other office as the Committee may from time to time direct, which shall contain provisions consistent with the provisions of the Plan as the Committee may from time to time prescribe and shall specify the number of optioned Shares being purchased. Not less than one hundred (100) shares may be purchased at any one time upon exercise of the Options unless the number purchased is the total number then purchasable under this Agreement. Subsequent to the grant of any Options which are not immediately exercisable in full, the Committee, at any time before complete termination of such Options, may accelerate the time or times at which such Options may be exercised in whole or in part. Any notice of exercise of Options shall be accompanied by payment of the full purchase price for the Shares being purchased: (i) by check payable to the Company; or (ii) with the prior consent of the Committee, by tendering previously acquired shares of Common Stock having a fair market value (determined as of the date such Options are exercised and in the same manner as the Fair Market Value of the Option Price is determined under the Plan) equal to all of the purchase price; or (iii) by any combination of (i) and (ii). The Company shall have no obligation to deliver the Shares being purchased pursuant to the exercise of any Options, in whole 3 20 or in part, until the aforesaid payment in full of the purchase price therefor is received by the Company. (g) ISSUANCE OF SHARES The exercise of Options granted hereunder is subject to the condition that if at any time the listing, registration or qualification of the Shares covered by the Options upon any securities exchange or under any state or federal law is necessary as a condition of or in connection with the purchase or delivery of Shares, the delivery of any or all Shares pursuant to exercise of the Options may be withheld unless and until such listing, registration or qualification shall have been effected. Optionee agrees to comply with any and all legal requirements relating to Optionee's resale or other disposition of any Shares acquired under this Agreement. Unless the Shares are registered for sale under an effective registration statement under the Securities Act of 1933, as amended, and applicable state securities laws, the Committee may require, as a condition of exercise of any Options, that Optionee represent, in writing, that the Shares received upon exercise of the Options are being acquired for investment and not with a view to distribution and agree that the Shares will not be disposed of except pursuant to an effective registration statement under the Securities Act of 1933, as amended, and only after any required qualifications under applicable state securities laws, unless the Company shall have received an opinion of counsel satisfactory to the Company that such disposition is exempt from such registration and qualification. In such case, there may be endorsed on certificates representing Shares issued upon the exercise of Options such legends referring to the foregoing representations or any applicable restrictions on resale as the Committee, in its discretion, shall deem reasonably appropriate, as well as place such stop transfer orders with its registrar and transfer agent as it deems reasonably appropriate. (h) RIGHTS AS A SHAREHOLDER Optionee shall acquire none of the rights of a shareholder of the Company under this Agreement unless and until certificates for such Shares are issued to Optionee upon the exercise of Options. (i) SIX-MONTH HOLDING PERIOD Optionee acknowledges that in no event may any Shares acquired upon exercise of any Options be sold or otherwise disposed of until after six (6) months have elapsed from the Date of Grant except, in the event of Optionee's death during such period, for a sale by the executors or administrators of Optionee's estate relying on Rule 16a-2(d)(1)(i) of the Securities Exchange Act of 1934, as amended. 3. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. In the event of any stock split, stock dividend, reclassification or recapitalization which changes the character or amount of the Company's outstanding Common Stock while any portion of any Options theretofore granted pursuant to this Agreement are outstanding but unexercised, the Committee shall make such adjustments in the character and number of Shares 4 21 subject to such Options and in the Option Price as shall be equitable and appropriate in order to make such Options, as nearly as may be practicable, equivalent to such Options immediately prior to such change; PROVIDED, however, that no such adjustment shall give any Optionee any additional benefits under this Agreement; and PROVIDED FURTHER, that, if any such adjustment is made by reason of a transaction described in section 424(a) of the Code, it shall be made so as to conform to the requirements of that section and the regulations thereunder. If any transaction (other than a change specified in the preceding paragraph) described in section 424(a) of the Code affects the Company's Common Stock subject to any unexercised Option theretofore granted hereunder (hereinafter for purposes of this paragraph 3 referred to as the "old option"), the Committee or any surviving or acquiring corporation may take such action as it deems appropriate, and in conformity with the requirements of that section and the regulations thereunder, to substitute a new option for the old option, in order to make the new option, as nearly as may be practicable, equivalent to the old option, or to assume the old option. If any such change or transaction shall occur, the number and kind of Shares to be issued upon the exercise of any Options shall be adjusted to give effect thereto. 4. OPTIONEE BOUND BY PLAN Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by the terms and provisions thereof, regardless of whether such provisions have been set forth in this Agreement. In the event of any conflict between this Agreement and the Plan, the Plan shall govern. 5. APPLICATION OF FUNDS The proceeds received by the Company from the sale of Shares subject to Options may be commingled with any other corporate funds and used for any corporate purpose. 6. GENERAL (a) Any communication in connection with this Agreement shall be deemed duly given when delivered in person or mailed by certified or registered mail, return receipt requested, to Optionee at his or her address listed on the signature page hereof or such other address of which Optionee shall have advised by similar notice, or to the Company or Committee at the Company's then executive offices. (b) This Agreement sets forth the parties' final and entire agreement with respect to its subject matter, may not be changed or terminated orally and shall be governed by and construed in accordance with the internal law of the State of Florida. This Agreement shall bind and inure to the benefit of Optionee, and his heirs, distributees and personal and legal representatives, and the Company and its successors and assigns. (c) As a condition of the granting of the Options hereunder, Optionee agrees for Optionee and Optionee's heirs, distributees and personal and legal representatives, that any dispute 5 22 or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined and resolved by the Committee in its reasonable discretion, and any interpretation by the Committee of the terms of this Agreement or the Plan shall be final, binding and conclusive. (d) Wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in the masculine, the feminine or the neuter gender shall include the masculine, feminine and neuter. