SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, no par value, and options to purchase Common Stock
(2) Aggregate number of securities to which transaction applies:
15,353,846 shares of Common Stock and options to purchase an
indeterminate number of shares, not to exceed 1,678,826 shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Based upon
the average of the high and low sales prices of the registrant's
Common Stock on August 30, 2001 as quoted on The Nasdaq National
Market
(4) Proposed maximum aggregate value of transaction: $236,583,814.08
(5) Total fee paid: $47,316.76
[ ] Fee paid previously with preliminary materials:
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $59,787.03
(2) Form, Schedule or Registration Statement No.: Form S-4 Registration
Statement No. 333-69142
(3) Filing Party: The Profit Recovery Group International, Inc.
(4) Date Filed: September 7, 2001
(PRG LOGO)
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 24, 2002
---------------------
To the Shareholders of
The Profit Recovery Group International, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of The Profit
Recovery Group International, Inc. ("PRG") will be held on Thursday, January 24,
2002 at 9:00 a.m. local time at PRG's offices, 2300 Windy Ridge Parkway,
Atlanta, Georgia 30339-8426, for the following purposes:
1. To consider and vote upon the proposed issuance by PRG of an
aggregate of up to 15,353,846 shares of its common stock and options to
purchase an indeterminate number of shares of its common stock, not to
exceed 1,678,826 shares, in connection with the proposed acquisition by PRG
of substantially all of the assets of Howard Schultz & Associates
International, Inc. ("HSA-Texas") and the concurrent acquisition by PRG of
substantially all of the outstanding stock of HS&A International Pte Ltd.
and all of the outstanding stock of Howard Schultz & Associates (Asia)
Limited, Howard Schultz & Associates (Australia), Inc. and Howard Schultz &
Associates (Canada), Inc., each an affiliated foreign operating company of
HSA-Texas; and pursuant to the terms of the proposed acquisitions, the
election of Howard Schultz and Andrew Schultz as Class II directors, Nate
Levine as a Class I director and Arthur Budge, Jr. as a Class III director,
conditioned upon closing of the proposed acquisitions.
2. To transact any other matters as may properly come before this
special meeting, including any motion to adjourn to a later time to permit
further solicitation of proxies, if necessary to establish a quorum or to
obtain additional votes in favor of the proposed acquisitions, or for any
postponements or adjournments thereof.
The foregoing proposed acquisitions are more fully described in the
accompanying proxy statement. The PRG board of directors unanimously recommends
that PRG shareholders vote in favor of the proposed share and option issuances
described above and the election of the nominated directors.
The PRG board of directors fixed the close of business on December 11, 2001
as the record date for the determination of PRG shareholders entitled to notice
of and to vote at the PRG special meeting and at any postponements or
adjournments thereof.
To ensure that your PRG shares are represented at the PRG special meeting,
please complete, date and sign the enclosed PRG proxy card and return it
promptly to PRG in the enclosed postage paid envelope whether or not you plan to
attend the PRG special meeting. If you attend the PRG special meeting, you may
revoke your proxy and vote in person.
By Order of the Board of Directors
/s/ John M. Cook
John M. Cook
Chairman of the Board and Chief
Executive Officer
Atlanta, Georgia
December 19, 2001
(PRG LOGO) The Profit Recovery Group
International
The Profit Recovery Group International, Inc. ("PRG") proposes to acquire
for up to 15,353,846 shares of its common stock substantially all of the assets
of Howard Schultz & Associates International, Inc. ("HSA-Texas"), substantially
all of the outstanding stock of HS&A International Pte Ltd. ("HSA-Singapore")
and all of the outstanding stock of Howard Schultz & Associates (Asia) Limited
("HSA-Asia"), Howard Schultz & Associates (Australia), Inc. ("HSA-Australia")
and Howard Schultz & Associates (Canada), Inc. ("HSA-Canada"), each an
affiliated foreign operating company of HSA-Texas, pursuant to an amended and
restated agreement and plan of reorganization in connection with the asset
acquisition and an amended and restated agreement and plan of reorganization in
connection with the stock acquisition. In addition, PRG expects to issue options
to purchase an indeterminate number of shares of PRG common stock, not to exceed
1,678,826 shares, in connection with the assumption of certain options to
purchase HSA-Texas common stock.
The board of directors of PRG has unanimously approved the asset and stock
agreements, the proposed issuance of shares of PRG common stock and options to
purchase PRG common stock described above, and the nomination of Mr. Howard
Schultz, Mr. Andrew Schultz, Mr. Arthur Budge, Jr. and Mr. Nate Levine to serve
as directors of PRG, conditioned upon the closing of the proposed acquisitions,
and recommends that PRG shareholders vote for approval of the proposed share and
option issuances and in favor of the four director nominees. The board of
directors of HSA-Texas has approved the final form of the asset agreement, which
has been executed by the parties thereto. The shareholders of HSA-Texas must
also approve the final form of the asset agreement and the sale of substantially
all of HSA-Texas' assets to PRG. The shareholders of the affiliated foreign
operating companies who are parties to the stock agreement have executed the
final form of the stock agreement.
The proposed acquisitions cannot be completed unless the shareholders of
PRG approve the share and option issuances and elect the four nominees for
director. PRG has scheduled a special meeting for PRG shareholders to vote on
the proposed share and option issuances and the election of the director
nominees. Each Shareholder's Vote Is Very Important.
Only shareholders of record of PRG common stock as of December 11, 2001 are
entitled to attend and vote at the PRG special meeting. The date, time and place
of the PRG meeting are as follows:
January 24, 2002 at 9:00 a.m.
2300 Windy Ridge Parkway
Atlanta, Georgia 30339-8426
Whether or not you plan to attend the meeting, please complete and mail the
enclosed PRG proxy card to PRG. If you sign, date and mail your PRG proxy card
without indicating how you want to vote, your PRG proxy will be counted as a
vote in favor of the proposed share and option issuances and for the election of
the director nominees.
This proxy statement provides PRG shareholders with detailed information
about the proposed share and option issuances. We encourage PRG shareholders to
read this entire document carefully. In addition, PRG shareholders may obtain
information about PRG from documents that PRG has filed with the Securities and
Exchange Commission. PRG's common stock trades on The Nasdaq National Market
under the symbol "PRGX."
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THE PROPOSED SHARE AND OPTION ISSUANCES DESCRIBED IN THIS PROXY
STATEMENT, NOR HAVE THEY DETERMINED IF THIS PROXY STATEMENT IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement is dated December 19, 2001, and is being first mailed
to PRG shareholders on or about December 21, 2001.
TABLE OF CONTENTS
PAGE
----
SUMMARY TERM SHEET.......................................... 1
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ACQUISITIONS..... 1
ADDITIONAL SUMMARY TERM SHEET INFORMATION................. 5
The Companies.......................................... 5
Reasons for the Proposed Acquisitions.................. 7
Recommendation of the Board of Directors............... 7
Opinion of Financial Advisor to PRG.................... 7
Shareholder Approval................................... 7
The Special Meeting.................................... 7
Accounting Treatment................................... 8
Regulatory Approvals................................... 8
Dissenters' Rights..................................... 8
Limitation on Considering Other Acquisition
Proposals............................................. 8
Lender Approvals....................................... 8
Conditions to the Asset Agreement...................... 9
Termination of the Asset Agreement..................... 9
Termination Fees....................................... 9
Expenses............................................... 10
Comparative Per Share Market Price..................... 10
Unaudited Comparative Per Share Data................... 10
Historical Market Prices of PRG Common Stock........... 12
PRG Selected Consolidated Financial Information........ 13
HSA-Texas Selected Combined Financial Information...... 17
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. SUMMARY
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION................................................. 18
SPECIAL CONSIDERATIONS...................................... 19
Special Considerations Relating to the Proposed
Acquisitions........................................... 19
Special Considerations Relating to PRG's Business
Following the Proposed Acquisitions.................... 23
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 27
THE PRG SPECIAL MEETING..................................... 29
Purpose, Time and Place................................... 29
Record Date; Voting Power................................. 29
Share Ownership of Management............................. 29
Voting of Proxies......................................... 30
Revocability of Proxies................................... 30
Solicitation of Proxies................................... 30
Recommendation of the Board of Directors.................. 31
THE PROPOSED ACQUISITIONS................................... 32
Background of the Proposed Acquisitions................... 32
Reasons for the Proposed Acquisitions..................... 32
Opinion of PRG's Financial Advisor........................ 34
Interests of Directors and Officers of HSA-Texas in the
Proposed Acquisitions.................................. 39
Effective Date............................................ 40
Regulatory Approvals...................................... 40
Lender Approvals; Replacement Senior Credit Facility...... 40
Assumption of HSA-Texas Indebtedness...................... 41
Material U.S. Federal Income Tax Consequences Relating to
the Proposed Acquisitions.............................. 41
Accounting Treatment...................................... 41
PRG Rights Plan........................................... 41
Dissenters' and Appraisal Rights Related to the Proposed
Acquisitions........................................... 41
i
PAGE
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Board of Directors and Management Following Proposed
Acquisitions........................................... 42
Nasdaq Listing............................................ 42
Federal Securities Law Consequences....................... 42
MATERIAL TERMS OF THE ASSET AGREEMENT....................... 43
Assets to be Acquired..................................... 43
Excluded Assets........................................... 43
Assumed Liabilities....................................... 43
Retained Liabilities...................................... 44
Purchase Price............................................ 45
HSA-Texas Stock Options and SARs.......................... 46
Shareholder Representative................................ 47
Expected Closing of the Proposed Acquisition.............. 47
Representations and Warranties............................ 47
Covenants and Agreements.................................. 49
Indemnification by HSA-Texas and PRG...................... 50
Conditions to Closing..................................... 53
Limitation on HSA-Texas' and PRG's Ability to Consider
Other Acquisition Proposals............................ 54
Termination of the Asset Agreement........................ 55
Termination Fees.......................................... 57
Expenses.................................................. 58
Amendment; Waiver......................................... 59
MATERIAL TERMS OF THE STOCK AGREEMENT....................... 60
Purchase Price; Closing................................... 60
Shareholder Representative................................ 60
Representations and Warranties............................ 60
Covenants and Agreements.................................. 61
Indemnification........................................... 62
Conditions to Closing..................................... 63
Termination of the Stock Agreement........................ 64
Amendment; Waiver......................................... 65
OTHER RELATED AGREEMENTS.................................... 66
Shareholder Agreement..................................... 66
Registration Rights Agreement............................. 67
Indemnification Agreement................................. 68
Employment Agreements..................................... 69
Noncompetition Agreement.................................. 70
Agreement to Pay Certain Litigation Expenses.............. 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HSA-TEXAS.................... 72
Overview.................................................. 72
Results of Operations..................................... 72
Liquidity and Capital Resources........................... 74
BUSINESS OF HSA-TEXAS....................................... 76
The Business.............................................. 76
History................................................... 76
Audit Services............................................ 78
Technology................................................ 79
Seasonality............................................... 80
Sales and Marketing....................................... 80
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PAGE
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Proprietary Rights........................................ 80
Competition............................................... 80
Employees and Contractors................................. 81
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND
SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)............................................... 82
PRG/HSA-TEXAS STOCK OPTION PLAN............................. 92
PRG DIRECTOR AND EXECUTIVE OFFICER INFORMATION.............. 97
Election of Directors..................................... 97
Information About the Board of Directors and Committees of
the Board.............................................. 100
March 2001 Report of the Compensation Committee on
Executive Compensation................................. 101
Executive Compensation.................................... 104
Certain Transactions...................................... 110
Section 16(a) Beneficial Ownership Reporting Compliance... 111
Ownership of Directors, Director Nominees, Principal
Shareholders and Certain Executive Officers of PRG..... 112
Executive Officers........................................ 115
Performance Graph......................................... 116
SHAREHOLDER PROPOSALS....................................... 116
INDEPENDENT AUDITORS........................................ 116
WHERE YOU CAN FIND MORE INFORMATION......................... 117
HSA-TEXAS INDEX TO COMBINED FINANCIAL STATEMENTS............ F-1
ANNEX A -- ASSET AGREEMENT.................................. A-1
ANNEX B -- STOCK AGREEMENT.................................. B-1
ANNEX C -- OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED.............................................. C-1
iii
SUMMARY TERM SHEET
The following information, together with the "Additional Summary Term Sheet
Information" below, highlights the material information contained in this
document and may not contain all of the information that is important to you. To
understand the proposed acquisitions fully, you should read carefully this
entire document and the other available information referred to in "Where You
Can Find More Information" at page 117 of this proxy statement. The asset
agreement is attached to this proxy statement as Annex A and the stock agreement
is attached to this proxy statement as Annex B. You are encouraged to read these
agreements, as they are the main legal documents governing the proposed
acquisitions.
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ACQUISITIONS
Q: WHAT TRANSACTIONS DO PRG AND HSA-TEXAS PROPOSE? (SEE PAGES 43-45; 60)
A: PRG proposes to acquire substantially all of the assets of HSA-Texas in
exchange for PRG's assumption of certain HSA-Texas liabilities and PRG's
issuance of 14,724,338 shares of PRG common stock, less a number of shares
of PRG common stock having a value equal to the "in the money" value of the
options to purchase shares of HSA-Texas common stock and HSA-Texas stock
appreciation rights, or SARs, outstanding at the closing, as described in
the asset agreement attached as Annex A to this proxy statement.
In addition to issuing shares of its common stock to acquire the assets of
HSA-Texas, PRG will also issue:
- 1,535 shares of PRG common stock to acquire substantially all of the
outstanding stock of HSA-Singapore;
- 75,234 shares of PRG common stock to acquire all of the outstanding stock
of HSA-Asia;
- 245,662 shares of PRG common stock to acquire all of the outstanding
stock of HSA-Australia; and
- 307,077 shares of PRG common stock to acquire all of the outstanding
stock of HSA-Canada;
each an affiliated foreign operating company of HSA-Texas, as described in
the stock agreement attached as Annex B to this proxy statement. The
aggregate number of shares to be issued pursuant to the asset and stock
agreements will not exceed 15,353,846 shares. PRG will also assume certain
outstanding liabilities of HSA-Texas and certain outstanding options to
purchase shares of HSA-Texas common stock. The number of shares of PRG
common stock subject to the assumed options will not exceed 1,678,826
shares. The closings of the transactions contemplated by the stock
agreement and the asset agreement are contingent on each other. See
"Material Terms of the Asset Agreement" and "Material Terms of the Stock
Agreement" for a detailed discussion of other closing conditions.
Q: WHY IS PRG ACQUIRING THE ASSETS OF HSA-TEXAS AND THE STOCK OF THE FOUR
AFFILIATED FOREIGN OPERATING COMPANIES? (SEE PAGE 32-34)
A: PRG's board of directors anticipates that after the completion of the
proposed acquisitions, PRG should have the potential to realize long-term
improved operating and financial results and should be in a stronger
competitive position in the recovery audit and expense containment
marketplace. PRG's board of directors believes that the proposed
acquisitions represent a unique, strategic fit between companies with
similar business strategies and complementary recovery audit service
offerings, and that the proposed acquisitions are in the best interest of
PRG and its shareholders.
Q: HOW MUCH DEBT DOES PRG EXPECT TO INCUR IN CONNECTION WITH THE PROPOSED
ACQUISITIONS? (SEE PAGE 41)
A: PRG expects to incur or assume between $59.7 million and $69.5 million of
HSA-Texas net debt in connection with the proposed acquisitions.
1
Q: WHAT ARE PRG SHAREHOLDERS BEING ASKED TO APPROVE? (SEE PAGE 29)
A: PRG shareholders are being asked to approve:
- the issuance of up to 15,353,846 shares of PRG common stock as
consideration in connection with the proposed acquisitions;
- the issuance of options to purchase up to 1,678,826 shares of PRG common
stock in connection with the assumption of certain outstanding HSA-Texas
options; and
- the election of Howard Schultz and Andrew Schultz as Class II directors,
Nate Levine as a Class I director and Arthur Budge, Jr. as a Class III
director, contingent upon the closing of the proposed acquisitions.
Assuming that holders of a majority of the outstanding shares of PRG common
stock entitled to vote on the record date of the special meeting, December
11, 2001, are present, either in person or by proxy, at the special
meeting, the affirmative vote of a majority of the shares of PRG common
stock entitled to vote that are actually voted either in person or by proxy
is required to approve the share and option issuances and to elect the
nominated directors.
Q: WHEN DOES PRG EXPECT THE PROPOSED ACQUISITIONS TO BE COMPLETED? (SEE PAGE
47)
A: The parties are working toward completing the transactions as quickly as
possible. Closing requires, in addition to approval by the shareholders of
PRG, that each of PRG, HSA-Texas and the shareholders of the affiliated
foreign operating companies satisfy or waive all of the closing conditions
contained in the asset agreement and stock agreement, as applicable. Under
the asset agreement, the transaction will close on a date no later than 10
business days after the satisfaction or waiver of the closing conditions or
on the date designated by PRG and HSA-Texas.
Q: WHAT WILL HAPPEN TO THE HSA-TEXAS STOCK OPTIONS AND SARS OUTSTANDING AT
CLOSING? (SEE PAGES 46-47)
A: At closing, PRG will assume each outstanding HSA-Texas option held by
persons who become employees, directors or independent contractors of PRG
or any of its affiliates. These assumed options will constitute options to
acquire PRG common stock, on terms equivalent to those of the HSA-Texas
stock options, in accordance with the 1999 Howard Schultz & Associates
Stock Option Plan. The exercise price and the number of shares subject to
each of these HSA-Texas stock options will be adjusted to give effect to
the proposed acquisition of HSA-Texas, and all of these options will be
vested and have a term of five years following the closing of the asset
acquisition. The HSA-Texas SARs and the remaining HSA-Texas options will
not be assumed by PRG.
Q: HOW WILL THE NUMBER OF HSA-TEXAS OPTIONS AND SARS OUTSTANDING AT THE
CLOSING AFFECT THE NUMBER OF SHARES THAT HSA-TEXAS RECEIVES IN THE ASSET
ACQUISITION? (SEE PAGE 45)
A: The number of shares of PRG common stock that PRG delivers to HSA-Texas in
the asset acquisition will be reduced by a number of shares having a value
equal to the aggregate "in the money" value of all HSA-Texas options and
SARs outstanding at closing, whether or not assumed by PRG, divided by the
PRG "average price." The PRG average price is defined to be the average of
the closing prices of PRG common stock on The Nasdaq National Market for
the five trading days prior to the closing of the asset acquisition.
The "in the money" value of each outstanding HSA-Texas option and SAR is
computed by subtracting the per share exercise price of the option or the
per share grant price of the SAR, as applicable, from the "per share value"
attributed to each HSA-Texas share in accordance with a formula which:
- Computes a value for HSA-Texas based on the number of PRG shares proposed
to be issued in the asset acquisition multiplied by the average closing
price, as defined above; and
- Divides that value by the sum of the number of shares of HSA-Texas
outstanding on the closing date, the number of shares of HSA-Texas common
stock subject to options outstanding on that date, and the number of
HSA-Texas SARs outstanding on that date. See "Material Terms of the Asset
Agreement -- Purchase Price."
2
The following table generally illustrates the aggregate number of shares
that PRG expects to issue to HSA-Texas in the asset acquisition and shows
how the number of shares that PRG will issue to HSA-Texas in the asset
acquisition will be reduced by the "in the money" value of outstanding
options and SARs, based upon a range of hypothetical PRG "average prices."
The following assumes that at the closing, there will be 2,307,482 shares
of HSA-Texas voting common stock outstanding, 6,435,383 shares of HSA-Texas
non-voting common stock outstanding, 1,133,423 shares of HSA-Texas common
stock underlying outstanding options and 64,569 outstanding HSA-Texas SARs.
The average price of PRG common stock may be more or less than the ranges
set forth below and the number of shares of HSA-Texas common stock
outstanding, the number of shares of HSA-Texas common stock underlying
outstanding options and the number of outstanding HSA-Texas SARs at closing
may be more or less than the numbers set forth above.
ESTIMATED TOTAL ESTIMATED REDUCTION
ASSUMED AVERAGE NUMBER OF PRG IN NUMBER OF PRG
PRICE OF PRG SHARES TO BE RECEIVED SHARES TO BE RECEIVED
COMMON STOCK BY HSA-TEXAS BY HSA-TEXAS
--------------- --------------------- -------------------------
$ 4.00............................ 14,724,338 --
$ 5.00............................ 14,724,338 --
$ 6.00............................ 14,699,298 25,040
$ 7.00............................ 14,473,853 250,485
$ 8.00............................ 14,283,356 440,982
$ 9.00............................ 14,135,204 589,134
$10.00............................ 14,016,671 707,667
$11.00............................ 13,919,689 804,649
$12.00............................ 13,838,871 885,467
$13.00............................ 13,770,486 953,852
$14.00............................ 13,711,871 1,012,467
$15.00............................ 13,661,071 1,063,267
$16.00............................ 13,616,621 1,107,717
Changes in the PRG average price do not affect the number of shares,
629,508 in the aggregate, to be issued to the shareholders of the
affiliated foreign operating companies.
Q: WHAT DO I NEED TO DO? (SEE PAGES 29-30)
A: After carefully reading and considering the information contained in this
proxy statement, please respond by completing, signing, and dating your PRG
proxy card and returning it, in the enclosed postage paid envelope, as soon
as possible so that your PRG shares may be represented at PRG's special
meeting.
Q: WHAT HAPPENS IF I DO NOT RETURN MY PRG PROXY CARD? (SEE PAGE 29)
A: The failure to return your PRG proxy card increases the risk that a quorum,
which is a majority of the outstanding voting shares of PRG common stock,
will not be obtained. If a quorum is not obtained at the special meeting or
any continuation of the special meeting, PRG cannot issue the proposed
shares and options and the nominated directors will not be elected. As a
result, PRG would be unable to proceed with the proposed acquisitions.
Q: WHAT HAPPENS IF I RETURN A SIGNED PRG PROXY CARD BUT DO NOT INDICATE HOW TO
VOTE MY PRG PROXY? (SEE PAGE 30)
A: If you do not include instructions on how to vote your properly signed and
dated PRG proxy card, your PRG shares will be voted for approval of the
proposed share and option issuances and the election of the nominated
directors.
Q: MAY I VOTE IN PERSON AT THE PRG SPECIAL MEETING? (SEE PAGE 29)
A: You may attend PRG's special meeting and vote your PRG shares in person,
rather than signing and returning your PRG proxy card. Only PRG
shareholders of record as of the record date, December 11, 2001, or their
proxies are eligible to vote in person.
3
Q: IF MY PRG SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY PRG SHARES FOR ME? (SEE PAGE 29)
A: Your broker will not be able to vote your PRG shares without instructions
from you. You should instruct your broker to vote your PRG shares by
following the procedures provided by your broker. The failure to provide
such voting instructions to your broker increases the risk that a quorum
will not be obtained, without which the proposed share and option issuances
will not be approved and the nominated directors will not be elected.
Q: CAN I CHANGE MY VOTE AFTER I HAVE DELIVERED MY PRG PROXY? (SEE PAGE 30)
A: Yes. You can change your vote at any time before your proxy is voted at
PRG's special meeting. You can do this in one of three ways. First, you can
revoke your proxy. Second, you can submit a new proxy. If you choose either
of these two methods, you must submit your notice of revocation or your new
proxy to the secretary of PRG so that it is received before your proxy is
voted at PRG's special meeting. If your PRG shares are held in an account
at a brokerage firm or bank, you should contact your brokerage firm or bank
to change your vote. Third, you can attend the PRG special meeting and vote
in person. Only PRG shareholders of record as of the record date or their
proxies are eligible to vote in person. Your attendance alone will not
revoke your proxy. If you have instructed a broker to vote your PRG shares,
you must follow directions received from your broker to change those
instructions.
Q: WHAT ARE THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED
ACQUISITIONS TO PRG? (SEE PAGE 41)
A: The proposed acquisition of the assets of HSA-Texas, and subsequent
liquidation of HSA-Texas, are intended to qualify as a tax-free
reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of
1986, or the Code. PRG will not recognize taxable gain or loss as a result
of the issuance of shares of PRG common stock to acquire the assets of
HSA-Texas.
The proposed acquisitions of the affiliated foreign operating companies are
intended to qualify as tax-free reorganizations under Section 368(a)(1)(B)
of the Code. PRG will not recognize taxable gain or loss solely as a result
of PRG's acquisition of the stock of the affiliated foreign operating
companies for PRG common stock.
Q: WILL THE NAME OF PRG CHANGE FOLLOWING THE CLOSING OF THE PROPOSED
ACQUISITIONS?
A: Yes. As soon as practicable following the closing, PRG will change its
corporate name to "PRG-Schultz International, Inc."
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about either the proposed acquisitions or how to
submit your PRG proxy, or if you need additional copies of this proxy
statement or the enclosed PRG proxy card or voting instructions, you should
contact:
The Profit Recovery Group International, Inc.
2300 Windy Ridge Parkway, Suite 100 North
Atlanta, Georgia 30339-8426
Attention: Leslie H. Kratcoski
Phone Number: (770) 779-3900
4
ADDITIONAL SUMMARY TERM SHEET INFORMATION
The following highlights additional information contained in this proxy
statement but may not contain all of the information that is important to you.
To understand the proposed acquisitions fully, you should read carefully this
entire document and the other available information referred to in "Where You
Can Find More Information" at page 117 of this proxy statement. The asset
agreement is attached to this proxy statement as Annex A and the stock agreement
is attached to this proxy statement as Annex B. You are encouraged to read these
agreements, as they are the main legal documents governing the proposed
acquisitions.
THE COMPANIES
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 779-3900
PRG is a leading provider of recovery audit, expense containment and
knowledge application services to large and mid-size businesses having numerous
payment transactions with many vendors. These businesses include, but are not
limited to, the following:
- retailers such as discount, department, specialty, grocery and drug
stores;
- manufacturers of pharmaceuticals, consumer electronics, chemicals and
aerospace and medical products;
- wholesale distributors of computer components, food products and
pharmaceuticals; and
- healthcare providers such as hospitals and health maintenance
organizations.
PRG currently services approximately 2,500 clients in 34 different
countries. PRG's continuing operations have one operating segment consisting of
Accounts Payable Services that offers different types of recovery and cost
containment services.
Recent Developments
Convertible Notes Offering
On November 26, 2001, PRG closed on a $95.0 million offering of its 4 3/4%
convertible subordinated notes due 2006. PRG issued an additional $15.0 million
of the notes on December 3, 2001, and on December 4, 2001, the initial
purchasers of the notes issued on November 26, 2001 purchased an additional
$15.0 million of the notes to cover over allotments, bringing to $125.0 million
the aggregate amount issued. PRG received net proceeds from the offering of
approximately $121.4 million. The proceeds of the notes were used to pay down
PRG's outstanding balance under its senior credit facility.
The notes are convertible into PRG common stock at a conversion price of
$7.74 per share, which is equal to a conversion rate of 129.1990 shares per
$1,000 principal amount of notes, subject to adjustment. PRG may redeem some or
all of the notes at any time on or after November 26, 2004 at a redemption price
of $1,000 per $1,000 principal amount of notes, plus accrued and unpaid
interest, if prior to the redemption date the closing price of PRG common stock
has exceeded $10.836 for at least twenty trading days within a period of thirty
consecutive days ending on the trading date before the date of mailing of the
optional redemption notice.
Discontinued Operations
In March 2001, PRG formalized a strategic realignment initiative designed
to enhance PRG's financial position and clarify its investment and operating
strategy by focusing on its core Accounts Payable Services business. Under this
strategic realignment initiative, PRG decided to divest the following non-core
businesses: Meridian, a part of the Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship &
Debit division within the Accounts Payable Services
5
segment. As a result, since the first quarter of 2001, these businesses have
been classified as discontinued operations.
Owing to the separate and distinct nature of each business to be divested,
PRG and its advisors determined that PRG would be unlikely to sell all of these
businesses as a whole to one buyer. As a result, during the last several months,
PRG has been engaged in independent divestiture processes for each of these
businesses. On October 30, 2001, PRG completed the sale of its Logistics
Management Services segment for approximately $13.0 million. PRG received
initial gross proceeds from the sale of approximately $10.0 million, and PRG may
receive up to an additional $3.0 million payable in the form of a revenue-based
royalty over the next four years. The other discontinued operations currently
remain for sale. However, if current difficult market conditions continue such
that there is further erosion in the expected net proceeds, PRG, in consultation
with its advisors, may in the future conclude that the sale of the remaining
discontinued operations is no longer advisable and may revisit the decision to
sell some or all of these businesses.
On December 14, 2001, PRG consummated the sale of its French Taxation
Services business for approximately $48.3 million. As a result, the French
Taxation Services business has been classified as a discontinued operation for
accounting purposes, and all historical and pro forma financial information
contained herein has been restated to remove this business from continuing
operations. The sale of the French Taxation Services business will result in a
net loss on the transaction of approximately $54.0 million in the fourth quarter
of 2001. See "Special Considerations -- Special Considerations Relating to PRG's
Business Following the Proposed Acquisitions -- As a result of the sale of PRG's
French Taxation Services operations, PRG will recognize a substantial and
material net loss in the fourth quarter of 2001."
Amendment to Senior Credit Facility
On November 9, 2001, PRG entered into an amendment to its senior credit
facility, effective September 30, 2001. The amendment waived certain financial
ratio covenant defaults as of September 30, 2001. Pursuant to the amendment,
several current and prospective financial ratio covenants were re-established
and relaxed. The amendment also prospectively increases interest rates and
effectively limits PRG's borrowing capacity to approximately $50.0 million,
after application of the net proceeds of the convertible note offering. It also
provides for additional mandatory reductions of the outstanding balance under
the senior credit facility equal to the net cash proceeds from future sales of
the discontinued operations and any future issuance of debt or equity
securities. After application of approximately $24.2 million of the net proceeds
from the sale of the French Taxation Services business, there will be no amounts
outstanding under PRG's senior credit facility.
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC. (SEE PAGES 76-81)
9241 LBJ FREEWAY, SUITE 100
DALLAS, TEXAS 75243
(972) 233-7564
Howard Schultz & Associates International, Inc., its subsidiaries and
licensees are industry pioneers in providing recovery audit services. HSA-Texas
audits accounts payable records, occupancy costs, vendor statements and direct
to store delivery records to recover overpayments that are a result of missed
credits, duplicated payments, overlooked allowances, incorrect invoices and
other discrepancies.
HSA-Texas provides recovery audit services to large and mid-size businesses
having numerous payment transactions with many vendors. These businesses
include, but are not limited to retailers, manufacturers, wholesale
distributors, technology companies and healthcare providers.
HSA-Texas has more than 1,000 audit associates working in most major U.S.
cities and several international markets. HSA-Texas and its affiliated operating
companies and licensees operate 25 regional offices in the United States,
Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Mexico, the
Philippines, Portugal, Singapore, Thailand, Taiwan, the Netherlands, Spain and
the United Kingdom.
6
REASONS FOR THE PROPOSED ACQUISITIONS (SEE PAGES 32-34)
PRG agreed to engage in the proposed acquisitions because of the synergies
and market strength that will result from combining the businesses. The
completion of the proposed acquisitions will give the combined company an
enhanced global presence and the opportunity to gain market share.
In addition, the board of directors of PRG approved the proposed
acquisitions based on a number of factors, including the belief that the
proposed acquisitions may allow the combined company to:
- accelerate innovation and audit effectiveness and thereby better meet
customer needs for next-generation audit recovery services;
- accelerate expansion into existing and new recovery audit markets;
- be more competitive with other leading audit recovery companies,
including the current and former consulting arms of the Big 5 accounting
firms;
- add to their intellectual property portfolio in the field of audit
recovery processes; and
- add qualified auditors and other employees from the HSA-Texas workforce
to PRG, enhancing its expertise in audit recovery technology.
RECOMMENDATION OF THE BOARD OF DIRECTORS (SEE PAGE 31)
The PRG board of directors has voted unanimously to nominate the proposed
directors, conditioned on the closing of the asset acquisition, and to approve
the terms and provisions of the asset agreement and the stock agreement and the
proposed issuance of shares and options, and believes that they are fair to
PRG's shareholders and in their best interest. The PRG board of directors
recommends that PRG's shareholders vote for the approval of the proposed share
and option issuances and in favor of the nominated directors.
OPINION OF FINANCIAL ADVISOR TO PRG (SEE PAGES 34-39)
In deciding to approve the proposed acquisitions, PRG's board of directors
considered the oral opinion of its financial advisor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, which opinion was subsequently confirmed in a
written opinion, to the effect that, as of the date of the opinion, and subject
to and based on the considerations referred to in the opinion, the consideration
to be paid by PRG in connection with the proposed acquisitions was fair, from a
financial point of view, to PRG. The opinion, dated as of August 3, 2001, is
attached as Annex C to this proxy statement. PRG urges its shareholders to read
the opinion of Merrill Lynch in its entirety.
SHAREHOLDER APPROVAL (SEE PAGES 29-30)
As of the record date, PRG directors and executive officers and their
affiliates owned in the aggregate approximately 16.71% of its outstanding shares
of common stock, which shares PRG expects to be voted for approval of the
proposed share and option issuances and in favor of the nominated directors. The
affirmative vote of a majority of the outstanding shares of PRG common stock
entitled to vote and present at the special meeting is required to approve the
proposed share and option issuances and to elect the nominated directors. As of
the record date, PRG directors and executive officers and their affiliates did
not own, beneficially or of record, any shares of HSA-Texas common stock.
HSA-Texas has informed PRG that, as of the record date, directors and executive
officers of HSA-Texas owned, beneficially or of record, 3,100 shares of PRG
common stock.
THE SPECIAL MEETING (SEE PAGE 29)
The special meeting of the shareholders of PRG will be held on January 24,
2002, at 9:00 a.m., local time, at PRG's offices, 2300 Windy Ridge Parkway,
Atlanta, Georgia 30339-8426.
7
ACCOUNTING TREATMENT (SEE PAGE 41)
PRG will account for the proposed acquisitions under the purchase method of
accounting.
REGULATORY APPROVALS (SEE PAGE 40)
The proposed acquisitions are subject to review by the Department of
Justice and the Federal Trade Commission, or FTC, to determine whether they
comply with applicable antitrust laws. Under the provisions of the HSR Act, the
proposed acquisitions could not be completed until the waiting period
requirement of the HSR Act had been satisfied. On August 3, 2001, PRG and
HSA-Texas filed required documents with the FTC and requested early termination
of the waiting period, which was granted effective as of August 10, 2001.
DISSENTERS' RIGHTS (SEE PAGE 41)
PRG's shareholders are not required to approve the proposed acquisitions
under Georgia law, but rather are required by Nasdaq rules to approve the
issuance of shares, including shares subject to options, that are proposed to be
issued in connection with the proposed acquisitions. Georgia corporate law,
which governs PRG as a Georgia corporation, does not afford dissenters' or
appraisal rights in connection with transactions such as the proposed
acquisitions to holders of shares that are quoted on The Nasdaq National Market,
or Nasdaq, as are PRG's shares. Therefore, PRG shareholders have no dissenters'
or appraisal rights with respect to the proposed acquisitions.
LIMITATION ON CONSIDERING OTHER ACQUISITION PROPOSALS (SEE PAGES 54-55)
PRG and HSA-Texas have agreed not to consider an alternative acquisition
proposal or other similar transaction with another party while the proposed
acquisitions are pending; provided, however, that PRG may consider an
alternative acquisition proposal if:
- a third party has made an unsolicited, bona fide written proposal to
PRG's board of directors; and
- the PRG board determines in good faith that consideration of the
alternative acquisition proposal is necessary for the board to comply
with its fiduciary duties to PRG's shareholders; and
- the board determines that the alternative acquisition proposal will, if
completed, be superior to the proposed acquisitions.
PRG may also consider an alternative acquisition proposal if a third party
agrees to acquire HSA-Texas, including the four affiliated foreign operating
companies, concurrently as if they were a part of PRG.
LENDER APPROVALS; REPLACEMENT SENIOR CREDIT FACILITY (SEE PAGES 40-41)
PRG has held extensive discussions with the nine members of its banking
syndicate concerning the proposed acquisitions. The credit facility, as amended,
provides that a two-thirds majority of the banks in the syndicate must approve
the proposed acquisitions. As a result of these discussions with the members of
PRG's current banking syndicate, PRG believes that it will be unable to obtain
the consent of at least two-thirds of the members of the syndicate required in
order to complete the proposed acquisitions. PRG is therefore negotiating a new
senior credit facility, the proceeds of which PRG will utilize to repay certain
indebtedness of HSA-Texas and fund various merger and integration costs related
to the proposed acquisitions. PRG expects to obtain a new senior credit facility
with a borrowing capacity of up to $75.0 million, with tiered interest based on
either prime or LIBOR and a term of at least three years, secured by all of
PRG's assets. Aggregate outstanding borrowing may be limited to a percentage of
eligible receivables. PRG will not complete the proposed acquisitions unless a
senior credit facility with terms substantially equivalent to those described
above, with immediate borrowing availability of at least $30.0 million and with
interest rates substantially equivalent to or more favorable to PRG than those
of its current senior credit facility, is in place as of or prior to the closing
of the proposed acquisitions.
8
CONDITIONS TO THE ASSET AGREEMENT (SEE PAGES 53-54)
The obligations of PRG and HSA-Texas to complete the asset acquisition are
subject to the satisfaction of a number of conditions in addition to the
approval by a majority of PRG's shareholders, including:
- the acquisition of substantially all of the outstanding stock of
HSA-Singapore and all of the outstanding stock of HSA-Asia, HSA-Australia
and HSA-Canada pursuant to the stock agreement prior to or concurrently
with the closing of the asset agreement;
- the approval for listing on The Nasdaq National Market of the shares of
PRG common stock to be issued in the proposed acquisitions; and
- PRG's obtaining either the consent of its principal lenders to the
proposed acquisitions or a new or amended senior credit facility that
does not prohibit the proposed transactions.
TERMINATION OF THE ASSET AGREEMENT (SEE PAGES 55-56)
Either PRG or HSA-Texas is entitled to terminate the asset agreement under
specified conditions, including:
- if the proposed acquisitions have not been completed by March 31, 2002;
- if PRG has not received lender consent or obtained a new or amended
credit facility on or before March 31, 2002 that does not prohibit the
proposed transactions;
- if a court issues a final and nonappealable order that prohibits the
proposed acquisitions; or
- if PRG shareholders or the holders of HSA-Texas voting common stock do
not approve the proposed acquisitions.
In addition, PRG and HSA-Texas can terminate the asset agreement by mutual
written consent, and HSA-Texas can terminate the asset agreement if a
"triggering event" occurs, such as the approval by the board of directors of PRG
of an alternative acquisition proposal which does not include the concurrent
acquisition of HSA-Texas and the four affiliated foreign operating companies.
TERMINATION FEES (SEE PAGES 57-58)
If the asset agreement is terminated after PRG mails this proxy statement
to its shareholders because:
- the PRG board of directors approves or recommends to its shareholders any
alternative acquisition proposal which does not include the concurrent
acquisition of HSA-Texas and the four affiliated foreign operating
companies;
- the PRG board withdraws its recommendation or amends it in a manner
adverse to HSA-Texas; or
- a tender or exchange offer is commenced and PRG does not recommend
rejection of the offer;
PRG will be obligated to pay HSA-Texas a fee in the amount of $2.0 million, plus
HSA-Texas' expenses incurred in connection with the proposed acquisitions, by
wire transfer of immediately available funds.
In addition, if the asset agreement is terminated after PRG mails this
proxy statement to its shareholders because:
- the HSA-Texas special meeting to approve the asset acquisition is not
held prior to March 31, 2002;
- HSA-Texas or any affiliated foreign operating company elects not to
participate in specified alternative acquisitions proposed by PRG; or
- HSA-Texas or shareholders of the affiliated foreign operating companies
have breached their representations and warranties or failed to perform
their covenants under the asset agreement or the stock agreement, as
applicable,
9
HSA-Texas will be required to promptly pay PRG an amount equal to all of PRG's
expenses incurred in connection with the proposed acquisitions by wire transfer
of immediately available funds. See "Material Terms of the Asset
Agreement -- Termination Fees" for a detailed discussion of termination fees.
EXPENSES (SEE PAGE 58)
Except as described above, the asset agreement provides that all expenses
incurred by each respective party shall be borne by that party. However, if the
proposed acquisitions are completed, PRG will pay any previously unpaid
reasonable and necessary fees and expenses of attorneys and accountants of
HSA-Texas.
COMPARATIVE PER SHARE MARKET PRICE
PRG common stock is listed on The Nasdaq National Market under the symbol
"PRGX." On July 25, 2001, the last full trading day before the public
announcement of the proposed acquisitions, the last sale price per PRG common
share on Nasdaq was $10.51. On December 18, 2001, the most recent practicable
date prior to the filing of this proxy statement, the last sale price per PRG
common share on Nasdaq was $8.25. HSA-Texas' and its affiliates' common stock is
not publicly traded.
UNAUDITED COMPARATIVE PER SHARE DATA
The following summary presents per share information for PRG, HSA-Texas,
HSA-Singapore, HSA-Asia, HSA-Australia and HSA-Canada on an historical, pro
forma combined and pro forma diluted equivalent basis for the periods and as of
the dates indicated below. The pro forma information gives effect to the
proposed acquisitions using the purchase method of accounting. This information
should be read in conjunction with HSA-Texas' historical financial statements
and related notes and the pro forma combined financial data included elsewhere
or incorporated by reference in this proxy statement. The pro forma information
should not be relied upon as being indicative of the historical results that the
companies would have had if the proposed acquisitions had occurred before such
periods or the future results that the companies will experience after the
proposed acquisitions.
The PRG pro forma combined income (loss) per diluted share has been
computed based on the diluted number of outstanding shares of PRG, adjusted for
the PRG common stock to be issued in the proposed acquisitions of HSA-Texas,
HSA-Singapore, HSA-Asia, HSA-Australia, and HSA-Canada. The pro forma equivalent
income (loss) from continuing operations per share of the acquired companies is
based on the pro forma income from continuing operations per fully diluted
common share of PRG multiplied by the estimated number of shares of PRG common
stock to which each holder of one share of each of the acquired companies'
common stock will be entitled upon completion of the proposed acquisitions, as
follows:
HSA-Texas(1)............................................... 1.64 shares
HSA-Singapore(2)........................................... 15.35 shares
HSA-Asia(2)................................................ 752.34 shares
HSA-Australia(2)........................................... 245.66 shares
HSA-Canada(2).............................................. 307.08 shares
---------------
(1) Assumes that at closing HSA-Texas will have 2,307,482 outstanding voting
shares of common stock, 6,435,383 outstanding shares of non-voting common
stock, 1,133,423 shares subject to outstanding options and 64,569
outstanding SARs, and that the PRG "average price" is $7.834.
(2) Assumes that the number of outstanding shares at closing will be 102 shares
of HSA-Singapore common stock, 100 shares of HSA-Asia common stock,
consisting of 2 outstanding "A" shares of common stock and 98 outstanding
"B" shares of common stock, 1,000 shares of HSA-Australia common stock and
1,000 shares of HSA-Canada common stock.
PRG, HSA-Texas and the affiliated foreign operating companies historically
have not paid cash dividends on common shares. PRG intends to retain all of its
earnings for the future operations and growth of its business and does not
intend to pay cash dividends in the foreseeable future. PRG is prohibited from
paying dividends by its credit facility.
10
The PRG pro forma combined book value per share is based upon the pro forma
combined equity of PRG, divided by the pro forma number of outstanding shares of
PRG common stock as of September 30, 2001. The pro forma equivalent book value
per share of the acquired companies is based on the pro forma book value per
share of PRG multiplied by the estimated number of shares of PRG common stock to
which each holder of one share of each acquired company's common stock will be
entitled upon completion of the proposed acquisitions, as listed above.
The pro forma combined and pro forma equivalent amounts may vary, based,
with respect to the HSA-Texas amounts, upon the closing price of PRG common
stock on the effective date and the other assumptions set forth above in
footnotes 1 and 2.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
Statement of Operations Data:
Income (loss) from continuing operations per weighted
average diluted share:
HISTORICAL
PRG.................................................... $ 0.11 $ 0.09
HSA-Texas.............................................. (0.38) 0.19
HSA-Singapore.......................................... (18,008.40) (753.36)
HSA-Asia............................................... 35.49 (685.26)
HSA-Australia.......................................... (320.96) (242.62)
HSA-Canada............................................. (170.13) 113.96
PRO FORMA COMBINED
PRG.................................................... 0.05 0.10
PRO FORMA EQUIVALENT
HSA-Texas.............................................. .08 .16
HSA-Singapore.......................................... 0.77 1.54
HSA-Asia............................................... 37.62 75.23
HSA-Australia.......................................... 12.28 24.57
HSA-Canada............................................. 15.35 30.71
AS OF SEPTEMBER 30,
2001
-------------------
Balance Sheet Data:
Net Book Value Per Share:
HISTORICAL
PRG.................................................... $ 4.59
HSA-Texas.............................................. 1.15
HSA-Singapore.......................................... (2,347.15)
HSA-Asia............................................... (17,413.35)
HSA-Australia.......................................... (277.75)
HSA-Canada............................................. (418.67)
PRO FORMA COMBINED
PRG.................................................... 5.25
PRO FORMA EQUIVALENT
HSA-Texas.............................................. 8.61
HSA-Singapore.......................................... 80.59
HSA-Asia............................................... 3,949.79
HSA-Australia.......................................... 1,289.72
HSA-Canada............................................. 1,612.17
11
The pro forma data above assume that the shares of PRG common stock
received by HSA-Texas will be available for distribution to the HSA-Texas
shareholders, and not subject to claims of creditors of HSA-Texas. See "Material
Terms of the Asset Agreement -- Retained Liabilities" for a description of
liabilities to be retained by HSA-Texas after the proposed acquisitions.
HISTORICAL MARKET PRICES OF PRG COMMON STOCK
The table below sets forth for the periods presented the high and low sales
prices per share for PRG common stock, as reported on The Nasdaq National
Market, adjusted for the 3-for-2 stock split effected by a stock dividend paid
on August 17, 1999. PRG has not paid cash dividends on its common stock since
its initial public offering on March 26, 1996 and does not intend to pay cash
dividends in the foreseeable future. Moreover, restrictive covenants included in
PRG's bank credit facility prohibit payment of cash dividends.
COMMON STOCK
PRICES
---------------
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................. $26.67 $18.75
Second Quarter............................................ 32.25 22.42
Third Quarter............................................. 45.50 24.83
Fourth Quarter............................................ 47.50 23.00
YEAR ENDED DECEMBER 31, 2000:
First Quarter............................................. $34.38 $14.75
Second Quarter............................................ 20.56 13.00
Third Quarter............................................. 18.81 7.88
Fourth Quarter............................................ 9.91 3.06
YEAR ENDED DECEMBER 31, 2001:
First Quarter............................................. $ 7.67 $ 4.81
Second Quarter............................................ 14.00 4.88
Third Quarter............................................. 16.10 9.18
Fourth Quarter (through December 18, 2001)................ 9.80 4.20
As of December 11, 2001, there were 48,784,120 shares of PRG common stock
outstanding, which were owned by 327 holders of record.
12
PRG SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial data for PRG
as of and for the five years ended December 31, 2000 and as of September 30,
2001 and for the nine months ended September 30, 2001 and 2000. Such historical
consolidated financial data as of and for the five years ended December 31, 2000
have been derived from PRG's Consolidated Financial Statements and Notes
thereto. The Consolidated Balance Sheets as of December 31, 2000 and 1999, and
the related Consolidated Statements of Operations, Shareholders' Equity and Cash
Flows for each of the years in the three-year period ended December 31, 2000 and
the independent auditors' report thereon, which in each such year is based
partially upon the report of other auditors and refers to changes in accounting
for revenue recognition in 2000 and 1999, are incorporated by reference in this
proxy statement. Such historical consolidated financial data as of September 30,
2001 and for the nine months ended September 30, 2001 and 2000 are derived from
PRG's unaudited Consolidated Financial Statements, and include, in the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the data for the periods. In March 2001, PRG
initiated a strategic realignment designed to enhance PRG's financial position
and clarify its investment and operating strategy by focusing primarily on its
core Accounts Payable business. Under this strategic realignment initiative, PRG
intends to divest the following non-core businesses: Meridian VAT Reclaim
("Meridian") within the former Taxation Service segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable Services
segment. Selected Consolidated Financial Data for PRG has been restated to
reflect Meridian, Logistics Management Services, Communications Services, and
Ship & Debit as discontinued operations for all periods presented. In addition,
in December 2001, the executive committee of PRG's board of directors authorized
the sale of PRG's French Taxation Services business. As a result of the
foregoing, the French Taxation Services business has been classified as a
discontinued operation and all historical and pro forma financial information
contained herein has been restated to remove this business from continuing
operations. Selected Consolidated Financial data for PRG was retroactively
restated, as required under accounting principles generally accepted in the
United States of America, to include the accounts of Meridian and PRS
International, Ltd. which were acquired in August 1999 and accounted for under
the pooling-of-interests method. Further, PRG made the decision in the second
quarter of 1999 to change its method of revenue recognition retroactively
effective to January 1, 1999 to recognize revenue on all of its then existing
operations when it invoices clients for its fees. PRG had previously recognized
revenue from services provided to its historical client base (consisting
primarily of retailers, wholesale distributors and governmental entities) at the
time overpayment claims were presented to and approved by its clients. In
accordance with the applicable requirements of accounting principles generally
accepted in the United States of America, consolidated financial statements for
periods prior to 1999 have not been restated. Due to accounting changes, certain
financial statement amounts related to continuing operations for 1999 will not
be directly comparable to corresponding amounts for 1998 and prior years, and
certain financial statement amounts related to discontinued operations for 2000
will not be directly comparable to corresponding amounts for 1999 and prior
years. The data presented below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto incorporated in this proxy
statement by reference to PRG's Form 8-K filed on December 17, 2001.
13
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
2001 2000 2000(13) 1999(2)(10) 1998(1)(3) 1997(1)(4) 1996(1)
-------- -------- -------- ----------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues............................... $186,299 $190,287 $255,110 $246,378 $180,903 $118,539 $85,439
Cost of revenues....................... 100,041 101,736 139,430 132,115 97,268 62,572 45,227
Selling, general and administrative
expense(5)........................... 74,521 66,867 100,435 78,757 60,900 41,055 28,925
-------- -------- -------- -------- -------- -------- -------
Operating income..................... 11,737 21,684 15,245 35,506 22,735 14,912 11,287
Interest (expense), net................ (3,900) (3,762) (5,270 (2,234) (403) 3 (90)
-------- -------- -------- -------- -------- -------- -------
Earnings from continuing operations
before income taxes, discontinued
operations and cumulative effect of
accounting change.................. 7,837 17,922 9,975 33,272 22,332 14,915 11,197
Income taxes(6)........................ 3,448 7,886 4,389 13,642 8,263 5,519 7,799
-------- -------- -------- -------- -------- -------- -------
Earnings from continuing operations
before discontinued operations and
cumulative effect of accounting
change............................. 4,389 10,036 5,586 19,630 14,069 9,396 3,398
Discontinued operations:
Earnings (loss) from discontinued
operations, net of income taxes.... (1,303) (22,755) (44,714) 7,806 565 (32) 445
Loss on disposal from discontinued
operations including operating
results from phase out period, net
of income taxes(11)................ (31,000) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------
Earnings (loss) from discontinued
operations......................... (32,303) (22,755) (44,714) 7,806 565 (32) 445
-------- -------- -------- -------- -------- -------- -------
Earnings (loss) before cumulative
effect of accounting change........ (27,914) (12,719) (39,128) 27,436 14,634 9,364 3,843
Cumulative effect of accounting
change............................... -- -- -- (29,195) -- -- --
-------- -------- -------- -------- -------- -------- -------
Net earnings (loss)............ $(27,914) $(12,719) $(39,128 $ (1,759) $ 14,634 $ 9,364 $ 3,843
======== ======== ======== ======== ======== ======== =======
Cash dividends per share(12)........... $ -- $ -- $ -- $ 0.01 $ 0.01 $ 0.01 $ 0.16
======== ======== ======== ======== ======== ======== =======
Basic earnings (loss) per share:
Earnings from continuing operations
before discontinued operations and
cumulative effect of accounting
change............................. $ 0.09 $ 0.20 $ 0.11 $ 0.41 $ 0.36 $ 0.28 $ 0.11
Discontinued operations.............. (0.67) (0.46) (0.91) 0.16 0.01 -- 0.02
Cumulative effect of accounting
change............................. -- -- -- (0.61) -- -- --
-------- -------- -------- -------- -------- -------- -------
Net earnings (loss)............ $ (0.58) $ (0.26) $ (0.80 $ (0.04) $ 0.37 $ 0.28 $ 0.13
======== ======== ======== ======== ======== ======== =======
Diluted earnings (loss) per share:
Earnings from continuing operations
before discontinued operations and
cumulative effect of accounting
change............................. $ 0.09 $ 0.20 $ 0.11 $ 0.40 $ 0.35 $ 0.27 $ 0.11
Discontinued operations.............. (0.66) (0.45) (0.90) 0.15 0.01 -- 0.01
Cumulative effect of accounting
change............................. -- -- -- (0.59) -- -- --
-------- -------- -------- -------- -------- -------- -------
Net earnings (loss)............ $ (0.57) $ (0.25) $ (0.79) $ (0.04) $ 0.36 $ 0.27 $ 0.12
======== ======== ======== ======== ======== ======== =======
14
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
2001 2000(13) 1999(2)(7) 1998(1)(3)(8) 1997(1)(4) 1996(1)(9)
------------- -------- ---------- ------------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 6,700 $16,127 $ 14,150 $ 20,016 $ 13,664 $17,056
Working capital...................... 137,059 208,308 177,072 85,592 55,172 36,388
Total assets......................... 408,704 453,232 460,757 349,430 102,074 51,936
Long-term debt, excluding current
installments and loans from
shareholders....................... 100,125 153,361 92,811 111,132 24,199 716
Total shareholders' equity........... 223,925 247,529 294,970 143,828 45,537 23,570
---------------
(1) Selected consolidated financial data for PRG as of and for the three years
ending December 31, 1998, as previously reported, have been retroactively
restated, as required under accounting principles generally accepted in the
United States of America, to include the accounts of Meridian VAT
Corporation Limited and PRS International, Ltd. which were each acquired in
August 1999 and accounted for under the pooling-of-interests method. See
Notes 2 and 10 of Notes to Consolidated Financial Statements incorporated
in this proxy statement by reference to PRG's Form 8-K filed on December
17, 2001.
(2) During 1999, PRG completed six acquisitions accounted for as purchases
consisting of Payment Technologies, Inc. (April), Invoice and Tariff
Management Group, LLC (June), AP SA (October), Freight Rate Services, Inc.
(December), Integrated Systems Consultants, Inc. (December) and minority
interests in three subsidiaries of Meridian VAT Corporation Limited
(December). See Notes 2 and 10 of Notes to Consolidated Financial
Statements incorporated in this proxy statement by reference to PRG's Form
8-K filed on December 17, 2001.
(3) During 1998, PRG completed eight acquisitions accounted for as purchases
consisting of Precision Data Link (March), The Medallion Group (June),
Novexel S.A. (July), Loder, Drew & Associates, Inc. (August), Cost Recovery
Professionals Pty Ltd (September), Robert Beck & Associates, Inc. and
related businesses (October), IP Strategies SA (November) and Industrial
Traffic Consultants, Inc. (December). See Notes 2 and 10 of Notes to
Consolidated Financial Statements incorporated in this proxy statement by
reference to PRG's Form 8-K filed on December 17, 2001.
(4) During 1997, PRG completed four acquisitions accounted for as purchases
consisting of Accounts Payable Recovery Services, Inc. (February), The Hale
Group (May), 98.4% of Financiere Alma, S.A. and its subsidiaries (October)
and TradeCheck, LLC (November), and one acquisition accounted for as a
pooling of interests, Shaps Group, Inc. (January). See Notes 2 and 10 of
Notes to Consolidated Financial Statements incorporated in this proxy
statement by reference to PRG's Form 8-K filed on December 17, 2001.
(5) Includes merger-related charges relating to a business acquired under the
pooling-of-interests accounting method and certain restructuring charges.
See Note 16 of Notes to Consolidated Financial Statements incorporated in
this proxy statement by reference to PRG's Form 8-K filed on December 17,
2001.
(6) In connection with PRG's March 1996 initial public offering, all domestic
entities became C corporations. As a result of these conversions to C
corporations, PRG incurred a charge to operations of $3.7 million in 1996
for cumulative deferred income taxes. PRG's 1996 provision for income taxes
of $7.8 million consists of the above-mentioned $3.7 million charge for
cumulative deferred income taxes combined with $4.1 million in tax
provisions for the three quarters subsequent to the March 26, 1996 initial
public offering.
(7) Balance Sheet Data as of December 31, 1999 reflect the receipt of $118.5
million in net proceeds from PRG's January 1999 follow-on public offering.
See Note 8 of Notes to Consolidated Financial Statements incorporated in
this proxy statement by reference to PRG's Form 8-K filed on December 17,
2001.
(8) Balance Sheet Data as of December 31, 1998 reflect the receipt of $81.2
million in net proceeds from PRG's March 1998 follow-on public offering.
See Note 8 of Notes to Consolidated Financial
15
Statements incorporated in this proxy statement by reference to PRG's Form
8-K filed on December 17, 2001.
(9) Balance Sheet Data as of December 31, 1996 reflect the receipt of $34.8
million in net proceeds from PRG's March 1996 initial public offering
together with the partial use of such proceeds to repay substantially all
debt obligations other than certain convertible debentures which were
converted to equity immediately prior to the offering.
(10) In 1999, PRG changed its method of accounting for revenue recognition. See
Notes 2(b) and 1(d) of Notes to Consolidated Financial Statements
incorporated in this proxy statement by reference to PRG's Form 8-K filed
on December 17, 2001.
(11) In December 2001, PRG authorized the sale of its French Taxation Services
business. As a result, PRG will recognize a loss on disposal of the French
Taxation Services business of approximately $54.0 million in the fourth
quarter of 2001.
(12) Cash dividends per share represent distributions to shareholders of PRG
prior to PRG's initial public offering and distributions to the
shareholders of PRS International, Ltd.
(13) During 2000, PRG completed two acquisitions accounted for as purchases
consisting of The Right Answer, Inc. (March) and TSL Services, Inc. (June).
See Note 2 of Notes to Consolidated Financial Statements incorporated in
this proxy statement by reference to PRG's Form 8-K filed on December 17,
2001.
16
HSA-TEXAS SELECTED COMBINED FINANCIAL INFORMATION
The following selected historical combined financial data should be read in
conjunction with HSA-Texas' combined financial statements contained in this
proxy statement. The statement of operations data for fiscal years 1998 through
2000 and the balance sheet data as of December 31, 2000 and 1999 have been
derived from HSA-Texas' audited combined financial statements, and the selected
combined financial data as of December 31, 1998 and September 30, 2001 and for
the nine months ended September 30, 2001 and 2000 have been derived from
HSA-Texas' unaudited combined financial statements and include, in the opinion
of management of HSA-Texas, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the data for these periods. Certain
reclassifications have been made to the 2000, 1999 and 1998 amounts to conform
to the presentation in 2001. The combined financial data included herein may not
necessarily be indicative of the financial position or results of operations of
HSA-Texas in the future. Selected financial data as of, and for the years ended,
December 31, 1996 and 1997, have not been presented, due to HSA-Texas' inability
to obtain from its former licensees a significant portion of the necessary
financial information required to prepare financial statements for those years
in conformity with accounting principles generally accepted in the United States
of America. In addition, HSA-Texas does not believe that such selected financial
data would be material to evaluation of the information regarding HSA-Texas
contained in this proxy statement because it relates to periods in which the
majority of HSA-Texas' operations were conducted by independently owned
licensees. See "Business of HSA-Texas."
NINE MONTHS ENDED
----------------------------- YEARS ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ------------------------------
2001 2000 2000 1999 1998
------------- ------------- -------- -------- --------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Revenues................................ $100,761 $102,542 $138,708 $133,789 $117,599
Cost of revenues........................ 65,651 67,364 91,222 94,071 89,849
Selling, general and administrative
expenses.............................. 35,564 34,396 48,324 37,760 26,223
-------- -------- -------- -------- --------
Operating income (loss)............... (454) 782 (838) 1,958 1,527
Interest income (expense), net.......... (2,277) (2,240) (2,938) (2,243) (1,770)
Settlement of litigation................ 3,650 -- -- -- --
Other income (expense), net............. 10 (72) 47 (33) 264
-------- -------- -------- -------- --------
Income (loss) before income taxes..... 929 (1,530) (3,729) (318) 21
Foreign tax benefit(1).................. 512 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)..................... $ 1,441 $ (1,530) $ (3,729) $ (318) $ 21
======== ======== ======== ======== ========
DECEMBER 31,
SEPTEMBER 30, ---------------------------
2001 2000 1999 1998
------------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 6,071 $ 2,179 $ 3,910 $ 1,980
Working capital (deficit)............................. 48 (3,669) 997 9,294
Total assets.......................................... 69,893 60,868 48,956 45,330
Long-term debt, excluding current installments........ 33,763 30,074 23,125 27,022
Total stockholders' equity............................ 7,396 186 5,701 5,627
---------------
(1) HSA-Texas has been a subchapter S corporation for all periods presented and
therefore has no income tax expense other than a foreign tax benefit item in
2001.
17
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
SUMMARY SELECTED UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following summary selected unaudited pro forma combined financial
information for PRG has been derived from the historical consolidated financial
statements contained in this proxy statement which give effect to the
acquisition of the HSA-Texas assets and substantially all of the outstanding
stock of HSA-Singapore and all of the outstanding stock of HSA-Asia,
HSA-Australia and HSA-Canada, under purchase accounting, and should be read in
conjunction with the unaudited pro forma combined financial statements and the
related notes contained herein. For pro forma purposes, PRG's unaudited pro
forma combined statements of operations for the nine months ended September 30,
2001 and the year ended December 31, 2000 are presented as if the purchase had
occurred as of January 1, 2000, and PRG's unaudited pro forma combined balance
sheet as of September 30, 2001 is presented as if the purchase had occurred as
of that date.
The summary selected unaudited pro forma combined financial information
should be read in conjunction with PRG's unaudited consolidated financial
statements and related notes included in PRG's Form 8-K filed on December 17,
2001 and the audited consolidated financial statements and related notes in
PRG's Form 8-K filed on December 17, 2001, which are incorporated by reference
herein. The pro forma information is based on estimates and assumptions and may
not necessarily be indicative of what PRG's results of operations or financial
position would have been had the proposed acquisitions been effected as of and
for the periods presented, nor is such information necessarily indicative of
PRG's results of operations or financial position for any future period or date.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2001
-------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................................... $393,818 $287,060
Cost of revenues............................................ 230,652 165,692
Selling, general and administrative expenses................ 147,315 107,421
-------- --------
Operating income.......................................... 15,851 13,947
Interest (expense), net..................................... (7,964) (5,658)
Settlement of litigation income............................. -- 3,650
-------- --------
Earnings from continuing operations before income taxes... 7,887 11,939
Income taxes................................................ 4,338 5,492
-------- --------
Earnings from continuing operations....................... $ 3,549 $ 6,447
======== ========
Basic earnings per share -- earnings from continuing
operations................................................ $ 0.06 $ 0.10
======== ========
Diluted earnings per share -- earnings from continuing
operations................................................ $ 0.05 $ 0.10
======== ========
Shares used for basic per share calculation................. 63,812 63,123
Shares used for diluted per share calculation............... 65,727 64,596
SEPTEMBER 30, 2001
------------------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,421
Working capital............................................. 8,112
Long-term debt, excluding current installments.............. 79,092
Total shareholders' equity.................................. 334,832
18
SPECIAL CONSIDERATIONS
You should consider the following together with the other information
included or incorporated by reference in this proxy statement.
SPECIAL CONSIDERATIONS RELATING TO THE PROPOSED ACQUISITIONS
IF PRG CANNOT OBTAIN A REPLACEMENT SENIOR CREDIT FACILITY, IT WILL BE
UNABLE TO COMPLETE THE PROPOSED ACQUISITIONS.
Based on discussions with its current lenders, PRG has determined that it
cannot obtain the consent required under its senior credit facility to complete
the proposed acquisitions. As a result, in order for PRG to have sufficient
liquidity to complete the proposed acquisitions and the necessary integration of
the HSA-Texas business, it must obtain a replacement senior credit facility for
the current senior facility with immediate borrowing availability of at least
$30.0 million. If PRG is unable to obtain a replacement senior credit facility,
it will be unable to complete the proposed acquisitions.
COMPLETION OF THE PROPOSED ACQUISITIONS WILL RESULT IN SUBSTANTIAL DILUTION
TO SHAREHOLDINGS OF CURRENT PRG SHAREHOLDERS.
As of December 11, 2001, PRG had outstanding 48,784,120 shares of its
common stock. If the proposed acquisitions are completed and PRG issues the
maximum aggregate consideration of approximately 15,353,846 shares of PRG common
stock in exchange for substantially all of the assets of HSA-Texas and
substantially all of the outstanding stock of the four affiliated foreign
operating companies, immediately following the proposed acquisitions affiliates
of HSA-Texas will own approximately 23.4% of PRG's outstanding common stock, and
the ownership of current PRG shareholders will be reduced to approximately
76.6%.
COMPLETION OF THE PROPOSED ACQUISITIONS COULD RESULT IN MATERIAL DILUTION
TO PRG'S EARNINGS PER SHARE.
PRG's unaudited pro forma combined financial statements contained in this
proxy statement, which give effect to the proposed acquisitions as if they had
closed on January 1, 2000, show a reduction of $.06 per share in PRG's pro forma
combined diluted earnings per share from continuing operations for the year
ended December 31, 2000 as compared to its historical audited results for the
same period. PRG's earnings from continuing operations for the year ended
December 31, 2000 were approximately $5.6 million as compared to pro forma
combined earnings from continuing operations of approximately $3.5 million for
the same period. It is possible that PRG's future earnings per share will be
materially diluted as a result of the completion of the proposed acquisitions.
If the proposed acquisitions have a material negative impact on PRG's earnings
per share, the trading price of PRG's common stock may be materially adversely
affected.
IF THE ASSET AGREEMENT IS TERMINATED AFTER PRG MAILS THIS PROXY STATEMENT,
PRG WILL INCUR SIGNIFICANT COSTS.
If the asset agreement is terminated after PRG mails this proxy statement
to its shareholders because:
- PRG is unable to obtain the approval of its shareholders;
- PRG materially breaches its representations and warranties or fails to
perform its covenants under the asset agreement and any such breach or
failure is not cured by the earlier of 10 days from notice thereof or
March 31, 2002; or
- PRG has not held a special meeting of its shareholders by March 31, 2002;
then PRG will be obligated to reimburse HSA-Texas for all reasonable fees and
expenses, including reasonable attorneys' fees, accountants' fees, financial
advisory fees, broker fees and filing fees, that have been paid by or on behalf
of HSA-Texas in connection with the preparation and negotiation of the proposed
acquisitions and related transactions.
19
If the asset agreement is terminated after PRG mails this proxy statement
to its shareholders because:
- the PRG board of directors or any committee thereof approves or
recommends to its shareholders any alternative acquisition proposal which
does not include the concurrent acquisition of HSA-Texas and the four
affiliated foreign operating companies or their assets by the third party
as if HSA-Texas and the four affiliated foreign operating companies were
a part of PRG at the completion of such alternative acquisition proposal;
or
- the PRG board of directors or any committee thereof shall for any reason
have withdrawn, or shall have amended or modified in a manner adverse to
HSA-Texas, the PRG board's recommendations of the proposed acquisitions;
or
- a tender or exchange offer to acquire 50% or more of the outstanding
shares of PRG common stock shall have been commenced by a third party,
and PRG shall not, within 10 business days after such tender or exchange
offer is first published or given to its shareholders, issued a statement
recommending rejection of such tender or exchange offer,
then PRG will be obligated to pay HSA-Texas $2.0 million plus all transaction
expenses incurred by HSA-Texas and its shareholders, including all reasonable
out of pocket legal and accounting fees, all broker and financial advisor fees,
all HSR fees, and all SEC fees.
In addition, if the proposed acquisitions are not completed for any reason,
PRG will incur a substantial and immediate charge to earnings, estimated to be
within a range of $9.0 million to $11.0 million, for all cumulative out of
pocket business combination costs related to the proposed acquisitions.
THE PROPOSED ACQUISITIONS ARE ANTICIPATED TO RESULT IN LOWER COMBINED
REVENUES FROM CLIENTS WITH RESPECT TO WHICH PRG AND HSA-TEXAS TOGETHER HAVE HAD
THE FIRST AND SECOND AUDIT POSITIONS.
Some of PRG's clients require that two independent audit companies perform
recovery audits of their payment transactions in a first recovery audit followed
by a second recovery audit. In situations where both PRG and HSA-Texas now
perform both the first and second recovery audit services, it is possible that
the client will, upon PRG's acquisition of HSA-Texas, retain another company for
the first or second audit position in place of them. PRG estimates that there
are 38 clients with respect to which PRG and HSA-Texas together have had the
first and second recovery audit positions. These clients represented
approximately 37% of PRG's total annualized revenues from its current client
base and approximately 50% of the total annualized revenues of HSA-Texas with
respect to its current client base. After the combination, a substantial number
of these clients may request that the combined company perform the first or
second audits at reduced rates, or they may award the first or second recovery
audit position to another party, rather than allowing the combined company to
keep both positions. In either case, the combined revenues from these clients
may be materially lower.
THE VALUE OF SHARES OF PRG COMMON STOCK RECEIVABLE IN THE PROPOSED
ACQUISITIONS IS UNCERTAIN.
Other than adjustments in the asset agreement for the "in the money" value
of outstanding options and SARs, neither the asset agreement nor the stock
agreement provides for any adjustments in the number of shares of PRG common
stock deliverable to HSA-Texas or the shareholders of the affiliated foreign
operating companies as a result of fluctuations in the price of PRG common
stock.
Therefore, other than as discussed above, if the market value of PRG common
stock changes significantly, there will be no change, either upward or downward,
in the aggregate number of shares of PRG common stock to be issued to HSA-Texas
or the shareholders of the foreign operating companies. Accordingly, the effect
of any such significant upward change in the stock price of PRG common stock
will result in PRG paying more for the assets of HSA-Texas and the stock of the
affiliated foreign operating companies than is presently contemplated. You
should obtain recent market quotations for PRG common stock in order to assess
accurately the market value of the PRG shares that will be issued in exchange
for the HSA-Texas assets and the stock of the affiliated foreign operating
companies. PRG cannot predict or give any assurances as to the market price of
PRG common stock before or after the closing of the proposed acquisitions.
Recently, the stock market and PRG's stock price have experienced extreme price
and volume
20
fluctuations. These market fluctuations have materially affected the market
price of PRG common stock and may materially affect the market price of PRG
common stock in the future.
FAILURE TO HIRE AND RETAIN HSA-TEXAS' AUDITORS AND OTHER CRITICAL HSA-TEXAS
PERSONNEL COULD DIMINISH THE BENEFITS OF THE PROPOSED ACQUISITIONS TO PRG.
The successful integration of the HSA-Texas business into PRG's current
business operations will depend in large part on PRG's ability to hire and
retain HSA-Texas' auditors and other personnel critical to the business and
operations of HSA-Texas. PRG may be unable to retain management personnel and
auditors that are critical to the successful operation of the HSA-Texas
business, resulting in loss of key information, expertise or know-how and
unanticipated additional recruiting and training costs and otherwise diminishing
anticipated benefits of the proposed acquisitions for PRG and its shareholders.
In addition, any auditors not retained by PRG could compete with the combined
company, particularly in Europe, and could cause existing HSA-Texas clients to
cease doing business with the combined company or to require more client
favorable terms to retain their business. Also, if PRG cannot successfully
implement a revised compensation plan that reduces the compensation level of a
large number of HSA-Texas' auditors, the anticipated benefits of the proposed
acquisitions will be diminished. Even if PRG is successful in implementing the
revised compensation plan, some HSA-Texas auditors may elect not to work for PRG
if their compensation is reduced.
IF PRG IS NOT SUCCESSFUL IN INTEGRATING THE BUSINESS OF HSA-TEXAS AND ITS
AFFILIATED FOREIGN OPERATING COMPANIES, PRG'S OPERATIONS MAY BE ADVERSELY
AFFECTED.
It is not certain that PRG and the business of HSA-Texas and its affiliated
foreign operating companies can be successfully integrated in a timely manner or
at all or that any of the anticipated benefits will be realized. The challenges
involved in this integration include the following:
- retaining and integrating management and other key personnel of each
company;
- combining the corporate cultures of PRG and HSA-Texas;
- combining service offerings effectively and quickly;
- transitioning HSA-Texas' auditors to PRG's information management and
compensation systems;
- integrating sales and marketing efforts so that customers can understand
and do business easily with the combined company;
- transitioning all worldwide facilities to common accounting and
information technology systems; and
- coordinating a large number of employees in widely dispersed operations
in the United States and several foreign countries.
Risks from unsuccessful integration of the companies include:
- the impairment of relationships with employees, clients and suppliers;
- the potential disruption of the combined company's ongoing business and
distraction of its management;
- delay in introducing new service offerings by the combined company; and
- unanticipated expenses related to integration of the companies.
The combined company may not succeed in addressing these risks. Further,
PRG cannot assure you that the growth rate of the combined company will equal or
exceed the historical growth rates experienced by PRG, HSA-Texas or any of its
affiliates individually. PRG's ability to realize the anticipated benefits of
the proposed acquisitions will depend in part on PRG's ability to integrate
HSA-Texas' operations into PRG's current operations in a timely and efficient
manner.
This integration may be difficult and unpredictable because PRG's
compensation arrangements, service offerings and processes are highly complex
and have been developed independently from those of HSA-Texas.
21
Successful integration requires coordination of different management personnel
and auditors, as well as sales and marketing efforts and personnel. If PRG
cannot successfully integrate the HSA-Texas assets with its operations, PRG may
not realize the expected benefits of the proposed acquisitions.
IF PRG IS NOT SUCCESSFUL IN INTEGRATING THE BUSINESS OPERATIONS OF
HSA-TEXAS IN THE UNITED KINGDOM, PRG'S FINANCIAL RESULTS MAY BE ADVERSELY
AFFECTED.
HSA-Texas' operations in the United Kingdom generated revenues of
approximately $24.4 million and operating income of approximately $1.8 million
for its fiscal year ended April 30, 2001. PRG's ability to realize the
anticipated benefits of the proposed acquisitions will depend in part on PRG's
ability to integrate HSA-Texas' United Kingdom operations into PRG's current
United Kingdom operations in a timely and efficient manner. If PRG cannot
successfully integrate such operations with its operations, PRG may not realize
the expected benefits of the proposed acquisitions and PRG's financial results
may be adversely affected.
THE ACQUISITIONS BY PRG OF BUSINESSES OUTSIDE OF ITS CORE BUSINESS OF
ACCOUNTS PAYABLE AUDITING HAVE BEEN, IN GENERAL, FINANCIALLY AND OPERATIONALLY
UNSUCCESSFUL.
The acquisitions by PRG of businesses outside of its core business of
accounts payable auditing have been, in general, financially and operationally
unsuccessful. As a result, on January 31, 2001, PRG announced that its board of
directors had approved the sale of its Meridian VAT Reclaim business, the
Communications Services segment, the Logistics Management Services segment, and
the Ship and Debit division within the Accounts Payable Service segment. The
sale of the Logistics Management Services segment was completed on October 30,
2001. In addition, on December 14, 2001, PRG consummated the sale of its French
Taxation Services business for approximately $48.3 million. PRG will recognize a
loss on the sale of approximately $54.0 million in the fourth quarter of 2001.
While PRG believes that the acquisition of HSA-Texas and its affiliates is
within its core business, there can be no assurance that PRG will be more
successful in achieving financial and operational success with the proposed
acquisitions than it was in previous non-core business acquisitions.
THE PROPOSED ACQUISITIONS MAY FAIL TO ACHIEVE BENEFICIAL SYNERGIES.
PRG and HSA-Texas believe that the proposed acquisitions will result in
beneficial synergies between the parties and their respective recovery audit
businesses. Factors that could cause the combined company to fail to achieve
these anticipated synergies and potential benefits include:
- failure to retain clients of either company;
- PRG's ability to timely integrate the service and sales efforts of the
combined company;
- the risk that the combined company may lose audit contracts from clients
for whom PRG and HSA-Texas currently serve in both the first and second
audit positions;
- failure to achieve operating and cost efficiencies in the combined
company;
- the risk that it may be difficult to retain key management, marketing,
and technical personnel; and
- competitive conditions and cyclicality in the audit recovery market.
Regardless of the outcome of the factors discussed above, there can be no
assurance that the anticipated synergies will be achieved. The failure to
achieve such synergies may affect the combined company's operating results and
efficiencies and its ability to expand into existing and new recovery audit
markets.
TRANSACTION COSTS OF THE PROPOSED ACQUISITIONS COULD ADVERSELY AFFECT
COMBINED FINANCIAL RESULTS.
PRG and HSA-Texas are expected to incur direct transaction costs of up to
approximately $15.0 million in connection with the proposed acquisitions. If the
benefits of the proposed acquisitions do not exceed the costs associated with
the proposed acquisitions, the combined company's financial results, including
earnings per share, could be adversely affected.
22
SPECIAL CONSIDERATIONS RELATING TO PRG'S BUSINESS FOLLOWING THE PROPOSED
ACQUISITIONS
PRG HAS VIOLATED ITS DEBT COVENANTS IN THE PAST AND MAY DO SO IN THE
FUTURE.
As of September 30, 2001, PRG was not in compliance with certain financial
ratio covenants in its credit facility. The existing covenant violations were
waived by PRG's lenders in an amendment to the credit facility dated November 9,
2001. This amendment also relaxed certain financial ratio covenants for the
fourth quarter of 2001 and each of the quarters of 2002. No assurance can be
provided that PRG will not violate these covenants or the covenants of any
replacement financing in the future, or that, if such violations occur, PRG's
lenders will not elect to pursue their contractual remedies under the credit
facility, including requiring the immediate repayment in full of all amounts
outstanding. There can be no assurance that PRG can secure adequate or timely
replacement financing to repay its lenders in the event of such a repayment
demand.
PRG DEPENDS ON ITS LARGEST CLIENTS FOR SIGNIFICANT REVENUES, AND IF PRG
LOSES A MAJOR CLIENT, PRG'S REVENUES COULD BE ADVERSELY AFFECTED.
PRG generates a significant portion of its revenues from its largest
clients. For the nine month period ended September 30, 2001, PRG's two largest
clients accounted for approximately 17.9% of PRG's revenues from continuing
operations. For the year ended December 31, 2000, PRG's two largest clients
accounted for approximately 16.0% of PRG's revenues from continuing operations.
If PRG loses any major clients, PRG's results of operations could be materially
and adversely affected by the loss of revenue, and PRG would have to seek to
replace the lost clients with new business.
PRG'S ANNOUNCED PLANNED DIVESTITURES MAY NOT ACHIEVE ANTICIPATED BENEFITS.
PRG has announced the planned divestiture of its Meridian VAT Reclaim
business, its Communications Services segment, its Logistics Management Services
segment, its Ship & Debit division within the Accounts Payable Services segment
and its French Taxation Services segment. The Logistics Management Services and
French Taxation Services segments have been sold. Although PRG is currently
proceeding to complete the divestiture of the remaining discontinued operations,
there is no guaranty that they can be completed on a timely basis, if at all, or
that the businesses to be divested can be disposed of at the prices PRG
anticipates. If PRG is unable to divest these businesses, if the timing of the
divestitures exceeds that anticipated, or if the proceeds received in the
divestitures are lower than expected, PRG may not achieve the anticipated
benefits. For example, PRG may incur additional losses upon completion of the
divestitures, PRG may not realize the cost savings anticipated as a result of
the divestitures and management's time and attention may be diverted to a
greater degree than expected. In addition, the announced intention to dispose of
these businesses may result in a diminished value of the assets to be divested
through, for example, the loss of customers or key personnel employed by such
businesses and therefore diminish expected operating results in these
businesses. Any of these events or others could have a material adverse impact
on PRG's business, results of operations and liquidity.
AS A RESULT OF THE SALE OF PRG'S FRENCH TAXATION SERVICES OPERATIONS, PRG
WILL RECOGNIZE A SUBSTANTIAL AND MATERIAL NET LOSS IN THE FOURTH QUARTER OF
2001.
On December 14, 2001, PRG consummated the sale of its French Taxation
Services business for approximately $48.3 million. The sale of the French
Taxation Services business will result in a net loss on the transaction of
approximately $54.0 million in the fourth quarter of 2001.
AN ADVERSE JUDGMENT IN THE SECURITIES ACTION LITIGATION IN WHICH PRG AND
JOHN M. COOK ARE DEFENDANTS COULD HAVE A MATERIAL ADVERSE EFFECT ON PRG'S
RESULTS OF OPERATIONS AND LIQUIDITY.
PRG and John M. Cook are defendants in three putative class action lawsuits
filed on June 6, 2000 in the United States District Court for the Northern
District of Georgia, Atlanta Division, which have since been consolidated into
one proceeding. A judgment against PRG in this case could have a material
adverse effect on PRG's results of operations, stock price and liquidity, while
a judgment against Mr. Cook could adversely affect his financial condition and
therefore have a negative impact upon his performance as PRG's chief executive
officer. Plaintiffs in this litigation have alleged in general terms that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by
23
allegedly disseminating materially false and misleading information about a
change in PRG's method of recognizing revenue and in connection with revenue
reported for a division. The plaintiffs further allege that these misstatements
and omissions led to an artificially inflated price for PRG's common stock
during the putative class period, which runs from July 19, 1999 to July 26,
2000. This case seeks an unspecified amount of compensatory damages, payment of
litigation fees and expenses, and equitable and/or injunctive relief. Although
PRG believes the alleged claims in this lawsuit are without merit and intends to
defend the lawsuit vigorously, due to the inherent uncertainties of the
litigation process and the judicial system, PRG is unable to predict the outcome
of this litigation.
ADDITIONAL ACQUISITIONS OR FINANCING MAY DECREASE PRG SHAREHOLDERS'
PERCENTAGE OWNERSHIP IN PRG AND REQUIRE PRG TO INCUR ADDITIONAL DEBT.
PRG may issue equity securities in future acquisitions or in connection
with future financings, including any additional financings necessary to obtain
lender consent to the proposed acquisitions. These issuances could be dilutive
to PRG shareholders. PRG also may incur additional debt and amortization expense
related to goodwill and other intangible assets in future acquisitions or in
connection with debt or equity financing or a combination thereof. This
additional debt and amortization expense may reduce significantly PRG's
profitability and materially and adversely affect PRG's business, financial
condition and results of operations.
PRG MAY NOT BE ABLE TO CONTINUE TO IDENTIFY A LARGER VOLUME OF RECOVERIES
EACH YEAR FOR THE CLIENTS SERVED BY PRG'S RETAIL/WHOLESALE OPERATIONS.
For most clients served by PRG's retail/wholesale operations, PRG typically
identifies a larger volume of recoveries each year as compared to recoveries
realized in the immediately preceding year. There is no guaranty, however, that
these larger recoveries will continue. If such recovery increases do not
continue, PRG's revenues and operating results would be materially adversely
affected. Factors that could prevent recoveries from increasing include advances
in technology which significantly reduce the levels of client overpayments or an
unexpected reversal of current trends toward the outsourcing of non-core
competencies such as recovery audit services.
CLIENT AND VENDOR BANKRUPTCIES AND VENDOR CHARGEBACKS COULD REDUCE PRG'S
EARNINGS.
PRG's clients generally operate in intensely competitive environments, and
bankruptcy filings are not uncommon. Future bankruptcy filings by one or more of
PRG's larger clients or significant vendor chargebacks by one or more of PRG's
larger clients could have a material adverse effect on PRG's business, financial
condition and results of operations.
PRG RELIES ON INTERNATIONAL OPERATIONS FOR SIGNIFICANT REVENUES.
In 2000, approximately 23.9% of PRG's revenues from continuing operations
and 7.8% of the aggregate revenues of HSA-Texas and its affiliates to be
acquired by PRG were generated from international operations. International
operations are subject to risks, including:
- political and economic instability in the international markets served by
PRG;
- difficulties in staffing and managing foreign operations and in
collecting accounts receivable;
- fluctuations in currency exchange rates, particularly weaknesses in the
Euro, the pound and other currencies of countries in which PRG transacts
business, which could result in currency translation losses that
materially reduce PRG's earnings;
- costs associated with adapting PRG's services to PRG's foreign clients'
needs;
- unexpected changes in regulatory requirements and laws;
- difficulties in transferring earnings from PRG foreign subsidiaries to
PRG; and
- burdens of complying with a wide variety of foreign laws and labor
practices, including laws that could subject certain tax recovery audit
practices to regulation as the unauthorized practice of law.
24
Because PRG expects a significant portion of its revenues to come from
international operations, the occurrence of any of the above events could
materially and adversely affect PRG's business, financial condition and results
of operations.
RECOVERY AUDIT SERVICES ARE NOT WIDELY USED IN INTERNATIONAL MARKETS.
PRG's long-term growth objectives are based in material part on achieving
significant future growth in international markets. Although PRG's recovery
audit services constitute a generally accepted business practice among retailers
in the U.S., Canada, and Mexico, such services have not yet become widely used
in many international markets. Prospective clients, vendors or other involved
parties in foreign markets may not accept PRG's services. The failure of these
parties to accept and use PRG's services could have a material adverse effect on
PRG's business, financial condition and results of operations.
PRG REQUIRES SIGNIFICANT MANAGEMENT AND FINANCIAL RESOURCES TO OPERATE AND
EXPAND PRG'S RECOVERY AUDIT SERVICES INTERNATIONALLY.
In PRG's experience, entry into new international markets requires
considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities. In addition, PRG has
encountered, and expects to continue to encounter, significant expense and
delays in expanding PRG's international operations because of language and
cultural differences, staffing, communications and related issues. PRG generally
incurs the costs associated with international expansion before any significant
revenues are generated. As a result, initial operations in a new market
typically operate at low margins or may be unprofitable. Because PRG's
international expansion strategy will require substantial financial resources,
PRG may incur additional indebtedness or issue additional equity securities
which could be dilutive to PRG's shareholders. In addition, financing for
international expansion may not be available to PRG on acceptable terms and
conditions.
THE LEVEL OF PRG'S ANNUAL PROFITABILITY IS SIGNIFICANTLY AFFECTED BY ITS
THIRD AND FOURTH QUARTER OPERATING RESULTS.