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. OPTIONEE: PRECISION RESPONSE CORPORATION, a Florida corporation By: - ------------------------------- ----------------------------------- WESLEY T. O'BRIEN Mark J. Gordon, Chairman of the Board 17849 Fieldbrook Circle Boca Raton, Florida 33496 6 23 PRECISION RESPONSE CORPORATION AMENDED AND RESTATED 1996 INCENTIVE STOCK PLAN1 1. PURPOSE. The PRECISION RESPONSE CORPORATION Amended and Restated 1996 Incentive Stock Plan (the "Plan") is intended to provide incentives which will attract and retain highly competent persons as officers and key employees of PRECISION RESPONSE CORPORATION and its subsidiaries (the "Company"), as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company's common stock, $.01 value per share ("Common Shares") or to receive monetary payments based on the value of such shares pursuant to the Awards described in Paragraph 4 below. 2. ADMINISTRATION. Prior to the date, if any, upon which the Company becomes subject to the Securities Exchange Act of 1934 (the "Act"), the Plan shall be administered by the Board of Directors of the Company (the "Board") or a committee appointed by the Board. After the date, if any, upon which the Company becomes subject to the Act, the Plan will be administered by the Compensation Committee (the administrator of the Plan, initially the Board and thereafter the Compensation Committee, if and when the Company becomes subject to the Act, shall be referred to hereinafter as the "Committee") appointed by the Board from among its members PROVIDED, HOWEVER, that, on and after November 1, 1996 (the "Effective Date") as long as Common Shares are registered under the Act, members of the Committee must each qualify as a "non-employee director" within the meaning of Securities and Exchange Commission Regulation ss. 240.16b-3. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution therefor, and fill vacancies however caused; provided, however, that at no time shall a Committee of less than two members of the Board administer the Plan, and provided further, that all members of the Committee on and after the Effective Date must be "non-employee directors." The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan and any Awards (as hereinafter defined) granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Board and Committee shall be binding and conclusive on all participants and their legal representatives. No member of the Board, no member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated or, except in circumstances involving such person's bad faith, gross negligence or fraud, for any act or failure to act by the member or employee. - ------------ (1) As amended through June 12, 1998 24 3. PARTICIPANTS. Participants will consist of such officers and key employees or prospective key employees (conditioned upon, and effective not earlier than his becoming an employee) of the Company, and independent contractors providing consulting or advisory services to the Company, as the Committee in its sole discretion determines to be significantly responsible for the success and future growth and profitability of the Company and whom the Committee may designate from time to time to receive Awards under the Plan. Designation of a participant in any year shall not require the Committee to designate such person to receive an Award in any other year or, once designated, to receive the same type or amount of Awards as granted to the participant in any year. The Committee shall consider such factors as it deems pertinent in selecting participants and in determining the type and amount of their respective Awards. 4. TYPES OF AWARDS. Awards under the Plan may be granted in any one or a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock Awards, (d) Performance Shares, and (e) Performance Units, all as described below (collectively "Awards"). 5. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for issuance under the Plan an aggregate of 4,000,000 Common Shares, which may be authorized but unissued shares. Any shares subject to Stock Options or Stock Appreciation Rights or issued under such options or rights or as Stock Awards may thereafter be subject to new options, rights or awards under this Plan if there is a lapse, expiration or termination of any such options or rights prior to issuance of the shares or the payment of the equivalent or if shares are issued under such options or rights or as such awards and thereafter are reacquired by the Company pursuant to rights reserved by the Company upon issuance thereof. 6. STOCK OPTIONS. Stock Options will consist of awards from the Company, in the form of agreements, which will enable the holder to purchase a specific number of Common Shares, at set terms and at a fixed purchase price. Stock Options may be "incentive stock options" ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or Stock Options which do not constitute Incentive Stock Options ("Nonqualified Stock Options"). The Committee will have the authority to grant to any participant one or more Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). Each Stock Option shall be subject to such terms and conditions consistent with the Plan as the Committee may impose from time to time, subject to the following limitations: (a) EXERCISE PRICE. Each Stock Option granted hereunder shall have such per- share exercise price as the Committee may determine at the date of grant provided, however, that the per-share exercise price for Incentive Stock Options shall not be less than 100% of the Fair Market Value (as hereinafter defined) of the Common Shares on the date the option is granted and provided further that the per-share exercise price for Nonqualified Stock Options shall not be less than 85% of the Fair Market Value of the Common Shares on the date the option is granted. Notwithstanding 2 25 the foregoing, the Committee may grant Nonqualified Stock Options for up to 50,000 Common Shares for a per-share exercise price equal to and/or in excess of $.01 per share. (b) PAYMENT OF EXERCISE PRICE. The option exercise price may be paid by check or, in the discretion of the Committee, by the delivery of Common Shares of the Company then owned by the participant or a combination of methods of payment; provided, however, that option agreements may provide that payment of the exercise price by delivery of Common Shares of the Company then owned by the participant may be made only if such payment does not result in a charge to earnings for financial accounting purposes as determined by the Committee. In the discretion of the Committee, if Common Shares are readily tradeable on a national securities exchange or other market system at the time of option exercise, payment may also be made by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the exercise price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. (c) EXERCISE PERIOD. Stock Options granted under the Plan will be exercisable at such times and subject to such terms and conditions as shall be determined by the Committee. In addition, Nonqualified Stock Options shall not be exercisable later than fifteen years after the date they are granted and Incentive Stock Options shall not be exercisable later than ten years after the date they are granted. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such option at the date of grant. (d) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted only to participants who are employees of the Company or one of its subsidiaries (within the meaning of Section 424(f) of the Code) at the date of grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Shares with respect to which Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under all option plans of the Company) shall not exceed $100,000. Incentive Stock Options may not be granted to any participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Shares on the date of grant and the exercise of such option is prohibited by its terms after the expiration of five years from the date of grant of such option. (e) REDESIGNATION AS NONQUALIFIED STOCK OPTIONS. Options designated as Incentive Stock Options that fail to continue to meet the requirements of Section 422 of the Code shall be redesignated as Nonqualified Stock Options for Federal income tax purposes automatically without further action by the Committee on the date of such failure to continue to meet the requirements of Section 422 of the Code. 3 26 (f) LIMITATION OF RIGHTS IN SHARES. The recipient of a Stock Option shall not be deemed for any purpose to be a shareholder of the Company with respect to any of the shares subject thereto except to the extent that the Stock Option shall have been exercised and, in addition, a certificate shall have been issued and delivered to the participant. 7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant Stock Appreciation Rights to the holders of any Stock Options granted hereunder. In addition, Stock Appreciation Rights may be granted independently of and without relation to Stock Options. Each Stock Appreciation Right shall be subject to such terms and conditions consistent with the Plan as the Committee shall impose from time to time, including the following: (a) A Stock Appreciation Right relating to a Nonqualified Stock Option may be made part of such option at the time of its grant or at any time thereafter up to six months prior to its expiration, and a Stock Appreciation Right relating to an Incentive Stock Option may be made part of such option only at the time of its grant. (b) Each Stock Appreciation Right will entitle the holder to elect in lieu of exercising the Stock Option to receive the appreciation in the Fair Market Value of the shares subject thereto up to the date the right is exercised. In the case of a right issued in relation to a Stock Option, such appreciation shall be measured from not less than the option price and in the case of a right issued independently of any Stock Option, such appreciation shall be measured from not less than 85% of the Fair Market Value of the Common Shares on the date the right is granted. Payment of such appreciation shall be made in cash or in Common Shares, or a combination thereof, as set forth in the Award, but no Stock Appreciation Right shall entitle the holder to receive, upon exercise thereof, more than the number of Common Shares (or cash of equal value) with respect to which the right is granted. (c) Each Stock Appreciation Right will be exercisable at the times and to the extent set forth therein, but no Stock Appreciation Right may be exercisable earlier than six months after the date it was granted or later than the earlier of (i) the term of the related Stock Option, if any, or (ii) fifteen years after it was granted. Exercise of a Stock Appreciation Right shall reduce the number of shares issuable under the Plan (and the related Stock Option, if any) by the number of shares with respect to which the right is exercised. 8. STOCK AWARDS. Stock Awards will consist of Common Shares transferred to participants without other payment therefor or payment at less than Fair Market Value as additional compensation for services to the Company. Stock Awards shall be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, restrictions on the sale or other disposition of such shares and rights of the Company to reacquire such shares for no consideration upon termination of the participant's employment within specified periods. The Committee may require the participant to deliver a duly signed stock power, endorsed in blank, relating to the Common Shares covered by such an Award. The Committee may also require that 4 27 the stock certificates evidencing such shares be held in custody until the restrictions thereon shall have lapsed. The participant shall have, with respect to the Common Shares subject to a Stock Award, all of the rights of a holder of Common Shares of the Company, including the right to receive dividends and to vote the shares. 9. PERFORMANCE SHARES. (a) Performance Shares may be awarded either alone or in addition to other Awards granted under this Plan and shall consist of the right to receive Common Shares or cash of an equivalent value at the end of a specified Performance Period (defined below). The Committee shall determine the participants to whom and the time or times at which Performance Shares shall be awarded, the number of Performance Shares to be awarded to any person, the duration of the period (the "Performance Period") during which, and the conditions under which, receipt of the Common Shares will be deferred, and the other terms and conditions of the Award in addition to those set forth in this Section 9. The Committee may condition the grant of Performance Shares upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine. (b) Performance Shares awarded pursuant to this Section 9 shall be subject to the following terms and conditions: (i) Unless otherwise determined by the Committee at the time of the grant of the Award, amounts equal to any dividends declared during the Performance Period with respect to the number of Common Shares covered by a Performance Share Award will not be paid to the participant. (ii) Subject to the provisions of the Performance Share Award and this Plan, at the expiration of the Performance Period, share certificates and/or cash of an equivalent value (as the Committee may determine) shall be delivered to the participant, or his or her legal representative, in a number equal to the vested shares covered by the Performance Share Award. (iii) Subject to the applicable provisions of the Performance Share Award and this Plan, upon termination of a participant's employment with the Company for any reason during the Performance Period for a given Performance Share Award, the Performance Shares in question will vest or be forfeited in accordance with the terms and conditions established by the Committee. 