The purchasing and operational cycles of PRG's clients typically cause PRG
to realize higher revenues and operating income in the last two quarters of its
fiscal year. If PRG does not continue to realize increased revenues in future
third and fourth quarter periods, PRG's profitability for any such quarter and
the entire year could be materially and adversely affected because selling,
general and administrative expenses are largely fixed over the short term.
PRG MAY BE UNABLE TO PROTECT AND MAINTAIN THE COMPETITIVE ADVANTAGE OF ITS
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS.
PRG's operations could be materially and adversely affected if PRG is not
adequately able to protect its proprietary software, audit techniques and
methodologies, and other proprietary intellectual property rights. PRG relies on
a combination of trade secret laws, nondisclosure and other contractual
arrangements and technical measures to protect its proprietary rights. Although
PRG presently holds U.S. and foreign registered trademarks and U.S. registered
copyrights on certain of its proprietary technology, PRG may be unable to obtain
similar protection on its other intellectual property. In addition, in the case
of foreign registered trademarks, PRG may not receive the same enforcement
protection on its intellectual property as in the U.S. PRG generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to, and distribution of, its proprietary
information. Nevertheless, PRG may be unable to deter misappropriation of its
proprietary information, detect unauthorized use and take appropriate steps to
enforce its intellectual property rights. PRG's competitors also may
independently develop technologies that are substantially equivalent or superior
to PRG's technology. Although PRG believes that its services and products do not
infringe on the intellectual property rights of others, PRG cannot prevent
someone else from asserting a claim against PRG in the future for violating
their technology rights.
PRG'S FAILURE TO RETAIN THE SERVICES OF MR. COOK COULD ADVERSELY IMPACT ITS
CONTINUED SUCCESS.
PRG's continued success depends largely on the efforts and skills of its
executive officers and key employees, particularly John M. Cook. PRG has entered
into employment agreements with Mr. Cook and
25
other members of management. PRG also maintains key man life insurance policies
in the aggregate amount of $13.3 million on the life of Mr. Cook. The loss of
the services of Mr. Cook could materially adversely affect the combined
company's business, financial condition and results of operations.
PRG MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER
BUSINESSES OFFERING RECOVERY AUDIT SERVICES.
The recovery audit business is highly competitive. PRG's principal
competitors for accounts payable recovery audit services include many local and
regional firms. Also, PRG believes that the major international accounting firms
or their former consulting units that have been spun-off or divested may become
formidable competitors in the future. PRG is uncertain whether it can continue
to compete successfully with its competitors. In addition, PRG's profit margins
could decline because of competitive pricing pressures that may have a material
adverse effect on the combined company's business, financial condition and
results of operations.
PRG'S ARTICLES OF INCORPORATION, BYLAWS, AND SHAREHOLDERS' RIGHTS PLAN AND
GEORGIA LAW MAY INHIBIT A TAKEOVER OF PRG.
PRG's articles of incorporation and bylaws and Georgia law contain
provisions that may delay, deter or inhibit a future acquisition of PRG not
approved by PRG's board of directors. This could occur even if PRG shareholders
are offered an attractive value for their shares or if a substantial number or
even a majority of PRG shareholders believe the takeover is in their best
interest. These provisions are intended to encourage any person interested in
acquiring PRG to negotiate with and obtain the approval of PRG's board of
directors in connection with the transaction. Provisions that could delay, deter
or inhibit a future acquisition include the following:
- a staggered board of directors;
- specified requirements for calling special meetings of shareholders; and
- the ability of the board of directors to consider the interests of
various constituencies, including PRG's employees, clients and creditors
and the local community.
PRG's articles of incorporation also permit the board of directors to issue
shares of preferred stock with such designations, powers, preferences and rights
as it determines, without any further vote or action by PRG's shareholders. In
addition, PRG has in place a "poison pill" shareholders' rights plan that will
trigger a dilutive issuance of common stock upon substantial purchases of PRG's
common stock by a third party which are not approved by the board of directors.
Also, the shareholders' rights plan requires approval by a majority of the
continuing directors, as defined in the plan, to redeem the rights plan, amend
the rights plan, or exclude a person or group who acquires beneficial ownership
or more than 15 percent of the outstanding PRG common stock from being
considered an acquiring person under the rights plan. These provisions also
could discourage bids for shares of PRG's common stock at a premium and have a
material adverse effect on the market price of PRG's shares.
THE PRICE OF PRG'S STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE
SUBSTANTIALLY.
PRG's common stock is traded on The Nasdaq National Market. The market
price of PRG's common stock has been volatile, has fluctuated substantially and
could continue to do so, based on a variety of factors, including the following:
- future announcements concerning PRG or its key clients or competitors;
- technological innovations;
- government regulations;
- litigation; or
- changes in earnings estimates by analysts or the publication of negative
reports by analysts about PRG.
26
Furthermore, stock prices for many companies fluctuate widely for reasons
that may be unrelated to their operating results. These fluctuations and general
economic, political and market conditions, such as recessions or international
currency fluctuations and demand for PRG's services, may adversely affect the
market price of the combined company's common stock.
PRG'S FURTHER EXPANSION INTO ELECTRONIC COMMERCE AUDITING STRATEGIES AND
PROCESSES MAY NOT BE PROFITABLE.
PRG anticipates a growing need for recovery auditing services among current
clients migrating to internet-based procurement, and among potential clients
already engaged in electronic commerce transactions. In response to future
demand for PRG's recovery auditing expertise, PRG intends to further expand into
internet technology areas in the near future and may make substantial financial
investments to do so. The profitability of these investments can not be assured
nor can the demand for these services be fully anticipated.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
PRG and HSA-Texas have made forward-looking statements in this proxy
statement about PRG and HSA-Texas and the combined company that are subject to
risks and uncertainties. Any statements contained in this proxy statement that
are not statements of historical or current fact may be deemed forward-looking
statements. Forward-looking statements may be identified by such words as
"could," "may," "might," "will," "would," "shall," "should," "pro forma,"
"potential," "pending," "plans," "anticipates," "believes," "estimates,"
"expects," "intends" or similar expressions, including the negative of any of
the foregoing. Some of the forward-looking statements contained in this proxy
statement include:
- statements regarding the expected completion date and purchase price of
the acquisition of the business of Howard Schultz & Partner (Deutschland)
GmbH, an independently owned licensee of HSA-Texas, and expected purchase
price adjustment in the acquisition of Tamebond Ltd. and J&G Associates
Ltd.;
- statements regarding the expected assumption of debt and anticipated
transaction expenses in connection with the proposed acquisitions;
- statements regarding expected payments at the closing to Howard Schultz
by PRG;
- statements regarding the estimated reduction in the number of PRG shares
to be received by HSA-Texas resulting from the "in the money" value of
all options and SARs outstanding at closing;
- statements regarding the potential dilutive effect of the proposed
acquisitions on PRG's earnings per share;
- statements regarding the expected financial and operational success of
the proposed acquisitions;
- statements regarding the expected benefits and synergies of the proposed
acquisitions;
- statements made by HSA-Texas with respect to its liquidity and capital
needs;
- statements regarding PRG's inability to obtain lender consent for the
proposed acquisitions and its ability to obtain replacement financing;
- statements regarding the combined company's relationship following the
proposed acquisitions with clients for whom PRG and HSA-Texas have
provided the first and second recovery audits;
- statements regarding PRG's ability to comply with the financial ratio
covenants of its senior credit facility or any replacement facility;
- statements regarding the amount of net loss from the sale of PRG's French
Taxation Services; and
- the information concerning possible or assumed future results of
operations of the combined company set forth under "Summary Term
Sheet -- Questions and Answers About the Proposed Acquisitions,"
"Additional Summary Term Sheet Information," "The Proposed
Acquisitions -- Background of the Proposed Acquisitions," "-- Reasons for
the Proposed Acquisitions -- PRG's Reasons for the Proposed Acquisitions
and Recommendations of PRG's Board of Directors," and "-- Opinion of
PRG's Financial Advisor," "Summary Term Sheet -- The Profit Recovery
Group International Inc. Sum-
27
mary Selected Unaudited Pro Forma Combined Financial Information," and
"The Profit Recovery Group International, Inc. and Subsidiaries Pro Forma
Combined Financial Statements (Unaudited)."
In making these forward-looking statements, PRG believes that the
expectations are based on reasonable assumptions. These statements are not meant
to predict future events or circumstances and might not be realized if actual
results and events differ materially from PRG's and HSA-Texas' expectations.
Several factors, some of which are beyond PRG's and HSA-Texas' control, which
are discussed under the heading "Special Considerations" and elsewhere in this
proxy statement and in the documents that PRG has incorporated by reference,
could affect the outcome of the matters discussed in these forward-looking
statements and the future results of PRG and the combined company after
completion of the proposed acquisitions. These factors could cause the results
or other outcomes to differ materially from those expressed in PRG's and
HSA-Texas' forward-looking statements.
Given these uncertainties, you are cautioned not to place undue reliance on
forward-looking statements. PRG and HSA-Texas disclaim any obligation to
announce publicly the results of any revisions to any of the forward-looking
statements contained in this proxy statement to reflect future events or
developments.
28
THE PRG SPECIAL MEETING
PURPOSE, TIME AND PLACE
This proxy statement is being furnished to shareholders of PRG in
connection with the solicitation of proxies by the PRG board of directors for
use at the PRG special meeting.
The PRG special meeting will be held on January 24, 2002, at 9:00 a.m.
local time at PRG's offices, 2300 Windy Ridge Parkway, Atlanta, Georgia
30339-8420. At the PRG special meeting, holders of PRG common stock will be
asked to consider and vote upon a proposal to approve the proposed issuance of
up to 15,353,846 shares of PRG common stock as consideration in connection with
the proposed acquisitions, the issuance of options to purchase up to 1,678,826
shares of PRG common stock in connection with the assumption of certain
outstanding HSA-Texas options, and the election of Howard Schultz and Andrew
Schultz as Class II directors, Nate Levine as a Class I director and Arthur
Budge, Jr. as a Class III director, contingent upon the closing of the proposed
acquisitions. Other than the proposal to approve the proposed share and option
issuances and elect the nominated directors, PRG is not aware of any other
matters that may come before the special meeting. However, PRG shareholders may
be asked to consider and vote upon matters incidental to the business to be
conducted at the special meeting.
RECORD DATE; VOTING POWER
The PRG board of directors has fixed the close of business on December 11,
2001 as the record date for determining the holders of PRG common stock entitled
to notice of, and to vote at, the PRG special meeting. Only holders of record of
PRG common stock at the close of business on the record date will be entitled to
notice of, and to vote at, the PRG special meeting.
At the close of business on the record date, 48,784,120 shares of PRG
common stock were issued and outstanding and entitled to vote at the PRG special
meeting. Holders of record of PRG common stock are entitled to one vote for each
share of PRG common stock held of record on the record date on any matter which
may properly come before the PRG special meeting. Votes may be cast at the PRG
special meeting in person or by proxy.
The presence at the PRG special meeting, either in person or by proxy, of
the holders of a majority of the outstanding shares of the PRG common stock is
necessary to constitute a quorum in order to transact business at the PRG
special meeting. In the event that a quorum is not present at the PRG special
meeting, it is expected that such meeting will be adjourned or postponed in
order to solicit additional proxies.
Assuming that a quorum is present, approval of the proposed share and
option issuances and election of the nominated directors will require the
affirmative vote of a majority of the shares of PRG common stock eligible to
vote that are actually voted either in person or by proxy.
Broker non-votes, i.e., proxies from brokers or nominees indicating that
such persons have not received instructions from the beneficial owners or other
persons entitled to vote shares as to a matter with respect to which brokers or
nominees do not have discretionary power to vote will not be considered as
present for the purposes of establishing a quorum. Brokers who hold shares of
PRG common stock as nominees, in the absence of instructions from the beneficial
owners, will not have discretionary authority to vote such shares for the
approval of the proposed share and option issuances and election of the
nominated directors. Abstentions will be counted as present for purposes of
establishing a quorum. Any shares which are not voted due to abstentions or
because a nominee-broker lacks discretionary authority will be disregarded and
will have no effect on the outcome of the vote.
SHARE OWNERSHIP OF MANAGEMENT
As of the close of business on the record date, PRG directors and executive
officers and their affiliates had the right to vote approximately 8,362,531
outstanding shares of PRG common stock, collectively representing approximately
16.71% of PRG's outstanding shares of common stock. PRG's directors and
executive officers are expected to vote for the approval of the proposed share
and option issuances and the
29
election of the nominated directors. As of the record date, directors and
executive officers of PRG did not own any shares of HSA-Texas common stock.
HSA-Texas has informed PRG that, as of the record date, directors and executive
officers of HSA-Texas owned, beneficially or of record, 3,100 shares of PRG
common stock.
VOTING OF PROXIES
Shares represented by properly executed proxies received in time for the
special meeting will be voted at the meeting in the manner specified by such
proxies. PRG shareholders should be aware that, if their proxies are properly
executed but do not contain voting instructions, such proxies will be voted for
approval of the proposed share and option issuances and the election of the
nominated directors. It is not expected that any matter other than as described
in this proxy statement will be brought before the PRG special meeting. If
incidental matters are properly presented before the meeting, the persons named
in your PRG proxy will have authority to vote on such matters without consulting
you. These matters may include a proposal to adjourn or postpone the meeting in
order to solicit additional votes in favor of the proposed acquisitions.
Votes cast by proxy or in person at the special meeting will be counted by
the person or persons appointed by PRG to act as election inspectors for the
meeting. Prior to the meeting, the inspector(s) will sign an oath to perform
their duties in an impartial manner and to the best of their abilities. The
inspector(s) will ascertain the number of shares outstanding and the voting
power of each of such shares, determine the shares represented at the meeting
and the validity of proxies and ballots, count all votes and ballots and perform
certain other duties as required by law.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed PRG proxy card does not preclude a
shareholder from voting in person. A shareholder of PRG may revoke a proxy at
any time prior to its exercise by:
- delivering a written notice of revocation bearing a later date or time
than the proxy, so that it is received prior to such shareholder's proxy
being voted at the PRG special meeting, to The Profit Recovery Group
International, Inc., 2300 Windy Ridge Parkway, Suite 100 North, Atlanta,
Georgia 30339-8426, Attention: Secretary;
- delivering a duly executed proxy bearing a later date or time than the
revoked proxy to the Secretary of PRG, so that it is received prior to
such shareholder's proxy being voted at the PRG special meeting; or
- attending the PRG special meeting and voting in person.
Attendance at the PRG special meeting will not by itself constitute
revocation of a proxy, unless you cast your vote at the special meeting.
PRG does not expect to adjourn its special meeting for a period of time
long enough to require the setting of a new record date for the special meeting.
If an adjournment occurs, it will have no effect on the ability of PRG
shareholders of record as of the record date to exercise their voting rights or
to revoke any previously delivered proxies.
SOLICITATION OF PROXIES
The PRG board of directors is soliciting the accompanying proxy, and PRG
will bear the cost of the solicitation. Arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of PRG common stock held of
record by such persons, and PRG will reimburse such companies, custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses. In
addition to solicitation by mail, the directors, officers and employees of PRG
may solicit proxies from shareholders by telephone, telegram or in person. Such
persons will not receive any additional compensation for their solicitation
activities.
30
RECOMMENDATION OF THE BOARD OF DIRECTORS
The PRG board of directors has unanimously determined that the terms of the
asset agreement and the stock agreement are fair to and in the best interests of
PRG and the PRG shareholders. Accordingly, the PRG board of directors
unanimously recommends that PRG shareholders vote for the proposal to approve
the proposed share and option issuances and to elect the nominated directors.
Your vote is very important, regardless of the number of PRG shares you
own. Please vote as soon as possible to make sure that your PRG shares are
represented at the meeting. To vote your PRG shares, please complete, date, and
sign the enclosed PRG proxy and mail it promptly in the postage-paid envelope
provided, whether or not you plan to attend the meeting. You may revoke your PRG
proxy at any time before it is voted at the special meeting. If you are a holder
of record, you may also cast your vote in person at the special meeting. If your
shares are held in an account at a brokerage firm or bank, you must instruct it
on how to vote your shares. If you do not vote, it may jeopardize PRG's ability
to obtain a quorum, thereby resulting in a disapproval of the proposed share and
option issuances and the failure to elect the four director nominees.
31
THE PROPOSED ACQUISITIONS
The following discussion describes the material aspects of the proposed
acquisitions. While PRG believes that the description covers the material terms
of the proposed acquisitions, this summary may not contain all of the
information that is important to you. You should carefully read this entire
proxy statement and the other documents referred to in this proxy statement for
a more complete understanding of the proposed acquisitions.
BACKGROUND OF THE PROPOSED ACQUISITIONS
In November 1997, John Cook, the Chairman of PRG, and Howard Schultz, the
Chairman of HSA-Texas, met in Dallas, Texas to discuss the possibility of a
combination of HSA-Texas and PRG. Following this meeting, neither party had any
further contact or discussions relating to a possible business combination until
November 2000.
In early November 2000, Jonathan Golden, a director of and counsel to PRG,
received a call from a business associate of Howard Schultz inquiring as to
whether PRG would be interested in reviving discussions relating to a possible
combination. Mr. Golden advised Mr. Cook of the call and Mr. Cook called Mr.
Schultz. Since both men intended to be in Bangkok, Thailand on November 11 and
12, 2000, they met in Bangkok, signed a mutual confidentiality agreement and
commenced a discussion of a possible business combination.
On December 18, 2000, Howard and Andrew Schultz, Mac Martirossian, Senior
Vice President and Group Managing Director -- International of HSA-Texas, and
Arthur Budge, Jr., a financial adviser to HSA-Texas, met with Mr. Cook, Jack
Toma, vice chairman of PRG and Mr. Golden in Atlanta, Georgia, to continue
discussions relating to a possible business combination. On January 9 and 10,
2001, Mr. Golden, Gene Ellis, the chief financial officer of PRG, and Mr. Toma
met with Arthur Budge, Jr., Mac Martirossian, and attorneys for HSA-Texas in
Dallas, Texas to continue these discussions. At these meetings, based on PRG's
preliminary analysis of the anticipated EBITDA of HSA-Texas, assuming the
closing of the then-proposed Tamebond Ltd., J&G Associates Ltd., Howard Schultz
& Partner (Deutschland) GmbH, Phoenix Audit Recoveries, Inc., JASAMA, Inc. and
Lowery, Inc. acquisitions, PRG offered 21.0 million shares of its common stock
for HSA-Texas, subject to completion of due diligence. PRG and HSA-Texas
realized that since they are competitors, the exchange of information could
create competition problems. In order to avoid the exchange of competitively
sensitive information of the two companies, Bain & Co., an independent
consulting firm, was hired to review and compile information furnished by both
companies and to provide each company with summaries that did not disclose
competitively advantageous information that could be used if the negotiations
did not result in a transaction. These initial meetings were followed by a
series of meetings on January 15-16, 2001 in Dallas; February 28, 2001 in
Dallas; March 8-9, 2001 in Atlanta; March 22-23, 2001 in Atlanta; March 27, 2001
in Dallas; May 21-23, 2001 in Atlanta; June 20-21, 2001 in Dallas; July 1, 2001
in Dallas; and July 25-26, 2001 in Atlanta. On May 22, 2001, following
completion of its preliminary due diligence, PRG reduced its offer to 16.0
million shares of common stock, less an adjustment for the amount of debt to be
incurred by HSA-Texas in connection with the Phoenix Audit Recoveries, Inc.,
JASAMA, Inc. and Lowery, Inc. acquisitions.
On July 25, 2001, PRG and HSA-Texas and the shareholders of the affiliated
foreign operating companies entered into a letter of intent to which were
attached drafts of proposed definitive agreements outlining the details of the
transaction. The letter of intent was announced by PRG in its earnings
conference call on July 26, 2001, at which time a press release was also issued.
Based on the July 25, 2001 closing price of PRG common stock of $10.51, PRG
placed a value on the transaction of approximately $160.0 million, exclusive of
any debt to be assumed or incurred. See "Pro Forma Combined Financial
Statements," Note 1(B) for a discussion of the total estimated purchase price of
the proposed acquisitions. The parties executed definitive agreements as of
August 3, 2001. The parties executed amended and restated asset and stock
agreements on December 11, 2001.
REASONS FOR THE PROPOSED ACQUISITIONS
The following discussion of the reasons for the proposed acquisitions
contains a number of forward-looking statements that reflect the current views
of PRG with respect to future events that could affect its
32
financial performance. Forward-looking statements are subject to risks and
uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Cautionary
statements that identify important factors that could cause or contribute to
differences in results and outcomes include those discussed in "Special
Considerations."
PRG's board of directors has determined that the terms of the proposed
acquisitions are fair to, and in the best interests of, PRG's shareholders.
PRG's board of directors consulted with PRG's senior management, as well as
PRG's financial advisors and legal counsel, in reaching its decision to approve
the asset agreement and the stock agreement. PRG's primary reasons for entering
into the asset agreement and the stock agreement are the beliefs of its board of
directors and the management of PRG that the proposed acquisitions may allow PRG
to enjoy a number of benefits, including:
- accelerating innovation and audit effectiveness and thereby better
meeting customer needs for recovery audit services;
- accelerating expansion into existing and new recovery audit markets;
- gaining additional clients and revenues;
- being more competitive with other providers of recovery audit services;
- adding to its intellectual property assets in recovery audit processes;
- receiving significant operating synergies from alignment of cost
structures, consolidation of technology expenditures and elimination of
duplicate positions and facilities; and
- adding qualified auditors and other employees of HSA-Texas and its
affiliated foreign operating companies to PRG and thereby enhancing its
recovery audit expertise.
The conclusions reached by the board of directors of PRG with respect to
the above factors supported the determination that the purchase by PRG of
substantially all of the assets of HSA-Texas, the acquisition of substantially
all of the outstanding stock of the affiliated foreign operating companies and
the issuance of shares of PRG common stock and the assumption of HSA-Texas
options pursuant to the asset agreement and the stock agreement, are fair to,
and in the best interests of, PRG. In reaching the determination that the asset
agreement and stock agreement are in the best interests of PRG's shareholders,
the board of directors of PRG considered a number of other factors, including
the factors listed below:
- the judgment, advice and analyses of PRG's management with respect to the
potential strategic, financial and operational benefits of the purchase;
- the terms of the asset agreement and the stock agreement, including price
and structure, which were considered by PRG's board of directors and by
the management of PRG to provide a fair and equitable basis for the
overall transaction; and
- the oral opinion of Merrill Lynch, which opinion was subsequently
confirmed in a written opinion dated as of August 3, 2001, to PRG's board
of directors, to the effect that, as of the date of the opinion and
subject to and based on the considerations referred to in the opinion,
the consideration to be paid by PRG in connection with the proposed
acquisitions was fair, from a financial point of view, to PRG.
The board of directors of PRG also considered a number of potentially
negative factors in its deliberations. The potentially negative factors
considered by the board of directors of PRG included:
- potential loss of revenue from clients where PRG and HSA-Texas together
have both the first and second audit positions;
- the risk that the transaction might not be completed in a timely manner
or at all;
- the likelihood of reduced borrowing capacity following closing;
- the potential negative impact of any vendor or client confusion after
announcement of the proposed acquisitions;
33
- the potential negative reaction of the financial community after
announcement of the proposed acquisitions;
- the risk that the potential benefits of the transaction may not be
realized, including the inability of PRG to hire the former auditors of
HSA-Texas;
- the analysis that the estimated theoretical maximum consideration that
could be paid in an acquisition of HSA-Texas by a financial buyer,
considering capital structures typically employed by financial buyers,
ranged from approximately $60.0 million to approximately $100.0 million,
which is less than the approximately $160.0 million value, based on the
July 25, 2000 closing price of PRG common stock, of the PRG common stock
to be paid as consideration in the transaction;
- the costs associated with the transaction; and
- the other risks and uncertainties discussed above under "Special
Considerations."
The foregoing discussion of information and factors considered by PRG's
board of directors is not intended to be exhaustive, but is believed to include
all material factors considered by the board of directors. In view of the wide
variety of factors considered by PRG's board of directors, PRG's board of
directors did not find it practicable to quantify or otherwise assign relative
weights to the specific factors considered. In addition, the board of directors
did not reach any specific conclusions on each factor considered, or any aspect
of any particular factor, but conducted an overall analysis of these factors.
Individual members of PRG's board of directors may have given different weights
to different factors. After taking into account all of the factors set forth
above, however, PRG's board of directors unanimously agreed that the asset
agreement and the stock agreement are fair to, and in the best interests of, PRG
and its shareholders and that PRG should proceed with the proposed acquisitions
and enter into the asset agreement and the stock agreement.
There can be no assurance that the benefits of the potential growth,
synergies or opportunities considered by PRG's board will be achieved through
completion of the proposed acquisitions. See "Special Considerations."
OPINION OF PRG'S FINANCIAL ADVISOR
On July 24, 2001, Merrill Lynch delivered its oral opinion, which opinion
was subsequently confirmed in a written opinion dated as of August 3, 2001, to
the PRG board of directors to the effect that, as of such dates and based upon
the assumptions made, matters considered and limits of review set forth in such
opinion, the proposed consideration to be paid by PRG pursuant to the proposed
acquisitions was fair from a financial point of view to PRG. A copy of Merrill
Lynch's opinion is attached to this document as Annex C.
Merrill Lynch's opinion sets forth the assumptions made, matters considered
and certain limitations on the scope of review undertaken by Merrill Lynch. Each
holder of PRG common stock is urged to read Merrill Lynch's opinion, which is
attached as Annex C, in its entirety. Merrill Lynch's opinion was intended for
the use and benefit of the PRG board of directors, was directed only to the
fairness of the consideration from a financial point of view to PRG, did not
address the merits of the underlying decision by PRG to engage in the proposed
acquisitions and does not constitute a recommendation to any shareholder of PRG
as to how that shareholder should vote on the proposed share and option issuance
or any related matter. The consideration was determined on the basis of
negotiations between PRG and HSA-Texas and was approved by the PRG board of
directors. This summary of Merrill Lynch's opinion is qualified in its entirety
by reference to the full text of the opinion attached as Annex C.
In arriving at its opinion, Merrill Lynch, among other things:
- Reviewed certain publicly available business and financial information
relating to PRG and HSA-Texas that Merrill Lynch deemed to be relevant;
- Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
PRG and HSA-Texas, as well as the amount and timing of the
34
cost savings and related expenses and synergies expected to result from
the proposed acquisitions furnished to Merrill Lynch by PRG;
- Conducted discussions with members of senior management and
representatives of PRG concerning the matters described in the previous
two bullets, as well as their respective businesses and prospects before
and after giving effect to the proposed acquisitions and the expected
synergies;
- Reviewed the market prices and valuation multiples for PRG common stock
and compared them with those of certain publicly traded companies that
Merrill Lynch deemed to be relevant;
- Reviewed the results of operations of PRG and HSA-Texas and compared them
with those of certain publicly traded companies that Merrill Lynch deemed
to be relevant;
- Participated in certain discussions and negotiations among
representatives of PRG and their legal advisor;
- Reviewed the potential pro forma impact of the proposed acquisitions;
- Reviewed each of the acquisition agreements, except for the disclosure
schedules thereto, which disclosure schedules had not been completed; and
- Reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.
Merrill Lynch's opinion stated that Merrill Lynch was not given the
opportunity to conduct discussions with HSA-Texas concerning any of the matters
described in the previous bullet points.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or publicly
available, and Merrill Lynch did not assume any responsibility for independently
verifying such information or undertake an independent evaluation or appraisal
of any of the assets or liabilities of PRG or HSA-Texas, and was not furnished
with any such evaluation or appraisal. In addition, Merrill Lynch did not assume
any obligation to conduct any physical inspection of the properties or
facilities of PRG or HSA-Texas. With respect to the financial forecast
information and the expected synergies furnished to or discussed with Merrill
Lynch by PRG, Merrill Lynch assumed that they were reasonably prepared and
reflected the best currently available estimates and judgment of PRG's
management as to the expected future financial performance of PRG and HSA-Texas
and the expected synergies. Merrill Lynch also assumed that the final forms of
the disclosure schedules to the acquisition agreements would not contain any
information materially adverse to Merrill Lynch's analysis.
Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of its opinion.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals, contractual or otherwise, for the proposed
acquisitions, no restrictions, including any divestiture requirements or
amendments or modifications, would be imposed that would have a material adverse
effect on the contemplated benefits of the proposed acquisitions.
Merrill Lynch expressed no opinion as to the prices at which shares of PRG
common stock would trade following the announcement or completion of the
proposed acquisitions.
The following is a summary of certain financial and comparative analyses
performed by Merrill Lynch that were presented to PRG's board of directors in
connection with the oral opinion delivered to PRG's board of directors on July
24, 2001. The financial analyses summarized below include information presented
in tabular format. In order to understand fully Merrill Lynch's financial
analyses, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
Considering the data described below without considering the full narrative
description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of Merrill Lynch's financial analyses.
35
HSA-Texas Analysis
Comparable Public Company Analysis. Using publicly available information
and estimates of future financial results published by First Call Corporation
and other various research reports, Merrill Lynch compared certain financial and
operations data and ratios for HSA-Texas with the corresponding data and ratios
of comparable companies.
The companies selected for the comparable company analysis included the
following publicly traded companies:
- Automatic Data Processing, Inc.;
- Convergys Corporation;
- CSG Systems International, Inc.;
- The BISYS Group, Inc.;
- Ceridian Corporation;
- Factset Research Systems Inc.; and
- NCO Group, Inc.
Merrill Lynch derived an estimated valuation range for HSA-Texas by
comparing market value as a multiple of estimated 2002 earnings. The earnings
estimates were obtained from First Call, a data service that monitors and
publishes a compilation of earnings estimates produced by selected research
analysts on companies of interest to investors, as of July 13, 2001, and
adjusted by Merrill Lynch to exclude goodwill amortization. Merrill Lynch also
compared firm value as a multiple of estimated 2001 earnings before interest,
taxes, depreciation and amortization, which is referred to as "EBITDA."
The results of this analysis were as follows:
HIGH FOR LOW FOR MEAN FOR
COMPARABLE COMPARABLE COMPARABLE
COMPANIES COMPANIES COMPANIES
---------- ---------- ----------
Market value as a multiple of estimated 2002 27.6x 9.0x 20.9x
earnings...........................................
Firm value as a multiple of estimated 2001 EBITDA.... 17.8x 6.0x 13.3x
Comparing market value as a multiple of estimated 2002 earnings and using a
reference range from 12.0x to 16.0x, the estimated equity value of HSA-Texas
ranged from approximately $155.0 million to approximately $205.0 million.
Comparing firm value as a multiple of estimated 2001 EBITDA and reviewing
selected research reports, Merrill Lynch extrapolated 2002 EBITDA multiples.
Comparing firm value as a multiple of estimated 2002 EBITDA and using a
reference range from 6.0x to 8.0x, the estimated equity value of HSA-Texas
ranged from approximately $120.0 million to approximately $175.0 million.
Leveraged Buyout Analysis. Merrill Lynch performed an analysis of the
theoretical maximum consideration that could be paid in an acquisition of
HSA-Texas by a financial buyer, based on HSA-Texas management projections, as
adjusted by Bain & Co., and considering capital structures typically employed by
financial buyers. In its analysis, Merrill Lynch assumed that a financial buyer
would be subject to the following constraints:
- a maximum ratio of total debt to 2001 EBITDA ranging from 4.0x to 4.5x;
- a maximum ratio of senior debt to 2001 EBITDA ranging from 2.5x to 3.0x;
- a minimum 5-year return on equity of approximately 30%;
- a maximum equity investment ranging from 40% to 50% of consideration;
- a maximum senior debt repayment period of 7 years; and
- a 2005 EBITDA exit multiple range of 6.0x to 8.0x.
36
Assuming a financial buyer refinanced $50.0 million of HSA-Texas
indebtedness and incurred transaction expenses of $4.0 million, the estimated
theoretical maximum consideration that could be paid in an acquisition of
HSA-Texas by a financial buyer ranged from approximately $60.0 million to
approximately $100.0 million.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash
flow, or "DCF," analysis for HSA-Texas using projections provided by HSA-Texas'
management and modified by Bain & Co.
The DCF for HSA-Texas was calculated assuming discount rates ranging from
11.5% to 12.5% and was comprised of the sum of the present values of:
- The projected cash flows for HSA-Texas for the years 2002 through 2006;
and
- The 2006 terminal value based upon a range of multiples from 6.0x to 8.0x
estimated 2006 EBITDA.
Merrill Lynch then subtracted from this sum $50.0 million in respect of
HSA-Texas' net debt.
Performing a DCF analysis for HSA-Texas, the estimated equity value of
HSA-Texas ranged from approximately $150.0 million to approximately $210.0
million.
Merrill Lynch also performed the DCF analysis assuming PRG attains its
projected synergies for the proposed acquisitions, which resulted in estimated
synergies on a present value basis of approximately $20.0 million. Including
these estimated synergies, the estimated equity value of HSA-Texas ranged from
approximately $170.0 million to approximately $230.0 million.
PRG Analysis
Historical Stock Performance. Merrill Lynch reviewed the trading price of
the shares of PRG's common stock for the one-year period ended July 23, 2001.
This stock performance review indicated that, for the 52-week period ended July
23, 2001, the high and low closing prices per share of PRG common stock were
$14.50 and $3.75, respectively.
Comparable Public Company Analysis. Using publicly available information
and estimates of future financial results published by First Call, Merrill Lynch
compared certain historical stock, financial and operations data and ratios for
PRG with the corresponding data and ratios of the same group of companies listed
above for the HSA-Texas comparable public company analysis.
Merrill Lynch derived estimated per-share valuation ranges for PRG common
stock by comparing market value as a multiple of 2001 earnings per share, market
value as a multiple of 2002 earnings per share, and firm value as a multiple of
2001 EBITDA. The earnings estimates were obtained from First Call, as of July
13, 2001, and adjusted by Merrill Lynch to exclude goodwill amortization.
HIGH FOR LOW FOR MEAN FOR
COMPARABLE COMPARABLE COMPARABLE
COMPANIES COMPANIES COMPANIES PRG
---------- ---------- ---------- -----
Market value as a multiple of estimated 2001 33.7x 10.4x 25.0x 27.1x
earnings.............................................
Market value as a multiple of estimated 2002 27.6x 9.0x 20.9x 19.2x
earnings.............................................
Firm value as a multiple of estimated 2001 EBITDA...... 17.8x 6.0x 13.3x 10.9x
Based on these analyses, Merrill Lynch derived a value per share of PRG
common stock ranging from:
- $10.80 to $12.70 by comparing market value as a multiple of 2001 earnings
per share and using a reference range from 23.0x to 27.0x;
- $10.55 to $13.20 by comparing market value as a multiple of 2002 earnings
per share and using a reference range from 16.0x to 20.0x; and
- $10.40 to $12.80 by comparing firm value as a multiple of 2001 EBITDA and
using a reference range from 9.0x to 11.0x.
37
Discounted Cash Flow Analysis. Merrill Lynch performed a DCF analysis for
PRG using projections provided by PRG's management.
The DCF for PRG was calculated assuming discount rates ranging from 11.5%
to 12.5% and was comprised of the sum of the present values of:
- The projected cash flows for PRG for the years 2002 through 2006; and
- The 2006 terminal value based upon a range of multiples from 7.0x to 9.0x
estimated 2006 EBITDA.
Merrill Lynch then subtracted from this sum $30.0 million in respect of
PRG's net debt.
Performing a DCF analysis for PRG, the estimated equity value per share of
PRG common stock ranged from $12.66 to $16.29, based on 48.7 million PRG common
shares outstanding.
Pro Forma Combination Analysis
Merrill Lynch also analyzed certain pro forma effects resulting from the
proposed acquisitions. Using the projected earnings of HSA-Texas for the years
2002, 2003 and 2004 provided by the management of HSA-Texas (as adjusted by Bain
& Co.), and the projected earnings of PRG for the years 2002, 2003 and 2004
provided by the management of PRG, Merrill Lynch compared the projected earnings
per share of PRG on a stand-alone basis, assuming the proposed acquisitions did
not occur, to the per-share earnings of PRG, assuming the proposed acquisitions
did occur.
Using the assumptions detailed above, the analysis indicated that the
proposed acquisitions would be accretive to projected earnings per share of PRG
common stock in 2002, 2003 and 2004 if PRG realized pre-tax cost-savings
synergies of $2.8 million, $3.4 million and $4.2 million, respectively,
excluding amortization of goodwill and assuming amortization of approximately
$20.0 million of intangible assets.
The summary of analyses performed by Merrill Lynch set forth above does not
purport to be a complete description of the analyses performed by Merrill Lynch
in arriving at its opinion. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial or summary description.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
Merrill Lynch, without considering all analyses and factors, could create an
incomplete view of the processes underlying the Merrill Lynch opinions. Merrill
Lynch did not assign relative weights to any of its analyses in preparing its
opinion. The matters considered by Merrill Lynch in its analyses were based on
numerous macroeconomic, operating and financial assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond PRG's and Merrill Lynch's control and involve
the application of complex methodologies and educated judgment. Any estimates
contained in the Merrill Lynch analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more or less
favorable than the estimates. Estimated values do not purport to be appraisals
and do not necessarily reflect the prices at which businesses or companies may
be sold in the future. The estimates are inherently subject to uncertainty.
No company utilized as a comparison in the analyses described above is
identical to PRG or HSA-Texas. In addition, various analyses performed by
Merrill Lynch incorporate projections prepared by research analysts using only
publicly available information. These estimates may or may not prove to be
accurate. An analysis of publicly traded comparable companies is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading value of the
comparable companies to which they are being compared.
The PRG board selected Merrill Lynch to act as its financial advisor
because of Merrill Lynch's reputation as an internationally recognized
investment banking firm with substantial experience in transactions similar to
the proposed acquisitions and because Merrill Lynch is familiar with PRG and its
business. As part of Merrill Lynch's investment banking business, Merrill Lynch
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
38
Pursuant to the terms of a letter agreement between PRG and Merrill Lynch
dated January 4, 2001, PRG agreed to pay Merrill Lynch a fee in the amount of
$2.5 million. This fee is payable in two installments as follows:
- $250,000 of such fee was paid upon Merrill Lynch's providing its opinion
to PRG's board of directors; and
- $2.25 million is payable upon the completion of the proposed
acquisitions.
PRG has agreed to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of legal counsel) and to indemnify Merrill Lynch and
related parties from and against specified liabilities, including liabilities
under the federal securities laws, arising out of its engagement.
Merrill Lynch has, in the past, provided financial advisory and financing
services to PRG and/or its affiliates and may continue to do so and has
received, and may receive, additional fees for the rendering of those services.
In connection with PRG's $125.0 million convertible notes offering that closed
in November and December 2001, Merrill Lynch received fees of approximately $3.0
million. Also, during the last two years, PRG has paid fees to Merrill Lynch and
its affiliates in the amount of approximately $11,400 for services provided. In
addition, in the ordinary course of Merrill Lynch's business, Merrill Lynch and
its affiliates may actively trade PRG common stock and other securities of PRG
for their own account and for the accounts of customers. Accordingly, Merrill
Lynch and its affiliates may at any time hold a long or short position in such
securities.
INTERESTS OF DIRECTORS AND OFFICERS OF HSA-TEXAS IN THE PROPOSED ACQUISITIONS
Members of HSA-Texas' management and board of directors have interests in
the proposed acquisitions that are different from, or in addition to, their
rights as shareholders or optionholders of HSA-Texas, which may create conflicts
of interest. The HSA-Texas board of directors was aware of and considered these
interests in reaching its conclusion that the asset agreement and the
transactions contemplated thereby are fair to, and in the best interests of,
HSA-Texas and its shareholders.
Stockholdings. As of the record date, the directors and executive officers
of HSA-Texas individually or beneficially owned 2,307,482 or 100% of the
outstanding shares of voting common stock of HSA-Texas and 3,873,301 or 60.19%
of the outstanding shares of non-voting common stock of HSA-Texas. Based on the
assumptions set forth below, after completion of the proposed acquisitions,
officers and directors of HSA-Texas will individually or beneficially own
approximately 16.66% of PRG's outstanding common stock.
In addition, based on the assumptions set forth below, Howard Schultz and
Andrew Schultz will collectively beneficially own approximately 4,569,097 shares
and 5,586,325 shares, respectively, of PRG's outstanding common stock
immediately following the closing. Howard Schultz and Andrew Schultz will then
beneficially own 7.17% and 8.77%, respectively, of the outstanding shares of PRG
common stock.
The beneficial ownership numbers shown above were calculated assuming an
average PRG common stock price of $7.834 per share, and are based upon the
following assumptions:
- HSA-Texas continues to have outstanding 2,307,482 shares of voting common
stock, 6,435,383 shares of non-voting common stock, options to purchase
1,133,423 shares and 64,569 SARs, and Howard and Andrew Schultz's
respective beneficial ownership thereof remains unchanged; and
- HSA-Texas' remaining liabilities, including the expenses of effecting the
liquidation and winding up of HSA-Texas, do not exceed the value
HSA-Texas' assets not purchased by PRG.
Stock Options. On the closing date, PRG will assume options to purchase
167,631 shares of HSA-Texas common stock currently held by Arthur Budge, Jr.,
with an exercise price of $9.06 per share that will convert into options to
purchase 248,295 shares of PRG common stock with an exercise price of $6.12 per
share, assuming an option conversion ratio of 1.4812. PRG will also grant
options to purchase 250,000 shares of PRG
39
common stock to Howard Schultz at an exercise price equal to the closing sales
price per share of PRG common stock on The Nasdaq National Market on the closing
date.
Assumption of a portion of the Howard Schultz loan. On the closing date of
the asset acquisition, PRG will assume a portion of the amount of principal and
interest payable to Howard Schultz for amounts loaned to HSA-Texas, including
loans made subsequent to September 30, 2001. The amount to be assumed is
currently estimated to be approximately $7.4 million, subject to adjustment by
post-closing audit. An initial payment of $7.4 million will be made to Howard
Schultz at closing. See "PRG Director and Executive Officer
Information -- Certain Transactions."
Employment with PRG. It is anticipated that certain of the current
officers and directors of HSA-Texas will be employed by PRG after the proposed
acquisitions. In addition, it is anticipated that Howard Schultz will serve as
the initial chairman of the board of the combined company and Andrew Schultz
will serve as a director and an executive officer of the combined company
following the proposed acquisitions. Each of Howard Schultz and Andrew Schultz
will have an employment agreement with PRG for a term of two years.
EFFECTIVE DATE
The proposed acquisitions will become effective as of 12:01 a.m., Eastern
time, on the closing date.
REGULATORY APPROVALS
PRG and HSA-Texas have agreed in the asset agreement to use their best
efforts to take whatever actions are required to obtain necessary regulatory
approvals and consents with respect to the proposed acquisitions. Other than
clearance under the antitrust laws applicable to the proposed acquisitions, PRG
and HSA-Texas do not believe that any additional material governmental filings
or approvals are required with respect to the proposed acquisitions.
Under the HSR Act and the related rules, the proposed acquisitions could
not be completed until PRG and HSA-Texas notified and furnished information to
the Federal Trade Commission, or FTC, and the Antitrust Division of the United
States Department of Justice, and specified waiting period requirements had been
satisfied. In connection with the proposed acquisitions, on or before August 3,
2001, PRG and HSA-Texas filed the required notification and report forms with
the FTC and the Antitrust Division under the HSR Act. Effective as of August 10,
2001, the request for early termination of the applicable waiting period was
granted.
At any time before or after the completion of the proposed acquisitions,
either the Antitrust Division or the FTC could take any action under U.S.
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the completion of the proposed acquisitions or
seeking the divestiture of substantial assets owned by PRG or HSA-Texas. Private
parties and state attorneys general may also bring actions under U.S. antitrust
laws depending on the circumstances. Although PRG and HSA-Texas believe that the
proposed acquisitions do not raise significant concerns under U.S. antitrust
laws, PRG and HSA-Texas can give no assurance that a challenge to the proposed
acquisitions on antitrust grounds will not be made or, if a challenge is made,
that it would not be successful.
LENDER APPROVALS; REPLACEMENT SENIOR CREDIT FACILITY
PRG has held extensive discussions with the nine members of its banking
syndicate concerning the proposed acquisitions. The credit facility, as amended,
provides that a two-thirds majority of the banks in the syndicate must approve
the proposed acquisitions. As a result of these discussions with the members of
PRG's current banking syndicate, PRG believes that it will be unable to obtain
the consent of at least two-thirds of the members of the syndicate required in
order to complete the proposed acquisitions. PRG is therefore negotiating a new
senior credit facility, the proceeds of which PRG will utilize to repay certain
indebtedness of HSA-Texas and fund various merger and integration costs related
to the proposed acquisitions. PRG expects to obtain a new senior credit facility
with a borrowing capacity of up to $75 million, with tiered interest based on
either prime or LIBOR and a term of at least three years, secured by all of
PRG's assets. Aggregate
40
outstanding borrowings may be limited to a percentage of eligible receivables.
PRG will not complete the proposed acquisitions unless a senior credit facility
with terms substantially equivalent to those described above, with immediate
borrowing availability of at least $30.0 million and with interest rates
substantially equivalent to or more favorable to PRG than those of its current
senior credit facility, is in place as of or prior to the closing of the
proposed acquisitions.
ASSUMPTION OF HSA-TEXAS INDEBTEDNESS
PRG expects to incur or assume between $59.7 million and $69.5 million of
HSA-Texas net debt in connection with the proposed acquisitions.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE PROPOSED
ACQUISITIONS
The following discussion is not tax advice. This discussion summarizes the
material U.S. federal income tax consequences to PRG of the proposed
acquisitions of substantially all of the assets of HSA-Texas and substantially
all of the outstanding stock of the affiliated foreign operating companies under
the Internal Revenue Code, or the Code, existing regulations thereunder,
including final, temporary or proposed regulations, and current administrative
rulings and court decisions, all of which are subject to change, retroactively
or prospectively, and possibly to differing interpretations.
Neither PRG nor HSA-Texas has requested, or plans to request, any ruling
from the Internal Revenue Service with regard to any of the U.S. federal income
tax consequences of the transactions described in this proxy statement, and the
statements in this proxy statement are not binding on the IRS or any court.
Thus, there can be no assurance that these statements will not be challenged by
the IRS or sustained by a court if challenged by the IRS.
The proposed acquisition of substantially all of the assets of HSA-Texas,
and subsequent liquidation of HSA-Texas, are intended to qualify as a
reorganization under Section 368(a)(1)(C) of the Code. PRG should not recognize
taxable gain or loss solely as a result of the acquisition of the acquired
HSA-Texas assets in exchange for PRG common stock. PRG's tax basis in the
acquired assets should generally be the same as HSA-Texas's tax basis in such
assets.
The proposed acquisitions of the stock of the affiliated foreign operating
companies by PRG are intended to qualify as reorganizations under Section
368(a)(1)(B) of the Code. PRG will not be required to recognize taxable gain or
loss solely as a result of the acquisitions.
The foregoing discussion is not intended to be a complete analysis or
description of all potential U.S. federal income tax consequences or any other
consequences of the acquisition of substantially all of the assets of HSA-Texas
and substantially all of the stock of the affiliated foreign operating
companies.
ACCOUNTING TREATMENT
The proposed acquisitions will be accounted for under the purchase method
of accounting in accordance with accounting principles generally accepted in the
United States of America.
PRG RIGHTS PLAN
PRG's board of directors has taken sufficient action to exempt the
transactions contemplated by the asset agreement and stock agreement from the
provisions of the rights plan.
DISSENTERS' AND APPRAISAL RIGHTS RELATED TO THE PROPOSED ACQUISITIONS
PRG shareholders will not have dissenters' or appraisal rights in
connection with the proposed acquisitions.
41
BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING PROPOSED ACQUISITIONS
If the proposed share and option issuances are approved, the nominated
directors are elected and the proposed acquisitions are closed, PRG will
continue to be managed by the same board of directors and officers of PRG as
before the proposed acquisitions except that the size of the board of directors
will be to expanded from 9 to 13 members and Howard Schultz will serve as the
initial chairman of the board of the combined company, and Andrew Schultz,
Arthur Budge, Jr. and Nate Levine will serve as directors of the combined
company.
Information relating to the business experience of each of Howard Schultz,
Andrew Schultz, Arthur Budge, Jr. and Nate Levine is set forth under the heading
"PRG Director and Executive Officer Information." In addition, information
relating to PRG's management, executive compensation, voting securities, certain
relationships and related transactions and other related matters pertaining to
PRG is also set forth under the heading "PRG Director and Executive Officer
Information."
Blum Capital Partners, L.P. and its affiliates, who, based on an amended
Schedule 13D filing dated December 5, 2001, currently beneficially own
approximately 14.6% of PRG's outstanding common stock, including stock
obtainable upon conversion of convertible notes, purchased $40.0 million of the
$125.0 million of notes issued in PRG's recent convertible notes offering. Blum
Capital Partners has expressed an interest in obtaining representation on PRG's
board of directors, and PRG has had discussions with them regarding this matter.
Blum Capital Partners has the contractual right to designate an observer to
attend PRG board meetings.
NASDAQ LISTING
PRG will use its reasonable best efforts to cause the shares of PRG common
stock to be issued in the proposed acquisitions, and the shares reserved for
issuance upon exercise of PRG stock options issued in connection with the
assumption of certain outstanding HSA-Texas stock options, to be approved for
listing on The Nasdaq National Market prior to the closing date. This listing is
a condition to closing the proposed acquisitions.
FEDERAL SECURITIES LAW CONSEQUENCES
The shares of PRG common stock to be received by HSA-Texas pursuant to the
asset agreement and by the affiliated foreign operating companies pursuant to
the stock agreement will be restricted securities and may only be sold:
- pursuant to an effective registration statement;
- in compliance with Rule 144 under the Securities Act; or
- in compliance with another exemption from the registration requirements
of the Securities Act.
Rule 144 requires that sales be made in compliance with the rule's holding
period requirements, volume limitations, manner of sale provisions, current
information requirements and notice of sale requirements. The volume limitations
of Rule 144 require that the number of securities sold in any three month period
may not exceed the greater of one percent of the number of shares of outstanding
PRG common stock or the average weekly trading volume for PRG common stock
during the preceding four week period.
Under the registration rights agreement, in addition to filing a Form S-3
registration statement for up to $10.0 million of PRG common stock concurrently
with the closing of the proposed acquisitions, PRG will be required upon written
request from a holder of registrable securities to register the shares of PRG
common stock issued in the proposed acquisitions for resale; provided however,
that PRG will not be required to file more than one registration statement
during any six month period or, other than the initial filing, file a
registration statement regarding a request covering less than $5.0 million of
such PRG common stock in a firm commitment underwritten offering. See "Other
Related Agreements -- Registration Rights Agreement."
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MATERIAL TERMS OF THE ASSET AGREEMENT
The following is a discussion of the material terms of the proposed amended
and restated asset agreement. The full text of the asset agreement is attached
as Annex A hereto and is included as part of this proxy statement. You are
encouraged to read the entire asset agreement carefully.
ASSETS TO BE ACQUIRED
The asset agreement provides that PRG will purchase substantially all of
the assets of HSA-Texas, including all right, title and interest in and to:
- contracts with clients;
- other contract rights, including the rights to acquire the direct to
store delivery audit operations and the businesses of Howard Schultz &
Partner (Deutschland) GmbH and Howard Schultz & Associates
(International) Ltd.;
- accounts receivable;
- work in progress;
- fixed assets;
- goodwill; and
- other tangible and intangible assets of HSA-Texas used or held for the
conduct of its business as of the effective date.
EXCLUDED ASSETS
PRG will not acquire, and HSA-Texas will not transfer to PRG, the following
assets:
- any assets held under any pension, profit sharing or other employee
benefit plan;
- the amount of cash, up to a maximum of $7,000, required for funding
termination obligations, if any, of HSA-Texas in respect of the HSA-Texas
401(k) plan;
- the two parcels of real property and the improvements thereon used on
August 3, 2001 as the HSA-Texas headquarters in Dallas, Texas and related
mortgage debt;
- the amount of any cash received by HSA-Texas after August 3, 2001
attributable to the exercise by employees of HSA-Texas of any options to
purchase HSA-Texas common stock;
- an amount of cash, and to the extent cash is insufficient, accounts
receivable of HSA-Texas having a face amount which in the reasonable
estimation of Howard Schultz and Andrew Schultz, as agreed to by PRG, is
sufficient to enable them to pay certain flow-through state and federal
income taxes; provided, that in the event that the amount of flow-through
taxes paid is less than the face amount of the retained accounts
receivable, HSA-Texas shall pay PRG the amount of such excess in cash or
by return to PRG of any such uncollected accounts receivable promptly
after payment of the flow-through taxes; and
- HSA-Texas' corporate minute and stock books.
ASSUMED LIABILITIES
PRG will assume on the closing date, as of the effective date, the
following liabilities of HSA-Texas outstanding as of the effective date:
- all liabilities and obligations of HSA-Texas to the extent disclosed on
the December 31, 2000 balance sheet contained in HSA-Texas' audited
financial statements, or incurred in the ordinary course of business
after December 31, 2000 through the effective date to the extent
disclosed on the estimated
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balance sheet delivered by HSA-Texas at closing, or incurred in the
ordinary course of business after the effective date through the closing
of the asset acquisition consistent with past practices;
- the portion of the amount of principal and interest outstanding on the
effective date payable to Howard Schultz for amounts loaned to HSA-Texas
(less approximately $3.0 million paid by HSA-Texas in connection with the
acquisition of Lowery, Inc.) for:
- working capital for normal operations,
- HSA-Texas transaction expenses paid prior to the effective date in
connection with the proposed acquisitions,
- aggregate amounts paid to the respective sellers of Phoenix Audit
Recoveries, Inc., JASAMA, Inc., Tamebond Ltd., J&G Associates Ltd.
and Howard Schultz & Partner (Deutschland) GmbH prior to the
effective date pursuant to certain acquisition agreements, as
approved by PRG;
- amounts required to cancel HSA-Texas options of persons not hired by
PRG,
- amounts required to cancel HSA-Texas SARs, and
- principal and interest payments paid by HSA-Texas since December 31,
2000 and prior to the effective date on certain notes issued in
connection with certain prior acquisitions made by
HSA-Texas;
- all outstanding obligations and liabilities of HSA-Texas arising from and
after the effective date under the assigned contracts and assigned
leases;
- the aggregate principal and accrued interest amount of the "change in
status payments," amounts paid to compensate HSA-Texas auditors with
respect to work in progress for the differential between the current
HSA-Texas audit commission rates and the new commission rates to be made
effective prior to the closing of the asset acquisition, if any, to the
extent accrued on the estimated balance sheet and outstanding on the
effective date;
- commissions payable to associates or commissioned employees whether or
not they accept employment with PRG or its designee upon collection of
accounts receivable with respect to work in progress outstanding on the
effective date which is converted to accounts receivable after the
effective date, net of any deductions attributable to vendor paybacks,
except to the extent any associate has agreed in writing to accept a
"change in status payment" in lieu of such commission amounts; and
- amounts owed under HSA-Texas' severance policies in effect as of the date
of the asset agreement to any employee of HSA-Texas or its subsidiaries
to whom PRG and HSA-Texas have mutually agreed PRG will not offer
employment with PRG or any of its affiliates.
Concurrently with the closing of the asset acquisition, PRG will make an
initial payment to Howard Schultz of $7.4 million for amounts loaned to
HSA-Texas.
RETAINED LIABILITIES
The liabilities and obligations which will be retained by HSA-Texas will
consist of all liabilities of HSA-Texas that are not included on the estimated
balance sheet and the following:
- all liabilities secured by or related to HSA-Texas' Dallas headquarters
property and all other liabilities of HSA-Texas or any subsidiary
relating to indebtedness for borrowed money;
- all liabilities of HSA-Texas and its subsidiaries and shareholders for
federal, state, local or foreign taxes, including taxes incurred in
respect of or measured by:
- the income of HSA-Texas and its subsidiaries earned on or realized prior
to the effective date to the extent such liabilities exceed the amount
accrued for such liabilities on the December 31, 2000 audited financial
statements and/or the estimated balance sheet; and
44
- any gain or income from the transfer of the acquired assets and other
transactions contemplated by the asset agreement;
- all claims and liabilities, regardless of when arising, resulting from
HSA-Texas' or its shareholders' breach, on or before the closing of the
asset acquisition, of any covenant, condition or other obligation
required of HSA-Texas or its shareholders under any contract or lease;
- all liabilities under HSA-Texas' or any of its subsidiaries' severance
policies to any employee or associate of HSA-Texas and its subsidiaries
who is offered employment as of the closing date and who either:
- rejects the offer of employment;
- did not satisfy on the closing date the employment conditions specified
in the asset agreement;
- voluntarily resigns his or her employment within 30 days after the
commencement of such person's employment with PRG or its designated
subsidiary; or
- does not accept the engagement as an independent contractor;
- any liabilities with respect to employee benefits or under any employee
benefit plan;
- all non-business payables of HSA-Texas and its subsidiaries;
- all obligations and liabilities with respect to HSA-Texas options of
persons not hired by PRG and with respect to HSA-Texas SARs; and
- all obligations and liabilities to any holder of HSA-Texas voting common
stock who exercises dissenters' rights.
PURCHASE PRICE
Under the terms of the asset agreement, PRG will acquire substantially all
of the assets of HSA-Texas in exchange for the assumption of certain HSA-Texas
liabilities and the issuance of an aggregate of 14,724,338 shares of PRG common
stock, less a number of shares of PRG common stock having a value equal to the
"in the money" value of the options to purchase shares of HSA-Texas common stock
and HSA-Texas SARs outstanding at the closing.
PRG will also grant options to purchase up to 1,678,826 shares of PRG
common stock in connection with the assumption of all outstanding HSA-Texas
options held by persons who are offered and accept employment or an engagement
as an independent contractor with PRG or a position on its board of directors.
The "in the money" value of each outstanding option and SAR will be
determined by subtracting the per share exercise price of the option or the per
share grant price of the SAR from the "per share value." The formula for the
"per share value" as follows:
- 14,724,338;
- times the PRG "average price;"
- divided by the sum of:
- the number of shares of HSA-Texas common stock outstanding on the
closing date; plus
- the number of shares of HSA-Texas common stock subject to HSA-Texas
options outstanding on the closing date; plus
- the number of HSA-Texas SARs outstanding on the closing date.
Neither PRG nor HSA-Texas has the right to terminate the asset agreement or
renegotiate the number of shares to be received by HSA-Texas as a result of
market price fluctuations; provided, however, that HSA-Texas may terminate the
asset agreement if PRG's per share closing price on any day beginning on August
3, 2001 and ending on a date five trading days prior to the closing date is less
than $4.00. You are encouraged to obtain current market quotations of PRG common
stock.
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HSA-TEXAS STOCK OPTIONS AND SARS
Options to be Assumed by PRG
At the closing, PRG will assume all outstanding options held by each
HSA-Texas option holder who:
- is offered and accepts employment with PRG and meets the employment
conditions specified in the asset agreement;
- agrees to serve on PRG's board of directors; or
- becomes an independent contractor of PRG.
Each option that PRG assumes will thereafter constitute an option to
purchase shares of PRG common stock, at terms equivalent to those of the
HSA-Texas stock option, in accordance with the 1999 Howard Schultz & Associates
Stock Option Plan. After the closing, PRG will adopt a stock option plan to
provide for the administration by PRG of the assumed options. See "PRG/HSA-Texas
Stock Option Plan."
Prior to the closing of the asset acquisition, HSA-Texas will amend and
restate its option plan and, if necessary, amend the option grant agreements in
order to extend the expiration date of the HSA-Texas options upon a change of
control to five years from one year and to modify or delete the provisions that
relate to HSA-Texas' status as a private company.
Within thirty days after the closing date, PRG intends to file a
registration statement on Form S-8 with the SEC to register the shares of PRG
common stock subject to the assumed options. After the filing of the Form S-8,
shares of PRG common stock received upon exercise of assumed options will be
freely transferrable, unless held by "affiliates" of PRG. See "The Proposed
Acquisitions -- Federal Securities Law Consequences."
The number of shares of PRG common stock underlying assumed options will
equal the number of shares of HSA-Texas common stock subject to such options
immediately prior to the closing multiplied by an option conversion ratio,
rounded upward to the nearest whole share, and the per share exercise price will
equal the exercise price of the HSA-Texas stock option immediately prior to the
closing divided by the option conversion ratio, rounded upward to the nearest
whole cent. The option conversion ratio equals the "per share value" divided by
the PRG "average price" over the five trading day period ending five trading
days prior to the closing of the asset acquisition. The formula for the "per
share value" is contained at "-- Purchase Price."
Assuming that at closing there will be 2,307,482 shares of HSA-Texas voting
common stock outstanding, 6,435,383 shares of HSA-Texas nonvoting common stock
outstanding, 1,133,423 shares of HSA-Texas common stock subject to outstanding
options and 64,569 outstanding HSA-Texas SARs, the option conversion ratio will
be 1.4812. HSA-Texas option holders currently own HSA-Texas options at one of
two exercise prices per share, $8.16 or $9.06. As an example based on the
assumptions above, an HSA-Texas option to purchase 1,000 shares of HSA-Texas
common stock at an exercise price of $8.16 per share would be converted into an
option to purchase 1,481 shares of PRG common stock at an exercise price of
$5.51 per share. An HSA-Texas option to purchase 1,000 shares of HSA-Texas
common stock at an exercise price of $9.06 per share would be converted into an
option to purchase 1,481 shares of PRG common stock at an exercise price of
$6.12 per share.
Options Not Assumed by PRG
If an HSA-Texas option holder:
- is not offered employment or an independent contractor relationship with
PRG;
- does not accept employment or an independent contractor relationship
with PRG;
- does not meet PRG's employment conditions; or
- does not serve on PRG's board of directors following the acquisitions;
HSA-Texas will, prior to or concurrently with the closing, cancel the
outstanding option and pay the option holder an amount equal to the per share
amount that each HSA-Texas shareholder would receive upon dissolution of
HSA-Texas, less the exercise price of the option.
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Stock Appreciation Rights
HSA-Texas will, concurrently with the closing or as soon thereafter as
practicable, in exchange for the cancellation of each outstanding HSA-Texas SAR,
offer to pay each HSA-Texas SAR holder an amount in cash equal to the per share
amount that an HSA-Texas shareholder would receive upon dissolution of HSA-
Texas, less the grant price of the HSA-Texas SAR.
SHAREHOLDER REPRESENTATIVE
Howard Schultz has been appointed as the shareholder representative for
each of the shareholders of HSA-Texas who are parties to the asset agreement. As
the shareholder representative, Mr. Schultz is authorized to take any and all
actions and make any decisions required or permitted to be taken by him under
the asset agreement. For example, under the asset agreement, the shareholder
representative has the authority to:
- approve any action or perform any covenant or agreement under the asset
agreement which requires the consent, approval, waiver or performance of
the HSA-Texas shareholders, including any action with regard to
termination;
- settle all claims, matters, disputes or disagreements under the asset
agreement, the escrow agreement and the indemnification agreement; and
- extend the closing date or change the location of the closing.
HSA-Texas shareholders will be bound by all actions taken by the
shareholder representative in connection with the asset agreement, and PRG will
be entitled to rely on any action or decision of the shareholder representative
evidenced by a written document executed by the shareholder representative as
the action or decision of each of HSA-Texas' shareholders. Except for willful
misconduct or gross negligence, the shareholder representative shall not be
liable for any action taken in the performance of his duties and shall be
entitled to indemnification from all liabilities, losses, damages, costs and
expenses of any kind which may be reasonably incurred or suffered by the
shareholder representative as a result of the performance of the shareholders
representative's duties under the asset agreement.
EXPECTED CLOSING OF THE PROPOSED ACQUISITION
Under the asset agreement, the acquisition will close on a date to be
designated by PRG and HSA-Texas, but no later than the tenth business day after
the satisfaction or waiver of the conditions described below, unless another
time or date is agreed to by the parties. The asset agreement further provides
that if the closing has not occurred by March 31, 2002, then, subject to certain
conditions described more fully in this proxy statement, either party may
terminate the agreement, provided such party is not then in breach.
REPRESENTATIONS AND WARRANTIES
The asset agreement contains customary representations and warranties by
HSA-Texas to PRG regarding aspects of HSA-Texas' and its subsidiaries' assets,
business, financial condition and structure, including the following:
- HSA-Texas' and its subsidiaries' corporate organization, corporate power
and good standing;
- the absence of untrue statements of material facts or the omission of
material facts;
- ownership of HSA-Texas capital stock and options and SARs;
- title to the assets being conveyed;
- receivables, inventory, equipment and real property;
- environmental and immigration matters;
- intellectual property matters;
47
- compliance with all applicable laws, orders, rules and regulations of
governmental entities, and all licenses and permits;
- tax matters and financial matters;
- employment and labor matters, including benefits and ERISA;
- trade payables, accrued expenses and other related matters;
- insurance;
- material contracts, material leases and license agreements;
- key clients, employees and associates;
- litigation and legal proceedings;
- the authorization, execution, delivery, performance and enforceability of
the asset agreement and related matters;
- internet matters and Year 2000 compliance;
- bank accounts;
- the absence of unlawful payments;
- the absence of conflicts between the asset agreement and HSA-Texas'
articles of incorporation, and bylaws and agreements with third parties;
- required consents of third parties or governmental entities;
- the absence of material changes or events since December 31, 2000;
- broker's fees and expenses;
- the absence of discussions between HSA-Texas and other potential
acquirors;
- the accuracy of information supplied by HSA-Texas in connection with this
proxy statement;
- board approval of the proposed acquisitions and approval requirements for
shareholders;
- to the effect that the assets constitute all of the material assets and
rights with which HSA-Texas has conducted its business for the twelve
month period prior to the effective date;
- the acquisition of Phoenix Audit Recoveries, Inc. and JASAMA, Inc., two
independent contractors of HSA-Texas, and the acquisition of Tamebond
Ltd., the parent of Howard Schultz & Associates (International) Ltd.,
which was the licensee of HSA-Texas in the United Kingdom, and J&G
Associates Ltd., an independent contractor that provides services with
respect to the business of HSA-Texas in the United Kingdom;
- entering into a purchase agreement dated November 15, 2001 to acquire
Howard Schultz & Partner (Deutschland) GmbH, a licensee of HSA-Texas that
provides recovery audit services in Germany and Austria;
- the investment intent of HSA-Texas and HSA-Texas shareholders party to
the asset agreement; and
- disclosure of certain transactions between shareholders, directors,
officers, employees, associates, and affiliates of HSA-Texas and
HSA-Texas or its subsidiaries.
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The asset agreement also contains limited representations and warranties
made by PRG to HSA-Texas. See "Other Related Agreements -- Indemnification
Agreement" for a discussion of the survival period of the representations and
warranties set forth above.
COVENANTS AND AGREEMENTS
The asset agreement also contains covenants by the parties, including
covenants relating to:
- conduct of the business by HSA-Texas pending the closing of the
transaction;
- HSA-Texas' maintenance of good relations with all individuals and
entities that have business relationships with HSA-Texas that relate to
the assets being sold to PRG;
- access to information by PRG and HSA-Texas;
- cooperation in connection with governmental and regulatory filings and in
obtaining consents and approvals;
- PRG's presenting an offer letter for two years of employment to each of
Howard Schultz and Andrew Schultz and other employment matters with
respect to HSA-Texas' employees and independent contractors;
- issuance by PRG of new nonqualified options to purchase shares of PRG
common stock to certain key employees who were employees or independent
contractors of HSA-Texas prior to the closing of the asset agreement;
- use of reasonable best efforts by the parties to cause the proposed
acquisition to be recognized as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and other tax matters;
- liquidation of HSA-Texas following the closing;
- use of HSA-Texas' best efforts to obtain all consents and approvals
required to complete the proposed acquisitions, including approvals under
the HSR Act;
- HSA-Texas, Howard Schultz, Andrew Schultz, the trusts which are parties
to the asset agreement and certain other shareholders of HSA-Texas
entering into noncompetition, non-solicitation and confidentiality
agreements with PRG;
- press releases and confidential treatment of non-public information;
- both parties holding shareholders' meetings to approve the asset
agreement and the proposed acquisitions;
- payment of acquisition expenses;
- use of HSA-Texas' best efforts to obtain releases of all recorded liens,
subject to certain exceptions;
- arrangements for the transfer to PRG of cash in bank accounts of
HSA-Texas after the closing of the asset acquisition;
- continuation of HSA-Texas' healthcare coverage and vesting of account
balances under HSA-Texas' 401(k) Plan;
- lease of a portion of HSA-Texas' principal Dallas, Texas office to PRG at
market rental rates;
- waiver of compliance with any applicable bulk sales law;
- commission payments with respect to accounts receivable and work in
progress of HSA-Texas employees and associates for any HSA-Texas audits
which have not been finalized;
- the entering into by John Cook, John Toma, Howard Schultz, Andrew Schultz
and certain other shareholders of HSA-Texas of a shareholders agreement
with PRG;
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- contribution, without consideration, of certain equity interests in
subsidiaries of HSA-Texas;
- use of commercially reasonable efforts by PRG to cause the PRG board to
be enlarged to 13 members and to nominate Howard Schultz, Andrew Schultz,
Nate Levine and Arthur Budge, Jr. for election by the PRG shareholders to
the PRG board of directors and Mr. Budge to be renominated for election
by the PRG shareholders at the PRG annual meeting of shareholders to be
held in 2002;
- transfer prior to the closing of any assets and rights relating to the
business owned by shareholders of HSA-Texas to HSA-Texas;
- HSA-Texas' delivering all required schedules to the asset agreement on or
before December 4, 2001;
- changing PRG's corporate name to PRG-Schultz International, Inc.;
- PRG's agreeing after the closing date to assume HSA-Texas' obligations to
advance expenses under certain advancement agreements, each dated as of
August 23, 2001, between HSA-Texas and Michael Glazer, Stephanie
Holloway, A. Schultz, and H. Schultz;
- repayment prior to the closing of the asset acquisition of all amounts
owed by shareholders of HSA-Texas to HSA-Texas;
- public announcements and notification of material changes;
- HSA-Texas' working with the parties to the German acquisition agreement
to complete the acquisition of the business of Howard Schultz & Partner
(Deutschland) GmbH pursuant to the German acquisition agreement;
- obtaining resignations of all persons from all offices and directorships
in each of HSA-Texas' subsidiaries and licensees; and
- filing applicable tax returns of HSA-Texas and its subsidiaries.
See "Other Related Agreements -- Indemnification Agreement" for a
discussion of the survival period of the covenants set forth above.
INDEMNIFICATION BY HSA-TEXAS AND PRG
The asset agreement provides that HSA-Texas, Howard Schultz, Andrew Schultz
and certain affiliated Schultz family trusts which are parties to the asset
agreement, jointly and severally, will indemnify PRG and its subsidiaries,
affiliates, officers, directors, employees and agents from any damages, claims,
liabilities, lawsuits, losses, costs or expenses, including reasonable
attorneys' fees and expenses incurred in litigation or otherwise, incurred in
connection with the matters set forth below and others discussed in the asset
agreement:
- any misrepresentation or breach of any representation or warranty, or
breach, nonfulfillment of, or failure to perform, any covenant,
obligation or agreement of HSA-Texas or any shareholder of HSA-Texas
contained in or made pursuant to the asset agreement or in any schedule
or with respect to each of the acquisitions of Phoenix Audit Recoveries,
Inc., JASAMA, Inc., Howard Schultz & Partner (Deutschland) GmbH, Tamebond
Ltd. and J&G Associates Ltd.;
- any liability or obligation suffered by PRG, other than HSA-Texas'
liabilities specifically assumed by PRG, relating to the operation of
HSA-Texas' business or the ownership of its assets prior to the effective
date or with respect to each of the acquisitions of Phoenix Audit
Recoveries, Inc., JASAMA, Inc., Howard Schultz & Partner (Deutschland)
GmbH, Tamebond Ltd. and J&G Associates Ltd., prior to the closing date of
such acquisitions, which is not specifically disclosed in the schedules
to the asset agreement;
- any failure of any of HSA-Texas or a subsidiary thereof to comply with
any specified legal compliance requirements;
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- the treatment, by any governmental entity, of HSA-Texas independent
contractors or HSA-Texas affiliated foreign operating company independent
contractors as employees and not as independent contractors;
- any tax or other charge or expense for HSA-Texas' failure to qualify or
maintain its qualification as an S corporation;
- any failure to obtain prior to closing the asset agreement any consent to
the assignment to PRG of any agreements between HSA-Texas and Tamebond
Ltd. and J & G Associates Ltd. or Howard Schultz & Partner (Deutschland)
GmbH;
- the failure to obtain concurrently with the closing of Phoenix Audit
Recoveries, Inc., JASAMA, Inc., Howard Schultz & Partner (Deutschland)
GmbH, Tamebond Ltd. and J & G Associates Ltd. non-competition,
non-solicitation and confidentiality restrictive covenants from each
seller and each equity holder of such seller;
- the failure, effective from and after the respective closings of Phoenix
Audit Recoveries, Inc. and JASAMA, Inc., of HSA-Texas, or PRG as its
assignee, to collect in full, net of any reserve established as of the
respective closing date of such acquisitions, within 270 days after the
day on which it first becomes due and payable, any account receivable
outstanding on the books of Phoenix Audit Recoveries, Inc. or JASAMA,
Inc. on the respective closing date of each such acquisition;
- any claims asserted by shareholders of HSA-Texas, HSA-Texas optionees or
holders of HSA-Texas SARs in connection with or arising out of the
determination of the number and exercise price of options to be assumed
by PRG, and the allocation among the HSA-Texas shareholders and the
optionees of the shares of PRG common stock under the asset agreement and
the consideration to be paid to the shareholders of the affiliated
foreign operating companies under the stock agreement;
- the failure to close the acquisition of Howard Schultz & Partners
(Deutschland) GmbH or to close such acquisition on the terms agreed to by
PRG at any time within 365 days after the closing of the asset
acquisition;
- all retained liabilities;
- the failure to comply with any applicable bulk transfer laws;
- the amount in excess of $100,000 of any vendor payback provided the
aggregate vendor paybacks to such client are in excess of $350,000, less
any payback reserve applicable in respect of any inactive audit;
- any claim, except claims raised by Evert Software, Inc., by any person
that the manufacture, marketing, license, sale or use by HSA-Texas and
its subsidiaries, or by PRG after the closing, of any intellectual
property assets used by any of HSA-Texas' independent contractors in
connection with services rendered to HSA-Texas violates or will violate
any license or agreement with any third party or infringes or has
infringed on the intellectual property rights of others;
- any breach occurring prior to the closing by HSA-Texas or any subsidiary
of any representation, warranty, covenant or agreement in any assigned
contract or assigned lease; and
- all severance liabilities or obligations of any subsidiary to any
employees of or other service providers to the business.
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If, at any time within 365 days after the closing of the asset acquisition,
despite commercially reasonable efforts, PRG is unable to close the acquisition
of Howard Schultz & Partner (Deutschland) GmbH because the seller has demanded a
purchase price in excess of or terms more favorable to the seller than those
previously agreed to by PRG at the closing of the asset acquisition, PRG will
notify the HSA-Texas shareholders representative in writing specifying the basis
for such inability to close and if applicable the amount of the consideration in
excess of the agreed upon purchase price required to close such acquisition. In
such event PRG will have the option:
- to close such acquisition by paying the excess price or agreeing to the
more favorable terms, as applicable, in which event, the HSA-Texas
shareholders party to the asset agreement and HSA-Texas, will indemnify
PRG, and its subsidiaries, affiliates, directors, officers, employees and
agents, and hold them harmless, from and against the full amount of the
additional cost to PRG of the excess price or such terms less favorable
to PRG to close such acquisition; or
- not to close such acquisition, in which event, the HSA-Texas shareholders
party to the asset agreement and HSA-Texas will indemnify PRG, and its
subsidiaries, affiliates, directors, officers, employees and agents, and
hold them harmless, from the expected lost earnings to PRG from the
failure to close such acquisition. In such case, the parties have agreed
that if such acquisition is not closed, the indemnification to which PRG,
and its subsidiaries, affiliates, directors, officers, employees and
agents, will be entitled will equal $1.4 million, as liquidated damages,
which amount the parties agree is reasonable and has been arrived at
after a good faith effort to estimate the value of such lost earnings.
In the event that such acquisition is not completed prior to 365 days after
the closing of the asset acquisition, despite PRG's commercially reasonable
efforts, the HSA-Texas shareholders party to the asset agreement and HSA-Texas
will indemnify PRG, and its subsidiaries, affiliates, directors, officers,
employees and agents, and hold them harmless, from the expected lost earnings to
PRG from the failure to close such acquisition, and the parties have agreed such
amount equals $1.4 million, as liquidated damages.
Neither HSA-Texas, Howard Schultz, Andrew Schultz nor the trusts which are
parties to the asset agreement shall have any liability to the PRG for any
claims, liabilities, lawsuits, costs, damages or expenses, including reasonable
attorneys' fees and expenses incurred in litigation or otherwise, arising out of
and sustained by PRG with respect to HSA-Texas' failure to obtain an executed
non-competition agreement from any of Michael Lowery, Gertrude Lowery, Charles
Schembri or Mac Martirossian.
The asset agreement also provides that PRG will indemnify HSA-Texas and its
shareholders and HSA-Texas' affiliates, directors, officers, employees and
agents harmless from and against all claims, liabilities, lawsuits, costs,
damages or expenses, including reasonable attorneys fees and expenses incurred
in litigation or otherwise, arising out of and sustained by any of them due to
or relating to:
- any misrepresentation or breach of any representation, warranty, covenant
or agreement of PRG in the asset agreement; and
- any liability or obligation incurred by HSA-Texas or any shareholder
relating to the operation or ownership of the HSA-Texas business by PRG,
or the ownership or use of the acquired assets by PRG, from and after the
effective date.
Concurrently with the closing, PRG, HSA-Texas, Howard Schultz, Andrew
Schultz, the Andrew H. Schultz Irrevocable Trust and certain other affiliated
Schultz family trusts which are parties to the asset agreement will enter into
an indemnification agreement which will set forth the procedures for
indemnification, and the survival period and limitations on indemnification of
the claims described above. For a discussion of the indemnification agreement,
see "Other Related Agreements -- Indemnification Agreement" below.
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CONDITIONS TO CLOSING
PRG's and HSA-Texas' respective obligations to close the proposed
acquisitions are subject to the satisfaction or waiver, on or prior to the
closing date, of the following conditions:
- approval by PRG's shareholders of the proposed share and option issuances
and the election of the nominated directors;
- HSA-Texas' providing to PRG on or before December 26, 2001, a fully
executed copy of an HSA-Texas unanimous consent or a certified copy of
resolutions duly adopted by the holders of HSA-Texas voting common stock
approving the asset agreement;
- no law, injunction or other order preventing the completion of the
proposed acquisitions may be in effect or pending or threatened;
- no objection by the SEC to PRG's mailing of this proxy statement to PRG
shareholders and no stop order or other order or suspension of use of
this proxy statement shall have been issued by the SEC and no proceeding
for that purpose shall have been initiated or threatened by the SEC;
- the approval for listing on The Nasdaq National Market, subject to
official notice of issuance, of the shares of PRG common stock to be
issued in the proposed acquisitions;
- the absence of certain conflicts;
- all parties' having obtained all required consents;
- prior to or concurrently with the closing, PRG must have consummated the
stock agreement with regard to HSA-Singapore, HSA-Asia, HSA-Australia and
HSA-Canada; and
- PRG must have obtained the required consents of its principal lenders, a
syndicate led by Bank of America, N.A., or have entered into a new or
amended senior credit facility that does not prohibit the proposed
acquisitions.
Also, HSA-Texas' obligations to close the proposed acquisitions are subject
to the satisfaction or waiver of each of the following additional conditions:
- PRG must perform in all material respects its obligations under the asset
agreement, including certain deliveries to be made at closing and
delivery of certain executed documents; and
- PRG's representations and warranties contained in the asset agreement
must be accurate in all material respects as of the closing of the asset
agreement and as of the date of the asset agreement, except for any such
representations and warranties that are made as of a specific date,
which, in such case, must be accurate in all material respects as of such
date; and
- PRG's board must have nominated for election by the PRG shareholders at
the PRG special meeting Howard Schultz, Andrew Schultz, Arthur Budge, Jr.
and Nate Levine, and such nominees must have been elected at the PRG
special meeting.
Also, PRG's obligations to close the proposed acquisitions are subject to
the satisfaction or waiver of each of the following additional conditions:
- HSA-Texas must perform in all material respects its obligations under the
asset agreement, including certain deliveries to be made at closing and
delivery of certain executed documents;
- each shareholder of HSA-Texas must have repaid in full at or prior to the
closing all amounts owed by such shareholder to HSA-Texas;
- HSA-Texas' representations and warranties contained in the asset
agreement and in schedules must be accurate in all material respects as
of the closing of the asset agreement and as of the date of the asset
agreement, except for any such representations and warranties that are
made as of a specific date, which, in such case, must be accurate in all
material respects as of such date;
- HSA-Texas must have completed the acquisition of Howard Schultz & Partner
(Deutschland) GmbH in accordance with the German acquisition agreement;
and
53
- the opinion of Merrill Lynch shall not have been modified or withdrawn by
Merrill Lynch.
PRG and HSA-Texas currently believe that it is likely that all of the
material conditions to the asset acquisition will be fulfilled. In the unlikely
event that a condition is not fulfilled, PRG or HSA-Texas may, but will not be
required to, waive the condition and complete the asset acquisition. If a waiver
by PRG results in a material change in the terms of the asset acquisition, PRG
will resolicit the votes of its shareholders.
LIMITATION ON HSA-TEXAS' AND PRG'S ABILITY TO CONSIDER OTHER ACQUISITION
PROPOSALS
HSA-Texas and PRG have agreed that they will not directly or indirectly,
and will not authorize or permit any of their representatives to, directly or
indirectly:
- solicit, initiate or encourage the submission of any alternative
acquisition proposal with respect to HSA-Texas or take any action that
may reasonably be expected to lead to such an alternative acquisition
proposal; or
- participate in any discussions or negotiations or furnish any information
regarding HSA-Texas or PRG or its subsidiaries to any person in
connection with an inquiry or indication of interest that may lead to an
alternative acquisition proposal.
However, these restrictions shall not be deemed to prevent PRG or its board
of directors from complying with its legal rights to make a public statement
about a tender offer under Rule 14e-2(a) promulgated under the Securities
Exchange Act of 1934 with regard to an alternative acquisition proposal.
Furthermore, these restrictions will not prohibit PRG from furnishing nonpublic
information regarding PRG or its subsidiaries to, or entering into discussions
or negotiations with, any person in response to an unsolicited bona fide
proposal that is submitted by that person, if:
- the board of directors of PRG determines in good faith that this action
is required in order for the board of directors of PRG to comply with its
fiduciary obligations to PRG's shareholders under applicable law;
- the board of directors of PRG determines in good faith that the
unsolicited alternative acquisition proposal would, if completed, be
reasonably likely to constitute a superior proposal, as defined below;
and
- prior to taking such action, PRG receives from that person an executed
confidentiality agreement containing customary limitations.
However, PRG may also take any action which may lead to an alternative
acquisition proposal from a person if the person agrees to include in the
alternative acquisition proposal the concurrent acquisition of all of the stock
or substantially all of the assets of HSA-Texas and the four affiliated foreign
operating companies as if HSA-Texas and the four affiliated foreign operating
companies were a part of PRG at the completion of the alternative acquisition
proposal.
For these purposes, a superior proposal means an unsolicited bona fide
written offer by a third party which:
- the board of directors of PRG determines in its good faith business
judgment to be superior to PRG's shareholders from a financial point of
view as compared to the transactions contemplated by the asset agreement;
and
- is reasonably capable of being completed in accordance with its terms
taking into account all factors the board considers relevant, including
all legal, financial, regulatory and other aspects of the offer.
If HSA-Texas receives an alternative acquisition proposal, any inquiry or
indication of interest that may reasonably be expected to lead to an alternative
acquisition proposal or any request for nonpublic information, HSA-Texas has
agreed to notify PRG promptly upon becoming aware of it.
54
In addition, the PRG board of directors has agreed not to:
- withdraw or modify, or propose to withdraw or modify, its recommendation
for the approval of the proposed acquisitions in an adverse manner; or
- approve or recommend to its shareholders an alternative acquisition
proposal, unless:
- the PRG board of directors determines in good faith that it is necessary
to terminate the asset agreement in order for the PRG board of directors
to comply with its fiduciary duties to PRG's shareholders under
applicable law, in which case PRG will terminate the asset agreement and
pay to HSA-Texas a termination fee of $2.0 million; or
- the alternative acquisition proposal includes the concurrent acquisition
of HSA-Texas and the four affiliated foreign operating companies or
substantially all of the assets of HSA-Texas and the four affiliated
foreign operating companies as if HSA-Texas and the four affiliated
foreign operating companies were a part of PRG at the completion of the
PRG alternative acquisition proposal, in which case PRG may terminate
the asset agreement without any obligation to pay HSA-Texas the $2.0
million termination fee.
The PRG board of directors may not approve or recommend a PRG alternative
acquisition proposal on the basis that it is necessary to comply with its
fiduciary duties to PRG's shareholders, and in connection therewith withdraw or
modify its recommendation, unless:
- the PRG alternative acquisition proposal is a superior proposal, as
defined above; and
- the PRG board of directors shall have specifically determined that such
action is necessary for the PRG board of directors to comply with its
fiduciary duties to PRG's shareholders.