10. PERFORMANCE UNITS. (a) Performance Units may be awarded either alone or in addition to other Awards granted under this Plan and shall consist of the right to receive a fixed dollar amount, payable in cash 5 28 or Common Shares or a combination of both. The Committee shall determine the participants to whom and the time or times at which Performance Units shall be awarded, the duration of Performance Units to be awarded to any person, the duration of the period (the "Performance Cycle") during which, and the conditions under which, a participant's right to Performance Units will be vested, the ability of participants to defer the receipt of payment of such Performance Units, and the other terms and conditions of the Award in addition to those set forth in this Section 10. The Committee may condition the vesting of Performance Units upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine. (b) The Performance Units awarded pursuant to this Section 10 shall be subject to the following terms and conditions: (i) At the expiration of the Performance Cycle, the Committee shall determine the extent to which the performance goals have been achieved, and the percentage of the Performance Units of each participant that have vested. (ii) Subject to the applicable provisions of the Performance Unit Award and this Plan, at the expiration of the Performance Cycle, cash and/or share certificates of an equivalent value (as the Committee may determine) shall be delivered to the participant, or his or her legal representative, in payment of the vested Performance Units covered by the Performance Unit Award. (iii) Subject to the applicable provisions of the Performance Unit Award and this Plan, upon termination of a participant's employment with the Company for any reason during the Performance Cycle for a given Performance Unit Award, the Performance Units in question will vest or be forfeited in accordance with the terms and conditions established by the Committee. 11. ADJUSTMENT PROVISIONS. (a) If the Company shall at any time change the number of issued Common Shares without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Common Shares) or make a distribution of cash or property which has a substantial impact on the value of issued Common Shares, the total number of shares available for Awards under this Plan shall be appropriately adjusted and the number of shares covered by each outstanding Award and the reference price or Fair Market Value for each outstanding Award shall be adjusted so that the net value of such Award shall not be changed. (b) In the case of any sale of assets, merger, consolidation, combination or other corporate reorganization or restructuring of the Company with or into another corporation which results in the outstanding Common Shares being converted into or exchanged for different securities, 6 29 cash or other property, or any combination thereof (an "Acquisition"), subject to the provisions of this Plan and any limitation applicable to the Award: (i) any participant to whom a Stock Option has been granted shall have the right thereafter and during the term of the Stock Option to receive upon exercise thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Common Shares which might have been obtained upon exercise of the Stock Option or portion thereof, as the case may be, immediately prior to the Acquisition; (ii) any participant to whom a Stock Appreciation Right has been granted shall have the right thereafter and during the term of such right to receive upon exercise thereof the difference on the exercise date between the aggregate Fair Market Value of the Acquisition Consideration receivable upon such acquisition by a holder of the number of Common Shares which are covered by such right and the aggregate reference price of such right; and (iii) any participant to whom Performance Shares or Performance Units have been awarded shall have the right thereafter and during the term of the Award, upon fulfillment of the terms of the Award, to receive on the date or dates set forth in the Award, the Acquisition Consideration receivable upon the Acquisition by a holder of the number of Common Shares which are covered by the Award. The term "Acquisition Consideration" shall mean the kind and amount of securities, cash or other property or any combination thereof receivable in respect of one Common Share upon consummation of an Acquisition. (c) Notwithstanding any other provision of this Plan, the Committee may authorize the issuance, continuation or assumption of Awards or provide for other equitable adjustments after changes in the Common Shares resulting from any other merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence upon such terms and conditions as it may deem equitable and appropriate. (d) In the event that another corporation or business entity is being acquired by the Company, and the Company assumes outstanding employee stock options and/or stock appreciation rights and/or the obligation to make future grants of options or rights to employees of the acquired entity, the aggregate number of Common Shares available for Awards under this Plan shall be increased accordingly. 7 30 12. NONTRANSFERABILITY. (a) Each Award granted under the Plan to a participant shall not be transferable by him otherwise than required by law or by will or the laws of descent and distribution, and shall be exercisable, during his lifetime, only by him. In the event of the death of a participant while the participant is rendering services to the Company, each Stock Option or Stock Appreciation Right theretofore granted to him shall be exercisable during such period after his death as the Committee shall in its discretion set forth in such option or right at the date of grant (but not beyond the stated duration of the option or right) and then only: (i) By the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participant's rights under the Stock Option or Stock Appreciation Right shall pass by will or the laws of descent and distribution; and (ii) To the extent that the deceased participant was entitled to do so at the date of his death. (b) Notwithstanding Section 12(a), in the discretion of the Committee, Awards granted hereunder may be transferred to members of the participant's immediate family (which for purposes of this Plan shall be limited to the participant's children, grandchildren and spouse), or to one or more trusts for the benefit of such immediate family members or partnerships in which such immediate family members and/or trusts are the only partners, but only if the Award expressly so provides. 13. OTHER PROVISIONS. Awards under the Plan may also be subject to such other provisions (whether or not applicable to any other Awards under the Plan) as the Committee determines appropriate, including without limitation, provisions for the installment purchase of Common Shares under Stock Options, provisions for the installment exercise of Stock Appreciation Rights, provisions to assist the participant in financing the acquisition of Common Shares, provisions for the forfeiture of, or restrictions on resale or other disposition of, Shares acquired under any form of Award, provisions for the acceleration of exercisability or vesting of Awards in the event of a change of control of the Company or other reasons, provisions for the payment of the value of Awards to participants in the event of a change of control of the Company or other reasons, or provisions to comply with Federal and state securities laws, or setting forth understandings or conditions as to the participant's employment in addition to those specifically provided for under the Plan. 14. FAIR MARKET VALUE. For purposes of this Plan and any Awards hereunder, Fair Market value of Common Shares shall be the mean between the highest and lowest sale prices for the Company's Common Shares as reported on the NASDAQ National Market (or such other consolidated transaction reporting system on which such Common Shares are primarily traded) on 8 31 the date immediately preceding the date of grant (or on the next preceding trading date if Common Shares were not traded on the date immediately preceding the date of grant), provided, however, that if the Company's Common Shares are not at any time readily tradeable on a national securities exchange or other market system, Fair Market Value shall mean the amount determined in good faith by the Committee as the fair market value of the Common Shares of the Company. 15. WITHHOLDING. All payments or distributions made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Shares pursuant to the Plan, it may require the recipient to remit to it an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Shares. The Committee may, in its discretion and subject to such rules as it may adopt, permit an optionee or Award or right holder to pay all or a portion of the federal, state and local withholding taxes arising in connection with (a) the exercise of a Nonqualified Stock Option or a Stock Appreciation Right, (b) the receipt or vesting of Stock Awards, or (c) the receipt of Common Shares upon the expiration of the Performance Period or the Performance Cycle, respectively, with respect to any Performance Shares or Performance Units, by electing to have the Company withhold Common Shares having a Fair Market Value equal to the amount to be withheld. 16. TENURE. A participant's right, if any, to continue to serve the Company as an officer, employee, independent contractor, or otherwise, shall not be enlarged or otherwise affected by such individual's designation as a participant under the Plan, nor shall this Plan in any way interfere with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the participant from the rate in existence at the time of the grant of an Award. 17. DURATION, AMENDMENT AND TERMINATION. No Award shall be granted after May 30, 2006 (the "Expiration Date"); provided, however, that the terms and conditions applicable to any Award granted prior to such date may thereafter be amended or modified by mutual agreement between the Company and the participant or such other persons as may then have an interest therein. Also, by mutual agreement between the Company and a participant hereunder, under this Plan or under any other present or future plan of the Company, Awards may be granted to such participant in substitution and exchange for, and in cancellation of, any Awards previously granted such participant under this Plan, or any other present or future plan of the Company. The Board may amend the Plan from time to time or terminate the Plan at any time. However, no action authorized by this Section 17 shall reduce the amount of any existing Award or change the terms and conditions thereof without the participant's consent. The approval of the Company's shareholders will be required for any amendment to the Plan which would (i) change the class of persons eligible for the grant of Stock Options, as specified in Section 3 or otherwise materially modify the requirements as to eligibility for participation in the Plan, (ii) increase the maximum number of shares subject to Stock Options, as specified in Section 5 (unless made pursuant to the provisions of Section 11) or (iii) materially increase the benefits accruing to participants under the Plan, within the meaning of 9 32 Rule 16b-3 promulgated under Act. With respect to persons subject to Section 16 of the Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Moreover, in the event the Plan does not include a provision required by Rule 16b-3 to be stated therein, such provision (other than one relating to eligibility requirements, or the price and amount of Awards) shall be deemed automatically to be incorporated by reference into the Plan insofar as participants subject to Section 16 of the Act are concerned. 18. GOVERNING LAW. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Florida (regardless of the law that might otherwise govern under applicable Florida principles of conflict of laws). 19. SHAREHOLDER APPROVAL. The Plan was adopted by the Board of the Company and approved by the Company's shareholders on May 31, 1996. 20. BOARD AMENDMENT. Section 2 of the Plan was amended by action taken by the Board of the Company on February 19, 1997, which amendment did not require approval of the shareholders of the Company. 21. SHAREHOLDERS AMENDMENTS. Section 5 of the Plan was amended to increase the number of Common Shares reserved for issuance under the Plan (a) to 3,000,000 Common Shares by action taken by the Board on February 19, 1997, which amendment was approved by the shareholders of the Company at the Company's annual meeting of shareholders held on May 15, 1997, and (b) to 4,000,000 Common Shares by action taken by the Board on March 12, 1998, which amendment was approved by the shareholders of the Company at the Company's annual meeting of shareholders held on June 12, 1998. 10 EX-10.41 4 LETTER AGREEMENT W/BERNARD KOSAR 1 Exhibit 10.41 PRECISION RESPONSE CORPORATION 1505 N.W. 167th Street Miami, Florida 33169 (305) 626-4600 Fax (305) 626-4650 October 1, 1998 Mr. Bernard J. Kosar, Jr. Precision Response Corporation 1505 N.W. 167th Street Miami, Florida 33169 Dear Bernie: This letter agreement (this "Agreement") sets forth the understanding of the conversations we have had regarding your employment relationship with Precision Response Corporation, a Florida corporation ("Employer"), and supersedes and replaces in its entirety that certain Employment Agreement dated as of February 19, 1997, as amended by that certain Amendment to Employment Agreement dated as of October 1, 1997, between Employer and you (as amended, the "Former Agreement"). As of this time, although we are terminating the Former Agreement, Employer wishes you to stay in the continued employment of Employer with reduced responsibilities and we understand that you ("Employee") wish to remain in the employ of Employer. Your continued employment will be subject to the terms and conditions set forth herein. The terms and conditions of our continued relationship shall be as follows: 1. TERM. Subject to Section 5.A, Employee's term of employment shall continue until 5:00, p.m., March 31, 2000 (the "Employment Term"). 