TERMINATION OF THE ASSET AGREEMENT
The asset agreement may be terminated at any time prior to the closing,
whether before or after approval of the proposed acquisitions by the
shareholders of HSA-Texas or PRG:
- by mutual written consent of HSA-Texas and PRG;
- by either PRG or HSA-Texas, if:
- the proposed acquisitions have not been completed on or before March 31,
2002; provided the party exercising the right to terminate is not then
in breach in any material respect of any of its representations,
warranties, covenants or other agreements under the asset agreement; or
- PRG has not received lender consent or entered into a new or amended
senior credit facility on or before March 31, 2002 that does not
prohibit the proposed transactions; or
- any court or other governmental entity has taken or failed to take any
action that has become final and non-appealable enjoining, restraining
or otherwise prohibiting the proposed acquisitions; or
- by HSA-Texas, if:
- PRG materially breaches its representations or warranties or fails to
perform its covenants or agreements under the asset agreement and any
such breach or failure has not been cured by the earlier of March 31,
2002 or 10 days after receipt of written notice thereof has been
received by PRG, provided that neither HSA-Texas nor any of its
shareholders is then in breach in any material respect of its
representations, warranties, covenants or agreements under the asset
agreement; or
- approval of PRG's shareholders has not been obtained by reason of the
failure to obtain the required PRG vote;
- upon the occurrence of an event that has a material adverse effect on
PRG, taken as a whole with its consolidated subsidiaries, provided that
neither HSA-Texas nor any of its shareholders is then in
55
breach in any material respect of its representations, warranties,
covenants or agreements under the asset agreement;
- the per share closing price of PRG's common stock on any trading day
during the period beginning on August 3, 2001 and ending on a date five
trading days prior to the closing of the asset acquisition is less than
$4.00;
- the PRG board of directors or any committee thereof approves or
recommends to its shareholders an alternative acquisition proposal which
includes the concurrent acquisition of HSA-Texas and the four affiliated
foreign operating companies by a third party, but HSA-Texas or any of
the affiliated foreign operating companies, in its discretion, does not
elect to participate in such alternative acquisition proposal;
- the PRG board of directors or any committee thereof approves or
recommends to its shareholders any alternative acquisition proposal
which does not include the concurrent acquisition of HSA-Texas and the
four affiliated foreign operating companies by a third party as if
HSA-Texas and the four affiliated foreign operating companies were a
part of PRG at the completion of such alternative acquisition proposal;
- the PRG board of directors or any committee thereof shall for any reason
have withdrawn, or shall have amended or modified in a manner adverse to
HSA-Texas, the PRG board's recommendation to the PRG shareholders; or
- a tender or exchange offer to acquire 50% or more of the outstanding
shares of PRG common stock shall have been commenced by a third party,
and PRG shall not within 10 business days after such tender or exchange
offer is first published, have sent or given to its shareholders a
statement disclosing that PRG recommends rejection of such tender or
exchange offer.
- by PRG, if:
- its board makes the determination to enter into a definitive written
agreement with respect to an alternative acquisition proposal;
- HSA-Texas or its shareholders materially breach their representations or
warranties or fail to perform their covenants or agreements under the
asset agreement and such breach or failure has not been cured by the
earlier of March 31, 2002 or 10 days after receipt of written notice
thereof has been received by HSA-Texas and its shareholders, provided
that PRG is not then in breach in any material respect of its
representations, warranties, covenants or agreements under the asset
agreement;
- approval of the HSA-Texas shareholders has not been obtained;
- approval of the HSA-Texas recommendations are rescinded by any of the
holders of HSA-Texas voting common stock;
- upon the occurrence of an event that has a material adverse effect on
HSA-Texas, provided that PRG is not then in breach in any material
respect of its representations, warranties, covenants or agreements
under the asset agreement; or
- within 30 days after receipt of all schedules that were not attached to
the asset agreement on the date it was signed.
Upon termination in accordance with the above provisions, the asset
agreement will become void and have no effect, without any liability or
obligation on the part of PRG, HSA-Texas or their respective shareholders,
officers or directors, other than the payment of termination fees as described
below, and provisions relating to broker's fees and expenses, confidentiality
and other provisions that survive generally; provided, however, that termination
will not relieve any party from liability or damages arising out of its breach
of the representations, warranties, covenants or agreements set forth in the
asset agreement.
56
TERMINATION FEES
If the asset agreement is terminated after PRG mails this proxy statement
to its shareholders:
- by either party, because the HSA-Texas special meeting was not held by
March 31, 2002; or
- by PRG, because approval of the HSA-Texas shareholders has not been
obtained;
- by PRG, because approval of the asset agreement has been rescinded by any
of the holders of HSA-Texas voting common stock;
- by HSA-Texas, because it elects not to participate in an alternative
acquisition proposal; or
- by PRG, because HSA-Texas or its shareholders materially breached their
representations or warranties or failed to perform covenants or
agreements under the asset agreement and such breach or failure was not
cured by the earlier of March 31, 2002 or 10 days after receipt of
written notice thereof has been received by HSA-Texas and its
shareholders, provided that PRG is not then in breach in any material
respect of its representations, warranties, covenants or agreements under
the asset agreement;
then HSA-Texas will be required to promptly pay PRG an amount equal to all of
PRG's expenses incurred in connection with the proposed acquisitions, by wire
transfer of immediately available funds.
The asset agreement also provides that if the asset agreement is terminated
after PRG mails this proxy statement to its shareholders:
- by either party, because PRG shareholders fail to approve the proposed
share and option issuances and the election of the nominated directors;
- by HSA-Texas, because PRG materially breaches its representations or
warranties or fails to perform its covenants or agreements under the
asset agreement and any such breach or failure has not been cured by the
earlier of March 31, 2002 or 10 days after receipt of written notice
thereof has been received by PRG, provided that neither HSA-Texas nor any
of its shareholders who are parties to the asset agreement is then in
breach in any material respect of its representations, warranties,
covenants or agreements under the asset agreement; or
- by either party, because the PRG special meeting was not held by March
31, 2002;
then PRG will be required to promptly pay HSA-Texas an amount equal to all of
HSA-Texas' expenses incurred in connection with the proposed acquisitions by
wire transfer of immediately available funds.
If the asset agreement is terminated by HSA-Texas after PRG mails this
proxy statement to its shareholders because:
- the PRG board of directors or any committee thereof approves or
recommends to its shareholders any alternative acquisition proposal which
does not include the concurrent acquisition of HSA-Texas and the four
affiliated foreign operating companies by a third party as if HSA-Texas
and the four affiliated foreign operating companies were a part of PRG at
the completion of such alternative acquisition proposal;
- the PRG board of directors or any committee thereof shall for any reason
have withdrawn, or shall have amended or modified in a manner adverse to
HSA-Texas, the PRG board's recommendation to PRG's shareholders; or
- a tender or exchange offer to acquire 50% or more of the outstanding
shares of PRG common stock shall have been commenced by a third party,
and PRG shall not have, within 10 business days after such tender or
exchange offer is first published, have sent or given to its shareholders
a statement disclosing that PRG recommends rejection of such tender or
exchange offer;
then PRG will be required to pay HSA-Texas a fee of $2.0 million and all of
HSA-Texas' expenses incurred by HSA-Texas and its shareholders in connection
with the asset agreement. The termination fee will be
57
payable within 10 days after HSA-Texas exercises its right to terminate the
asset agreement as described above.
EXPENSES
The asset agreement provides that, subject to the provisions regarding
termination fees as described above, PRG and HSA-Texas will pay their own
respective fees and expenses incurred in connection with the asset agreement and
the transactions contemplated by the asset agreement. The PRG transaction
expenses include all fees and expenses of agents, representatives, brokers,
counsel and accountants for PRG, financial advisory expenses of Bain & Co., all
filing fees and expenses in respect of filings by PRG under the HSR Act, and all
fees and expenses for the preparation, printing, filing, and mailing of this
proxy statement and drafts of the joint proxy statement/prospectus registration
statement on Form S-4 previously prepared in connection with the asset
acquisition and the solicitation of shareholder approvals in connection
herewith.
In addition, if the proposed acquisitions are completed, PRG will pay any
previously unpaid reasonable and necessary fees and expenses of attorneys and
accountants of HSA-Texas incurred in connection with the proposed acquisitions,
including all fees and expenses of KPMG LLP in connection with the audit of HSA-
Texas, its majority-owned subsidiaries and those companies under common control
and ownership by its controlling stockholders financial statements.
If either party shall terminate the asset agreement prior to the date on
which PRG mails this proxy statement to its shareholders or if either party
shall terminate the asset acquisition after PRG mails this proxy statement
because a court or governmental entity prohibits the transactions contemplated
by the asset agreement or PRG fails to obtain lender consent, and such party
seeking termination is not then in breach in any material respect of any of its
representations, warranties, covenants and other agreements under the asset
agreement, neither party shall have any liability or obligation to the other to
pay either its expenses or the termination fee described above.
If PRG terminates the asset agreement:
- because of an event which has a material adverse effect on HSA-Texas; or
- in order to enter into a superior acquisition; or
- within 30 days of receipt of the required schedules;
and PRG is not then in breach in any material respect of any of its
representations, warranties, covenants and other agreements under the asset
agreement, neither party shall have any liability or obligation to the other to
pay either its expenses or the termination fee described above.
If HSA-Texas terminates the asset agreement because:
- an event has a material adverse effect on PRG; or
- PRG's closing price is less than $4.00 during the period beginning on
August 3, 2001 and ending on a date five trading days prior to the
closing of the asset acquisition; or
- PRG's board or any committee recommends an alternative transaction;
and HSA-Texas is not then in breach in any material respect of any of its
representations, warranties, covenants and other agreements under the asset
agreement, neither party shall have any liability or obligation to the other to
pay either its expenses or the termination fee described above.
Any and all expenses incurred by any shareholder of HSA-Texas in connection
with the authorization, negotiation, preparation, execution and performance of
the asset agreement and the contemplated transactions will be paid by such
shareholder of HSA-Texas.
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AMENDMENT; WAIVER
The asset agreement may be amended by the parties, by action taken or
authorized by their respective boards of directors, at any time before or after
approval of the proposed acquisitions by the shareholders of PRG and HSA-Texas;
except that after approval has been obtained, no amendment which by law or The
Nasdaq National Market rules would require further approval by PRG's
shareholders will be made without such further approval. In addition, prior to
the closing, the parties may:
- extend the time for the performance of any obligation or other act of any
other party to the asset agreement;
- waive any inaccuracies in the representations and warranties contained in
the asset agreement or in any document delivered pursuant to the asset
agreement; and
- waive compliance with any of the agreements or conditions contained in
the asset agreement, provided that no amendment which by law or Nasdaq
National Market rules requires further approval by PRG shareholders will
be made without such further approval.
All amendments and waivers must be in writing and signed by the parties.
59
MATERIAL TERMS OF THE STOCK AGREEMENT
The following is a discussion of the material terms of the proposed amended
and restated stock agreement. The full text of the stock agreement is attached
as Annex B hereto, and is included as part of, this proxy statement. You are
encouraged to read the entire stock agreement carefully.
PURCHASE PRICE; CLOSING
Under the terms of the stock agreement, PRG will acquire substantially all
of the outstanding stock of HSA-Singapore and all of the outstanding stock of
HSA-Asia, HSA-Australia and HSA-Canada, each an affiliated foreign operating
company of HSA-Texas, in exchange for a total aggregate consideration of 629,508
shares of PRG common stock, of which an aggregate of:
- 1,535 shares will be issued to acquire HSA-Singapore;
- 75,234 shares will be issued to acquire HSA-Asia;
- 245,662 shares will be issued to acquire HSA-Australia; and
- 307,077 shares will be issued to acquire HSA-Canada.
The closing of the transactions contemplated by the stock agreement is
contingent upon the closing of the transactions contemplated by the asset
agreement. In the event the transactions contemplated by the asset agreement are
not completed, the parties to the stock agreement will not have any obligation
to complete the transactions described in the stock agreement.
SHAREHOLDER REPRESENTATIVE
Pursuant to the stock agreement, Howard Schultz has been appointed as the
shareholder representative for each of the shareholders of the affiliated
foreign operating companies. The terms and provisions relating to the
shareholder representative under the stock agreement are substantially the same
as those under the asset agreement. See "Material Terms of the Asset
Agreement -- Shareholder Representative" above.
REPRESENTATIONS AND WARRANTIES
The stock agreement contains customary representations and warranties by
the shareholders of the affiliated foreign operating companies to PRG regarding
aspects of each of the affiliated foreign operating companies' assets, business,
financial condition, and structure and other facts pertinent to the proposed
acquisitions, including such shareholders' ownership of the stock of the
affiliated foreign operating companies and their authority to enter into the
stock agreement. Matters covered by the representations and warranties made by
the shareholders of each affiliated foreign operating company include the
following:
- corporate organization, corporate power and good standing;
- the absence of untrue statements of material facts or the omission of
material facts;
- that each affiliated foreign operating company has, and will have, at
closing, marketable title to all of its assets free and clear of any
mortgages, liens, pledges and security interests, except for any liens
for taxes not yet due and payable;
- information regarding audits and accounts receivable;
- environmental and immigration matters;
- intellectual property matters;
- compliance with all applicable laws and all licenses and permits held by
each affiliated foreign operating company;
- tax returns and liabilities;
- financial statements;
60
- employment matters, including benefits and ERISA;
- trade payables, accrued expenses and outstanding debt;
- insurance;
- material contracts, leases and license agreements, the enforceability
thereof and the lack of any defaults thereunder;
- key clients, employees and associates;
- compliance with employment laws;
- litigation and legal proceedings;
- internet matters and Year 2000 compliance;
- bank accounts;
- the absence of unlawful payments;
- that the consummation of the purchase of the stock of the affiliated
foreign operating companies does not require the consent of any person
and will not violate any material contracts of the foreign operating
companies, or laws or organizational documents applicable to the
shareholders of the affiliated foreign operating companies;
- the absence of material changes or events;
- investment intent of each of the shareholders of the affiliated foreign
operating companies;
- the absence of any broker's fees or expenses; and
- disclosure of certain arrangements with any shareholder, director,
officer, employee, associate or other affiliate of the affiliated foreign
operating company.
The stock agreement also contains limited representations and warranties
made by PRG to the shareholders of each of the affiliated foreign operating
companies.
See "Other Related Agreements -- Indemnification Agreement" for a
discussion of the survival period of the representations and warranties set
forth above.
COVENANTS AND AGREEMENTS
The stock agreement also contains covenants by the parties, including
covenants relating to:
- conduct of the business of the affiliated foreign operating companies
pending the closing of the transaction;
- each affiliated foreign operating company maintaining good relations with
all individuals and entities that have business relationships with it;
- access to information by PRG and the affiliated foreign operating
companies;
- use of best efforts to obtain all consents and approvals required to
complete the proposed acquisitions;
- press releases and confidential treatment of non-public information;
- acquisition expenses and tax matters;
- waivers of claims and covenants not to sue;
- resignations of each of the shareholders of the affiliated foreign
operating companies from all offices and directorships held by such
shareholders;
- repayment by shareholders of shareholder loans from each affiliated
foreign operating company;
61
- delivery of all required schedules to the stock agreement on or before
November 19, 2001;
- transfer of equity interests by Acceptor Professional Directors (Pte)
Ltd. to reduce its equity interest in HSA-Singapore to equal the minimum
amount required to satisfy Singapore law regarding resident ownership;
- commission payments with respect to accounts receivable and work in
progress of certain independent contractors of the affiliated foreign
operating companies to employees; and
- public announcements and notification of material changes.
See "Other Related Agreements -- Indemnification Agreement" for a
discussion of the survival period of the covenants set forth above.
INDEMNIFICATION
The stock agreement provides that Howard Schultz, Andrew H. Schultz and the
Andrew H. Schultz Irrevocable Trust, jointly and severally, will indemnify PRG,
and its subsidiaries, affiliates, officers, directors, employees and agents from
any damages, claims, liabilities, lawsuits, costs, losses or expenses, including
reasonable attorney's fees and expenses incurred in litigation or otherwise,
incurred in connection with:
- any misrepresentation or breach of any representation or warranty, or
breach, nonfulfillment of, or failure to perform, any covenant,
obligation or agreement of any shareholder of the affiliated foreign
operating companies contained in the stock agreement;
- any liability or obligation suffered by PRG as a result of the operation
of the business of the affiliated foreign operating companies or the
ownership or use of the assets of the affiliated foreign operating
companies prior to the closing date of the stock agreement which is not
specifically disclosed in the schedules to the stock agreement;
- any failure of any of the affiliated foreign operating companies prior to
the closing of the stock acquisition to obtain any required consent;
- the treatment, by any governmental entity, of independent contractors of
the affiliated foreign operating companies as employees and not as
independent contractors;
- the amount in excess of $100,000 of any vendor payback of any affiliated
foreign operating company in respect of any inactive audit which is in
excess of $350,000;
- all severance liabilities or obligations, if any, to all employees and
all associates of any affiliated foreign operating company who
voluntarily resign employment within 30 days after the closing date;
- any litigation, arbitrations and mediations of the affiliated foreign
operating companies that existed on or at any time prior to the effective
date of the acquisitions; and
- any surplus distributed to the Andrew H. Schultz Irrevocable Trust by
HSA-Canada to pay federal income taxes.
The stock agreement also provides that PRG will indemnify each shareholder
of an affiliated foreign operating company and hold it harmless from and against
all losses arising out of and sustained by any of them due to or relating to:
- any misrepresentation or breach of any representation, warranty, covenant
or agreement of PRG in the stock agreement; and
- any liability or obligation incurred by any shareholder of the affiliated
foreign operating companies relating to the operation or ownership of any
affiliated foreign operating company by PRG, or the ownership or use of
the assets of any affiliated foreign operating company by PRG, from and
after the effective date.
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Concurrently with the closing, PRG, HSA-Texas, Howard Schultz, Andrew
Schultz, the Andrew H. Schultz Irrevocable Trust and certain other affiliated
Schultz family trusts will enter into an indemnification agreement which will
set forth the procedures for indemnification, and the survival period and
limitations on indemnification of the claims described above. For a discussion
of the indemnification agreement, see "Other Related
Agreements -- Indemnification Agreement" below.
CONDITIONS TO CLOSING
PRG's and the affiliated foreign operating companies' shareholders'
respective obligations to close the proposed acquisitions are subject to the
satisfaction or waiver, on or prior to the closing date, of the following
conditions:
- no law, injunction or other order preventing the completion of the
proposed acquisitions may be in effect or pending or threatened;
- the asset agreement must be consummated prior to or concurrently with
closing of the transactions contemplated in the stock agreement; and
- all required consents and approvals must be obtained.
The shareholders of the affiliated foreign operating companies' obligations
to close the proposed acquisitions are subject to the satisfaction, or waiver by
the shareholder representative, on or prior to the closing date, of each of the
following additional conditions:
- PRG must perform its obligations under the stock agreement, including
certain deliveries to be made at closing; and
- PRG's representations and warranties contained in the stock agreement
must be accurate in all material respects as of the closing of the
proposed acquisitions and as of the date of the stock agreement, and
except for any such representations and warranties that are made as of a
specific date, which, in such case, must be accurate in all material
respects as of such date.
PRG's obligations to close the proposed acquisitions are subject to the
satisfaction, or waiver by PRG, on or prior to the closing date, of the
following additional conditions:
- the shareholders of the affiliated foreign operating companies and the
Andrew H. Schultz Irrevocable Trust must have performed in all material
respects their obligations under the stock agreement, including certain
deliveries to be made at closing;
- absence of any pending or threatened investigation by any governmental
entity with regard to any affiliated foreign operating company which in
the reasonable judgment of PRG would have a material adverse effect on
such affiliated foreign operating company;
- since December 31, 2000, no affiliated foreign operating company shall
have been subject to a material adverse effect;
- the shareholders of the affiliated foreign operating companies must
provide PRG with revised schedules dated as of the closing date;
- the shareholders of the affiliated foreign operating companies' and the
Andrew H. Schultz Irrevocable Trust's representations and warranties
contained in the stock agreement must be accurate in all material
respects as of the closing of the proposed acquisitions and as of the
date of the stock agreement, except for any such representations and
warranties that are made as of a specific date, which, in such case, must
be accurate in all material respects as of such date;
- the repayment of all amounts owed by any shareholder to any of the
companies.
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PRG and the shareholders of the affiliated foreign operating companies
currently believe that it is likely that all of the material conditions to the
stock acquisition will be fulfilled. In the unlikely event that a condition is
not fulfilled, the parties may, but will not be required to, waive the condition
and complete the stock acquisition. If a waiver by PRG results in a material
change in the terms of the stock acquisition, PRG will resolicit the votes of
its shareholders.
TERMINATION OF THE STOCK AGREEMENT
The stock agreement will automatically terminate on the termination of the
asset agreement. The stock agreement may be terminated at any time prior to the
closing as follows:
- by mutual written consent of the shareholder representative and PRG;
- by either PRG or the shareholder representative if:
- the proposed acquisitions have not been completed on or before March 31,
2002, provided that the party exercising the right to terminate the
stock agreement is not then in breach in any material respect of any of
its representations, warranties, covenants or other agreements under the
stock agreement;
- PRG has not received lender consent or obtained a new or amended senior
credit facility on or before March 31, 2002 that does not prohibit the
proposed transactions;
- any court or other governmental entity has taken any action enjoining,
restraining or otherwise prohibiting the proposed acquisitions;
- by the shareholder representative, if:
- PRG materially breaches its representations or warranties or fails to
perform its covenants or agreements under the stock agreement and any
such breach or failure has not been cured by the earlier of March 31,
2002 or 10 days after receipt of written notice thereof has been
received by PRG; provided that none of the shareholders of the
affiliated foreign operating companies is then in breach in any material
respect of its representations, warranties, covenants or agreements
under the stock agreement; or
- by PRG, if:
- any of the shareholders of the affiliated foreign operating companies
materially breach their representations or warranties or fail to perform
their covenants or agreements under the stock agreement and such breach
or failure has not been cured by the earlier of March 31, 2002 or 10
days after receipt of written notice thereof has been received by the
shareholder representative, provided that PRG is not then in breach in
any material respect of its representations, warranties, covenants or
agreements under the stock agreement; or
- upon the occurrence of an event or development that has a material
adverse effect on any of the affiliated foreign operating companies,
provided that PRG is not then in breach in any material respect of its
representations, warranties, covenants or agreements under the stock
agreement; or
- within 30 days after receipt of all of the schedules required to be
delivered pursuant to the stock agreement.
Upon termination in accordance with the above provisions, the stock
agreement will become void and have no effect, without any liability or
obligation on the part of PRG or the respective shareholders of the affiliated
foreign operating companies, other than the provisions relating to transaction
expenses and fees, including expenses and fees of agents, representatives,
brokers, counsel and accountants, and other provisions that survive generally;
provided, however, that termination will not relieve any party from liability or
damages arising out of its breach of the representations, warranties, covenants
or agreements set forth in the asset agreement or the stock agreement. See
"Material Terms of the Asset Agreement -- Termination of the Asset Agreement."
64
AMENDMENT; WAIVER
Prior to the closing, the parties may amend the stock agreement to:
- extend the time for the performance of any obligation or other act of any
other party to the stock agreement;
- waive any inaccuracies in the representations and warranties contained in
the stock agreement or in any document required to be delivered pursuant
to the stock agreement; and
- waive compliance with any of the agreements or conditions contained in
the stock agreement.
All amendments and waivers must be in writing and signed on behalf of each
of the parties.
65
OTHER RELATED AGREEMENTS
The following are descriptions of the material provisions of other
agreements entered into or to be entered into in connection with the proposed
acquisitions.
SHAREHOLDER AGREEMENT
In connection with the proposed acquisitions, PRG, HSA-Texas, Howard
Schultz, Andrew Schultz, the Andrew H. Schultz Irrevocable Trust, of which
Andrew Schultz is the trustee and the beneficiary, certain other affiliated
Schultz family trusts, John M. Cook, the current chairman of the board and chief
executive officer of PRG, and John M. Toma, the current vice chairman of PRG,
will enter into a shareholder agreement.
Pursuant to the shareholder agreement, the parties will agree not to effect
any transfer of PRG common stock that such party now owns of record or acquires
and to take such actions as are necessary to prevent any transfers of PRG common
stock beneficially owned by such party, other than a transfer:
- by HSA-Texas to its shareholders in a pro rata distribution;
- to a party's spouse, lineal or adopted descendants, siblings and lineal
or adopted descendants of siblings, trusts for the benefit of parties
referred to above, charitable trusts and charitable foundations; provided
that the transferee becomes a party to the shareholder agreement, and
agrees to be bound by its terms;
- pursuant to a tender offer or exchange offer approved and recommended by
a simple majority of PRG's board of directors;
- by means of a public sale in a "brokers' transaction," as defined in Rule
144 under the Securities Act of 1933, in the market on a nationally
recognized U.S. exchange or The Nasdaq National Market;
- pursuant to a private block sale not to exceed $20.0 million in the
aggregate in any given six month period;
- pursuant to a firm commitment, underwritten registration statement filed
and declared effective pursuant to the registration rights agreement
entered into by Howard Schultz, Andrew Schultz, the Andrew H. Schultz
Irrevocable Trust, certain other parties and PRG;
- for charitable purposes or pursuant to a gratuitous transfer for the
benefit of such transferor or the transferor's spouse, siblings or lineal
descendents, all in an aggregate amount not to exceed $10.0 million in
any given 12 month period;
- pursuant to the written consent of all parties to the shareholders
agreement.
In addition, the parties to the shareholder agreement will agree, as to
matters submitted to a vote of PRG's shareholders, to vote and take such actions
as necessary to cause any shares of PRG common stock beneficially owned by such
party to be voted consistent with the recommendation of a specified majority of
PRG's board of directors; provided that:
- the specified majority must consist of at least nine members of PRG's 13
member board of directors;
- if the number of members of PRG's board of directors is increased or
decreased from 13, then the number of directors required to recommend a
matter will be accordingly increased or decreased to that percentage of
the total board, rounded up to the nearest whole number, equal to 9
divided by 13; and
- PRG's board of directors shall not have withdrawn such recommendation
prior to the vote.
Further, the parties will agree not to:
- initiate, propose, cause or vote in favor of or consent to a sale of PRG,
unless the sale of PRG has been approved and recommended by a simple
majority of PRG's board of directors;
- participate in or encourage the solicitation of PRG proxies in opposition
to a recommendation of PRG's board of directors with respect to any
matter;
66
- form, join or in any way participate in a group for the purpose of
acquiring, holding, voting or effecting the transfer of any PRG common
stock; or
- take any action that might require PRG to make a public announcement
regarding a sale of PRG, unless such sale has been approved and
recommended by a majority of PRG's board of directors.
The shareholder agreement will terminate upon the earlier to occur of:
- the second anniversary of the closing date of the proposed acquisitions;
- a material default by PRG with respect to any material loan agreement,
provided that the lender under such loan agreement has given PRG written
notice of such material default and has exercised its right to notice the
default in accordance with the terms of such loan agreement and such
default remains uncured or unwaived for not less than thirty days
following PRG's receipt of such notice;
- completion by PRG, without the consent of Howard Schultz or his personal
representative or estate, of a merger, consolidation, exchange, sale of
substantially all of the assets of PRG or other business combination
having an aggregate transaction value in excess of $50.0 million;
- completion of a fully underwritten, firm commitment public offering
pursuant to an effective registration statement under the Securities Act
of 1933 covering the offer and sale by PRG of PRG common stock with net
proceeds to PRG in excess of $50.0 million;
- amendment of PRG's articles of incorporation as they exist on the closing
date other than any amendment contemplated in the asset agreement or an
amendment approved by Howard Schultz; or
- any change in the number of members of PRG's board of directors other
than as contemplated in the asset agreement or as approved by Howard
Schultz;
provided, however, that a vote in favor of the following by Howard Schultz in
his capacity as a director of PRG will be deemed to be a consent and approval of
such action:
- completion by PRG of a merger, consolidation, exchange, sale of
substantially all of the assets of PRG or other business combination
having an aggregate transaction value in excess of $50.0 million;
- an amendment to PRG's articles of incorporation; or
- any change in the number of members of PRG's board of directors.
REGISTRATION RIGHTS AGREEMENT
In connection with the proposed acquisitions, PRG and each of the parties
to the asset and stock agreements and each additional holder of HSA-Texas voting
or nonvoting common stock will enter into a registration rights agreement. Under
the registration rights agreement, PRG will file a registration statement on
Form S-3 on or before the closing of the proposed acquisitions to register up to
$10.0 million of PRG common stock as directed by Howard and Andrew Schultz. PRG
will also be required upon written request from a holder of registrable
securities to register the shares of PRG common stock issued in the proposed
acquisitions for resale pursuant to a firm commitment underwritten public
offering, subject to certain exceptions; provided, however, that PRG will not be
required to file more than one registration statement during any six month
period or file a registration statement, other than the initial filing,
regarding a request covering less than $5.0 million of such PRG common stock in
a firm commitment underwritten offering. The registration rights agreement also
provides that all registration expenses will be paid by PRG except under certain
circumstances, including when the registration request is subsequently withdrawn
by a majority of such shareholders, unless the shareholders agree that the
request will count as one demand registration under the registration rights
agreement.
Pursuant to the registration rights agreement, PRG will have the right to
defer the filing of any registration statement, other than the initial filing,
or supplement or amendment thereto for a period of not more that 135 days from
the date of the request if PRG provides notice to such requesting shareholder
stating that compliance with the request would require the disclosure of
material nonpublic information and it would
67
be seriously detrimental to PRG and its shareholders for the registration
statement to be filed or for it to be supplemented or amended at that time. In
addition, the registration rights agreement will also provide for
indemnification by PRG of each holder of registrable securities, indemnification
of PRG by each holder of registrable securities participating in any
registration and indemnification of any underwriters by each of PRG and all
sellers of registrable securities with respect to claims arising from such
registration. The registration rights agreement will not be applicable to any
shares which are eligible for immediate resale under Rule 144 or Rule 145 under
the Securities Act.
INDEMNIFICATION AGREEMENT
In connection with the proposed acquisitions, PRG, HSA-Texas, Howard
Schultz, Andrew Schultz, the Andrew H. Schultz Irrevocable Trust and certain
other affiliated Schultz family trusts will enter into an indemnification
agreement. The indemnification agreement will set forth the procedures for
indemnification of claims, the survival period of claims and the limitations on
indemnification of claims under each of the asset agreement and stock agreement,
which are discussed above under the headings "Material Terms of the Asset
Agreement -- Indemnification by HSA-Texas and PRG" and "Material Terms of the
Stock Agreement -- Indemnification."
Under the indemnification agreement, all representations and warranties
contained in the asset agreement, the stock agreement and the agreements to be
executed and delivered in connection therewith to complete the contemplated
transactions shall survive the execution and delivery of such agreements for a
period ending on the date, referred to herein as the general expiration date, 60
days after the date of issuance of PRG's independent auditors' report in respect
of the second annual audited financial statements issued after the closing date
which include the acquired assets of HSA-Texas and the business of the
affiliated foreign operating companies in the financial statements and results
of operations of PRG. The representations and warranties shall thereafter cease
to be of any force and effect, except for:
- claims as to which notice has been given prior to the general expiration
date and which are pending on such date;
- claims based on the breach or nonfulfillment of representations,
warranties, covenants and agreements relating to taxes, employee benefit
plans, or any litigation, arbitrations and mediations that existed on or
at any time prior to the closing date, each of which shall survive until
the end of the statute of limitations applicable to the underlying claim
for which indemnification is sought;
- claims based on the breach or nonfulfillment of representations,
warranties, covenants and agreements relating to compliance by HSA-Texas
or its subsidiaries with applicable laws, orders, rules and regulations
of all governmental entities, each of which shall survive until the third
anniversary of the closing date; and
- representations and warranties with respect to ownership of the capital
stock of HSA-Texas, any of its subsidiaries, and of HSA-Asia,
HSA-Singapore, HSA-Australia and HSA-Canada, each of which shall survive
without expiration.
In addition, all covenants and agreements contained in the asset agreement,
stock agreement and the agreements to be executed and delivered in connection
therewith to complete the contemplated transactions shall survive the execution
and delivery of such agreements for a period ending on the general expiration
date, provided that any covenant which expressly specifies a period for
performance shall survive until the end of such specified period. In the event
of a breach of a representation or warranty or failure to perform a covenant or
agreement by a party which constitutes civil fraud, the representation,
warranty, covenant or agreement shall survive the completion of the transactions
contemplated in the asset agreement and stock agreement and continue in full
force and effect thereafter with respect to such fraud until the expiration of
the applicable statute of limitations for civil fraud.
68
Also, if the acquisition of Howard Schultz & Partner (Deutschland) GmbH
closes after the closing of the asset acquisition, the period during which PRG,
and its subsidiaries, affiliates, directors, officers, employees and agents, may
bring claims against HSA-Texas and/or the shareholders party to the asset
agreement for:
- any misrepresentation or breach of any representation or warranty, or
breach, nonfulfillment of, or failure to perform, any covenant,
obligation or agreement in any acquisition agreement approved by PRG;
- any liability or obligation suffered by PRG, other than HSA-Texas'
liabilities specifically assumed by PRG, relating to the operation of the
business of such seller and use of the assets by the seller, which is not
specifically disclosed in the schedules to the asset agreement;
- the treatment, by any governmental entity, of HSA-Texas affiliated
foreign operating companies independent contractors as employees and not
as independent contractors;
- any failure to obtain prior to closing the asset agreement any consent to
the assignment to PRG of any agreements between HSA-Texas and Howard
Schultz & Partner (Deutschland) GmbH;
- the failure to obtain concurrently with the closing of Howard Schultz &
Partner (Deutschland) GmbH, non-competition, non-solicitation and
confidentiality restrictive covenants from each seller and each equity
holder of such seller;
- the failure to close the acquisition of Howard Schultz & Partners
(Deutschland) GmbH or to close such acquisition on the terms agreed to by
PRG at any time within 365 days after the closing of the asset agreement;
shall survive until the third anniversary of the respective closing date of such
acquisition.
The indemnification agreement will also provide that neither HSA-Texas,
Howard Schultz, Andrew Schultz nor the affiliated Schultz family trusts which
are parties to the indemnification agreement will be obligated to indemnify PRG
for an indemnified claim until the total amount of all such claims equals or
exceeds $3.0 million in the aggregate, at which time, all such claims, including
those up to $3.0 million, may be claimed in full by PRG; provided, however, PRG
shall have the right to be indemnified without regard to such base amount for
claims relating to or arising from certain specified events, including:
- the treatment, by any governmental entity, of HSA-Texas independent
contractors as employees and not as independent contractors;
- certain severance liabilities or obligations to employees of or other
service providers to the HSA-Texas business;
- the amount in excess of $100,000 of any vendor payback, less any payback
reserve applicable in respect of any inactive audit, provided the
aggregate vendor payback to such client is in excess of $350,000;
- any litigation, arbitrations, or mediations that existed on or before the
closing;
- claims in respect of payroll and other tax liabilities; and
- any surplus distributed to the Andrew H. Schultz Irrevocable Trust by
HSA-Australia and/or HSA-Canada to pay federal income taxes.
Notwithstanding the foregoing, in no event will PRG, on the one hand, and
HSA-Texas, Howard Schultz and Andrew Schultz, on the other, be liable for
indemnified claims exceeding 35% of the aggregate amount of the consideration to
be paid by PRG pursuant to the asset agreement, the stock agreement and the
consideration paid or to be paid for the acquisitions of Tamebond Ltd., J & G
Associates Ltd., Howard Schultz & Partner (Deutschland) GmbH, Phoenix Audit
Recoveries, Inc. and JASAMA, Inc.
EMPLOYMENT AGREEMENTS
Effective at the closing, PRG will enter into an employment agreement with
Howard Schultz that expires on the second anniversary of the closing date.
Pursuant to Howard Schultz' employment agreement, Howard
69
Schultz will receive an annual base salary of $400,000, and will not be eligible
for a bonus during the term of the employment agreement. In addition, Howard
Schultz will receive options to purchase 250,000 shares of PRG common stock at
an exercise price per share equal to the closing price of PRG common stock on
the closing date, as published in The Wall Street Journal on the business day
immediately following the closing date, which options will vest over a five-year
period at 20% per year. Howard Schultz also is eligible to participate in PRG's
employee benefit plans and other benefits pursuant to his employment agreement.
In addition, effective at the closing, PRG will enter into an employment
agreement with Andrew Schultz that currently expires on the second anniversary
of the closing date. Pursuant to Andrew Schultz' employment agreement, Andrew
Schultz will receive an annual base salary of $240,000, and will be eligible to
receive an incentive bonus, which will include payout potentials of up to 35% of
annual salary for achievement of annual target performance goals and 70% of base
pay for achievement of annual maximum performance goals, during the term of the
employment agreement. Andrew Schultz also is eligible to participate in PRG's
employee benefit plans and other benefits pursuant to his employment agreement.
NONCOMPETITION AGREEMENT
In connection with the proposed acquisitions, PRG, HSA-Texas, Howard
Schultz, Andrew Schultz, certain affiliated Schultz family trusts and four other
shareholders of HSA-Texas will enter into a noncompetition, nonsolicitation and
confidentiality agreement. Under the agreement, HSA-Texas, Howard Schultz,
Andrew Schultz, certain other affiliated Schultz family trusts and four other
shareholders of HSA-Texas will agree not to, for a period of five (5) years from
and after the effective date, except on behalf of PRG:
- within the geographic area in which HSA-Texas conducts its business on
the closing date, provide or perform services which are in competition
with the HSA-Texas business, either on the shareholder's own behalf or on
behalf of any other person, whether as a shareholder, owner, partner,
proprietor, agent, consultant, independent contractor or lender of a
competing business or otherwise;
- within the geographic area in which HSA-Texas conducts its business on
the closing date, have a financial interest in or be in any way connected
with or affiliated with any competing business;
- use, reproduce, distribute, disclose or otherwise disseminate to anyone
any proprietary information utilized by HSA-Texas or its affiliates in
the HSA-Texas business at any time prior to the closing; provided,
proprietary information utilized by HSA-Texas or any such affiliate prior
to the closing that constitutes a trade secret under applicable law shall
not be used, reproduced, distributed, disclosed or otherwise disseminated
as long as such information retains its status as a trade secret;
- solicit or call upon any of HSA-Texas's accounts, former clients of
HSA-Texas to which services have been provided by HSA-Texas within the
last two years prior to the closing or any prospective client of
HSA-Texas, or any employee or independent contractor of any such client
or prospective client, for purposes of selling or providing any product,
equipment or service which is competitive with any product, equipment or
service sold, leased, offered for sale or lease or under development by
HSA-Texas during the 24-month period immediately preceding the closing;
- hire, solicit, entice, persuade or induce, or attempt to hire, solicit,
entice, persuade or induce any person who was employed by, or performing
services as an independent contractor or as an employee of an independent
contractor for, HSA-Texas or an affiliate and is subsequently hired or
engaged by PRG in connection with PRG's acquisition of the HSA-Texas
business pursuant to the asset agreement, either to terminate such
person's employment with PRG or to cease performing such services for
PRG; or
- authorize any person to engage in or assist any person in any of the
activities described in the preceding paragraph.
Notwithstanding the foregoing, HSA-Texas, Howard Schultz, Andrew Schultz,
certain affiliated Schultz family trusts and the four other shareholders may own
any number of shares of PRG common stock or have a
70
passive investment in less than one percent (1%) of the outstanding capital
stock of any other publicly traded company that is, or is connected with or
affiliated with, a competing business.
AGREEMENT TO PAY CERTAIN LITIGATION EXPENSES
In connection with the proposed acquisitions, PRG, HSA-Texas and Extreme
Recoveries, LLC, an independent contractor of HSA-Texas servicing the Midwest,
expect to enter into an agreement to pay certain litigation expenses of Extreme
Recoveries and the principals thereof resulting from an alleged copyright
infringement claim. This agreement will set forth the terms upon which PRG will
subsidize all or a portion of the litigation costs of Extreme Recoveries and
such principals after the closing of the proposed acquisitions. Any litigation
costs assumed by PRG pursuant to this agreement are not expected to have a
material impact on PRG's business or its results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HSA-TEXAS
This discussion should be read in conjunction with the combined financial
statements of HSA-Texas, its majority-owned subsidiaries and those companies
under common control and ownership by its controlling stockholders and their
family members and notes thereto included elsewhere in this proxy statement.
References to HSA-Texas in this "Management's Discussion and Analysis of the
Financial Condition and Results of Operations of HSA-Texas" are to those
entities in the aggregate, except where the context otherwise requires.
OVERVIEW
In 1970, HSA-Texas began to offer accounts payable and other recovery audit
services. HSA-Texas is a leading provider of such services to large and mid-size
businesses having numerous payment transactions with many vendors.
In businesses with large volumes of vendor transactions with fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In the aggregate, these transaction errors can represent meaningful
"lost profits" that can be particularly significant for businesses with
relatively low profit margins. HSA-Texas' trained, experienced auditors use
sophisticated proprietary technology and advanced recovery techniques and
methodologies to identify overpayments to vendors and other payees. These
auditors also review clients' current practices and processes related to
procurement and other expenses in order to identify solutions to manage and
reduce expense levels, as well as apply knowledge and expertise of
industry-specific "best practices" to assist clients in improving their business
efficiencies.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in HSA-Texas' condensed combined statements of operations for the
periods indicated:
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------
2001 2000 2000 1999 1998
----- ----- ----- ----- -----
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost of revenues............................... 65.2 65.7 65.8 70.3 76.4
Selling, general and administrative expense.... 35.3 33.5 34.8 28.2 22.3
----- ----- ----- ----- -----
Operating income (loss).............. (0.5) 0.8 (0.6) 1.5 1.3
----- ----- ----- ----- -----
Other income (expense)
Interest income.............................. 0.2 0.3 0.3 0.3 0.2
Interest expense............................. (2.4) (2.5) (2.4) (2.0) (1.7)
Settlement of litigation..................... 3.6 -- -- -- --
Other income (expense), net.................. -- (0.1) -- -- 0.2
----- ----- ----- ----- -----
Interest and other income (expense),
net..................................... 1.4 (2.3) (2.1) (1.7) (1.3)
----- ----- ----- ----- -----
Income (loss) before income taxes.... 0.9 (1.5) (2.7) (0.2) --
Foreign tax benefit............................ 0.5 -- -- -- --
----- ----- ----- ----- -----
Net income (loss).................... 1.4% (1.5)% (2.7)% (0.2)% --%
===== ===== ===== ===== =====
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September
30, 2000
Revenues. HSA-Texas' revenues are generated primarily from a contractually
specified percentage of the amount of the net overpayments actually recovered by
HSA-Texas for its clients, either in the form of credits taken by such clients
against invoices submitted by its recurring transaction vendors or cash re-
72
payment of those amounts. HSA-Texas has one reportable operating segment,
consisting of accounts payable auditing services.
Revenues decreased by $1.7 million from $102.5 million in the nine months
ended September 30, 2000 to $100.8 million in the nine months ended September
30, 2001.
Domestic revenues decreased by approximately $4.3 million in 2001, while
international revenues increased by $2.5 million, compared to the nine months
ended September 30, 2000. The decrease in domestic revenues was partially a
result of lost accounts and lower production on certain clients. The increase in
international revenues was partially a result of obtaining new accounts in late
2000 and higher production on existing accounts.
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to HSA-Texas' auditors based primarily upon the amount of
overpayment recoveries. Also included in cost of revenues are partial
reimbursement of direct costs incurred by the auditors, including rental of
non-headquarters offices, travel, telephone, utilities, maintenance, supplies
and clerical assistance.
Cost of revenues as a percentage of revenues decreased slightly to 65.2% in
the nine months ended September 30, 2001, down from 65.7% for the same period in
2000, due to the change in the mix of domestic and international revenues, as
well as actions taken to reduce domestic cost of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and HSA-Texas' corporate data centers, human
resources, legal, accounting, administration, depreciation of property and
equipment and amortization of intangibles.
Selling, general and administrative expenses as a percentage of revenues
increased to 35.3% of revenues in the nine months ended September 30, 2001, up
from 33.5% of revenues for the same period in 2000. A substantial portion of
this increase was due to higher payroll costs associated with building
HSA-Texas' management infrastructure, higher legal and accounting fees and
higher bad debt expenses in the nine months ended September 30, 2001, compared
to the same period in 2000.
Settlement of Litigation. In May 2001, HSA-Texas entered into a settlement
agreement with respect to litigation pending at December 31, 2000, involving a
group of independent contractors formerly associated with HSA-Texas. Pursuant to
the settlement agreement, HSA-Texas was relieved of certain obligations to pay
accrued commissions to those independent contractors, which amounted to $3.2
million at December 31, 2000. The total May 2001 settlement was $3.7 million.
Foreign Tax Benefit. During the third quarter of 2001, HSA-Texas collected
$512,000 in taxes paid on its behalf to the Inland Revenue taxing authority by
its former licensee in the United Kingdom. The refund was a result of inquiries
made by HSA-Texas which caused Inland Revenue to reverse its position on the
taxability of royalties remitted by the licensee. HSA-Texas had not recorded a
receivable in prior periods, due to the uncertainty of collection.
Net Income (Loss). HSA-Texas had net income of $1.4 million or 1.4% of
revenues in the nine months ended September 30, 2001, compared to a net loss of
$(1.5) million or (1.5)% of revenues for the same period in 2000, due primarily
to the factors discussed above.
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Revenues increased 3.7% to $138.7 million in 2000, up from $133.8 million
in 1999. The increase was primarily attributable to increased revenue from
existing clients as a result of HSA-Texas achieving additional recoveries for
those clients.
Cost of revenues as a percentage of revenues decreased to 65.8% in 2000,
down from 70.3% in 1999. This decrease resulted primarily from the acquisition
of its affiliates, Howard Schultz & Associates of the Northeast, Inc. and Howard
Schultz & Associates of the Mid-Atlantic, Inc. on January 1, 2000. These
acquisitions had a favorable impact on cost of revenues, since they enabled
HSA-Texas to compensate the
73
independent contractor audit associates directly, at a rate which was lower than
that previously paid to the acquired affiliates.
Selling, general and administrative expenses as a percentage of revenues
increased to 34.8% of revenues in 2000, up from 28.2% of revenues in 1999. A
substantial portion of this increase was due to higher payroll costs associated
with building HSA-Texas' management infrastructure, higher costs associated with
information technology expenditures and generally higher travel, meeting and
other general and administrative expenses. Additionally, in 2000, HSA-Texas'
depreciation of property and equipment and amortization of goodwill were higher
than in 1999, due to the acquisition of the affiliated companies discussed above
and the expansion of HSA-Texas' business.
Interest Expense. Interest expense for 2000 was $3.4 million, up from $2.7
million in 1999. The increase was due to an increased level of borrowings
primarily related to promissory notes issued in 2000 for the acquisitions
discussed above, as well as an increase in other notes payable used to finance
the increase in infrastructure during 2000.
Net Income (Loss). HSA-Texas incurred a net loss of $(3.7) million or
(2.7)% of revenues in 2000, compared to a net loss of $(0.3) million or (0.2)%
of revenues in 1999, due primarily to the reasons outlined above.
Year Ended December 31, 1999 Compared To December 31, 1998
Revenues. Revenues increased 13.8% to $133.8 million in 1999, up from
$117.6 million in 1998. This year-over-year increase of $16.2 million was
primarily due to the acquisition of the European operations, the addition of new
clients in all other international markets generating incremental revenue, and
increased revenues from selected domestic clients, resulting from higher audit
recoveries.
Cost of Revenues. Cost of revenues as a percentage of revenues decreased
to 70.3% in 1999, down from 76.4% in 1998, due to the acquisition of three
affiliated companies on January 1, 1999. The acquisition of the affiliated
companies had a favorable impact on cost of revenues, since it enabled HSA-Texas
to compensate the independent contractor audit associates directly, at a rate
which was lower than that paid to the affiliated associates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues increased to 28.2% in 1999,
up from 22.3% in 1998. HSA-Texas increased its management infrastructure
substantially in 1999 to accommodate the acquisitions discussed above and
incurred $1.2 million in compensation expense in 1999 (none in 1998) resulting
from stock options issued to non-employees. Additionally, HSA-Texas incurred
additional depreciation and amortization expenses in 1999 associated with these
acquisitions.
Interest Expense. Interest expense for 1999 was $2.7 million, up from $2.0
million in 1998, due primarily to acquisition-related indebtedness.
Net Income (Loss). HSA-Texas incurred a net loss of $(0.3) million in
1999, compared to net income of $21,000 in 1998 due primarily to the reasons
outlined above.
LIQUIDITY AND CAPITAL RESOURCES
From time to time, HSA-Texas has borrowed money from a bank and a
stockholder to meet on-going operating cash flow needs. HSA-Texas believes that
the combination of cash available from these lenders and cash flow generated
from future operations will be sufficient to meet HSA-Texas' working capital
expenditure requirements through December 31, 2002, including the transaction
costs associated with the proposed acquisitions; provided, however, in
connection with revisions to its compensation system in preparation for the
proposed acquisitions, HSA-Texas will be obligated to compensate its auditors
with respect to work in progress for the differential between the current
HSA-Texas audit commission rates and the new commission rates to be made
effective prior to the closing of the proposed acquisitions. In the event the
proposed acquisitions do not close, HSA-Texas will have to obtain financing for
up to $12.0 million to fund this obligation. While HSA-Texas will use its best
efforts to secure any necessary financing, there can be no assurances that it
will be able to do so.
74
Net cash provided by operating activities was $7.0 million in the nine
months ended September 30, 2001, and $6.7 million in the nine months ended
September 30, 2000.
Net cash used in investing activities was $2.1 million and $4.5 million in
the nine months ended September 30, 2001 and 2000, respectively. During the nine
months ended September 30, 2001, HSA-Texas borrowed approximately $5.5 million
from a principal stockholder and made payments of approximately $5.4 million
against debt incurred in various acquisitions. During the nine months ended
September 30, 2000, HSA-Texas issued approximately $2.3 million in notes payable
in connection with the acquisition of a building in 2000, and made payments of
approximately $3.7 million against debt incurred in acquisitions of principal
associates in prior years. HSA-Texas also distributed approximately $1.5 million
in cash to its principal stockholders during the nine months ended September 30,
2000. Additionally, HSA-Texas provided loans to stockholders of $0.8 million and
$0.3 million, and made payments on lease obligations of $0.4 million and $0.3
million, in the nine months ended September 30, 2001 and 2000, respectively.
Net cash provided by operating activities was $11.1 million in 2000, $10.3
million in 1999 and $6.2 million in 1998. The increase each year was due
primarily to the acquisitions discussed above.
Net cash used in investing activities was $7.0 million in 2000, $3.7
million in 1999 and $2.7 million in 1998. The expenditures each year primarily
related to the purchase of property and equipment, to support the increased
management infrastructure and the acquisitions discussed above.
Net cash used in financing activities was $5.9 million in 2000, $4.7
million in 1999 and $3.0 million in 1998. These uses of cash resulted from the
following: principal payments on notes payable, net of proceeds from the
issuance of notes payable, were $3.8 million in 2000, $4.7 million in 1999 and
$1.1 million in 1998, and distributions to stockholders were $1.5 million in
2000 and $2.4 million in 1998 (none in 1999). Additionally, 1998 cash used in
financing activities included proceeds from issuance of common stock net of
loans of stockholders of $0.5 million and 2000 cash used in financing activities
included principal payments on capital lease obligations of $0.4 million and a
loan provided to a stockholder of $0.2 million.
75
BUSINESS OF HSA-TEXAS
THE BUSINESS
Howard Schultz & Associates International, Inc., its subsidiaries and
licensees are industry pioneers in providing recovery audit services. HSA-Texas
audits accounts payable records, occupancy costs, vendor statements and direct
to store delivery audit records to recover overpayments that are a result of
missed credits, duplicated payments, overlooked allowances, incorrect invoices
and other discrepancies. References herein to HSA-Texas are to HSA-Texas, its
majority-owned subsidiaries and those companies under common control and
ownership by its controlling stockholders and their family members in the
aggregate, except where the context otherwise requires.
HSA-Texas provides recovery audit services to large and mid-size businesses
having numerous payment transactions with many vendors. These businesses
include, but are not limited to, retailers, manufacturers, wholesale
distributors, technology companies and healthcare providers. During 2000, two
clients, The Kroger Company and JC Penney accounted for 13% and 10%,
respectively, of HSA-Texas' combined revenues. During 1999 the same two clients
accounted for 12% and 10%, respectively, of HSA-Texas' combined revenues. During
1998, one client, American Stores, accounted for 11% of HSA-Texas' combined
revenues.
HSA-Texas receives a contractual percentage of overpayments and other
savings it identifies and its clients recover or realize.
HSA-Texas has more than 1,000 audit associates working in most major U.S.
cities and several international markets. HSA-Texas operates 25 regional offices
in the United States, Australia, Belgium, Canada, France, Germany, Hong Kong,
Italy, Mexico, the Philippines, Portugal, Singapore, Thailand, Taiwan, the
Netherlands, Spain and the United Kingdom.
HSA-Texas has affiliate companies that conduct operations for HSA-Texas in
Asia, Australia and Canada. These affiliate companies are Howard Schultz &
Associates (Asia) Ltd., a Hong Kong corporation; HS&A International Pte, Ltd., a
Singapore corporation; Howard Schultz & Associates (Australia), a Texas
corporation; and Howard Schultz & Associates (Canada), a Texas corporation.
These entities primarily provide recovery audit services in Singapore, Hong
Kong, Australia and Canada. In addition to these companies which operate as
affiliates of HSA-Texas, HSA-Texas has a licensee operating in Germany.
HISTORY
HSA-Texas commenced business in 1970. Prior to 1996, HSA-Texas' operations
were conducted substantially through its independent contractors. HSA-Texas
secured client contracts, but all services were rendered by the independent
contractors. These independent contractors received approximately 80%-85% of the
revenues generated from clients and incurred all of the direct expenses of
performing the recovery audit services while HSA-Texas was paid a contract fee
equal to approximately 15%-20% of the revenues generated. During this time
period, HSA-Texas was essentially a holding company collecting contract and
license fees.
Beginning in January 1995 and continuing through July 2001, HSA-Texas
entered into a series of transactions to acquire the operations of its
"principal associates." These principal associates were HSA-Texas' licensees and
provided the independent contract auditors that performed audit recovery
services for HSA-Texas in various regions in the United States. Following these
acquisitions, HSA-Texas assigned existing management personnel to run the
acquired operations, utilizing independent contractors, who previously had
provided audit services to the principal associates, to perform the necessary
audit functions. Additionally, HSA-Texas invested heavily in building a
corporate infrastructure and information systems to effectively manage and
support field operations. HSA-Texas also established a centralized training and
development group, regional business development professionals, and centralized
marketing, client relations, corporate-based human resource and finance
functions. In 1998, HSA-Texas began acquiring its foreign licensees. In
addition, in 2001 HSA-Texas entered into a definitive agreement to acquire its
German licensee.
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Set forth below is a summary of the acquisitions related to HSA-Texas' U.S.
and foreign operations:
DATE OF ACQUISITION PRINCIPAL ASSOCIATE OR LICENSEE WHOSE STOCK OR ASSETS WERE ACQUIRED
------------------- -------------------------------------------------------------------
March 4, 1996.................. Howard Schultz & Associates of the Pacific Southwest
April 1, 1996.................. Howard Schultz & Associates of the Southeast, Inc.
June 16, 1997.................. Howard Schultz & Associates of the Central States, Inc.
June 30, 1997.................. Howard Schultz & Associates of the Mountain States, Inc.
June 30, 1997.................. Howard Schultz & Associates of the North Central States, Inc.
January 5, 1998................ Howard Schultz & Associates, Mid Pacific, Inc.
July 1, 1998................... Howard Schultz & Associates of Mid-Southwest, Inc.
January 1, 1999................ HS&A Florida, Inc.
January 1, 1999................ Howard Schultz & Associates of the Mid-West, Inc.
January 1, 1999................ Howard Schultz & Associates of the Pacific Northwest, Inc.
January 1, 2000................ Howard Schultz & Associates of the Northeast, Inc.
January 1, 2000................ Howard Schultz & Associates of the Mid-Atlantic, Inc.
January 23, 1998............... Howard Schultz & Associates (1989) Corporation
January 30, 1998............... Howard Schultz & Associates (Australia) PTY Limited
January 1999................... Various European licensees
November 1, 2000............... Infinite Imaging Systems, Inc.
July 3, 2001................... Lowery, Inc.
September 1, 2001.............. Phoenix Audit Recoveries, Inc.
September 17, 2001............. JASAMA, Inc.
November 21, 2001.............. Tamebond Ltd. and J&G Associates Ltd.
On November 21, 2001, HSA-Texas acquired all of the stock of Tamebond Ltd.,
the parent of Howard Schultz & Associates (International) Ltd., which is the
licensee of HSA-Texas in the United Kingdom, and all of the stock of J&G
Associates Ltd., an independent contractor that provides services with respect
to the business of HSA-Texas in the United Kingdom, for an aggregate purchase
price of approximately $11.5 million plus a closing net worth adjustment
estimated to be approximately $1.0 million at December 19, 2001 exchange rates.
HSA-Texas entered into a purchase agreement dated November 15, 2001 to
acquire 98% of the outstanding stock of Howard Schultz & Partner (Deutschland)
GmbH, or Deutschland, a licensee of
HSA-Texas that provides recovery audit services in Germany and Austria, for a
purchase price equal to the sum of 98% of Deutschland's shareholders' equity at
December 31, 2001 and an amount equal to 23% of Deutschland's receipts during
the period from July 1, 1999 through June 30, 2001, currently estimated in the
aggregate to be approximately $2.2 million at December 19, 2001 exchange rates.
The transaction is expected to close in January 2002. The remaining 2% of
Deutschland is owned by Howard Schultz and will be contributed to HSA-Texas
prior to the closing of the proposed acquisitions.
On September 17, 2001, HSA-Texas acquired substantially all of the assets
and certain specified, related liabilities of JASAMA, Inc., an independent
contractor that performed direct to store delivery audit operations for
HSA-Texas, in exchange for a $1.2 million note payable in six equal quarterly
installments beginning January 1, 2002, bearing interest at the rate of 7.0% per
annum.
On September 1, 2001, HSA-Texas acquired substantially all of the assets
and certain specified, related liabilities of Phoenix Audit Recoveries, Inc., an
independent contractor that performed direct to store delivery audit operations
for HSA-Texas, in exchange for a $3.0 million note payable in six equal
quarterly installments beginning January 1, 2002, bearing interest at the rate
of 7.0% per annum.
On July 3, 2001, HSA-Texas acquired substantially all of the assets and
certain specified related liabilities of Lowery, Inc., an independent contractor
that performed recovery audit and information technology services for HSA-Texas,
in exchange for 307,482 shares of HSA-Texas voting common stock, the assumption
of $1 million in debt, which was repaid upon assumption, and the forgiveness of
$2.048 million of outstanding advances to Lowery, Inc. The shares of HSA-Texas
voting common stock are subject to the terms
77
of a stock ownership and restriction agreement which gives HSA-Texas limited
"call" options on the stock upon termination of the recipient's employment.
HSA-Texas also completed acquisitions of licensees in Australia and Canada
in 1998 and in Europe in 1999, as discussed below.
On January 23, 1998, HSA-Canada, an affiliated foreign operating company,
acquired all of the net assets of a former licensee in Canada.
On January 30, 1998, HSA-Australia, an affiliated foreign operating
company, acquired all of the net assets of a former licensee in Australia.
In November 1998, HSA-Texas formed its wholly-owned subsidiary, Howard
Schultz & Associates Europe, N.V., a Belgian corporation ("HS&A Europe"), for
the purpose of acquiring the equity interests of entities that performed
recovery audit services in various European countries, including Belgium,
France, Italy and Spain. HS&A Europe acquired 100% of such interests in January
1999 (except for a 10% interest in Howard Schultz Italia S.r.l., which was
acquired by HS&A Europe in March 2000).
On November 1, 2000, HSA-Texas acquired the stock of Infinite Imaging
Systems, Inc. for a total purchase price of approximately $1.5 million. The
acquired company provides document imaging utilizing high speed scanning
technology to convert paper records into a digital format. The digitized
documents are then indexed and archived. HSA-Texas is currently evaluating its
options with respect to continuing or disposing of this business.
AUDIT SERVICES
Accounts Payable Services
Through the use of proprietary technology, audit techniques and
methodologies, HSA-Texas' trained and experienced auditors examine merchandise
procurement records on a post-payment basis to identify overpayments resulting
from duplicate payments, missed discounts, allowances, rebates and other forms
of pricing concessions offered by vendors.
HSA-Texas' accounts payable services are offered to two main client types,
with each type currently having different service delivery characteristics.
Retail and Wholesale Industries. Services provided to retail and wholesale
clients are currently HSA-Texas' largest worldwide source of revenues. These
services typically recur annually and are largely predictable in terms of
estimating the dollar volume of client overpayments which will be ultimately
recovered. For most retail/wholesale clients, HSA-Texas typically identifies a
larger volume of recoveries each year when compared to recoveries realized in
the immediate preceding year. This growth generally results from factors such as
increasing sophistication of HSA-Texas' auditors and software, and continuing
client migration toward electronic merchandise procurements which HSA-Texas can
more thoroughly audit. HSA-Texas currently serves retail/wholesale clients on
four continents.
Other Industries. HSA-Texas also examines merchandise procurements and
other payments made by business entities such as manufacturers, distributors and
healthcare providers which are collectively termed as "commercial clients."
Services to these types of clients tend to be more rotational in nature with
different divisions of a given client often audited in pre-arranged annual
sequences. Accordingly, revenues derived from a given client may change markedly
from year-to-year depending on factors such as the size and nature of the client
division under audit. Currently, the majority of HSA-Texas' commercial clients
are located in the U.S.
Occupancy Cost Audit Services
The occupancy cost audit services division primarily examines the common
area maintenance cost, improper property tax allocations and incorrect
percentage rent charges and other real estate fees that many real estate tenants
experience. HSA-Texas provides auditors who will identify overpayments by
reviewing common area maintenance charges and related costs, office building
operating cost, property tax allocation
78
cost, rent charges, including percentage rent and CPI adjustments, insurance and
overhead expenses. In their audit, the auditors examine leases and other types
of cost statements provided to lessees.
Statement Audit Services
The statement audit services division has its auditors review vendors'
records for the client. The auditors review statements from suppliers for
credits that are not itemized on invoices as well as other items not taken from
vendor statements. The process begins with requesting copies of vendor
statements to be sent to HSA-Texas' statement audit center. Follow-up telephone
calls are made by a bank of callers specially trained by HSA-Texas to obtain
statements not sent by the vendors or to clarify questions relating to
statements received. Once the audit associates have analyzed the statements,
vendors are contacted to validate the potential claim. This service differs from
the standard accounts payable audit, since its success is dependent on the
effectiveness of the telephone solicitations.
Direct to Store Delivery Audit Services
The direct store delivery audit services division specializes in recovering
overpayments generated through the processing of transactions which bypass the
warehouse system, primarily for grocery retailers. Certain products, such as
soft drinks, potato chips and snacks, are delivered directly to the grocery
store shelves by vendor route salesmen. The paperwork for these deliveries is
processed through a separate system, independent of the client's warehouse
receiving system, where all other products are received and processed. The
invoices in direct store delivery audits usually are of relatively low dollar
amounts. These invoices are audited to recover discounts and credits that were
not taken in the ordering process generating the invoices.
Client Contracts
HSA-Texas' typical client contract provides that HSA-Texas is entitled to a
contractual percentage of overpayments or other savings recovered for or
realized by clients. Clients generally recover claims by either (a) taking
credits against outstanding payables or future purchases from the involved
vendors, or (b) receiving refund checks directly from those vendors. The method
of effecting a recovery is often dictated by industry practice. The client
contract provides that HSA-Texas is entitled to a fee for the rendering of that
service.
In addition to client contracts, many clients establish specific procedural
guidelines that HSA-Texas must satisfy prior to submitting claims for client
approval. These guidelines are unique to each client.
HSA-Texas recognizes revenue when it invoices clients for its fee, which
occurs after the client has processed approved claims.
TECHNOLOGY
HSA-Texas has data technology centers in Salt Lake City, Utah and Chicago,
Illinois in the U.S., as well as in Mexico City, Mexico; Sydney, Australia;
Brussels, Belgium; and Hong Kong. HSA-Texas employs applications of computer
technology to meet clients' needs in an increasingly paperless environment. The
primary software tool of HSA-Texas is SUREF!ND(R) which is HSA-Texas'
proprietary suite of software tools for analysis of HSA-Texas' clients'
electronic records.
At the beginning of a typical accounts payable recovery audit engagement,
HSA-Texas obtains transaction data from its client for the time period under
audit. HSA-Texas receives this data typically by magnetic media, which is then
reformatted into standardized and proprietary layouts at one of HSA-Texas'
technology centers.
HSA-Texas' experienced programmers then prepare statistical reports to
verify the completeness and accuracy of the data. HSA-Texas delivers this
reformatted data to its auditors who, using SUREF!ND(R), sort, filter and search
the data for overpayments. HSA-Texas also produces client-specific standard
reports and statistical data for its auditors. These reports and data often
reveal patterns of activity or unusual relationships suggestive of potential
overpayment situations.
HSA-Texas has developed and continuously updates and refines its
proprietary accounts payable databases to assist it in providing recovery audit
services to its domestic retail/wholesale clients. These
79
databases serve as a central repository reflecting its auditors' experiences,
vendor practices and knowledge of regional and national pricing information,
including seasonal allowances, discounts and rebates. These proprietary
databases, however, do not include confidential client information. Auditors use
these databases to identify discounts, allowances and other pricing information
not previously detected.
SEASONALITY
HSA-Texas has experienced and expects to continue to experience seasonality
in its business. HSA-Texas typically realizes higher revenues and operating
income in the last two quarters of its fiscal year.
SALES AND MARKETING
HSA-Texas maintains its sales and marketing function at its Dallas, Texas
headquarters as well as at regional offices throughout the U.S. Due to the
highly confidential and proprietary nature of a business' purchasing patterns
and procurement prices combined with the typical desire to maximize the amount
of funds recovered, most prospective clients conduct an extensive investigation
which may include an on-site inspection of HSA-Texas' service facilities.
HSA-Texas has typically found that its service offerings require long sales
cycles and the highest level of direct person-to-person contact.
PROPRIETARY RIGHTS
HSA-Texas continuously evaluates new recovery audit software and enhances
existing proprietary software. HSA-Texas regards its proprietary software as
protected by trade secret and copyright laws of general applicability. In
addition, HSA-Texas attempts to safeguard its software through employee and
third-party nondisclosure agreements and other methods of protection. While
HSA-Texas' competitive position may be affected by its ability to protect its
software and other proprietary information, HSA-Texas believes that the
protection afforded by trade secret and copyright laws is less significant to
HSA-Texas' success than the continued pursuit and implementation of its
operating strategies and other factors such as the knowledge, ability and
experience of its personnel.
HSA-Texas owns or has rights to various copyrights, trademarks and trade
names used in HSA-Texas' business, including but not limited to SUREF!ND(R).
COMPETITION
The recovery audit business is highly competitive and barriers to entry are
relatively low. The competitive factors affecting the market for HSA-Texas'
recovery audit services include:
- establishing and maintaining client relationships;
- quality and quantity of claims identified;
- experience and professionalism of audit staff;
- rates for services;
- technology; and
- geographic scope of operations.
In addition to PRG, HSA-Texas' principal competitors for accounts payable
recovery audit services include many local and regional firms.
In recent years, HSA-Texas has seen increasing competition from the
consulting arms of the five largest international accounting firms.
Historically, the accounting firms have been precluded from providing
significant levels of recovery audit services due to the potential for conflicts
of interest with audit clients. Additionally, the accounting firms have relied
primarily on fee-based arrangements versus the predominant contingency model
associated with recovery audit services. Since January 2000, three of the
accounting firms have spun off, sold or otherwise granted separate independence
to their management consulting units and one other has announced its intention
to eventually effect a similar separation. With the potential for conflicts of
80
interest substantially reduced, HSA-Texas believes that these independent
consulting units may become formidable competitors in the future.
EMPLOYEES AND CONTRACTORS
As of November 30, 2001, HSA-Texas and its subsidiaries had approximately
560 employees dedicated to its business operations, and approximately 500
independent contractors providing audit services for HSA-Texas located in the
U.S., Australia, France, Spain, Italy, Belgium, the Netherlands and Canada.
HSA-Texas is currently reviewing plans and options to convert independent
contractor auditors to employees of HSA-Texas who will perform the same type of
services. HSA-Texas believes that its relationships with its employees and
independent contractors are good.
81
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
On August 3, 2001, PRG signed a definitive agreement with HSA-Texas to
acquire for up to 16 million shares of its common stock substantially all of the
assets of HSA-Texas and substantially all of the outstanding stock of
HSA-Singapore, and all of the outstanding stock of HSA-Asia, HSA-Australia and
HSA-Canada, each an affiliated foreign operating company of HSA-Texas, pursuant
to an agreement and plan of reorganization in connection with the asset
acquisition and an agreement and plan of reorganization in connection with the
stock acquisition. Unless the text otherwise requires, references to HSA-Texas
in this pro forma section also include the affiliated entities of HSA-Texas that
are included in the audited financial statements of HSA-Texas.
The following unaudited pro forma combined financial statements present
financial information giving effect to the proposed acquisitions under purchase
accounting and to the disposal of PRG's French Taxation Services business as
discussed below. The unaudited pro forma combined balance sheet as of September
30, 2001 is presented as if the proposed acquisitions and the disposal of PRG's
French Taxation Services business, as discussed below, had been completed as of
that date. The unaudited pro forma combined statements of operations for the
nine month period ended September 30, 2001 and the year ended December 31, 2000
are presented as if the proposed acquisitions and the disposal of PRG's French
Taxation Services business, as discussed below, had been completed as of January
1, 2000.
The unaudited pro forma combined financial statements reflect certain
assumptions deemed probable by PRG management regarding the purchase. The total
estimated purchase cost of the proposed acquisitions was allocated on a
preliminary basis to assets based upon management's best estimates of their fair
value with the excess cost over the net assets acquired allocated to goodwill.
The adjustments to the unaudited pro forma combined financial information are
subject to change pending a final analysis of the total purchase cost and the
fair value of the assets assumed. The impact of these changes could be material.
The unaudited pro forma combined financial statements should be read in
conjunction with PRG's unaudited consolidated financial statements and notes
thereto included in PRG's Quarterly Report on Form 10-Q for the period ended
September 30, 2001 and the audited consolidated financial statements and notes
thereto incorporated by reference herein from PRG's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 as amended by PRG's Form 8-K filed
on December 17, 2001. The pro forma adjustments are based upon preliminary
estimates, available information and certain assumptions that management deems
appropriate and are not necessarily indicative of what PRG's results of
operations or financial position would have been had the transaction been in
effect as of and for the periods presented, nor is such information necessarily
indicative of PRG's results of operations or financial position for any future
period or date.
On December 3, 2001, PRG entered into an agreement, subject to approval of
PRG's board of directors, to sell its French Taxation Services business for
approximately 352 million French francs. On December 10, 2001, the executive
committee of PRG's board of directors ratified the agreement and authorized the
sale of PRG's French Taxation Services business. On December 14, 2001, PRG
consummated the sale and received gross proceeds of approximately $48.3 million.
The sale of the French Taxation Services business will result in a net loss on
the transaction of approximately $54.0 million in the fourth quarter of 2001. As
a result of the foregoing, the French Taxation Services business has been
classified as discontinued operations for accounting purposes in the historical
financial statements. The pro forma statement of operations information has been
reclassified to remove this business from continuing operations and the pro
forma combined balance sheet has been reclassified to reflect this business as
discontinued operations but does not reflect receipt of sales proceeds nor the
application thereof nor the removal of related net assets. See "Special
Considerations -- Special Considerations Relating to PRG's Business Following
the Proposed Acquisitions -- As a result of the sale of PRG's French Taxation
Services operations, PRG will recognize a substantial and material net loss in
the fourth quarter of 2001."
82
On November 26, 2001, PRG closed on a $95.0 million offering of its 4 3/4%
convertible subordinated notes due 2006. PRG issued an additional $15.0 million
of the notes on December 3, 2001, and on December 4, 2001, the initial
purchasers of the notes issued on November 26, 2001 purchased an additional
$15.0 million of the notes to cover over allotments, bringing to $125.0 million
the aggregate amount issued. PRG received net proceeds from the offering of
approximately $121.4 million. The proceeds of the notes were used to pay down
PRG's outstanding balance under its senior credit facility. The coupon on the
convertible notes of 4 3/4% is slightly favorable to the weighted average
interest rate incurred on PRG's senior credit facility. The effect of these
notes upon the EPS calculations for the periods presented are antidilutive and
as such have not been included in the proforma adjustments.
83
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
PRO FORMA
---------------------------
PRG HSA-TEXAS ADJUSTMENTS COMBINED
-------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues...................................... $186,299 $100,761 $ -- $287,060
Cost of revenues.............................. 100,041 65,651 -- 165,692
Selling, general and administrative
expenses.................................... 74,521 35,564 (2,664)(D)(E) 107,421
-------- -------- --------- --------
Operating income (loss)............. 11,737 (454) 2,664 13,947
Interest (expense), net....................... (3,900) (2,277) 519(F) (5,658)
Settlement of litigation...................... -- 3,650 -- 3,650
Other income (expense), net................... -- 10 (10)(H) --
-------- -------- --------- --------
Earnings from continuing operations
before income taxes............... 7,837 929 3,173 11,939
Income tax expense (benefit).................. 3,448 (512) 2,556(G) 5,492
-------- -------- --------- --------
Earnings from continuing
operations........................ $ 4,389 $ 1,441 $ 617 $ 6,447
======== ======== ========= ========
Basic earnings per share -- earnings from
continuing operations....................... $ 0.09 $ 0.10
======== ========
Diluted earnings per share -- earnings from
continuing operations....................... $ 0.09 $ 0.10
======== ========
Denominator:
Denominator for basic earnings per share --
weighted-average shares outstanding...... 48,182 14,941 63,123
Effect of dilutive securities:
Employee stock options................... 496 977 1,473
-------- --------- --------
Denominator for diluted earnings.... 48,678 15,918 64,596
======== ========= ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
84
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2000
PRO FORMA
----------------------------
PRG HSA-TEXAS ADJUSTMENT COMBINED
-------- --------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues..................................... $255,110 $138,708 $ -- $393,818
Cost of revenues............................. 139,430 91,222 -- 230,652
Selling, general and administrative
expenses................................... 100,435 48,324 (1,444)(D)(E) 147,315
-------- -------- ------- --------
Operating income (loss).................... 15,245 (838) 1,444 15,851
Interest (expense), net...................... (5,270) (2,938) 244(F) (7,964)
Other income (expense), net.................. -- 47 (47)(H) --
-------- -------- ------- --------
Earnings (loss) from continuing operations
before income taxes..................... 9,975 (3,729) 1,641 7,887
Income tax expense (benefit)................. 4,389 -- (51)(G) 4,338
-------- -------- ------- --------
Earnings (loss) from continuing
operations.............................. $ 5,586 $ (3,729) $ 1,692 $ 3,549
======== ======== ======= ========
Basic earnings per share -- earnings from
continuing operations...................... $ 0.11 $ 0.06
======== ========
Diluted earnings per share -- earnings from
continuing operations...................... $ 0.11 $ 0.05
======== ========
Denominator:
Denominator for basic earnings per share --
weighted-average shares outstanding..... 48,871 14,941 63,812
Effect of dilutive securities:
Shares issuable for Groupe AP earnout... 201 -- 201
Employee stock options.................. 737 977 1,714
-------- ------- --------
Denominator for diluted earnings... 49,809 15,918 65,727
======== ======= ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
85
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2001
PRO FORMA
----------------------------
PRG HSA-TEXAS ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,700 $ 6,071 $ (7,350)(A) $ 5,421
Receivables:
Contract receivables.................................... 43,913 15,233 -- 59,146
Employee advances and miscellaneous receivables......... 4,388 1,491 -- 5,879
-------- ------- -------- ---------
Total receivables................................... 48,301 16,724 -- 65,025
-------- ------- -------- ---------
Prepaid expenses and other current assets................. 2,852 1,930 -- 4,782
Deferred income taxes..................................... 10,099 -- -- 10,099
Net assets of discontinued operations..................... 149,465 -- (51,307)(C) 98,158
-------- ------- -------- ---------
Total current assets................................ 217,417 24,725 (58,657) 183,485
-------- ------- -------- ---------
Property and equipment:
Computer and other equipment.............................. 43,037 14,067 (4,525)(B) 52,579
Furniture and fixtures.................................... 3,286 1,546 (455)(B) 4,377
Land and buildings........................................ -- 4,716 (4,716)(A) --
Leasehold improvements.................................... 4,513 1,648 (1,454)(A)(B) 4,707
-------- ------- -------- ---------
50,836 21,977 (11,150) 61,663
Less accumulated depreciation and amortization............ 29,801 9,334 (7,234)(B) 31,901
-------- ------- -------- ---------
Property and equipment, net............................. 21,035 12,643 (3,916) 29,762
-------- ------- -------- ---------
Noncompete agreements....................................... 315 -- -- 315
Deferred loan costs......................................... 2,139 -- -- 2,139
Goodwill.................................................... 162,077 31,511 155,681(B) 349,269
Intangible assets........................................... -- -- 32,400(B) 32,400
Deferred income taxes....................................... 582 -- (582)(B) --
Other assets................................................ 5,139 1,014 (4,541)(B) 1,612
-------- ------- -------- ---------
Total assets........................................ $408,704 $69,893 $120,385 $ 598,982
======== ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 52,045 $ 8,461 $ 41,089(A)(C) $ 101,595
Capital lease obligations -- current...................... -- 682 -- 682
Accounts payable and accrued expenses..................... 7,444 7,478 13,249(B) 28,171
Accrued payroll and related expenses...................... 20,869 7,993 16,000(B) 44,862
Other current liabilities................................. -- 63 -- 63
-------- ------- -------- ---------
Total current liabilities........................... 80,358 24,677 70,338 175,373
Long-term debt, excluding current installments.............. 100,125 33,763 (54,796)(A)(C) 79,092
Capital lease obligations, excluding current installments... -- 971 -- 971
Deferred income taxes....................................... -- -- 4,418(B) 4,418
Deferred compensation....................................... 4,296 -- -- 4,296
-------- ------- -------- ---------
Total liabilities................................... 184,779 59,411 19,960 264,150
-------- ------- -------- ---------
Common stock put options.................................... -- 3,086 (3,086)(B) --
Shareholders' equity:
Preferred stock........................................... -- -- -- --
Common stock.............................................. 51 701 (686)(B) 66
Additional paid-in capital................................ 320,238 6,773 155,325(B) 482,336
Accumulated deficit....................................... (67,949) (688) (53,312)(B)(C) (121,949)
Accumulated other comprehensive loss...................... (6,139) 610 2,184(B)(C) (3,345)
Less treasury stock at cost............................... (21,024) -- -- (21,024)
Unearned portion of restricted stock...................... (1,252) -- -- (1,252)
-------- ------- -------- ---------
Total shareholders' equity.......................... 223,925 7,396 103,511 334,832
-------- ------- -------- ---------
Total liabilities and shareholders' equity.......... $408,704 $69,893 $120,385 $ 598,982
======== ======= ======== =========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
86
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The unaudited pro forma combined balance sheet gives effect to the purchase
and the proposed disposal of PRG's French Taxation Services business as if they
had occurred on September 30, 2001 with respect to the balance sheets of PRG and
HSA-Texas.
On August 3, 2001, PRG signed a definitive agreement with HSA-Texas to
acquire for up to 16.0 million shares of its common stock substantially all of
the assets of HSA-Texas and substantially all of the outstanding stock of
HSA-Singapore and all of the outstanding stock of HSA-Asia, HSA-Australia, and
HSA-Canada, each an affiliated foreign operating company, pursuant to an
agreement and plan of reorganization in connection with the asset acquisition
and an agreement and plan of reorganization in connection with the stock
acquisition. This business combination will be accounted for under the purchase
method of accounting.
The following adjustments were reflected in the unaudited pro forma
combined balance sheet:
(A) To eliminate HSA-Texas assets not acquired and HSA-Texas
liabilities not assumed and cash to be paid at closing.
The reduction of current installments of long-term debt of $(111)
thousand and a reduction of long-term debt, excluding current installments
of $(13,596), thousands components of adjustment A, represent debt not
assumed by PRG plus cash to be paid at closing.
(B) To record common stock and options issued to HSA-Texas and the
application of purchase accounting. The total purchase price consists of
approximately 14.9 million shares of PRG common stock with an estimated
fair value of approximately $156.6 million, 1.7 million fully vested
options to purchase PRG's common stock with an estimated fair value of
approximately $5.5 million, and estimated direct transaction costs of
approximately $15.0 million. The fair value of PRG's common stock was
determined as the average closing price per share from July 24, 2001 to
July 28, 2001, which was $10.482. PRG announced the proposed transaction on
July 26, 2001. The fair value of fully vested PRG options was determined
using the Black Scholes pricing model.
The amounts and components of the estimated purchase price are presented
below:
(IN THOUSANDS)
Common stock................................................ $ 15
Additional paid-in capital.................................. 162,098
Transaction costs........................................... 15,000
--------
Total estimated purchase price.................... $177,113
========
The allocation of the estimated purchase price is as follows:
(IN THOUSANDS)
Assets acquired............................................. $ 28,396
Liabilities assumed......................................... (70,875)
--------
Net liabilities assumed................................... (42,479)
Allocation of purchase price to:
Intangible assets......................................... 32,400
Goodwill.................................................. 187,192
--------
Total estimated purchase price.................... $177,113
========
87
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The identified tangible and intangible assets likely to be recognized are
as follows:
(IN THOUSANDS)
Tangible assets:
Total receivables............................... $15,233
Property and equipment.......................... 8,727
Other........................................... 4,436
-------
Total tangible assets................... $28,396
=======
ESTIMATED
VALUE USEFUL LIFE
-------------- -----------
(IN THOUSANDS)
Intangible assets:
Customer relationships.......................... $21,000 20 years
Trade name...................................... 9,000 Indefinite
Unrecognized customer revenue................... 2,000 2 months
Employee agreements............................. 400 2 years
-------
Total intangible assets................. $32,400
=======
Customer Relationships: The value of the customer relationships represents
the present value of the future cash flows attributable to HSA's existing
customers based on historical margins.
The average remaining life was derived from the historical attrition rate
of HSA's customers, where a customer is considered lost in the first year where
there is no revenue attributable to them. The average life of customer
relationships was estimated at 20 years.
Trade names: In the valuation of trade names, the supposition is that a
company would be willing to pay for the right to use an established and
registered trademark or trade name in the sale of similar products that would
not otherwise enjoy the required customer acceptance.
The trade names under consideration, "Howard Schultz & Associates
International" and "Howard Schultz & Associates" are associated with the name of
the company rather than relating to a specific product or service. The
expectation is that the combined business leveraging these trade names will
continue indefinitely as a going concern. There are no current plans to change
or modify the names; therefore, the trade names have an indefinite life.
Unrecognized customer revenue (order or production backlog): Order or
production backlog is a marketing-related asset primarily used in the marketing
or promotion of products and services. It meets the contractual-legal criterion
for recognition apart from goodwill, because it arises from a customer contract.
In this case, production backlog is viewed as unrecognized revenue where claims
by HSA-Texas have been submitted to their client's suppliers but have not
achieved the point of revenue recognition.
Unrecognized customer revenue has an estimated life of two months' time
until revenue is realized.
Employee Agreements: HSA-Texas has employment agreements with four of its
executive officers. If any one of these employees were to leave, HSA-Texas would
incur the expense of recruiting and training a replacement. Therefore, the value
of the current employee agreements is the sum of the costs of the lost
productivity due to training, the overhead for taxes and benefits, and the
recruiting cost associated with each employee.
The average life was estimated at two years based on the employee contract
terms.
PRG expects to amortize intangible assets with definite useful lives over
their respective estimated useful lives to their estimated residual values, and
review them for impairment in accordance with SFAS No. 121,
88
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." PRG expects to amortize tangible assets over their estimated
useful lives as estimated above.
The adjustments to computer and other equipment, leasehold improvements and
accumulated depreciation noted in adjustment B to the unaudited pro forma
combined balance sheet are to record the fixed assets purchased at their
estimated fair value (determined as the net book value at the date of the
purchase).
The adjustments to liabilities include an estimate of severance costs to be
incurred for employees of HSA-Texas or of the affiliated foreign operating
companies who are not retained by the combined organization and a provision for
lease payments for duplicate HSA-Texas facilities that will be closed.
Additionally, adjustments to liabilities include an estimate of costs to be
incurred to complete the acquisition.
In addition, PRG will assume certain other obligations of HSA-Texas
including obligations owed to HSA-Texas independent contractors to be incurred
prior to closing. Presently, PRG has estimated this liability at $12.0 million.
As a result, this adjustment has been reflected in the pro forma combined
balance sheet adjustments.
The number of shares to be issued was calculated assuming an average price
per share of PRG common stock of $7.834. The number of shares to be issued in
the proposed acquisitions will vary according to the average price per share of
our common stock, which in turn will affect the stated purchase price as
follows:
STATED PURCHASE PRICE
(IN THOUSANDS)
---------------------
$ 4.00.................................................. $181,439
$ 5.00.................................................. $181,439
$ 6.00.................................................. $181,176
$ 7.00.................................................. $178,813
$ 8.00.................................................. $176,816
$ 9.00.................................................. $175,263
$10.00.................................................. $174,021
$11.00.................................................. $173,004
$12.00.................................................. $172,157
$13.00.................................................. $171,440
$14.00.................................................. $170,826
$15.00.................................................. $170,294
$16.00.................................................. $169,827
The stated purchase price will increase as the average market price
decreases because the number of shares to be issued increases. This results from
a smaller "in the money" value for the HSA-Texas options at lower average
prices, which in turn results in a smaller reduction in the number of shares
issued. Pursuant to EITF No. 99-12, the transaction will be valued at a per
share amount of $10.482, the average closing price per share of PRG common stock
from July 24, 2001 to July 28, 2001. This purchase price for accounting purposes
may not reflect the actual market value to the HSA-Texas shareholders.
Under purchase accounting, the total purchase price will be allocated to
the acquired assets based upon their fair values. Allocations are subject to
valuations as of the date of the completion of the purchase. PRG expects to
allocate the total purchase price to goodwill and other identifiable intangible
and tangible assets. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill as well as intangible assets with indefinite useful
lives will no longer be amortized but instead these assets must be tested for
impairment at least annually. PRG expects to amortize intangible assets with
definite useful lives over their respective estimated useful lives to their
estimated residual values, and review them for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." PRG expects to amortize tangible assets
over their estimated useful lives.
89
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(C) On December 14, 2001, PRG consummated the sale of its French Taxation
Services business and received gross proceeds of approximately $48.3 million.
PRG will recognize a loss on the sale of approximately $54.0 million in the
fourth quarter of 2001. See "Special Considerations -- Special Considerations
Relating to PRG's Business Following the Proposed Acquisitions." These pro forma
adjustments reflect the estimated loss of $54.0 million as a reduction to
shareholders' equity in the pro forma combined balance sheet calculated as
follows:
Computation of estimated loss on the sale of the French Taxation Services
business (in millions):
Net carrying value, including accumulated other
comprehensive loss........................................ $94.2
Gross proceeds from sale.................................... $48.3
Less: Compensation obligations.............................. (5.3)
Transaction expenses.................................. (1.8)
-----
Net proceeds...................................... (41.2)
Estimate of contingent liabilities recorded as a result of
the sale.................................................. 1.0
-----
Remaining net carrying value of the French Taxation Services
business to be recorded as a loss in the fourth quarter of
2001...................................................... $54.0
=====
Of the total loss of $54.0 million, approximately $51.3 million will be
recorded as a reduction to the net assets of discontinued operations, and
approximately $2.7 million will be a reduction of the accumulated other
comprehensive loss.