2. DUTIES. Employee's duties and responsibilities hereunder shall be those reasonably assigned to Employee from time to time by the Employer's Chairman of the Board or Chief Executive Officer. Employer shall, unless and until otherwise determined by Employer, serve as a senior advisor to Employer and shall attend to matters as determined by Employer, which may include, but not be limited to, advising the executives of Employer on general sales, client matters and other business related matters, participating in client relations and engaging in, and supporting and advising the Employer's sales group on, the generation of new client prospects and new clients. Employee shall report directly to Employer's Chief Executive Officer or as otherwise directed from time to time by Employer's Chairman of the Board or Chief Executive Officer. Notwithstanding the 2 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 2 foregoing, Employee shall be free to engage in other remunerative activities during the Employment Term so long as such activities do not interfere with Employee's duties to Employer hereunder. 3. COMPENSATION. A. SALARY. Subject to the provisions of this Agreement, Employer shall pay salary ("Salary") to Employee in an aggregate amount of $75,000 per annum during the Employment Term, which Salary shall be earned ratably over the Employment Term. Salary shall be payable in accordance with Employer's normal payroll practices for its employees and shall be subject to payroll deductions and tax withholdings in accordance with Employer's usual practices and as required by law. B. COMMISSION. If solely and directly as a result of Employee's introduction to decision-makers at a company and material facilitation efforts thereafter (and not (i) as a result of a lead from, or at the direction of, Employer or any of its other employees, or (ii) from Employee assisting or advising any other employees of the Employer), Employer enters into an agreement with such company on or after the date hereof (an "Applicable Customer") to perform services ("Employer Services"), Employee shall be entitled to the commission (the "Commission Amount") described below so long as Employee remains employed by Employer hereunder, provided, however, that, notwithstanding anything to the contrary herein, in no event shall any Commission Amount be payable to Employee with respect to any Applicable Customer for a period in excess of one year, and, accordingly, all calculations of the Commission Amount under this Section 3.B. shall exclude Adjusted Gross Sales (as hereinafter defined) from any Applicable Customer after a period of one year. The Commission Amount payable to Employee shall equal one and one-half percent (1 1/2%) of Adjusted Gross Sales derived by Employer from performance of Employer Services, in all cases, which are actually collected by Employer each month from Applicable Customers. Adjusted Gross Sales means, with respect to each month, the total revenues collected that month from Applicable Customers, less only (a) credits and refunds given to Applicable Customers such month, (b) amounts collected by Employer from Applicable Customers to pay sales, use or similar taxes, (c) amounts collected by Employer from Applicable Customers for postage, freight and delivery charges, (d) any amounts or costs collected which are associated with telecommunications charges and (e) amounts collected by Employer from Applicable Customers to pay for equipment or other items purchased by Employer to provide Employer services to such Applicable Customers, excluding any mark-up above Employer's cost thereof charged such Applicable Customers which mark-up shall be included in total revenues for purposes of calculating Adjusted Gross Sales. The Commission Amount shall be payable monthly on or before the end of the month following the month in which the Adjusted Gross Sales as to which it relates has been collected. Notwithstanding anything to the contrary hereunder, should Employee's employment hereunder terminate, Employer's obligation to pay the Commission Amount shall automatically terminate and, as of such time, Employee shall be entitled 3 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 3 to no further Commission Amount except for the Commission Amount earned on Adjusted Gross Sales collected by Employer prior to the end of the calendar month in which Employee's employment hereunder has terminated; provided, however, that, if Employee's employment hereunder is terminated by Employer without cause, Employee shall be entitled to the Commission Amount earned on Adjusted Gross Sales collected by Employer for a period ending on the earlier to occur of (i) March 31, 2000 and (ii) the last day of the calendar month which falls one (1) year after the end of the calendar month in which Employee's employment hereunder has been terminated by Employer without cause, unless Employee and Employer shall mutually agree upon a lump sum amount to be paid to Employee at the time of any such termination in lieu of payment of any future Commission Amount. The Commission Amount shall be subject to payroll deductions and tax withholdings in accordance with Employer's usual payroll practices and as required by law. C. CANCELLATION PAYMENT. In consideration of Employee agreeing to the cancellation of the Former Agreement, Employee shall receive a cancellation payment (the "Cancellation Payment") in the aggregate amount of $400,000, subject to adjustment by subtracting from such Cancellation Payment the amount of any salary paid to Employee from October 1, 1998 through April 30, 1999 at a rate in excess of $75,000 per annum. The Cancellation Payment shall be payable (subject to the aforesaid reduction for any excess salary payment) on or prior to April 30, 1999. The Cancellation Payment shall be subject to payroll deductions and tax withholdings in accordance with Employer's usual payroll practices and as required by law. D. STOCK OPTIONS. Each stock option agreement between Employee and Employer, as and to the extent as previously amended, shall remain in full force and effect in accordance with its terms and unchanged by this Agreement. 4. FRINGE BENEFITS AND EXPENSES. A. EMPLOYEE BENEFITS. Employee shall be entitled to such benefits and fringe benefits (such as individual and family health, dental, life and disability insurance) as are made available by Employer from time to time, in Employer's sole discretion, to all other similarly-situated employees generally; provided, however, that Employee shall not be entitled to any vacation. B. EXPENSES. Employer shall reimburse Employee for Employee's reasonable out-of-pocket costs and expenses incurred in connection with the performance of Employee's duties and responsibilities hereunder, subject to Employee's presentation of appropriate documentation and, if requested, justification therefor, and provided that the types and amounts of expenses incurred are consistent with, in Employer's judgment, Employer's policies and practices. 