The proforma combined balance sheet does not reflect receipt of sales
proceeds, nor the application thereof nor the removal of related net assets.
Adjustment C includes an increase of current installments of long-term debt
of $41.2 million, reclassified from long-term debt, excluding current
installments for net proceeds expected to be used to pay down outstanding debt.
NOTE 2. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations give effect to
the purchase as if it had occurred at January 1, 2000. The following adjustments
have been reflected in the unaudited pro forma combined statements of
operations:
(D) Adjustment to remove depreciation and amortization expense in
order to reflect only the ongoing impact of assets acquired.
(E) To record the application of purchase accounting, the amortization
of identifiable intangible and tangible assets. The pro forma adjustments
assume that the estimated purchase price of $177.1 million will be
allocated to goodwill and other identifiable intangible and tangible
assets. Goodwill, as well as intangible assets, with indefinite useful
lives will not be amortized but instead these assets must be tested for
impairment at least annually. Intangible assets with definite useful lives
will be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
SFAS No. 121. Tangible assets will be amortized over their estimated useful
lives. The ultimate lives assigned will be determined at the date of
closing based on the facts and circumstances existing at that date.
90
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro forma adjustments D and E are as follows (in thousands):
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
Adjustment D:
Depreciation on building and leasehold
improvements not acquired...................... $ (384) $ (275)
Adjustment E:
Eliminate amortization of goodwill on HSA-Texas
historical books............................... (5,518) (4,272)
Amortization of intangible assets with estimated
useful lives................................... 3,250 937
Other:
Howard Schultz's payroll expense............... 400 300
Net adjustment to rental income for building
not acquired and leased back................. 855 656
Reclassification for HSA financials to conform
with PRG presentation format................. (47) (10)
------- -------
Total pro forma adjustments.................. $(1,444) $(2,664)
======= =======
(F) To eliminate interest expense related to the loans that will not
be assumed by PRG as a result of the transaction.
(G) To adjust income tax expense (benefit) on pro forma adjustments to
the statutory rate in effect during each period and to present the income
tax expense (benefit) for the effect of converting HSA-Texas to a C
Corporation for the periods for which the pro forma income statements are
presented.
(H) To reflect reclassification of HSA-Texas' other income (expense)
to selling, general and administrative expenses to conform with PRG's
financial presentation.
91
PRG/HSA-TEXAS STOCK OPTION PLAN
In order to administer the HSA-Texas options assumed by PRG which will
convert into options to purchase shares of PRG common stock, on October 24,
2001, PRG's board of directors adopted the PRG/HSA-Texas Stock Option Plan. The
material provisions of the PRG/HSA-Texas Stock Option Plan, or the plan, are
summarized below.
ELIGIBILITY FOR PARTICIPATION UNDER THE PLAN
Participation in this plan is limited to participants in the 1999 Howard
Schultz & Associates Stock Option Plan whose HSA-Texas options are assumed by
PRG. PRG estimates that, as of the date of this proxy statement, up to 450
employees (including officers), up to 500 independent contractors and one
non-employee director of PRG will be eligible to participate in the plan.
Nothing contained in the plan or in any agreement entered into pursuant thereto
may confer upon any person any right to continue as a director, officer or
employee of PRG or its subsidiaries or as a consultant or advisor, or limit in
any way any right of shareholders or of the board, as applicable, to remove such
person.
SHARES RESERVED UNDER THE PLAN
The plan provides for the issuance of a maximum of 1,678,826 shares of PRG
common stock, subject to adjustment in the event of stock dividends, stock
splits, combination of shares, recapitalizations, or other changes in the
outstanding common stock of PRG. Shares issued under the plan may consist, in
whole or in part, of authorized and unissued shares, treasury shares or shares
purchased on the open market.
PURPOSE OF THE PLAN
The purpose of the plan is to allow PRG to attract and retain key employees
and independent contractors and advisors of HSA-Texas who become employees,
independent contractors or directors of PRG following the acquisitions and to
provide these individuals with a proprietary interest in PRG through the
granting of nonqualified stock options. The plan is not qualified under Section
401(a) of the Code and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974.
DURATION OF THE PLAN
The plan will expire when the last option outstanding under it has either
been exercised or has expired. All options outstanding under the plan will
expire five years from the closing of the proposed acquisitions.
ADMINISTRATION OF THE PLAN
The plan will be administered by PRG's compensation committee. In
administering the plan, the compensation committee, shall have the authority to
interpret the plan and prescribe, amend, and rescind any rules and regulations
necessary or appropriate for the administration of the plan, and make such other
determinations and take such other actions as it deems necessary or advisable in
connection with the foregoing.
The current compensation committee members are Jonathan Golden, Chairman,
Thomas S. Robertson and Jackie M. Ward. Under the plan, acts by a majority of
the compensation committee, or acts reduced to or approved in writing by a
majority of the members of the compensation committee, shall be the valid acts
of the compensation committee.
No members of the board of directors or the compensation committee shall be
liable for any action or determination made in good faith with respect to the
plan or any stock options granted under it. No member of the board or the
compensation committee, shall be liable for any act or omission of any other
member of the board or the compensation committee, or for any act or omission on
his or her own part, except those resulting from such member's own gross
negligence or willful misconduct. In addition to such other rights of
indemnification as such member may have as a member of the board or compensation
committee, each
92
member of the board and the compensation committee shall be entitled to
indemnification by PRG with respect to administration of the plan and the
granting of rights and benefits under it.
AMENDMENT OF THE PLAN
The board may at any time and from time to time, without the consent of the
participants, alter, amend, revise, suspend, or discontinue the plan in whole or
in part. In the event of any amendment to the plan, the holder of any stock
option outstanding under the plan shall, upon request of the compensation
committee and as a condition to the exercisability thereof, execute a conforming
amendment in the form prescribed by the compensation committee to the stock
option agreement. No amendments shall adversely affect any rights of
participants or obligations of PRG to participants with respect to any
outstanding stock options without the consent of the affected participant.
PLAN BENEFITS
The only options outstanding under the plan will be options that are
assumed in the asset acquisition. After the completion of the asset acquisition,
there will be no additional grants under the plan. Based on the assumptions
described in "Summary Term Sheet -- Questions and Answers About the Proposed
Acquisitions -- What will happen to the HSA-Texas stock options and SARs
outstanding at closing?," the number and exercise price of options that will be
outstanding to executive officers as a group, non-executive directors and
non-executive employees pursuant to the plan are set forth below.
EXERCISE PRICE
NUMBER OF OR RANGE OF
INDIVIDUAL/GROUP OPTIONS EXERCISE PRICES
---------------- --------- ---------------
Executive Officer Group..................................... -- $ --
Non-Executive Director Group................................ 248,295 6.12
All Employees excluding Executive Officer Group............. 1,430,531 5.51-6.12
VESTING OF OPTIONS
All options under the plan are currently vested.
ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES
If the shares of common stock of PRG shall increase through the declaration
of a stock dividend or through any recapitalization resulting in a stock
split-up, combination or exchange of shares of common stock, then appropriate
adjustments shall be made to the number of shares of common stock and the
exercise price per share under each stock option previously granted and
unexercised.
In the event of any reorganization, merger or consolidation pursuant to
which PRG is not the surviving or resulting corporation, or of any proposed sale
of substantially all of the assets of PRG, there may be substituted for each
share of common stock subject to the unexercised portions of the outstanding
stock option that number of shares of each class of stock or other securities or
that amount of cash, property or assets of the surviving or consolidated company
which were distributed or distributable to the stockholders of PRG in respect of
each share of common stock held by them. The outstanding stock options will then
be exercisable for the substituted stock, securities, cash or property in
accordance with their terms. However, the board, in its sole discretion, may
cancel any portion or all of the stock options as of the effective date of any
reorganization,
93
merger or consolidation, or of any proposed sale of substantially all of the
assets of PRG, or of any dissolution or liquidation of PRG, and, with respect to
any stock options that are cancelled, either:
- give notice to each holder or such holder's personal representative of
its intention to cancel the stock options and permit the purchase during
the 30 day period next preceding such effective date of any or all of the
shares subject to the outstanding stock options, including shares as to
which the stock options would not otherwise be exercisable; or
- pay the holder thereof an amount equal to a reasonable estimate of an
amount equal to the difference between the net amount per share payable
in the transaction or as a result of the transaction, less the exercise
price of the stock options.
The board may make an adjustment if PRG shall, at any time while any stock
option under the plan is in force and remains unexpired:
- sell all or substantially all of its property, or
- dissolve, liquidate, or wind up its affairs.
In this case, if the board so determines in its sole discretion, each
participant may thereafter receive upon exercise of an option under the plan in
lieu of each share of common stock of PRG which the participant would have been
entitled to receive, the same kind and amount of any securities or assets as may
be issuable, distributable or payable upon any such sale, dissolution,
liquidation, or winding up with respect to each share of common stock of PRG.
In the event that PRG shall, at any time prior to the expiration of any
stock option, make any partial distribution of its assets in the nature of a
partial liquidation, whether payable in cash or in kind, but excluding the
distribution of a cash dividend payable out of retained earnings or earned
surplus and designated as such, then in such event the exercise prices then in
effect with respect to each option shall be reduced, as of the payment date of
such distribution, in proportion to the percentage reduction in the tangible
book value of the shares of PRG's common stock, determined in accordance with
accounting principles generally accepted in the United States of America,
resulting by reason of such distribution. However, in no event shall any
adjustment of exercise prices in accordance with the terms of the plan result in
any exercise prices being reduced below the par value per share of the common
stock.
DURATION AND TERMINATION OF OPTIONS
The option period will begin on the date of the closing of the asset
acquisition and terminate on the date that is five years from the date of the
closing of the asset acquisition. Each option is exercisable during such
five-year period unless it terminates earlier in accordance with its terms. No
option may be exercised subsequent to its termination.
Upon the termination of service of a participant for any reason, the
specific stock option agreement shall govern the treatment of any unexercised
stock options. In the event of a termination, the compensation committee may, in
its discretion:
- provide for the extension of the exercisability of a stock option for any
period that is not beyond the applicable expiration date thereof;
- accelerate the vesting or exercisability of a stock option;
- eliminate or make less restrictive any restrictions contained in a stock
option;
- waive any restriction or other provision of the plan or a stock option;
or
- otherwise amend or modify the stock option in any manner that is either
not adverse to such participant or is consented to by such participant.
94
In the event of termination of service of a participant by PRG for cause,
all of the participant's outstanding stock options, whether or not vested, shall
be forfeited and immediately terminate. In the event of a termination of service
of a participant for any reason other than for cause, then the stock option will
terminate and be forfeited at the first of the following to occur:
- 5 p.m. on the date which is twelve months following the participant's
termination of service due to death or disability;
- 5 p.m. on the date which is ninety days following the participant's
retirement or following the participant's involuntary termination of
service without cause;
- 5 p.m. on the day prior to the date of the participant's voluntary
termination, other than termination of service for death, disability, or
retirement; or
- 5 p.m. on the date prior to the date the participant violates any
covenant not to compete or confidentiality agreement set forth in the
participant's stock option agreement.
The plan specifies the definitions of "cause," "disability," "retirement,"
and "termination" for purposes of determining these provisions.
MEANS OF EXERCISE OF OPTIONS
Options may be exercised by giving written notice to PRG at its principal
office address, accompanied by full payment of the purchase price therefor and
the applicable withholding tax, either:
- in United States dollars in cash or by check; or
- if permitted by the compensation committee, the delivery of shares of
common stock having a fair market value equal, as of the date of the
exercise, to the cash exercise price of the option, provided, that the
shares must have been held for at least six months.
NON-TRANSFERABILITY OF OPTIONS
No option is transferable except by will or by the laws of descent and
distribution, and all options are exercisable, during the lifetime of the
grantee, only by the grantee or the grantee's guardian or legal representative.
TAX TREATMENT
The following discussion addresses certain anticipated federal income tax
consequences to PRG and to recipients of awards made under the plan. It is based
on the Code and interpretations thereof in effect on the date of this proxy
statement. This summary is not intended to be exhaustive and, among other
things, does not describe state, local or foreign tax consequences.
A company, such as PRG, for which an individual is performing services will
generally be allowed to deduct amounts that are includable in the taxable income
of such individual as compensation income in PRG's taxable year in which the
employee's taxable year of inclusion ends, provided that such amounts qualify as
reasonable compensation for the services rendered. This general rule will apply
to the deductibility of a participant's compensation income resulting from
participation in the plan. The timing and amount of deductions available to PRG
as a result of the plan will, therefore, depend upon the timing and amount of
compensation income recognized by a participant as a result of participation in
the plan. The following discusses the timing and amount of compensation income
which will be recognized by participants and the accompanying deduction which
will be available to PRG.
All of the options under the plan are classified as nonqualified stock
options, or NSOs. A participant to whom a NSO is granted will not normally
recognize income at the time of grant of the option. When a participant
exercises a NSO, the participant will generally recognize compensation income,
and PRG will be entitled to a deduction, in an amount equal to the excess, if
any, of the fair market value of the shares of common stock when acquired over
the option exercise price. The amount of gain or loss recognized by a
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participant from a subsequent sale of shares of common stock acquired from the
exercise of a NSO will be equal to the difference between the sales price for
the shares of common stock and the sum of the exercise price of the option plus
the amount of compensation income recognized by the participant upon exercise of
the option.
Different tax rules will apply to a participant who would be subject to
suit under Section 16(b) of the Securities Exchange Act of 1934, or the Exchange
Act, from the sale of the shares of PRG common stock received upon the exercise
of an NSO. For such a participant, unless the participant makes an election
pursuant to Section 83(b) of the Code, the amount of compensation income
recognized with respect to the shares of PRG common stock received upon the
exercise of an NSO will be determined at the earlier of the following
determination dates:
- the first day on which the participant would not be subject to suit
under Section 16(b) of the Exchange Act with respect to such shares,
or
- the expiration of the six-month period following the exercise of the
NSO.
A Section 83(b) election represents an election by a participant to
recognize the compensation consequences of receipt of the shares of PRG common
stock at the time the shares are acquired notwithstanding that at such time sale
of the shares would subject the participant to potential liability under Section
16(b) of the Exchange Act. A Section 83(b) election must be made within 30 days
of receipt of the shares by filing a written statement with the IRS, PRG and, if
applicable, the affiliate of PRG that is the participant's employer. If a
Section 83(b) election is made, the amount of compensation income recognized
with respect to the shares, the tax basis for the shares and their capital gain
holding period is determined by reference to the fair market value of the shares
when they are received.
If a Section 83(b) election is not timely made with respect to the shares
subject to Section 16(b) of the Exchange Act, the amount of ordinary
compensation income recognized with respect to the shares will be determined at
the earlier of the two determination dates described above. The amount of
compensation income recognized by the participant will be measured by the excess
of the value of the shares at such time over the option exercise price, and the
participant's tax basis in the shares will be determined by reference to the
fair market value of the shares at that time. The participant's capital gain
holding period for the shares will also begin at that time, rather than when the
shares were acquired. Furthermore, if a Section 83(b) election is not made with
respect to the shares subject to Section 16(b) of the Exchange Act, any
dividends paid with respect to the shares will be treated as compensation income
subject to withholding and employment taxes until the earlier of the two
determination dates described above. After such time, the dividends paid will be
treated as any other dividends paid with respect to PRG common stock and thus
taxed as ordinary income which is not compensation.
TAX WITHHOLDING
Whenever PRG proposes, or is required, to distribute shares of common stock
under the plan, PRG may require the recipient to satisfy any Federal, state and
local tax withholding requirements prior to the delivery of any certificate for
such shares or, in the discretion of the committee, PRG may withhold from the
shares to be delivered shares sufficient to satisfy all or a portion of the tax
withholding requirements.
UNFUNDED STATUS OF THE PLAN
The plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a participant by PRG,
nothing contained in the plan shall give any participant or optionee any rights
that are greater than those of a general creditor of PRG.
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PRG DIRECTOR AND EXECUTIVE OFFICER INFORMATION
ELECTION OF DIRECTORS
PRG currently has nine directors. On October 24, 2001, the PRG board
increased the size of the board to 13, effective upon the closing of the asset
acquisition. The board is divided into three classes of directors, designated as
Class I, Class II and Class III. The three classes serve staggered three-year
terms. Shareholders annually elect directors to serve for the three-year term
applicable to the class for which such directors are nominated or until their
successors are elected and qualified. At the special meeting, shareholders will
be voting to elect four directors: Howard Schultz and Andrew Schultz to serve as
Class II directors, Nate Levine to serve as a Class I director and Arthur Budge,
Jr. to serve as a Class III director.
The director elected to serve as a Class I director at the special meeting
to be held on January 24, 2002 will serve for a term that expires on the earlier
of the 2003 annual meeting of shareholders of PRG or when his successor is
elected and qualified. Each director elected to serve as a Class II director
will serve for a term that expires on the earlier of the 2004 annual meeting of
shareholders or when his successor is elected and qualified. The director
elected to serve as a Class III director will serve for a term that expires on
the earlier of the 2002 annual meeting of shareholders or when his successor is
elected and qualified.
The name, age and term of each director nominee are set forth below:
Director Nominees
NAME OF NOMINEE AGE CLASS OF DIRECTOR TERM EXPIRES
--------------- ---- ----------------- ------------
Howard Schultz.............................................. 73 Class II 2004
Andrew H. Schultz........................................... 35 Class II 2004
Nate Levine................................................. 64 Class I 2003
Arthur N. Budge, Jr......................................... 46 Class III 2002
HOWARD SCHULTZ is the founder of Howard Schultz & Associates International,
Inc. and has served as its chairman since 1970. Mr. Schultz received a B.A. in
Mathematics and Economics from Cornell University in 1950. Mr. Schultz is a PRG
Class II director nominee at PRG's special meeting. The terms of PRG Class II
directors expire in 2004.
ANDREW H. SCHULTZ has served as executive vice president and a member of
the board of directors of HSA-Texas since January, 2000. Mr. Schultz has held
several positions at HSA-Texas during the period from 1990 to 1999, including
the position of senior vice president and chief financial officer since March,
1999 and the position of vice president - special projects from 1996 to 1999.
Mr. Schultz is a PRG Class II director nominee at PRG's special meeting. The
terms of PRG Class II directors expire in 2004.
NATE LEVINE serves as chief executive officer of ETAN Industries, which he
founded in 1977. ETAN owns Cable Management Associates, a multiple cable system
operator serving over 55,000 subscribers, and Credit Protection Association, a
company specializing in bad debt recovery for the cable TV and video industry.
Mr. Levine is also an active private investor, personally managing his portfolio
of stocks, real estate and private investments. Mr. Levine is a graduate of RCA
Institute of Technology. Mr. Levine is a Class I director nominee at PRG's
special meeting. The terms of PRG Class I directors expire in 2003.
ARTHUR N. BUDGE, JR. has served as president and chief executive officer of
Five States Energy Company, an owner of a portfolio of oil and gas investments,
since 1998. Since 1985, Mr. Budge has also served as president of Budge
Financial, Inc., a company that provides clients with planning, forecasting and
investment analysis services and asset management. In addition, Mr. Budge serves
as a principal in several Blockbuster Video franchise limited partnerships and
serves as a director of several non-public companies in which Mr. Budge and his
clients have investments. Mr. Budge received a B.B.A. in Finance from Texas Tech
University in 1977 and an M.S. in Business Administration from Texas Tech
University in 1979. Mr. Budge is a PRG Class III director nominee at PRG's
special meeting. The terms of PRG Class III directors expire in 2002.
97
Howard Schultz is the father of Andrew Schultz.
Directors Continuing in Office
NAME OF NOMINEE AGE CLASS OF DIRECTOR TERM EXPIRES SERVICE AS DIRECTOR
--------------- --- ----------------- ----------------- -------------------
Stanley B. Cohen(1)(2)................. 58 Class II 2004 Since November 1990
Garth H. Greimann(2)................... 46 Class II 2004 Since April 1995
E. James Lowrey(2)..................... 73 Class II 2004 Since December 1995
Fred W.I. Lachotzki(4)................. 54 Class III 2002 Since January 1996
Thomas S. Robertson(3)(4).............. 59 Class III 2002 Since May 1999
Jackie M. Ward(3)...................... 62 Class III 2002 Since May 1999
John M. Cook(1)........................ 59 Class I 2003 Since November 1990
John M. Toma(1)........................ 56 Class I 2003 Since November 1990
Jonathan Golden(1)(3)(4)............... 64 Class I 2003 Since November 1990
---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee
STANLEY B. COHEN is the president and sole director/shareholder of SBC
Financial Corporation ("SBC") and until March 31, 1999, was the President and
sole director/shareholder of Advisory Services, Ltd. ("ASL"). These companies
provided certain financial consulting and investment services to PRG and certain
of its executive officers until December 31, 1999. In addition, until December
31, 1998, Mr. Cohen was President of Capital Advisory Corporation, a financial
advisory company. Mr. Cohen served or has served, as applicable, in each of
these positions in excess of five years. Mr. Cohen has served as a director of
PRG since its founding in 1990.
JOHN M. COOK is chairman of the board, chief executive officer and
president of PRG, having served as chairman and CEO and since founding PRG in
November 1990. Mr. Cook served as president of PRG from November 1990 through
January 1998 and resumed this role in October 2000. Mr. Cook also serves as a
director of CryoLife, Inc., a company engaged in cryopreservation of
transplantable human tissue and development of complementary implantable
products and technologies.
JONATHAN GOLDEN has served as a director of PRG since its founding in 1990
and provides consulting services to PRG through Jonathan Golden, P.C., a wholly
owned professional corporation ("JGPC"). Mr. Golden also serves through his
professional corporation as a partner in the Atlanta, Georgia law firm of Arnall
Golden Gregory LLP, which provides legal services to PRG. Mr. Golden has served
in this capacity for in excess of five years. Mr. Golden also serves as a
director of SYSCO Corporation, a distributor of food and related products.
GARTH H. GREIMANN has served since 1989 in two management positions, most
recently as Managing Director, of Berkshire Partners LLC, a private equity
investment firm that manages five investment funds. Mr. Greimann also has served
as a Managing Director of Third Berkshire Associates, a Limited Partnership,
which is the general partner of Berkshire Fund III, a Limited Partnership.
Berkshire Fund III makes private equity and equity-related investments in
established middle market companies. Prior to 1996, Mr. Greimann was an
individual general partner of Berkshire Fund III, a Limited Partnership.
FRED W.I. LACHOTZKI has served since 1989 as a professor at Nyenrode
University in The Netherlands, most recently as a Philip Morris Professor of
Strategic Entrepreneurship. Mr. Lachotzki is Co-Chairman of Meyer Monitor, a
research consulting company in the area of corporate architecture and also
serves as a director of DKV-Nederland, an insurance company specializing in
healthcare, Frg Navigation Systems, which makes controls for automatic guided
vehicles, Merison Holding NV, the owner of a franchised chain of
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electronics retail stores and a supplier of non-food products to supermarket
chains, and Unisono, a marketing and distribution company in the People's
Republic of China.
E. JAMES LOWREY served as Executive Vice President -- Finance and
Administration of SYSCO Corporation from 1978 until his retirement in 1993 and
was a director of SYSCO Corporation from 1981 to 1993. He currently serves as a
director of Riviana Foods, Inc., a processor and distributor of rice and other
food products.
THOMAS S. ROBERTSON is the Dean of the Goizueta Business School at Emory
University, a position he assumed in July 1998. Prior to taking this position at
Emory University, he was a member of the faculty of the London Business School
since 1994, with his most recent position being Deputy Dean.
JOHN M. TOMA was elected Vice Chairman of PRG in January 1997. Prior to
that he was Executive Vice President -- Administration of PRG and had served in
such capacity since 1992. Mr. Toma has served as a Director of PRG since its
founding in November 1990 and as Senior Vice President -- Administration of PRG
from 1990 to 1992.
JACKIE M. WARD is the Managing Director for Intec USA, a telecommunications
systems company, and has held this position since January 2001. Prior to
assuming her current position, Ms. Ward was the President and Chief Executive
Officer of Computer Generation Incorporated, a provider of turn-key
telecommunications systems products and data processing services that she
co-founded in 1968. She serves as a director of BankAmerica Corporation, a
banking and financial services company, Equifax, Inc., a provider of credit and
payment information services, Flowers Foods, Inc., a producer of baked foods,
Matria Healthcare, Inc., a provider of specialized home healthcare services,
PTEK Holdings, Inc., a provider of enhanced communications and data services,
SCI Systems, Inc., a diversified electronics manufacturer, and Trigon
Healthcare, Inc., a managed healthcare company.
No family relationship exists among any of the current directors and
executive officers of PRG.
Blum Capital Partners, L.P. and its affiliates, who based on an amended
Schedule 13D filing made on December 5, 2001, currently beneficially own
approximately 14.6% of PRG's outstanding common stock, including stock
obtainable upon conversion of convertible notes, purchased $40.0 million of the
$125.0 million of notes issued in PRG's recent convertible notes offering. Blum
Capital Partners has expressed an interest in obtaining representation on PRG's
board of directors, and PRG has had discussions with them regarding this matter.
Blum Capital Partners has the contractual right to designate an observer to
attend PRG board meetings.
99
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Meetings of the Board of Directors
Through December 18, 2001, there were eight meetings of the board of
directors in 2001. Each director who was a director through December 7, 2001
attended more than 75 percent of all meetings of the board of directors and any
committees on which that director served.
Director Compensation
PRG compensates its non-employee directors $20,000 per year for their
service on the board and any committee thereof. Non-employee directors are
reimbursed for all out-of-pocket expenses, if any, incurred in attending board
and committee meetings. The board of directors has approved an automatic annual
grant of options under PRG's Stock Incentive Plan to directors not employed by
PRG to purchase from 2,500 to 7,500 shares of common stock; provided, however,
that no grants will be made in any year unless PRG's fully diluted earnings per
share, before business acquisitions and restructuring expenses, for such year
shall have increased by at least 25 percent over the previous year. A 25 percent
increase in the adjusted earnings per share will result in a grant of options to
purchase 2,500 shares of common stock while each additional one percent increase
in adjusted earnings per share will result in a grant of options to purchase an
additional 200 shares of common stock, up to a maximum annual grant of options
to purchase 7,500 shares of common stock. The per share option exercise price
will be the closing price of PRG's common stock on The Nasdaq National Market on
December 31 of the year of grant, or if no sale of the common stock was made on
that date, on the next preceding date on which there was such a sale. Options
will vest in 20 percent increments over a period of five years. Since PRG did
not attain the minimum 25 percent increase in adjusted earnings per share in
2000 over 1999, no automatic grant of stock options was made to the non-employee
directors for 2000.
To offer additional compensation that is tied to future appreciation in
PRG's common stock to five outside directors, on August 14, 2000, PRG granted
10,000 options that were immediately vested to each of Ms. Ward and Messrs.
Greimann, Lachotzki, Lowrey and Robertson. The per share exercise price was the
closing price as of the date of grant of $9.265. In addition, on March 26, 2001,
Ms. Ward and Messrs. Cohen, Golden, Greimann, Lachotzki, Lowrey and Robertson
each were granted additional vested options to acquire 10,000 shares of PRG
common stock with a per share exercise price of $6.56, the closing price of
PRG's common stock on the date of such grant.
Jonathan Golden, a director of PRG, provides consulting services to PRG
through JGPC. Mr. Golden is the sole shareholder of JGPC. During 2000, PRG paid
JGPC aggregate consulting fees of approximately $36,000. PRG currently pays JGPC
a consulting fee of $6,000 per month. The consulting agreement may be terminated
by either party for any reason upon not less than 30 days prior notice.
Audit Committee
PRG's audit committee consists of three outside directors: Messrs. Cohen,
Greimann and Lowrey. Through December 18, 2001, the audit committee met four
times in 2001. The audit committee reviews the general scope of PRG's annual
audit and the nature of services to be performed for PRG in connection
therewith, acting as liaison between the board of directors and PRG's
independent auditors. The audit committee also formulates and reviews various
PRG policies, including those relating to accounting practices and the internal
control structure of PRG. In addition, the audit committee is responsible for
recommending, reviewing and monitoring the performance of PRG's independent
auditors.
Compensation Committee
PRG has a compensation committee consisting of three directors: Messrs.
Golden and Robertson and Ms. Ward. Through December 18, 2001, the compensation
committee met five times in 2001. The compensation committee is responsible for
reviewing and establishing the annual compensation for all executive officers,
including the salary and the compensation package of each such officer. A
portion of the compensation package may include an incentive award. The
compensation committee also administers PRG's
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benefit plans, including the Stock Incentive Plan, the Executive Incentive Plan,
the Management and Professional Incentive Plan and PRG's Employee Stock Purchase
Plan and will administer the PRG/HSA-Texas Stock Option Plan; provided, however,
that the board of directors has delegated all rights to determine awards of
stock-based compensation to individuals who file reports pursuant to Section 16
of the Securities Exchange Act of 1934, or the Exchange Act, to a subcommittee
of the compensation committee consisting of Mr. Robertson and Ms. Ward, each of
whom is a "non-employee" director, as such term is defined in Rule 16b-3
promulgated pursuant to the Exchange Act and is an "outside" director, as such
term is defined in the regulations promulgated pursuant to Section 162(m) of the
Internal Revenue Code.
Nominating Committee
PRG has a standing nominating committee of the board of directors
consisting of three directors: Messrs. Golden, Lachotzki and Robertson. As of
December 18, 2001, the nominating committee had not met in 2001. The nominating
committee has the responsibility to consider and recommend nominees for the
board of directors and assess the performance of the board. The nominating
committee will consider nominees recommended by security holders to the extent
that such security holders comply with PRG's advance notice Bylaw provisions.
Notwithstanding anything to the contrary which is or may be set forth in
any of PRG's filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934 that might incorporate PRG filings, including this proxy statement,
in whole or in part, the following Report and the Performance Graph shall not be
incorporated by reference into any such filings.
MARCH 2001 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The compensation committee is composed entirely of directors who are not
employed by PRG. The committee considers and establishes compensation policies
and approves benefit plans as well as specifically setting salary, annual
incentive levels, and long-term incentive levels for the chief executive officer
and other members of executive management.
Compensation Philosophy
The compensation committee reviewed and further refined the executive
compensation program in 2000. A high emphasis was placed on performance-based
incentives.
In 2000, the committee established targets for PRG revenue and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a minimum
for the performance-based incentives and has slightly increased the potential
maximum bonus for the highest category of performance. The compensation
committee believes that having greater levels of each executive's compensation
determined by performance-based incentives, and enhancing the incentives for
exceptional performance, serves to greater align the executive's interests with
those of PRG's shareholders.
The following objectives were used by the compensation committee in
designing PRG's 2000 executive compensation program. The compensation program
must:
- Attract, motivate and retain key executives;
- Align key management and shareholder interests; and
- Provide incentives that reward executive management performance only if
PRG's performance meets or exceeds planned results as part of PRG's pay
for performance philosophy.
Executive Compensation Program
The 2000 executive compensation program consisted of base salary, annual
incentives and long-term remuneration in the form of deferred compensation
arrangements and non-qualified stock options. In addition, two executive
officers received signing bonus payments for commencing employment with PRG in
2000.
101
Base Salary. In determining the appropriate base salary levels for 2000,
the compensation committee considered several factors, including current
industry practices, external market surveys of similarly sized companies and
review of peer group compensation. For 2000, base salaries were set by the
compensation committee for members of executive management with the following
factors in mind:
- the fact that rapidly growing responsibilities and complexities are
inherent in key positions;
- the need to retain key executives with industry knowledge within PRG; and
- the need to attract new talent.
All of these factors were considered subjectively with no particular
emphasis or weight given to any one factor.
Annual Incentive Compensation. The 2000 annual incentives for executive
management pursuant to PRG's Management and Professional Incentive Plan included
several performance criteria: PRG pro forma earnings per share, PRG revenues,
PRG operating income, functional expense control, cash collections and specific
business or personal performance objectives. The Management and Professional
Incentive Plan was designed to align pay more directly to financial results,
with increases and decreases in incentive pay from year to year tied to
financial targets achieved and missed, respectively. Components of the executive
officers' annual incentive compensation were established by the compensation
committee. The 2000 annual incentive compensation for Messrs. Cook and Toma was
based solely on PRG pro forma earnings per share attainment. Annual incentive
compensation in 2000 for the other executive officers was based on factors such
as PRG pro forma earnings per share, PRG operating income, functional expense
control and specific business and personal performance objectives. The 2000
annual incentives for each executive officer contained targets for each
incentive component to ensure that no annual incentive compensation would be
earned for substandard performance. Additionally, maximum limits were in effect
for each incentive component pertaining to each executive officer. No incentive
bonuses were awarded to any of the named executive officers for 2000, as defined
under the heading "-- Executive Compensation" below, except for a prorated
minimum bonus payment of $8,333 to Mr. Ellis, which was negotiated as a part of
his current employment agreement.
Deferred Compensation. PRG historically has provided, and continues to
provide, non-qualified deferred compensation arrangements for certain executive
officers. The purpose of these arrangements is to assist in the retention of
these executives by allowing a portion of their total compensation to be
deferred along with a full or partial matching obligation by PRG. In most
instances, the matching obligation vests over a series of years of continuing
employment with PRG. Each executive officer negotiated the deferred compensation
component of his compensation package when he entered into his employment
agreement with PRG. Mr. Cook does not have a deferred compensation element in
his employment agreement. Since deferred compensation is accrued and paid in
accordance with provisions of the related employment agreements, no additional
determinations with respect to this compensation component are made by the
compensation committee.
Other Long-Term Incentive Compensation. PRG's shareholders approved an
additional long-term incentive program through the adoption of PRG's Stock
Incentive Plan. All executive officers have received option grants under the
Stock Incentive Plan. The use of stock options is meant to align the interests
of key executives and shareholders. All options granted to executive officers
under the Stock Incentive Plan through the date of this proxy statement have
been at fair market value on the date of the grant. Generally, option grants
made before 2001 vest ratably over five years of continuous employment with PRG.
Option grants made beginning in 2001 generally will vest ratably over four years
of continuous employment with PRG. In 2001, the compensation committee elected
to vest all options in the event of a change in control. The compensation
committee grants options to key employees of PRG, including the executive
officers, based upon the following subjective factors: current position, level
of performance, potential for future responsibilities and the number of vested
and unvested options already held. The size of the grant is intended to create
meaningful opportunities for stock ownership for the executive officers.
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On August 14, 2000, the compensation committee awarded shares of restricted
stock to certain named executive officers, such shares to vest over a five-year
period of continuous employment with PRG.
Compliance with Code Section 162(m). The maximum amount which an employer
may claim as a compensation deduction with respect to certain employees in a
given fiscal year, pursuant to Section 162(m) of the Code is $1.0 million,
unless an exemption for performance-based compensation is met. The compensation
committee believes it is unlikely that any executive officers of PRG will, in
the near future, receive in excess of $1.0 million in aggregate compensation,
other than those individuals with respect to whom the performance-based
compensation exemption has been satisfied or severance payments are made.
Compensation of Chief Executive Officer. On March 20, 1996, Mr. Cook
signed a revised employment agreement with PRG. This agreement currently expires
in the year 2005, but provides for automatic one-year renewals upon expiration
of each year of employment, such that it always has a five-year term, subject to
prior notice of non-renewal by the board of directors. Under Mr. Cook's
employment agreement, the compensation committee fixed the 2000 salary of Mr.
Cook at $500,000.
An annual incentive compensation arrangement pursuant to the Management and
Professional Incentive Plan was established for Mr. Cook pursuant to which he
was eligible to earn an annual cash incentive of up to 200 percent of his annual
salary if PRG achieved certain pro forma earnings per share goals for 2000. The
target goal for 2000 was established at $1.12 per share, which represented a
41.7 percent increase over PRG's 1999 pro forma earnings per share of $0.79 per
share. PRG reported a loss of $(0.80) per share for 2000. Mr. Cook did not earn
a bonus for 2000.
Mr. Cook's incentive option program under the Stock Incentive Plan provided
that option grants would be made if 2000 adjusted earnings per share exceeded
the level achieved in 1999 by 30 percent or more. Since PRG's adjusted earnings
per share did not exceed the level achieved in 1999, no stock options were
granted to Mr. Cook for 2000 under the incentive option program.
Compensation Committee
Jonathan Golden, Chairman
Thomas S. Robertson
Jackie M. Ward
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by PRG to
the chief executive officer and the other four most highly paid executive
officers of PRG in 2000 who were executive officers at December 31, 2000 and two
others who would have been among the four most highly paid executive officers
had they continued as executive officers through the end of 2000, the "named
executive officers". The information presented is for the years ended December
31, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) ---------------------------
------------------------------------------ RESTRICTED SECURITIES
SALARY BONUS OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND POSITION YEAR ($)(2)(3) ($)(3)(4) COMPENSATION($)(5) AWARD($)(6) OPTIONS(#)(7) COMPENSATION($)(8)
----------------- ---- --------- --------- ------------------ ----------- ------------- ------------------
John M. Cook............... 2000 $484,617 $ -- $ -- $ -- -- $ 9,724
Chairman of the Board 1999 405,782 452,300 -- -- 300,000 900
and Chief Executive 1998 350,012 359,800 -- -- 180,000 900
Officer
John M. Toma............... 2000 388,461 -- -- -- -- 66,500
Vice Chairman 1999 333,840 147,672 -- -- 150,000 55,900
1998 305,994 125,827 -- -- 120,000 58,952
Donald E. Ellis, Jr.(9).... 2000 158,077 213,166 -- -- 250,000 105,634
Executive Vice 1999 216,058 129,250 -- -- 30,000 26,446
President --
Finance, Chief Financial 1998 175,000 71,393 -- -- -- 26,446
Officer and Treasurer
Robert G. Kramer........... 2000 247,692 -- -- 48,125 15,000 25,000
Executive Vice President 1999 216,154 90,179 -- -- 30,000 25,000
and Chief Information 1998 225,000 52,043 65,528 -- -- 25,000
Officer
Mark C. Perlberg........... 2000 293,846 -- -- 336,875 100,000 25,000
President, Accounts
Payable Group
Michael A. Lustig(10)...... 2000 343,801 -- -- 481,250 -- 1,597,500
Former President and 1999 291,154 224,356 -- -- 225,000 40,900
Chief Operating Officer 1998 299,538 154,200 -- 981,750 510,000 42,230
Scott L. Colabuono(11)..... 2000 271,766 50,000 -- 336,875 10,000 981,666
Former Executive Vice 1999 138,462 101,155 -- -- 112,500 --
President -- Finance, 1998 -- -- -- -- -- --
Chief Financial Officer
and Treasurer
---------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the named executive officers
which are available generally to all salaried employees of PRG and certain
perquisites and other personal benefits, securities or property received by
the named executive officers which do not exceed the lesser of $50,000 or
10 percent of any such officer's salary and bonus disclosed in this table.
(2) Includes contributions made by the named executive officers to PRG's 401(k)
Plan during the years presented.
(3) Includes amounts that the named executive officers have elected to defer
under their respective deferred compensation programs.
(4) Includes $59,000 retention bonus, $145,833 sign-on bonus and $8,333
prorated minimum bonus for Mr. Ellis for 2000 and for Mr. Colabuono, a
final $50,000 installment of his 1999 sign-on bonus.
(5) Includes $50,328 for relocation and $14,600 for car allowance for Mr.
Kramer.
(6) Messrs. Kramer, Perlberg, Lustig and Colabuono received awards of 5,000
shares, 35,000 shares, 50,000 shares and 35,000 shares, respectively, of
restricted stock on August 14, 2000. The shares awarded to Mr. Kramer vest
100 percent August 14, 2005. The shares awarded to Messrs. Perlberg, Lustig
and Colabuono vest ratably over five years of continued employment with
PRG. On August 21, 1998, 63,000 restricted shares were awarded to Mr.
Lustig, such shares to vest ratably over seven years of continued
104
employment, with vesting to accelerate in certain circumstances. Following
Mr. Lustig's resignation from PRG effective as of October 25, 2000, all
restricted shares awarded in 1998 were forfeited. Restricted shares awarded
to Messrs. Lustig and Colabuono in 2000 were forfeited as of October 25,
2000, the dates of their respective resignations, in accordance with the
terms of the respective awards. The restricted shares awarded to Messrs.
Kramer and Perlberg were the only shares of restricted stock held by any of
the named executive officers on December 31, 2000. At December 31, 2000,
these shares were valued at, $31,875 and $223,125, respectively.
(7) Does not include non-qualified stock options granted under the Stock
Incentive Plan on March 26, 2001 to Messrs. Cook (200,000 options), Toma
(150,000 options) and Perlberg (135,000 options). Each option grant has a
five-year term and vested 50 percent on the date of grant and will vest 25
percent on each of the first two anniversaries of such grant.
(8) Consists of:
- Premiums for supplemental term life insurance paid by PRG on behalf of
Mr. Cook -- $8,224 in 2000; Mr. Ellis -- $1,468 in 2000 and $1,446 in
each of 1999 and 1998; and Mr. Lustig -- $1,330 in 1998.
- Annual contributions by PRG to the deferred compensation programs for the
named executive officers:
DEFERRED COMPENSATION
2000 1999 1998
------- ------- -------
Mr. Cook..................................... $ -- $ -- $ --
Mr. Toma..................................... 65,000 55,000 55,000
Mr. Ellis.................................... -- 25,000 25,000
Mr. Kramer................................... 25,000 25,000 25,000
Mr. Perlberg................................. 25,000 -- --
Mr. Lustig................................... -- 40,000 40,000
Mr. Colabuono................................ -- -- --
- Annual matching contributions to PRG's 401(k) Plan made by PRG on behalf
of Messrs. Cook and Toma in 2000 -- $1,500 each; and to Messrs. Cook,
Toma and Lustig in 1999 and 1998 -- $900 each.
- Severance payments to Messrs. Lustig and Colabuono for 2000 of $1,597,500
and $981,666, respectively, and severance payments to Mr. Ellis for 2000
of $104,166. See "-- Employment Agreements" below.
(9) Mr. Ellis was formerly Senior Vice President, Chief Financial Officer and
Treasurer of PRG and relinquished those positions when Mr. Colabuono was
elected Executive Vice President -- Finance, Chief Financial Officer and
Treasurer on July 19, 1999. Mr. Ellis subsequently rejoined PRG as its
Executive Vice President, Chief Financial Officer and Treasurer as of
October 26, 2000.
(10) Mr. Lustig resigned his position as President and Chief Operating Officer
of PRG effective as of October 25, 2000.
(11) Amounts shown for 1999 reflect compensation for Mr. Colabuono from July 19,
1999 when he began employment with PRG. Mr. Colabuono resigned his position
as Executive Vice President -- Finance, Chief Financial Officer and
Treasurer of PRG effective as of October 25, 2000.
105
Option Grants Table
The following table sets forth certain information regarding options
granted to the named executive officers during the year ended December 31, 2000.
No separate SARs were granted during 2000.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#)(1) 2000 ($/SH) DATE 5%($) 10%($)
---- ----------- ------------ ----------- ---------- --------- ---------
John M. Cook................... -- -- $ -- -- $ -- $ --
John M. Toma................... -- -- -- -- -- --
Donald E. Ellis, Jr.(2)........ 250,000 8.60% 4.31 4/25/06 332,500 742,500
Robert G. Kramer............... 10,000 .34% 25.75 1/4/10 162,000 410,500
Robert G. Kramer............... 5,000 .17% 9.63 2/10/06 14,800 33,200
Mark C. Perlberg(3)............ 100,000 3.44% 28.77 2/15/10 -- --
Michael A. Lustig.............. -- -- -- -- -- --
Scott L. Colabuono(4).......... 10,000 .34% 25.75 1/4/10 -- --
---------------
(1) Unless otherwise footnoted, options are non-qualified options granted under
the Stock Incentive Plan. All options have either five-and-one-half or
ten-year terms with 20 percent of the options vesting and becoming
exercisable on each of the first five anniversaries of the date of grant;
provided, however, that all options granted under the Stock Incentive Plan
will vest automatically upon the occurrence of certain events.
(2) These options vest as follows: 100,000 shares became exercisable on the
grant date; the remaining 150,000 shares are exercisable at a rate of 4,167
per month beginning November 26, 2000 and continuing thereafter on the 26th
day of each of the next 34 months, and on October 26, 2003 the remaining
4,155 shares shall become exercisable.
(3) These options vest as follows: 20,000 shares became exercisable on the grant
date; the remaining 80,000 shares vest 20 percent on each grant date
anniversary thereafter. These options were subsequently surrendered to PRG
on August 14, 2000. See "-- Certain Transactions" below.
(4) These options were subsequently surrendered to PRG on August 14, 2000. See
"-- Certain Transactions" below.
106
Option Exercises and Year-End Value Table
None of the named executive officers held or exercised SARs during 2000.
The following table sets forth certain information regarding options exercised
during the year ended December 31, 2000, and unexercised options held at
year-end, by each of the named executive officers.
AGGREGATED OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED VALUE (#) ($)(1)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
John M. Cook................. -- $ -- 346,233 119,057 $ -- $ --
John M. Toma................. -- -- 135,000 52,500 -- --
Donald E. Ellis, Jr. ........ 39,000 565,250 108,333 141,667 223,437 292,188
Robert G. Kramer............. -- -- 37,500 60,000 -- --
Mark C. Perlberg............. -- -- -- -- -- --
Michael A. Lustig............ -- -- 306,150 -- 15,000 --
Scott L. Colabuono........... -- -- -- -- -- --
---------------
(1) Calculated based on a fair market value of $6.375 per share of common stock
at December 31, 2000, less the applicable exercise prices.
Employment Agreements
PRG has entered into an employment agreement, as amended, with John M. Cook
that currently expires December 31, 2005. The employment agreement provides for
automatic one-year renewals upon the expiration of each year of employment, such
that it always has a five-year term, subject to prior notice of non-renewal by
the board of directors. Pursuant to Mr. Cook's employment agreement, for 2000
through 2005, Mr. Cook receives an annual base salary of $500,000, effective
March 1, 2000, and an annual target bonus of up to 200 percent of his base
salary based upon PRG's performance for the respective year. For the year 2001,
the compensation committee determined that Mr. Cook is eligible to receive up to
a maximum of 150,000 options if earnings per share for 2001 are greater than 150
percent of 2000 adjusted earnings per share. Mr. Cook will be entitled to
receive a pro-rata share of options if 2001 earnings per share are between 130
percent and 149 percent of 2000 earnings per share. Any options granted to Mr.
Cook would be granted at fair market value as of the end of 2001 and would vest
over a four-year period at 25 percent per year. If Mr. Cook is terminated other
than for cause or if Mr. Cook resigns for "Good Reason," he is eligible to
receive a severance payment for the remainder of the five-year term, comprised
of base salary and bonus, up to a maximum amount not to be deemed an "excess
parachute payment" under the Code, and all outstanding options immediately
become vested. "Good Reason" means any of the following occurring without Mr.
Cook's consent:
- the assignment of duties or a position or title inconsistent with or
lower than the duties, position or title provided in Mr. Cook's
employment agreement;
- a requirement that Mr. Cook perform a substantial portion of his duties
outside Atlanta, Georgia;
- a reduction of Mr. Cook's compensation unless the board or an appropriate
committee of the Board has authorized a general compensation decrease for
all executive officers of PRG;
- the acquisition by any person, entity or group of 50 percent or more of
the combined voting power of the then outstanding securities of PRG;
- certain events of merger, consolidation, or transfer of assets of PRG,
"change in control," resulting in a minority ownership by PRG
stockholders in the successor company following the change in control;
107
- the existing directors of PRG prior to a change in control constituting
less than a majority of the directors of the successor company following
the change in control; or
- any other transaction or event that the board of directors of PRG in its
discretion identifies as a change in control for this purpose.
Mr. Cook also is entitled to receive certain supplemental insurance
coverage and other personal benefits under his employment agreement. Mr. Cook
has agreed not to compete with PRG or to solicit any of PRG's clients or
employees for a period of 18 months following termination of employment.
PRG also has entered into employment agreements with John M. Toma, Donald
E. Ellis, Jr., Robert G. Kramer, and Mark C. Perlberg. The agreements with
Messrs. Toma and Kramer automatically renewed on December 31, 2000 and provide
for automatic one-year renewals upon the expiration of each year of employment,
subject to prior notice of non-renewal by the board of directors. Mr. Ellis'
agreement terminates in October 2003. Prior to their resignations, PRG was also
a party to employment agreements with each of Michael A. Lustig and Scott L.
Colabuono. Messrs. Toma, Ellis, Kramer Perlberg, Lustig and Colabuono have
agreed not to compete with PRG nor to solicit any clients or employees of PRG
for a period of 18 months following termination of their respective employment.
Effective March 1, 2000 Mr. Toma receives a base salary of $400,000 with a
target bonus potential of 50 percent of his base salary, with a maximum
potential bonus of 100 percent of his base salary based upon PRG's annual
performance. In addition, Mr. Toma is eligible to receive, for 2001, up to a
maximum of 100,000 options if earnings per share for 2001 are greater than 150
percent of 2000 adjusted earnings per share. Mr. Toma will also be entitled to
receive a pro-rata share of options if earnings per share for 2001 are between
130 percent and 149 percent of 2000 adjusted earnings per share. Any options
granted to Mr. Toma would be granted at fair market value as of the end of 2001
and would vest over a four-year period at 25 percent per year. In addition, PRG
has agreed to make annual contributions in the amount of $65,000 per year to a
deferred compensation program for Mr. Toma, which amounts will vest 50 percent
immediately and the remainder over a ten-year period. If Mr. Toma is terminated
other than for cause or if Mr. Toma resigns for "Good Reason," as defined in Mr.
Cook's employment arrangement, with the additional qualifying event of Mr.
Cook's removal without cause as chief executive officer of PRG, he is eligible
to receive a severance benefit consisting of (1) two years of base salary,
target bonus and auto allowance, (2) a contribution of two years of the annual
deferred compensation credit to a rabbi trust established for deferred
compensation, and (3) payment of employee COBRA premiums, plus a full state and
federal tax gross-up sufficient to pay any applicable excise taxes on items (1)
through (3). PRG also has agreed to provide Mr. Toma with certain other personal
benefits. Mr. Toma's employment agreement will automatically renew on December
31, 2001 and provides for automatic one-year renewals at the expiration of each
year of employment, subject to prior notice of non-renewal by the board of
directors.
Prior to leaving PRG in June 1999, Mr. Ellis received a base salary of
$250,000 per year plus a retention bonus of $59,000 for remaining with PRG
through May 31, 2000. On May 31, 2000, Mr. Ellis resigned from PRG and received
a severance benefit of $104,166. On October 26, 2000, Mr. Ellis rejoined PRG as
its Executive Vice President -- Finance, Chief Financial Officer and Treasurer,
with a base salary of $300,000 per annum and bonus potential of up to 70 percent
of his base salary, with a minimum bonus of $50,000 per annum. Mr. Ellis
received a sign-on bonus in the amount of $145,833. The compensation committee
also granted Mr. Ellis options to purchase 250,000 shares of common stock of
PRG, with 100,000 shares vesting immediately and the remaining 150,000 shares
vesting ratably over 36 months. Upon termination without cause or a resignation
for Good Reason, as defined in Mr. Cook's employment agreement, with the
additional qualifying events of Mr. Cook no longer serving as chief executive
officer, or the liquidation or dissolution of PRG, any then unvested portion of
the aforementioned 250,000 share option grant will immediately vest and Mr.
Ellis will receive a severance payment equal to 24 months of base salary and car
allowance, plus a bonus of $100,000, and a full state and federal tax gross-up
sufficient to pay any applicable excise taxes on such amounts.
For the year 2001, Mr. Kramer's base salary was increased to $265,000 with
a target bonus set at 35 percent of base salary. Mr. Kramer elected to defer
payment of $25,000 of his base salary pursuant to a
108
deferred compensation plan. Pursuant to Mr. Kramer's employment agreement, he is
eligible to receive a target-level bonus based in part upon PRG's performance
for the year. In addition, PRG agreed to make annual matching contributions in
the aggregate amount of $25,000 per year to Mr. Kramer's deferred compensation
program, which amounts vest over a ten-year period. Upon termination, other than
for cause or by voluntary resignation, Mr. Kramer will receive severance
payments equal to six months of base salary.
Effective February 9, 2000, Mr. Perlberg entered into an employment
agreement with PRG. For the year 2000, Mr. Perlberg was paid a base salary of
$325,000, with a target bonus of 35 percent of base salary. Mr. Perlberg elected
to defer $25,000 of his base salary pursuant to a deferred compensation plan. In
addition, PRG agreed to make annual matching contributions in the aggregate
amount of $25,000 per year to Mr. Perlberg's deferred compensation program,
which amounts vest over a ten-year period. Effective October 1, 2001, Mr.
Perlberg's base salary was increased to $375,000. Also, in February 2001,
pursuant to his employment agreement, Mr. Perlberg received a sign-on bonus
equal to 33 percent of his base salary paid in 2000. Upon termination, other
than for cause or by voluntary resignation, Mr. Perlberg will receive severance
payments equal to 24 months of base salary, bonus at target level, and car
allowance, paid monthly.
Upon Mr. Lustig's resignation effective as of October 25, 2000, Mr. Lustig
received a lump sum payment of $937,500 plus the right to receive 18 additional
monthly payments, each such payment equal to the sum of his monthly salary and
the monthly proration of his annual car allowance. Upon certain events of change
in control of PRG, payment of such monthly payments may be accelerated.
Upon Mr. Colabuono's resignation effective as of October 25, 2000, Mr.
Colabuono received a lump sum payment of $301,041 plus the right to receive 18
additional monthly payments, each such payment equal to the sum of his monthly
salary and the monthly proration of each of his annual target bonus and his
annual car allowance. Upon certain events of change in control of PRG, payment
of such monthly payments may be accelerated.
Stock Incentive Plan
On June 15, 1998, PRG, with the approval of its shareholders, amended its
Stock Incentive Plan, which initially provided for the grant of options to
acquire a maximum of 9,375,000 shares of common stock, subject to certain
adjustments. On June 8, 2000, PRG's shareholders approved an amendment to the
Stock Incentive Plan such that the Stock Incentive Plan currently provides for
the grant of options and other awards to acquire a maximum, aggregate of
10,875,000 shares of common stock, subject to certain adjustments. As of August
31, 2001, options for 7,167,637 shares were outstanding, after adjustment for
forfeitures, and options for 1,430,873 shares had been exercised. Options may be
granted under this plan to employees, officers or directors of and consultants
and advisors to, PRG and its subsidiaries. PRG estimates that, as of March 30,
2001, approximately 2,000 employees, including officers, and seven non-employee
directors of PRG were eligible to participate in the Stock Incentive Plan.
Unless sooner terminated by the board, this plan terminates in June 2008.
Employee Stock Purchase Plan
In May 1997, PRG's shareholders approved the adoption of The Profit
Recovery Group International, Inc. Employee Stock Purchase Plan. This plan is
intended to be an "employee stock purchase plan" as defined in Code Section 423.
Under this plan, eligible employees may authorize payroll deductions at the end
of a semi-annual purchase period of from 1 percent to 10 percent of their
compensation, as defined in the stock purchase plan, with a minimum deduction of
$10 per pay period and a maximum aggregate deduction of $10,625 during each
semi-annual purchase period, to purchase common stock at a price of 85% of the
fair market value thereof as of the first trading day, as defined in the stock
purchase plan, of the offering period. The aggregate number of shares of common
stock which may be purchased by all participants under this plan may not exceed
1,125,000, subject to certain adjustments. PRG estimates that, as of December
31, 2000, approximately 1,800 employees of PRG and its subsidiaries are eligible
to participate in this plan. This plan will terminate at the option of PRG's
compensation committee or, if earlier, at the time purchase rights have been
exercised for all shares of common stock reserved for purchase under this plan.
109
PRG's 401(k) Plan
PRG assumed, effective immediately prior to completion of its initial
public offering, the 401(k) plan sponsored by a predecessor of PRG. This plan is
a tax-qualified retirement plan designed to meet the requirements of Sections
401(a) and 401(k) of the Code. Under this plan, participants may elect to make
pre-tax savings deferrals of from 1 percent to 15 percent of their compensation
each year, subject to annual limits on such deferrals (e.g., $10,500 in 2000)
imposed by the Code. PRG may also in its discretion, on an annual basis, make a
matching contribution with respect to a participant's elective deferrals and/or
may make additional PRG contributions. The only form of benefit payment under
this 401(k) plan is a single lump-sum payment equal to the balance in the
participant's account. Under this 401(k) plan, the vested portion of a
participant's accrued benefit is payable upon such employee's termination of
employment, attainment of age 59 1/2, with respect to 100 percent vested
accounts only, retirement, total and permanent disability or death.
CERTAIN TRANSACTIONS
The following members of Mr. Cook's immediate family are employed by PRG as
field auditors or audit managers and received compensation in 2000 in the
approximate amounts set forth beside their names: David H. Cook,
brother -- $201,250 consisting of $175,000 salary and $26,250 bonus; Harriette
L. Cook, sister-in-law -- $97,000 consisting of $44,000 salary, $3,000 bonus and
$50,000 commissions; Pamela M. Cook, sister -- $115,000 salary; and Allen R.
Sluiter, brother-in-law -- $135,000 commissions.
Mr. Toma's sister-in-law, Maria A. Neff, is employed with PRG as Senior
Vice President of Human Resources. For 2000, PRG paid Ms. Neff compensation of
approximately $138,000 salary.
On August 14, 2000, five named executive officers surrendered a total of
1,295,000 nonqualified stock options to allow for broad-based grants of stock
options and awards of restricted stock to employees throughout PRG. The table
below identifies the executive officers who surrendered nonqualified stock
options and the amount of nonqualified stock options surrendered. No
consideration was paid for the surrender and cancellation.
VESTED OPTIONS UNVESTED OPTIONS TOTAL OPTIONS WEIGHTED AVERAGE
SURRENDERED SURRENDERED SURRENDERED EXERCISE PRICE/SHARE
-------------- ---------------- ------------- --------------------
Mr. Cook............................. 72,000 408,000 480,000 $25.96
Mr. Toma............................. 33,000 199,500 232,500 25.99
Mr. Ellis............................ -- -- -- --
Mr. Kramer........................... -- -- -- --
Mr. Perlberg......................... 20,000 80,000 100,000 28.77
Mr. Lustig........................... 33,750 326,250 360,000 25.96
Mr. Colabuono........................ 22,500 100,000 122,500 28.93
See "-- Summary Compensation Table, Footnote (6)" above for a description
of restricted stock awarded to such named executive officers. Messrs. Lustig and
Colabuono subsequently forfeited their shares of restricted stock in exchange
for an unspecified portion of the lump sum payments they received following
their resignations.
HSA-Texas owns the building in which HSA-Texas' Dallas headquarters is
located. Following the closing, PRG will lease a portion of HSA-Texas' current
office space from HSA-Texas for a period of approximately three years at market
rental rates.
On the closing date of the asset acquisition, PRG will assume approximately
$7.4 million of the amount of principal and interest outstanding on the
effective date payable to Howard Schultz for amounts loaned to HSA-Texas,
including amounts loaned subsequent to September 30, 2001, for:
- working capital for normal operations;
- HSA-Texas transaction expenses incurred in connection with the asset
acquisition;
- amounts required to cancel HSA-Texas options of persons not hired by PRG;
110
- amounts required to cancel HSA-Texas SARs; and
- principal and interest payments since December 31, 2000 on certain notes
issued in connection with certain prior acquisitions made by HSA-Texas.
Currently the amount to be assumed is estimated to be approximately $7.4
million. Concurrently with the closing of the asset acquisition, PRG will make
an initial payment of $7.0 million to Howard Schultz for amounts loaned to
HSA-Texas.
On the closing date, PRG will assume options to purchase 167,631 shares of
HSA-Texas common stock currently held by Arthur Budge, Jr., with an exercise
price of $9.06 per share that will convert into options to purchase 248,295
shares of PRG common stock with an exercise price of $6.12 per share, assuming
an option conversion ratio of 1.4812.
PRG will grant options to purchase 250,000 shares of PRG common stock to
Howard Schultz at an exercise price equal to the closing sales price per share
of PRG common stock on The Nasdaq National Market on the closing date.
Alma Intervention, S.A. ("Alma"), a wholly-owned subsidiary of PRG, leases
certain vehicles and business equipment and other property used in the business
from Collek S.N.C., a French company owned by Marc Eisenberg. Mr. Eisenberg
served as a Class II director during 2000, but did not stand for election as a
director at the 2001 Annual Meeting of Shareholders. Alma also leases office
space from a relative of Mr. Eisenberg. Aggregate rent paid by Alma in 2000 for
these vehicles, property and office space was $228,000.
PRG has also entered into a consulting agreement with Lieb Finance S.A., a
Luxembourg company of which Mr. Eisenberg is the sole owner and employee, to
assist on strategic and long-term planning matters for PRG and its affiliates in
certain portions of Europe. The term of the consulting agreement will end
October 7, 2002. Under the consulting agreement, Lieb Finance S.A. receives an
annual consulting fee of approximately 325,000 French francs, the approximate
equivalent of $44,576.47 as of December 19, 2001.
Blum Capital Partners, L.P. and its affiliates, who based on an amended
Schedule 13D filing made on December 5, 2001, currently beneficially own
approximately 14.6% of PRG's outstanding common stock, including stock
obtainable upon conversion of convertible notes, purchased $40 million of the
$125 million of PRG's convertible notes due 2006. Blum Capital Partners has
expressed an interest in obtaining representation on PRG's board of directors,
and PRG has had discussions with them regarding this matter. Blum Capital
Partners has the contractual right to designate an observer to attend PRG board
meetings.
See "-- Information About the Board of Directors and Committees of the
Board -- Director Compensation" above for a discussion of certain additional
transactions.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires PRG's executive officers and
directors and persons who beneficially own more than 10 percent of PRG's stock
to file initial reports of ownership and reports of changes in ownership with
the SEC. Executive officers, directors and greater than 10 percent beneficial
owners are required by SEC regulations to furnish PRG with copies of all Section
16(a) forms they file.
Based solely on its review of copies of forms received by it pursuant to
Section 16(a) of the Exchange Act, or written representations from certain
reporting persons, PRG believes that with respect to the fiscal year ended
December 31, 2000, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10 percent beneficial owners were
complied with, except that Mr. Kramer filed one late Form 5 reporting one late
transaction, Mr. Lowrey filed one late Form 4 and one late Form 5, reporting one
late transaction each, and Mr. Lachotzki filed one late Form 5 reporting one
late transaction.
111
Compensation Committee Interlocks and Insider Participation
PRG's compensation committee consists of Messrs. Golden and Robertson and
Ms. Ward. PRG has paid the law firm of Arnall Golden Gregory LLP, of which Mr.
Golden's personal corporation, JGPC, serves as a partner, compensation for legal
services rendered since 1991 and expects to continue utilizing this firm's
services in the future.
OWNERSHIP OF DIRECTORS, DIRECTOR NOMINEES, PRINCIPAL SHAREHOLDERS AND CERTAIN
EXECUTIVE OFFICERS OF PRG
The following table sets forth information regarding the beneficial
ownership of PRG's common stock as of December 11, 2001, the record date, and as
adjusted to give effect to the proposed acquisitions, by:
- each person, or group of affiliated persons, known by PRG to be the
beneficial owner of more than 5 percent of the outstanding common stock;
- the named executive officers;
- each director and director nominee of PRG; and
- all of PRG's executive officers and directors, including director
nominees, as a group.
Except as otherwise indicated in the footnotes to this table, PRG believes
that the persons named in this table have sole investment and voting power with
respect to all the shares of common stock indicated.
BENEFICIAL OWNERSHIP
AS OF DECEMBER 11, 2001(1) PRO FORMA(1)
--------------------------- ------------------------
BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE
---------------- ----------- ------------ ----------- ----------
John M. Cook(2)(3)............................. 4,719,481 9.58% 4,719,481 7.35%
Mellon Financial Corporation(4)................ 2,984,087 6.12 2,984,087 4.68
Blum Capital Partners, L.P.(5)................. 7,850,160 14.55 7,850,160 11.40
Farallon Capital Management LLC(6)............. 3,627,987 7.19 3,627,987 5.55
Stanley B. Cohen(7)............................ 803,000 1.65 803,000 1.26
Jonathan Golden(8)............................. 1,206,205 2.47 1,206,205 1.89
Garth H. Greimann(8)........................... 37,491 * 37,491 *
Fred W. I. Lachotzki(9)........................ 64,000 * 64,000 *
E. James Lowrey(10)............................ 54,000 * 54,000 *
Thomas S. Robertson(11)........................ 24,700 * 24,700 *
John M. Toma(12)............................... 1,008,355 2.06 1,008,355 1.58
Jackie M. Ward(11)............................. 31,535 * 31,535 *
Donald E. Ellis, Jr.(13)....................... 183,333 * 183,333 *
Robert G. Kramer(14)........................... 89,983 * 84,983 *
Mark C. Perlberg(15)........................... 140,448 * 140,448 *
Scott L. Colabuono(16)......................... 6,200 * 6,200 *
Michael A. Lustig(17).......................... 17,445 * 17,445 *
Arthur Budge, Jr.(18).......................... -- -- 248,295 *
Nate Levine(18)................................ -- -- -- --
Andrew Schultz(18)............................. -- -- 5,586,325 8.77
Howard Schultz(18)............................. -- -- 4,819,097 7.53
All executive officers and directors as a group
(16 persons)(19)............................. 8,362,531 16.71% 19,016,248 29.03%
---------------
* Represents holdings of less than one percent.
(1) Applicable percentage of ownership at December 11, 2001 is based upon
48,784,120 shares of common stock outstanding. Beneficial ownership is
determined in accordance with the rules of the SEC and includes investment
and voting power with respect to the shares shown as beneficially owned.
Shares of common stock subject to options currently exercisable or which
will become exercisable within sixty (60) days of the date of this proxy
statement are deemed outstanding for computing the percentage
112
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage ownership of any other persons.
The pro forma shares and percentage reflect the percentage of ownership as
of December 11, 2001 after the issuance of 14,941,123 shares of PRG common
stock in the proposed acquisitions, and are based upon the following
assumptions:
- an average PRG common stock price of $7.834 per share;
- HSA-Texas continues to have outstanding 2,307,482 shares of voting common
stock, 6,435,383 shares of non-voting common stock, options to purchase
1,133,423 shares and 64,569 SARs, and Howard and Andrew Schultz's
respective beneficial ownership thereof remains unchanged; and
- HSA-Texas' remaining liabilities, including the expenses of effecting
liquidation and winding up of HSA-Texas, do not exceed the value
HSA-Texas' assets not purchased by PRG.
(2) The business address for Mr. Cook is 2300 Windy Ridge Parkway, Suite 100
North, Atlanta, Georgia 30339-8426.
(3) Includes 897,618 shares held by the Cook Family Limited Partnership, for
which Mr. Cook serves as the general partner, 86,159 shares and 60,000
shares held by the Cook Family Grantor Retained Annuity Trust and the M.
Lucy Cook Family 2001 Grantor Retained Annuity Trust, respectively, for
which Mr. Cook is trustee and has sole investment and voting power with
respect to such shares, 90,000 shares held by the John M. Cook Family 2001
Grantor Retained Annuity Trust for which M. Lucy Cook, Mr. Cook's spouse,
is trustee and has sole investment and voting power with respect to such
shares, and 695,139 shares held by M. Lucy Cook. Also includes 491,233
shares subject to options which are currently exercisable. Does not include
1,191,809 shares held for the benefit of John M. Cook pursuant to a Grantor
Retained Annuity Trust for which James R. Cook is trustee and has sole
investment and voting power with respect to such shares, 294,013 shares
held by the John M. Cook Charitable Remainder UniTrust for which M.
Christine Cook is trustee and has sole investment and voting power with
respect to such shares, and 1,191,809 shares held for the benefit of M.
Lucy Cook pursuant to a Grantor Retained Annuity Trust for which M.
Christine Cook and M. Thomas Cook are co-trustees and have sole investment
and voting power with respect to such shares.
(4) Information provided is based on a Schedule 13-G dated January 22, 2001
filed by Mellon Financial Corporation ("Mellon"). Mellon's business address
is One Mellon Center, Pittsburgh, Pennsylvania 15258. Shares are
beneficially owned by direct or indirect subsidiaries of Mellon, a parent
holding company of certain banks and registered investment advisers. Mellon
has shared voting and dispositive power with respect to 297,800 and 6,400
shares, respectively. No single investment advisory client of Mellon owns
more than 5 percent of the common stock reported as beneficially owned.
(5) Includes 3,229,975 shares the Blum Reporting Persons, as defined below,
have the right to acquire upon conversion of convertible notes acquired on
November 26, 2001. Includes an additional 1,937,985 shares the Blum
Reporting Persons have the right to acquire upon conversion of convertible
notes acquired on December 3, 2001. Information provided is based on a
Schedule 13D filed on November 13, 2001, as amended on November 26, 2001
and December 5, 2001 by BLUM Capital Partners, L.P., a California limited
partnership, ("BLUM L.P."); Richard C. Blum & Associates, Inc., a
California corporation ("RCBA Inc."); RCBA GP, L.L.C., a Delaware limited
liability company ("RCBA GP"); Blum Strategic GP II, L.L.C., a Delaware
limited liability company ("Blum GP"); Blum Strategic Partners II, L.P., a
Delaware limited partnership; and Richard C. Blum, the Chairman and a
substantial shareholder of RCBA Inc. and a managing member of RCBA GP and
Blum GP (collectively, the "Blum Reporting Persons"). BLUM L.P. is a
California limited partnership whose principal business is acting as
general partner for investment partnerships and providing investment
advisory services. BLUM L.P. is an investment advisor registered with the
Securities and Exchange Commission. The sole general partner of BLUM L.P.
is RCBA Inc. Each of the Blum Reporting Persons reports that it has shared
voting and dispositive power over the shares reported above. The principal
office for each of the Blum Reporting Persons is 909 Montgomery Street,
Suite 400, San Francisco, California 94133.
(6) Includes 1,679,587 shares the Farallon Reporting Persons, as defined below,
have the right to acquire upon conversion of convertible notes acquired on
November 26, 2001. Information provided is based on a Schedule 13D filed on
November 29, 2001, by Farallon Capital Management LLC, a Delaware limited
liability company; Farallon Capital Partners, L.P., a California limited
partnership; Farallon
113
Capital Institutional Partners, L.P., a California limited partnership;
Farallon Capital Institutional Partners II, L.P., a California limited
partnership; Farallon Capital Institutional Partners III, L.P., a Delaware
limited partnership; Tinicum Partners, L.P., a New York limited
partnership; Farallon Partners, L.L.C., a Delaware limited liability
company which is the general partner of each of the above partnerships;
Enrique H. Boilini; David I. Cohen; Joseph F. Downes; William F. Duhamel;
Andrew B. Fremder; Richard B. Fried; Monica R. Landry; William F. Mellin;
Stephen L. Millham; Meridee A. Moore; Thomas F. Steyer and Mark C. Wehrly
(collectively, the "Farallon Reporting Persons"). Each of the Farallon
Reporting Persons reports that it has shared voting and dispositive power
over the shares reported above. The principal office for each of the
Farallon Reporting Persons other than Enrique Boilini is c/o Farallon
Capital Management, L.L.C., One Maritime Plaza, Suite 1325, San Francisco,
California 94111. The address of Enrique Boilini is c/o Farallon Capital
Management, L.L.C., 75 Holly Hill Lane, Greenwich, Connecticut 06830.
(7) Includes 231,677 shares held by the Stanley B. Cohen Grantor Retained
Annuity Trust for the benefit of Mr. Cohen, for which Shirley L. Cohen, Mr.
Cohen's spouse, is the trustee and has sole investment and voting power,
22,000 shares held by the SBC Family Limited Partnership for which Mr.
Cohen is a general partner and 16,000 shares subject to options which are
currently exercisable.
(8) Includes 26,000 shares subject to options which are currently exercisable.
(9) Includes 41,000 shares subject to options which are currently exercisable.
(10) Includes 29,000 shares subject to options which are currently exercisable.
(11) Includes 21,500 shares subject to options which are currently exercisable.
(12) Includes 48,034 shares held for the benefit of Mr. Toma for which Maria A.
Neff and Dorothy M. Toma, Mr. Toma's spouse, serve as co-trustees and share
investment and voting power with respect to such shares. Includes 275,886
shares held by the Toma Family Limited Partnership, for which Mr. Toma
serves as the general partner and 5,556 shares held by Toma Family
Foundation, Inc. of which Mr. Toma is President. Also, includes 73,190
shares held by Mrs. Toma, 12,021 shares held by the Mary Caitlin Cook
Trust, of which Mr. Toma is the trustee, 10,298 shares held by the Adam
Cook Trust, of which Mr. Toma is the trustee, and 247,500 shares subject to
options which are currently exercisable.
(13) Represents 150,000 shares subject to options which are currently
exercisable and 8,333 shares subject to options which will become
exercisable within sixty (60) days of the date of this proxy statement.
(14) Includes 5,000 shares of stock currently subject to certain restrictions
and risk of forfeiture. Includes 75,000 shares subject to options which are
currently exercisable.
(15) Includes 35,000 shares of stock currently subject to certain restrictions
and risk of forfeiture and 67,500 shares subject to options which are
currently exercisable.
(16) Mr. Colabuono resigned his position as Executive Vice President Finance,
Chief Financial Officer and Treasurer of PRG effective as of October 25,
2000 and is no longer an executive officer of PRG.
(17) Mr. Lustig resigned his position as President and Chief Operating Officer
of PRG effective as of October 25, 2000 and is no longer an executive
officer of PRG.
(18) Messrs. Budge, Levine, Andrew Schultz and Howard Schultz will become
directors upon the completion of the HSA acquisitions. Based on assumptions
set forth above at note (1), each will become beneficial owners of the
following shares of PRG common stock following the closing of the proposed
acquisitions: Mr. Budge 248,295 shares; Mr. Levine 0 shares; Mr. Andrew
Schultz 5,586,325 shares; and Mr. Howard Schultz 4,819,097 shares. The
numbers shown for Howard Schultz and Mr. Budge include 250,000 shares and
248,295 shares, respectively, subject to options which will be immediately
exercisable. The business address for these reporting persons is 9241 LBJ
Freeway, Suite 100, Dallas, Texas 75243.
(19) Includes 40,000 shares of stock currently subject to certain restrictions
and risk of forfeiture. Also includes options to purchase 1,200,567 shares
which are either currently exercisable or will become exercisable within
sixty (60) days of the date of this proxy statement. The pro forma numbers
include an additional 498,295 shares subject to options which will be
exercisable immediately following the closing of the asset acquisition.
114
EXECUTIVE OFFICERS
Each of the executive officers of PRG was elected by the board of directors
to serve until the board of directors' meeting immediately following the next
annual meeting of the shareholders or until his earlier removal by the board or
his resignation. The following table lists the executive officers of PRG and
their ages and offices with PRG.
NAME AGE OFFICE WITH REGISTRANT
---- --- ----------------------
John M. Cook............................... 59 Chairman of the Board, Chief Executive
Officer and Director
John M. Toma............................... 56 Vice Chairman and Director
Donald E. Ellis, Jr........................ 50 Executive Vice President -- Finance, Chief
Financial Officer and Treasurer
Robert G. Kramer........................... 58 Executive Vice President and Chief
Information Officer
Mark C. Perlberg........................... 45 President -- Accounts Payable Group
The employment histories of those executive officers who are not also
directors are set forth below:
DONALD E. ELLIS, JR. rejoined PRG in October 2000 as Executive Vice
President -- Finance, Chief Financial Officer and Treasurer. Mr. Ellis had
previously served PRG as Special Assistant to the Chairman from July 19, 1999 to
May 31, 2000 and as its Senior Vice President, Chief Financial Officer and
Treasurer from March 1995 to July 1999. Prior to first joining PRG, Mr. Ellis
served as Vice President -- Finance, Treasurer and Chief Financial Officer of
Information America, Inc., a provider of on-line computer information services.
Mr. Ellis is a certified public accountant.
ROBERT G. KRAMER joined PRG in October 1997 as Executive Vice President and
Chief Information Officer. Prior to joining PRG, Mr. Kramer had worked for Home
Shopping Network, Inc. since 1996 as Executive Vice President and Chief
Information Officer. From 1994 to 1996, Mr. Kramer served as Executive Vice
President and Chief Information Officer with Hanover Direct, Inc., a direct
specialty retailer.
MARK C. PERLBERG joined PRG in February 2000 as President of the Accounts
Payable Group. Prior to joining PRG, Mr. Perlberg had worked for John H. Harland
Company, a check printing company, since February 1996, most recently serving as
Vice President and General Manager of the North Region.
115
PERFORMANCE GRAPH
Set forth below is a line graph presentation comparing the cumulative
shareholder return on PRG's common stock (Nasdaq: PRGX), on an indexed basis,
against cumulative total returns of the Nasdaq Stock Market (U.S. Companies)
Index and the Hambrecht & Quist Technology Index. The graph assumes that the
value of the investment in the common stock in each index was $100 on March 26,
1996. The Performance Graph shows total return on investment for the period
beginning March 26, 1996 (the date of PRG's initial public offering) through
December 31, 2000.
THE PROFIT
RECOVERY GROUP NASDAQ STOCK HAMBRECHT & QUIST
INTERNATIONAL, INC. MARKET (U.S.) TECHNOLOGY
------------------- ------------- -----------------
3/26/1996 $100.00 $100.00 $100.00
12/31/1996 $145.45 $118.44 $123.07
12/31/1997 $161.36 $145.06 $144.29
12/31/1998 $340.34 $204.57 $224.43
12/31/1999 $362.22 $380.17 $501.24
12/31/2000 $ 86.93 $228.74 $324.03
Total return assumes reinvestment of any dividends.
SHAREHOLDER PROPOSALS
Appropriate proposals of shareholders intended to be presented at PRG's
2002 Annual Meeting of Shareholders pursuant to Rule 14a-8 promulgated under the
Securities Exchange Act, must be received by PRG by December 21, 2001 for
inclusion in its proxy statement and form of proxy relating to that meeting. In
addition, all shareholder proposals submitted outside of the shareholder
proposal rules promulgated pursuant to Rule 14a-8 under the Exchange Act must be
received by PRG by January 20, 2002 in order to be considered timely. If such
shareholder proposals are not timely received, proxy holders will have
discretionary voting authority with regard to any such shareholder proposals
which may come before the 2002 annual meeting. With regard to such shareholder
proposals, if the date of the 2002 annual meeting is subsequently advanced or
delayed by more than 30 days from the date of the 2001 annual meeting, PRG
shall, in a timely manner, inform shareholders of the change and the date by
which proposals must be received.
INDEPENDENT AUDITORS
The accounting firm of KPMG LLP are the independent auditors of PRG.
Approval or selection of the independent auditors of PRG is not submitted for a
vote of PRG's shareholders. The board of directors of PRG has historically
selected the independent auditors of PRG, with the advice of the audit
committee, and
116
the board believes that it would be to the detriment of PRG and its shareholders
for there to be any impediment to the board's exercising its judgment to remove
PRG's independent auditors if, in its opinion, such removal is in the best
interest of PRG and its shareholders.
It is anticipated that a representative from the accounting firm of KPMG
LLP will be present at the PRG special meeting to answer appropriate questions
and make a statement if the representative desires to do so.
WHERE YOU CAN FIND MORE INFORMATION
PRG files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy this information at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information regarding the public
reference room. In addition, the SEC also maintains an internet worldwide web
site that contains reports, proxy statements and other information about issuers
like PRG who file electronically with the SEC. The address of that site is
http://www.sec.gov.
HSA-Texas and its affiliates are not reporting companies and therefore no
reports or financial information about them is publicly available.
The SEC allows PRG to "incorporate by reference" information into this
proxy statement, which means that PRG can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this proxy
statement, except for any information superseded by information contained
directly in this proxy statement. This proxy statement incorporates by reference
the documents set forth below that PRG has previously filed with the SEC. These
documents contain important information about PRG and its financial condition.
The following documents that PRG previously filed with the SEC are
incorporated by reference in this document:
- PRG's Annual Report on Form 10-K for the year ended December 31, 2000;
- PRG's Quarterly Reports on Form 10-Q for the quarters ended March 31,
2001, June 30, 2001 and September 30, 2001;
- PRG's Current Report on Form 8-K filed on October 9, 2001;
- PRG's Current Report on Form 8-K filed on November 1, 2001;
- PRG's Current Report on Form 8-K filed on November 15, 2001;
- PRG's Current Report on Form 8-K filed on November 16, 2001;
- PRG's Current Report on Form 8-K filed on December 17, 2001 containing
updated financial information related to the classification of PRG's
French Taxation Services segment as a discontinued operation; and
- The description of PRG's common stock contained in PRG's registration
statement on Form 8-A (Registration No. 0-28000) as declared effective by
the SEC on March 26, 1996, as amended by the registration statement on
Form 8-A/A on August 9, 2000.
All documents that PRG files pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 from the date of this proxy statement to
the date of the special meeting shall also be deemed to be incorporated in this
proxy statement by reference and to be a part of it from the date they are filed
with the SEC.
PRG has supplied all information contained or incorporated by reference in
this proxy statement relating to PRG, and HSA-Texas has supplied all such
information contained in this proxy statement relating to
HSA-Texas and its affiliates.
117
Documents incorporated by reference are available from PRG, without charge,
excluding all exhibits unless PRG has specifically incorporated by reference an
exhibit in this proxy statement or in a document incorporated by reference
herein. Shareholders may obtain documents incorporated by reference in this
proxy statement by requesting them in writing or by telephone from:
The Profit Recovery Group International, Inc.
Leslie H. Kratcoski
Director, Investor Relations
2300 Windy Ridge Parkway
Suite 100 North
Atlanta, Georgia 30339-8426
Telephone: (770) 779-3900
If you would like to request documents from PRG, you must do so no later
than five business days prior to the special meeting, or January 16, 2002, in
order to receive them prior to the special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT. NONE OF PRG, HSA-TEXAS OR ANY OF THEIR
AFFILIATES HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT
IS DATED DECEMBER 19, 2001.
118
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of December 31, 2000 and 1999.... F-3
Combined Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Combined Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998.................... F-5
Combined Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Combined Financial Statements...................... F-7
UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS:
Combined Balance Sheets as of September 30, 2001 and
December 31, 2000......................................... F-21
Combined Statements of Operations for the nine-month periods
ended September 30, 2001 and 2000......................... F-22
Combined Statements of Cash Flows for the nine-month periods
ended September 30, 2001 and 2000......................... F-23
Notes to Combined Financial Statements...................... F-24
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Howard Schultz & Associates International, Inc.
We have audited the accompanying combined balance sheets of Howard Schultz
& Associates International, Inc. (see note 1) as of December 31, 2000 and 1999,
and the related combined statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2000. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Howard Schultz &
Associates International, Inc. as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Dallas, Texas
July 26, 2001
except as to note 16,
which is as of September 5, 2001
F-2
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,179 $ 3,910
Accounts receivable, net.................................. 15,644 12,904
Commission advances, net.................................. 2,058 1,471
Principal associate advance............................... 550 --
Prepaid expenses and other current assets................. 1,512 1,138
------- -------
Total current assets.............................. 21,943 19,423
Property and equipment, net (notes 4 and 7)................. 11,781 6,273
Other assets:
Goodwill, net (notes 3 and 5)............................. 25,226 21,149
Other assets.............................................. 768 1,911
------- -------
Total assets...................................... $59,718 $48,756
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,529 $ 820
Accrued compensation...................................... 1,868 1,012
Accrued commissions and royalties......................... 9,543 7,394
Other accrued expenses.................................... 3,506 1,508
Notes payable, current portion (note 6)................... 6,422 7,286
Capital lease obligations, current portion (note 7)....... 620 144
Other current liabilities................................. 124 262
------- -------
Total current liabilities......................... 25,612 18,426
Notes payable, net of current portion (note 6).............. 30,074 23,125
Capital lease obligations, net of current portion (note
7)........................................................ 1,388 293
------- -------
Total liabilities................................. 57,074 41,844
------- -------
Common stock put options (note 10).......................... 2,458 1,211
Stockholders' equity: (note 10)
Common stock.............................................. 2,102 2,102
Retained earnings (accumulated deficit)................... (2,129) 3,070
Accumulated other comprehensive income.................... 213 529
------- -------
Total stockholders' equity........................ 186 5,701
------- -------
Commitments and contingencies (notes 7 and 15)
Total liabilities and stockholders' equity........ $59,718 $48,756
======= =======
See accompanying notes to combined financial statements.
F-3
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Revenues, net............................................... $138,708 $133,789 $117,599
Cost of revenues............................................ 91,222 94,071 89,849
Selling, general and administrative expenses................ 48,324 37,760 26,223
-------- -------- --------
Operating income (loss)........................... (838) 1,958 1,527
-------- -------- --------
Interest income............................................. 425 462 198
Interest expense............................................ (3,363) (2,705) (1,968)
Other income (expense), net................................. 47 (33) 264
-------- -------- --------
Interest and other income (expense), net.......... (2,891) (2,276) (1,506)
-------- -------- --------
Net income (loss)................................. $ (3,729) $ (318) $ 21
======== ======== ========
See accompanying notes to combined financial statements.
F-4
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
COMMON (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK DEFICIT) INCOME EQUITY
-------- ------------ ------------- -------------
(IN THOUSANDS)
Balance at December 31, 1997.................. $ 1,421 $ 5,733 $ 1 $ 7,155
Comprehensive income:
Net income............................... -- 21 -- 21
Foreign currency translation
adjustment............................. -- -- 142 142
--------
Total comprehensive income.......... 163
Distributions to stockholders............... -- (2,366) -- (2,366)
Issuance of common stock.................... 681 -- -- 681
-------- -------- ------ --------
Balance at December 31, 1998.................. $ 2,102 $ 3,388 $ 143 $ 5,633
Comprehensive income (loss):
Net loss................................. -- (318) -- (318)
Foreign currency translation
adjustment............................. -- -- 386 386
--------
Total comprehensive income.......... 68
-------- -------- ------ --------
Balance at December 31, 1999.................. $ 2,102 $ 3,070 $ 529 $ 5,701
Comprehensive income (loss):
Net loss................................. -- (3,729) -- (3,729)
Foreign currency translation
adjustment............................. -- -- (316) (316)
--------
Total comprehensive loss............ (4,045)
Distributions to stockholders............... -- (1,470) -- (1,470)
-------- -------- ------ --------
Balance at December 31, 2000.................. $ 2,102 $ (2,129) $ 213 $ 186
======== ======== ====== ========
See accompanying notes to combined financial statements.
F-5
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $(3,729) $ (318) $ 21
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 8,074 5,494 3,987
Non-cash interest expense.............................. 637 570 265
Non-cash stock compensation expense.................... 1,247 1,211 --
Changes in assets and liabilities, net of working capital
from acquisitions:
Accounts receivable, net............................... (2,601) 7,550 (3,848)
Associate advances..................................... (550) -- --
Commission advances, net............................... (587) (789) 2,278
Prepaid expenses and other current assets.............. (38) 318 (687)
Other assets........................................... 1,143 (2,133) 38
Accounts payable and other accrued expenses............ 4,646 (127) 1,212
Accrued commissions and royalties...................... 2,149 (2,779) 2,892
Accrued compensation................................... 856 1,012 --
Other accrued liabilities.............................. (138) 262 --
------- ------- -------
Net cash provided by operating activities......... 11,109 10,271 6,158
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (5,858) (2,181) (1,387)
Acquisitions of businesses................................ (617) (1,123) (1,275)
Other..................................................... (476) (376) --
------- ------- -------
Net cash used in investing activities............. (6,951) (3,680) (2,662)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... -- -- 681
Proceeds from issuance of notes payable, net.............. 3,272 2,336 2,443
Principal payments on notes payable....................... (7,027) (7,065) (3,608)
Principal payments on capital lease obligations........... (404) -- --
Distributions to stockholders............................. (1,470) -- (2,366)
Net loans (provided to) repaid by stockholders............ (260) 68 (148)
------- ------- -------
Net cash used in financing activities............. (5,889) (4,661) (2,998)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (1,731) 1,930 498
Cash and cash equivalents at beginning of year.............. 3,910 1,980 1,482
------- ------- -------
Cash and cash equivalents at end of year.................... $ 2,179 $ 3,910 $ 1,980
======= ======= =======
Supplemental disclosures of non-cash investing and financing
activities:
In conjunction with the acquisition of businesses:
Fair value of assets acquired.......................... $10,220 $ 8,612 $ 9,289
Cash paid.............................................. 617 1,123 1,275
Notes payable to seller................................ 9,203 7,489 7,639
Release of funds escrowed in 1999...................... 400 -- --
Other notes payable to third party..................... -- 981 458
Issuance of capital lease obligation for the purchase of
equipment.............................................. $ 1,975 $ 437 $ --
======= ======= =======
Cash paid for:
Interest............................................... $ 2,553 $ 2,208 $ 1,465
======= ======= =======
See accompanying notes to combined financial statements.
F-6
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
The accompanying combined financial statements of Howard Schultz &
Associates International, Inc. include the accounts of Howard Schultz &
Associates International, Inc. ("HSA-Texas"), its majority-owned subsidiaries,
Howard Schultz & Associates Europe N.V., Howard Schultz & Associates de Mexico,
S.A. de C.V., Howard Schultz & Associates International (Thailand) Limited, HS&A
Imaging, Inc. ("HS&A Imaging") and companies which were under majority common
control and ownership by the controlling stockholders/family members of
HSA-Texas, which are Howard Schultz, Andrew H. Schultz and the Andrew H. Schultz
Irrevocable Trust (the "Schultz Trust"). These entities include Howard Schultz &
Associates (Canada) Inc. ("HSA-Canada"), Howard Schultz & Associates (Australia)
Inc. ("HSA-Australia"), HS&A International Pte Ltd. ("HSA-Singapore"), and
Howard Schultz & Associates (Asia) Limited ("HSA-Asia"). All entities included
in the combined financial statements are collectively referred to herein as the
"Company". All significant intercompany balances and transactions have been
eliminated in combination.
The principal business of the Company is providing accounts payable and
other recovery audit services to large and mid-size businesses having numerous
payment transactions with many vendors. These businesses include, but are not
limited to, retailers, manufacturers, wholesale distributors, technology
companies, and healthcare providers. The Company provides its services
throughout the United States and in 16 other countries.
(b) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
(c) Revenue Recognition
The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify the: (a) time periods covered by the audit, (b)
nature and extent of audit services to be provided by the Company, (c) client's
duties in assisting and cooperating with the Company, and (d) fees payable to
the Company generally expressed as a specified percentage of the amounts
recovered by the client resulting from overpayment claims identified.
In addition to contractual provisions, most clients also establish specific
procedural guidelines which the Company must satisfy prior to submitting claims
for client approval. These guidelines are unique to each client and impose
specific requirements on the Company such as adherence to vendor interaction
protocols, provision of advance written notification to vendors of forthcoming
claims, securing written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity concurrence
from the involved vendors. Approved claims are processed by clients and
generally taken as credits against outstanding payables or future purchases from
the vendors involved. It is only after completing these steps that the Company
invoices its clients for its fees.
For all recovery audit operations, the Company recognizes revenue when it
invoices clients for its fee.
F-7
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consist of money market funds, certificates of deposit, overnight
repurchase agreements and other investment securities. The Company had cash
equivalents of $86,000 and $1,956,000 at December 31, 2000 and 1999,
respectively.
(e) Commission Advances
From time to time, the Company makes advances of commissions to its
independent contractor auditors. Such advances are recorded as current assets
and recovered from commissions payable to the contractors as such commissions
are earned in connection with providing audit recovery services.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets which
range from three to 30 years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or estimated life of the
asset.
(g) Direct Expenses
Direct expenses incurred during the course of accounts payable audits and
other recovery audit services are expensed as incurred and are included in cost
of revenues. Cost of revenues consists principally of commissions paid or
payable to the Company's auditors, who are independent contractors, based
primarily upon the level of overpayment recoveries, and compensation paid to
various types of hourly workers and salaried operational managers. Also included
in cost of revenues are other direct costs incurred by these personnel,
including rental of non-headquarters offices, travel and entertainment,
telephone, utilities, maintenance and supplies and clerical assistance.
(h) Goodwill
Goodwill represents the excess of the purchase price over the estimated
fair value of net assets of acquired businesses. The Company evaluates the
unique relevant aspects of each individual acquisition when establishing an
appropriate goodwill amortization period. Goodwill is being amortized on a
straight-line basis over estimated useful lives ranging from 5 to 7 years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of goodwill over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(i) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less cost to sell.
F-8
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Income Taxes
HSA-Texas, HSA-Canada and HS&A Imaging have each elected to be treated as
an S Corporation for tax purposes. Accordingly, the tax consequences of all
profits and losses are the responsibility of the stockholders of each of those
corporations. Income taxes for the remaining companies included in the Company,
all of which are foreign-based corporations, are accounted for under the asset
and liability method for financial reporting purposes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating losses and tax
credit carryforwards. (See Note 8)
(k) Foreign Currency Translation
The local currency is the functional currency in the countries in which the
Company conducts business outside of the United States. The assets and
liabilities denominated in foreign currency are translated into U.S. dollars at
the current rate of exchange at the balance sheet date and revenues and expenses
are translated at the average monthly exchange rates. The resulting translation
gains and losses are recorded as accumulated other comprehensive income in
stockholders' equity. Transaction gains and losses included in results of
operations are not material.
(l) Employee Stock Options
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation expense would be recorded on the date of grant only if the fair
value of the underlying stock exceeded the exercise price.
2. MERGERS
On January 1, 1999, the Company acquired 100% of the outstanding common
stock of three companies owned (directly or beneficially) by the controlling
stockholders of HSA-Texas through the issuance of 3,716 shares of HSA-Texas
common stock: HS&A Acquisition, Inc., which was owned 100% by Howard Schultz;
HS&A Acquisition No. 2, Inc., which was owned 100% by Andrew H. Schultz; and
HS&A Acquisition No. 3, Inc., which was owned 100% by the Schultz Trust.
The combination of the Company and these three entities was accounted for
as a common control merger on an "as if" pooling-of-interests at historical
cost.
3. ACQUISITIONS
From January 1998 through January 2000, the Company entered into a series
of transactions to acquire operations known as "principal associates." The
principal associates provided the independent contract auditors that performed
audit recovery services for the Company in various regions in the United States.
The Company also completed acquisitions of licensees in Australia and Canada in
1998 and in Europe in 1999.
A summary of the acquisitions of principal associates follows:
DATE OF ACQUISITION PRINCIPAL ASSOCIATE ACQUIRED PURCHASE PRICE
------------------- ---------------------------- --------------
January 5, 1998................ Howard Schultz & Associates, $3.4 million note payable,
Mid Pacific, Inc. discounted to $3.1 million
July 1, 1998................... Howard Schultz & Associates of $4.8 million note payable,
Mid-Southwest, Inc. discounted to $4.4 million
January 1, 1999................ HS&A Florida, Inc. $3.0 million note payable,
discounted to $2.7 million
F-9
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DATE OF ACQUISITION PRINCIPAL ASSOCIATE ACQUIRED PURCHASE PRICE
------------------- ---------------------------- --------------
January 1, 1999................ Howard Schultz & Associates of $2.1 million note payable,
the Mid-West, Inc. discounted to $1.9 million
January 1, 1999................ Howard Schultz & Associates of $3.2 million note payable,
the Pacific Northwest, Inc. discounted to $2.9 million
January 1, 2000................ Howard Schultz & Associates of $3.6 million note payable,
the Northeast, Inc. discounted to $3.4 million
and $0.4 million of cash
January 1, 2000................ Howard Schultz & Associates of $5.1 million note payable,
the Mid-Atlantic, Inc. discounted to $4.8 million
On January 23, 1998, HSA-Canada, an affiliate of HSA-Texas, acquired all of
the net assets of a former licensee in Canada for a total purchase price of
$600,000, which was funded by HSA-Texas.
On January 30, 1998, HSA-Australia, an affiliate of HS&A, acquired all of
the net assets of a former licensee in Australia for a total purchase price of
$1.1 million, which was funded through a $458,000 note payable to the Schultz
Trust and cash of $675,000.
In November 1998, the Company formed its wholly-owned subsidiary, Howard
Schultz & Associates Europe, N.V., a Belgian corporation ("HS&A Europe"), for
the purpose of acquiring the equity interests of entities that performed
recovery audit services in various European countries, including Belgium,
France, Italy and Spain. HS&A Europe acquired 100% of such interests in January
1999 (except for a 10% interest in Howard Schultz Italia S.r.l., which was
acquired by HS&A Europe in 2000 for approximately $0.12 million) for a total
purchase price of $1.1 million. The Company funded this acquisition through cash
of approximately $0.14 million and a bank loan of approximately $0.98 million.
On November 1, 2000, the Company acquired the stock of Infinite Imaging
Systems, Inc. for a total purchase price of approximately $1.5 million, payable
in the form of $500,000 in cash and a promissory note in the amount of $1.0
million.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, results of operations of the acquired entities have
been included in the accompanying combined financial statements from the dates
of acquisition. The purchase prices were allocated to tangible assets acquired
and intangible assets based on the estimated fair values at the respective dates
of acquisition. Additionally, as the promissory notes for the principal
associate acquisitions were entered into at below-market rates of interest, in
order to record the promissory notes at fair value, the Company recorded a
discount for each promissory note. The discount effectively decreased the total
purchase price of each acquisition. The Company incurred no significant direct
costs of acquisition. A summary of the total purchase price and purchase price
allocation for acquisitions made during 2000, 1999 and 1998 is as follows (in
thousands):
ACQUISITIONS ACQUISITIONS ACQUISITIONS
IN 2000 IN 1999 IN 1998
------------ ------------ ------------
Net tangible assets................................. $ 477 $1,964 $1,427
Goodwill............................................ 9,743 6,648 7,862
------- ------ ------
Total purchase price...................... $10,220 $8,612 $9,289
======= ====== ======
F-10
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma operating results as though the acquisitions discussed
above had occurred on January 1, 1999, with adjustments primarily to give effect
to amortization of goodwill and interest expense related to the promissory
notes, are as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
Revenues.................................................... $140,141 $134,976
Operating income............................................ 800 2,124
Net loss.................................................... $ (2,012) $ (859)
4. PROPERTY AND EQUIPMENT
Property and equipment, which includes assets under capital leases, at
December 31, 2000 and 1999 consists of the following (in thousands):
2000 1999
------- -------
Land........................................................ $ 1,045 $ 265
Buildings................................................... 3,670 1,743
Leasehold Improvements...................................... 1,336 1,230
Equipment................................................... 11,087 6,575
Furniture and Fixtures...................................... 618 642
Software.................................................... 938 175
------- -------
18,694 10,630
Less accumulated depreciation and amortization.............. 6,913 4,357
------- -------
Net property and equipment........................ $11,781 $ 6,273
======= =======
Depreciation expense for the years ended December 31, 2000, 1999, and 1998
was approximately $2,556,000, $1,176,000, and $927,000, respectively.
5. GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair value of the net assets of acquired businesses.
Goodwill and accumulated amortization consists of the following at December
31, 2000 and 1999 (in thousands):
2000 1999
------- -------
Goodwill.................................................... $39,907 $30,312
Less accumulated amortization............................... 14,681 9,163
------- -------
$25,226 $21,149
======= =======
Amortization expense for the years ended December 31, 2000, 1999 and 1998
was approximately $5,518,000, $4,318,000, and $3,060,000, respectively.
F-11
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
Notes payable at December 31, 2000 and 1999 is summarized as follows (in
thousands):
2000 1999
------- -------
Notes payable -- acquisition related:
$1.4 million promissory note, payable in twenty four (24)
equal installments, commencing on July 1, 1996, bearing
interest at a rate of 6.05% per annum.................. $ 265 $ 546
$6.5 million promissory note, payable in fifteen (15)
equal semi-annual installments, commencing on December
1, 1997, bearing interest at a rate of 6.39% per
annum.................................................. 3,507 4,251
$6.8 million promissory note, payable in sixteen (16)
equal semi-annual installments, commencing on December
31, 1997, bearing interest at a rate of 6.77% per
annum.................................................. 4,749 5,578
$3.4 million promissory note, payable in twelve (12) equal
semi-annual installments, commencing on June 30, 1998,
bearing interest at a rate of 5.93% per annum.......... 1,615 2,384
$4.8 million promissory note, payable in twelve (12) equal
semi-annual installments, commencing on January 1,
1999, bearing interest at a rate of 5.60% per annum.... 2,656 3,375
$3.0 million promissory note, payable in twelve (12) equal
semi-annual installments, commencing on July 1, 1999,
bearing interest at a rate of 4.46% per annum.......... 1,869 2,247
$3.6 million promissory note, payable in twelve (12)
semi-annual installments, commencing on July 1, 2000,
bearing interest at a rate of 5.99% per annum.......... 2,855 --
Notes payable -- acquisition related, due to current
employees:
$2.0 million promissory note, payable in twelve (12)
semi-annual installments each commencing on December
31, 1997, bearing interest at a rate of 6.39% per
annum.................................................. 799 1,108
$2.1 million promissory note, payable in twelve (12)
semi-annual installments, commencing on July 1, 1999,
bearing interest at a rate of 4.46% per annum.......... 1,312 1,618
$3.2 million promissory note, payable in twelve (12) equal
semi-annual installments, commencing on July 1, 1999,
bearing interest at a rate of 4.46% per annum.......... 1,947 2,402
$5.1 million promissory note, payable in twelve (12) equal
semi-annual installments, commencing on July 1, 2000
bearing interest at a rate of 6.12% per annum.......... 4,044 --
$1.0 million promissory note, payable in twenty-four (24)
equal installments commencing on December 1, 2000,
bearing interest at a rate of 10% per annum............ 924 --
F-12
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
------- -------
Note payable -- Bank, with monthly installments of $12,030
including interest at 8.25% per annum, beginning October
1999 and maturing October 2014. The note is collateralized
by land, building and personal guarantee of stockholder... 1,187 1,230
Note payable -- Bank, with monthly installments of $19,359
including interest at 8.25% per annum, beginning May 2000
and maturing April 2020. The note is collateralized by
land, building and personal guarantee of stockholder...... 2,240 --
Note payable -- stockholder, interest at 5.59% per annum,
with monthly interest only payments maturing March 2003.
This note is unsecured.................................... 5,050 4,050
Notes payable -- other, primarily international............. 1,477 1,622
------- -------
36,496 30,411
Less: current portion....................................... 6,422 7,286
------- -------
$30,074 $23,125
======= =======
In connection with the acquisition-related notes payable, the Company
recorded a discount from the face of the notes payable to reflect an effective
market interest rate. At December 31, 2000 and 1999, the unamortized discount
was $1,402,000 and $1,492,000, respectively, on face amounts of $27,020,000 and
$25,027,000, respectively. The effective interest rates range from 7.75% and
8.5%, with a weighted average effective interest rate of 8.3% at December 31,
2000 and 1999. The acquisition-related notes are secured generally by the assets
acquired in the relevant transaction.
Maturities of notes payable at December 31, 2000, are as follows (in
thousands):
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
2001...................................................... $ 6,422
2002...................................................... 7,150
2003...................................................... 12,105
2004...................................................... 5,761
2005...................................................... 3,161
Thereafter................................................ 3,299
-------
Total future maturities........................... 37,898
Less unamortized discount......................... 1,402
-------
Total notes payable............................... $36,496
=======
F-13
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE OBLIGATIONS
(a) Capital Leases
The Company has entered into several capital leases primarily for computer
and office equipment, expiring on various dates through December 2004. The
leases generally have terms of 36 months to 60 months. Future minimum lease
payments under non-cancelable capital leases having terms in excess of one year
are as follows (in thousands):
YEAR ENDING DECEMBER 31, (SEE NOTE 7(B))
------------------------ ---------------
2001..................................................... $ 834
2002..................................................... 754
2003..................................................... 643
2004..................................................... 232
------
Total future minimum lease payments.............. 2,463
Less amount representing interest.......................... 455
------
Present value of minimum lease payments.................... 2,008
Less current portion....................................... 620
------
Capital lease obligations -- long-term..................... $1,388
======
Included in property and equipment at December 31, 2000 and 1999 are the
following assets under capital leases:
2000 1999
------ ----
Equipment................................................... $2,412 $437
Less: accumulated depreciation.............................. 466 --
------ ----
$1,946 $437
====== ====
(b) Operating Leases
The Company is committed under various noncancelable operating lease
arrangements for facilities and equipment. Rent expense for 2000, 1999, and 1998
was $938,000, $722,000, and $150,000, respectively. The future minimum annual
lease payments under these leases for the next five years are summarized as
follows:
YEAR ENDING DECEMBER 31, (AMOUNT IN 000'S)
------------------------ -----------------
2001.................................................... $1,035
2002.................................................... 964
2003.................................................... 638
2004.................................................... 365
2005.................................................... 323
------
$3,325
======
8. INCOME TAXES
At December 31, 2000, the Company had foreign operating loss carryforwards
available to offset future foreign taxable income of approximately $4,120,000.
The Company's remaining deferred tax assets and liabilities are not significant.
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets
depends on the generation of future taxable income during the periods in which
those temporary differences become deductible. Based upon these considerations,
the
F-14
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company's deferred tax assets relating to the operating losses have been fully
offset by a valuation allowance of $1,004,000. Accordingly, no income tax
benefit has been recorded. These operating loss carryforwards begin to expire in
2004 based on local tax laws and regulations.
9. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Plan which allows eligible participating
employees to defer receipt of a portion of their compensation up to 15% and
contribute such amount to one or more investment funds. Employee contributions
are matched by the Company, dollar for dollar, up to 5% per participant. The
Company may also make discretionary contributions to the Plan as determined by
the Company each plan year. Company matching funds and discretionary
contributions vest at the rate of 20% each year beginning after the
participants' second year of service. Company contributions were approximately
$475,000, $291,000 and $73,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
10. STOCKHOLDERS' EQUITY
(a) Common Stock
The authorized, issued and outstanding common stock of the Company at
December 31, 2000 and 1999 is summarized as follows:
NUMBER OF SHARES
------------------------
ISSUED AND COMMON
AUTHORIZED OUTSTANDING STOCK
---------- ----------- ------
HSA-Texas voting...................................... 2,000,000 2,000,000 $ 341
HSA-Texas non voting.................................. 10,000,000 6,381,566 1,080
HSA-Canada............................................ 10,000,000 1,000 1
HSA-Australia......................................... 10,000,000 1,000 674
HSA-Singapore......................................... 100,000 5 --
HSA-Asia.............................................. 1,000 100 6
---------- --------- ------
32,101,000 8,383,671 $2,102
========== ========= ======
Effective March 24, 1999, HSA-Texas restated its Articles of Incorporation
to increase the number of authorized shares of its common stock to 12,000,000,
of which 2,000,000 are voting and 10,000,000 are non-voting, and to change the
par value of such stock to no par value. Also, effective as of March 24, 1999,
the HSA-Texas declared a stock dividend to its stockholders of record as of
March 23, 1999, of 922.9615 shares per outstanding share of common stock and
issued the appropriate number of shares of its common stock to such stockholders
in respect of such stock dividend. The stock dividend has been accounted for as
a stock split and, accordingly, all share amounts have been retroactively
adjusted to give effect to the stock split. At December 31, 2000, outstanding
shares included 2,000,000 shares of voting common stock and 6,381,566 shares of
non-voting common stock.
Effective January 1, 2001, the Company issued approximately 30,638 shares
of its non-voting common stock to Charles Schembri. In connection with such
issuance, the parties entered into a Stock Transfer Restriction Agreement. The
Agreement provides, among other things, limited "put" and "call" options as to
such shares upon the termination of Mr. Schembri's employment, each at a
purchase price equal to the fair market value of the shares, subject to certain
conditions. Also effective January 1, 2001, the Company issued an immaterial
number of fractional shares of its non-voting common stock to each of Howard
Schultz, Andrew Schultz, the Schultz Trust and Charles Schembri in order to
"round up" previous issuances of fractional shares that had been made to such
shareholders. Accordingly, as of the close of business on January 1, 2001, the
shareholders of the Company's no par value common stock were as follows: Voting
shares: Howard Schultz -- 1,257,200; Andrew Schultz -- 274,400; and, the Schultz
Trust -- 468,400; Non-
F-15
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Voting shares: Howard Schultz -- 4,011,452; Andrew Schultz -- 875,551; the
Schultz Trust -- 1,494,563; and, Charles Schembri -- 30,638.
(b) Stock Option Plan
On March 22, 1999, the board of directors of the Company adopted the 1999
Howard Schultz & Associates Stock Option Plan (the "Plan"), under which
2,500,000 shares of HS&A non-voting common stock are available for issuance with
respect to awards granted to officers, directors, key employees and independent
contractors.
The board of directors has designated a committee to administer the Plan.
From time to time, the Committee will designate key employees and independent
contractors to whom the options will be granted. According to the terms of the
Plan, the options typically vest in annual increments of one-third of the number
of options granted, beginning on the third year after the date of grant and the
options generally expire ten years from the date of grant. Upon a change in
control, all outstanding options fully vest. The Plan also includes a provision
whereby the grantee of an option can cause the Company to purchase any or all of
his/her shares of common stock acquired through the exercise of option(s) at a
price per share equal to the fair market value of the common shares.
Accordingly, under APB Opinion 25, a measurement date does not occur until the
options are exercised and the Company will continue to estimate fair value
periodically as such options vest.
During the years ended December 31, 2000 and 1999, the Company granted
options to employees to purchase 358,099 and 251,530 shares of the common stock
of HS&A, respectively. The options granted during the years ended December 31,
2000 and 1999 were granted at exercise prices of $9.06 and $8.16, respectively.
The estimated fair value of the options granted was $5,470,000 and $2,752,000 at
December 31, 2000 and 1999, respectively.
During the years ended December 31, 2000 and 1999, the Company also issued
options to non-employees to acquire 210,125 and 32,170 shares, respectively of
HSA-Texas common stock at exercise prices of $9.06 and $8.16, respectively. The
estimated fair value of the options granted was $3,454,000 and $369,000 at
December 31, 2000 and 1999, respectively. In connection with the issuance of
these options, the Company recorded the estimated fair value of the options
granted of $298,000 and $94,000 as an operating expense and as common stock put
options in the accompanying combined financial statements during the years ended
December 31, 2000 and 1999, respectively, based on the options vested. The fair
value of each option was estimated using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate ranging from 4.7% to
5.8%, expected option life of 10 years; expected volatility ranging from 53% to
72% and no dividend yield. The vesting period is the same as options issued to
employees as discussed below. Under EITF 96-18 "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," for those options that vest over a
period of time, a measurement date has not occurred. The Company will continue
to estimate fair value periodically as such options vest.
The fair value of total employee and non-employee vested option issuances
outstanding at December 31, 2000 and 1999 of $2,458,000 and $1,211,000,
respectively, has been classified in the mezzanine between liabilities and
stockholders' equity due to the fact that option holders can put the options
back to the Company subsequent to exercising the options.
F-16
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity for the years ended
December 31, 2000 and 1999 follows:
$9.06 $8.16
OPTIONS OPTIONS TOTAL
------- ------- -------
Outstanding at December 31, 1998.......................... -- -- --
Granted................................................. -- 283,700 283,700
Exercised............................................... -- -- --
Forfeited............................................... -- -- --
------- ------- -------
Outstanding, December 31, 1999............................ -- 283,700 283,700
Granted................................................. 568,224 -- 568,224
Exercised............................................... -- -- --
Forfeited............................................... (40,609) (29,718) (70,327)
------- ------- -------
Outstanding, December 31, 2000............................ 527,615 253,982 781,597
======= ======= =======
Options granted in 1999 begin to vest at the rate of one-third per year
beginning January 1, 2002 and expire on December 31, 2009. Of the 2000 grants,
options to acquire 400,593 shares of HSA-Texas common stock begin to vest at the
rate of one-third per year beginning January 1, 2003 and expire on December 31,
2010, and options to acquire 167,631 shares of HS&A common stock begin to vest
at the rate of one-third per year beginning October 1, 2003 and expire on
September 29, 2010. Accordingly, no options are vested at December 31, 2000 or
1999.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options issued to employees and non-employee directors. The
Company has recognized compensation expense of $949,000 and $1,117,000 during
the year ended December 31, 2000 and 1999, respectively, based on the intrinsic
value of the options at the date of grant and the estimated fair value of the
underlying common stock at those dates.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options granted to employees and non-employee directors
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", the Company's net income (loss) would have been
the pro forma amounts below for the years ended December 31, 2000 and 1999 (in
thousands):
2000 1999
------- -------
Net income (loss):
As reported............................................... $(3,729) $ (318)
Pro forma................................................. $(4,422) $ (580)
The fair value of stock options granted in 2000 and 1999 was estimated on
the date of grant using the Black-Scholes option pricing model. The weighted
average fair values and related assumptions were:
2000 1999
--------- ------
Weighted average fair value................................. $ 17.42 $17.42
Risk free interest rates.................................... 5.8%-6.3% 4.7%
Weighted-average expected life of option years.............. 10 10
Volatility factor of expected market price.................. 0.72 0.53
11. RELATED PARTY TRANSACTIONS
As of December 31, 2000 and 1999, the Company owed $5,050,000 and
$4,050,000, respectively to Howard Schultz (Note 6). The Company paid Mr.
Schultz interest in the amounts of $168,000, $168,000 and $126,000, during the
years ended December 31, 2000, 1999 and 1998, respectively.
F-17
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
HSA-Australia borrowed funds from the Schultz Trust in connection with the
acquisition (Note 3). The outstanding borrowings, including cumulative unpaid
interest, at December 31, 2000 and 1999 were $584,000 and $532,000,
respectively.
The Company has access to a condominium owned by the Schultz family, which
is used by the Company's clients, employees and independent contractors from
time to time. The Company paid the Schultz family rental fees of $35,000 during
each of the years ended December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000 and 1999, stockholders of HSA-Texas owed the
Company $390,000 and $130,000, respectively. Amounts are non-interest bearing
and due on demand and are included in other current assets.
The Company leases software from Howard Schultz under a lease agreement
dated December 1999. The Company made total payments of approximately $115,000
in 2000, including approximately $37,000 in interest and $78,000 in principal.
Monthly installments of approximately $8,900 are payable through December 31,
2004. The Company had recorded a related capital lease obligation of $352,000 at
December 31, 2000.
12. MAJOR CLIENTS
During 2000, two clients accounted for 13% and 10%, respectively, of the
Company's combined revenues. During 1999, the same two clients accounted for 12%
and 10%, respectively, of the Company's combined revenues. During 1998, one
client accounted for 11% of the Company's combined revenues.
13. SEGMENT AND RELATED INFORMATION
The Company has one reportable operating segment consisting of accounts
payable services. Accounts payable services consist of the review of client
accounts payable disbursements to identify and recover overpayments. This
operating segment includes accounts payable services provided to retailers,
wholesale distributors and various other types of business entities. The Company
performs these accounts payable services in the United States, Canada, Mexico,
Australia, and throughout Europe and Asia, including France, Spain and Hong
Kong.
Geographical information for the years ended December 31, 2000, 1999 and
1998 is as follows:
2000 1999 1998
-------- -------- --------
($000'S)
United States.......................................... $127,836 $122,560 $112,530
Europe................................................. 4,359 4,150 --
Mexico................................................. 756 207 125
Australia.............................................. 1,936 2,987 2,345
Canada................................................. 2,464 3,533 2,568
Asia................................................... 1,357 352 31
-------- -------- --------
Revenues, net................................ $138,708 $133,789 $117,599
======== ======== ========
F-18
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Geographical information at December 31, 2000 and 1999 is as follows:
2000 1999
------- ------
($000'S)
United States............................................... $11,855 $7,442
Europe...................................................... 146 383
Mexico...................................................... 91 81
Australia................................................... 140 136
Canada...................................................... 118 120
Asia........................................................ 199 22
------- ------
Total long-lived assets........................... $12,549 $8,184
======= ======
For purposes of the geographical information above, revenues are
attributable to the individual countries based on the location of the customer.
Long-lived assets are attributed to the individual countries based on the
physical location of the assets. Long-lived assets are primarily property and
equipment.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, receivables, advances,
accounts payable and accrued expenses and current portion of long-term
obligations approximate fair value because of the short maturity of these
instruments.
The fair values of each of the Company's long-term debt instruments are
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The estimated fair value approximates the
carrying value of the Company's notes payable as the notes have either been
entered into at rates of interest that reflect market rates at December 31, 2000
and 1999 or have been recorded with a discount to reflect an effective market
rate of interest.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
15. COMMITMENTS AND CONTINGENCIES
The Company has contingent liabilities resulting from litigation, claims
and commitments incidental to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position, results of operations or liquidity of the Company.
The Company also has contingent liabilities in connection with two Letters
of Credit relating to a loan agreement and a leasing agreement for Howard
Schultz & Associates Europe, N.V. These letters of credit are partially
collateralized by a certificate of deposit of the Company and personal funds of
a shareholder. The unsecured amounts of these contingent liabilities were
$1,279,000 and $1,070,000 at December 31, 2000, and December 31, 1999,
respectively.
16. SUBSEQUENT EVENTS
In May 2001, the Company entered into a settlement agreement with respect
to litigation pending at December 31, 2000, involving a group of independent
contractors formerly associated with the Company. Pursuant to the agreement, the
Company was relieved of certain obligations to pay accrued commissions to
F-19
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
those contractors, which amounted to $3.2 million at December 31, 2000. The
total settlement was $3.7 million.
In July 2001, the Company acquired substantially all of the assets and
certain, specified related liabilities, of an independent contractor of the
Company that performed recovery audit and information technology services for
the Company, in a tax-free reorganization in exchange for 307,482 newly-issued
shares of the Company's no par value, voting common stock, assumption of
$1,000,000 in debt (repaid upon assumption), and forgiveness of $2,048,000 of
advances to the independent contractor outstanding as of the acquisition date.
In connection with such issuance, the parties entered into a Stock Ownership and
Restriction Agreement. The Agreement provides, among other things, limited
"call" options as to such shares upon the termination of the recipient's
employment, each at a purchase price equal to the fair market value of the
shares, subject to certain conditions.
On July 26, 2001, the Company announced that the board of directors had
approved a letter of intent to be acquired by The Profit Recovery Group
International, Inc. ("PRG") in an all-stock transaction, which is expected to
close in the fourth quarter of 2001. The combination is subject to finalization
of a definitive agreement, approval of both companies' shareholders, approval
from PRG's bank syndicate, and customary regulatory approvals.
On September 1, 2001, the Company acquired substantially all of the assets
and certain specified, related liabilities of an independent contractor that
performed recovery audit services for the Company in exchange for a $3.0 million
note payable in six equal quarterly installments beginning January 1, 2002
bearing interest at the rate of 7.0% per annum.
F-20
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 6,071 $ 2,179
Accounts receivable, net.................................. 15,233 16,794
Commission advances, net.................................. 1,491 2,058
Principal associate advance............................... -- 550
Prepaids and other current assets......................... 1,930 1,512
------- -------
Total current assets.............................. 24,725 23,093
Property and equipment, net................................. 12,643 11,781
Other assets:
Goodwill, net............................................. 31,511 25,226
Other assets.............................................. 1,014 768
------- -------
Total assets...................................... $69,893 $60,868
======= =======
Current liabilities:
Accounts payable.......................................... $ 922 $ 3,529
Accrued compensation...................................... 879 1,868
Accrued commissions and royalties......................... 7,114 9,543
Other accrued expenses.................................... 6,556 4,656
Notes payable, current portion............................ 8,461 6,422
Capital lease obligations, current portion................ 682 620
Other current liabilities................................. 63 124
------- -------
Total current liabilities......................... 24,677 26,762
Notes payable, net of current portion....................... 33,763 30,074
Capital lease obligations, net of current portion........... 971 1,388
------- -------
Total liabilities................................. 59,411 58,224
------- -------
Common stock put options.................................... 3,086 2,458
Stockholders' equity: (Notes 3 and 5)
Common stock.............................................. 7,474 2,102
Accumulated deficit....................................... (688) (2,129)
Accumulated other comprehensive income.................... 610 213
------- -------
Total stockholders' equity........................ 7,396 186
------- -------
Commitments and contingencies (Note 7)
Total liabilities and stockholders' equity........ $69,893 $60,868
======= =======
See accompanying notes to unaudited combined financial statements.
F-21
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Revenues, net............................................... $100,761 $102,542
Cost of revenues............................................ 65,651 67,364
Selling, general and administrative expenses................ 35,564 34,396
-------- --------
Operating income (loss)........................... (454) 782
-------- --------
Interest income............................................. 185 295
Interest expense............................................ (2,462) (2,535)
Settlement of litigation (Note 7)........................... 3,650 --
Other income (expense), net................................. 10 (72)
-------- --------
Interest and other income (expense), net............... 1,383 (2,312)
-------- --------
Income (loss) before income taxes................. 929 (1,530)
-------- --------
Foreign tax benefit (Note 6)................................ 512 --
-------- --------
Net income (loss)................................. $ 1,441 $ (1,530)
======== ========
See accompanying notes to unaudited combined financial statements.
F-22
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 1,441 $(1,530)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 6,700 5,605
Non-cash interest expense.............................. 394 478
Non-cash stock compensation expense.................... 628 837
Changes in assets and liabilities, net of working capital
from acquisitions:
Accounts receivable, net............................... 1,711 (2,610)
Prepaid expenses and other current assets.............. 423 (1,857)
Principal associate advances........................... (1,498) --
Commission advances, net............................... 1,044 256
Other assets........................................... 235 965
Accounts payable and other accrued expenses............ (587) 3,315
Accrued commissions and royalties...................... (2,429) 999
Accrued compensation................................... (1,049) 389
Other current liabilities.............................. (61) (155)
------- -------
Net cash provided by operating activities......... 6,952 6,692
------- -------
Cash flows used in investing activities --
purchase of property and equipment........................ (2,097) (4,474)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 16 --
Proceeds from issuance of notes payable, net.............. 5,548 2,268
Principal payments on notes payable....................... (5,414) (3,741)
Principal payments on capital lease obligations........... (355) (280)
Distributions to stockholders............................. -- (1,470)
Net loans provided to stockholders........................ (758) (263)
------- -------
Net cash used in financing activities............. (963) (3,486)
------- -------
Net increase (decrease) in cash and cash equivalents...... 3,892 (1,268)
Cash and cash equivalents at beginning of the period...... 2,179 3,910
------- -------
Cash and cash equivalents at the end of the period........ $ 6,071 $ 2,642
======= =======
Supplemental disclosures of non-cash investing and financing
activities:
In conjunction with the acquisition of businesses:
Fair value of assets acquired.......................... $12,604 $ 8,203
Forgiveness of advances................................ $ 2,048 --
Notes payable to seller................................ $ 5,200 $ 8,203
Common stock issued to seller.......................... $ 5,356 --
Cash paid for:
Interest.................................................. $ 1,851 $ 1,277
======= =======
See accompanying notes to unaudited combined financial statements.
F-23
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
The accompanying unaudited combined financial statements of Howard Schultz
& Associates International, Inc. include the accounts of Howard Schultz &
Associates International, Inc. ("HSA-Texas"), its majority-owned subsidiaries,
Howard Schultz & Associates Europe N.V., Howard Schultz & Associates de Mexico,
S.A. de C.V., Howard Schultz & Associates International (Thailand) Limited, HS&A
Imaging, Inc. ("HS&A Imaging") and companies which were under majority common
control and ownership by the controlling stockholders/family members of
HSA-Texas, which are Howard Schultz, Andrew H. Schultz and the Andrew H. Schultz
Irrevocable Trust (the "Schultz Trust"). These entities include Howard Schultz &
Associates (Canada) Inc. ("HSA-Canada"), Howard Schultz & Associates (Australia)
Inc. ("HSA-Australia"), Howard Schultz & Associates (Asia) Limited ("HSA-Asia"),
and HS&A International Pte Ltd ("HSA-Singapore"). All entities included in the
combined financial statements are collectively referred to herein as the
"Company". All significant intercompany balances and transactions have been
eliminated in combination.
The accompanying unaudited combined financial statements of the Company for
the nine months ended September 30, 2001 and 2000 have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Significant accounting policies followed by the Company were disclosed
in the notes to the combined financial statements for the year ended December
31, 2000. Operating results for interim periods are not necessarily indicative
of the results that may be expected for the full year. The accompanying
financial statements are for interim periods and should be read in conjunction
with the 2000 audited combined financial statements of the Company.
Certain reclassifications have been made to the 2000 amounts to conform to
the presentation in 2001.
2. RELATED PARTY TRANSACTION
As of September 30, 2001 and December 31, 2000, the Company owed
$10,350,000 and $5,050,000, respectively, to Howard Schultz. The Company paid
Mr. Schultz interest in the amount of $306,000 during the nine-month period
ended September 30, 2001.
3. STOCKHOLDERS' EQUITY
During the nine-month period ended September 30, 2001, the Company granted
options to employees and non-employees to purchase 331,754 shares and 37,638
shares, net of cancellations, of the common stock of HSA-Texas, respectively, at
an exercise price of $9.06. Additionally, the Company awarded stock grants
totaling 23,179 shares to certain employees, and granted 64,569 stock
appreciation rights, at a grant price of $9.06 per stock appreciation right, to
certain employees in international markets.
4. SEGMENT AND RELATED INFORMATION
The Company has one reportable operating segment consisting of accounts
payable services. Accounts payable services consist of the review of client
accounts payable disbursements to identify and recover overpayments. This
operating segment includes accounts payable services provided to retailers,
wholesale distributors and various other types of business entities. The Company
performs these accounts payable services in the United States, Canada, Mexico,
Australia, and throughout Europe and Asia, including France, Spain and Hong
Kong.
F-24
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Geographical information for the nine months ended September 30, 2001 and
2000 is as follows:
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
(IN THOUSANDS)
REVENUES
United States............................................... $ 91,762 $ 96,055
Europe...................................................... 4,102 3,065
Mexico...................................................... 662 299
Australia................................................... 1,317 1,054
Canada...................................................... 2,161 1,595
Asia........................................................ 757 474
-------- --------
Revenues, net..................................... $100,761 $102,542
======== ========
Geographical information as of September 30, 2001 and 2000 is as follows:
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
(IN THOUSANDS)
LONG-LIVED ASSETS
United States............................................... $13,000 $11,154
Europe...................................................... 219 114
Mexico...................................................... 105 90
Australia................................................... 42 76
Canada...................................................... 101 119
Asia........................................................ 190 236
------- -------
Total long-lived assets..................................... $13,657 $11,789
======= =======
For purposes of the geographical information above, revenues are
attributable to the individual countries based on the location of the customer.
Long-lived assets are attributed to the individual countries based on the
physical location of the assets. Long-lived assets are primarily property and
equipment.
5. MERGERS AND ACQUISITIONS
On August 3, 2001, the Company entered into a definitive agreement to be
acquired by The Profit Recovery Group International, Inc. ("PRG") in an
all-stock transaction, which is expected to close in the fourth quarter of 2001.
The combination is subject to approval of both companies' shareholders, approval
from PRG's bank syndicate, and customary regulatory approvals.
In connection with the announced acquisition by PRG, the board of directors
of the Company terminated the Company's Management Incentive Plan. On August 22,
2001, the board of directors approved the issuance of options to purchase 79,000
shares of the common stock of HSA-Texas, at an exercise price of $9.06, to the
participants in the Management Incentive Plan.
Also, in July 2001, the Company acquired substantially all of the assets
and certain, specified related liabilities, of an independent contractor of the
Company that performed recovery audit and information technology services for
the Company, in a tax-free reorganization in exchange for 307,482 newly-issued
shares of the Company's no par value, voting common stock, assumption and
payment of $1,000,000 in debt (repaid upon assumption) and forgiveness of
$2,048,000 of advances to the independent contractor outstanding as of the
acquisition date.
F-25
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On September 1, 2001, the Company acquired substantially all of the assets
and certain specified, related liabilities of an independent contractor that
performed recovery and audit services for the Company in exchange for a $3.0
million note payable in six equal quarterly installments beginning January 1,
2002 with simple interest at the rate of 7.0% per annum.
On September 17, 2001, the Company acquired substantially all of the assets
and certain specified liabilities of an independent contractor that performed
recovery audit services for the Company in exchange for a $1.2 million note
payable in six equal quarterly installments beginning January 1, 2002 with
simple interest at a rate of 7.0% per annum.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, results of operations of the acquired entities have
been included in the accompanying combined financial statements from the dates
of acquisition. The purchase prices were allocated to tangible assets acquired
and intangible assets based on the estimated fair values at the respective dates
of acquisition. The Company incurred no significant direct costs of acquisition.
A summary of the total purchase price and purchase price allocation for
acquisitions made in July and September 2001 is as follows (in thousands):
Net tangible assets......................................... $ 2,168
Goodwill.................................................... 10,436
-------
Total purchase price.............................. $12,604
=======
Unaudited pro forma operating results as though the acquisitions made in
July and September, 2001 had occurred on January 1, 2000, with adjustments
primarily to give effect to interest expense related to the promissory notes,
are as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Revenues.................................................... $100,761 $102,542
Operating income (loss)..................................... (890) 640
Net income (loss)........................................... $ 808 $ (1,946)
6. FOREIGN TAX BENEFIT
During the third quarter of 2001, the Company collected $512,000 in taxes
paid on its behalf to the Inland Revenue taxing authority by its licensee in the
United Kingdom. The refund was a result of inquiries made by the Company, which
caused Inland Revenue to reverse its position on the taxability of royalties
remitted by the licensee. The Company had not recorded a receivable in prior
periods, due to the uncertainty of collection.
7. COMMITMENTS AND CONTINGENCIES
In May 2001, the Company entered into a settlement agreement with respect
to litigation pending at December 31, 2000, involving a group of independent
contractors formerly associated with the Company. Pursuant to the agreement, the
Company was relieved of certain obligations to pay accrued commissions to those
contractors, which amounted to $3.7 million at the date of settlement. The
Company has no further obligations with respect to those contractors at
September 30, 2001.
The Company has contingent liabilities resulting from litigation, claims
and commitments incidental to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position, results of operations or liquidity of the Company.
F-26
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has contingent liabilities in connection with two Letters
of Credit relating to a loan agreement and a leasing agreement for Howard
Schultz & Associates Europe, N.V. These letters of credit are partially
collateralized by a certificate of deposit of the Company and personal funds of
a shareholder. The unsecured amounts of these contingent liabilities of the
Company were $686,000 and $1,279,000 at September 30, 2001, and December 31,
2000, respectively.
8. SUBSEQUENT EVENTS
On November 15, 2001, HS&A Europe N.V., a subsidiary of the Company,
entered into a purchase agreement to acquire 98% of the stock of Howard Schultz
& Partner (Deutschland) GmbH, the licensee of HSA-Texas in Germany and Austria,
for a purchase price equal to the sum of 98% of Deutschland's shareholders'
equity at December 31, 2001 and an amount equal to 23% of Deutschland's receipts
during the period from July 1, 1999 through June 30, 2001. The remaining 2% of
Howard Schultz & Partner (Deutschland) GmbH is owned by Howard Schultz.
On November 21, 2001, HS&A Acquisition - UK, Inc., a subsidiary of the
Company, acquired all of the stock of Tamebond Ltd., the parent of Howard
Schultz & Associates (International) Ltd., which was the licensee of HSA-Texas
in the United Kingdom, and all of the stock of J&G Associates Ltd., an
independent contractor that provides services with respect to the business of
HSA-Texas in the United Kingdom, in exchange for a $7.9 million note payable and
a $3.6 million note payable, each bearing interest at the rate of 5.5% per annum
with accrued interest payable in three semi-annual installments beginning May
21, 2002 plus consideration for each company's net assets, which has not yet
been determined.
F-27
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
the 11th day of December, 2001, by and among THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC., a Georgia corporation ("PRGX"), HOWARD SCHULTZ & ASSOCIATES
INTERNATIONAL, INC., a Texas corporation ("HSA-Texas"), HOWARD SCHULTZ, a Texas
resident ("H. Schultz"), ANDREW H. SCHULTZ, a Texas resident ("A. Schultz"),
each of the trusts identified on the signature pages hereto (collectively, the
"Trusts" and individually a "Trust") (each of H. Schultz, A. Schultz and the
Trusts being collectively, the "Shareholders" and individually a "Shareholder"),
and H. SCHULTZ, as representative of the Shareholders ("Shareholders'
Representative").
WITNESSETH:
WHEREAS, PRGX, HSA-Texas, the Shareholders and the Shareholders'
Representative are parties to that certain Agreement and Plan of Reorganization
dated as of August 3, 2001 (the "Original Agreement"); and
WHEREAS, the parties to the Original Agreement wish to amend and restate
the Original Agreement in its entirety, as provided herein;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby amend and restate the Original Agreement, as
follows:
WHEREAS, HSA-Texas is in the business of (a) auditing accounts payable
records, occupancy costs, vendor statements and direct to store delivery records
to recover overpayments that are a result of missed credits, duplicated
payments, overlooked allowances, incorrect invoices and other discrepancies,
through its Global Data Services (GDS) Center, Associate Support Center,
Occupancy Cost Audit Group, Statement Audit Group, Direct to Store Delivery
Group and Commercial Audit Group and (b) operating a document imaging service
bureau and selling and dealing in electronic document imaging and microfilming
services (collectively, the "Business");
WHEREAS, HSA-Texas conducts the Business in the United States and in
non-U.S. countries (a) through those first-tier and second-tier majority owned
subsidiaries of HSA-Texas listed on Schedule 1(a) attached hereto (collectively,
the "Subsidiaries" and individually a "Subsidiary"; and the Subsidiaries,
collectively with HSA-Texas, being the "Companies" and individually, a
"Company") and (b) through licenses granted to those entities listed on Schedule
1(b) attached hereto (collectively, the "Licensees" and individually, a
"Licensee");
WHEREAS, the parties hereto desire to enter into a plan of reorganization
qualifying under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"), whereby HSA-Texas shall transfer to PRGX, and PRGX shall
acquire, substantially all of the assets of HSA-Texas used or held for use in
the Business in exchange for shares of common stock of PRGX, no par value per
share ("PRGX Common Stock"), pursuant to the terms of this Agreement (the
"Acquisition");
WHEREAS, PRGX intends to acquire solely in exchange for unregistered shares
of PRGX Common Stock, concurrently with the consummation of the Acquisition, (a)
substantially all of the outstanding equity of HS&A International Pte Ltd., a
Singapore corporation and a Licensee ("HSA Singapore"), from H. Schultz and (b)
all of the outstanding equity of (i) Howard Schultz & Associates (Asia) Limited,
a Hong Kong corporation and a Licensee ("HSA Asia"), from H. Schultz, (ii)
Howard Schultz & Associates (Australia), Inc., a Texas corporation and a
Licensee ("HSA Australia"), from the Andrew H. Schultz Irrevocable Trust (the
"AHS Irrevocable Trust") and (iii) Howard Schultz & Associates (Canada), Inc., a
Texas corporation and a Licensee ("HSA Canada"), from the AHS Irrevocable Trust,
pursuant to an
A-1
Agreement and Plan of Reorganization Pursuant to Section 368(a)(1)(B) of the
Internal Revenue Code, as Amended, dated August 3, 2001, as amended and restated
by agreement dated as of December 11, 2001 (collectively, HSA Singapore, HSA
Asia, HSA Australia and HSA Canada being the "Affiliated Foreign Operating
Companies," such agreement, as amended and restated, being the "Stock
Agreement," and such acquisitions collectively being the "Concurrent
Acquisitions");
WHEREAS, prior to or at the Closing, each of the Shareholders shall
contribute all of the shares of common stock of each Subsidiary owned by him or
it to the direct parent corporation of such Subsidiary holding a majority of the
capital stock of such Subsidiary or such parent corporation's designee without
consideration as provided in Section 4.20 hereof;
WHEREAS, as of the date hereof, HSA-Texas' authorized capital stock
consists of 12,000,000 shares of common stock, no par value per share, 2,000,000
of which have voting rights ("HSA-Texas Voting Common Stock") and 10,000,000 of
which have no voting rights except where Texas law requires ("HSA-Texas Non-
Voting Common Stock" and collectively with the HSA-Texas Voting Common Stock,
the "HSA-Texas Common Stock") and the Shareholders own a majority of the
outstanding shares of HSA-Texas Common Stock;
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the transactions contemplated herein and certain additional
agreements related thereto;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Appendix A attached hereto contains a list of the location, by Section
reference, of the definition of each capitalized term used herein.
ARTICLE 1
REORGANIZATION
1.1 Assets to Be Acquired. Subject to and upon the terms and conditions
set forth herein, PRGX agrees to acquire from HSA-Texas, and HSA-Texas agrees to
transfer to PRGX, as of the Closing Date, except as provided in Section 1.2
hereof, all right, title and interest in and to the tangible and intangible
assets of HSA-Texas used or held for use in the conduct of the Business as of
the Closing Date, including assets which have been fully depreciated, amortized
and/or expensed, whether or not reflected on the Estimated Balance Sheet, free
and clear of all claims, liens, encumbrances, security interests and similar
interests of any kind or nature whatsoever except for the Permitted Encumbrances
(collectively, the "Acquired Assets") including the following:
(a) all machinery, appliances, equipment, including computer hardware
(and as to each computer, the software licensed for use thereon), tools,
supplies, leasehold improvements, furniture and fixtures, used or held for
use by HSA-Texas in connection with the Business as of the Closing Date,
including those items listed on Schedule 1.1(a) attached hereto
(collectively, the "Fixed Assets");
(b) all written and oral "Contracts" (which, for purposes hereof,
shall include all written or oral contracts with Clients (collectively, the
"Client Contracts"), employment agreements, agreements with Associates,
agreements with independent contractors, agreements with Licensees, the DSD
Acquisition Agreements, the U.K. Acquisition Agreements and the German
Acquisition Agreement (as defined herein and collectively, the "Other
Acquisition Agreements") and all other agreements and instruments relating
to the Acquired Assets and the operation of the Business to which HSA-Texas
is a party or to which the Acquired Assets are subject or bound, except for
any Lease) which PRGX specifically agrees to assume, which assumption shall
be evidenced by inclusion of such Contract by PRGX on a schedule to the
Assignment and Assumption Agreement (collectively, "Assigned Contracts");
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(c) all accounts receivable, notes receivable, employee, independent
contractor and associate advances made by HSA-Texas (collectively,
"Accounts Receivable") and all work in progress including all unbilled
claims of HSA-Texas (collectively, the "Work in Progress");
(d) all benefits accruing to HSA-Texas as lessee or sublessee under,
those "Leases" (which, for purposes hereof, means all written and oral
leases or subleases in respect of the Business and to which HSA-Texas is a
party, including all real property and equipment leases), which PRGX
specifically agrees to assume, which assumption shall be evidenced by
inclusion of such Lease by PRGX on a schedule to the Assignment and
Assumption Agreement (collectively, the "Assigned Leases");
(e) all intellectual property used or owned by HSA-Texas or the
Business, including:
(i) the trade names and trademarks "Howard Schultz &
Associates(R)," "Howard Schultz & Associates International(R)," "HS&A",
"SUREF!ND(R)" "DIRECTF!ND(R)", "NETF!ND", and any other trade names,
trademarks, service marks, brand names, certification marks, trade dress
and other indications of origin, whether registered or unregistered, the
goodwill associated with the foregoing and registrations in any
jurisdiction, and applications to register in any jurisdiction,
including any extension, modification or renewal of any such
registration or application;
(ii) inventions, discoveries and ideas, whether patentable or not,
in any local, state, U.S. or non-U.S. jurisdiction;
(iii) patents, applications for patents (including, without
limitation, divisions, continuations, continuations in part and renewal
applications), and any renewals, extensions or reissues thereof, in any
local, state, U.S. or non-U.S. jurisdiction;
(iv) nonpublic information, trade secrets and confidential
information and rights in any jurisdiction to limit the use or
disclosure thereof by any person;
(v) writings and other works, whether copyrightable or not, in any
local, state, U.S. or non-U.S. jurisdiction;
(vi) registrations or applications for registration of copyrights
in any local, state, U.S. or non-U.S. jurisdiction, and any renewals or
extensions thereof, and all unregistered copyrighted works;
(vii) all computer and electronic data processing programs and
software programs and systems and related documentation, research
projects, computer software under development, software concepts owned
and proprietary intellectual property, processes, formulae and
algorithms, including all intellectual property used in the ownership,
marketing, development, maintenance, support and delivery of the
software and presently owned or licensed by HSA-Texas which are used or
proposed to be used or reserved for use by HSA-Texas in the Business
(including SUREF!ND(R) software, DIRECTF!ND(R)software, NETF!ND(TM)
software, and any other computer software programs and databases
developed by or for HSA-Texas and the Business or licensed to them) (the
"Software");
(viii) all intellectual property inventions, improvements,
developments, modifications and derivative works, whether or not reduced
to practice, which HSA-Texas, Shareholders, or any employee of HSA-Texas
or Associate, together or individually, alone or in combination with
each other or any other person, has made which relates to the Business
(collectively, "Developments");
(ix) all know-how, trade secrets, formulas, confidential
information, customer lists, technical information, data, reports,
deliverables, source code, object code, process technology, plans,
drawings and blueprints;
(x) and any similar intellectual property or proprietary rights,
including those set forth on Schedule 5.19(a) attached hereto
(collectively, the "Intellectual Property Assets");
(f) all of HSA-Texas' licenses, consents, permits, variances,
certifications and approvals of all Governmental Entities, to the extent
assignable, including those listed on Schedule 1.1(f) attached hereto
(collectively, the "Licenses and Permits");
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(g) all claims, security and other deposits, refunds, prepaid
expenses, causes of action, lawsuits, choses in action, rights of recovery
and rights to indemnification, warranty rights, rights under non-
disclosure, non-competition, non-solicitation, and similar agreements, and
rights of set off in respect of the Business and Acquired Assets, including
those items listed on Schedule 1.1(g) attached hereto (collectively, the
"Deposits and Other Rights");
(h) all of HSA-Texas' client and supplier lists, all client files, all
files related to employees, consultants or independent contractors, all
computer data bases and other business records relating to the Acquired
Assets other than HSA-Texas' corporate minute books and stock records;
(i) all of HSA-Texas' telephone numbers and the directory advertising
for such telephone numbers;
(j) all of HSA-Texas' bank accounts, lock boxes (including the
contents thereof), safety deposit boxes (including the contents thereof),
including those listed on Schedule 1.1(j) attached hereto;
(k) all of HSA-Texas' cash on hand, cash in bank or other financial
institution accounts and cash equivalents;
(l) all of HSA-Texas' equity ownership interests, including shares of
voting and non-voting common and preferred stock, in all of the
Subsidiaries, and interests in any joint ventures; and
(m) all of HSA-Texas' other tangible personal property and intangible
property used or held for use in connection with the Business, including
any and all goodwill and going concern value of the Business and the
Companies.
1.2 Excluded Assets. Notwithstanding anything to the contrary contained in
Section 1.1 hereof, PRGX shall not acquire, and HSA-Texas shall not transfer to
PRGX, the following assets (collectively, the "Excluded Assets"):
(a) HSA-Texas' corporate minute and stock books;
(b) any assets held under any pension, profit sharing or other
Employee Benefit Plan;
(c) the amount of cash, up to a maximum of $7,000, required for
funding termination obligations, if any, of HSA-Texas in respect of the
HSA-Texas 401k Plan;
(d) the two parcels of real property and the improvements thereon used
on the date hereof as the HSA-Texas headquarters in Dallas, Texas, located
at the addresses and with the legal descriptions, as set forth on Schedule
1.2 attached hereto (such real property and improvements collectively being
the "Dallas Headquarters");
(e) the amount of any cash received by HSA-Texas after the date hereof
attributable to the exercise by employees of HSA-Texas of any options to
purchase HSA-Texas Common Stock; and
(f) an amount of cash, and to the extent cash is insufficient,
accounts receivable of HSA-Texas (the "Retained Accounts") having a face
amount, which in the reasonable estimation of the Shareholders, as agreed
to by PRGX, is in an amount sufficient to enable the Shareholders to pay
Flow-Through Taxes (but not to pay taxes on any gains or income on the
transactions contemplated herein) resulting from normal operations in the
ordinary course of business for the period beginning on January 1, 2001
through the Closing Date and any Flow-Through Taxes attributable to the
collection of the Retained Accounts; provided in the event that the amount
of Flow-Through Taxes paid is less than the face amount of the retained
accounts receivable, HSA-Texas shall pay PRGX the amount of such excess in
cash or by return to PRGX of any such uncollected accounts receivable
promptly after payment of the Flow-Through Taxes.
1.3 Conveyance of Assets. The conveyance, transfer and delivery of the
Acquired Assets shall be made by HSA-Texas and accepted by PRGX as of the
Closing Date, as follows:
(a) HSA-Texas shall execute and deliver to PRGX a bill of sale in the
form of Exhibit 1.3(a) attached hereto and made a part hereof (the "Bill of
Sale");
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(b) HSA-Texas and PRGX shall execute and deliver to PRGX an Assignment
and Assumption Agreement in the form of Exhibit 1.3(b) attached hereto and
made a part hereof (the "Assignment and Assumption Agreement") with respect
to the Assumed Liabilities;
(c) HSA-Texas shall execute and deliver to PRGX a trademark assignment
in the form of Exhibit 1.3(c)-1 attached hereto and made a part hereof and
a copyright assignment in the form of Exhibit 1.3(c)-2 attached hereto and
made a part hereof; and
(d) HSA-Texas shall execute and deliver such additional instruments of
transfer, conveyance and assignment on the Closing Date, as counsel to
HSA-Texas and counsel to PRGX shall mutually deem necessary or appropriate.
1.4 Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place at 10:00 a.m. Eastern time on a date to be specified
by the parties, which shall be no later than the tenth business day after the
satisfaction or waiver (subject to applicable law) of the conditions set forth
in Article 8 hereof, unless another time or date is agreed to by the parties
hereto (the "Closing Date"). The Closing will be held at the offices of Arnall
Golden Gregory LLP, Atlanta, Georgia. The Closing shall be effective as of 12:01
a.m., Eastern time, on the Closing Date.
ARTICLE 2
CONSIDERATION; ASSUMPTION OF LIABILITIES
2.1 Consideration.
(a) Determination of Consideration. Subject to the terms and
conditions of this Agreement and subject to the possible forfeiture of
certain shares of PRGX Common Stock as provided in Section 2.5 hereof, the
aggregate consideration (the "Consideration") payable to HSA-Texas for the
Acquired Assets shall be determined as follows:
(i) 14,724,338 shares of PRGX Common Stock;
(ii) less that number of shares of PRGX Common Stock determined, as
follows:
(A) first, calculate the aggregate "in the money" value of
HSA-Texas Options outstanding on the Closing Date (including both the
HSA-Texas Options of Persons Not Hired and HSA-Texas Options which
are Options to be Assumed) in accordance with Section 2.1(b) below;
(B) second, calculate the aggregate "in the money" value of the
HSA-Texas SARs outstanding on the Closing Date in accordance with
Section 2.1(b) below;
(C) third, provided that such sum is a positive number, add the
result of the calculations in Section 2.1(a)(ii)(A) and Section
2.1(a)(ii)(B) above, and divide the sum by the average closing price
per share of PRGX Common Stock (as reported in The Wall Street
Journal) for the 5 consecutive trading days ending on the fifth
trading day immediately preceding the Closing Date (the "PRGX Average
Price").
(b) "In the Money" Calculation. The "in the money" value of HSA-Texas
Options and HSA-Texas SARs is determined, as follows:
(i) multiply 14,724,338 by the PRGX Average Price;
(ii) divide the product in (i) above by the sum of (A) the number
of shares of HSA-Texas Common Stock outstanding on the Closing Date, (B)
the number of shares of HSA-Texas Common Stock subject to HSA-Texas
Options (both HSA-Texas Options of Persons Not Hired and Options to be
Assumed) outstanding on the Closing Date, and (C) and the number of HSA-
Texas SARs outstanding on the Closing Date;
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(iii) the quotient in (ii) above is the "Per Share Value" of the
gross consideration paid by PRGX for HSA-Texas' Acquired Assets (before
reducing such gross consideration by the "in the money" value of the
HSA-Texas Options and HSA-Texas SARs outstanding on the Closing Date);
(iv) the per share "in the money" value of each HSA-Texas Option
and each HSA-Texas SAR equals the Per Share Value less the respective
exercise price of such HSA-Texas Option and the grant price of such
HSA-Texas SARs;
(v) the aggregate "in the money value" of the HSA-Texas Options or
HSA-Texas SARs, as the case may be, equals the product of the per share
"in the money value" of each HSA-Texas Option or each HSA-Texas SAR
granted at a particular exercise or grant price, times the total number
of HSA-Texas Options or HSA-Texas SARs outstanding at Closing granted at
such exercise or grant price; and
(vi) the sum of the aggregate "in the money value" of the HSA-Texas
Options and the HSA-Texas SARs divided by the PRGX Average Price
determines the number of shares of PRGX Common Stock to be deducted in
Section 2.1(a)(ii) above.
(c) Payment to HSA-Texas at Closing. On the Closing Date, HSA-Texas
shall be entitled to receive a stock certificate or certificates for that
number of shares of PRGX Common Stock equal to the Consideration; provided
that in lieu of delivering fractional shares, PRGX shall deliver to
HSA-Texas an amount in cash based on the PRGX Average Price.
2.2 Assumption of Liabilities.
(a) Assumed Liabilities. PRGX agrees to assume on the Closing Date,
only the following liabilities outstanding as of the Closing Date, to the
extent not included in Retained Liabilities (collectively, the liabilities
described in Sections 2.2(a) and 2.2(b) hereof being the "Assumed
Liabilities"): all liabilities and obligations of HSA-Texas to the extent
disclosed either on the December 31, 2000 balance sheet contained in the
Audited Statements (reduced by the amount such liabilities have been paid
prior to the Closing Date) or on the Estimated Balance Sheet, prepared as
provided herein and all liabilities and obligations of HSA-Texas incurred
by HSA-Texas in the ordinary course of Business after the Closing Date
consistent with past practices, and the amount of principal and interest
outstanding on the Closing Date in respect of the Assumed Schultz Loan
(without duplication of any other Assumed Liability). For purposes hereof,
"Assumed Schultz Loan" means that portion of HSA-Texas' obligations to H.
Schultz as of the Closing Date solely for amounts loaned to HSA-Texas for
the following, less $3,048,000 (paid by HSA-Texas in connection with the
asset acquisition of Lowrey, Inc.):
(i) normal operations in the ordinary course of the Business to be
acquired pursuant hereto, including amounts expended by the Business in
acquisitions of assets utilized by the Business (but will not include
amounts paid or to be paid (A) equal to cash distributions to
Shareholders after December 31, 2000, other than normal compensation and
expense reimbursement, (B) after December 31, 2000 in respect of any
asset or liability designated an Excluded Asset or a Retained Liability
and (C) that are not directly related to the Business to be acquired by
PRGX pursuant hereto, all of which such amounts will not be deemed part
of the Assumed Schultz Loan, but will include amortization of HSA-Texas'
mortgages in respect of the Dallas Headquarters from December 31, 2000
through the Closing Date);
(ii) the aggregate amount, if any, paid to the respective sellers
thereof prior to the Closing Date pursuant to the DSD Acquisition
Agreements and the U.K. Acquisition Agreements, as approved by PRGX; and
if the German Acquisition has closed prior to the Closing, the aggregate
amount paid to the sellers thereof prior to the Closing Date pursuant to
the German Acquisition Agreement, as approved by PRGX;
(iii) that portion of the aggregate amount paid by HSA-Texas to the
holders of HSA-Texas SARs to extinguish their rights thereunder prior to
or concurrently with the Closing which
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represents the "in the money" value of the HSA-Texas SARs, together with
applicable withholding amounts,
(iv) that portion of the aggregate amount paid by HSA-Texas to the
Optionees who are Persons Not Hired to cancel their HSA-Texas Options
prior to or concurrently with the Closing which represents the "in the
money value" of all such HSA-Texas Options of Persons Not Hired,
together with applicable withholding amounts,
(v) all HSA-Texas Transaction Expenses paid prior to the Closing
Date, and
(vi) principal and interest payments paid by HSA-Texas since
December 31, 2000 and prior to the Closing Date on the
acquisition-related notes payable described in Note 3 of the Audited
Statements (the "Acquisition-Related Notes").
(b) Certain Assumed Liabilities. Without limiting the generality of
the foregoing, PRGX shall assume on the Closing Date the following
liabilities of HSA-Texas:
(i) all outstanding obligations and liabilities of HSA-Texas
arising from and after the Closing Date under the Assigned Leases and
the Assigned Contracts (which shall include the Other Acquisition
Agreements and other documents executed in connection therewith as
approved by PRGX, but shall not include, except as provided in Section
4.27 hereof, any agreements or understandings providing for expense
advancement in connection with indemnification, or other
indemnification, of officers and/or directors of any Company, including
the Advancement Agreements between HSA-Texas and Michael Glazer,
Stephanie Holloway, Andrew Schultz and Howard Schultz previously
delivered to PRGX);
(ii) the aggregate principal and accrued interest amount of the
Commission Buy-Down Payments, as agreed to by PRGX, to the extent
accrued on the Estimated Balance Sheet and outstanding on the Closing
Date;
(iii) commission amounts payable to Associates or commissioned
employees whether or not they accept employment with PRGX or its
designee upon collection of Work in Progress outstanding on the Closing
Date which is converted to accounts receivable after the Closing Date,
net of any deductions attributable to Vendor Paybacks (except to the
extent any Associate has agreed in writing to accept a Commission
Buy-Down Payment in lieu of such commission amounts); and
(iv) amounts owed under HSA-Texas severance policies (including
policies with respect to accrued, but unused, vacation and/or sick pay)
in effect as of the date hereof to any employee of the Companies to whom
PRGX and HSA-Texas have mutually agreed not to offer employment by PRGX
or any of its affiliates to the extent such amounts are specified on
Schedule 2.2(b)(iv) (the "Assumed Severance Amount").
(c) Schultz Loan Worksheet. At least 3 days prior to the Closing,
HSA-Texas shall prepare and deliver to PRGX a detailed estimated worksheet,
certified by the chief financial or other executive officer of HSA-Texas as
true, correct and complete, establishing the amount of the Assumed Schultz
Loan, showing (i) the balance of the amount owed by HSA-Texas to H. Schultz
as of December 31, 2000, (ii) the total cash received by HSA-Texas from H.
Schultz from December 31, 2000 through the Closing Date, (iii) the amount
repaid by HSA-Texas to H. Schultz during the period from December 31, 2000
through the Closing Date, (iv) any payments by HSA-Texas after December 31,
2000 through the Closing Date that would not qualify, under the provisions
of Sections 2.2(a)(i)-(iv) hereof, as funds that are included within the
definition of the Assumed Schultz Loan (the "Schultz Loan Worksheet").
Concurrently with the Closing, PRGX shall assume the Assumed Schultz Loan
and make an initial payment to H. Schultz of $7,000,000 of the Assumed
Schultz Loan. PRGX will have 5 business days after the Closing to review
and consult with HSA-Texas and H. Schultz about the Schultz Loan Worksheet.
Promptly after the end of such 5 business day period, either (A) PRGX shall
pay H. Schultz the amount, if any, in excess of $7,000,000 of the Assumed
Schultz Loan as set forth in the Schultz Loan Worksheet or as otherwise
agreed to by PRGX and H. Schultz within such 5 business day period, or
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(B) H. Schultz shall repay to PRGX the amount, if any, that he was paid at
Closing in excess of the amount agreed to by PRGX and H. Schultz as
representing the Assumed Schultz Loan within such 5 business day period.
All amounts paid by PRGX to H. Schultz, or repaid by H. Schultz to PRGX,
under this Section 2.2 shall be paid by wire transfer in immediately
available funds to an account designated by H. Schultz to PRGX, or by PRGX
to H. Schultz, as the case may be, in writing prior to the Closing;
provided that such payments will be made without prejudice to each parties'
rights under Section 2.2(d) below.
(d) Post-Closing Review. During the 18 months following the Closing
Date, PRGX and H. Schultz shall each have the right to request that the
Accountants, as defined in Section 4.17(d) hereof, review the Schultz Loan
Worksheet and the amount of the Assumed Schultz Loan. In the event that
such determination shows that the amount PRGX paid under Section 2.2(c)
above was incorrect and that payments are required by PRGX or by H.
Schultz, any such payment shall be made by H. Schultz or PRGX to the other,
as the case may be, within 15 days after completion of the review by the
Accountants, and PRGX's payment, after satisfying any such post-Closing
review rights and payment adjustments, shall be in full and final
settlement of all amounts of principal and accrued interest owed by PRGX to
H. Schultz in respect of the Assumed Schultz Loan. The fees and expenses
charged by the Accountants in respect of such review shall be borne equally
by PRGX and H. Schultz.
2.3 Retained Liabilities. The liabilities and obligations which shall be
retained by HSA-Texas shall consist of all liabilities of HSA-Texas that are not
set forth on the Estimated Balance Sheet (other than the liabilities comprising
the Assumed Schultz Loan and other than the liabilities described in Section
2.2(b) hereof, all of which are Assumed Liabilities), and the following
liabilities, whether or not included on the Estimated Balance Sheet (the
"Retained Liabilities"):
(a) all liabilities secured by or related to the Dallas Headquarters
property described on Schedule 1.2 attached hereto and all other
liabilities of any Company relating to indebtedness for borrowed money,
except as specifically provided otherwise herein;
(b) all liabilities of the Companies and Shareholders for federal,
state, local or foreign Taxes, including Taxes incurred in respect of or
measured by (i) the income of the Companies earned on or realized prior to
the Closing Date to the extent such liabilities exceed the amount accrued
for such liabilities on the December 31, 2000 Audited Statements and/or the
Estimated Balance Sheet and (ii) any gain or income from the transfer of
the Acquired Assets and other transactions contemplated herein;
(c) all claims and liabilities, whether arising on or before, or
subsequent to Closing, resulting from HSA-Texas' or Shareholders' breach,
on or before Closing, of any covenant, condition or other obligation
required of HSA-Texas or Shareholders under any Contract or Lease;
(d) all liabilities under any Companies' severance policies to any
employee or Associate of the Companies (i) to whom PRGUSA offered
employment as of the Closing Date and who either (a) rejected PRGUSA's
offer of employment, (b) did not satisfy on the Closing Date the Employment
Conditions specified herein or (c) voluntarily resigned his employment with
PRGUSA within 30 days after the commencement of such person's employment
with PRGUSA or (ii) to whom PRGUSA offered engagement as an independent
contractor and such person did not accept such engagement (collectively
"Persons Not Hired");
(e) except as specifically provided in Section 2.2(b)(iv) with respect
to certain severance obligations, any liabilities with respect to employee
benefits (including any liability for unused vacation or sick pay) or under
any Employee Benefit Plan;
(f) all non-Business payables of any of the Companies, meaning those
not directly related to the Business to be acquired by PRGX pursuant
hereto;
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(g) all obligations and liabilities in excess of or other than the "in
the money value" as of the Closing Date as accrued on the Estimated Balance
Sheet with respect to HSA-Texas Options of Persons Not Hired and HSA-Texas
SARs; and
(h) all obligations and liabilities to any shareholder of HSA Texas
who exercises dissenters' rights.
2.4 HSA-Texas Options and HSA-Texas SARs.
(a) Assumed Options. Concurrently with the Closing, PRGX will assume
all of the HSA-Texas Options set forth on Schedule 5.5(b) held by each of
those Optionees identified on Schedule 5.5(b) hereof, who either is offered
and accepts employment with PRGX and meets the Employment Conditions, is
offered and accepts engagement by PRGX as an independent contractor, or has
agreed to serve on the Board of Directors of PRGX (with all of the
HSA-Texas Options of such Optionees being the "Options to be Assumed").
With respect to each of the Options to be Assumed, PRGX shall substitute
PRGX Common Stock for HSA-Texas Common Stock in respect of the unexercised
portion of such HSA-Texas Option in accordance with the 1999 Howard Schultz
& Associates Stock Option Plan, as amended prior to the Closing Date in
accordance herewith (the "HSA-Texas Option Plan") and based on the Option
Conversion Ratio described herein (after such assumption and conversion,
the "Assumed Options"). Effective upon the Closing, PRGX shall adopt a
stock option plan providing substantially the same terms and conditions as
the HSA-Texas Option Plan, as amended as described herein for the
administration by PRGX of the Assumed Options. The number of shares of PRGX
Common Stock subject to each Assumed Option shall equal the number of
shares of HSA-Texas Common Stock to which the corresponding HSA-Texas
Option was subject immediately prior to the Closing, multiplied by the
Option Conversion Ratio (rounded to the nearest whole share), and the per
share exercise price of such Assumed Option shall equal the exercise price
of the corresponding HSA-Texas Option immediately prior to the Closing,
divided by the Option Conversion Ratio, rounded upward to the nearest whole
cent. The Assumed Options shall be fully vested and immediately exercisable
upon the Closing, subject to compliance with applicable federal and state
securities laws, and shall expire on the fifth anniversary of the Closing
Date.
(b) Amendment to HSA-Texas Option Plan; Mechanics for Receiving
Assumed Option. Prior to Closing, HSA-Texas shall adopt an amended and
restated HSA-Texas Option Plan in substantially the same form attached
hereto as Exhibit 2.4(b), and, if necessary, amend the HSA-Texas option
grant agreements, in order to extend the expiration date of the HSA-Texas
Options upon a "change of control" as defined therein to five years, modify
or delete those provisions that relate to HSA-Texas' status as a private
company whose shares of capital stock are not publicly traded and such
other amendments as mutually agreed by PRGX and HSA-Texas. Promptly after
the Closing, HSA-Texas and PRGX shall jointly notify all Optionees whose
HSA-Texas Options have become Assumed Options of the number of shares of
PRGX Common Stock subject thereto and the exercise price thereof. HSA-Texas
shall cooperate with PRGX in connection with PRGX's distribution of this
information to the Optionees as described herein.
(c) Option Conversion Ratio. For purposes hereof, the "Option
Conversion Ratio" means the Per Share Value, as determined pursuant to
Section 2.1(b) hereof, divided by the PRGX Average Price.
(d) Adjustments. If, between the date of this Agreement and the
Closing Date, the outstanding PRGX Common Stock or HSA-Texas Common Stock
shall have been changed into a different number of shares or different
class by reason of any reclassification, recapitalization, stock split,
split-up, combination or exchange of shares, or a stock dividend or
dividend payable in any other securities shall be declared with a record
date within such period, or any similar event shall have occurred, the
Option Conversion Ratio, to the extent not adjusted as a result of the
adjustment to the PRGX Average Price, shall be appropriately adjusted to
provide to the Optionees the same economic effect as contemplated by this
Agreement prior to such event.
(e) Form S-8. PRGX shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of PRGX Common Stock for
delivery upon exercise of the Assumed Options. As soon
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as practicable, but in no event more than 30 days, after the Closing Date,
PRGX shall file a registration statement on Form S-8 (or any successor or
other appropriate form) with respect to the shares of PRGX Common Stock
subject to such Assumed Options, and shall use its commercially reasonable
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus
or prospectuses referred to therein) for so long as such Assumed Options
remain outstanding.
(f) HSA-Texas SARs. With respect to all stock appreciation rights
granted by HSA-Texas (collectively, the "HSA-Texas SARs"), HSA-Texas shall,
prior to or concurrently with the Closing, acquire for cash in an amount
equal to the aggregate difference between the Per Share Value and the grant
price of such HSA-Texas SARs, provided such difference is a positive
number, plus any other amount required to extinguish such HSA-Texas SARs.
HSA-Texas will be responsible for deducting or withholding from such
payment and remitting to the appropriate Tax Authority(ies) such amount or
amounts as may be required to be so deducted or withheld pursuant to
applicable federal, state or local laws.
(g) Persons Not Hired. In respect of the HSA-Texas Options held by
any Person Not Hired, HSA-Texas shall, prior to or concurrently with the
Closing, cancel all such HSA-Texas Options and pay such Optionees an amount
in cash equal to the "spread" in respect of such HSA-Texas Option, as
defined in and in accordance with Article XI of the HSA-Texas Option Plan.
HSA-Texas will be responsible for deducting or withholding from such
payment and remitting to the appropriate Tax Authority(ies) such amount or
amounts as may be required to be so deducted or withheld pursuant to
applicable federal, state or local laws.
ARTICLE 3
APPROVALS
3.1 Approvals; Proxy Statement; Shareholder Meetings.
(a) PRGX Approvals.
(i) PRGX Recommendations. PRGX hereby represents that the PRGX
Board of Directors (the "PRGX Board"), at a meeting duly called and
held, has (A) approved this Agreement and the transactions contemplated
hereby, including the Acquisition and the Concurrent Acquisitions, the
issuance of shares of PRGX Common Stock as Consideration in connection
with the Acquisition and as consideration in connection with the
Concurrent Acquisitions and the issuance of options to acquire PRGX
Common Stock in connection with the assumption of the Assumed Options
(the "PRGX Share Issuance and Option Issuance"), and (B) resolved to
recommend approval of the PRGX Share Issuance and Option Issuance by the
PRGX shareholders and the election of the directors to be nominated in
accordance with Section 4.18 hereof at the PRGX Special Meeting (the
recommendations referred to in clause (B) above are collectively
referred to in this Agreement as the "PRGX Recommendations").
(ii) Opinion of PRGX Financial Advisor. PRGX has received the
opinion of Merrill Lynch (the "Fairness Opinion"), dated on or about the
date of the Letter of Intent by and among PRGX, HSA-Texas, the
Shareholders and certain other shareholders of HSA-Texas dated July 24,
2001 (the "Letter of Intent"), and updated as of August 3, 2001, to the
effect that, as of such date, the aggregate consideration to be paid by
PRGX pursuant to this Agreement and the Stock Agreement is fair to PRGX
from a financial point of view, a copy of which opinion has been made
available to HSA-Texas.
(iii) PRGX Special Meeting. PRGX shall, in accordance with all
applicable laws, duly call, give notice of, convene and hold a special
meeting of its shareholders (the "PRGX Special Meeting") as soon as
practicable for the purpose of considering and taking action on the PRGX
Recommendations. In order to comply with certain requirements of The
Nasdaq National Market,
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on which shares of PRGX Common Stock are listed, PRGX shall, as promptly
as practicable after the date of this Agreement prepare and file with
the Securities and Exchange Commission (the "SEC") in accordance with
applicable regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") a proxy statement to be mailed by PRGX to
its shareholders soliciting votes in favor of the PRGX Recommendations
at the PRGX Special Meeting (the "Proxy Statement").
(b) HSA-Texas Approvals.
(i) HSA-Texas Recommendations. HSA-Texas and the Shareholders
hereby represent and warrant that the HSA-Texas Board of Directors (the
"HSA-Texas Board"), at a meeting duly called and held, has unanimously
(A) approved this Agreement and the transactions contemplated hereby,
including the Acquisition and the Concurrent Acquisitions, and (B)
resolved to recommend approval and adoption of this Agreement, the
Acquisition and the Concurrent Acquisitions by the HSA-Texas
shareholders (the recommendations referred to in clause (B) above are
collectively referred to in this Agreement as the "HSA-Texas
Recommendations").
(ii) HSA-Texas Shareholder Approval. As soon as practicable after
delivery by HSA-Texas to each of the holders of HSA-Texas Voting Common
Stock of (A) a draft of this Agreement, (B) a copy of any other
documents or information which the holders of HSA-Texas Voting Common
Stock request PRGX to deliver to them, and (C) any other documents and
information required by Texas corporate law to be delivered by HSA-Texas
to the holders of HSA-Texas Voting Common Stock, HSA-Texas shall within
5 days after the date of this Agreement, in accordance with all
applicable laws, HSA-Texas' articles of incorporation and bylaws, either
(1) duly call, give notice of (or obtain appropriate waivers of notice
of), convene and hold a special meeting of the holders of HSA-Texas
Voting Common Stock to consider and take action on the HSA-Texas
Recommendations or (2) obtain the unanimous written consent of the
holders of HSA-Texas Voting Common Stock containing resolutions
approving the HSA-Texas Recommendations. The Shareholders covenant and
agree that they shall vote in favor of the HSA-Texas Recommendations at
any such special meeting or shall execute the HSA-Texas unanimous
consent within 15 days after the date of this Agreement.
(c) PRGX Shares. The shares of PRGX Common Stock to be issued as
Consideration hereunder (the "PRGX Shares") will be unregistered,
restricted securities, issued pursuant to customary investment
representations by HSA-Texas and the Shareholders, as set forth in Section
5.38 hereof.
(d) Cooperation. PRGX shall obtain and furnish the information
required by the SEC to be included in the Proxy Statement. HSA-Texas and
Shareholders agree that they will promptly provide PRGX with information
concerning HSA-Texas and its shareholders required to be included in the
Proxy Statement. PRGX shall use its reasonable best efforts to respond to
any comments of the SEC with respect to the Proxy Statement as promptly as
practicable. If at any time prior to the Closing Date there shall occur any
event with respect to PRGX or HSA-Texas or any of their respective
subsidiaries, as the case may be, or with respect to other information
supplied by PRGX or HSA-Texas, as the case may be, for inclusion in the
Proxy Statement, in either case which event is required to be described in
an amendment of, or a supplement to, the Proxy Statement, PRGX or HSA-Texas
shall notify the other party, and such event shall be so described, and
such amendment or supplement shall be promptly filed with the SEC and, as
required by applicable law, disseminated to the PRGX shareholders. PRGX
shall notify HSA-Texas promptly upon (i) the issuance or threatened
issuance of any stop order or other order preventing or suspending the use
of the Proxy Statement, (ii) any proceedings commenced or threatened to be
commenced by the SEC or any state securities commission that might result
in the issuance of a stop order or other order or suspension of use of the
Proxy Statement or (iii) any request by the SEC to supplement or amend the
Proxy Statement after the mailing thereof. PRGX and, to the extent
applicable, HSA-Texas, shall use their reasonable best efforts to prevent
or promptly remove any stop order or other order preventing or suspending
the use of the Proxy Statement and to comply with any such request by the
SEC or any state securities commission to amend or supplement the Proxy
Statement.
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(e) Solicitation of Proxies. PRGX Board shall use its commercially
reasonable efforts to solicit from the PRGX shareholders proxies in favor
of the PRGX Recommendations and shall take all other action necessary or in
the opinion of PRGX advisable to secure the vote of the PRGX shareholders
required for the approval of the PRGX Recommendations.
(f) SEC Comments. PRGX and HSA-Texas will notify each other promptly
of the receipt by such party or its representatives of any comments from
the SEC or its staff or any other appropriate government official and of
any requests by the SEC or its staff or any other appropriate government
official for amendments or supplements to the Proxy Statement or for
additional information and will supply the other party with copies of all
correspondence between PRGX, HSA-Texas or any of their respective
representatives, on the one hand, and the SEC or its staff or any other
appropriate government official, on the other hand, with respect thereto.
(g) HSA-Texas Comfort Letters. HSA-Texas shall use its commercially
reasonable efforts to cause to be delivered to PRGX a letter from KPMG LLP
(Dallas), dated as of the date on which the Proxy Statement is mailed to
the PRGX shareholders, which letter will be updated as of the Closing Date,
addressed to PRGX, with respect to data contained in the Proxy Statement,
in form and substance reasonably satisfactory to PRGX and customary in
scope and substance for comfort letters delivered by independent public
accountants in connection with proxy statements similar to the Proxy
Statement.
(h) PRGX Comfort Letters. PRGX shall use its commercially reasonable
efforts to cause to be delivered to HSA-Texas a letter from KPMG LLP
(Atlanta), dated as of the date on which the Proxy Statement is mailed to
the PRGX shareholders, which letter will be updated as of the Closing Date,
addressed to HSA-Texas, with respect to data contained in the Proxy
Statement, in form and substance reasonably satisfactory to HSA-Texas and
customary in scope and substance for comfort letters delivered by
independent public accountants in connection with proxy statements similar
to the Proxy Statement.
3.2 Listing of Shares. PRGX shall use its reasonable best efforts to cause
the shares of PRGX Common Stock to be issued in the Acquisition, and the shares
of PRGX Common Stock to be reserved for issuance upon exercise of the Assumed
Options, to be approved for listing on The Nasdaq National Market, subject to
official notice of issuance, concurrently with the Closing Date.