4 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 4 5. TERMINATION. A. TERMINATION EVENTS. Employee's employment under this Agreement may be terminated by Employer only as follows: with or without Cause (as hereinafter defined), effective upon the delivery of written notice to Employee; upon Employee's death; or upon Employee becoming Disabled (as hereinafter defined) and receiving written notice of termination from Employer to that effect. Employee may terminate Employee's employment under this Agreement without being in breach hereunder by giving written notification of Employee's resignation to Employer which shall specify a resignation date no earlier than ninety (90) days following the date of delivery of such notice of resignation. B. DEFINITIONS OF CAUSE AND DISABLED. For purposes of this Agreement, "Cause" shall mean and include: (i) commission of a felony, or commission of acts of fraud, dishonesty, or the like; (ii) habitual drunkenness during business hours or at Employer's premises; (iii) illicit use of drugs during business hours or at Employer's premises; (iv) abandonment of employment duties; (v) negligence in the performance of employment duties; (vi) an act or omission on the part of Employee not directed by Employer which results in or contributes to Employer being sanctioned or penalized by any governmental or quasi-governmental authority or body, or any stock exchange or body regulating or governing publicly-traded companies (including the NASD); (vii) insubordination; or (viii) breach by Employee of this Agreement which, if curable, is not cured by Employee within ten (10) days following Employee's receipt of written notice thereof. Employee shall be deemed "Disabled" for purposes of this Agreement (a) if, in the reasonable judgment of Employer, Employee is unable, due to physical, mental or emotional illness or injury, to perform substantially all of Employee's duties and responsibilities for Employer for a continuous period of ninety (90) days, or (b) if Employee is adjudicated as an incompetent or has a guardian appointed to handle Employee's affairs. C. EFFECT OF TERMINATION FOR CAUSE OR EMPLOYEE'S RESIGNATION. In the event that Employee's employment under this Agreement is terminated by Employer with Cause, or because Employee resigns from or quits Employee's employment, Employer shall pay to Employee, within thirty (30) days following the date of such termination or resignation, the Salary, if any, accrued and unpaid through the date of termination; and, except for the payment of any unpaid portion of (i) the Cancellation Payment as and when due as set forth in Section 3.C. or (ii) the accrued and unpaid Commission Amount to the extent set forth in Section 3.B., Employee shall not be entitled to any other compensation, remuneration or other sums provided for in this Agreement or to which Employee might otherwise be entitled hereunder or at law or in equity. D. COMPENSATION UPON DEATH OR DISABILITY. Upon the death of Employee, or termination of employment because Employee is Disabled, Employer shall pay to Employee, 5 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 5 Employee's legal guardian or the legal representative of Employee's estate (or heir as designated by the legal representative of Employee's estate at such time), within thirty (30) days following the date of Employee's death or termination, the Salary, if any, accrued and unpaid through the date of termination; and, except for the payment of any unpaid portion of (i) the Cancellation Payment as and when due as set forth in Section 3.C. or (ii) the accrued and unpaid Commission Amount to the extent set forth in Section 3.B., Employee (or such legal guardian, legal representative or any heirs) shall not be entitled to any other compensation, remuneration or other sums provided for in this Agreement or to which Employee might otherwise be entitled hereunder or at law or in equity. E. COMPENSATION UPON TERMINATION WITHOUT CAUSE. In the event that Employer terminates Employee's employment under this Agreement without Cause, Employee's sole and exclusive compensation and remedy hereunder shall be to receive from Employer, and Employer shall pay and/or provide: (i) the amount of Salary, if any, accrued and unpaid through the date of termination; (ii) the amount of any unpaid portion of the Cancellation Payment as and when due as set forth in Section 3.C.; and (iii) the Commission Amount to the extent set forth in Section 3.B. 6. CONFIDENTIALITY. A. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee had been informed by Employer at the time of his original employment of Employer's policy to maintain as secret and confidential all information and materials relating to (i) the financial condition, operations, business and interests of Employer, (ii) the systems, technology, know-how, records, products, services, cost or pricing information, inventions, computer software programs, marketing and sales techniques and/or programs, methods, methodologies, manuals, lists and other trade secrets from time to time acquired, sold, developed, maintained and/or used by Employer, and (iii) the nature and terms of Employer's relationships with its clients, suppliers, lenders, underwriters, vendors, consultants, independent contractors, attorneys, accountants and employees (all such information and materials being hereinafter collectively referred to as "Confidential Information"). Employee further acknowledges that such Confidential Information is of great value to Employer and has been developed by Employer as a result of substantial effort and expense. Therefore, Employee understands that it is reasonably necessary to protect Employer's good will, trade secrets and legitimate business interests that Employee agree and, accordingly, Employee does hereby agree, that Employee will not directly or indirectly (except where authorized by the Board of Directors, Chairman of the Board or Chief Executive Officer of Employer for the benefit of Employer) at any time hereafter divulge or disclose for any purpose to any persons, firms, corporations or other entities (hereinafter referred to collectively as "Third Parties"), or use or cause or authorize any Third Parties to use, any such Confidential Information, except as otherwise required by law. Any software, technology, know-how, trade secrets or intellectual property rights of any kind developed by Employee during the period of his employment with Employer which in any way relate or have 6 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 6 application or value to Employer's business shall be the property, as between Employee and Employer, solely of Employer. B. EMPLOYER'S MATERIALS. In accordance with the foregoing, Employee furthermore agrees that (i) Employee will at no time retain or remove from the premises of Employer any products, prototypes, drawings, notebooks, software programs or discs, tapes or similar containers of software, manuals, data, books, records, materials or documents of any kind or description for any purpose unconnected with the strict performance of Employee's duties with Employer and (ii) upon the cessation or termination of Employee's employment with Employer for any reason, Employee shall forthwith deliver or cause to be delivered to Employer any and all drawings, notebooks, software programs or discs, tapes or similar containers of software, manuals, data, books, records, materials and other documents and materials in Employee's possession or under Employee's control relating to any Confidential Information or any other material or thing which is the property of Employer. 