3.3 Intentionally Omitted.
3.4 No Negotiations.
(a) HSA-Texas. From and after the date hereof until the earlier of
the termination of this Agreement pursuant to Article 9 hereof or the
Closing, neither HSA-Texas nor any of the Shareholders will take any of the
following actions, nor will HSA-Texas or any of the Shareholders permit any
of HSA-Texas or the Subsidiaries to take any of the following actions, nor
will HSA-Texas or any of the Shareholders authorize any officer, director
or employee of or any investment banker, attorney, accountant or other
advisor or representative of, HSA-Texas or any of its Subsidiaries to take
any of the following actions (and will instruct such persons not to take
any of the following actions), directly or indirectly: (i) solicit,
initiate or encourage the submission of a proposal for any HSA-Texas
Alternative Transaction or (ii) participate in any discussions or
negotiations regarding, or furnish to any "Third Party" (which, for all
purposes of this Agreement includes any "person" as such term is defined in
Section 13(d)(3) of the Exchange Act other than PRGX, HSA-Texas or any
affiliate thereof) any information with respect to, or take any other
action knowingly to facilitate, any HSA-Texas Alternative Transaction or
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any HSA-Texas Alternative Transaction.
For all purposes of this Agreement, "HSA-Texas Alternative Transaction"
means: (i) a merger, reorganization, share exchange, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving HSA-Texas or any of those of the Subsidiaries whose
assets, individually or in the aggregate, constitute 20% or more of the
consolidated assets of HSA-Texas and its Subsidiaries, (ii) any purchase or
sale of 20% or more of the consolidated assets (including stock of
Subsidiaries) of HSA-Texas and its Subsidiaries outside the ordinary course
of business (iii) the purchase or sale of, or tender or exchange offer for,
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capital stock of HSA-Texas or any of the Subsidiaries, (iv) the issuance by
HSA-Texas of capital stock containing terms which are inconsistent with the
consummation of the transactions contemplated by this Agreement, or (v) the
declaration or payment of any dividend or distribution other than those
permitted by Section 4.5(a)(iii) hereof. HSA-Texas and the Shareholders
agree to notify PRGX in writing promptly upon becoming aware that it or
they have received any indications in writing or otherwise of interest,
requests for information or offers in respect of an HSA-Texas Alternative
Transaction relating to any of the assets or operations of HSA-Texas or its
Subsidiaries, and will communicate to PRGX the identity of the potential
buyer and, if indicated, whether or not the consideration in respect of the
HSA-Texas Alternative Transaction is in an amount greater than the
Consideration provided for herein or in the Stock Agreement. HSA-Texas and
Shareholders represent that neither it nor they are party to or bound by
any agreement with respect to an HSA-Texas Alternative Transaction.
(b) PRGX. From and after the date hereof until the earlier of the
termination of this Agreement pursuant to Article 9 hereof or the Closing,
PRGX will not, and will not permit any of its subsidiaries to, and will not
authorize any officer, director or employee of or any investment banker,
attorney, accountant or other advisor or representative of, PRGX or any of
its subsidiaries to (and will instruct such persons not to), directly or
indirectly, (i) solicit, initiate or encourage the submission of a proposal
for any PRGX Alternative Transaction or (ii) participate in any discussions
or negotiations regarding, or furnish to any Third Party any information
with respect to, or take any other action knowingly to facilitate, any PRGX
Alternative Transaction or any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any PRGX Alternative
Transaction; provided, however, that nothing contained in this Section
3.4(b) shall prohibit the PRGX Board from furnishing information to, or
entering into discussions or negotiations with, any Third Party that (A)
makes an unsolicited bona fide proposal of a PRGX Alternative Transaction
if (1) the PRGX Board determines in good faith that such action is
necessary for the PRGX Board to comply with its fiduciary duties to PRGX's
shareholders under applicable law, (2) the PRGX Board determines in good
faith that such PRGX Alternative Transaction would, if consummated,
constitute or be reasonably likely to constitute a Superior Proposal and
(3) prior to taking such action, receives from such Third Party an executed
confidentiality agreement in reasonably customary form or (B) agrees to
include in the PRGX Alternative Transaction the concurrent acquisition of
HSA-Texas and the Affiliated Foreign Operating Companies or substantially
all of HSA-Texas' and the Affiliated Foreign Operating Companies' assets as
if HSA-Texas and the Affiliated Foreign Operating Companies were a part of
PRGX at the consummation of the PRGX Alternative Transaction. PRGX will
promptly notify HSA-Texas of its receipt of any written indications of
interest or written offers in respect of a PRGX Alternative Transaction.
(c) PRGX Recommendations. The PRGX Board will not (i) withdraw or
modify, or propose to withdraw or to modify, in any case in a manner
adverse to HSA-Texas, the PRGX Recommendations or (ii) approve or recommend
to its shareholders a PRGX Alternative Transaction, unless (A) the PRGX
Board determines in good faith that it is necessary to terminate this
Agreement in order for the PRGX Board to comply with its fiduciary duties
to PRGX's shareholders under applicable law, in which case, PRGX will
terminate this Agreement and pay HSA-Texas the Termination Fee as provided
in Section 9.2(e) hereof or (B) such PRGX Alternative Transaction includes
the concurrent acquisition of HSA-Texas and the Affiliated Foreign
Operating Companies or substantially all of HSA-Texas' and the Affiliated
Foreign Operating Companies' assets as if HSA-Texas and the Affiliated
Foreign Operating Companies were a part of PRGX at the consummation of the
PRGX Alternative Transaction, in which case PRGX may terminate this
Agreement without any obligation to pay HSA-Texas any Termination Fee. The
PRGX Board may not approve or recommend a PRGX Alternative Transaction on
the basis that it is necessary to comply with its fiduciary duties to
PRGX's shareholders (and in connection therewith, withdraw or modify the
PRGX Recommendations) unless (1) such PRGX Alternative Transaction is a
Superior Proposal and (2) the PRGX Board shall have specifically determined
that such action is necessary for the PRGX Board to comply with its
fiduciary duties to PRGX's shareholders. Nothing contained in this Section
3.4(c) shall prohibit PRGX from taking and disclosing to its shareholders a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act
or from making any disclosure to PRGX's shareholders which, in the good
faith reasonable judgment of the
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PRGX Board, is required under applicable law; provided, that except as
otherwise permitted in this Section 3.4(c), PRGX shall not withdraw or
modify, or propose to withdraw or modify, the PRGX Recommendations or
approve or recommend, or propose to approve or recommend, a PRGX
Alternative Transaction. Notwithstanding anything contained in this
Agreement to the contrary, (x) any action by the PRGX Board permitted by,
and taken in accordance with, this Section 3.4(c) shall not constitute a
breach of this Agreement by PRGX and (y) nothing in this Agreement shall
(aa) limit the PRGX's Board's ability to make any disclosure to PRGX's
shareholders that the PRGX Board determines in good faith is required to be
made to satisfy its fiduciary duties under applicable law or (bb) limit
PRGX's ability to make any disclosure required by applicable law, and such
actions shall not be considered a breach of this Agreement.
(d) Definitions.
(i) For all purposes of this Agreement, "PRGX Alternative
Transaction" specifically excludes each of the proposed divestitures
described on Schedule 3.4(d) hereof and means: (A) a merger,
reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction
involving PRGX or any of those of its subsidiaries whose assets,
individually or in the aggregate, constitute 20% or more of the
consolidated assets of PRGX and its subsidiaries; (B) any purchase or
sale of 20% or more of the consolidated assets (including stock of
subsidiaries) of PRGX and its subsidiaries, taken as a whole; (C) the
purchase or sale of, or tender or exchange offer for, 20% or more of the
shares of capital stock of PRGX; (D) the issuance by PRGX of capital
stock containing terms which are inconsistent with the consummation of
the transactions contemplated by this Agreement; (E) the declaration or
payment of a dividend representing 20% or more of the value of PRGX and
its subsidiaries, taken as a whole; or (F) the repurchase by PRGX or any
of its subsidiaries of an aggregate of more than 20% of the outstanding
shares of capital stock of PRGX, except for repurchases pursuant to
PRGX's previously announced stock buy back plan.
(ii) For all purposes of this Agreement, a "Superior Proposal"
means any bona fide written unsolicited proposal of a PRGX Alternative
Transaction that the PRGX Board determines in its good faith business
judgment (A) would result in a transaction, if consummated, that would
be superior to PRGX's shareholders from a financial point of view as
compared to the transactions contemplated hereby and (B) is reasonably
capable of being consummated in accordance with its terms (including
that any financing required to consummate the transaction contemplated
by such proposal is reasonably likely to be obtained), in each case
taking into account all factors the PRGX Board considers relevant,
including all legal, financial, regulatory and other aspects of the
proposal and the Third Party.
3.5 Registration Rights Agreement. Concurrently with the Closing, PRGX,
each of the Shareholders and each holder of shares of the Foreign Affiliated
Operating Companies (other than Acceptor Professional Directors Pte Ltd) will
enter into a registration rights agreement in respect of the shares of PRGX
Common Stock issued in connection with this Acquisition and the Concurrent
Acquisitions in substantially the same form attached hereto as Exhibit 3.5A (the
"Registration Rights Agreement"). In addition, at the Closing, each person, in
addition to the Shareholders, who is a holder of HSA-Texas Voting Common Stock
or of HSA-Texas Non-Voting Common Stock and who has executed and delivered to
PRGX at or prior to the Closing an investment representation letter in
substantially the same form as Exhibit 3.5B attached hereto (the "Investment
Representation Letter"), may execute at the Closing and become a party to the
Registration Rights Agreement.
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ARTICLE 4
ADDITIONAL COVENANTS AND AGREEMENTS
4.1 Due Diligence Review.
(a) Due Diligence. HSA-Texas shall deliver to PRGX all Schedules
required to be attached hereto in accordance with Section 4.21 and shall
promptly deliver to PRGX true, correct and complete copies of all
documents, together with all amendments thereto through the date of
execution hereof, contemplated by this Agreement and required by the terms
hereof to be listed on the Exhibits or Schedules attached hereto not
previously delivered to PRGX, including any Material Leases, Material
Contracts, insurance policies, the Historical Statements and Companies' Tax
Returns for 1997, 1998 and 1999. Prior to the Closing Date, PRGX, its
counsel and representatives, including KPMG LLP (collectively, the "PRGX
Representatives") shall have conducted such due diligence investigation of
the Business of HSA-Texas as PRGX shall determine. HSA-Texas shall provide
such persons full access during normal business hours to the offices,
properties, books, records, files and other documents and information
regarding HSA-Texas' assets and Business, to HSA-Texas' employees,
independent contractors, Associates, officers, sales agents, project
managers, contract service providers, strategic partners, other
representatives and customers and to all materials, programs, data,
reports, systems, practices, deliverables, and other properties and assets
and shall fully cooperate with PRGX and such persons and provide full
opportunity to said parties to make such investigation and copy such
documents as PRGX shall desire; provided, however, that (i) no information
with respect to any specific Clients will be required to be disclosed
pursuant to this Section prior to or in any manner other than as set forth
in the Schedules attached hereto (or to be attached hereto) in accordance
with Section 5.14, Section 5.15 (with respect to information about Clients)
or Section 5.17 hereof, (ii) no information with respect to trade secrets
relating to technology and/or auditing methodology of the Business will be
provided prior to obtaining HSA-Texas' consent, which consent will not be
unreasonably withheld, (iii) with respect to employees of the Business,
PRGX will not communicate with such persons without prior notice to HSA-
Texas and providing HSA-Texas an opportunity to be present at any meeting
with such employees, and (iv) with respect to Associates, PRGX will not
communicate with the Associates prior to obtaining HSA-Texas' consent,
which consent will not be unreasonably withheld. Such persons shall not
contact independent contractors or customers of HSA-Texas without
HSA-Texas' prior consent. No investigation of the Business of HSA-Texas by
PRGX, its counsel and representatives, including the PRGX Representatives,
either prior to, on, or after the date hereof shall affect PRGX's right to
rely upon, or HSA-Texas' and Shareholders' responsibility for the accuracy
of the representations and warranties of HSA-Texas and Shareholders made
herein.
(b) Historical Statements. As soon as practicable, HSA-Texas and
Shareholders, at their sole cost and expense, shall prepare and provide to
PRGX an audited combined balance sheet (including the notes thereto) of
HSA-Texas, its consolidated Subsidiaries, and the Affiliated Foreign
Operating Companies prepared as of December 31, 2000 and December 31, 1999,
and the related audited combined statements of operations, changes in
Shareholders' equity and cash flows for each of the years in the three year
period ending December 30, 2000, including in each case, the notes thereto,
together with an unqualified audit report thereon (the "Report") of KPMG
LLP, HSA-Texas' independent auditor (collectively, the "Audited
Statements") and separate internal unaudited combined quarterly balance
sheets and combined income statements as of and for the calendar quarters
ended June 30, 2001 and September 30, 2001 (collectively, such quarterly
statements with the Audited Statements, the "Historical Statements"). In
addition, HSA-Texas and Shareholders shall provide PRGX with such other
financial information, including copies of books and records and other
materials (i) required in connection with filing the Proxy Statement, (ii)
sufficient to enable PRGX to prepare such pro forma financial statements as
shall comply with the provisions of Article 11 of Regulation S-X to be
presented in the Proxy Statement and any filing required pursuant to the
Exchange Act, and (iii) in form and substance satisfying the requirements
for filing the Historical Statements and Report with the Securities and
Exchange Commission. HSA-Texas and Shareholders will, and will cause each
of its Subsidiaries' and the Affiliated Foreign Operating Companies'
officers, directors and employees to, cooperate fully with PRGX and the
PRGX Representa-
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tives to provide all such information and documents as PRGX or the PRGX
Representatives may periodically request.
(c) Estimated Financials. On or before seven business days prior to
the Closing Date, HSA-Texas shall prepare in accordance with Section 4.1(d)
hereof, and PRGX and HSA-Texas shall agree upon, a combined estimated
balance sheet of HSA-Texas, its majority-owned Subsidiaries, and the
Affiliated Foreign Operating Companies, including a detailed listing of the
assets and liabilities of the Business as of the Closing Date and such
separate estimated balance sheets, on a stand-alone basis as of the Closing
Date, of those operating units of the Business as agreed to by PRGX and
HSA-Texas (collectively the "Estimated Balance Sheet"), and a combined
written estimated income statement of HSA-Texas, its majority-owned
Subsidiaries, and the Affiliated Foreign Operating Companies, including a
detailed listing of revenues, expenses and income of the Business for the
period from January 1, 2001 through the Closing Date and such separate
estimated income statements, on a stand-alone basis for such period, of
those operating units of the Business as agreed to by PRGX and HSA-Texas
(collectively the "Estimated Income Statement"), and a combined written
estimated statement of cash flows of HSA-Texas, its consolidated
Subsidiaries, and the Affiliated Foreign Operating Companies for the period
from January 1, 2001 through the Closing Date and such separate estimated
statements of cash flows, on a stand-alone basis for such period, of those
operating units of the Business as agreed to by PRGX and HSA-Texas (the
"Estimated Statement of Cash Flows") (collectively, the Estimated Balance
Sheet, the Estimated Income Statement, the Estimated Statement of Cash
Flows, being the "Estimated Financials"), each of which statements will
contain with respect to any item which is not capable of determination at
Closing, a good faith estimate of such item as of the Closing Date, and
which shall, when delivered, be attached hereto as Schedule 4.1(c).
(d) Preparation of Estimated Financials. The Estimated Financials
shall be prepared in accordance with generally accepted accounting
principles for financial reporting in the United States ("GAAP") applied on
a basis consistent with the Historical Statements including the notes
thereto, shall include the same categories of assets and liabilities of the
Companies as of the Closing Date as were included on the December 31, 2000
balance sheet included in the Audited Statements and the same items of
revenues, expenses and income of the Companies as of the Closing Date as
were included on the income statement for the year ended December 31, 2000
included in the Audited Statements, and shall be consistent with HSA-Texas'
past accounting practices and procedures.
(e) Confidentiality. Between the date of this Agreement and the
Closing Date, PRGX and HSA-Texas will maintain in confidence, and will
cause their respective directors, officers, employees, agents,
representatives and advisors, to maintain in confidence any written, oral
or other information obtained in confidence from any other party hereto in
connection with this Agreement or the transactions contemplated herein,
unless (a) such information is already known to such party or to others not
bound by a duty of confidentiality or such information becomes publicly
available through no fault of such party, (b) or use of such information is
necessary or appropriate in making any filing or obtaining any consent or
approval required for the consummation of the transactions contemplated
herein, or (c) the furnishing of such information is required by, or is
necessary or appropriate in connection with, legal proceedings or any
statute, regulation or rule of any Governmental Entity. The parties hereto
will hold any information obtained pursuant to this Agreement in confidence
in accordance with, and shall otherwise be subject to the Nondisclosure
Agreement dated November 2000 between HSA-Texas and PRGX (the
"Nondisclosure Agreement"), which Nondisclosure Agreement shall continue in
full force and effect.
4.2 Employment Matters.
(a) H. Schultz and A. Schultz Offer Letters. Concurrently with the
Closing, PRGX and H. Schultz shall enter into an offer letter for two-year
employment (the "H. Schultz Offer Letter") in substantially the form of
Exhibit 4.2A attached hereto and PRGX and A. Schultz shall enter into an
offer letter for two-year employment (the "A. Schultz Offer Letter") in
substantially the form of Exhibit 4.2B attached hereto.
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(b) Other PRGX Employment.
(i) The Business is conducted through employees of the Companies
and through independent contractors directly or indirectly engaged by
the Companies (including those persons designated as Regional
Associates, Resident Associates, Senior Associates, Junior Associates,
Principal Associates or otherwise who are engaged directly or indirectly
by the Companies or any other Associate or affiliate thereof) to perform
accounts payable auditing and related consulting services, which
independent contractors (collectively such independent contractors
being, "Associates"). PRGX shall cause its wholly owned subsidiary, The
Profit Recovery Group USA, Inc. ("PRGUSA") to offer employment to such
employees and Associates as indicated on Schedule 4.2 attached hereto,
each of whom are persons whose continued employment is important to the
success of the Business (such persons, as designated or modified from
time to time by PRGX prior to the Closing, together with H. Schultz and
A. Schultz, being the "Key Employees"). PRGX may, but shall have no
obligation to offer employment to any other employees of the Companies
or any other Associates.
(ii) With respect to any individual offered employment by PRGUSA,
such employment shall be subject to the following conditions: such
person shall (A) report to work for PRGUSA, (B) shall sign customary
documents and forms including a Form I-9 and PRGUSA's Employee Agreement
(providing for non-competition, non-solicitation and confidentiality
covenants during the term of such person's employment and for 24 months
thereafter), in substantially the form attached hereto as Exhibit 4.2C
(the "Employee Agreement"), if a Key Employee, prior to the Closing
Date, if not a Key Employee, within 60 days after the Closing Date, and
(C) meet PRGUSA's then current employment standards (collectively, the
"Employment Conditions"); provided that nothing contained herein shall
preclude PRGX or PRGUSA from revising the Employment Conditions after
the Closing or effecting the termination of any such persons after the
Closing. HSA-Texas and Shareholders shall cooperate with and assist PRGX
in obtaining executed Employee Agreements from Key Employees and such
other employees, consultants and independent contractors as PRGX
designates as needed or requested by PRGX. Notwithstanding the
foregoing, in no event shall PRGX be required to provide employee
benefits the same as or similar to those provided by HSA-Texas or
otherwise.
(c) Payroll. The parties acknowledge that, after the Closing, PRGUSA
shall move those employees and Associates of the Business who are offered
and accept employment by PRGUSA and who meet the Employment Conditions (the
"Hired Employees") to PRGUSA's payroll system as soon as practicable, but
no later than a date 90 days after the Closing Date. Until such time as
such Hired Employees are included on PRGUSA's payroll system, HSA-Texas
shall, when and as funded by PRGUSA, make disbursements on behalf of PRGUSA
and as PRGUSA's agent to the Hired Employees for payroll and employee
compensation earned after the Closing Date in respect of their employment
by PRGUSA in accordance with HSA-Texas past practices pursuant to
instructions from PRGUSA. PRGX will cause PRGUSA to fund HSA-Texas with all
amounts necessary to make such payments prior to the time such payments are
due to the Hired Employees, including payroll taxes, and PRGX shall
indemnify and hold HSA-Texas harmless in respect of any and all liabilities
arising from such arrangement, other than HSA-Texas' failure to properly
apply the funds advanced by PRGUSA.
(d) Continuation of Healthcare Coverage. HSA-Texas shall use its best
efforts to obtain and deliver to PRGX prior to the Closing an undertaking
from its current group health and dental insurance providers that such
providers will continue coverage of (a) the Hired Employees, (b) their
covered dependents as of the Closing Date and (c) all other "M & A
qualified beneficiaries" as of the Closing Date, as that term is defined in
U.S. Treas. Reg. sec. 54.4980B8, Q & A -4(a), with respect to the
transactions contemplated hereby, within the meaning of such Treas. Reg.,
at PRGX's sole expense, subject to participants' contributions, deductibles
and copayments, as applicable, until such time as the Hired Employees are
enrolled into such PRGUSA health and welfare benefit plans as such persons
may be eligible to participate in. HSA-Texas shall notify PRGUSA of the
termination of any group health or dental insurance plans sponsored by
HSA-Texas which occurs after the Closing Date.
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(e) HSA-Texas' 401(k) Plan. HSA-Texas agrees that it will cause the
account balance, if any, of each Business Employee under the HSA-Texas
401(k) Plan (the "401(k) Plan") to be fully vested as of the Closing Date.
Such vested account balances shall include (i) the employer matching
contribution on behalf of Business Employees for the 401(k) Plan's 2000
plan year (the "2000 Employer Match"), and (ii) the employer matching
contribution on behalf of Business Employees for the 401(k) Plan's 2001
plan year (the "2001 Employer Match") and (iii) if applicable, the accrued,
prorated portion prior to the Closing Date, of the employer matching
contribution on behalf of Business Employees for the 401(k) Plan's 2002
plan year (the "2002 Employer Match"). The 2000 Employer Match, the 2001
Employer Match and, if applicable, the 2002 Match will be contributed by
HSA-Texas to the 401(k) Plan on or prior to the Closing Date. At Closing,
HSA-Texas shall deliver to PRGX an amendment to the 401(k) Plan, properly
authorized by the Board of Directors of HSA-Texas, that ceases
contributions to the 401(k) Plan effective from and after the Closing Date.
As soon as reasonably practicable following the Closing, HSA-Texas shall
(i) amend the 401(k) Plan to bring the 401(k) Plan into compliance with
current laws, including, without limitation, changes in law described in
Rev. Proc. 2000-27, 2000-26 I.R.B. 1272, (ii) file the 401(k) Plan with the
IRS pursuant to Form 5310 to obtain a determination upon plan termination,
and (iii) take all actions subsequent to such filing as are necessary to
obtain a favorable determination upon plan termination from the IRS,
including, without limitation, making any amendments to the 401(k) Plan
requested by the IRS. HSA-Texas shall bear all costs and expenses
associated with the foregoing. Upon receipt of a favorable determination
letter from the IRS with respect to the 401(k) Plan, HSA-Texas shall cause
the 401(k) Plan to distribute the Participant's vested account balances in
the 401(k) Plan in accordance with applicable law, and PRGUSA shall have no
obligation to accept qualified direct transfer distributions from the
401(k) Plan. Until such distributions are made, HSA-Texas, PRGX and PRGUSA
shall take such actions as are necessary to maintain any plan loan that any
Business Employee may have outstanding from the 401(k) Plan ("HSA-Texas
Plan Loan") in good standing and with repayment terms comparable to the
repayment terms of such HSA-Texas Plan Loan in effect prior to the Closing
Date, including, without limitation, facilitating repayment of such
HSA-Texas Plan Loans by means of payroll deduction from salary paid by
PRGUSA. Once all distributions have been made from the 401(k) Plan,
HSA-Texas shall take appropriate steps to terminate the 401(k) Plan. The
obligations of HSA-Texas under this Section 4.2(e) shall be assumed by the
Shareholders following the liquidation of HSA-Texas.
(f) New PRGX Stock Options. Effective as of the Closing, in
consideration of their employment with PRGX, PRGX shall, pursuant to PRGX's
standard stock option agreement (the "PRGX Stock Option Agreement"), grant
to certain Key Employees (as mutually agreed to by PRGX and HSA-Texas), new
non-qualified options to purchase that number of shares of PRGX Common
Stock set forth in their respective PRGX Stock Option Agreements, at an
exercise price equal to the closing sale price per share of PRGX Common
Stock on the Closing Date (as reported in The Wall Street Journal published
on the first business day immediately following the Closing Date) in
amounts commensurate with those non-qualified options to purchase shares of
PRGX Common Stock that PRGX has recently granted prior to the date hereof
to PRGX personnel in similar jobs. In order to receive options to purchase
PRGX Common Stock, such Person must be a Hired Employee.
(g) Notices to Employees. HSA-Texas shall, for itself and on behalf
of PRGX, acting as PRGX's agent, be solely responsible for providing any
notices and other communications to employees, except for employees who
receive offers of employment from by PRGX or PRGUSA, and to any state
dislocated worker unit and to other appropriate Governmental Entities, as
required under the Workers Adjustment and Retraining Notification Act, 29
U.S.C. Section 2101 et. Seq., or any similar provision of any federal,
state, regional, foreign or local law rule or regulation (collectively, the
"WARN Act and Similar Laws"). HSA-Texas shall use its best efforts to send
all such required notices within 5 days after the date on which PRGX first
mails the Proxy Statement for the PRGX Special Meeting to PRGX
shareholders. HSA-Texas agrees to indemnify the PRGX Indemnified Parties
and hold them harmless in accordance with Article 7 hereof from and against
any back pay, benefits, penalties, fines or any other claims, liabilities,
lawsuits, losses, costs, damages or expenses (including reasonable
attorneys' fees and expenses awarded to other parties as relief by any
court of competent jurisdiction or incurred by the PRGX
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Indemnified Parties in litigation or otherwise) arising out of and
sustained by any of the PRGX Indemnified Parties due to or relating to any
deficiency contained in such notices or communications, any failure to
provide notices or communications required by the WARN Act and Similar Laws
in a timely manner within the prescribed time period prior to the Closing
Date or any other failure to comply with the provisions of the WARN Act and
Similar Laws.
4.3 Consents. Promptly after execution of this Agreement, HSA-Texas and
Shareholders will apply for or otherwise seek, and use their best efforts to
obtain, all consents, releases and approvals required with respect to HSA-Texas
and/or Shareholders for consummation of the transactions contemplated hereby,
including without limitation, those consents listed in Schedule 5.4 hereof
(collectively, "Consents"). Any charges imposed by the lessors or other parties
to the Assigned Contracts and Assigned Leases for such estoppels and consents
shall be borne solely by HSA-Texas.
4.4 Non-Competition Agreement. Concurrently with the Closing, in
consideration of the acquisition of Acquired Assets as contemplated herein,
HSA-Texas, the Shareholders, Michael Lowery, Gertrude Lowery, Charles Schembri
and Mac Martirossian shall enter into a non-competition, non-solicitation, and
confidentiality agreement with PRGX in substantially the form attached hereto as
Exhibit 4.4 (the "Non-competition Agreement").
4.5 Conduct of Business By HSA-Texas Pending Reorganization. HSA-Texas and
Shareholders covenant and agree that, unless PRGX shall otherwise consent in
writing or as otherwise specifically contemplated herein, between the date
hereof and the Closing, the Business shall be conducted only in, and HSA-Texas
shall not take any action except in, the ordinary course of business and in a
manner consistent with HSA-Texas' past practices; and HSA-Texas will use its
best efforts to preserve substantially intact the Business of HSA-Texas, to keep
available the services of the present officers, employees, and consultants of
the Companies, and to preserve the present relationships of the Companies with
customers, clients and other persons having business relationships with the
Companies. HSA-Texas and Shareholders covenant and agree that between the date
hereof and Closing, there shall be no material diminution of the Acquired
Assets, nor any material increase in the Assumed Liabilities except for amounts
owed by HSA-Texas to H. Schultz for advances of amounts that would be included
in the definition of the Assumed Schultz Loan. By way of amplification and not
limitation, except as expressly provided for in this Agreement, HSA-Texas and
Shareholders covenant that, between the date hereof and the Closing, the
Companies and Shareholders shall not, directly or indirectly, do any of the
following without the prior written consent of PRGX, which consent will not be
unreasonably withheld or delayed:
(a) (i) issue, sell, gift, pledge, transfer, dispose of, encumber,
authorize any shares of capital stock, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock of, or any other ownership interest in, any Company; (ii)
amend the Articles of Incorporation or By-Laws or other organizational
documents of any Company; (iii) split, combine or reclassify any
outstanding share of any Company's capital stock or other ownership
interest, or declare, set aside or pay any dividend or distribution payable
in cash, stock, property or otherwise with respect to any Company's capital
stock or other ownership interest (except for (A) normal salary and bonuses
earned in the ordinary course of business that have been disclosed to PRGX
in writing in advance of payment, and (B) distributions from HSA-Texas (not
in excess of the amount set forth in Section 1.2(f)) to enable its
Shareholders to pay federal and state taxes on the taxable income (for U.S.
federal and state and foreign income tax purposes) from the Business'
operations in the ordinary course of the business for the period from and
after January 1, 2001 up to the Closing Date, in each case consistent with
HSA-Texas' past practices and as disclosed to PRGX in writing in advance of
payment, and (C) the aggregate amount of cash received by HSA-Texas from
and after the date hereof and prior to the Closing Date attributable to the
exercise by its employees of any HSA-Texas Options) (iv) redeem, purchase
or otherwise acquire any shares of any Company's capital stock or other
ownership interest; or (v) enter into any contract, agreement, commitment
or arrangement with respect to any of the matters set forth in this Section
4.5(a);
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(b) except with respect to the Other Acquisitions, (i) acquire (by
merger, consolidation, or acquisition of stock or assets) any interest in
any corporation, partnership or other business organization or division
thereof; (ii) except in the ordinary course of business and in a manner
consistent with past practices, sell, pledge, dispose of, or encumber any
assets of any Company; (iii) enter into any material Contract or agreement,
except for Client Contracts entered into in the ordinary course of
business; (iv) authorize or consummate any single capital expenditure in
excess of $50,000 or capital expenditures in the aggregate in excess of
$100,000; or (v) enter into or amend any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this Section
4.5(b);
(c) take any action other than in the ordinary course of business and
in a manner consistent with past practice (none of which actions shall be
unreasonable or unusual) with respect to materially increasing the
compensation or other remuneration of any officer, director, Shareholder or
employee of any Company, pay any bonuses to any of its employees (except
for bonuses earned in the ordinary course of business and disclosed to PRGX
in writing in advance of payment), or with respect to the grant of any
severance or termination pay (otherwise than pursuant to policies of
HSA-Texas in effect on the date hereof and fully disclosed to PRGX in
writing prior to the date hereof) or with respect to any increase of
benefits payable under its severance or termination pay policies in effect
on the date hereof;
(d) make any payments except in the ordinary course of business and in
amounts and in a manner consistent with past practice (none of which
payments shall be unreasonable or unusual), under any Employee Benefit Plan
or otherwise to any employee of, or independent contractor or consultant
to, any Company, enter into any Employee Benefit Plan, any employment or
consulting agreement, grant or establish any new awards under any such
existing Employee Benefit Plan or agreement, or adopt or otherwise amend
any of the foregoing;
(e) take any action except in the ordinary course of business and in a
manner consistent with past practice with respect to, or make any change
in, its methods of management, distribution, marketing, accounting or
operating (including practices relating to payment of trade accounts or to
other payments) or relating to establishing or adjusting reserves, writing
down or failing to write down (in accordance with its past practices
consistently applied) or writing up the value of any assets of any Company;
(f) take any action or enter into any agreement or make any change in
the billing or collection of its accounts receivable and unbilled claims
(other than in the ordinary course of business and consistent with past
practices), including without limitation, discounting or writing off any of
HSA-Texas' accounts receivable or work in progress for early payment, or
granting any other deduction or discount thereon or accelerating the
collection thereof;
(g) take any action to incur, assume, increase or guarantee prior to
Closing any indebtedness for borrowed money from banks or other financial
institutions or cancel, without payment in full, any notes, loans or other
receivables;
(h) loan or advance monies to any Person under any circumstance
whatsoever except travel advances or other reasonable expense advances to
employees or audit associates of any Company made in the ordinary course of
business and consistent with past practice;
(i) change any existing bank accounts or lock box arrangements of any
Company, except for deposits, withdrawals, or changes of signatories in the
ordinary course of business;
(j) waive any material rights of any Company or settle any material
claim involving any Company;
(k) sell, license, or otherwise dispose of any of its Intellectual
Property Assets other than in the ordinary course of business consistent
with past practice;
(l) fail to make any Tax filing or Tax payment required to be made
prior to the Closing Date; or
(m) do any act or omit to do any act which would cause a breach of, or
inability to perform, any contract, commitment or obligation of any Company
or any Shareholder, which breach has a Material
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Adverse Effect on HSA-Texas or the ability of HSA-Texas or Shareholders to
perform its, his or her obligations under this Agreement or any HSA-Texas
Transaction Document.
4.6 Notification.
(a) HSA-Texas and Shareholders shall give prompt notice to PRGX of the
following:
(i) The occurrence or nonoccurrence of any event of which any
Shareholder or HSA-Texas obtains knowledge the occurrence or
nonoccurrence of which would be reasonably likely to cause either (A) a
material breach of any representation or warranty of HSA-Texas or any
Shareholder contained in this Agreement at any time from the date hereof
to the Closing Date, or (B) directly or indirectly, any Material Adverse
Effect. PRGX's knowledge of any facts obtained by PRGX prior to the date
hereof or disclosed herein that may give rise after the date hereof to a
Material Adverse Effect on HSA-Texas shall not affect whether or not a
Material Adverse Effect on HSA-Texas shall have occurred.
(ii) Any material failure by HSA-Texas to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
(b) PRGX shall give prompt notice to HSA-Texas and Shareholders of the
following:
(i) The occurrence or nonoccurrence of any event of which PRGX
obtains knowledge the occurrence or nonoccurrence of which would be
reasonably likely to cause either (A) a material breach of any
representation or warranty of PRGX contained in this Agreement at any
time from the date hereof to the Closing Date, or (B) directly or
indirectly, any Material Adverse Effect. Neither HSA-Texas' nor any
Shareholder's knowledge of any facts obtained by HSA-Texas or such
Shareholder prior to the date hereof or disclosed herein that may give
rise after the date hereof to a Material Adverse Effect on PRGX shall
affect whether or not a Material Adverse Effect on PRGX shall have
occurred.
(ii) Any material failure by HSA-Texas to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
(c) For purposes of this Agreement, "Material Adverse Effect" means
with respect to any Person, any change or effect that is materially adverse
to the financial condition, business, results of operations, assets, or
prospects of such Person and its subsidiaries, taken as a whole. For
purposes of this Agreement, "Person" means an individual, partnership, a
corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a Governmental Entity.
Notwithstanding the foregoing, the delivery of any notice pursuant to this
Section 4.6. shall not limit or otherwise affect the remedies available
hereunder to the Person receiving such notice.
4.7 Public Announcements.
(a) PRGX and HSA-Texas will issue a mutually agreeable joint press
release at such time as PRGX and HSA-Texas shall agree. HSA-Texas and
Shareholders shall obtain the prior written consent of PRGX before issuing
any press release or otherwise making any public statements with respect to
the transactions contemplated herein and shall not issue any such press
release or make any such public statement prior to receiving such consent.
After the execution of this Agreement, PRGX shall use commercially
reasonable efforts to provide HSA-Texas and the Shareholders with a copy of
any press release relating to the transaction prior to its release,
provided that nothing contained herein shall limit PRGX from making any
public disclosure relating to the transactions without such prior delivery
to HSA-Texas and Shareholders if, in PRGX's good faith belief, such public
disclosure is necessary to comply with applicable law, regulations or stock
exchange rules.
(b) Except for any public announcement relating to the transactions
contemplated herein as may be required by law or stock exchange rules or as
provided in this Section or in Section 4.1 hereof, each Company, each
Shareholder, and PRGX agrees that until the press release contemplated in
Section 4.7(a) hereof is issued, each of such parties have not, and have
directed its directors, officers,
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employees, representatives and agents who have knowledge of the
transactions not to, disclose to any Person who is not a participant in
discussions concerning the transactions (other than persons whose consent
is required to be obtained hereunder), any of the terms, conditions or
other facts with respect to the transactions contemplated herein, or any
portion of the PRGX Disclosure which has not been made publicly available
by PRGX, including the fact that negotiations are taking place. In
addition, each Company and Shareholder shall obtain the prior written
consent of PRGX (and shall require their respective directors, officers,
members, employees, representatives and agents who have knowledge of the
transactions contemplated hereby or of any portion of the PRGX Disclosure
which has not been made publicly available by PRGX to obtain the prior
written consent of PRGX) before buying, selling, assigning, exchanging (by
merger or otherwise) or otherwise trading in or engaging in any
transactions with respect to PRGX securities, including any grant of a lien
or other security interest with respect to PRGX securities, any short sale,
the sale of any option or contract to purchase, the purchase of any option
or contract to sell, the grant of any option, right or warrant to purchase
or otherwise transfer or dispose of such securities, entering into any
hedge, swap, straddle, collar, prepaid forward contract, single pay
contract or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of any such securities, whether such
transaction is to be settled by delivery of securities, in cash or
otherwise, until such time as PRGX shall have notified HSA-Texas in writing
that such permission is no longer required due to the public availability
of all material information with respect to the contemplated transactions
and the PRGX Disclosure.
4.8 Regulatory Authorization. As soon as practicable after the date
hereof, PRGX, HSA-Texas and Shareholders shall each file with the United States
Federal Trade Commission ("FTC") and the United States Department of Justice
("DOJ") the notification and report form required for the transactions
contemplated hereby in connection therewith pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act") and each agrees to
file as promptly as practicable any supplemental information requested by the
DOJ or FTC. Any such notification and report form and supplemental information
will be in substantial compliance with the requirements of the HSR Act. All fees
in respect of any filings under the HSR Act made by PRGX and HSA-Texas in
connection with the transactions contemplated herein shall paid by PRGX. All
fees in respect of any filings made by any Shareholder under the HSR Act in
connection with the transactions contemplated herein shall be paid by such
Shareholder. Each of the parties shall assist the other in making all filings
under the HSR Act and shall provide all information and documentation requested
by the DOJ or the FTC.
4.9 Tax Matters.
(a) Definitions. As used in this Agreement, the following terms have
the specified meanings:
(i) "Flow-Through Taxes" shall mean U.S. federal income Taxes
attributable to income and gains of HSA-Texas until the Closing date
which are payable by Shareholders pursuant to Section 1366 of the Code
for Tax years, or partial Tax years, for which HSA-Texas is an S
corporation. The term "Flow-Through Taxes" shall also include any state
or local income Taxes attributable to income and gains of HSA-Texas
which are payable by the Shareholders under principles comparable to
Section 1366 of the Code.
(ii) "Tax Authority" shall mean any federal, foreign, national,
state, county or municipal or other local government, any subdivision,
agency, commission or authority thereof, or any quasi-governmental body
exercising any taxing authority or any other authority exercising tax
regulatory authority.
(iii) "Tax Return" shall mean any return, amended return, estimated
return, information return, declaration, deposit, claim for refund or
statement (including any related or supporting information) filed or to
be filed with any Tax Authority in connection with the determination,
assessment, collection or administration of any Tax or filed by or
including HSA-Texas or any of the Subsidiaries.
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(iv) "Tax" or "Taxes" shall mean all taxes, charges, fees,
interest, fines, penalties, additions to tax or other assessments,
whether disputed or not, including without limitation, income, excise,
environmental, property, sales, gross receipts, gains, transfer,
occupation, privilege, employment (including social security and
unemployment), use, value added, capital stock or surplus, franchise
taxes, advance corporate tax and customs duties imposed by any Tax
Authority, payable by HSA-Texas, the Shareholders, or any of the
Subsidiaries, or relating to or chargeable against HSA-Texas' or any of
the Subsidiaries' assets, revenues or income and payable by HSA-Texas,
the Shareholders or such Subsidiary.
(b) Tax Returns.
(i) Preparation and Filing of Tax Returns. The Shareholders shall
prepare or cause to be prepared, and file or cause to be filed, at the
Shareholders' expense, all Tax Returns required to be filed by HSA-Texas
and the Shareholders. Such Tax Returns for HSA-Texas shall be prepared
based on and consistent with tax accounting methods and principles used
by HSA-Texas and Shareholders, as the case may be, in preparing Tax
Returns for prior Tax periods.
(ii) Methods of Allocating Tax Liabilities. For purposes of
preparing the Estimated Financials, any Tax for any Tax period which
begins before the Closing Date and ends after the Closing Date (an
"Overlap Tax Period") shall be allocated as follows: The portion of such
Tax which relates to the portion of such Taxable period ending on the
Closing Date shall (A) in the case of any Taxes other than Taxes based
upon or related to income or receipts, be deemed to be an amount of such
Tax for the total number of days in the Overlap Tax Period multiplied by
a fraction the numerator of which is the number of days in the Taxable
period ending on the Closing Date and the denominator is the total
number of days in the entire Overlap Tax Period, and (B) in the case of
any Tax based upon or related to income or receipts, be deemed to be
equal to the amount which would be payable if the relevant Taxable
period ended on the Closing Date. Any credits relating to a Taxable
period that begins before and ends after the Closing Date shall be taken
into account as though the relevant Taxable period ended on the Closing
Date. All determinations necessary to give effect to the foregoing
allocations shall be made in a manner consistent with the prior practice
of the Companies.
(c) Cooperation of Parties. Except as otherwise provided in this
Agreement, the parties hereby agree that each of them shall cooperate with
the other in executing or causing to be executed any required document and
by making available to the other all work papers, records and notes of any
kind at all reasonable times for the purpose of allowing the appropriate
party to complete Tax Returns, participate in a proceeding, obtain refunds,
make any determination required under this Agreement or defend or prosecute
Tax claims.
(d) Reorganization. HSA-Texas, Shareholders and PRGX hereby
acknowledge and agree that the transactions contemplated hereby with
respect to the acquisition of the Acquired Assets of HSA-Texas shall be
treated by the parties for all tax purposes as (i) the acquisition by PRGX
of the Acquired Assets solely in consideration of the issuance to HSA-Texas
of the shares of PRGX Common Stock, constituting the Consideration and the
assumption by PRGX of the Assumed Liabilities, and (ii) as a tax-free
reorganization under Section 368(a)(1)(C) of the Code and any other
applicable laws. It is the intent of the parties that this Agreement shall
constitute a "plan of reorganization" for purposes of Section 368(a) of the
Code. The parties hereto shall use their best efforts to cause the
transaction contemplated hereby to be recognized as a tax-free
reorganization under Section 368(a)(1)(C) of the Code and any other
applicable state or federal law.
4.10 Liquidation of HSA-Texas. HSA-Texas hereby covenants and agrees that,
following the Closing, it will promptly effect its complete liquidation and
distribute all of its remaining assets (including the shares of PRGX Common
Stock) to its stockholders in accordance with applicable law and its operative
agreements.
4.11 Transaction Expenses. Except as otherwise specifically provided in
Section 9.2 hereof, all of the expenses incurred by PRGX in connection with the
authorization, negotiation, preparation, execution and
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performance of this Agreement and other agreements referred to herein and the
consummation of the transactions contemplated hereby, including, without
limitation, all fees and expenses of agents, representatives, brokers, counsel
and accountants for PRGX, Bain & Co., all filing fees and expenses in respect of
filings by PRGX under the HSR Act, and all fees and expenses for the
preparation, printing, filing, and mailing of the Proxy Statement, and the
drafts of the Joint Proxy Statement/Prospectus and Registration Statement on
Form S-4 previously prepared in connection with the Acquisition, and the
solicitation of shareholder approvals ("PRGX Transaction Expenses") shall be
paid by PRGX. Except as otherwise specifically provided in Section 9.2 hereof,
all expenses incurred by HSA-Texas in connection with the authorization,
negotiation, preparation, execution and performance of this Agreement and the
other agreements referred to herein and the consummation of the transactions
contemplated hereby, including without limitation, all fees and expenses of
agents, representatives, brokers, counsel, accountants, and all HSR filing fees
of HSA-Texas ("HSA-Texas Transaction Expenses") shall be paid by HSA-Texas or
Shareholders. If the Acquisition is consummated, PRGX shall pay any previously
unpaid reasonable and necessary fees and expenses of attorneys and accountants
of HSA-Texas (including all fees and expenses of KPMG LLP in connection with the
preparation of the Audited Statements) in connection with or related to the
authorization, preparation, negotiation, execution, and performance of this
Agreement and the transactions contemplated herein. Any and all expenses
incurred by any stockholder of HSA-Texas, including the Shareholders, in
connection with the authorization, negotiation, preparation, execution and
performance of this Agreement and the other agreements referred to herein and
the consummation of the transactions contemplated hereby shall be paid solely by
such stockholder of HSA-Texas.
4.12 Removal of Liens and Encumbrances. HSA-Texas and Shareholders hereby
agree to use their best efforts to obtain and file releases and termination
statements for all recorded liens, encumbrances, judgments and similar filings
which in any way relate to or affect the Acquired Assets as such liens,
encumbrances, judgments and similar filings are described on Schedule 5.3
hereto, other than the Permitted Encumbrances (the "Recorded Liens") as and when
provided herein. In respect of any such Recorded Liens that reflect underlying
obligations of a Company that have previously been satisfied, HSA-Texas shall,
or shall cause such Company to, obtain and file releases and termination
statements in respect thereof prior to the Closing Date. In respect of any
Recorded Liens and any liens relating to the Permitted Encumbrances that reflect
underlying obligations that will be paid by PRGX, HSA-Texas or such Company at
Closing, HSA-Texas shall, or shall cause such Company to, prior to the Closing
Date, prepare termination statements and releases in respect of such Recorded
Liens and cause them to be executed by the secured party in respect thereof and
delivered to PRGX at Closing for filing upon confirmation by such secured party
of receipt of funds satisfying such underlying obligation. HSA-Texas and
Shareholders hereby covenant and agree to indemnify and hold PRGX harmless from
and against any and all losses or liabilities incurred by PRGX resulting from or
arising out of HSA-Texas' failure to remove any Recorded Liens or liens relating
to Permitted Encumbrances which are paid off concurrently with the Closing, in
accordance with Article 7 hereof.
4.13 Bulk Sales Law. PRGX hereby waives compliance by HSA-Texas with any
applicable U.C.C. or tax bulk sales law, and HSA-Texas and Shareholders agree,
jointly and severally, to indemnify and hold harmless PRGX (and affiliates
thereof) from and against any claims or liabilities not assumed by PRGX pursuant
to this Agreement asserted against PRGX (or any affiliate thereof) by any
creditor of HSA-Texas by reason of such noncompliance or for any other claims or
liabilities against PRGX for failure to comply with any such bulk transfer law.
4.14 Bank Accounts. Prior to the Closing Date and effective as of the
Closing Date, HSA-Texas and Shareholders shall have caused the following to
occur in respect of each of the Bank Accounts: All payments to HSA-Texas or
Shareholders in connection with the Business received on or after the Closing
Date will be for the sole benefit of PRGX and, provided the Closing occurs,
shall be remitted to PRGX as part of the Acquired Assets. Signature cards
required by the Bank to change or add to persons authorized to access the
Accounts shall have been provided to PRGX with sufficient time for PRGX to
complete and transmit to the Bank prior to the Closing Date.
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4.15 Dallas Lease. Prior to the Closing, HSA-Texas and Shareholders shall
negotiate a lease between PRGX and the HSA-Texas for that square footage of the
premises required by the Business after the Closing, at fair market rental rates
and other terms and conditions acceptable to PRGX. All expenses of HSA-Texas in
connection with the negotiation, execution and delivery of such lease, and all
brokers fees of HSA-Texas and PRGX, shall be borne by the Shareholders.
4.16 Intentionally Omitted.
4.17 Commission Buy-Down Payments.
(a) For purposes hereof, the following terms shall have the following
meanings:
(i) "Post-Change Date Collections" means all collections received
after the Change Date from accounts receivable and work in process of
all audits of HSA-Texas outstanding as of the Change Date.
(ii) "Change Date" means a date prior to the Closing agreed to by
PRGX and HSA-Texas as of which the commission rates of Associates and,
if applicable, employees of HSA-Texas will be changed from the Old Rate
to the New Rates.
(iii) "Old Rate" means the commission rate for an Associate and, if
applicable, employee of HSA-Texas payable by HSA-Texas pursuant to a
written or oral compensation agreement in effect immediately prior to
the Change Date, which rates for all written and oral agreements are set
forth by auditor and by audit on Schedule 5.18(b) and Schedule 5.15
attached hereto.
(iv) "New Rate" means with respect to each Associate and, if
applicable, employee of HSA-Texas, the new commission rate for such
Associate or employee, as set forth in the Addendum to such person's
compensation agreement with HSA-Texas, as agreed to by HSA-Texas and
such Associate or employee, and as approved by PRGX.
(v) "Addendum" means a written agreement between HSA-Texas and an
Associate or, if applicable, employee of HSA-Texas, in form and
substance approved by PRGX, which, among other things, changes the Old
Rate to the New Rate effective on the Change Date with respect to the
Associate's or employee's commissions on Post-Change Date Collections
and sets forth the agreement between the parties thereto regarding the
amount and terms of the Commission Buy-Down Payment.
(vi) "Hypothetical Net Future Cash" means the good faith estimate
as agreed to by each Associate or, as applicable, employee and
HSA-Texas, and as approved by PRGX, of the amount of Post-Change Date
Collections in respect of each audit to which such Associate or employee
is, as of the Change Date, entitled to a commission at the Old Rate
pursuant to a written or oral compensation agreement compensation
agreement with HSA-Texas, less an agreed upon amount of all related
reductions for Vendor Paybacks, voids, cancels, client bankruptcies or
insolvencies and other adjustments.
(vii) "Commission Buy-Down Payment" means a fixed amount, as agreed
to by such Associate or, as applicable, employee and HSA-Texas, and as
approved by PRGX, payable on terms as set forth in the Addendum, which
represents the aggregate dollar amount as of the Change Date of the
difference between the Old Rate and the New Rate with respect to
Hypothetical Net Future Cash of each audit in respect of which such
Associate or employee is entitled to a commission under their respective
compensation agreements with HSA-Texas.
(viii) "Actual Net Receipts" means PRGX's actual cash collections
received on billings through March 31, 2004 of Post-Change Date
Collections of HSA-Texas in respect of which an Associate or, as
applicable, employee of HSA-Texas has entered into an Addendum.
(b) HSA-Texas will use its best efforts to obtain, prior to Closing, a
signed Addendum from all Associates and, if applicable, employees who are
entitled to commissions pursuant to written compensation agreements with
HSA-Texas. In consideration of the New Rate as set forth in the Addendum,
the
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Addendum will provide that HSA-Texas will pay such Associate or employee
the Commission Buy-Down Payment in the amount and on the terms set forth in
the Addendum, as agreed to by such Associate or employee and HSA-Texas, and
as approved by PRGX, all subject to appropriate withholding and deductions.
PRGX shall assume pursuant to the terms hereof the aggregate amount of all
such Commission Buy-Down Payments payable to Associates and employees of
HSA-Texas that are accrued as a liability on the Estimated Balance Sheet.
(c) Notwithstanding anything to the contrary contained herein or in
the Indemnification Agreement, on or before June 30, 2004, PRGX will submit
to the Shareholders' Representative a written statement setting forth, and
calculating the difference between, (i) the sum of the aggregate amount of
all commissions at the New Rate on Actual Net Receipts plus the aggregate
Commission Buy-Down Payments made pursuant to Addenda specifically agreed
to by PRGX ("Actual Payments") and (ii) the aggregate amount of all
commissions that would have been payable to the Associates and employees
who signed an Addendum at the Old Rates on Actual Net Receipts
("Hypothetical Commissions").
(d) Within 90 days after PRGX's delivery of such statement to the
Shareholders' Representative, the Shareholders' Representative shall
complete its review of the statement. If PRGX and the Shareholders'
Representative reach agreement on such statement within such 90 day period,
such statement shall be the "Final Commissions Statement." If PRGX and the
Shareholders' Representative are unable to reach agreement on the statement
within 20 days after the Shareholders' Representative's 90-day review
period of the statement, the parties shall submit the matter to Grant
Thornton LLP (or its successor-in-interest) in Atlanta, Georgia (the
"Accountants") for resolution. Such resolution by the Accountants shall be
set forth in a written report delivered by the Accountants to PRGX and the
Shareholders' Representative within 15 days after submission of the dispute
to the accountants, and the statement as modified by the Accountants
report, being the "Accountants' Final Commissions Statement" and shall be
final and binding on the parties hereto. All expenses of the Accountants
incurred in such resolution shall be shared equally between PRGX and the
Shareholders' Representative.
(e) If the amount of Actual Payments exceeds the amount of
Hypothetical Commissions, each amount as set forth on the Final Commissions
Statement or, if applicable, the Accountants' Final Commissions Statement
(the "Excess") by at least 2.5% of the Hypothetical Commissions, HSA-Texas
and each of the Shareholders, jointly and severally, agree to pay PRGX 50%
of the full amount of such Excess within 10 days after the date on which
the Final Commissions Statement is agreed to or, if applicable, on which
the Accountants' Final Commissions Statement is delivered to PRGX and the
Shareholders' Representative (the "Statement Date"). This obligation is
without regard to the requirement in Section 4(a) of the Indemnification
Agreement that the amount of Section 7.1 Indemnified Claims and Section 6.1
Indemnified Claims, as defined therein, must exceed the Base Amount,
defined therein, before PRGX will assert a claim against HSA-Texas and the
Shareholders for indemnification. In no event will the Shareholders be
subject to any additional indemnification obligation for the payment of the
Excess pursuant to Section 7.1 of this Agreement or Section 6.1 of the
Stock Agreement if the Shareholders fulfill their obligations to pay the
Excess in accordance with this Section 4.17.
(f) If the amount of Actual Payments is less than the amount of
Hypothetical Commissions, each amount as set forth on the Final Commission
Buy-Down Payments Statement (the "Shortfall") by at least 2.5% of the
Hypothetical Commissions, the parties hereto agree that 50% of the full
amount of such Shortfall shall increase the Base Amount under the
Indemnification Agreement; provided that if on the Statement Date, the
aggregate amount of Section 7.1 Indemnified Claims and Section 6.1
Indemnified Claims have exceeded the Base Amount, then a new Base Amount
equal to the original Base Amount plus 50% of the full amount of such
Shortfall shall immediately be instituted, upon the same terms and
conditions as provided in the Indemnification Agreement, in respect of all
Section 7.1 Indemnified Claims and Section 6.1 Indemnified Claims that
arise after the Statement Date.
4.18 Directors. Subject to compliance with the Georgia Business
Corporation Code (the "GBCC"), PRGX's Certificate of Incorporation, the
fiduciary duties of the PRGX Board of Directors and applicable law, as soon as
practicable after the Closing, PRGX shall promptly use its commercially
reasonable efforts to take
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all actions necessary (a) to cause the PRGX Board to be enlarged to thirteen
(13) members, and either (b) to cause the following four persons: H. Schultz, A.
Schultz, Arthur N. Budge, Jr. and Nate Levine to be nominated by the PRGX Board
for election as directors of PRGX by the PRGX shareholders at the Special
Meeting or, if PRGX's audited financial statements for the year ended December
31, 2001 are required to be delivered to PRGX's shareholders either with or
prior to delivery of the Proxy Statement, (c) to appoint the following persons
to fill the four new vacancies on the Board: H. Schultz, A. Schultz, Arthur N.
Budge, Jr. and Nate Levine; provided that the term of each director appointed in
accordance with (c) above to such newly created directorship shall expire at the
next election of directors by the PRGX shareholders in accordance with the GBCC.
H. Schultz and A. Schultz will be nominated (or appointed, as the case may be)
as Class II Directors, Nate Levine will be nominated (or appointed, as the case
may be) as a Class I Director, and Mr. Budge will be nominated (or appointed, as
the case may be) as a Class III Director. In connection with the PRGX annual
meeting of shareholders to be held in 2002, PRGX will use its commercially
reasonable efforts to take all actions necessary to cause Mr. Budge (or, if the
Directors named above have been appointed, all such Directors) to be renominated
for election by the PRGX shareholders at such meeting.
4.19 Shareholder Agreement. Effective upon the Closing, each of the
Shareholders shall enter into a shareholders agreement with John M. Cook and
Jack M. Toma in substantially the form attached hereto as Exhibit 4.19 (the
"Shareholder Agreement").
4.20 Contribution of Shares. Effective upon the Closing, each of the
Shareholders shall, and shall use its best efforts to cause all other equity
owners of each of the Subsidiaries to contribute without consideration therefor
all of the equity interests owned by such Shareholder or other equity owner in
such Subsidiary to the direct parent corporation holding a majority of the
outstanding equity interest in such Subsidiary or to the designee of such
corporation, unless such ownership is required by the jurisdiction of
organization of such Subsidiary, in which case, each of the Shareholders shall,
and shall use its best efforts to cause all other equity owners of such
Subsidiaries, to enter into a written agreement, in substantially the form
attached hereto as Exhibit 4.20, confirming that such Person is holding such
equity interests solely to satisfy a requirement of local law and that such
Person agrees to transfer such equity interest to any designee of PRGX, without
consideration, upon written request by PRGX, after the Closing.
4.21 Schedules. As soon as practicable but in no event later than December
4, 2001, HSA-Texas shall deliver final forms of all those Schedules required by
the terms hereof that are not attached hereto, which Schedules shall speak as of
August 3, 2001, unless otherwise indicated on such Schedule.
4.22 Transfer of Personal Property. Effective upon the Closing, each of
the Shareholders shall transfer to HSA-Texas by appropriate documents of
transfer, any and all right, title and interest such Shareholder has in and to
any assets (including Intellectual Property Assets) and rights relating to the
Business which any of the Companies use to conduct the Business, so that at the
Closing all such assets shall be part of the Acquired Assets, but not including
the condominium owned by the Schultz family that is used from time to time by
the Companies.
4.23 Repayment of Other Shareholder Loans. Effective upon the Closing,
HSA-Texas and the Shareholders shall cause all of the stockholders of HSA-Texas
(including those other than the Shareholders) to repay in full all amounts owed
by such stockholders to HSA-Texas.
4.24 Resignations. Effective upon the Closing, each of the Shareholders
shall resign and shall cause all other persons to resign, in writing from all
offices and directorships held by such Shareholder or other person in each of
the Subsidiaries and Licensees.
4.25 German Acquisition.
(a) From and after the date hereof, HSA-Texas shall diligently work
with the parties to the German Acquisition to consummate such acquisition
pursuant to the German Acquisition Agreement. HSA-Texas agrees to keep PRGX
fully and promptly apprised of the status of such acquisition. HSA-Texas
will not enter into any agreement with respect to the German Acquisition
without the prior review by and consent of PRGX, which consent will not be
unreasonably withheld.
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(b) If, at any time within 365 days after the Closing, despite
commercially reasonable efforts, PRGX is unable to close the acquisition of
the businesses of the German Licensee because the German Licensee has
demanded a purchase price in excess of or terms more favorable than those
previously agreed to by PRGX at the Closing, PRGX will notify the
Shareholders' Representative in writing specifying the basis for such
inability to close and if applicable the amount of the consideration in
excess of the agreed upon purchase price required to close such
acquisition. In such event PRGX will have the option:
(i) to close such acquisition by paying such excess price or
agreeing to the more favorable terms, as applicable, in which event, the
Shareholders and HSA-Texas, hereby indemnify the PRGX Indemnified
Parties (as defined herein) and hold them harmless, in accordance with
the provisions of Article 7 hereof, from and against the full amount of
the additional cost to PRGX of such excess price or such terms less
favorable to PRGX to close the German Acquisition; or
(ii) not to close such acquisition, in which event, the
Shareholders and HSA-Texas hereby indemnify the PRGX Indemnified Parties
and hold them harmless, in accordance with the provisions of Article 7
hereof, from the expected lost earnings to PRGX from the failure to
close the German Acquisition, which lost earnings will cause immediate
and irreparable economic harm to PRGX which actual loss to be suffered
by PRGX will be difficult, if not impossible to ascertain. Therefore,
the parties have agreed that if the German Acquisition is not closed
pursuant hereto, the indemnification to which the PRGX Indemnified
Parties will be entitled will equal $1,400,000, as liquidated damages,
which amount the parties hereto agree is reasonable and has been arrived
at after a good faith effort to estimate the value of such lost
earnings.
(c) In the event that the acquisition of the business of the German
Licensee is not completed prior to 365 days after the Closing, despite
PRGX's commercially reasonable efforts, the Shareholders and HSA-Texas
hereby indemnify the PRGX Indemnified Parties and hold them harmless from
the expected lost earnings to PRGX from the failure to close the German
Acquisition, which, for the reasons stated in Section 4.25(b)(ii) above,
the parties have agreed equals $1,400,000, as liquidated damages.
(d) The indemnification obligations contained in Sections 4.25(b)(ii)
and 4.25(c) are without regard to, and not subject to, the requirement in
Section 4(a) of the Indemnification Agreement that the amount of Section
7.1 Indemnified Claims and Section 6.1 Indemnified Claims, as defined
therein, must exceed the Base Amount, defined therein, before PRGX will
assert a claim against HSA-Texas and the Shareholders for indemnification
pursuant hereto.
4.26 Corporate Name. As soon as practicable following Closing, HSA-Texas
shall change its corporate name to a name which does not contain the words
"Howard Schultz", "Schultz" or the letters "HS&A", and HSA-Texas and
Shareholders shall cooperate with PRGX in any efforts undertaken by PRGX to
secure or protect its rights in any name used by the Companies in the conduct of
the Business prior to Closing. As soon as practicable following Closing, PRGX
will change its corporate name to "PRG-Schultz International, Inc."
4.27 Certain Advancement of Expenses. From and after the Closing Date,
PRGX agrees to assume HSA-Texas' obligations to advance expenses under those
certain Advancement Agreements, each dated as of August 23, 2001, between
HSA-Texas and Michael Glazer, Stephanie Holloway, A. Schultz, and H. Schultz
(the "Managers"), copies of which Advancement Agreements were previously
provided to PRGX, only if the Manager incurs expenses in a claim, action, suit,
proceeding or investigation which is brought, whether before or after the
Closing Date, by a shareholder of PRGX, in such person's capacity as a
shareholder of PRGX, by reason of the fact that such person served as a Manager
of HSA-Texas; provided that PRGX shall have no obligation under the foregoing
provisions of this Section 4.27 to any Manager when and if (i) a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and non-appealable, that indemnification of such Manager in
the manner contemplated hereby is prohibited by applicable law or (ii) the loss,
claim, damage, liability, cost, expense, judgment or fine is based on or arises
from a final non-appealable order of a court of competent jurisdiction or in
connection with a settlement, consent, decree, order or injunction with any
governmental agency or authority finding that the Manager violated Section 16(b)
of the Exchange Act, Section 10(b) of the Exchange Act or Rule 10b-5 promulgated
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thereunder or any federal or state securities law relating to or governing
"insider" trading of securities. At the Closing Date, each Manager shall confirm
in writing that upon the finality of any such determination that PRGX is not
liable for any such claims for expenses, the Manager will immediately reimburse
PRGX in full for any fees, expenses and costs incurred by PRGX advanced in
connection with the defense of such claims. Any Manager wishing to claim expense
reimbursement under this Section 4.27, upon learning of any such claim, action,
suit, proceeding or investigation, shall immediately notify PRGX, thereof
(provided that the failure to give such notice shall not affect any obligations
hereunder, except to the extent that the indemnifying party is actually and
materially prejudiced thereby).
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
HSA-TEXAS AND SHAREHOLDERS
In order to induce PRGX to enter into this Agreement and consummate the
transactions contemplated hereby, HSA-Texas and each Shareholder jointly and
severally represent and warrant to PRGX as follows, each of which warranties and
representations is material to and relied upon by PRGX.
5.1 Organization and Authority of Companies. Each Company is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction designated on Schedule 5.1(a) attached hereto. Each Company is duly
qualified as a foreign corporation in all jurisdictions inside and outside of
the United States in which the conduct of its business or the ownership of its
properties requires such qualification (except where the failure to do so would
not have a Material Adverse Effect on such Company) and Schedule 5.1(b) lists
all the jurisdictions inside and outside the United States where each Company is
so qualified. Each Company has all necessary corporate power and authority to
own, lease and operate its properties and conduct its business as it is
currently being conducted. Except as described on Schedule 1(a), no Company
owns, directly or indirectly, any equity interest in any corporation,
partnership, joint venture, or other entity.
5.2 Corporate Power and Authority; Due Authorization. HSA-Texas has full
corporate power and authority, and each Shareholder has full power and
authority, to execute and deliver this Agreement and each of the HSA-Texas
Transaction Documents to which HSA-Texas or such Shareholder is or will be a
party and to consummate the transactions contemplated hereby. "HSA-Texas
Transaction Documents" means each of the agreements, documents and instruments
referenced in this Agreement to be executed and delivered by HSA-Texas and/or
any Shareholder. Prior to the Closing Date, the directors and the Shareholders
of HSA-Texas shall have duly approved and authorized the execution and delivery
of this Agreement and each of the HSA-Texas Transaction Documents to which
HSA-Texas is or will be a party and the consummation of the transactions
contemplated hereby and thereby, and no other corporate proceedings shall then
be necessary. In respect of each of the Trusts, the execution, delivery and
performance of this Agreement by such Trust has been duly authorized by all
governing agreements of such Trust. In respect of each trust, the trustee
identified on Schedule 5.2(a) hereof is the sole Trustee of such Trust and has
sole full right, power and authority to enter into this Agreement on behalf of
the Trust and to perform Trust's obligations hereunder. Assuming that this
Agreement and each of the HSA-Texas Transaction Documents which are also PRGX
Transaction Documents constitutes a valid and binding agreement of PRGX, this
Agreement and each of the HSA-Texas Transaction Documents constitutes, or will
constitute when executed and delivered, a valid and binding agreement of
HSA-Texas and/or such Shareholder, as the case may be, in each case enforceable
in accordance with its terms. The duly elected directors and officers of each
Company are set forth on Schedule 5.2(b) attached hereto.
5.3 Title to Assets. Except as set forth on Schedule 5.3 attached hereto,
each Company has good, valid and marketable title to all of its assets free and
clear of any mortgages, liens, pledges, security interests, encumbrances, or
similar rights of every kind and nature, except for any liens for taxes not yet
due and payable and those encumbrances in respect of the Acquisition-Related
Notes specifically set forth on Schedule 5.11B attached hereto which will be
removed concurrently with the Closing (collectively, the "Permitted
Encumbrances") and except for liens and encumbrances on the Dallas Headquarters
property, which is an Excluded
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Asset. Except for the Dallas Headquarters property, which is an Excluded Asset,
no Company owns any real property.
5.4 No Conflict; Required Consents. Schedule 5.4 contains a true, correct
and complete list of (a) all Material Contracts and Material Leases that require
consent or approval to the assignment of such Material Contract or Material
Lease in order to operate the Business on a daily basis as presently conducted
and (b) all contracts (other than Material Contracts) and all Leases (other than
Material Leases) that require consent or approval to the assignment of a
Contract or Lease where the absence of such consent is likely to result in a
Material Adverse Effect (collectively, the "Company Consents" and individually a
"Company Consent"). Assuming compliance with the applicable requirements of the
HSR Act and assuming all Company Consents have been obtained or taken prior to
Closing, the execution and delivery by HSA-Texas and Shareholders of this
Agreement and the HSA-Texas Transaction Documents, and the consummation by
HSA-Texas and Shareholders of the transactions contemplated hereby and thereby
do not and will not (i) require the consent, approval or action of, or any
filing with or notice to, any corporation, firm, Person or other entity or any
Governmental Entity (except for the Acquisition-Related Notes and related
security agreements, and except for consents and approvals under Contracts and
Leases not required to be listed on Schedule 5.4); (ii) violate the terms of any
instrument, document or agreement to which any Company is a party, or by which
any Company or any Shareholder or the property of any Company is bound, or be in
conflict with, result in a breach of or constitute (upon the giving of notice or
lapse of time or both) a default under any such instrument, document or
agreement, or result in the creation of any lien upon any of the property or
assets of any Company (except for the Acquisition-Related Notes and related
security agreements, and except for consents and approvals under Contracts and
Leases not required to be listed on Schedule 5.4), in each case except where
such violation, conflict, breach, default or lien will not have a Material
Adverse Effect; (iii) violate HSA-Texas' Articles of Incorporation or Bylaws or
other organizational or governing agreements; or (iv) violate any order, writ,
injunction, decree, judgment, ruling, law, rule or regulation of any
Governmental Entity applicable to any Company, the Business or the Acquired
Assets. No Company nor any Shareholder is subject to, or is a party to, any
mortgage, lien, lease, agreement, contract, instrument, order, judgment or
decree or any other restriction of any kind or character which would prevent or
hinder the continued operation of the Business after the Closing Date on
substantially the same basis as theretofore operated.
5.5 Ownership of Capital Stock and Options.
(a) All outstanding shares of each Company's capital stock are validly
issued, fully paid and non-assessable and are owned of record and
beneficially solely by those persons and entities listed on Schedule 5.5(a)
attached hereto in respect of each Company. Except as set forth on Schedule
5.5(a), no one other than the Shareholders has any beneficial or record
interest in the capital stock of HSA-Texas and no one other than the
shareholders identified on Schedule 5.5(a) in respect of each Subsidiary
owns any beneficial or record interest in the capital stock of such
Subsidiary. Each Shareholder warrants and represents that it is the lawful
owner of, and has good and marketable title to, all of HSA-Texas'
outstanding capital stock identified as owned by it on Schedule 5.5(a),
free and clear of any mortgage, pledge, claim, lien, charge, encumbrance or
other right in any third party (including any right to purchase, vote or
direct the voting of, any shares thereof). HSA-Texas represents and
warrants that the lawful owner(s) of each Subsidiary are identified on
Schedule 5.5.(a) and that each such owner(s) so identified have good and
marketable title to, all of such Subsidiary's outstanding capital stock
identified as owned by it on Schedule 5.5(a), free and clear of any
mortgage, pledge, claim, lien, charge, encumbrance or other right in any
third party (including any right to purchase, vote or direct the voting of,
any shares thereof). Schedule 5.5(a) includes a true, correct and complete
list of those Subsidiaries organized in jurisdictions which require
individual or resident shareholders.
(b) Schedule 5.5(b) attached hereto is a true, correct and complete
list of the only options outstanding as of the date hereof, issued by
HSA-Texas prior to the date hereof, to purchase shares of HSA-Texas Common
Stock, showing the name and address of the holder (each an "Optionee"), the
number of shares of HSA-Texas Common Stock subject to such option, the
exercise price of such option, the expiration date of such option and any
other relevant information with respect to such option, which
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list will be updated (only so as to delete options from such list that may
have been cancelled or surrendered, but not so as to add any options or
other rights to such list) so as to be true, correct and complete as of the
Closing Date (collectively, the "HSA-Texas Options"). Prior to the date
hereof, HSA-Texas has provided PRGX with a true, correct and complete copy
of the 1999 Howard Schultz & Associates Stock Option Plan, which is the
only stock option plan pursuant to which any options to acquire shares of
any of the Companies' common stock have been granted. Also set forth on
Schedule 5.5(b) is a true, correct and complete list of the only holders of
HSA-Texas SARs, showing the name and address of each holder, the number of
SARs granted to such holder, the grant price of such SAR, and all other
relevant information with respect to such HSA-Texas SAR, which list will be
updated so as to be true, correct and complete as of the Closing Date. As
soon as practicable after the date hereof, HSA-Texas will provide true
correct and complete copies of all option grant agreements entered into by
HSA-Texas, which reflect options outstanding as of the date hereof to
acquire shares of common stock of any of the Companies and true correct and
complete copies of all documents memorializing the HSA-Texas SARs and any
other contract rights obligating any of the Companies to issue shares of
its capital stock or otherwise relating to its capital stock, in each case
as amended and in effect on the date hereof (collectively, the "Grant
Agreements"). All such HSA-Texas Options are fully vested and are
nonqualified stock options, and are not "incentive stock options", under
Section 422 of the Code. The HSA-Texas Common Stock subject to all
HSA-Texas Options is solely HSA-Texas Non-Voting Common Stock. Except as
set forth on Schedule 5.5(b), no Company has issued any convertible
securities, options, warrants, or entered into any contracts, commitments,
agreements, understandings, arrangements or restrictions by which it is
bound to issue any additional shares of its capital stock or other
securities or which otherwise relate to its capital stock or other
securities. Any and all convertible securities, options, warrants or
contracts, commitments, agreements, understandings, arrangements or
restrictions by which any Company other than HSA-Texas is bound to issue
additional shares of its capital stock or other securities or which
otherwise relate to its capital stock or other securities, including those
options granted by Howard Schultz & Associates Europe, SA, to Pascal
Bordet, Viller Galafassi and Tomas Herreros (but not the SARs that were
granted to terminate such options as set forth on Schedule 5.5(b) hereof),
have been, or prior to Closing will be, fully and finally terminated
without any liability to PRGX. All HSA-Texas Options have been granted
under a stock option grant agreement in the form attached hereto in
Schedule 5.5(b)(i) and there are no other written or oral agreements
relating to such HSA-Texas Options. All HSA-Texas SARs have been granted
pursuant to a document(s) in the form attached hereto as Schedule
5.5(b)(ii) and there are no other written or oral agreements relating to
such HSA-Texas SARs.
5.6 Compliance with Laws. Except as set forth on Schedule 5.6, each
Company is in compliance with all applicable laws, orders, rules and regulations
of all Governmental Entities, except where such noncompliance has and will have,
individually or in the aggregate, no Material Adverse Effect on the Business or
Acquired Assets. No Company nor any Shareholder has received written notice of
any noncompliance with the foregoing, nor are they aware of any basis therefor.
5.7 Licenses and Permits. Except as set forth on Schedule 5.7, each
Company holds and is in compliance with all Licenses and Permits listed on
Schedule 1.1(f) attached hereto, and such list constitutes all of the city,
county, state, federal and foreign licenses, permits, approvals and
authorizations necessary or required for the use or ownership of the Acquired
Assets and the operation of the Business, except where such failure to hold or
noncompliance has or will have, individually or in the aggregate, no Material
Adverse Effect on the Business or Acquired Assets. No Company nor any
Shareholder has received written notice of any violations in respect of any such
Licenses and Permits. No proceeding is pending or, to the Knowledge of HSA-Texas
or any Shareholder, threatened, which seeks revocation or limitation of any such
Licenses and Permits.
5.8 Financial Information. Prior to the date hereof, HSA-Texas has
delivered to PRGX true, correct and complete copies of the Historical Statements
for periods through June 30, 2001, except that Historical Statements (other than
the Audited Statements) do not contain customary footnotes. The Historical
Statements have been prepared in accordance with GAAP, fairly present the
combined financial position of
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the Companies and the Affiliated Foreign Operating Companies at the respective
dates thereof and the combined results of operations of the Companies and the
Affiliated Foreign Operating Companies for the periods then ended, in each case
in accordance with past practice and GAAP consistently applied during the
periods presented (except as otherwise disclosed in the notes thereto). The
Estimated Financials will be prepared in accordance with GAAP, will fairly
present the combined financial conditions of the Companies and the Affiliated
Foreign Operating Companies for the period ended as of the Closing Date, in
accordance with past practice and GAAP consistently applied during the periods
presented. The Historical Statements are, and the Estimated Financials will be,
consistent with the books and records of the Business. All work papers related
to the Historical Statements and the Estimated Financials and other financial
information provided by the Companies and the Affiliated Foreign Operating
Companies to PRGX or KPMG LLP in connection with their due diligence are true,
correct and consistent with the books and records of the Companies and the
Affiliated Foreign Operating Companies. On the date hereof there were, and as of
the Closing Date there will be, no liabilities or obligations of the Companies
or the Affiliated Foreign Operating Companies of any nature, whether liquidated,
unliquidated, accrued, absolute, contingent or otherwise except for those (i)
that are specifically reflected or reserved against as to amount in the balance
sheets contained in the Audited Statements, or (ii) that are Assumed Liabilities
or are specifically set forth on Schedule 5.8 attached hereto, none of which,
individually or in the aggregate, constitutes a Material Adverse Effect. Except
as disclosed on Schedule 5.8 attached hereto, no Company is, nor has any Company
been during the 12 months immediately preceding the execution of this Agreement,
insolvent within the meaning of 11 U.S.C. sec.sec.. 101(31). Each Company has
paid and is paying its debts as they become due.
5.9 Sufficiency of Assets. The Acquired Assets, together with the Excluded
Assets, constitute all of the material assets and rights of any nature with
which HSA-Texas has conducted the Business for the twelve month period prior to
the Closing Date, subject only to additions and deletions in the ordinary course
of business. The Acquired Assets are owned and held solely by the Companies, and
all agreements, obligations, expenses and transactions related to the Business
have been entered into, incurred and conducted solely by the Companies.
5.10 Deposits and Other Rights. Attached as Schedule 1.1(g) is a true,
correct and complete list of all Deposits and Other Rights of each of the
Companies, listing, where appropriate, the location thereof. Schedule 1.1(g)
shall be updated, as of the Closing Date, to list the amount of all monetary
Deposits and Other Rights.
5.11 Trade Payables; Accrued Expenses; Other Debt.
(a) Trade Payables. All trade payables and accrued expenses of the
Companies assumed by PRGX at Closing shall have been incurred in the
ordinary course of business, shall be directly related to the Business to
be acquired by PRGX pursuant hereto, and shall not, as of the Closing Date,
be overdue other than those, if any, not yet paid due to a bona fide
dispute (as detailed on Schedule 5.11A).
(b) Debt for Borrowed Money. Schedule 5.11B is a true, correct and
complete list as of the date hereof, which list will be updated at Closing
so as to be true, correct and complete as of the Closing Date, of all
debts, obligations, guaranties, seller financing and other indebtedness for
borrowed money of each of the Companies outstanding as of the date hereof
(including the Acquisition-Related Notes), stating the origin of the
obligation, the obligee of such obligation, the security therefor
(including a specific description of collateral), the terms of payment and
the amount owed as of the date hereof.
5.12 Tax Returns and Payments.
(a) Payment of Taxes and Other Matters. Except as otherwise disclosed
in Schedule 5.12 attached hereto: (i) all material Tax Returns, including
estimated Tax returns and reports of every kind with respect to Taxes which
are due to have been filed by HSA-Texas and the Subsidiaries on or before
the Closing Date in accordance with any applicable law in all jurisdictions
where HSA-Texas or any Subsidiary is subject to Taxes, have been or will be
duly filed on or before the Closing Date and are, or on or before the
Closing Date will be, true, correct and complete in all material respects;
(ii) all Taxes, deposits or other payments which relate to Taxes required
to be paid (whether or not shown on a Tax
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Return) by HSA-Texas and any Subsidiary on or prior to the Closing Date
have been, or will be, paid in full or will be accrued or reserved as a Tax
liability on the December 31, 2000 Audited Financials and/or on the
Estimated Financials; (iii) there are not now any extensions of time in
effect with respect to the dates on which any Tax Returns or reports of
Taxes were or are due to be filed; (iv) all deficiencies asserted as a
result of any examination of any Tax Return or report of Taxes of HSA-Texas
or any Subsidiary have been, or on or before the Closing Date, will be,
paid in full or finally settled with no outstanding liability to HSA-Texas
or any Subsidiary or will be included in the amount of the reserve for Tax
liability shown on the December 31, 2000 Audited Financials and/or on the
Estimated Financials, and no issue has been raised in any such examination
which, by application of the same or similar principles, reasonably could
be expected to result in a proposed deficiency for any other period not so
examined; (v) to HSA-Texas' knowledge, no claims have been asserted against
and no proposals or deficiencies for any Taxes are being asserted against
HSA-Texas or any Subsidiary, or proposed or threatened, and no audit or
investigation of any Tax Return or report of Taxes is currently underway,
pending or threatened; (vi) there are no outstanding waivers or agreements
by HSA-Texas or any Subsidiary for the extension of time for the assessment
of any Taxes or deficiency thereof, nor are there any requests for rulings,
outstanding subpoenas or requests for information, notices of proposed
reassessment of any property owned or leased by HSA-Texas or any Subsidiary
or any other matter pending between HSA-Texas or any Subsidiary and any
taxing authority; (vii) there are no liens for Taxes upon any property or
assets of HSA-Texas or any Subsidiary except statutory liens for current
Taxes not yet delinquent; (viii) to HSA-Texas' knowledge, no claim has ever
been made by a Tax Authority in a jurisdiction where any Subsidiary does
not file Tax Returns that such Subsidiary is or may be subject to Tax by
that jurisdiction; (ix) no Subsidiary is a party to or bound by any tax
allocation or tax sharing agreement and has no current or potential
contractual obligation to indemnify any other Person with respect to Taxes;
(x) no Subsidiary and, with respect to Flow-Through Taxes attributable to
the operations of HSA-Texas, no Shareholder, is required to include in
income any adjustment pursuant to Section 481(a) of the Code by reason of a
voluntary change in accounting method initiated by such Subsidiary or
HSA-Texas, nor to HSA-Texas' knowledge, has the Internal Revenue Service
proposed any adjustment or change in accounting methods for HSA-Texas or
any Subsidiary.
(b) Subchapter S Status. HSA-Texas made a valid election to be
treated as an S Corporation for U.S. federal income tax purposes effective
as of January 1, 1983 (the "S Effective Date"), and such election has
remained valid and effective at all times since such date, and HSA-Texas
will be an S corporation up to and including the day before the Closing
Date. HSA-Texas has made available to PRGX a true, correct and complete
copy of its S election, and acknowledgement of receipt thereof by the
Internal Revenue Service.
5.13 Fixed Assets. The Fixed Assets and the fixed assets leased by each of
the Companies include all of the furniture, fixtures, and equipment owned and
used by each of the Companies in the operation of the Business. Except as
specifically set forth on Schedule 1.1(a) attached hereto, each of the Fixed
Assets is in the possession of the Companies and is in good operating condition
and repair, normal wear and tear excepted. Prior to the Closing, HSA-Texas will
deliver to PRGX a true, correct and complete list of the Fixed Assets of the
Companies that is reconciled with the Fixed Assets line item of the Estimated
Balance Sheet.
5.14 Information on Audits; Accounts Receivable.
(a) Information on Audits. Schedule 5.14(a) will be delivered by
HSA-Texas to PRGX on or before 3 days after the mailing by PRGX of the
Proxy Statement to its shareholders. Schedule 5.14(a), when so delivered,
will be a true, correct and complete list, as of the last day of the
calendar quarter immediately preceding delivery of such Schedule, of the
following information with respect to each Active Audit of Key Clients;
provided that with respect to such Schedule, Key Clients shall not be
identified by name, but shall be represented by a letter of the alphabet,
and at least 3 business days prior to the Closing, HSA-Texas will update
the information contained on Schedule 5.14(a) so as to be true,
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correct and complete as of the Closing Date, and deliver to PRGX a key
which identifies the name and address of the Key Client represented by each
letter on such list:
(i) name of Client;
(ii) primary or secondary audit;
(iii) scope of audit (e.g., all divisions, Southeast region
only-merchandise, expenses, advertising, real estate);
(iv) audit year(s) or other covered time period of audit;
(v) the contract rate for the Company's service fee;
(vi) Client reserve or holdback percentage;
(vii) audit commencement date and projected completion date;
(viii) aggregate claims approved by Client;
(ix) aggregate gross service fees billed to Client by the Company
for such audit;
(x) aggregate amount of cash receipts from such audit;
(xi) reserve amount held by Client; and
(xii) the aggregate amount of Vendor Paybacks per audit that have
been paid as of June 30, 2001 (and as of the last day of the calendar
quarter immediately preceding the Closing Date).
For purposes hereof, "Active Audits" means, collectively, all those audits
of Clients of the Business in respect of which claims remain to be written,
including those listed on Schedule 5.14(a) attached hereto. "Inactive
Audits" means, collectively, all those audits for Clients of the Business
in respect of which no claims remain to be written, including those in
respect of which Client continues, as of the date hereof, to hold a reserve
for credits, chargebacks or other Vendor Paybacks. A "Vendor Payback" means
the credits, chargebacks or payments made by a Company to a Client as a
result of the Client's refund of payments made to such Client's vendor
refunding commissions received by said Company from such Client.
(b) Accounts Receivable. Prior to the Closing, HSA-Texas shall
provide PRGX with a true, correct and complete list of the Accounts
Receivables of the Companies and the Affiliated Foreign Operating Companies
reconciled with the Accounts Receivable line item on the Estimated Balance
Sheet, showing by Client and by each Active Audit for such Client, the
terms and time period for collection thereof. Each of the Accounts
Receivable is bona fide and represents a valid obligation arising from
sales actually made or services actually performed by the Companies or the
Affiliated Foreign Operating Companies in the ordinary course of Business.
Each of the Accounts Receivable shall be as of the Closing Date current and
collectible in full within ninety (90) days after the day on which it first
becomes due and payable net of the reserve shown on the Estimated Balance
Sheet (which reserve will be adequate and calculated consistent with past
practice and will not represent a greater percentage of the Accounts
Receivable reflected on the Estimated Balance Sheet than the reserve to the
accounts receivable on the December 31, 2000 balance sheet contained in the
Audited Statements) and will not represent a material adverse change in the
composition of such Accounts Receivable in terms of aging. There is no
contest, claim, dispute, defense or right of setoff relating to the amount
or validity of such Account Receivable, except for possible vendor payback
claims of the Client. As to each such Account Receivable, to the Knowledge
of HSA-Texas and, if such Account Receivable is on the books of a
Subsidiary, to the knowledge of such Subsidiary, neither the vendor nor the
respective Client has objected to the claim for reimbursement upon which
such Account Receivable is based. The Work in Progress included in the
Acquired Assets is bona fide and will, if and when converted to Accounts
Receivable, represent valid obligations arising from sales actually made or
services actually performed by the Companies in the ordinary course of
business, subject only to possible vendor pay-back claims of the Client.
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5.15 Material Contracts; License Agreements.