7. COVENANT-NOT-TO-COMPETE. In view of (A) the Confidential Information known to and to be obtained by or disclosed to or previously disclosed to Employee, (B) the substantial consideration (including, without limitation, the Cancellation Payment) paid and payable to Employee under this Agreement, (C) as a material inducement to Employer to enter into this Agreement, and (D) for other good and valuable considerations (including, without limitation, the termination of Employee's obligations and agreements under Section 11 of the Former Agreement), Employee covenants and agrees that, for as long as Employee is employed by Employer and for a period of two (2) years after the date Employee ceases for any reason to be employed by Employer, Employee shall not, directly or indirectly, (A) solicit the services of, or hire, directly or indirectly, whether on Employee's own behalf or on behalf of others, any managerial or executive employee, account manager, member of Employers' sales, marketing, customer service or client relations group or programmer or other information services or data base management personnel of Employer who is employed by Employer or any of its affiliates as of or following the date of termination of Employee's employment, or (B) engage in any venture, enterprise, activity or business, passively or actively, as an owner, or as a consultant, adviser, independent contractor, participant, employee or agent in a capacity relating to marketing, advertising, promotional activities, client relations, customer service or sales, competitive with the business of Employer anywhere within the continental United States other than and excluding any business performing the services provided by Employer solely for its own internal use. Employee acknowledges that the business of Employer is national in scope, that one can effectively compete with such business from anywhere in the continental United States, and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect Employer's trade secrets, goodwill and other legitimate business interests. 7 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 7 8. ENFORCEMENT. Employee covenants and agrees that if Employee shall violate or breach any of Employee's covenants or agreements provided for in Section 6 or 7, Employer shall be entitled to an accounting and repayment of all profits, compensation, commissions, remunerations and benefits which Employee directly or indirectly has realized and realizes as a result of, growing out of or in connection with any such violation or breach. In addition, in the event of a breach or violation or threatened or imminent breach or violation of any provisions of Section 6 or 7, Employer shall be entitled to a temporary and permanent injunction or any other appropriate decree of specific performance or equitable relief (without being required to post bond or other security, to the extent permitted by applicable law) from a court of competent jurisdiction in order to prevent, prohibit or restrain any such breach or violation or threatened or imminent breach or violation by Employee and/or by any Third Parties. Employer shall be entitled to such injunctive or other equitable relief in addition to any ascertainable damages which are suffered, together with reasonable attorneys' and paralegals' fees and costs and other costs incurred in connection with any such litigation, both before and at trial and at all tribunal levels. It is understood that resort by Employer to such injunctive or other equitable relief shall not be deemed to waive or to limit in any respect any other rights or remedies which Employer may have with respect to such breach or violation. 9. RESIGNATION. Employee hereby resigns, effective as of the date of this Agreement, as an executive officer of Employer. 10. MISCELLANEOUS. A. This Agreement shall be governed by and construed pursuant to the laws of the State of Florida. B. Any notices required or permitted to be given pursuant to this Agreement shall be sufficient if in writing, and delivered personally, by commercial courier service or sent by certified mail, return receipt requested, and sent to Employer's executive offices, to the attention of the Chief Executive Officer, if mailed to Employer, and to Employee's then current residence, if mailed to Employee. C. This Agreement constitutes the entire final agreement between the parties with respect to, and supersedes any and all prior and contemporaneous agreements (including, but not limited to, the Former Agreement) between the parties hereto, both oral and written, concerning the subject matter hereof and may not be amended, modified or terminated except by a writing signed by the parties hereto. The parties mutually acknowledge and agree that the Former Agreement is hereby terminated and of no further force or effect whatsoever. 8 Mr. Bernard J. Kosar, Jr. October 1, 1998 Page 8 D. If any provision of this Agreement shall be held to be invalid or unenforceable, and is not reformed by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to such provision and shall not in any way affect or render invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if such invalid or unenforceable provision were not herein contained. E. A waiver of any breach or violation of any term, provision or covenant herein contained shall not be deemed a continuing waiver or a waiver of any future or past breach or violation. No oral waiver shall be binding. F. This Agreement may be executed in counterparts, each of which shall be an original, but both of which together shall constitute one and the same instrument. G. Employer strongly recommends to Employee that Employee retain independent legal counsel to advise Employee with respect to this Agreement before Employee signs it. If you agree that this Agreement correctly sets forth the current understanding and agreement of employment between Employee and Employer, please sign by your name below and return this letter to me. PRECISION RESPONSE CORPORATION, a Florida corporation By: /s/ David L. Epstein ----------------------------------------- David L. Epstein, Chief Executive Officer AGREED TO AND ACCEPTED BY: /s/ Bernard J. Kosar, Jr. - ------------------------------------ BERNARD J. KOSAR, JR. EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Precision Response Corporation on Form S-8 (File No. 333-19651) of our report dated February 17, 1999, on our audits of the consolidated financial statements and financial statement schedule of Precision Response Corporation as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this annual report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Miami, Florida March 30, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 1,656 0 50,996 8,225 0 55,734 101,576 30,162 133,446 33,715 16,916 0 0 215 79,144 133,446 0 175,173 0 153,638 22,339 14,534 1,050 (16,127) (5,938) 0 0 0 0 (10,189) (0.47) (0.47)
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