(a) Definition of Material Contract. Schedule 5.15 attached hereto is
a true, correct and complete list of all "Material Contracts" which, for
purposes hereof, means, collectively, all Contracts which:
(i) are with those entities which constitute Key Clients for 2000
or 2001;
(ii) evidence the obligation of any Company for debt to any Person
for borrowed money or evidence the obligation of any Person, including
any franchisee or licensee, to any of the Companies for borrowed money
(including seller/licensee financing arrangements, but not Leases);
(iii) are license agreements (including those related to Software),
either as licensor or licensee, including all agreements with all
Licensees and which involve an aggregate annual expenditure or receipt
by any Company of $25,000 or more;
(iv) are with strategic or business partners of any Company,
including all agreements relating to the Salt Lake City Data Processing
Center and the direct to store delivery audit operations of the
Business;
(v) involve the provision of data processing services or
telecommunications services to any Company and which involve an
aggregate annual expenditure by any Company of $100,000 or more;
(vi) are contracts with vendors of products or services to any
Company (including supply or requirements contracts), indicating any
which are not cancelable by such Company without cost on 60 days or less
notice and which involve an aggregate annual expenditure by any Company
of $100,000 or more;
(vii) are with employees or independent contractors or sales agents
of any Company;
(viii) relate to any merger, asset purchase, stock purchase or
similar purchase and sale agreement to which any of the Company is or
was a party within the last three years, or has continuing obligations
in respect of, including all agreements relating to the prior
acquisition of the imaging business, the Salt Lake City Data Processing
Center and the DSD Acquisitions;
(ix) are with any current Client and have an unexpired term of 2 or
more years;
(x) have or may have the effect of (1) prohibiting or impairing any
business practice of the Companies, any acquisition of property
(tangible or intangible) by Companies or the conduct of business by the
Companies, (2) requiring the referral of any business by the Companies,
or (3) requiring or purporting to require the payment of money or the
acceleration of performance of any obligations of any Company by virtue
of the Closing; or
(xi) are Client Contracts which contain any (1) obligations to
provide equipment or services beyond the scope of the Business or (2)
any guaranty, rebate or refund that will or is reasonably likely to
exceed $25,000 in any 12 month period.
Schedule 5.15 indicates thereon the category, by section reference, of Material
Contract described in this Section 5.15(a) to which such Material Contract
belongs. Notwithstanding anything to the contrary herein, with respect to the
information about Clients and Key Clients on the Schedules or deliveries
required to be delivered as of the date hereof by this Section 5.15, Client and
Key Clients shall not be identified by name, but shall be represented by a
letter of the alphabet, and immediately prior to the Closing, HSA-Texas will
deliver to PRGX a key which identifies the name and address of the Client or Key
Client represented by each letter on such list.
(b) Certain Representations regarding Material Contracts. Except as
specifically set forth in Schedule 5.15(b)-1, no Company has entered into
any agreement under which it is restricted from providing services to
Clients or potential Clients or any class of Clients, in any geographic
area during any period of time or in any segment of the market. HSA-Texas
and Shareholders have provided or made available to PRGX true, correct and
complete copies of all written Material Contracts, including any and all
amendments and waivers thereto, and have provided descriptions of the
material terms of any oral
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Material Contracts on Schedule 5.15(b)-2 hereof. Assuming the Material
Contracts constitute the valid and binding agreements of the Company party
thereto, such Material Contracts are valid, legally binding and enforceable
against the other parties thereto subject to laws of general application in
effect affecting creditors' rights and subject to the exercise of judicial
discretion in accordance with general equitable principles. Except as
specifically set forth on Schedule 5.15(b)-3, no Company nor, to the
Knowledge of HSA-Texas or any Shareholder, any other party to any of the
Material Contracts, is in breach of, or in default under, any of the
Material Contracts, and no event has occurred which, with the giving of
notice or lapse of time, or both, would constitute a default by any Company
or, to the Knowledge of HSA-Texas or any Shareholder, any other party to
any of the Material Contracts. Except as specifically set forth on Schedule
5.15(b)-4, the assignment of any of the Material Contracts to PRGX in
accordance with this Agreement will not constitute a breach or violation of
such Material Contract.
(c) Contracts regarding Licensees. Prior to the date hereof,
HSA-Texas has provided to PRGX true, correct and complete copies of all
agreements, together with all amendments, supplements and addenda thereto,
between PRGX and each Licensee. In addition to the representations set
forth in subsection (b) above, HSA-Texas and Shareholders make the
following additional representations in respect of Material Contracts
involving a Licensee. With respect to the German Licensee, HSA-Texas has
the absolute and unqualified right to purchase the license granted to such
Licensee pursuant to the terms of a written agreement, true, correct and
complete copies of which have been previously delivered to PRGX.
5.16 Material Leases. Schedule 5.16 attached hereto is a true, correct and
complete list of all "Material Leases," which means, for purposes hereof, all
Leases which (a) involve an aggregate annual expenditure by any Company of
$25,000 or more, (b) are not cancelable by such Company without cost on sixty
(60) days' or less notice, or (c) have a term which extends for more than one
(1) year from the Closing Date. HSA-Texas has delivered to PRGX true, correct
and complete copies of all of the Material Leases, together with all amendments,
addenda and supplements thereto. Except as specifically set forth on Schedule
5.16, with respect to each Material Lease:
(a) the Company party thereto holds the leasehold interest created
under each Material Lease;
(b) assuming the Material Lease constitutes the valid and binding
agreement of such Company, the Material Lease is legal, valid, binding and
enforceable against the other party thereto and in full force and effect,
subject to laws of general application in effect affecting creditors'
rights and subject to the exercise of judicial discretion in accordance
with general equitable principles;
(c) subject to obtaining any necessary consent in respect of the
transactions contemplated hereunder and assuming the Material Lease
constitutes the valid and binding agreement of the party thereto other than
such Company, the Material Lease will continue to be legal, valid, binding
and enforceable against PRGX and in full force and effect on identical
terms following the Closing Date;
(d) no Company, nor, to HSA-Texas' or any Shareholder's Knowledge, any
other party to the Material Lease is in breach or default, and no event has
occurred which, with the giving of notice or lapse of time, would
constitute a breach or default by such Company or permit termination,
modification or acceleration thereunder by any other party thereto;
(e) no Company nor, to HSA-Texas' or any Shareholder's Knowledge, any
other party to the Material Lease has repudiated in writing any provision
thereof;
(f) there have been and there are no disputes, oral agreements or
forbearances in effect as to the Material Lease;
(g) no Company has assigned, transferred, conveyed, mortgaged, deeded
in trust or encumbered any interest in the leasehold of the Material Lease
and HSA-Texas and Shareholders are not aware of any such assignment,
transfer, conveyance, mortgage, deed in trust or encumbrance of any
interest in the leasehold of the Material Lease;
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(h) in respect of each such Material Lease which is a real property
lease, (i) such lease is the only instrument which gives rise to a right of
occupancy by the Company at such location, (ii) Company is the original
lessee (or has validly succeeded to the rights of the original lessee)
under such lease, (iii) Company actively occupies such location, (iv)
Company has paid the rent under the lease on a current basis and there are
no past due amounts; and
(i) in respect of each such Material Lease which is an equipment
lease, (i) such Company is in actual possession of the equipment leased
under each equipment lease, (ii) Company has paid the rent set forth in
each of the equipment leases on a current basis and there are no past due
amounts. Attached as Schedule 5.16 is a true, correct and complete list of
the equipment subject to each equipment lease and the location of such
equipment.
5.17 Clients and Key Clients. For purposes hereof, "Clients" means those
clients to whom any Company provides or has provided the services of the
Business and "Key Clients" means those 27 Clients of the Companies and the
Affiliated Foreign Operating Companies, which as of December 31, 2000 (or in
respect of 2001, as of the period from January 1, 2001 to June 30, 2001)
accounted for the highest percentages of the revenue of the Clients generating
at least 80% of the revenues of the Companies and the Affiliated Foreign
Operating Companies on a combined basis during such period.
(a) Schedule 5.17(a-1) attached hereto contains the number of Key
Clients for each of 2000 and 2001, and the aggregate revenues of such
Clients for each of such periods. Schedule 5.17(a-2) separately states the
number of Key Client Contracts (and the aggregate revenues of such number
of Key Clients for each of such periods) which contain any of the following
provisions: (i) performance guaranties, refunds or rebates that could
reasonably be expected to exceed $25,000, with respect to any annual audit
period, (ii) have or may have the effect of limiting or impairing any
material business practice or activity of any Company, (iii) have a net
commission rate below 20% of recovered funds, (iv) require any referral of
business by any Company, (v) allow for cancellation by the Client on less
than 90 days notice or (vi) require consent to assignment, the payment of
money or the acceleration of performance of any obligation by a Company
because of the proposed transaction with PRGX. Except for the number of Key
Clients (with the aggregate revenues for such number for each period)
listed on Schedule 5.17(a-3), to the Knowledge of HSA-Texas, there are no
Key Clients who have, within the 12 months immediately preceding the date
hereof, expressed to any Company material dissatisfaction with the
Companies' services. Schedule 5.17(a-4) contains the revenues generated by
all Key Clients during each of 2000 and 2001, the percentage of the total
revenues of the Companies and the Affiliated Foreign Operating Companies on
a combined basis for each such period that the revenues of the Key Clients
for such period constitutes, and the average remaining term of the
Contracts for all Key Clients. Schedule 5.17(a-5) contains the number of
Key Clients gained from or lost to any Person other than PRGX in the last
24 months and the number of primary audits for Key Clients converted to
secondary audits in the last 24 months, other than audits in which PRGX
performs the primary audit. All written contracts with Key Clients reflect
all material terms of the contractual relationship of the Key Client with
the Company.
(b) Schedule 5.17(b-1) when delivered, as provided below, will be a
true, correct and complete list of all Key Clients, which will be
separately identified for each of 2000 and 2001. Schedule 5.17(b-2) will
specifically identify each Key Client Contract which contains any of the
following provisions: (i) performance guaranties, refunds or rebates that
could reasonably be expected to exceed $25,000, with respect to any annual
audit period, (ii) have or may have the effect of limiting or impairing any
material business practice or activity of any Company, (iii) have a net
commission rate below 20% of recovered funds, (iv) require any referral of
business by any Company, (v) allow for cancellation by the Client on less
than 90 days notice or (vi) require consent to assignment, the payment of
money or the acceleration of performance of any obligation by a Company
because of the proposed transaction with PRGX. Except as will be
specifically described on Schedule 5.17(b-3), to the Knowledge of
HSA-Texas, there are no Key Clients who have, within the 12 months
immediately preceding the date hereof, expressed to any Company material
dissatisfaction with the Companies' services. Schedule 5.17(b-4) will
contain a true, correct and complete list for calendar year 2000 and 2001
of each Key Client for each such period, the revenues generated by each
such Key Client during the respective period, the percentage of the total
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revenues of the Companies and the Affiliated Foreign Operating Companies on
a combined basis for each such period that the revenues of each Key Client
for such period constitutes, and the term of the Contract for such Key
Client, including the expiration date thereof. In addition, Schedule
5.17(b-5) will include a list of Key Clients gained from or lost to any
Person other than PRGX in the last 24 months a list of primary audits for
Key Clients converted to secondary audits in the last 24 months, other than
audits in which PRGX performs the primary audit, and the details of any
rebate, recovery advance, or recovery guarantee provisions with Key Clients
for 2000 and 2001, and the assumption or reimbursement of Key Client
expenses associated with data acquisition or other audit related activities
("Key Client Programs"). Schedule 5.17(b-1) through Schedule 5.17(b-5) will
be delivered to PRGX at least five business days prior to the Closing. In
addition, upon delivery of such Schedules, HSA-Texas will update the
information contained on Schedule 5.17(b), so as to be true, correct and
complete as of the Closing Date. At least five days prior to the Closing,
HSA-Texas will provide PRGX true, correct and complete copies of all
contracts with all Key Clients, together with all amendments thereto. All
contracts with Key Clients reflect all material terms of the contractual
relationship of the Key Client with the Company as of the Closing Date.
5.18 Employees; Associates.
(a) Employees.
(i) Schedule 5.18(a) includes in respect to each current employee
of each of the Companies, a true, correct and complete list of the name,
location address, function and title of such person, base salary or
hourly rate, any bonus, commission formulae or profit sharing agreements
applicable thereto, all other benefits and all accrued commissions, the
amount of any advances on commissions (describing the repayment terms
thereof) and expenses such Person has received which are outstanding as
of the Closing Date and the name of the entity which pays the
compensation or commission to such employee. Schedule 5.18(a) includes a
true, correct and complete list of all agreements and understandings
between each Company and its employees (including a description on such
Schedule of all oral agreements) concerning their employment
relationship with such Company (including all restrictive covenant
agreements and severance benefits), true, correct and complete copies of
which have been provided to PRGX (or descriptions contained on Schedule
5.18(a) in respect of any oral agreements).
(ii) Except as otherwise set forth in Schedule 5.18(a), the
employment of each employee is terminable within 30 days' written notice
by such Company or such employee, subject to any rights to salaries and
commissions earned prior to such termination and no such Person has been
granted the right to continued employment or engagement by any Company
or to any material compensation or payment following termination of
employment with such Company.
(iii) Schedule 5.18(a) contains a true, correct and complete copy
of HSA-Texas' standard form employment agreement and non-competition and
restrictive covenant agreement with its employees. Except to the extent
specified on Schedule 5.18(a), there are no deviations from such
standard contract in the agreements with the employees, except for
immaterial modifications which do not confer additional benefits on such
employee or impose additional liability on any Company.
(iv) To HSA-Texas' and Shareholders' Knowledge, no officer or Key
Employee, or any group of employees, intends to terminate their
employment with any Company, nor does any Company have a present
intention to terminate the employment of any officer, Key Employee or
group of employees.
(b) Associates.
(i) Schedule 5.18(b) includes in respect to each Associate who, as
of the date of this Agreement, is engaged by any of the Companies to
perform auditing services a true, correct and complete list of the name,
location address, function and title of such person, the Associate's
commission percentage, any bonus arrangements, all accrued commissions,
the amount of any advances on commissions or other amount owed to any
Company (describing the repayment terms
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thereof) which are outstanding as of the Closing Date, any rights to
payments upon or after termination of the independent contractor
relationship with any of the Companies, any other benefits, and the name
of the entity which pays the commission to such Associate. Prior to the
Closing, HSA-Texas shall have delivered to PRGX, true, correct and
complete copies of all agreements and understandings between each
Company and its Associates (including a written description on such
Schedule of all oral agreements) together with all amendments, addenda
and supplements thereto concerning their relationship with such Company
(including any restrictive covenant agreements and any severance
agreements).
(ii) Except as otherwise set forth in Schedule 5.18(b), the
engagement of each Associate is terminable within 30 days' written
notice by such Company or such Associate, subject to any rights to
commissions earned prior to such termination and no such Person has been
granted the right to continued engagement by any Company or to any
material compensation or payment following termination of engagement
with such Company.
(iii) Schedule 5.18(b) attached hereto contains a true, correct and
complete description of the Companies' policy for post-termination
trailing commissions payable to Associates and its policy for the
deduction of commissions associated with Client paybacks and lists any
material deviations from such policy in respect of any Associate, except
for immaterial modifications which do not confer additional benefits on
such Associate or impose additional liability on any Company. Each
Associate and any other Person who is designated by any Company as an
independent contractor has met, and until the Closing Date will continue
to meet, the requirements under the Code, and the regulations
promulgated thereunder to be an independent contractor.
(iv) To HSA-Texas' and Shareholders' Knowledge, no Associates, or
any group of Associates, intends to terminate their engagement with any
Company, nor does any Company have a present intention to terminate the
engagement of any Associate or group of Associates.
(v) None of Companies' agreements or arrangements with any sales
agents or Associates will obligate PRGX to pay commissions, fees or
other compensation to such sales agents or Associates for revenues
earned by PRGX for services performed for Clients after the Closing Date
other than services of the type the Companies provided to such Clients
prior to the Closing Date.
(c) Employment Laws. Each Company (i) is in compliance with all
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours in
respect of its employees and, to the extent applicable, its Associates of
all Governmental Entities which have jurisdiction over such Company's
employment practices; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to its
employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing in respect of any
employees or Associates; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority with
respect to unemployment compensation benefits, social security or other
benefits for employees (other than routine payments to be made in the
normal course of business and consistent with past practice). In respect of
each Company's current and former employees and Associates, except as set
forth on Schedule 5.18(b), (i) there are no charges, investigations,
administrative proceedings or formal complaints of discrimination pending
or, to HSA-Texas' and the Shareholders' Knowledge, threatened before any
Governmental Entity against any Company; (ii) there have been no audits by
any Governmental Entity of any of the Companies' equal employment
opportunity practices; (iii) no current or former employee or Associate of
any Company has notified any Company of any fact or circumstance which, if
true, might constitute a violation of any Employment Law; and (iv) to
HSA-Texas' and the Shareholders' Knowledge, no Company nor any employee of
any Company has engaged in any activity which constitutes a violation of
any Employment Law. For purposes hereof, "Employment Laws" means any
constitutional, statutory, regulatory or common law of any Governmental
Entity relating to employment discrimination or harassment, including, but
not limited to, the Age Discrimination in
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Employment Act, the Older Workers' Benefit Protection Act, Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1991 and the Americans
with Disabilities Act.
(d) Breaches. To the Knowledge of HSA-Texas and the Shareholders,
and, except as set forth in Schedule 5.18(d), (i) no Person employed or
engaged as an employee, sales agent, business or strategic partner,
Associate, independent contractor or consultant by any Company has, in
respect of his or her activities to date on behalf of such Company,
violated any of the terms or conditions of his or her employment agreement,
independent contractor, proprietary inventions or similar agreement or
other engagement with the Company or any other contract to which Company is
a party with any third party, or disclosed or used any trade secrets or
proprietary or confidential information or documentation of any third party
without the authorization of such third party, or interfered in the
employment relationship between any third party and any of its employees
and (ii) no Person employed or engaged as an employee, sales agent,
business or strategic partner, independent contractor or consultant by any
Company has disclosed or used any trade secrets or any other proprietary or
confidential information or documentation of any former employer or other
third party, or has violated any non-compete obligation or confidential
relationship that such Person has or may have had with any third party, in
connection with such person's activities on behalf of the Companies. To
HSA-Texas' and the Shareholders' Knowledge, except as set forth on Schedule
5.18(d) and excluding any former employees or Associates who are performing
services for PRGX or its affiliates, no former employees whose employment
with any Company was terminated by such Company or by such employee or
otherwise expired within the last 2 years and no Associate whose engagement
with any Company was terminated by such Company or by such Associate or
otherwise expired within the last 2 years is currently or has within the
last 2 years competed with the Business.
5.19 Intellectual Property.
(a) Schedule 5.19(a) is a true, correct and complete list of all
Intellectual Property Assets that are material to the conduct of the
Business and/or are used by any of the Companies in the operation of the
Business. Schedule 5.19(a) indicates with respect to the Intellectual
Property Assets whether such Intellectual Property Asset is (i) owned by
the Company, (ii) licensed to or from, the Company, and/or (iii) registered
with any Governmental Entity (or whether an application for registration is
pending). Except as would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on HSA-Texas: (A) each of the
Companies owns, or is validly licensed to use (in each case, free and clear
of all liens, security interests, charges, encumbrances and other adverse
claims), all Intellectual Property Assets used in or necessary for the
conduct of its business as currently conducted; (B) to the Knowledge of
HSA-Texas and Shareholders, the use of any Intellectual Property Assets by
any Company does not infringe on or otherwise violate the rights of any
Person; (C) except as of the date hereof as disclosed in Schedule 5.19(a)
with respect to certain software owned by H. Schultz which will be
contributed by him to HSA-Texas prior to Closing in accordance with Section
4.21 hereof and with respect to which this representation will apply at
Closing, the use of any licensed Intellectual Property Assets is in
accordance with applicable licenses pursuant to which the Company acquired
the right to use such Intellectual Property Asset; and (D) except as of the
date hereof as disclosed in Schedule 5.19(a) with respect to certain
software owned by H. Schultz which will be contributed by him to HSA-Texas
prior to Closing in accordance with Section 4.21 hereof and with respect to
which this representation will apply at Closing, to the Knowledge of
HSA-Texas and Shareholders, no Person is challenging, infringing on, or
otherwise violating any right of any of the Companies with respect to any
Intellectual Property Asset owned by and/or licensed to any of the
Companies. Except as would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on HSA-Texas, neither
HSA-Texas nor any of the Shareholders has Knowledge of any pending claim,
order or proceeding with respect to any Intellectual Property Asset used by
any Company and to its Knowledge no Intellectual Property Asset owned
and/or licensed by any Company is being used or enforced in a manner that
would reasonably be expected to result in the abandonment, cancellation or
unenforceability of such Intellectual Property Asset.
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(b) Schedule 5.19(b) contains a complete and accurate list and summary
description of all of the Software and Developments. Schedule 5.19(b)
identifies any third-party software which has been incorporated into the
Software (the "Incorporated Software"), and identifies any other standard
third party software required to utilize the Software. Except as specified
on Schedule 5.19(b), no Company has taken any measures to register, patent,
copyright or otherwise protect the Software other than reasonable efforts
to protect the confidentiality of the source code for the Software. Except
as set forth on Schedule 5.19(b), the Company identified on Schedule
5.19(b) owns outright the Software and Developments, and no Company has
sold, licensed, leased or otherwise transferred or granted any interest or
rights to any of such Software and Developments, and:
(i) Such Company possesses or has access to the original and all
copies of all documentation, including all source code for all Software
and Developments owned by it;
(ii) any Intellectual Property Assets (other than those
intellectual property assets claimed by Evert Software in the litigation
described on Schedule 5.24 attached hereto) that were created by
employees of any Company or by Associates were made in the regular
course of such employees' employment relationship with such Company or
such Associates' engagement directly or indirectly by the Company using
such Company's facilities and/or resources and, as such, constitute
"works made for hire" within the meaning of the United States Copyright
Act of 1976, as amended (the "Copyright Act"). Each Company acquired its
rights to the Incorporated Software pursuant to the license agreements
listed on Schedule 5.19(b), complete copies of which have been delivered
to PRGX (the "Intellectual Property Rights Agreements"). As to
Incorporated Software, each Company has the rights granted to it in the
related Intellectual Property Rights Agreements;
(iii) with respect to all Software and Developments and except as
disclosed in the Intellectual Property Rights Agreements or the Client
Contracts: (A) neither the manufacture, marketing, license, sale or use
of any Software or Development violates or will violate any license or
agreement with any third party or infringes or has infringed on the
intellectual property rights of others, (B) Company identified on
Schedule 5.19(b) has the exclusive right to use the Software and
Developments, (C) such Company has retained the exclusive right to
reproduce, copy, sell, license and/or distribute the Software and
Developments.
(iv) All of the Software which is licensed by any Company under
Client Contracts complies in all material respects with the performance
representations with respect thereto contained in such Company's user
and technical manuals in effect at the time of the Client Contracts,
and, when used in accordance with such user and technical manuals,
performs in accordance with the Client Contracts in all material
respects. Except as set forth on Schedule 5.19(b), any such Software as
is currently made available for licensing to or access by customers is
ready for installation and/or use in substantial conformance with the
capability and performance standards set forth in the user or
instruction manual associated with such Software. Any such marketed
Software system is documented and the documentation supplied to each
licensee or user of each such system is sufficient in all material
respects to enable a user reasonably competent in such matters to
operate, access and/or use such system as intended. Nothing has come to
the attention of any Company or any Shareholder to indicate that the
license agreements entered into by any Company for use of Software by
customers do not contain provisions for protection of such Company's
confidential information, trade secrets and proprietary rights which
such Company reasonably believes have been and will be sufficient to
preserve such Company's proprietary rights therein.
(v) Except as set forth on Schedule 5.19(b), no Company has any
royalty, commission or similar obligation relating to the Software.
(vi) To the Knowledge of HSA-Texas and the Shareholders, none of
the past or present employees or independent contractors of any Company
is in possession of Software, nor has made unauthorized use of Software
or the Intellectual Property Assets, except such as have had and will
have no Material Adverse Effect. To the Knowledge of HSA-Texas and the
Shareholders, no party other than the Companies has access to or
possession of source code, except as disclosed in the
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Client Contracts. Except as set forth on Schedule 5.19(b), none of the
elements of the Software and the Intellectual Property Assets is in the
public domain.
(c) Subject to receipt of any consents required by the terms thereof,
the consummation of the transactions contemplated hereby will not cause the
termination, or cancellation, or otherwise affect in any manner any
licenses or other rights held by any Company in the Intellectual Property
Assets (including rights to Incorporated Software) and will not alter or in
any way impair any of the Intellectual Property Assets (including rights to
Incorporated Software).
(d) Each of the Companies has taken all reasonable precautions to
protect the secrecy, confidentiality, and value of its Trade Secrets.
Companies have good title and an absolute (but not necessarily exclusive)
right to use the Trade Secrets. The Trade Secrets are not part of the
public knowledge or literature, and, to HSA-Texas' and the Shareholders'
Knowledge, have not been used, divulged, or appropriated either for the
benefit of any Person or to the detriment of any Company. Except as set
forth on Schedule 5.19(d), no Trade Secret is subject to any adverse claim
or, to the Knowledge of HSA-Texas and the Shareholders, has been challenged
or threatened in any way.
(e) All third party software utilized by any Company is identified in
either Schedule 1.1(a) or Schedule 5.19(e). No Company uses any third party
software which is not properly licensed to it, nor has it violated any such
license. All software on each personal computer owned or leased by any
Company is properly licensed to such Company, and such Company has in its
possession written evidence of each such license. Upon the Closing, each
such license will permit PRGX's continued use of such third party software
after the Closing Date, with no additional cost to PRGX.
(f) All obligations of H. Schultz under the Lease Agreement dated
December 1, 1999 between H. Schultz and HSA-Texas relating to computer
software purchased from Oracle Corporation and all obligations of HSA-Texas
under the Software License and Services Agreement between HSA-Texas and
Oracle dated August 31, 1999 have been fully satisfied by HSA-Texas and all
rights to the software that is the subject matter thereof have vested in
HSA-Texas.
5.20 Internet Presence. Except as set forth on Schedule 5.20 attached
hereto, no Company has any public, private or reserved presence on the world
wide web, multi-party extranet, virtual private network, or similar internet
based, linked system ("Internet Presence"). Each Company's domain name(s), if
any, are currently registered with the currently authorized Internet Domain Name
Registrar, are transferable to PRGX, and are in good standing. Except as set
forth on Schedule 5.20 attached hereto, Companies warrant that their Internet
Presence, is wholly passive and informational in nature and involves no
interactivity between third parties and any Company including purchases, sales,
leases or other commercial transactions conducted in any degree by or through
the Internet Presence.
5.21 Year 2000 Compliance. Except as set forth on Schedule 5.21 attached
hereto, each Company has previously performed unit, integration and acceptance
testing of all software, hardware, and all other devices containing or utilizing
electronic components reasonably necessary to the performance of the Business'
obligations and operations and the Software (all of the foregoing, collectively,
"Computer Systems"), including all Computer Systems owned, leased, sold,
developed, assembled, distributed, supported, maintained, used, or operated by,
to, for, or from any Company, and the results of such testing, as well as the
Companies' experience to date, establish that all Computer Systems, have
functioned normally before, during, and after the change from the year 1999 to
each successive year through the year 2010, and Companies have no basis to
believe there will be any interruption in service in the future attributable to
such change.
5.22 Benefit Plans and Erisa.
(a) Employee Benefit Plans. Schedule 5.22(a) sets forth a true and
complete list of each "employee benefit plan" (as defined by Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), and any other bonus, profit sharing, pension, compensation,
deferred compensation, stock option, stock purchase, fringe benefit,
severance, post-retirement, scholarship, disability, sick leave, vacation,
individual employment, commission, bonus, payroll practice, retention, or
other plan, agreement, policy, trust fund or arrangement (each such plan,
agreement, policy, trust fund or
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arrangement is referred to herein as an "Employee Benefit Plan", and
collectively, the "Employee Benefit Plans") that is currently in effect,
was maintained since December 31, 1994 or which has been approved before
the date hereof but is not yet effective, for the benefit of (i) directors
or employees of any Company working in the Business or any other persons
performing services for any Company in the Business, including without
limitation, the Associates (ii) former directors or employees of any
Company working in the Business or any other persons formerly performing
services for any Company in the Business, including, without limitation,
any Person formerly performing services for any Company as an independent
contractor, and/or (iii) beneficiaries of anyone described in (i) or (ii)
(collectively, "Business Employees") or with respect to which any Company
or any "ERISA Affiliate" (hereby defined to include any trade or business,
whether or not incorporated, other than HSA-Texas, which has employees who
are or have been at any date of determination occurring within the
preceding six (6) years, treated pursuant to Section 4001(a)(14) of ERISA
and/or Section 414 of the Code as employees of a single employer which
includes any Company) has or has had any obligation on behalf of any
Business Employee. Except as disclosed on Schedule 5.22(a) attached hereto,
there are no other benefits to which any Business Employee is entitled.
(b) Documents Delivered. HSA-Texas has delivered to PRGX, with
respect to each Employee Benefit Plan, true and complete copies of (i) the
documents embodying and relating to each Employee Benefit Plan, including,
without limitation, the current plan documents and documents creating any
trust maintained pursuant thereto, all amendments, investment management
agreements, group annuity contracts, administrative service contracts,
insurance contracts, collective bargaining agreements, the most recent
summary plan description with each summary of material modification, if
any, and employee handbooks, (ii) annual reports including but not limited
to Forms 5500, 990 and 1041 for the last three (3) years for the plan or
any related trust, (iii) actuarial valuation reports and financial
statements for the last three (3) years, (iv) each communication involving
the plan or any related trust to or from the Internal Revenue Service
("IRS"), Department of Labor ("DOL"), Pension Benefit Guaranty Corporation
("PBGC") or any other governmental authority including, without limitation,
the most recent determination letter received from the IRS pertaining to
any Employee Benefit Plan intended to qualify under Sections 401(a) or
501(c)(9) of the Code.
(c) Compliance with ERISA and the Code; Pension Plans. Except as set
forth in Schedule 5.22(c), each Employee Benefit Plan is in compliance with
the provisions of ERISA and the provisions of the Code applicable to it.
Except as set forth in Schedule 5.22(c), no Company has maintained or
contributed to any plan subject to the minimum funding standards of Section
302 of ERISA or Section 412 of the Code during its last six (6) fiscal
years, and each plan maintained by an ERISA Affiliate which is subject to
Title IV of ERISA or Section 412 of the Code is fully accrued and funded in
compliance with ERISA and the Code as of the Closing Date, and if any such
plan or plans were terminated as of the Closing Date, the termination would
satisfy the minimum funding requirements of ERISA and the Code. All
Employee Benefit Plans which are "pension plans" as defined in Section 3(2)
of ERISA have received favorable determination letters from the Internal
Revenue Service as to their tax-qualified status and the tax-exempt status
of any related trust under Sections 401(a) and 501 of the Code,
respectively, which determinations are currently in effect, and no event
has occurred and no circumstances exists that will or could give rise to
disqualification or loss of tax-exempt status of any such plan or trust.
All amendments required to bring any such pension plans and related trusts
into conformity with applicable law have been timely adopted or the
applicable deadlines for making such amendments have not expired.
(d) Multiple Employer Arrangements. Except as set forth in Schedule
5.22(d), no Company nor any ERISA Affiliate maintains or contributes to, is
required to maintain or contribute to, or, since December 31, 1975, has
maintained or contributed to, (i) a "multiemployer plan" (as defined by
Section 4001(a)(3) of ERISA), (ii) a "multiple employer welfare
arrangement" (within the meaning of Section 3(40) of ERISA), (iii) a "plan
maintained by more than one employer" (within the meaning of Section 413(c)
of the Code), or (iv) a voluntary employee beneficiary association within
the meaning of Section 501(c)(9) of the Code.
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(e) No Employee Benefit Plan Claims. PRGX and PRGUSA shall not, as a
result of the transactions contemplated by this Agreement (or any
employment by PRGX or PRGUSA of Business Employees): (i) become liable for
any contribution, tax, lien, penalty, cost, interest, claim, loss, action,
suit, damage, cost assessment or other similar type of liability or expense
of any Company or any ERISA Affiliate (including predecessors thereof) with
regard to any Employee Benefit Plan or any Employee Benefit Plan sponsored,
maintained or contributed to by an ERISA Affiliate (including predecessors
thereof) (assuming a like definition of "Employee Benefit Plan" were
applicable to ERISA Affiliates as to those same types of agreements,
policies, trusts, funds and arrangements sponsored, maintained or
contributed to by them) (each such plan for an ERISA Affiliate, an "ERISA
Affiliate Employee Benefit Plan"), including, without limitation,
withdrawal liability arising under Title IV, Subtitle E, Part 1 of ERISA,
liabilities to the PBGC, liabilities under Section 412 of the Code or
Section 302(a)(2) of ERISA and liabilities arising from the failure to
treat any Person performing services for any Company or ERISA Affiliate as
an employee (or improper treatment of a Person as an employee), or (ii) be
or become a party to any Employee Benefit Plan or any ERISA Affiliate
Employee Benefit Plan.
(f) No Liens. No Company, ERISA Affiliate, and none of the Acquired
Assets is subject to any lien arising under ERISA or the Code, including,
but not limited to, a lien arising pursuant to Title IV of ERISA or Section
412 of the Code or a lien arising as a result of any tax imposed by Chapter
43 of Subtitle D of the Code. Neither HSA-Texas nor any ERISA Affiliate has
ceased operations at a facility so as to become subject to the provisions
of Section 4062(e) of ERISA.
(g) COBRA Matters. Each Company, each ERISA Affiliate, each Employee
Benefit Plan and each Employee Benefit Plan "sponsor" or "administrator"
(within the meaning of Section 3(16) of ERISA) has complied in all respects
with the applicable requirements of Part 6 of Subtitle B of Title I of
ERISA and Section 4980B of the Code (such statutory provisions and
predecessors thereof are referred to herein collectively as "COBRA").
Schedule 5.22(g) attached hereto lists the name of each Business Employee
who has experienced a "Qualifying Event" (as defined in COBRA) with respect
to an Employee Benefit Plan who is eligible for "Continuation Coverage" (as
defined in COBRA) and whose maximum period for Continuation Coverage has
not expired. Included in such list are the current address for each such
individual, the date and type of each Qualifying Event, whether the
individual has already elected Continuation Coverage and, for any
individual who has not yet elected Continuation Coverage, the date on which
such individual was notified of his or her rights to elect Continuation
Coverage. Schedule 5.22(g) attached hereto also lists the name of each
Business Employee who is on a leave of absence (whether or not pursuant to
the Family and Medical Leave Act of 1993, as amended ("FMLA")) and is
receiving or is entitled to receive health coverage under an Employee
Benefit Plan, whether pursuant to FMLA, COBRA or otherwise.
(h) Accrued Vacation and Sick Pay. Attached hereto as a part of
Schedule 5.22(h) is a true, correct and complete list by employee of the
number of days and amount of accrued unpaid vacation and sick pay for each
employee of each Company. No Company has any liability to Business
Employees upon termination of employment for unused and/or accrued sick
pay.
5.23 Environmental Compliance. For purposes of this Agreement: (a)
"Environmental Laws" means the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 et seq., the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., and all other applicable foreign,
federal, state, county, municipal, administrative or other laws, ordinances,
rules, regulations and requirements or common law doctrines pertaining to
environmental, health, safety or ecological conditions, along with any
regulations promulgated thereunder; and (b) "Hazardous Material" means (i) any
"hazardous substance", "hazardous waste" or "hazardous material" defined as such
in (or for purposes of) any Environmental Law; (ii) any petroleum product; and
(iii) any other substance, regardless of physical form, that is subject to any
law regulating, or imposing obligations, liability, or standards of conduct
concerning the protection of human health, plant life, animal life, natural
resources, or property.
(a) No Company, nor to the Knowledge of HSA-Texas and the
Shareholders, any prior owner, user or occupant of any property currently
or formerly owned (collectively, the "Properties"), has conducted
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or authorized the use, generation, transportation, storage, handling,
treatment, or disposal of any Hazardous Material on the Properties, except
as is necessary in the ordinary course of business and in all cases in
material compliance with the Environmental Laws and in each instance in a
manner that has not and will not result in any liability to any Company,
PRGX or the Properties;
(b) There has been by any Company no spill, discharge, release,
emission, or contamination of the Properties by any Hazardous Material;
(c) No Company nor any Shareholder has received any written notice of,
and to the Knowledge of HSA-Texas and the Shareholders, no Governmental
Entity or any employee or agent thereof has determined, or threatens to
determine, that there exists a violation of any Environmental Law at the
Properties or that any Company has incurred any liability with respect to
the Properties or any wastes or material generated at the Properties under
any Environmental Law;
(d) There is no pending litigation or proceeding by or before any
Governmental Entity in which it is alleged that there has been a discharge,
spill, disposal or release of any Hazardous Material on or from the
Properties, nor is any Company or any Shareholder aware of any facts or
circumstances that would reasonably lead it to believe that any Person or
Governmental Entity may allege any of the foregoing;
(e) There are no agreements between any Company and any Governmental
Entity relating in any way to the presence, spill, discharge, release,
threat of release, storage, treatment or disposal of any Hazardous Material
on or from the Properties;
(f) There are no Environmental Laws applicable to the Properties that
would require any Company to obtain the approval of or provide notice to
any Governmental Entity as a condition to the consummation of the
transactions contemplated by this Agreement;
(g) Each Company is, and at all times has been in full compliance
with, and has not been and is not in violation of or liable under any
Environmental Laws;
(h) No Company is required to obtain any permits required by any
Environmental Laws to conduct the Business as it is presently being
conducted;
(i) No Company nor the Properties have incurred any liability or
obligation under the Environmental Laws or otherwise pertaining to
Hazardous Materials that remains unresolved;
(j) During each Company's leasing and occupancy of the Properties, (A)
none of the Properties has been excavated; and (B) to the Knowledge of
HSA-Texas and the Shareholders no construction debris or other debris was
buried on the Properties; and
(k) HSA-Texas and Shareholders have delivered to PRGX true and
complete copies of all reports or tests with respect to the compliance of
the Properties with the Environmental Laws and/or the presence of any
Hazardous Material on the Properties, if any, that were (A) prepared for
any Company or (B) prepared for other parties and are in the possession of
any Company or any Shareholder.
5.24 Litigation; Judgments.
(a) Except as set forth on Schedule 5.24 attached hereto, there is no
action, proceeding or, to HSA-Texas' or Shareholders' Knowledge,
investigation before any court, tribunal or governmental body pending or,
to HSA-Texas' or Shareholders' Knowledge, threatened: (i) that has been
commenced by or against or involving the Acquired Assets, any of the
Companies or the Business, or (ii) that challenges, or may have the effect
of preventing, delaying, making illegal, or otherwise interfering with any
of the transactions contemplated herein or the Companies' or Shareholders'
ability to consummate the transactions contemplated by this Agreement and
the HSA-Texas Transaction Documents or which might adversely affect the
Business or the Acquired Assets.
(b) No event has occurred and no circumstance exists that may give
rise to or serve as a basis for the commencement of any such any action,
proceeding or investigation described in subsection (a) above.
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(c) None of the Companies or Shareholders are subject to any judgment,
order or decree entered in any lawsuit or proceeding relating to the
Acquired Assets, the Companies or the operation of the Business, nor has
any such action been settled or resulted in a final judgment since January
1, 1999.
5.25 Insurance. Schedule 5.25 attached hereto contains a true, correct and
complete list of all of the insurance policies maintained by each Company, which
schedule includes the name of the insurance company, the policy number, a
description of the type of insurance covered by such policy, the dollar limit of
the policy, and the annual premiums for such policy, and the name and phone
number of the insurance agent in respect thereto. Companies shall maintain such
insurance policies in full force and effect through the Closing Date. Except as
set forth on Schedule 5.25, (i) no claims are pending under the listed policies,
nor do HSA-Texas or Shareholders know of any basis therefor and (ii) there have
been no settlement of insurance claims since January 1, 1999.
5.26 Immigration Matters.
(a) Companies Employing Persons in the U.S. With respect to each of
the Companies which employees persons in the U.S.:
(i) Current Employees. With respect to all current employees (as
defined in Section 274a.1(g) of Title 8, Code of Federal Regulations) of
the Companies, true and complete copies of all Forms I-9 (Employment
Eligibility Verification Forms) completed pursuant to the Immigration
Reform and Control Act of 1986, as amended, and all regulations
promulgated thereunder ("IRCA") and any and all copies of documentation,
records or other papers retained with Forms I-9 (Employment Eligibility
Verification Forms), will be delivered to PRGX prior to the Closing.
Each of the Companies has complied with IRCA with respect to the
completion of Forms I-9 for all employees and the re-verification of the
employment status of any and all employees whose employment
authorization documents indicated a limited period of employment
authorization.
(ii) Former Employees. With respect to all former employees of the
Companies who left the employment within three (3) years prior to
Closing, such Company has complied with IRCA with respect to the
maintenance of Forms I-9 for at least three (3) years or for one (1)
year beyond the date of termination, whichever is later. True and
complete copies all Forms I-9 maintained for former employees pursuant
to IRCA, and any and all copies of documentation, records or other
papers retained with Forms I-9, will be delivered to PRGX prior to the
Closing.
(iii) Visa Status. Schedule 5.26 attached hereto contains a true
and complete list of all employees of each of the Companies working
under INS authorization in E, F, H, J, L, M, O, P or TN Visa Status
together with a listing of each such employee's visa status and visa
expiration date. Each of the Companies maintains current files
containing all Labor Condition Applications (LCA) and related public and
non-public access documentation which it must present upon request by
the U.S. Department of Labor or the general public, including but not
limited to all documentation noted in 20 CFR sec. 655.760.
(iv) Authorization to Work in U.S. The Companies have only
employed in respect of the Business individuals authorized to work in
the United States. Within the twenty-four (24) months preceding the
execution of this Agreement, none of the Companies have received any
written notice of any inspection or investigation relating to its
alleged noncompliance with or violation of IRCA, nor has it been warned,
fined or otherwise penalized by reason of any failure to comply with
IRCA.
(v) Effect of Reorganization. The consummation of the transactions
contemplated by this Agreement will not, (i) give rise to any liability
for the failure to properly complete and update Forms I-9, (ii) give
rise to any liability for the employment of individuals not authorized
to work in the United States or (iii) cause any current employee to
become unauthorized to work in the United States.
(vi) Delivery of Forms I-9. HSA-Texas shall obtain and provide to
PRGX at least thirty (30) days before the Closing Date Forms I-9 from
all of its Business Employees. HSA-Texas shall
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prepare all Forms W-2 for filing with the United States Internal Revenue
Service for its current employees as of the Closing Date.
(b) Companies Employing Persons Outside the U.S. With respect to each
of the Companies which employees persons outside the U.S., such Company is
in compliance with all laws, orders, rules and regulations of all
Governmental Entities relating to the employment of persons who are not
citizens of such jurisdiction.
5.27 Broker's Fees. No Company or Shareholder has retained or utilized the
services of any broker, finder or intermediary or paid or agreed to pay any fee
or commission to any other Person for or on account of the transactions
contemplated hereby, or had any communications with any Person with respect
thereto, which would obligate PRGX to pay any such fees or commissions.
5.28 Absence of Material Changes. Except as set forth in Schedule 5.28
attached hereto, from December 31, 2000 to the date of this Agreement:
(a) there has not been any Material Adverse Effect;
(b) no Company has lost (or received written notice that it is about
to lose) any Key Clients or Key Clients with which any Company has
significant business relations;
(c) to the Knowledge of HSA-Texas, no former senior manager (i.e.,
audit manager or higher) of any Company is currently competing with any
Company or planning to so compete;
(d) the Companies have operated the Business in the ordinary course
and have not sold, assigned, or transferred any assets except in the
ordinary course of business consistent with past practice;
(e) no Company or Shareholder has mortgaged, pledged or subjected to
any lien, pledge, mortgage, security interest, conditional sales contract,
or other encumbrance of any nature whatsoever, any of the Acquired Assets;
(f) there has been no amendment, termination, or waiver of any right
of any Company under any contract, governmental license or permit that may
materially adversely affect the Acquired Assets or the Business;
(g) No Company has:
(i) paid any judgment resulting from any suit, proceeding,
arbitration, claim or counterclaim in respect of its assets or Business
in excess of $1,000 (provided that all such excluded payments do not
aggregate to more than $5,000);
(ii) made any such payment to any party in settlement of any such
suit, proceeding, arbitration, claim or counterclaim in excess of $1,000
(provided that all such excluded payments do not aggregate to more than
$5,000);
(iii) written down, or failed to write down (in accordance with its
past practices consistently applied) or written up the value of any
inventory or assets of Companies;
(iv) made any material changes in the customary methods of
operation of the Business, including practices and policies relating to
purchasing, marketing, selling, accounting, payment of trade creditors
or in the billing or collection of accounts receivable or work in
progress, including without limitation, discounting or writing off any
of Companies' accounts receivable or work in progress for early payment,
or granting any other deduction or discount thereon or accelerating the
collection thereof except in accordance with past practices consistently
applied;
(v) (except in respect of ordinary trade payables) incurred any
indebtedness or guaranteed any indebtedness, except for borrowings under
existing loans or lines of credit in the ordinary course of business
consistent with past practice;
(vi) taken any action other than in the ordinary course of business
and in a manner consistent with past practices (none of which actions
has been unreasonable or unusual) with respect to
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increasing the compensation of any officer, director, consultant or
employee of any Company, paid bonuses to any consultant or employees
(except for bonuses earned in the ordinary course of business), or with
respect to the grant of any severance or termination pay (otherwise than
pursuant to policies of Companies in effect on the date hereof fully
disclosed to PRGX in writing prior to the date hereof) or with respect
to any increase of benefits payable under its severance or termination
pay policies in effect on the date hereof;
(vii) declared, set aside or paid any dividend or distribution
payable in cash, stock, property or otherwise with respect to any
Company's capital stock (except for distributions to Shareholders
consistent with past practices); or
(viii) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 5.28.
5.29 Certain Arrangements.
(a) Schedule 5.29 is a true, correct and complete list as of the date
hereof and since December 31, 2000 of, any direct or indirect transaction
or series of transactions involving more than $60,000 per year,
individually or in the aggregate (other than in respect of compensation or
travel or expense account reimbursement in the ordinary course of business
consistent with past practice) that any Shareholder, director, officer,
employee, Associate or other affiliate (for purposes of this Agreement,
"affiliate" means any individual, partnership, corporation, trust, joint
venture or other entity controlled by, controlling or under common control
with any Company or any Shareholder) or any relative of any Shareholder,
director, officer, employee, Associate, or other affiliate (collectively, a
"Related Party") has or had with any Company and contains a brief
description of each transaction, including without limitation:
(i) any oral or written contract, agreement, understanding,
commitment or other arrangement providing for the furnishing of
services, or the sale or rental of real or personal property from or
otherwise requiring payments to any such Related Party or to any
affiliate or relative of such Related Party;
(ii) any loans or advances to or from any Company (exclusive of
travel advances, expense advances, and normal salary advances in
connection with vacation periods, or compensation, or travel or expense
account reimbursement all in the ordinary course of business) to any
such Related Party or to any affiliate or relative of such Related
Party, giving for each the principal amount outstanding, interest rate,
maturity date and security therefor;
(iii) any direct or indirect interest in any property, real or
personal, tangible or intangible by any such Related Party or to any
affiliate or relative of such Related Party, including inventions,
patents, copyrights, trademarks, or trade names, used in or pertaining
to the Business, except for the normal rights of a shareholder; and
(iv) all services and overhead support provided by such Related
Party to any Company, describing the nature and value of such services
and support, the amount of all compensation, fees, commissions or other
amounts owed by or to the Related Party and a description of the
relationship of, and oral or written agreements or understandings
between, any Company and such Related Party in respect of such Related
Party as a supplier or customer to any Company.
(b) Except as set forth on Schedule 5.29, all services, overhead
support and other interests provided by Shareholder or any affiliate
thereof to any Company have been provided on a basis no more favorable to
such Company than could be obtained in an arms' length transaction.
(c) No Shareholder is engaged in competition with any Company with
respect to any line of the products or services of such Company in any
market presently served by such Company. No Shareholder uses the services
of any employee of the Business in any other enterprise controlled by such
Shareholder.
5.30 Bank Accounts. Schedule 1.1(j) contains a true, correct and complete
list showing the name and location of each bank or other institution in which
each Company has any deposit account, lock box or safe
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deposit box (collectively, the "Bank Accounts"), together with a listing of all
account numbers and names of all persons authorized to draw thereon or have
access thereto.
5.31 Information Supplied. None of the information supplied or to be
supplied by HSA-Texas for inclusion or incorporation by reference in the Proxy
Statement will, on the date it is first mailed to PRGX shareholders or at the
time of the PRGX Special Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
5.32 Board Approval. The Board of Directors of HSA-Texas, by resolutions
duly adopted by vote of those voting at a meeting duly called and held and not
subsequently rescinded or modified in any way, has duly (a) approved this
Agreement and the Acquisition and (b) recommended that the shareholders of
HSA-Texas adopt this Agreement and directed that such adoption be submitted for
consideration by the HSA-Texas shareholders. To the Knowledge of HSA-Texas and
Shareholders, no state takeover statute is applicable to this Agreement or the
Acquisition or the other transactions contemplated hereby.
5.33 Vote Required. If action to approve the HSA-Texas Recommendations is
taken (a) at a meeting of the holders of HSA-Texas Voting Common Stock, approval
of this Agreement and the other HSA-Texas Recommendations will require the
affirmative vote of two-thirds of the outstanding shares of HSA-Texas Voting
Common Stock entitled to vote or (b) without a meeting, without prior notice,
and without a vote, by written consent, approval of this Agreement and the other
HSA-Texas Recommendations will require the consent or consents in writing,
setting forth the action so taken, signed by the holders of all of the shares of
HSA-Texas Voting Common Stock entitled to vote with respect to such action, and
such vote or consent is the only vote of the holders of any class or series of
HSA-Texas capital stock necessary to approve or adopt the HSA-Texas
Recommendations, including approval of this Agreement, the Acquisition and the
consummation of the Acquisition and the other transactions contemplated herein
(the "Required HSA-Texas Vote"). The holders of HSA-Texas Non-Voting Common
Stock are not entitled to vote to approve or adopt this Agreement, the
Acquisition and the consummation of the Acquisition and the other transactions
contemplated herein.
5.34 Termination of Alternative Negotiations. HSA-Texas and Shareholders
have and have caused the Subsidiaries to, and have instructed their respective
officers, directors, employees, investment bankers, attorneys, accountants and
other agents to have, ceased and terminated any activities, discussions or
negotiations with any parties conducted heretofore with respect to any possible
HSA-Texas Alternative Transaction and have notified in writing each party with
whom HSA-Texas, or any Shareholders, officer, director, investment advisor,
financial advisor, attorney or other representative retained by any of them, has
had discussions with during the 60 days prior to the date of this Agreement that
the HSA-Texas Board no longer seeks the making of any HSA-Texas Alternative
Transaction.
5.35 No Unlawful Payments.
(a) Neither HSA-Texas nor, to the Knowledge of HSA-Texas, any
director, officer, agent, employee, or other person associated with or
acting on behalf of HSA-Texas has, directly or indirectly:
(i) used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political
activity;
(ii) made any unlawful payment to domestic or foreign government
officials or employees, or to domestic or foreign political parties or
campaigns, from corporate funds;
(iii) violated any provision of the Foreign Corrupt Practices Act
of 1977, as amended;
(iv) established or maintained any unlawful or unrecorded fund of
corporate monies or other assets;
(v) made any false or fictitious entry on the books or records of
HSA-Texas;
(vi) made any bribe, rebate, payoff, influence payment, kickback,
or other unlawful payment;
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(vii) given any favor or gift which is not deductible for federal
income tax purposes; or
(viii) made any bribe, kickback or other payment of a similar or
comparable nature, whether lawful or not, to any person or entity,
private or public, regardless of form, whether in money, property, or
services, to obtain favorable treatment in securing business or to
obtain special concessions, or to pay for favorable treatment for
business secured or for special concessions already obtained.
5.36 Disclosure. The statements, representations and warranties made by
HSA-Texas and any Shareholder in this Agreement and in the Schedules attached
hereto do not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading. No notice
given pursuant to Section 4.6 will contain any untrue statement or omit to state
a material fact necessary to make the statements therein or in this Agreement in
light of the circumstances in which they were made, not misleading. There is no
fact Known to HSA-Texas or any Shareholder that has specific application to any
Company (other than general economic or industry conditions) and that has a
Material Adverse Effect or, as far as HSA-Texas or any Shareholder can
reasonably foresee, materially threatens to have a Material Adverse Effect that
has not been set forth in this Agreement or the Schedules hereto.
5.37 Other Acquisitions.
(a) DSD Acquisitions. Historically, HSA Texas has conducted its
direct to store delivery audit operations through two independent
contractors, Phoenix Audit Recoveries, Inc. ("PAR") and JASAMA, Inc.
("JASAMA"). Effective as of September 1, 2001, HSA-Texas consummated the
acquisition of substantially all of the assets of PAR solely in exchange
for an unsecured promissory note in the original principal amount of
$3,000,000 in accordance with that certain Asset Purchase Agreement dated
as of September 1, 2001 executed by PAR and HSA-Texas, a copy of which has
been previously delivered to PRGX. Effective as of September 17, 2001,
HSA-Texas consummated the acquisition of substantially all of the assets of
JASAMA solely in exchange for an unsecured promissory note in the original
principal amount of $1,200,000 in accordance with that certain Asset
Purchase Agreement dated as of September 17, 2001 executed by JASAMA and
HSA-Texas, a copy of which has been previously delivered to PRGX
(collectively, such acquisitions being the "DSD Acquisitions" and
collectively, such asset purchase agreements and promissory notes being the
"DSD Acquisition Agreements"). The DSD Acquisition Agreements are
assignable to PRGX without the consent of PAR or JASAMA.
(b) U.K. Acquisitions. Effective as of November 21, 2001, HSA-Texas
and HS&A Acquisition -- UK, Inc., a Texas corporation and a Subsidiary
("U.K. Acquisition Sub"), consummated the acquisition of all of the
outstanding equity of Tamebond Limited ("Tamebond") and of J & G Associates
Limited ("J & G") in exchange for two unsecured promissory notes in the
aggregate principal amount of $11,501,450 (collectively, the "U.K.
Acquisitions") in accordance with the following agreements and instruments:
(i) Agreement for the Sale and Purchase of the entire Issued Share Capital
of Tamebond among HSA-Texas, U.K. Acquisition Sub, Peter George Bennett and
Eileen Margaret Bennett dated November 21, 2001, (ii) Instrument, issued by
U.K. Acquisition Sub and guaranteed by HSA-Texas, Constituting US
$7,945,000 and such further loan notes to be issued pursuant to clause
3.2(b) and 4.2 of the Agreement described in (i) above, 5 1/2 per cent
Guaranteed, Unsecured Loan Notes dated November 21, 2001, (iii) Agreement
for the Sale and Purchase of the entire Issued Share Capital of J & G among
HSA-Texas, U.K. Acquisition Sub, John David Holdstock and Gillian Patricia
Holdstock dated November 21, 2001, (ii) Instrument, issued by U.K.
Acquisition Sub and guaranteed by HSA-Texas, Constituting US $3,556,450 and
such further loan notes to be issued pursuant to clause 3.2(b) and 4.2 of
the Agreement described in (i) above, 5 1/2 per cent Guaranteed, Unsecured
Loan Notes dated November 21, 2001 (collectively, the agreements and
instruments described in Section 5.37(b)(i)-(iv), being the "U.K.
Acquisition Agreements"), copies of which U.K. Acquisition Agreements have
been previously delivered to PRGX. The U.K. Acquisition Agreements are
assignable to PRGX without the consent of the Bennetts or the Holdstocks.
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(c) German Acquisition. Effective as of November 15, 2001, Howard
Schultz & Associates Europe S.A. ("HSA Europe") entered into an agreement
with Daniel Van der Spiegal GmbH and Mrs. Leslie Van der Spiegal for the
acquisition of all shares of Howard Schultz & Partner (Deutschland) GmbH
(such entity being the "German Licensee" and such acquisition being the
"German Acquisition"), other than those owned by H. Schultz or by HSA
Europe (the "German Acquisition Agreement"), a copy of which has been
previously delivered to PRGX. The German Acquisition Agreement is
assignable to PRGX without the consent of the Van der Spiegals.
5.38 Investment Intent. HSA-Texas and each of the undersigned Shareholders
hereby covenant, represent and warrant to PRGX as follows, and acknowledge that
each such covenant, representation and warranty is material to and intended to
be relied upon by PRGX:
(a) The undersigned (which for purposes of this Section 5.38 includes
HSA-Texas and each of the Shareholders) is acquiring the PRGX Shares for
the undersigned's own account for investment purposes and not with a view
to resale or distribution within the meaning of the Securities Act of 1933,
as amended (the "Securities Act") and the rules and regulations thereunder;
and the undersigned will not distribute the PRGX Shares in violation or
contravention of the Securities Act.
(b) HSA-Texas is a Texas corporation and each of the undersigned
Shareholders, if an individual, is a resident of the state of Texas, and,
if a trust, is a trust organized under the laws of the state of Texas.
(c) The undersigned acknowledges that all of the PRGX Shares acquired
by the undersigned will be issued to it without registration and in
reliance upon certain exemptions under the Securities Act and in reliance
upon certain exemptions from registration requirements under applicable
state securities laws.
(d) The undersigned will make no distribution, transfer or assignment
of any of the PRGX Shares except in compliance with the Securities Act and
any other applicable securities laws.
(e) The undersigned consents, agrees and acknowledges that the
certificate or certificates representing the PRGX Shares may bear the
following legend, or another legend to the same effect and agrees to the
restrictions set forth therein:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended or under the securities
laws of any other jurisdiction, in reliance upon exemptions from the
registration requirements of such laws. The shares represented by this
certificate may not be sold or otherwise transferred, nor will an
assignee or endorsee hereof be recognized as an owner of these shares by
the issuer unless: (i) a registration statement under the Securities Act
of 1933 as amended and other applicable securities laws with respect to
the shares and the transfer shall then be in effect; or (ii) in the
opinion of counsel satisfactory to the issuer, the shares are
transferred in a transaction which is exempt from the registration
requirements of such laws.
(f) The undersigned is aware that no federal or state agency has made
any recommendation or endorsement of the PRGX Shares or any finding or
determination as to the fairness of the investment in such PRGX Shares.
(g) Neither PRGX nor any person acting on its behalf offered the PRGX
Shares to the undersigned by means of general or public solicitation or
general or public advertising, such as by newspaper or magazine
advertisements, by broadcast media, or at any seminar or meeting whose
attendees were solicited by such means.
(h) The undersigned hereby acknowledges that the PRGX Shares are a
speculative investment. The undersigned represents that it can bear the
economic risks of such an investment for an indefinite period of time.
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(i) The undersigned acknowledges, represents and warrants that the
undersigned has received and reviewed the following:
(i) A copy of this Agreement;
(ii) A copy of all filings relating to PRGX on the web site of the
Securities and Exchange Commission (www.sec.gov), other than PRGX's
registration statement on form S-4 filed with the Commission on
September 7, 2001, which has not been used by PRGX to offer the PRGX
Shares to the undersigned; and
(iii) Disclosure Document dated as of November 15, 2001; and
(iv) PRGX Private Offering Memorandum dated November 30, 2001
relating to the Offering by PRGX of Convertible Subordinated Promissory
Notes due 2006.
(j) The undersigned acknowledges, represents and warrants that the
undersigned has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an
investment in the PRGX Shares; that the undersigned has had reasonable
opportunity to ask questions of and receive answers from PRGX's officers
and directors and to obtain any additional information, documents or
instruments available from PRGX that the undersigned has reasonably
requested; and that the undersigned has consulted with its own legal, tax
and financial advisors with respect to the tax consequences of acquiring
the PRGX Shares and has not relied upon PRGX or its representatives as to
such matters.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PRGX
In order to induce HSA-Texas and Shareholders to enter into this Agreement
and consummate the transactions contemplated hereby, PRGX represents and
warrants to HSA-Texas and Shareholders as follows, each of which representations
and warranties is material to and relied upon by HSA-Texas and Shareholders:
6.1 Organization of PRGX. PRGX is a corporation duly organized, validly
existing and in good standing under the laws of the State of Georgia and has the
corporate power and authority to own its property and to carry on its business
as now being conducted by it.
6.2 Corporate Power and Authority; Due Authorization. PRGX has full
corporate power and authority to execute and deliver this Agreement and each of
the other agreements, documents and instruments referenced in this Agreement to
which PRGX is or will be a party (the "PRGX Transaction Documents") and to
consummate the transactions contemplated hereby and thereby. Prior to the
Closing Date, the Board of Directors of PRGX shall have duly approved and
authorized the execution and delivery of this Agreement and each of the PRGX
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby, and no other corporate proceedings on the part of PRGX are
necessary to approve and authorize the execution and delivery of this Agreement
and such PRGX Transaction Documents and the consummation of the transactions
contemplated hereby and thereby. Assuming that this Agreement and each of the
PRGX Transaction Documents constitutes a valid and binding agreement of
Companies and/or Shareholders, as the case may be, this Agreement and each of
the PRGX Transaction Documents constitutes, or will constitute when executed and
delivered, a valid and binding agreement of PRGX, enforceable against PRGX in
accordance with its terms.
6.3 No Conflict; Consents. The execution and delivery by PRGX of this
Agreement, the PRGX Transaction Documents and the consummation by PRGX of the
transactions contemplated hereby and thereby do not and will not (a) require,
other than compliance with applicable requirements of the HSR Act and the
Lenders' Consent, the consent, approval or action of, or any filing or notice
to, any corporation, firm, Person or other entity or any Governmental Entity;
(b) violate the terms of any instrument, document or agreement to which PRGX is
a party, or by which PRGX or the property of PRGX is bound, or be in conflict
with, result in a breach of or constitute (upon the giving of notice or lapse of
time, or both) a default under
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any such instrument, document or agreement; (c) violate PRGX's Articles of
Incorporation or Bylaws; or (d) violate any order, writ, injunction, decree,
judgment, ruling, law or regulation of any Governmental Entity applicable to
PRGX, or the business or assets of PRGX.
6.4 Broker's Fees and Expenses. Except for any broker used in connection
with the negotiation of the leased space at the Dallas Headquarters, PRGX has
not retained or utilized the services of any broker, finder, or intermediary, or
paid or agreed to pay any fee or commission to any other Person for or on
account of the transactions contemplated hereby, or had any communications with
any Person which would obligate HSA-Texas or Shareholders to pay any such fees
or commissions.
6.5 Information Supplied.
(a) None of the information supplied or to be supplied by PRGX for
inclusion or incorporation by reference in the Proxy Statement will, on the
date it is first mailed to PRGX shareholders or at the time of the PRGX
Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Proxy Statement will comply as to form
in all material respects with the requirements of the Exchange Act and the
Securities Act of 1933, as amended, and the rules and regulations of the
SEC promulgated pursuant to such acts.
(b) Notwithstanding the foregoing provisions of this Section 6.5, no
representation or warranty is made by PRGX with respect to statements made
or incorporated by reference in the Proxy Statement based on information
supplied by HSA-Texas for inclusion or incorporation by reference therein.
6.6 Board Approval. The Board of Directors of PRGX, by resolutions duly
adopted by the affirmative vote of a majority of those voting at a meeting duly
called and held, at which a quorum was present, and not subsequently rescinded
or modified in any way, has duly (a) approved this Agreement, the Stock
Agreement, the Acquisition, the Concurrent Acquisitions, and the PRGX Share
Issuance and Option Issuance and (b) recommended that the shareholders of PRGX
vote for the proposal to approve the proposed PRGX Share Issuance and Option
Issuance and the election of the directors to be nominated in accordance with
Section 4.18 at the PRGX Special Meeting. To the knowledge of PRGX, no state
takeover statute is applicable to this Agreement or the Acquisition or the other
transactions contemplated hereby.
6.7 Vote Required. Assuming that a quorum is present at the PRGX Special
Meeting, approval of the proposed PRGX Share Issuance and Option Issuance and
the election of the nominated directors will require the affirmative vote of a
majority of the shares of PRGX Common Stock eligible to vote that are actually
voted either in person or by proxy at the PRGX Special Meeting (the "Required
PRGX Vote"). Such vote is the only vote of the holders of any class or series of
PRGX capital stock necessary to approve the proposed PRGX Share Issuance and
Option Issuance and the election of the nominated directors.
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification by HSA-Texas and Shareholders. In addition to any
other indemnification obligation of HSA-Texas or Shareholders under any other
provision hereof, HSA-Texas and each of the Shareholders, jointly and severally,
indemnify and hold PRGX, and its subsidiaries, affiliates, directors, officers,
employees and agents (collectively, the "PRGX Indemnified Parties"), harmless
from and against all claims, liabilities, lawsuits, losses, costs, damages or
expenses (including reasonable attorneys' fees and expenses awarded to the other
parties as relief by any court of competent jurisdiction or incurred by the PRGX
Indemnified Parties in litigation or otherwise) arising out of and sustained by
any of the PRGX Indemnified Parties due to or relating to, the following
(collectively, "Section 7.1 Indemnified Claims"):
(a) Misrepresentations or Breaches.
(i) With respect to the Companies, any misrepresentation or breach
of any representation or warranty, or breach, nonfulfillment of, or
failure to perform, any covenant, obligation or agreement of
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HSA-Texas or any Shareholder contained in this Agreement or in any
Schedule or Revised Schedule hereto or any HSA-Texas Transaction
Document; and
(ii) With respect to each of the Other Acquisitions, any
misrepresentation or breach of any representation or warranty or breach,
nonfulfillment of, or failure to perform any covenant, obligation or
agreement in any Other Acquisition Agreement by those persons or
entities who are the sellers in such Other Acquisition Agreements and/or
by HSA-Texas or any affiliate thereof or the purchaser thereunder in any
such Other Acquisition Agreement in any schedule thereto, other
agreement or instrument contemplated therein;
(b) Operations and Ownership Prior to the Closing Date.
(i) With respect to the Companies, any liability incurred or
obligation suffered by the PRGX Indemnified Parties, other than Assumed
Liabilities, whether or not the existence or assertion of such liability
or obligation would constitute a breach of any representation, warranty,
covenant, obligation or agreement contained herein or in any HSA-Texas
Transaction Document relating to the operation of the Business, or the
ownership or use of the Acquired Assets prior to the Closing Date, which
is not specifically disclosed in the Schedules or Revised Schedule
delivered in accordance with Sections 4.1, 4.21, 8.3(f) and any other
applicable provision hereof; and
(ii) With respect to each of the Other Acquisitions, any liability
incurred or obligation suffered by the PRGX Indemnified Parties, other
than liabilities specifically assumed pursuant to the respective Other
Acquisition Agreement, as approved by PRGX, whether or not the existence
or assertion of such liability would constitute a breach of any
representation, warranty, covenant, obligation or agreement contained in
the Other Acquisition Agreement, relating to the operation of the
business of such Seller and use of the assets by the Seller prior to the
closing date of such Other Acquisition which is not specifically
disclosed in the schedules delivered in accordance with the Other
Acquisition Agreement;
(c) Specific Legal Documents. Any failure of any Company to comply
with any specified legal compliance requirements, including Executive Order
11246, contained in any contracts of any Company with any Governmental
Entity;
(d) Tax Matters.
(i) The treatment, as employees, for any period prior to the
Closing Date, by any Governmental Entity, including any Tax Authority,
of any Associates, auditors, consultants or other service providers of
the Business whom any Company treated for such period as independent
contractors, and not as employees, for any foreign, national federal,
state or local purposes, including any withholding for any state,
federal or foreign income tax, FICA or FUTA amounts, state, federal or
foreign unemployment insurance contributions, payments in respect of
workers' compensation insurance, the provision of benefits under the
Employee Benefit Plans, or payments under The Fair Labor Standards Act
or regulations promulgated thereunder, and
(ii) The treatment, as employees, for any period prior to the
respective closing date of any of the Other Acquisitions by any
Governmental Entity, including any Tax Authority, of any service
providers of the business of the Sellers or the U.K. Licensee or the
German Licensee, as appropriate, in such Other Acquisition whom the
respective Sellers or its business or the U.K. Licensee or the German
Licensee, as appropriate, treated for such period as independent
contractors, and not as employees, for any foreign, national federal,
state or local purposes, as described above, but also including, with
respect to the U.K. Acquisition, any National Insurance Contributions,
whether due of the employer or the employee in the United Kingdom; and;
(iii) Any Tax or other charge or expense for HSA-Texas' failure to
qualify or maintain its qualification as an S corporation (or the state
equivalent thereof) in any jurisdiction.
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(e) Failures to Obtain.
(i) Any failure to obtain prior to Closing any required consent to
the assignment to PRGX of:
(A) any agreements between HSA-Texas and the U.K. Licensee or
the German Licensee; or
(B) any other Acquired Asset (unless PRGX has waived in writing
prior to or at the Closing the requirement that such consent be
obtained or unless such unobtained consent is listed on Schedule 5.4
attached hereto, other than consents to the assignment of agreements
with the U.K. Licensee even if listed on Schedule 5.4); and
(ii) the failure to obtain, concurrently with the closing of each
of the Other Acquisitions, restrictive covenants from each Seller and
each equity holder of such Seller as to non-competition,
non-solicitation of customers and employees and confidentiality in form
and substance acceptable to PRGX;
(f) Accounts Receivable of the DSD Operations. Effective from and
after the respective closings of the DSD Acquisitions, the failure of
HSA-Texas, or PRG as its assignee hereunder, to collect in full, net of any
reserve established as of the respective closing date of the DSD
Acquisitions, within 270 days after the day on which it first becomes due
and payable any account receivable outstanding on the books of Phoenix
Audit Recoveries, Inc. or JASAMA, Inc. on the respective closing date of
each such DSD Acquisition;
(g) Certain Vendor Paybacks. The amount in excess of $100,000 of any
Vendor Paybacks provided the aggregate Vendor Paybacks to such Client is in
excess of $350,000; "Vendor Paybacks" means, for this purpose, all Vendor
Paybacks in respect of the Inactive Audits of a Client (reduced by any
Vendor Paybacks charged after the Closing against the aggregate reserves
established by HSA-Texas prior to the Closing for all of such Client's
Inactive Audits and without regard to potential claims that could be
asserted against any Associates for commissions or compensation paid with
respect to such Client's Vendor Paybacks);
(h) Certain Other Liabilities. With respect to the following:
(i) all severance liabilities or obligations of any Company to any
employees of, Associates of, or other service providers to the Business
other than the Assumed Severance Amount; and
(ii) any claims asserted by shareholders of HSA-Texas, Optionees or
holders of HSA-Texas SARs in connection with or arising out of (a) the
determination of the number and exercise price of Options to be Assumed
by PRGX, and the allocation among the HSA-Texas shareholders and the
Optionees of the shares of PRGX Common Stock to be issued in the Share
Issuance and the Options to be Assumed in the Option Issuance pursuant
to this Agreement and the (b) the allocation of the Consideration
hereunder and the consideration to be paid to the shareholders of the
Affiliated Foreign Operating Companies under the Stock Agreement;
(iii) the failure to close the German Acquisition, in accordance
with the terms of the German Acquisition Agreement and Section 4.25
hereof; and
(iv) except in respect of the claims raised by Evert Software, Inc.
in the litigation described on Schedule 5.24 attached hereto, any claim
by any Associate, former Associate or other Person that the manufacture,
marketing, license, sale or use by the Companies, or by PRGX after the
Closing, of any intellectual property assets, including software and
developments, used by the Companies, and/or used by any Associates in
connection with services rendered to or on behalf of the Business
(including the Intellectual Property Assets transferred pursuant
hereto), (A) violates or will violate any license or agreement with any
third party or infringes or has infringed on the intellectual property
rights of others, (B) that such Company or, after the Closing, PRGX,
does not have the right to use such intellectual property assets and/or
(C) that such Company or, after the Closing,
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PRGX, does not have the right to reproduce, copy, sell, license and/or
distribute such intellectual property assets
(i) Certain Breaches. Any breach occurring prior to the Closing by
any Company in respect of any representation, warranty, covenant or
agreement in any Assigned Contract or Assigned Lease;
(j) Retained Liabilities. All Retained Liabilities; and
(k) Bulk Transfer. Failure to comply with any applicable bulk
transfer laws.
Notwithstanding the foregoing, neither HSA-Texas, H. Schultz, A. Schultz nor the
Trusts shall have any liability to the PRGX Indemnified Parties for any claims,
liabilities, lawsuits, costs, damages or expenses (including reasonable
attorneys' fees and expenses incurred in litigation or otherwise) arising out of
and sustained by any of the PRGX Indemnified Parties due to or relating to
HSA-Texas' failure to obtain executed Non-competition Agreement from any of
Michael Lowery, Gertrude Lowery, Charles Schembri or Mac Martirossian.
7.2 Indemnification by PRGX. In addition to any other indemnification
obligation of PRGX hereunder, PRGX hereby indemnifies and holds HSA-Texas and
Shareholders and Shareholders' and HSA-Texas' affiliates, directors, officers,
employees and agents (collectively, the "HSA-Texas Indemnified Parties")
harmless from and against all claims, liabilities, lawsuits, costs, damages or
expenses (including reasonable attorneys fees and expenses incurred in
litigation or otherwise) arising out of and sustained by any of them due to or
relating to (a) any misrepresentation or breach of any representation, warranty,
covenant or agreement of PRGX in this Agreement or any of the PRGX Transaction
Documents; and (b) any liability or obligation incurred by HSA-Texas or any
Shareholder relating to the operation or ownership of the Business by PRGX, or
the ownership or use of the Acquired Assets by PRGX, from and after the Closing
Date, other than Section 7.1 Indemnified Claims and other than Retained
Liabilities (collectively, "Section 7.2 Indemnified Claims").
7.3 Procedures for Indemnification. Concurrently with the Closing, the
parties hereto shall enter into an Indemnification Agreement in substantially
the same form as attached hereto as Exhibit 7.3 (the "Indemnification
Agreement"), providing the procedures for indemnification, the survival period
and certain limitations on indemnification described herein and in the Stock
Agreement.
ARTICLE 8
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligations. The respective obligations of
PRGX and HSA-Texas to consummate the Acquisition are subject to the satisfaction
or waiver, by both PRGX and HSA-Texas, on or prior to the Closing Date of the
following conditions:
(a) Shareholder Approval.
(i) PRGX shall have obtained the Required PRGX Vote by the
shareholders of PRGX in connection with the approval of the proposed
PRGX Share Issuance and Option Issuance and the election of the
nominated directors, and
(ii) HSA-Texas shall have provided to PRGX, within 15 days after
the date of this Agreement, a fully executed copy of a unanimous written
consent of the holders of HSA-Texas Voting Common Stock or a certified
copy of resolutions duly adopted by the holders of HSA-Texas Voting
Common Stock authorizing and approving the Agreement and the other
HSA-Texas Recommendations.
(b) No Injunctions or Restraints, Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Entity of competent jurisdiction shall be in effect, having the effect of
making the Acquisition illegal or otherwise prohibiting consummation of the
Acquisition. No action seeking such an
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order or injunction shall be pending or threatened. A "Governmental Entity"
means any supranational, national, state, municipal, local or foreign
government, any instrumentality, subdivision, court, administrative agency
or commission or other authority thereof, or any quasi-governmental or
private body exercising any regulatory, taxing, importing or other
governmental or quasi-governmental authority (or any department, agency or
political subdivision thereof).
(c) HSR Act. The waiting period (and any extension thereof)
applicable to the Acquisition under the HSR Act shall have been terminated
or shall have expired.
(d) Listing. The shares of PRGX Common Stock to be issued as
Consideration or to be reserved for issuance in connection with the
Acquisition shall have been approved for listing on The Nasdaq National
Market, subject to official notice of issuance.
(e) Proxy Statement. The SEC shall not have objected to PRGX's
mailing the Proxy Statement to the PRGX shareholders and no stop order or
other order or suspension of use of the Proxy Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been
initiated or threatened by the SEC.
(f) Consents. Each of the consents and approvals that are described
in Section 6.3 shall have been duly obtained and shall be in full force and
effect.
(g) Intentionally omitted.
(h) Intentionally omitted.
(i) Concurrent Acquisitions. Prior to or concurrently with the
Closing, PRGX shall have consummated the Stock Agreement in respect of the
Concurrent Acquisitions.
(j) Intentionally omitted.
(k) Lenders' Consent. PRGX shall have obtained either (i) the consent
of its principal lenders, a syndicate led by Bank of America, N.A., to the
Acquisition, the Other Acquisitions, and the Concurrent Acquisitions,
including an agreement by such lenders to loan to PRGX any and all amounts
required to satisfy any of the Acquisition-Related Notes, to repay the
Assumed Schultz Loan, to consummate the Concurrent Acquisitions, to pay any
obligations assumed or to be paid by PRGX relating to the Other
Acquisitions and any other transactions contemplated hereby (collectively,
the "Contemplated Transactions" or (ii) if such consent is not obtained,
PRGX shall have entered into a new or amended credit facility which makes
the consent of its lenders unnecessary and which does not prohibit the
Contemplated Transactions (in either event, the "Lenders' Consent").
8.2 Additional Conditions to Obligations of HSA-Texas. The obligations of
HSA-Texas to effect the Acquisition are subject to the satisfaction, or waiver
by HSA-Texas, on or prior to the Closing Date of the following additional
conditions:
(a) Representations and Warranties. Each of the representations and
warranties of PRGX set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (except to the
extent that such representations and warranties speak as of another date,
in which case such representations and warranties shall be true and correct
as of such other date); and HSA-Texas shall have received a certificate of
a senior executive officer and a senior financial officer of PRGX to such
effect.
(b) Performance of Obligations of PRGX. PRGX shall have performed or
complied with all agreements and covenants required to be performed by it
under this Agreement at or prior to the Closing Date that are qualified as
to materiality or Material Adverse Effect and shall have performed or
complied in all material respects with all other material agreements and
covenants required to be performed by it under this Agreement at or prior
to the Closing Date that are not so qualified, and HSA-Texas shall have
received a certificate of a senior executive officer and a senior financial
officer of PRGX to such effect.
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(c) Closing Deliveries. PRGX shall have delivered to HSA-Texas each
of the following, together with any additional items which HSA-Texas may
reasonably request to effect the transactions contemplated herein:
(i) the Consideration;
(ii) intentionally omitted;
(iii) the documents and instruments described in Section 1.3 hereof
duly executed by PRGX;
(iv) H. Schultz Offer Letter, the A. Schultz Offer Letter, the
offer letters for employment between PRGX and each of the other Key
Employees, duly executed by PRGX or PRGUSA;
(v) the Non-competition Agreement referred to in Section 3.4 hereof
duly executed by PRGX;
(vi) the Lenders' Consent, if applicable, as described in Section
8.1(k) hereof;
(vii) the Closing Statement, reflecting the payment and receipt of
the Consideration, duly executed by PRGX;
(viii) the Shareholders Agreement duly executed by John Cook and
Jack Toma;
(ix) certified copies of the corporate resolutions of the Board of
Directors of PRGX authorizing and approving the Acquisition and the
transactions contemplated herein, together with an incumbency
certificate with respect to the officers of PRGX executing documents or
instruments on behalf of PRGX;
(x) the Report of the Inspector of Elections of the PRGX Special
Meeting certifying that the Required PRGX Vote was obtained;
(xi) the Indemnification Agreement duly executed by PRGX;
(xii) the Registration Rights Agreement, duly executed by PRGX;
(xiii) the payment to H. Schultz of all outstanding principal and
accrued interest on the Assumed Schultz Loan; and
(xiv) any other documents or agreements, as reasonably requested by
HSA-Texas or Shareholders, contemplated hereby and/or necessary to
consummate the transactions contemplated hereby.
(d) Election of Certain Nominees as Directors. The PRGX Board shall
have nominated for election by the PRGX shareholders at the PRGX Special
Meeting those persons recommended by H. Schultz in accordance with Section
4.18 hereof and such nominees shall have been elected at the PRGX Special
Meeting.
8.3 Additional Conditions to Obligations of PRGX. The obligations of PRGX
to effect the Acquisition are subject to the satisfaction, or waiver by PRGX, on
or prior to the Closing Date of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of HSA-Texas and Shareholders set forth in this Agreement and in
the Schedules and Revised Schedules delivered in accordance with this
Agreement shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date as though made on and as of
the Closing Date (except to the extent that such representations and
warranties speak as of another date, in which case such representations and
warranties shall be true and correct as of such other date); and PRGX shall
have received a certificate of a senior executive officer and a senior
financial officer of HSA-Texas and of the Shareholders to such effect,
together with a complete set of Schedules and Revised Schedules as of the
Closing Date.
(b) Performance of Obligations of HSA-Texas. HSA-Texas and
Shareholders shall have performed or complied with all agreements and
covenants required to be performed by it under this
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Agreement, including those set forth in Articles 3 and 4 hereof, at or
prior to the Closing Date that are qualified as to materiality or Material
Adverse Effect and shall have performed or complied in all material
respects with all other material agreements and covenants required to be
performed by it under this Agreement at or prior to the Closing Date that
are not so qualified, and PRGX shall have received a certificate of a
senior executive officer and a senior financial officer of HSA-Texas and of
the Shareholders to such effect.
(c) Closing Deliveries. As of the Closing Date, HSA-Texas and
Shareholders shall have delivered possession of the Acquired Assets to
PRGX. At the Closing, HSA-Texas and Shareholders shall have delivered to
PRGX each of the following, together with any additional items which PRGX
may reasonably request to effect the transactions contemplated herein:
(i) a certified copy of the corporate resolutions of the directors
of HSA-Texas and Shareholders authorizing the transactions contemplated
herein and the execution, delivery and performance of this Agreement and
the HSA-Texas Transaction Documents by HSA-Texas and any other actions
or authorizations required under Article 3 hereof, together with an
incumbency certificate with respect to officers of HSA-Texas executing
documents or instruments on behalf of HSA-Texas;
(ii) the Bill of Sale, the Assignment and Assumption Agreement and
the other documents described in Section 1.3 hereof;
(iii) intentionally omitted;
(iv) the Non-competition Agreements duly executed by HSA-Texas,
Shareholders, Michael Lowery, Gertrude Lowery, Charles Schembri and Mac
Martirossian;
(v) written consents from all parties whose consent to the
transactions contemplated herein is required;
(vi) an opinion of counsel to HSA-Texas and Shareholder
substantially in the form of Exhibit 8.3(c)(vi) attached hereto;
(vii) the H. Schultz Offer Letter, the A. Schultz Offer Letter, the
offer letters for employment between PRGX and each of the other Key
Employees and the Employee Agreements, duly executed by each of the Key
Employees;
(viii) a Certificate of Good Standing, or equivalent certificate,
in respect of each Company issued within 5 days prior to the Closing, by
the Secretary of State, or equivalent authority, of its jurisdiction of
organization and by the Secretary of State, or equivalent authority, of
any other jurisdiction in which such Company is qualified to do
business;
(ix) if applicable, termination statements, releasing all liens on
the Acquired Assets;
(x) a Closing Statement, duly executed by HSA-Texas and
Shareholders;
(xi) the Historical Statements provided for in Section 4.1 hereof
and the Estimated Financials;
(xii) the General Release substantially in the form attached hereto
as Exhibit 8.3(xii), duly executed by each Shareholder and by Michael
Lowery, Gertrude Lowery, Charles Schembri and Mac Martirossian;
(xiii) the Shareholders Agreement duly executed by the
Shareholders;
(xiv) the Dallas Lease, duly executed by HSA-Texas;
(xv) the Indemnification Agreement, duly executed by the
Shareholders; and
(xvi) any other documents or agreements, as reasonably requested by
HSA-Texas or Shareholders, contemplated hereby and/or necessary to
consummate the transactions contemplated hereby.
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(d) Fairness Opinion. The Fairness Opinion shall not have been
modified or withdrawn by Merrill Lynch.
(e) Repayment of Shareholder Loans. Each shareholder of HSA-Texas,
including the Shareholders, shall have repaid in full at or prior to the
Closing all amounts owed by such shareholder to HSA-Texas.
(f) Revised Schedules. The Companies and the Shareholders shall have
provided PRGX with revised Schedules dated as of the Closing Date
(collectively, the "Revised Schedules"), with all changes duly noted
thereon, accompanied by a certificate of a duly authorized officer of
HSA-Texas and a certificate of the Shareholders certifying that such
Revised Schedules are delivered pursuant to the applicable Sections of this
Agreement; provided however, that in the event the Revised Schedules
contain any disclosure or change which (i) should have been but was not
shown on the Schedules attached hereto at the date hereof, or (ii)
individually or in the aggregate is material to any warranty or
representation contained herein, or (iii) arose outside the ordinary course
of business, the condition contained in this Section shall be deemed
unsatisfied unless PRGX has agreed in writing to such disclosures or
changes.
(g) German Acquisition. HSA-Texas shall have consummated the German
Acquisition in accordance with the German Acquisition Agreement.
ARTICLE 9
TERMINATION AND AMENDMENT
9.1 Termination. This Agreement may be terminated at any time before the
Closing Date (notwithstanding any approval of the Acquisition and adoption of
this Agreement by the Shareholders or the PRGX shareholders):
(a) by mutual written consent of HSA-Texas and PRGX;
(b) by either PRGX or HSA-Texas, if the Acquisition has not been
consummated on or before March 31, 2002 (the "Termination Date"), provided
that the party seeking to exercise the right to terminate this Agreement
under Section 9.1(b) is not then in breach in any material respect of any
of its representations, warranties, covenants or other agreements under
this Agreement;
(c) by HSA-Texas, if the approval of the shareholders of PRGX
contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the Required PRGX Vote, as contemplated herein; and
by PRGX, if the approval of the shareholders of HSA-Texas shall not have
been obtained by reason of failure to obtain the Required HSA-Texas Vote
pursuant to Section 3.1(b)(ii) and Section 5.33 hereof, or by reason of the
rescission by any of the holders of HSA-Texas Voting Common Stock of their
approval of any of the HSA-Texas Recommendations;
(d) by either PRGX or HSA-Texas, if any Governmental Entity of
competent jurisdiction (i) shall have issued an order, decree or ruling or
taken any other action (which the parties shall have used their reasonable
best efforts to resist, resolve or lift, as applicable) permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and non-appealable, or (ii) shall have
failed to issue an order, decree or ruling or to take any other action, and
such denial of a request to issue such order, decree or ruling or to take
such other action shall have become final and non-appealable (which order,
decree, ruling or other action the parties shall have used their reasonable
best efforts to obtain); or
(e) by HSA-Texas, (i) if PRGX shall have materially breached its
representations or warranties contained in this Agreement or failed to
perform in any material respect any of its covenants or other agreements
contained in this Agreement, which breach would result in the failure to
satisfy the conditions set forth in Section 8.2(a) and (b) and in any such
case such breach is incapable of being cured, or, if capable of being
cured, shall not have been cured on or before the Termination Date within
10 days after written notice thereof shall have been received by PRGX; or
(ii) upon the occurrence of an event that
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has a Material Adverse Effect on PRGX, taken as a whole with its
consolidated subsidiaries, regardless of whether the conditions set forth
in 8.2(a) and (b) are capable of being satisfied on or before the
Termination Date, in either case provided that neither HSA-Texas nor any of
the Shareholders is then in breach in any material respect of any of its
representations, warranties, covenants or other agreements under this
Agreement; or
(f) by PRGX, (i) if HSA-Texas or the Shareholders shall have
materially breached any of their representations or warranties contained in
this Agreement or failed to perform in any material respect their covenants
or other agreements contained in this Agreement, which breach would result
in the failure to satisfy the conditions set forth in Section 8.3(a) and
(b) and in any such case such breach is incapable of being cured, or if
capable of being cured, shall not have been cured on or before the
Termination Date and within 10 days after written notice thereof shall have
been received by HSA-Texas and the Shareholders; or (ii) upon the
occurrence of an event or development that has a Material Adverse Effect on
HSA-Texas, regardless of whether the conditions set forth in Section 8.3(a)
and (b) are capable of being satisfied on or before the Termination Date,
in either case, provided PRGX is not then in breach in any material respect
of any of its representations, warranties, covenants or other agreements
under this Agreement; or
(g) by HSA-Texas, if the per share closing price (as reported in The
Wall Street Journal) of PRGX Common Stock on any trading day during the
period beginning on the date hereof and ending on a date 5 trading days
prior to the Closing Date is less than $4.00, by written notice by
HSA-Texas to PRGX within 3 days after the trading day on which the per
share closing price of PRGX Common Stock was less than $4.00; or
(h) by PRGX, in order to enter into a definitive written agreement
with respect to a PRGX Alternative Transaction; or
(i) by HSA-Texas, if a Triggering Event shall have occurred. For
purposes of this Agreement, a "Triggering Event" shall be deemed to have
occurred if, (A) the PRGX Board or any committee thereof shall have
approved or recommended to its shareholders any PRGX Alternative
Transaction which does not include the concurrent acquisition of HSA-Texas
and the Affiliated Foreign Operating Companies or HSA-Texas' and the
Affiliated Foreign Operating Companies assets by the Third Party which is
party to such PRGX Alternative Transaction as if HSA-Texas and the
Affiliated Foreign Operating Companies were a part of PRGX at the
consummation of such PRGX Alternative Transaction, (B) the PRGX Board or
any committee thereof shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to HSA-Texas the PRGX
Recommendations; or (C) a tender or exchange offer to acquire 50% or more
of the outstanding shares of PRGX Common Stock shall have been commenced by
a Third Party, and PRGX shall not have sent to its shareholders pursuant to
Rule 14e-2 promulgated under the Exchange Act, within 10 business days
after such tender or exchange offer is first published sent or given, a
statement disclosing that PRGX recommends rejection of such tender or
exchange offer; or
(j) by HSA-Texas, if the PRGX Board or any committee thereof shall
have approved or recommended to its shareholders a PRGX Alternative
Transaction which includes the concurrent acquisition of HSA-Texas and the
Affiliated Foreign Operating Companies or HSA-Texas' and the Affiliated
Foreign Operating Companies' assets by a third party, but HSA-Texas or any
of the Affiliated Foreign Operating Companies in its discretion, or
(k) by PRGX, within 30 days after receipt of all of the Schedules as
provided in Section 4.21; or
(l) notwithstanding anything in Section 9.1 to the contrary, by PRGX
or HSA-Texas, if PRGX has not received the Lenders' Consent described in
Section 8.1(k) hereof on or before March 31, 2002.
9.2 Effect of Termination.
(a) Termination Prior to Mailing Proxy Statement. If either party
shall terminate this Agreement pursuant to any Section of Section 9.1 prior
to the date on which PRGX mails the Proxy Statement to its
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shareholders, and the party exercising such right is not then in breach in
any material respect of any of its representations, warranties, covenants
and other agreements under this Agreement, neither party shall have any
liability or obligation to the other (including any obligation to pay the
PRGX Transaction Expenses or the HSA-Texas Transaction Expenses, as the
case may be, or the Termination Fee described below) except for those
obligations as provided in Section 9.2(g) hereof.
(b) HSA-Texas Pays PRGX Transaction Expenses. If after PRGX mails the
Proxy Statement to its shareholders, (i) either party shall terminate this
Agreement pursuant to Section 9.1(b) prior to obtaining the Required
HSA-Texas Vote pursuant to Section 3.1(b)(ii) and Section 5.33 hereof, or
PRGX shall terminate this Agreement pursuant to Section 9.1(c) (provided
that the basis for such termination is the failure of HSA-Texas'
shareholders to obtain the Required HSA-Texas Vote pursuant to Section
3.1(b)(ii) and Section 5.33 hereof, or the basis for such termination is
the rescission by the holders of the HSA-Texas Voting Common Stock of the
approval of any of the HSA-Texas Recommendations or the failure of any of
the shareholders of the Affiliated Foreign Operating Companies (other than
Acceptor Professional Directors Pte Ltd) to execute the Stock Agreement
concurrently herewith, (ii) HSA-Texas shall have terminated this Agreement
pursuant to Section 9.1(j) or (iii) PRGX shall terminate this Agreement
pursuant to Section 9.1(f)(i), then in any such event HSA-Texas shall
promptly, but not later than ten days after the date of such termination,
pay PRGX an amount equal to all of the PRGX Transaction Expenses, by wire
transfer of immediately available funds and, notwithstanding anything to
the contrary contained herein, PRGX shall not be required to pay any
HSA-Texas Transaction Expenses hereunder.
(c) PRGX Pays HSA-Texas Transaction Expenses. If after PRGX mails the
Proxy Statement to its shareholders, (i) either party shall terminate this
Agreement pursuant to Section 9.1(b) prior to the PRGX Special Meeting
having occurred or pursuant to Section 9.1(c) (provided that the basis for
such termination is the failure of PRGX's shareholders to approve the
proposed PRGX Share Issuance and Option Issuance and the election of the
proposed directors) or (ii) HSA-Texas shall terminate this Agreement
pursuant to Section 9.1(e)(i), then in any such event PRGX shall promptly,
but in no event later than ten days after the date of such termination, pay
HSA-Texas an amount equal to all of the HSA-Texas Transaction Expenses,
including all reasonable out-of-pocket legal and accounting fees, all
broker and financial advisor fees, all HSR fees, and all SEC fees, payable
by wire transfer of immediately available funds.
(d) Certain Terminations. If after PRGX mails the Proxy Statement to
its shareholders, either party shall terminate this Agreement pursuant to
Section 9.1(d) or 9.1(l), or if PRGX shall terminate this Agreement
pursuant to Sections 9.1(f)(ii), 9.1(h), or 9.1(k), or if HSA-Texas shall
terminate this Agreement pursuant to Sections 9.1(e)(ii), 9.1(g) or
9.11(j), and the party exercising such right is not then in breach in any
material respect of any of its representations, warranties, covenants and
other agreements under this Agreement, neither party shall have any
liability or obligation to the other (including any obligation to pay the
PRGX Transaction Expenses or the HSA-Texas Transaction Expenses, as the
case may be, or the Termination Fee described below) except for those
obligations as provided in Section 9.2(g) hereof.
(e) Termination Fee. If after PRGX mails the Proxy Statement to its
shareholders, HSA-Texas terminates this Agreement pursuant to Section
9.1(i), PRGX shall pay to HSA-Texas in cash the sum of $2,000,000
("Termination Fee") plus all HSA-Texas Transaction Expenses incurred by
HSA-Texas and the Shareholders in connection with this Agreement,
including, without limitation, all reasonable out-of-pocket legal and
accounting fees, all broker and financial advisor fees, all HSR fees, and
all SEC fees.
(f) Timing of Payment of Termination Fee. The Termination Fee shall
be due and payable to HSA-Texas within ten (10) days after HSA-Texas'
termination of this Agreement in accordance with Section 9.1(i) hereof.
(g) Effect of Termination. If this Agreement is terminated by either
PRGX or HSA-Texas as provided in Section 9.1, this Agreement shall
forthwith become void and have no further effect, without any liability or
obligation on the part of PRGX, HSA-Texas, or their respective
shareholders, officers or
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directors, other than with respect to the provisions of Section 4.1(e),
Section 4.7(b), Section 4.11, Section 5.27, Section 6.4, this Section 9.2,
Section 10.6, Sections 10.8 and Section 10.10, which provisions shall
survive such termination, and except that, notwithstanding anything to the
contrary contained in this Agreement, neither PRGX, HSA-Texas nor the
Shareholders shall be relieved or released from any liabilities or damages
arising out of its breach of this Agreement, including any representations,
warranties, covenants or other agreements contained herein, and none of the
limitations contained in Indemnification Agreement shall be applicable.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Severability. If any provision of this Agreement is prohibited by the
laws of any jurisdiction as those laws apply to this Agreement, that provision
shall be ineffective to the extent of such prohibition and/or shall be modified
to conform with such laws, without invalidating the remaining provisions hereto.
10.2 Amendment; Modification; Extension; Waiver.
(a) This Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the
Acquisition by the shareholders of PRGX and HSA-Texas, but, after any such
approval, no amendment shall be made which by law or in accordance with the
rules of the NASDAQ Stock Market requires further approval by the PRGX
shareholders without such further approval; provided, however, this
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
(b) At any time prior to the Closing, the parties may (a) extend the
time for the performance of any of the obligations or other acts of the
other parties, (b) waive (by the party entitled to waive) any inaccuracies
in the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) subject to the proviso
of Section 10.2(a) that no amendment shall be made which by law or in
accordance with the rules of the NASDAQ Stock Market requires further
approval by the PRGX shareholders without such further approval, waive
compliance with any of the agreements or conditions contained in this
Agreement. Any such extension or waiver shall be valid only if set forth in
an instrument in writing signed by each of the parties hereto. No failure
or delay by any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
10.3 Assignment, Survival and Binding Agreement. This Agreement, the other
HSA-Texas Transaction Documents and the other PRGX Transaction Documents (a) may
not be assigned by PRGX on or prior to the Closing without the prior written
consent of HSA-Texas and Shareholders (except for an assignment to a wholly
owned subsidiary of PRGX, which may be made without the prior consent of, but
with notice to, HSA-Texas provided that, in such event, the assignor shall
remain obligated hereunder in the same manner as if such assignment had not been
effected); (b) may not be assigned by PRGX after the Closing without the prior
written consent of HSA-Texas and Shareholders' Representative, except for (i) an
assignment to an affiliate of PRGX, which may be made without the prior consent
of, but with notice to, HSA-Texas and Shareholders' Representative; provided
that, in such event, the assignor shall remain obligated hereunder in the same
manner as if such assignment had not been effected and (ii) in the event of a
merger, consolidation, reorganization or similar transaction of PRGX with a
Person where such other Person is the surviving entity of such transaction, this
Agreement may be assigned by PRGX without the prior consent of, but with notice
to, the Shareholders' Representative; and (c) may not be assigned by HSA-Texas
or Shareholders at any time, without the prior written consent of PRGX. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and assigns. The parties hereto acknowledge that
PRGX intends to transfer and assign the
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Acquired Assets and the Assumed Liabilities to PRGUSA, its wholly-owned
subsidiary, as soon as practicable after the Closing, whereupon all obligations
of PRGX referred to herein with respect to such Acquired Assets and Assumed
Liabilities shall thereafter be deemed to be primary obligations of PRGUSA, for
which PRGX shall be secondarily liable.
10.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.5 Notices. All notices, requests, demands, claims or other
communications hereunder will be in writing and shall be deemed duly given if
personally delivered, sent by telefax, sent by a recognized overnight delivery
service which guarantees next-day delivery ("Overnight Delivery") or mailed by
certified mail, return receipt requested, postage prepaid and addressed to the
intended recipient, as set forth below:
If to HSA-Texas or Shareholders: Howard Schultz & Associates International, Inc.
9924 LBJ Freeway Dallas, TX 75243 Attention: Howard
Schultz Telefax: (972) 690-7584
with a copy to: Malouf Lynch Jackson & Swinson 600 Preston Commons
East, 8115 Preston Road Dallas, TX 75225
Attention: Curtis Swinson, Esq. Telefax: (214)
273-0567
with a copy to: Michael Glazer, Esq. Howard Schultz & Associates
International, Inc. 9924 LBJ Freeway Dallas, TX
75243
If to PRGX: The Profit Recovery Group International, Inc. 2300
Windy Ridge Parkway Suite 100 North Atlanta, GA
30339-8426 Attention: Clinton McKellar, Jr. Senior
Vice President & General Counsel Telefax: (770)
779-3034
with a copy to: Arnall Golden Gregory LLP 1201 West Peachtree
Street, Suite 2800 Atlanta, Georgia 30309-3400
Attention: Jonathan Golden, Esq. Telefax: (404)
873-8701
or at such other address as any party hereto notifies the other parties hereof
in writing. The parties hereto agree that notices or other communications that
are sent in accordance herewith (i) by personal delivery or telefax, will be
deemed received on the day sent or on the first business day thereafter if not
sent on a business day (with written confirmation of receipt), (ii) by Overnight
Delivery, will be deemed received on the first business day immediately
following the date sent, and (iii) by certified U.S. Mail, return receipt
requested, will be deemed received three (3) business days immediately following
the date sent. For purposes of this Agreement, a "business day" is a day on
which U.S. national banks are open for business and shall not include a Saturday
or Sunday or legal holiday. Notwithstanding anything to the contrary in this
Agreement, no action shall be required of the parties hereto except on a
business day and in the event an action is required on a day which is not a
business day, such action shall be required to be performed on the next
succeeding day which is a business day.
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10.6 Entire Agreement; No Third Party Beneficiaries. Except for the
Nondisclosure Agreement, which remains in full force and effect in accordance
with the terms thereof, this Agreement, together with the Exhibits and Schedules
attached hereto, constitutes the entire agreement and supersedes any and all
other prior agreements and undertakings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof, including
the Letter of Intent, and, except as otherwise expressly provided herein, is not
intended to confer upon any Person other than PRGX, HSA-Texas and the
Shareholders, any rights or remedies hereunder.
10.7 Further Assurances. The parties to this Agreement agree to execute
and deliver, both before and after the Closing, any additional information or
documents or agreements contemplated hereby and/or necessary or appropriate to
effect and consummate the transactions contemplated hereby. Shareholders and
Companies agree to provide to PRGX, both before and after the Closing, such
information as PRGX may reasonably request in order to consummate the
transactions contemplated hereby and to effect an orderly transition of the
Business following the Closing Date.
10.8 Choice of Law. This Agreement and all documents executed in
connection therewith shall be governed by, and construed in accordance with, the
laws of the State of Georgia, regardless of the laws that might otherwise govern
under applicable principles of conflict of laws thereof.
10.9 Consent to Jurisdiction. Each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any federal court located in the
Northern District of Georgia or, if there is not a basis for federal court
jurisdiction, a Superior Court of Cobb County, Georgia in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, and (c)
agrees that it will not bring any action relating to this Agreement or any of
the transactions contemplated by this Agreement in any court other than a
federal court sitting in the Northern District of Georgia or a Cobb County
Superior Court.
10.10 Dispute Resolution.
(a) Financial Matters. Notwithstanding any provision of this
Agreement to the contrary, all disputes, controversies or claims arising
out of or relating to this Agreement or the transactions contemplated
hereby relating to financial matters shall be resolved by agreement among
the parties, or, if not so resolved within forty-five (45) days following
written notice of dispute given by either party hereto to the other, by
arbitration in accordance with Title 9 of the United States Code (the
United States Arbitration Act), the Commercial Arbitration Rules of the
American Arbitration Association, and its Optional Rules for Emergency
Measures of Protection (the "Optional Rules"), all as amended from time to
time (collectively, the "Rules") and the provisions of this Section;
provided, however, that the provisions of this Section shall prevail in the
event of any conflict with such Rules. The parties agree that they shall
use their best efforts to cause the matter to be presented to the arbitral
tribunal as soon as possible in light of the complexity of the dispute. The
arbitral tribunal, except as provided under the Optional Rules, shall
consist of three neutral arbitrators experienced in the industry related to
the dispute, one of whom shall be chosen by the claimant and one chosen by
respondent, and the two so chosen shall choose the third arbitrator who
shall act as chairperson. The parties shall be entitled to engage in
discovery in connection with arbitration, which discovery shall be
conducted in accordance with Georgia rules of Civil Procedure and Evidence.
Additionally, there shall be no evidence by affidavit allowed, and each
party shall disclose a list of all documentary evidence to be used, a list
of all witnesses and experts to be called by the party at least twenty (20)
days prior to the arbitration hearing. The decision of a majority of the
arbitration panel with respect to the matters referred to them pursuant
hereto shall be final and binding upon the parties to the dispute, and
confirmation and enforcement thereof may be rendered thereon by any court
having jurisdiction upon application of any Person who is a party to the
arbitration proceeding. The arbitral tribunal shall assess fees, expenses,
compensation, and attorney's fees in the award as provided in the Rules.
The arbitral tribunal shall have no power or authority under this Agreement
or otherwise to award or provide for the award of punitive or consequential
damages against any party. Any arbitration shall be conducted in Atlanta,
Georgia.
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(b) Other Matters. Notwithstanding any provision of this Agreement to
the contrary, in respect of all disputes, controversies or claims arising
out of or relating to this Agreement or the transactions contemplated
relating to any matters other than financial matters the parties may
exercise any and all rights and remedies available at law or in equity.
Without limiting the generality of the foregoing, in the event of a breach
or threatened breach by any party hereto of any of its covenants or other
obligations hereunder, including, without limitation, the parties'
respective obligations to close the transactions contemplated hereby, each
of the parties hereby consents and agrees that the non-breaching party
shall be entitled to an injunction or similar equitable relief restraining
the breaching party(s) from committing or continuing any such breach or
threatened breach or granting specific performance of any act required to
be performed by the breaching party(s) under any such provision, without
the necessity of showing any actual damage or that money damages would not
afford an adequate remedy and without the necessity of posting any bond or
other security. The right of the non-breaching party to injunctive relief
shall be in addition to any and all other remedies available to it and
shall not be construed to prevent it from pursuing, either consecutively or
concurrently, any and all other legal or equitable remedies available to
them including the recovery of monetary damages.
10.11 Schedules, Revised Schedules and Exhibits. All Schedules, Revised
Schedules and Exhibits referenced in this Agreement shall be deemed to be a part
of this Agreement. The lists and deliveries referenced in Sections 3.3, 5.8,
5.15 through 5.23 inclusive, and 5.26 or elsewhere herein, which have been
delivered to PRGX prior to the execution of this Agreement, shall be updated
prior to the Closing so as to be true, correct and complete and be
"brought-down" as of the Closing Date, shall, when delivered, be accompanied by
a certificate of the Shareholders and a duly authorized officer of HSA-Texas
certifying that they are delivered pursuant to the applicable Section of this
Agreement, as referenced in such certificate, and shall, when delivered, be
attached to this Agreement and for all intents and purposes, be deemed Schedules
hereto. All Schedules and Revised Schedules shall be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in applicable
Article hereof and shall provide information thereon separately in respect of
each Company, as applicable.
10.12 Definition of HSA-Texas' Knowledge. As used herein, the terms "Known
by HSA-Texas," "to HSA-Texas' Knowledge," "to the Knowledge of HSA-Texas," "to
the best Knowledge of HSA-Texas" and words of similar import shall mean the
actual knowledge after reasonable investigation of the following individuals on
the date hereof and on the Closing Date: H. Schultz, A. Schultz, Charles
Schembri and Mac Martirossian.
10.13 Reliance. Each party hereto acknowledges and represents (i) that
this Agreement is executed without reliance on any agreement, promise,
statement, or representation by or on behalf of any person, except as set forth
specifically herein or in the HSA-Texas Transaction Documents and/or the PRGX
Transaction Documents or referred to herein or therein, (ii) that no person, and
no agent or attorney of any person, has made any promises, representations, or
warranties whatsoever, whether expressed or implied, which are not expressly
contained herein, and (iii) that he or its authorized officer has read this
Agreement and is fully aware of its contents and legal effect.
10.14 Marital Property Rights. The Persons signing in their individual
capacities below, whether as a party or as a "spouse" of a party, acknowledge
and agree that: (i) each is individually joining in and assenting to this
Agreement, (ii) each consents to and approves of the transactions contemplated
by this Agreement, and (iii) each intends individually to be legally bound by
this Agreement and each of the HSA-Texas Transaction Documents to which such
individual or his or her spouse is a party (the "Transaction Agreements"). Each
such individual Person also acknowledges that he or she will directly and
personally benefit from the transactions contemplated by the Transaction
Agreements to which such individual or his or her spouse is a party, that he or
she has had an opportunity to review all such agreements and consult with
independent legal counsel, and that PRGX is entering into this Agreement and the
PRGX Transaction Documents in reliance upon the agreements set forth in this
paragraph.
10.15 Section Headings; Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or
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"Sections" refer to the corresponding Section or Sections of this Agreement. All
words used in this Agreement will be construed to be of such gender or number,
as the circumstances require. Unless otherwise expressly provided, the word
"including" does not limit the preceding words or terms.
ARTICLE 11
SHAREHOLDERS' REPRESENTATIVE
11.1 Irrevocable Appointment of Shareholders' Representative. By the
execution and delivery of this Agreement, including counterparts hereof,
effective upon the approval by the holders of HSA-Texas Voting Common Stock of
the HSA-Texas Recommendations in accordance with Section 3.1(b)(ii) and Section
5.33 hereof, the execution of the HSA-Texas Unanimous Consent, each Shareholder
hereby irrevocably constitutes and appoints H. Schultz, and any successor to the
foregoing person appointed pursuant to Section 11.3 hereof, as the true and
lawful agent and attorney-in-fact (referred to in this Agreement as the
"Shareholders' Representative") of such Shareholder with full power of
substitution and with full power and authority to act in the name, place and
stead of such Shareholder with respect to the terms and provisions of this
Section 11.1, as the same may be from time to time amended, and to do or refrain
from doing all such further acts and things, and to execute all such documents,
as the Shareholders' Representative shall deem necessary or appropriate in
connection with the following powers granted under this Section 11.1:
(a) to approve any action or perform any covenant or agreement
hereunder or under any and all HSA-Texas Transaction Documents which
requires the consent, approval, waiver or performance of the Shareholders,
including, without limitation, any action under Article 9 hereof;
(b) to settle all claims, matters, disputes or disagreements under
this Agreement and the Indemnification Agreement; and
(c) to extend the Closing Date or change the location of the Closing.
11.2 Acts of Shareholders' Representative.
(a) The appointment of the Shareholders' Representative in Section
11.1 hereof shall be deemed coupled with an interest and shall be
irrevocable, and PRGX and any other Person may conclusively and absolutely
rely, without inquiry, upon any action of the Shareholders' Representative
as the act of each of the Shareholders in all matters referred to in
Section 11.1 hereof. Each Shareholder hereby ratifies and confirms all that
the Shareholders' Representative shall do or cause to be done by virtue of
Shareholders' Representative's appointment as Shareholders' Representative
of such Shareholder. The Shareholders' Representative shall act for the
Shareholders on all of the matters set forth in Section 11.1 hereof in the
manner the Shareholders' Representative believes to be in the best interest
of the Shareholders and consistent with Shareholders' Representative's
obligations under this Agreement, but the Shareholders' Representative
shall not be responsible to any Shareholder for any loss or damage any
Shareholder may suffer by reason of the performance by the Shareholders'
Representative of Shareholders' Representative's duties under this
Agreement, including any loss or damage resulting from any error of
judgment, mistake of fact or law, or any act done or omitted to be done in
good faith, other than loss or damage arising from willful violation of law
or gross negligence in the performance of Shareholders' Representative's
duties under this Agreement.
(b) Each Shareholder hereby expressly acknowledges and agrees that the
Shareholders' Representative is authorized to act on behalf of such
Shareholder notwithstanding any dispute or disagreement among the
Shareholders, and that the PRGX shall be entitled to rely on any and all
action taken by the Shareholders' Representative under this Agreement
without liability to, or obligation to inquire of, any of the Shareholders.
PRGX is hereby expressly authorized to rely on the authority and
genuineness of the signature of the Shareholders' Representative on any
instrument, certificate or document. Upon receipt of any writing which
reasonably appears to have been signed by the Shareholders' Representative,
PRGX may act upon the same without any further duty of inquiry as to the
genuineness of the writing.
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11.3 Replacement of Shareholders' Representative. If the Shareholders'
Representative resigns or ceases to function in Shareholders' Representative's
capacity for any reason whatsoever, then A. Schultz shall become the
Shareholders' Representative and if A. Schultz shall cease to act as the
Shareholders' Representative, then a majority-in-interest of the Shareholders
shall appoint a successor; provided, however, that, if for any reason no
successor has been appointed within thirty (30) days, then any Shareholder or
PRGX shall have the right to petition a court of competent jurisdiction for
appointment of a successor. A "majority-in-interest" means those Shareholders
entitled to receive a majority of the Consideration under this Agreement.
11.4 Indemnification of Shareholders' Representative. Shareholders do
hereby jointly and severally agree to indemnify and hold the Shareholders'
Representative harmless from and against any and all liability, loss, cost,
damage or expense (including without limitation fees and expenses of legal
counsel) reasonably incurred or suffered as a result of the performance of
Shareholders' Representative's duties under this Agreement except for actions
constituting gross negligence or willful misconduct.
11.5 Proof of Authority. Each Shareholder shall execute and deliver to the
Shareholders' Representative such further documents requested by the
Shareholders' Representative, if any, as may be necessary to the efficient proof
of his authority to act and to exercise the powers granted the Shareholders'
Representative under this Article 11.
11.6 Survivability of Power. EACH SHAREHOLDER INTENDS FOR THE
AUTHORIZATIONS AND AGREEMENTS IN THIS ARTICLE XI TO REMAIN IN FORCE AND NOT BE
AFFECTED IF SUCH SHAREHOLDER SUBSEQUENTLY BECOMES MENTALLY OR PHYSICALLY
DISABLED OR INCOMPETENT.
[SIGNATURES BEGIN ON THE NEXT PAGE]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
PRGX:
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
By:
--------------------------------------
Name: John M. Cook
Its: Chairman of the Board and CEO
HSA-TEXAS:
HOWARD SCHULTZ & ASSOCIATES
INTERNATIONAL, INC.
By:
--------------------------------------
Name: Howard Schultz
Its: Chairman of the Board and CEO
SHAREHOLDERS:
--------------------------------------
Howard Schultz
--------------------------------------
Leslie Schultz, signing solely for the
purpose of acknowledging the
provisions of Section 10.14 hereof
--------------------------------------
Andrew H. Schultz
--------------------------------------
Nicole Malkoff Schultz, signing solely
for the purpose of acknowledging the
provisions of Section 10.14 hereof
Andrew H. Schultz Irrevocable Trust
u/a dated May 1, 1997
By:
--------------------------------------
Andrew H. Schultz, Sole Trustee
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The Zachary Herman Schultz Trust u/a
dated June 3, 1997
By:
--------------------------------------
Howard Schultz, Sole Trustee
The Gabriella Schultz Trust u/a dated
March 31, 1998
By:
--------------------------------------
Howard Schultz, Sole Trustee
The Samuel Joel Schultz Trust u/a
dated July 3, 2001
By:
--------------------------------------
Howard Schultz, Sole Trustee
The HHS Charitable Lead Annuity Trust
u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The LVS Charitable Lead Annuity Trust
u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The Daniel Alan Schultz HHS (2001) GST
Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The Jaynie Schultz Romaner HHS (2001)
GST Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
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The Andrew Harold Schultz HHS (2001)
GST Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The Daniel Alan Schultz LVS (2001) GST
Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The Jaynie Schultz Romaner LVS (2001)
GST Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
The Andrew Harold Schultz LVS (2001)
GST Trust u/a dated April 5, 2001
By:
--------------------------------------
Harold Berman, Sole Trustee
SHAREHOLDERS' REPRESENTATIVE:
--------------------------------------
Howard Schultz
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LIST OF APPENDICES, SCHEDULES AND EXHIBITS
APPENDIX A LOCATION OF DEFINED TERMS
Schedule 1(a) -- First and Second-Tier Subsidiaries of HSA-Texas
Schedule 1(b) -- Licensees
Schedule 1.1(a) -- Fixed Assets
Schedule 1.1(f) -- Licenses and Permits
Schedule 1.1(g) -- Deposits and Other Rights
Schedule 1.1(j) -- Bank Accounts and Lock Boxes
Schedule 1.2 -- Legal Descriptions of Parcels Constituting of Dallas,
Headquarters
Schedule 2.2(b)(iv) -- Assumed Severance Amount
Schedule 3.4(d) -- PRGX Proposed Divestitures (Prepared by PRGX)
Schedule 4.1(c) -- Estimated Financials
Schedule 4.2 -- Key Employees
Schedule 5.1(a) -- Jurisdictions in which HSA-Texas is Qualified to do Business
Schedule 5.1(b) -- Jurisdictions in which other Companies are Qualified to do
Business
Schedule 5.2(a) -- Trusts and Trustees
Schedule 5.2(b) -- Each Company's Directors and Officers
Schedule 5.3 -- List of Recorded Liens (other than Permitted Encumbrances)
Schedule 5.4 -- Consents
Schedule 5.5(a) -- Capitalization of Each Company
Schedule 5.5(b) -- HSA-Texas Options and Optionees
Schedule 5.5(b)(i) -- Form of HSA-Texas Stock Option Grant Agreement
Schedule 5.5(b)(ii) -- Form of Documents Relating to HSA-Texas SARs
Schedule 5.6 -- Exceptions to Compliance with Laws
Schedule 5.7 -- Exceptions to Licenses and Permits
Schedule 5.8 -- Financial Information
Schedule 5.11A -- Disputes Relating to Trade Payables and Accrued Expenses
Schedule 5.11B -- Acquisition-Related Notes and Other Debts, Obligations,
Guaranties and Liabilities
Schedule 5.12 -- Tax Matters
Schedule 5.14(a) -- Information on Audits
Schedule 5.15 -- Material Contracts
Schedule 5.15(b)-1 -- Certain Representations regarding Material Contracts
Schedule 5.15(b)-2 -- Descriptions of oral Material Contracts
Schedule 5.15(b)-3 -- Breaches or Defaults of Material Contracts
Schedule 5.15(b)-4 -- Assignability of Material Contracts
Schedule 5.16 -- Material Leases
Schedule 5.17(a-1) -- Clients and Key Clients
5.17(a-2) --
5.17(a-3) --
5.17(a-4) --
5.17(a-5) --
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Schedule 5.17(b-1) -- Clients and Key Clients (delivered supplementally per the
Agreement)
5.17(b-2) --
5.17(b-3) --
5.17(b-4) --
5.17(b-5) --
Schedule 5.18(a) -- Employees, Associates
5.18(b) --
5.18(d) --
Schedule 5.19 (a) -- Intellectual Property Assets
5.19(b) --
5.19(d) --
5.19(e) --
Schedule 5.20 -- Internet Presence
Schedule 5.21 -- Year 2000 Compliance
Schedule 5.22(a) -- Benefit Plans and List of Accrued Vacation Obligations
5.22(c) --
5.22(d) --
5.22(g) --
5.22(h) --
Schedule 5.24 -- Litigation
Schedule 5.25 -- Insurance
Schedule 5.26 -- Immigration Matters
Schedule 5.28 -- Material Changes
Schedule 5.29 -- Certain Arrangements
Exhibit 1.3(a) -- Bill of Sale
Exhibit 1.3(b) -- Assignment and Assumption Agreement
Exhibit 1.3(c)-1 -- Trademark Assignment
Exhibit 1.3(c)-2 -- Copyright Assignment
Exhibit 2.4(b) -- Amended and Restated HSA-Texas Option Plan
Exhibit 3.5A -- Registration Rights Agreement
Exhibit 3.5B -- Investment Representation Letter
Exhibit 4.2A -- H. Schultz Offer Letter
Exhibit 4.2B -- A. Schultz Offer Letter
Exhibit 4.2C -- Employee Agreement
Exhibits 4.4 -- Non-competition Agreement
Exhibit 4.19 -- Shareholder Agreement
Exhibit 4.20 -- Agreement regarding Nominee Stockholder
Exhibit 7.3 -- Indemnification Agreement
Exhibit 8.3(c)(vi) -- Content of Opinion of HSA-Texas' and Shareholders' Counsel
Exhibit 8.3(c)(xii) -- General Release
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ANNEX B
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION PURSUANT TO
SECTION 368(A)(1)(B) OF THE INTERNAL REVENUE CODE, AS AMENDED
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement" or this "Stock
Purchase Agreement") is made and entered into as of the 11th day of December,
2001, by and among THE PROFIT RECOVERY GROUP INTERNATIONAL, INC., a Georgia
corporation ("PRGX"), HOWARD SCHULTZ, a Texas resident ("H. Schultz"), ANDREW H.
SCHULTZ, a Texas resident ("A. Schultz"), ANDREW H. SCHULTZ IRREVOCABLE TRUST
under agreement dated May 1, 1997 (the "Trust"), LESLIE SCHULTZ, a Texas
resident ("L. Schultz") (each of H. Schultz, A. Schultz, the Trust, and L.
Schultz being hereinafter collectively referred to as the "Shareholders" and
individually as a "Shareholder"), and H. SCHULTZ, as representative of the
Shareholders ("Shareholders' Representative").
WITNESSETH:
WHEREAS, PRGX, the Shareholders and the Shareholders' Representative are
parties to that certain Agreement and Plan of Reorganization Pursuant to Section
368(A)(1)(B) of the Internal Revenue Code, As Amended dated as of August 3, 2001
(the "Original Agreement"); and
WHEREAS, the parties to the Original Agreement wish to amend and restate
the Original Agreement in its entirety, as provided herein;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties and covenants herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby amend and restate the Original Agreement, as
follows:
WHEREAS, PRGX, Shareholders, and Howard Schultz & Associates International,
Inc., a Texas corporation ("HSA-Texas") have executed and delivered that certain
Agreement and Plan of Reorganization, dated as of August 3, 2001, as amended and
restated by agreement dated December 11, 2001 (as amended and restated, the
"Asset Purchase Agreement"), pursuant to which HSA-Texas shall sell to PRGX, and
PRGX shall purchase from Schultz, substantially all of the assets of HSA-Texas;
and
WHEREAS, the portion of HSA-Texas' Business (as defined in the Asset
Purchase Agreement) not operated through HSA-Texas is conducted through Howard
Schultz & Associates (Asia) Limited, a Hong Kong corporation ("Asia"); HS&A
International Pte Ltd., a Singapore corporation ("Singapore"), Howard Schultz &
Associates (Australia), Inc., a Texas corporation ("Australia"), and Howard
Schultz & Associates (Canada), Inc., a Texas corporation ("Canada") (Asia,
Singapore, Canada and Australia are hereinafter collectively referred to as the
"Companies" and individually as the "Company") pursuant to written licenses; and
WHEREAS, PRGX, H. Schultz and A. Schultz have executed and delivered that
certain Indemnification Agreement, dated of even date herewith ("Indemnification
Agreement"), pursuant to which the parties thereto have agreed, among other
things, on the terms and conditions pursuant to which H. Schultz, A. Schultz and
PRGX and others named therein will indemnify each other for breaches of
representations, warranties and covenants set forth in this Stock Purchase
Agreement and in the Asset Purchase Agreement; and
WHEREAS, subject to the terms and conditions of this Agreement,
Shareholders and PRGX desire to exchange the Shares (defined in Section 1.1) for
an agreed-upon number of shares of PRGX's common stock, no par value per share
("PRGX Common Stock") (the "Transaction"); and
WHEREAS, the parties hereto desire to consummate the exchange for the
Shares (defined in Section 1.1 below) pursuant to a plan of reorganization
intended to qualify under Section 368(a)(1)(B) of
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the Internal Revenue Code of 1986, as amended, whereby PRGX shall acquire the
Shares solely in exchange for PRGX's Common Stock;
WHEREAS, the closing of the Transaction is contingent among other things
upon the closing of the asset acquisition described in the Asset Purchase
Agreement ("Asset Acquisition").
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF SHARES; CLOSING
1.1 Agreement to Exchange Shares. Subject to the terms and conditions of
this Agreement, the Shareholders shall sell, transfer and assign to PRGX, and
PRGX shall acquire from the Shareholders, on the Closing Date (defined in
Section 1.3), all of shares of capital stock issued by the Companies and owned
by the Shareholders (collectively, the "Shares") free and clear of all security
interests, pledges, liens, encumbrances, charges, adverse claims of ownership or
use, restrictions on the Shares' ownership, use, voting, transfer, receipt of
dividends or any other encumbrances of any nature whatsoever ("Share
Encumbrances").
1.2 Consideration; Allocation. Subject to the terms and conditions of this
Agreement, the aggregate consideration ("Consideration") deliverable to the
Shareholders in exchange for the Shares is Six Hundred Twenty-Nine Thousand Five
Hundred And Eight (629,508) shares of PRGX Common Stock. The shares of PRGX
Common Stock delivered as Consideration hereunder shall be unregistered,
restricted securities issued subject to the investment representation made
pursuant hereto and may not be resold except in compliance with applicable
federal and state securities laws. Schedule 1.2 sets forth the number of shares
of PRGX Common Stock each Shareholder is to receive and allocates the PRGX
Common Stock among each of the Companies in which each Shareholder owns Shares;
provided that in lieu of delivering fractional shares, PRGX shall deliver to any
Shareholder otherwise entitled to a fractional share, an amount in cash based on
the PRGX Average Price. For purposes hereof, "PRGX Average Price" means the
average closing price per share of PRGX Common Stock (as reported in The Wall
Street Journal) for the 5 consecutive trading days ending on the fifth trading
day immediately preceding the Closing Date.
1.3 Closing. The closing of the Transaction (the "Closing") shall be
consummated concurrently with the closing of the Asset Acquisition (the date on
which the Closing occurs being hereinafter referred to as the "Closing Date.")
The Transaction shall be effective on and as of 12:01 am Eastern time on the
Closing Date. If the Asset Acquisition is not consummated for any reason
whatsoever, then none of the parties hereto shall have any right or obligation
to consummate the Transaction described in this Stock Purchase Agreement. The
Closing shall be effective as of the same time and date as the closing of the
Asset Acquisition.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
In order to induce PRGX to enter into this Agreement and consummate the
transactions contemplated in this Agreement, H. Schultz and A. Schultz hereby,
jointly and severally, represent and warrant to PRGX, and the Trust hereby
severally represents and warrants to PRGX, as follows, each of which is material
to and relied upon by PRGX.
2.1 Organization and Authority of Companies; Subsidiaries. Each Company is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, all of which are designated on
Schedule 2.1(a). Each Company is duly qualified as a foreign corporation in all
jurisdictions inside and outside of the United States in which the conduct of
its business or the ownership of its properties requires such qualification, and
Schedule 2.1(b) lists all the jurisdictions inside and outside the United States
where each Company is so qualified. Each Company has all necessary corporate
power and
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authority to own, lease and operate its properties and conduct its business as
it is currently being conducted. No Company owns, directly or indirectly, any
equity interest in any corporation, partnership, joint venture, or other Person.
For purposes of this Agreement, "Person" means an individual, partnership,
a corporation, an association, a joint stock company, a trust, a joint venture,
an unincorporated organization, or a Governmental Entity. For purposes of this
Agreement, "Governmental Entity" means any supranational, national, state,
municipal, local or foreign government, any instrumentality, subdivision, court,
administrative agency or commission or other authority thereof, or any
quasi-governmental or private body exercising any regulatory, taxing, importing
or other governmental or quasi-governmental authority (or any department, agency
or political subdivision thereof).
2.2 Power and Authority; Due Authorization; Directors and Officers.
(a) Each Shareholder has full power and authority to execute and
deliver this Agreement and each of the Shareholders' Transaction Documents
to which each Shareholder is or will be a party and to consummate the
transactions contemplated hereby and thereby. "Shareholders' Transaction
Documents" means each of the agreements, documents and instruments
referenced in this Agreement to be executed and delivered by any
Shareholder. Each Shareholder has duly executed and delivered this
Agreement on the Closing Date subject to the terms and conditions of this
Agreement, each Shareholder shall duly execute and deliver each of the
Shareholders' Transaction Documents, and no other proceedings shall then be
necessary for the execution, delivery or effectiveness of this Agreement
and Shareholder's Transaction Documents.
(b) Shareholders have delivered to PRGX true, correct and complete
copies of all documents, agreements and instruments which govern the Trust.
In respect of the Trust, the execution, delivery and performance of this
Agreement and the Shareholders' Transaction Documents by the Trust has been
duly authorized and approved in accordance with all agreements governing
the Trust. A. Schultz is the sole Trustee of the Trust and has sole full
right, power and authority to enter into this Agreement on behalf of the
Trust and to cause the Trust to perform its obligations hereunder and under
the Shareholders' Transaction Documents.
(c) Assuming that this Agreement and each of the Shareholders'
Transaction Documents which are also PRGX Transaction Documents constitute
a valid and binding agreement of PRGX, this Agreement and each of the
Shareholders' Transaction Documents constitute, or will constitute when
executed and delivered, a valid and binding agreement of each Shareholder,
in each case enforceable in accordance with its terms. A true, correct and
complete list of the incumbent duly elected directors and officers of each
Company are set forth on Schedule 2.2. Schedule 2.2 shall be updated on the
Closing Date to be true, correct and complete as of the Closing Date.
2.3 Assets.
(a) Title. Except as set forth on Schedule 2.3(a), each Company has a
good, valid and marketable title to all of its assets free and clear of any
mortgages, liens, pledges, security interests, encumbrances, claims or
similar rights of every kind and nature, except for any liens for Taxes not
yet due and payable. At Closing, each Company will have good, valid and
marketable title to all of its assets free and clear of any mortgages,
liens, pledges, security interests, encumbrances, claims or similar rights
of every kind and nature, except for any liens for Taxes not yet due and
payable and liens for liabilities reflected on the Estimated Balance Sheet
(defined in Section 4.1(d)). No Company currently has title to, or a fee
simple ownership interest in, any real property.
(b) Condition of the Assets. Prior to the Closing, Shareholders shall
cause each Company to deliver to PRGX a true, correct and complete list of
the fixed assets of such Company reconciled with the fixed assets line item
of the Estimated Balance Sheet.
2.4 No Conflict; Required Consents. The consummation of the Transaction
does not and will not (i) require the consent, approval or action of, or any
filing with or notice to, any corporation, firm, Person or
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other entity or any Governmental Entity; (ii) violate the terms of any Contract
(defined in Section 2.12) to which any Company or Shareholder is a party, or by
which any Company or any Shareholder or the property of any Company or
Shareholder is bound, or be in conflict with, result in a breach of or
constitute (upon the giving of notice or lapse of time or both) a default under
any such Contract, or result in the creation of any lien upon any of the
property or assets of any Company; (iii) violate the organizational documents of
any Company or the Trust; or (iv) violate any order, writ, injunction, decree,
judgment, ruling, law, rule or regulation of any Governmental Entity
(individually, a "Law" collectively, "Laws") applicable to any Company or any
Shareholder. No Company nor any Shareholder is subject to, or is a party to, any
Contract or Law of any kind or character which would prevent or hinder the
continued operation of the Companies after the Closing Date on substantially the
same basis as theretofore operated.
2.5 Ownership of Capital Stock and Options.
(a) All outstanding shares of each Company's capital stock (including,
without limitation, the Shares) are duly authorized, validly issued, fully
paid and nonassessable. Schedule 2.5(a) is a true, correct and complete
list of each Person who is a beneficial or record owner of any of the
outstanding shares of capital stock of any of the Companies together with
the number of shares owned by each such Person. As of the date of this
Agreement, all outstanding shares of capital stock of each Company
(including, without limitation, the Shares) are free and clear of all Share
Encumbrances.
(b) Except as set forth on Schedule 2.5(a), as of the date hereof,
there are outstanding (i) no shares of capital stock or other voting or
non-voting securities of any Company, (ii) no securities of any Company
convertible into or exchangeable for shares of capital stock or voting or
non-voting securities of any Company, (iii) no options (including employee
stock options), warrants or rights of conversion or other rights,
agreements, arrangements or commitments obligating, or which may obligate,
any Company to sell or issue any additional securities, (iv) no obligation
of any Company to issue any voting or non-voting securities or securities
convertible into or exchangeable for voting or non-voting securities of any
Company, and (v) no equity equivalents, interests in the ownership or
earnings, or other similar rights of or with respect to any Company (the
items in clauses (i), (ii), (iii), (iv) and (v) being referred to
collectively as the "Company Securities"). There are no outstanding
obligations of any Company to repurchase, redeem or otherwise acquire any
outstanding shares of Capital Stock of any Company or Company Securities.
(c) Acceptor Professional Directors (Pte) Ltd. ("Nominee Shareholder")
holds two shares of common stock of Singapore solely for the purpose of
keeping Singapore in compliance with the applicable laws of the nation of
Singapore.
2.6 Compliance with Laws. Each Company currently is, and always has been,
in compliance with all applicable Laws. No Company nor any Shareholder has
received written notice of any noncompliance by any Company of any applicable
Laws, nor to the Shareholders' knowledge, is there any basis therefor.
2.7 Licenses and Permits. Schedule 2.7 is a true, correct and complete
list of all licenses, permits, approvals and authorizations which have been
issued or delivered to each Company. Each Company holds, and is in compliance
with, all Licenses and Permits. No Company nor any Shareholder has received
written notice of any violations in respect of any such Licenses and Permits. No
proceeding is pending or, to the Shareholders' knowledge, threatened, which
seeks revocation or limitation of any such Licenses and Permits.
2.8 Financial Information.
(a) Schedule 2.8 is a true, correct and complete copy of the
Historical Statements (defined in Section 4.1). The Historical Statements
have been prepared in accordance with generally accepted accounting
principles (except that they may not contain customary footnotes) ("GAAP"),
consistently applied for the periods presented, and fairly present the
financial condition of each Company, at the respective dates thereof and
the separate results of operations of each Company for the periods then
ended, except as otherwise disclosed in the notes thereto, if any. The
Interim Financials (defined in Section 4.1) and the Estimated Financials
(defined in Section 4.1) will be prepared in accordance with GAAP (except
that they may not contain customary footnotes), consistently applied for
the periods
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presented, and will fairly present the financial condition of each Company,
at the respective dates thereof and the separate results of operations of
each Company for the periods then ended, except as otherwise disclosed in
the notes thereto, if any.
(b) The Historical Statements are, and the Interim Financials and the
Estimated Financials will be, consistent with the books and records of each
Company. All work papers related to the Historical Statements, the Interim
Financials and the Estimated Financials and other financial information
provided by the Companies to PRGX in connection with their due diligence
are, and will be, true, correct and consistent with the books and records
of each Company.
(c) On the date hereof, there are no liabilities or obligations of any
Company of any nature, whether liquidated, unliquidated, accrued, absolute,
contingent or otherwise except for those that are specifically reflected or
reserved against as to amount in the December 31, 2000 balance sheets which
are part of the Historical Financials and those arising thereafter in the
ordinary course of each Company's business. On the Closing Date, there will
be no liabilities or obligations of any Company of any nature, whether
liquidated, unliquidated, accrued, absolute, contingent or otherwise,
except for those that are specifically reflected or reserved against as to
amount in the Estimated Financials.
(d) No Company is, nor has any Company been, during the 12 months
immediately preceding the execution of this Agreement, insolvent within the
meaning of 11 U.S.C. ss. 101(31). Each Company has paid, and is paying, its
debts as they become due.
2.9 Trade Payables; Accrued Expenses; Other Debt.
(a) Trade Payables. As of the Closing Date, all trade payables and
accrued expenses of the Companies shall have been incurred in the ordinary
course of business, shall be directly related to each Company's business,
and shall not, as of the Closing Date, be overdue other than those, if any,
not yet paid due to a bona fide dispute (as detailed on Schedule 2.9A).
(b) Debt for Borrowed Money. Schedule 2.9B is a true, correct and
complete list as of the date hereof, which list will be updated prior to
Closing so as to be true, correct and complete as of the Closing Date, of
all debts, obligations, guaranties, financings and other indebtedness for
borrowed money of each of the Companies outstanding as of the date hereof
(and as of the Closing Date), stating the origin of the obligation, the
obligee of such obligation, the security therefor (including a specific
description of collateral), the terms of payment and the amount owed as of
the date hereof.
2.10 Tax Returns and Payments.
(a) Payment of Taxes and Other Matters. All Tax Returns (defined in
Section 4.7), including estimated Tax Returns (defined in Section 4.7) and
reports of every kind with respect to Taxes which are due to have been
filed by the Companies on or before the Closing Date in accordance with any
applicable law in all jurisdictions where any Company is subject to Taxes,
have been or will be duly filed on or before the Closing Date and are, or
on or before the Closing Date will be, true, correct and complete. All
Taxes (defined in Section 4.7), deposits or other payments which relate to
Taxes required to be paid (whether or not shown on a Tax Return) by any
Company on or prior to the Closing Date have been, or will be, paid in full
or will be accrued or reserved as a Tax liability on the December 31, 2000
Historical Financials and/or on the Estimated Financials. There are not now
any extensions of time in effect with respect to the dates on which any Tax
Returns or reports of Taxes for any Company were or are due to be filed.
All deficiencies asserted as a result of any examination of any Tax Return
or report of Taxes of any Company have been, or on or before the Closing
Date, will be, paid in full or finally settled with no outstanding
liability to the Company or the Shares or were, or will be, included in the
amount of the reserve for Tax liability shown on the December 31, 2000
Historical Financials and/or on the Estimated Financials, and no issue has
been raised in any such examination which, by application of the same or
similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so examined. No claims have been
asserted against and no proposals or deficiencies for any Taxes are being
asserted against any Company, or proposed or threatened, and no audit or
investigation of any Tax Return or report of Taxes is currently underway,
pending or threatened; there are no outstanding waivers
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or agreements by any Shareholder or any Company for the extension of time
for the assessment of any Taxes or deficiency thereof, nor are there any
requests for rulings, outstanding subpoenas or requests for information,
notices of proposed reassessment of any property owned or leased by any
Company or any other matter pending between any Company and any taxing
authority; there are no liens for Taxes upon any property or assets of any
Company except statutory liens for current Taxes not yet delinquent; to
Shareholders' knowledge, no claim has ever been made by a Tax Authority
(defined in Section 4.7) in a jurisdiction where any Company does not file
Tax Returns that such Company is or may be subject to Tax by that
jurisdiction; no Company is a party to or bound by any tax allocation or
tax sharing agreement and has no current or potential contractual
obligation to indemnify any other Person with respect to Taxes; no Company
and, with respect to Flow-Through Taxes (defined in Section 4.7)
attributable to the operations of Canada, no Shareholder, is required to
include in income any adjustment pursuant to Section 481(a) of the Code by
reason of a voluntary change in accounting method initiated by such
Company, nor Shareholders' knowledge, has the Internal Revenue Service
proposed any adjustment or change in accounting methods for any Company.
(b) Subchapter S Status. Canada has made a valid election to be
treated as an S Corporation for U.S. federal income tax purposes effective
as of the date set forth on Schedule 2.10 attached hereto (the "S Effective
Date"), and such election has remained valid and effective at all times
since such date, and Canada will be an S corporation up to and including
the day before the Closing Date. Canada has made available to PRGX true,
correct and complete copies of such S election, and acknowledgement of
receipt thereof by the Internal Revenue Service.
2.11 Information on Audits; Accounts Receivable.
(a) Information on Audits. Schedule 2.11(a) will be delivered by the
Shareholder to PRGX within 3 days after the mailing by PRGX of the Proxy
Statement to PRGX's Shareholders (as defined in Section 3.1 of the Asset
Purchase Agreement.) Schedule 2.11(a), when so delivered, will be a true,
correct and complete list as of the last day of the calendar quarter
immediately preceding the delivery of such Schedule of the following
information with respect to each Active Audit of Key Clients; provided that
with respect to such Schedule, Key Clients shall not be identified by name,
but shall be represented by a letter of the alphabet, and at least 3
business days prior to the Closing, Shareholders will update the
information contained on Schedule 2.11(a) so as to be true, correct and
complete as of the Closing Date, and deliver to PRGX a key which identifies
the name and address of the Key Client represented by each letter on such
list:
(1) name of Client;
(2) primary or secondary audit;
(3) scope of audit (e.g., all divisions, regional limitations,
only-merchandise, expenses, advertising, real estate);
(4) audit year(s) or other covered time period of audit;
(5) the contract rate for the Company's service fee;
(6) Client reserve or holdback percentage;
(7) audit commencement date and projected completion date;
(8) aggregate claims approved by Client;
(9) aggregate gross service fees billed to Client by the Company
for such audit;
(10) aggregate amount of cash receipts from such audit;
(11) reserve amount held by Client; and
(12) the aggregate amount of Vendor Paybacks per audit that have
been paid as of June 30, 2001 (and as of the last day of the calendar
quarter immediately preceding the Closing Date).
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For purposes hereof, "Active Audits" means, collectively, all those audits
of Clients of the Companies in respect of which claims remain to be
written, including those listed on Schedule 2.11(a) attached hereto.
"Inactive Audits" means, collectively, all those audits for Clients of the
Companies in respect of which no claims remain to be written, including
those in respect of which Client continues, as of the date hereof, to hold
a reserve for credits, chargebacks or other Vendor Paybacks. A "Vendor
Payback" means the credits, chargebacks or payments made by a Company to a
Client as a result of the Client's refund of payments made to such Client's
vendor refunding commissions received by said Company from such Client.
(b) Accounts Receivable. Prior to the Closing, Shareholders shall
provide PRGX with a true, correct and complete list of the accounts
receivable ("Accounts Receivable") of the Companies reconciled with the
accounts receivable line item on the Estimated Balance Sheet, showing by
Client and by each Active Audit for such Client, the terms and time period
for collection thereof. Each of the Accounts Receivable is bona fide and
represents a valid obligation arising from sales actually made or services
actually performed by each Company in the ordinary course of its business.
Each of the Accounts Receivable shall be as of the Closing Date current and
collectible in full within ninety (90) days after the day on which it first
becomes due and payable net of the reserve shown on the Estimated Balance
Sheet (which reserve will be adequate and calculated consistent with past
practice and will not represent a greater percentage of the Accounts
Receivable reflected on the Estimated Balance Sheet than the reserve to the
accounts receivable on the December 31, 2000 balance sheet contained in the
Historical Statements) and will not represent a material adverse change in
the composition of such Accounts Receivable in terms of aging. There is no
contest, claim, dispute, defense or right of setoff relating to the amount
or validity of such Account Receivable, except for possible vendor payback
claims of the Client. As to each such Account Receivable, to the
Shareholders' knowledge, neither the vendor nor the respective Client has
objected to the claim for reimbursement upon which such Account Receivable
is based. The work in progress outstanding on the Closing Date will be bona
fide and will, if and when converted to accounts receivable, represent
valid obligations arising from sales actually made or services actually
performed by the Companies in the ordinary course of business, subject only
to possible vendor pay-back claims of the Client.
2.12 Material Contracts; License Agreements.
(a) Definition of Material Contract. Schedule 2.12(a) is a true,
correct and complete list of all "Material Contracts" which, for purposes
hereof, means all written or oral contracts (collectively, "Contracts")
which:
(i) is with any Person which constitutes a "Key Client" (defined in
Section 2.14) for 2000 or 2001; or
(ii) evidences the obligation of any Company for debt to any Person
for borrowed money or evidences the obligation of any Person to any
Company for borrowed money; or
(iii) is a license agreement (including those related to software)
in which a Company is either as licensor or licensee which involves an
aggregate expenditure or receipt by any Company of $50,000 or more; or
(iv) is with a strategic or business partner of any Company; or
(v) involves the provision of data processing services or
telecommunications services to any Company of $100,000 or more; or
(vi) is a contract with any vendor of products or services to any
Company (including supply or requirements contracts), indicating any
which are not cancelable by such Company without cost on 60 days or less
notice and which involve an aggregate annual expenditure by any Company
of $100,000 or more; or.
(vii) is with any employee or independent contractor of any
Company; or
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(viii) related to any merger, asset purchase, stock purchase or
similar purchase and sale agreement to which any of the Company is or
was a party within the last three years; or
(ix) is with any Client (defined in Section 2.14) and (1) has an
unexpired term of two (2) or more years, or (2) requires any Company to
provide equipment or services beyond the scope of such Company's
business or (3) requires any Company to provide such Client with a
guaranty, rebate or refund other than possible vendor payback claims of
the Client that will or is reasonably likely to exceed $25,000 in any 12
month period; or
(x) has or may have the effect of (1) prohibiting or impairing (i)
any business practice of any Company, (ii) any acquisition of property
(tangible or intangible) by any Company or (iii) the conduct of business
by any Company, including, without limitation, any restrictive covenant
or noncompete agreement (2) requiring the referral of any business by
any Company, or (3) requiring or purporting to require the payment of
money or the acceleration of performance of any obligation of any
Company by virtue of the Closing.
Schedule 2.12(a) indicates thereon the category, by section reference,
of Material Contract described in this Section 2.12(a) to which such
Material Contract belongs. Notwithstanding anything to the contrary
herein, with respect to the information about Clients and Key Clients on
the Schedules or deliveries required to be delivered as of the date
hereof by this Section 2.12, Client and Key Clients shall not be
identified by name, but shall be represented by a letter of the
alphabet, and immediately prior to the Closing, Shareholders shall cause
each Company to deliver to PRGX a key which identifies the name and
address of the Client or Key Client represented by each letter on such
list.
(b) Certain Representations re: Contracts.
(i) Each Company has provided to PRGX true, correct and complete
copies of all written Material Contracts, including any and all
amendments and waivers thereto and has provided true, correct and
complete descriptions of the material terms of any oral Material
Contracts on Schedule 2.12(b)(1).
(ii) Assuming the Contracts constitute the valid and binding
agreements of the Company party thereto, such Contracts are valid,
legally binding and enforceable against the other parties thereto
subject to laws of general application in effect affecting creditors'
rights and subject to the exercise of judicial discretion in accordance
with general equitable principles. No Company nor, to Shareholders'
knowledge, any other party to any of the Contracts, is in breach of, or
in default under, any of the Contracts, and no event has occurred which,
with the giving of notice or lapse of time, or both, would constitute a
default by any Company or, to Shareholders' knowledge, any other party
to any of the Contracts.
2.13 Material Leases. Schedule 2.13 is a true, correct and complete list
of all "Material Leases," which means, for purposes hereof, all leases of each
Company which (a) involve an aggregate annual expenditure by such Company of
$50,000 or more, (b) are not cancelable by such Company without cost on sixty
(60) days' or less notice, (c) have a term which extends for more than one (1)
year from the Closing Date, or (d) are for an interest in real estate. Each
Company has provided to PRGX true, correct and complete copies of all of the
Material Leases, together with all amendments, addenda and supplements thereto.
With respect to each Material Lease:
(a) the Company party thereto holds the leasehold interest created
under each Material Lease;
(b) assuming the Material Lease constitutes the valid and binding
agreement of such Company, the Material Lease is legal, valid, binding and
enforceable against the other party thereto and in full force and effect,
subject to laws of general application in effect affecting creditors'
rights and subject to the exercise of judicial discretion in accordance
with general equitable principles;
(c) subject to obtaining any necessary consent in respect of the
transactions contemplated hereunder and assuming the Material Lease
constitutes the valid and binding agreement of the party
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thereto other than such Company, the Material Lease will continue to be
legal, valid, binding and enforceable by and against such Company and in
full force and effect on identical terms following the Closing Date;
(d) no Company, nor, to Shareholders' knowledge, any other party to
the Material Lease is in breach or default, and no event has occurred
which, with the giving of notice or lapse of time, would constitute a
breach or default by such Company or permit termination, modification or
acceleration thereunder by any other party thereto;
(e) no Company nor, to Shareholders' knowledge, any other party to the
Material Lease has repudiated in writing any provision thereof;
(f) there have been and there are no disputes, oral agreements or
forbearances in effect as to the Material Lease;
(g) no Company has assigned, transferred, conveyed, mortgaged, deeded
in trust or encumbered any interest in the leasehold of the Material Lease
and Shareholders are not aware of any such assignment, transfer,
conveyance, mortgage, deed in trust or encumbrance of any interest in the
leasehold of the Material Lease;
(h) in respect of each such Material Lease which is a real property
lease, (i) such lease is the only instrument which gives rise to a right of
occupancy by the Company at such location, (ii) Company is the original
lessee (or has validly succeeded to the rights of the original lessee)
under such lease, (iii) Company actively occupies such location, (iv)
Company has paid the rent under the lease on a current basis and there are
no past due amounts; and
(i) in respect of each such Material Lease which is an equipment
lease, (i) such Company is in actual possession of the equipment leased
under each equipment lease, (ii) Company has paid the rent set forth in
each of the equipment leases on a current basis and there are no past due
amounts. Schedule 2.13(i) is a true, correct and complete list of the
equipment subject to each equipment lease and the location of such
equipment.
2.14 Clients and Key Clients. For purposes hereof, "Clients" means those
clients to whom any Company provides or has provided the services of its
business and "Key Clients" means those Clients of the Companies which as of
December 31, 2000 (or in respect of 2001, as of the period from January 1, 2001
to June 30, 2001) accounted for the highest percentages of the revenue of the
Clients generating at least 80% of the revenues of the Companies on a combined
basis during such period.
(a) Schedule 2.14(a-1) attached hereto contains the number of Key
Clients for each of 2000 and 2001, and the aggregate revenues of such
Clients for each of such periods. Schedule 2.14(a-2) separately states the
number of Key Client Contracts (and the aggregate revenues of such number
of Key Clients for each of such periods) which contain any of the following
provisions: (i) performance guaranties, refunds or rebates that could
reasonably be expected to exceed $25,000, with respect to any annual audit
period, (ii) have or may have the effect of limiting or impairing any
material business practice or activity of any Company, (iii) have a net
commission rate below 20% of recovered funds, (iv) require any referral of
business by any Company, (v) allow for cancellation by the Client on less
than 90 days notice or (vi) require consent to assignment, the payment of
money or the acceleration of performance of any obligation by a Company
because of the proposed transaction with PRGX. Except for the number of Key
Clients (with the aggregate revenues for such number for each period)
listed on Schedule 2.14(a-3), to the Shareholders' knowledge, there are no
Key Clients who have, within the 12 months immediately preceding the date
hereof, expressed to any Company material dissatisfaction with any
Company's services. Schedule 2.14(a-4) contains the revenues generated by
all Key Clients during each of 2000 and 2001, the percentage of the total
revenues of the Companies on a combined basis for each such period that the
revenues of the Key Clients for such period constitutes, and the average
remaining term of the Contracts for all Key Clients. Schedule 2.14(a-5)
contains the number of Key Clients gained from or lost to any Person other
than PRGX in the last 24 months and the number of primary audits for Key
Clients converted to secondary audits in the last 24 months, other than
audits in which PRGX performs the
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primary audit. All written contracts with Key Clients reflect all material
terms of the contractual relationship of the Key Client with such Company.
(b) Schedule 2.14(b-1) when delivered, as provided below, will be a
true, correct and complete list of all Key Clients, which will be
separately identified for each of 2000 and 2001. Schedule 2.14(b-2) will
specifically identify each Key Client Contract which contains any of the
following provisions: (i) performance guaranties, refunds or rebates that
could reasonably be expected to exceed $25,000, with respect to any annual
audit period, (ii) have or may have the effect of limiting or impairing any
material business practice or activity of any Company, (iii) have a net
commission rate below 20% of recovered funds, (iv) require any referral of
business by any Company, (v) allow for cancellation by a Client on less
than 90 days notice or (vi) require consent to assignment, the payment of
money or the acceleration of performance of any obligation by any Company
because of the proposed transaction with PRGX. Except as will be
specifically described on Schedule 2.14(b-3), to the Shareholders'
knowledge, there are no Key Clients who have, within the 12 months
immediately preceding the date hereof, expressed to any Company material
dissatisfaction with any Company's services. Schedule 2.14(b-4) will
contain a true, correct and complete list for calendar year 2000 and 2001
of each Key Client for each such period, the revenues generated by each
such Key Client during the respective period, the percentage of the total
revenues of the Companies on a combined basis for each such period that the
revenues of each Key Client for such period constitutes, and the term of
the Contract for such Key Client, including the expiration date thereof. In
addition, Schedule 2.14(b-5) will include a list of Key Clients gained from
or lost to any Person other than PRGX in the last 24 months a list of
primary audits for Key Clients converted to secondary audits in the last 24
months, other than audits in which PRGX performs the primary audit, and the
details of any rebate, recovery advance, or recovery guarantee provisions
with Key Clients for 2000 and 2001, and the assumption or reimbursement of
Key Client expenses associated with data acquisition or other audit related
activities ("Key Client Programs"). Schedule 2.14(b-1) through Schedule
2.14(b-5) will be delivered to PRGX at least five business days prior to
the Closing. In addition, upon delivery of such Schedules, the Shareholders
shall cause each Company to update the information contained on Schedules
2.14(b-1) through (b-5), so as to be true, correct and complete as of the
Closing Date. At least five days prior to the Closing, the Shareholders
will cause each Company to provide PRGX true, correct and complete copies
of all contracts with all Key Clients, together with all amendments
thereto. All contracts with Key Clients reflect all material terms of the
contractual relationship of the Key Client with each Company as of the
Closing Date.
2.15 Employees.
(a) Employees. Schedule 2.15(a) is a true, correct and complete list
as of the date of this Agreement of the name, location address, function
and title of each Company's employees, together with each employee's base
salary or hourly rate, any bonus or commission formulae applicable thereto,
vacation and sick leave, the amount of any advances on commissions
(describing the repayment terms thereof) and expenses each employee has
received which are outstanding and the name of the entity which pays the
compensation or commission to such employee. Schedule 2.15(a) includes a
true, correct and complete list of all agreements and understandings
between each Company and its employees (including a description on such
Schedule of all oral agreements) concerning their employment relationship
with such Company (including all restrictive covenant agreements and
severance benefits), true, correct and complete copies of which agreements
have been provided to PRGX (or descriptions contained on Schedule 2.15(a)
in respect of any oral agreements).
(i) Except as otherwise set forth in Schedule 2.15(a)(i), the
employment of each employee is terminable without cause within 30 days'
written notice by such Company or such employee, subject to any rights
to salaries and commissions earned prior to such termination and no such
Person has been granted the right to continued employment or engagement
by any Company or to any material compensation or payment following
termination of employment with such Company.
(ii) Schedule 2.15(a)(ii) contains a true, correct and complete
copy of each Company's standard form employment agreement and
noncompetition and restrictive covenant agreement with
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its employees. Except to the extent specified on Schedule 2.15(a)(ii),
there are no deviations from such standard contract in the agreements
with the employees, except for immaterial modifications which do not
confer additional benefits on such employee or impose additional
liability on any Company.
(iii) To the Shareholders' knowledge, no officer or Key Employee,
or any group of employees, intends to terminate their employment with
any Company, nor does any Company have a present intention to terminate
the employment of any officer, Key Employee or group of employees. As
used herein, "Key Employees" shall mean H. Schultz, A. Schultz and those
individuals listed on Schedule 2.15(a)(iii).
(iv) Schedule 2.15(a) shall be updated immediately prior to the
Closing so as to be true, correct and complete as of the Closing Date.
(b) Associates.
(i) Schedule 2.15(b) is a true, correct and complete list as of the
date of this Agreement of the name, location address, function and title
of each Company's Associates (defined in Section 2.15(b)(vi) hereof),
together with each Associate's commission percentage, any bonus
arrangements, all accrued commissions, the amount of any advances on
commissions or other amount owed to any Company (describing the
repayment terms thereof) which are outstanding, any rights to payments
upon or after termination of the independent contractor relationship
with any of the Companies, any other benefits, and the name of the
entity which pays the commission to such Associate. Prior to the
Closing, each Company shall have delivered to PRGX, true, correct and
complete copies of all agreements and understandings between each
Company and its Associates (including a written description on such
Schedule of all oral agreements) together with all amendments, addenda
and supplements thereto concerning their relationship with such Company
(including any restrictive covenant agreements and any severance
agreements).
(ii) The engagement of each Associate is terminable without cause
within 30 days' written notice by such Company or such Associate,
subject to any rights to commissions earned prior to such termination
and no such Person has been granted the right to continued engagement by
any Company or to any material compensation or payment following
termination of engagement with such Company.
(iii) Schedule 2.15(b) contains a true, correct and complete
description of the Companies' policy for post-termination trailing
commissions payable to Associates and its policy for the deduction of
commissions associated with paybacks owed to clients of the companies
and lists any material deviations from such policy in respect of any
Associate, except for immaterial modifications which do not confer
additional benefits on such Associate or impose additional liability on
any Company. Each Associate has met, and until the Closing Date will
continue to meet, the requirements under the Code, and the regulations
promulgated thereunder, to be an independent contractor.
(iv) To Shareholders' knowledge, no Associate, or any group of
Associates, intends to terminate their engagement with any Company, nor
does any Company have a present intention to terminate the engagement of
any Associate or group of Associates.
(v) None of Companies' agreements or arrangements with any
Associates will obligate PRGX to pay commissions, fees or other
compensation to such sales agents or Associates for revenues earned by
PRGX for services performed for Clients after the Closing Date other
than services of the type the Companies provided to such Clients prior
to the Closing Date.
(vi) Schedule 2.15(b) shall be updated prior to the Closing Date to
be true, correct and complete as of the Closing Date. As used herein,
"Associates" shall mean those independent contractors engaged by the
Companies to perform accounts payable auditing and related consulting
services. Other than those individuals listed on Schedule 2.15(a) or
Schedule 2.15(b), none of the
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Companies employs or engages, directly or indirectly, any other Persons,
in any capacity, including without limitation, as employees, agents,
consultants, partners, or independent contractors.
(c) Employment Laws. Each Company (i) is in compliance with all
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours in
respect of its employees and, to the extent applicable, its Associates of
any Governmental Entity which have jurisdiction over such Company's
employment practices; (ii) has withheld all amounts required by Law or by
agreement to be withheld from the wages, salaries and other payments to its
employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing in respect of any
employees or Associates; and (iv) is not liable for any payment to any
trust or other fund or to any Governmental Entity with respect to
unemployment compensation benefits, social security or other benefits for
employees (other than routine payments to be made in the normal course of
business and consistent with past practice). In respect of each Company's
current and former employees and Associates, (i) there are no charges,
investigations, administrative proceedings or formal complaints of
discrimination pending or, to Shareholders' knowledge, threatened by or
before any Governmental Entity against any Company; (ii) there have been no
audits by any Governmental Entity of any of the Companies' equal employment
opportunity practices; (iii) no current or former employee or Associate of
any Company has notified any Company of any fact or circumstance which, if
true, might constitute a violation of any Employment Law; and (iv) to
Shareholders' knowledge, no Company nor any employee of any Company has
engaged in any activity which constitutes a violation of any Employment
Law. For purposes hereof, "Employment Laws" means any constitutional,
statutory, regulatory or common law of any Governmental Entity relating to
employment discrimination or harassment, including, but not limited to, the
Age Discrimination in Employment Act, the Older Workers' Benefit Protection
Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991 and the Americans with Disabilities Act.
(d) Breaches. To the Shareholders' knowledge, (i) no Person employed
or engaged as an employee or Associate by any Company has, in respect of
his or her activities to date on behalf of such Company, violated any of
the terms or conditions of his or her employment agreement or other
engagement with the Company or any other contract to which Company is a
party with any third party, or disclosed or used any trade secrets or
proprietary or confidential information or documentation of any third party
without the authorization of such third party, or interfered in the
employment relationship between any third party and any of its employees
and (ii) no Person employed or engaged as an employee or independent
contractor by any Company has disclosed or used any trade secrets or any
other proprietary or confidential information or documentation of any
former employer or other third party, or has violated any non-compete
obligation or confidential relationship that such Person has or may have
had with any third party, in connection with such person's activities on
behalf of the Companies. To the Shareholders' knowledge, excluding any
former employees or Associates who are performing services for PRGX or its
affiliates, no former employees whose employment with any Company was
terminated by such Company or by such employee or otherwise expired within
the last 2 years and no Associate whose engagement with any Company was
terminated by such Company or by such Associate or otherwise expired within
the last 2 years is currently or has within the last 2 years, directly or
indirectly, competed with the HSA-Texas or the Companies.
(e) Unions. None of the Companies are, nor have they ever been, a
party to any collective bargaining agreement or any other contract, written
or oral, with any trade or labor union, employees' association or similar
organization. There are no, and there never have been any, attempts at
union organization of the employees of any of the Companies.
2.18 Intellectual Property. None of the Companies owns any intellectual
property. All intellectual property used by the Companies is licensed solely
from HSA-Texas. To the extent that work performed by any employee or Associate
constitutes a "work made for hire" within the meaning of the Copyright Act, each
such Person has signed a proprietary inventions or similar agreement with
HSA-Texas transferring and assigning to HSA-Texas all right, title and interest
in and to intellectual property developed by such employee or Associate.
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2.19 Internet Presence. No Company has any public, private or reserved
presence on the world wide web, multi-party extranet, virtual private network,
or similar internet based, linked system.
2.20 Year 2000 Compliance. Each Company has previously performed unit,
integration and acceptance testing of all software, hardware, and all other
devices containing or utilizing electronic components reasonably necessary to
the performance of its respective business obligations and operations (all of
the foregoing, collectively, "Computer Systems"), including all Computer Systems
owned, leased, sold, developed, assembled, distributed, supported, maintained,
used, or operated by, to, for, or from any Company, and the results of such
testing, as well as the Companies' experience to date, establish that all
Computer Systems, have functioned normally before, during, and after the change
from the year 1999 to each successive year through the year 2010, and Companies
have no basis to believe there will be any interruption in service in the future
attributable to such change.
2.21 Benefit Plans and ERISA.
(a) Other than bonuses, commission formulae, sick leave and vacation
policies which are set forth on Schedule 2.15(a), no Company (directly or
indirectly) maintains or sponsors, nor has it ever (directly or indirectly)
maintained or sponsored, any "employee benefit plan" (as defined by Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), but without regard to whether such plan is subject to ERISA), or
any other bonus, profit sharing, pension, compensation, deferred
compensation, stock option, stock purchase, fringe benefit, severance,
post-retirement, scholarship, disability, sick leave, vacation, individual
employment, commission, bonus, payroll practice, retention, or other plan,
agreement, policy, trust fund or arrangement for the benefit of (i) the
Company's directors or employees or any other person performing services
for the Company; (ii) the Company's former directors or former employees or
any other persons formerly performing services for the Company; and/or
(iii) beneficiaries or covered dependents of anyone described in (i) or
(ii) above (each such plan, agreement, policy, trust fund or arrangement is
referred to herein as an "Employee Benefit Plan").
(b) Other than an obligation to provide benefits arising in the
ordinary course pursuant to those Employee Benefit Plans set forth on
Schedule 2.15(a), none of the Companies has any liability for, under, with
respect to or otherwise in connection with any Employee Benefit Plan.
(c) PRGX shall not, as a result of the transactions contemplated by
this Agreement: (i) become liable for any contribution, tax, lien, penalty,
cost, interest, claim, loss, action, suit, damage, cost assessment or other
similar type of liability or expense of the Companies or any ERISA
Affiliate (including predecessors thereof) with regard to any Employee
Benefit Plan or any Employee Benefit Plan sponsored, maintained or
contributed to by an ERISA Affiliate (including predecessors thereof)
(assuming a like definition of "Employee Benefit Plan" were applicable to
ERISA Affiliates as to those same types of agreements, policies, trusts,
funds and arrangements sponsored, maintained or contributed to by them, and
each such plan for an ERISA Affiliate is referred to herein as an "ERISA
Affiliate Employee Benefit Plan"), including, without limitation withdrawal
liability arising under Title IV, Subtitle E, Part 1 of ERISA, liabilities
to the PBGC, liabilities under Section 412 of the Code or Section 302(a)(2)
of ERISA, or liabilities arising under the applicable requirements of Part
6 of Subtitle B of Title I of ERISA and Section 4980B of the Code, or (ii)
be or become a party to any Employee Benefit Plan or any ERISA Affiliate
Employee Benefit Plan. Without limiting any other provision of this Section
2.21, none of PRGX or any of the Companies shall have liability for, under,
with respect to or otherwise in connection with any Employee Benefit Plan,
including, without limitation, an ERISA Affiliate Employee Benefit Plan,
which liability arises under ERISA or the Code by virtue of any of the
Companies being aggregated in a controlled group or affiliated service
group with any ERISA Affiliate for purposes of ERISA or the Code at any
relevant time prior to the Closing Date.
(d) For purposes of this Agreement, the term "ERISA Affiliate" shall
mean, with respect to each Company, any trade or business, whether or not
incorporated, other than such Company, which has employees who are or have
been at any date of determination occurring within the preceding six (6)
years, treated pursuant to Section 4001(a)(14) of ERISA and/or Section 414
of the Code as employees of a single employer which includes such Company,
including, without limitation, HSA-Texas.
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2.22 Environmental Compliance. None of the Companies conducts its business
or has any material assets located in the United States.
2.23 Litigation; Judgments.
(a) Except as set forth on Schedule 2.23, there is no action,
proceeding or, to Shareholders' knowledge, investigation, by or before any
Governmental Entity pending or, to Shareholders' knowledge, threatened:
(i) that has been commenced by or against or involving any Company
or its business; or
(ii) that challenges, or may have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the
transactions contemplated in this Agreement or Shareholders' ability to
consummate the transactions contemplated by this Agreement and the
Shareholders' Transaction Documents or which might give rise to a
Material Adverse Effect on any Company.
(b) No event has occurred and no circumstance exists that may give
rise to or serve as a basis for the commencement of any such any action,
proceeding or investigation described in Section 2.23(a).
(c) None of the Companies or Shareholders are subject to any judgment,
order or decree entered in any lawsuit or proceeding relating to any
Company, its assets or its business, nor has any such action been settled
or resulted in a final judgment since January 1, 2000.
2.24 Insurance. Schedule 2.24 contains a true, correct and complete list
of all of the insurance policies maintained by each Company, which schedule
includes the name of the insurance company, the policy number, a description of
the type of insurance covered by such policy, the dollar limit of the policy,
and the annual premiums for such policy, and the name and phone number of the
insurance agent in respect thereto. Each Company shall maintain such insurance
policies in full force and effect through the Closing Date. Except as set forth
on Schedule 2.24, (i) no claims are pending under the listed policies, nor do
Shareholders know of any basis therefor and (ii) there have been no settlement
of insurance claims since January 1, 2000.
2.25 Immigration Matters.
(a) Companies Employing Persons in the U.S. The only Persons who are
currently employees of the Companies in the United States (and the only
Persons who shall be so employed by the Companies in the United States as
of the Closing Date) are H. Schultz, A. Schultz, and L. Schultz, all of
whom are citizens of the United States.
(b) Companies Employing Persons Outside the U.S. With respect to each
of the Companies which employs persons outside the U.S., such Company is in
compliance with all Laws of any Governmental Entity relating to the
employment of persons who are not citizens of such jurisdiction.
2.26 Broker's Fees. No Company or Shareholder has retained or utilized the
services of any broker, finder or intermediary or paid or agreed to pay any fee
or commission to any other Person for or on account of the transactions
contemplated hereby, or had any communications with any Person with respect
thereto, which would obligate PRGX to pay any such fees or commissions.
2.27 Absence of Material Changes. Except as set forth in Schedule 2.27,
from December 31, 2000 to the date of this Agreement with respect to each
Company:
(a) there has not been any Material Adverse Effect;
(b) no Company has lost (or received written notice that it is about
to lose) any Key Clients or Key Clients with which any Company has
significant business relations;
(c) to the Shareholders' knowledge, no former senior manager (i.e., an
audit manager or higher) of any Company is currently competing with any
Company or planning to so compete;
(d) each Company has operated its business in its ordinary course and
has not sold, assigned, or transferred any of its assets except in the
ordinary course of business consistent with past practice;
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(e) no Company has mortgaged, pledged or subjected to any lien,
pledge, mortgage, security interest, conditional sales contract, or other
encumbrance of any nature whatsoever, any of its assets;
(f) there has been no amendment, termination, or waiver of any right
of any Company under any contract, governmental license or permit that may
materially adversely affect the business or assets of such Company;
(g) No Company has:
(i) paid any judgment resulting from any suit, proceeding,
arbitration, claim or counterclaim in respect of its assets or business
in excess of $1,000 (provided that all such excluded payments do not
aggregate to more than $5,000);
(ii) made any such payment to any party in settlement of any such
suit, proceeding, arbitration, claim or counterclaim in excess of $1,000
(provided that all such excluded payments do not aggregate to more than
$5,000);
(iii) written down, or failed to write down (in accordance with its
past practices consistently applied) or written up the value of any
inventory or assets of such Company;
(iv) made any material changes in the customary methods of
operation of its business, including practices and policies relating to
purchasing, marketing, selling, accounting, payment of trade creditors
or in the billing or collection of accounts receivable or work in
progress, including without limitation, discounting or writing off any
of Companies' accounts receivable or work in progress for early payment,
or granting any other deduction or discount thereon or accelerating the
collection thereof except in accordance with past practices consistently
applied;
(v) (except in respect of ordinary trade payables) incurred any
indebtedness or guaranteed any indebtedness, except for borrowings under
existing loans or lines of credit in the ordinary course of business
consistent with past practice;
(vi) taken any action other than in the ordinary course of business
and in a manner consistent with past practices (none of which actions
has been unreasonable or unusual) with respect to increasing the
compensation of any officer, director, consultant or employee of any
Company, paid bonuses to any consultant or employees (except for bonuses
earned in the ordinary course of business), or with respect to the grant
of any severance or termination pay (otherwise than pursuant to policies
of Companies in effect on the date hereof fully disclosed to PRGX in
writing prior to the date hereof) or with respect to any increase of
benefits payable under its severance or termination pay policies in
effect on the date hereof;
(vii) declared, set aside or paid any dividend or distribution
payable in cash, stock, property or otherwise with respect to any
Company's capital stock (except for distributions to Shareholders
consistent with past practices); or
(h) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 2.27.
2.28 Certain Arrangements.
(a) Schedule 2.28 is a true, correct and complete list as of the date
hereof and since December 31, 2000 of, any direct or indirect transaction,
or series of transactions, involving more than $60,000 per year,
individually or in the aggregate, (other than in respect of compensation or
travel or expense account reimbursement in the ordinary course of business
consistent with past practice) that any Shareholder, director, officer,
employee, Associate or other affiliate (for purposes of this Agreement,
"affiliate" means any individual, partnership, corporation, trust, joint
venture or other entity controlled by, controlling or under common control
with any Company or any Shareholder) or any relative of any Shareholder,
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director, officer, employee, Associate or other affiliate (collectively, a
"Related Party") has or had with any Company and contains a brief
description of each transaction, including without limitation:
(i) any oral or written contract, agreement, understanding,
commitment or other arrangement providing for the furnishing of
services, or the sale or rental of real or personal property from or
otherwise requiring payments to any such Related Party or to any
affiliate or relative of such Related Party;
(ii) any loans or advances to or from any Company (exclusive of
travel advances, expense advances, and normal salary advances in
connection with vacation periods, or compensation, or travel or expense
account reimbursement all in the ordinary course of business) to any
such Related Party or to any affiliate or relative of such Related
Party, giving for each the principal amount outstanding, interest rate,
maturity date and security therefor;
(iii) any direct or indirect interest in any property, real or
personal, tangible or intangible by any such Related Party or to any
affiliate or relative of such Related Party, including inventions,
patents, copyrights, trademarks, or trade names, used in or pertaining
to its business, except for the normal rights of a shareholder; and
(iv) all services and overhead support provided by such Related
Party to any Company, describing the nature and value of such services
and support, the amount of all compensation, fees, commissions or other
amounts owed by or to the Related Party and a description of the
relationship of, and oral or written agreements or understandings
between, any Company and such Related Party in respect of such Related
Party as a supplier or customer to any Company.
(b) Except as set forth on Schedule 2.28, all services, overhead
support and other interests provided by Shareholder or any affiliate
thereof to any Company have been provided on a basis no more favorable to
such Company than could be obtained in an arms' length transaction.
(c) None of the Shareholders is engaged in competition with any
Company with respect to any line of the products or services of such
Company (a "Competing Business") in any market presently served by such
Company. None of the Shareholders use the services of any employee of any
Company in any other enterprise controlled by such Shareholder.
2.29 Bank Accounts. Schedule 2.29 contains a true, correct and complete
list showing the name and location of each bank or other institution in which
each Company has any deposit account, lock box or safe deposit box
(collectively, the "Bank Accounts"), together with a listing of all account
numbers and names of all persons authorized to draw thereon or have access
thereto.
2.30 No Unlawful Payments.
(a) None of the Companies nor, to Shareholders' knowledge any
director, officer, agent, employee, or other person associated with or
acting on behalf of any Company has, directly or indirectly:
(i) used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political
activity;
(ii) made any unlawful payment to domestic or foreign government
officials or employees, or to domestic or foreign political parties or
campaigns, from corporate funds;
(iii) violated any provision of the Foreign Corrupt Practices Act
of 1977, as amended;
(iv) established or maintained any unlawful or unrecorded fund of
corporate monies or other assets;
(v) made any false or fictitious entry on the books or records of
any Company;
(vi) made any bribe, rebate, payoff, influence payment, kickback,
or other unlawful payment;
(vii) given any favor or gift which is not deductible for federal
income tax purposes; or
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(viii) made any bribe, kickback or other payment of a similar or
comparable nature, whether lawful or not, to any person or entity,
private or public, regardless of form, whether in money, property, or
services, to obtain favorable treatment in securing business or to
obtain special concessions, or to pay for favorable treatment for
business secured or for special concessions already obtained.
2.31 Disclosure. The statements, representations and warranties made by
each Shareholder in this Agreement and in the Schedules do not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading. No notice given
pursuant to Section 4.4 will contain any untrue statement or omit to state a
material fact necessary to make the statements therein or in this Agreement in
light of the circumstances in which they were made, not misleading. To
Shareholders' knowledge, there is no fact that has specific application to any
Company (other than general economic or industry conditions) and that has a
Material Adverse Effect or, as far as any Shareholder can reasonably foresee,
materially threatens to have a Material Adverse Effect that has not been set
forth in this Agreement or the Schedules hereto.
2.32 Investment Intent. Each of the undersigned Shareholders hereby
covenants, represents and warrants to PRGX as follows, and acknowledges that
each such covenant, representation and warranty is material to and intended to
be relied upon by PRGX:
(a) The undersigned is acquiring the shares of PRGX Common Stock
issued as Consideration hereunder (the "PRGX Shares") for the undersigned's
own account for investment purposes and not with a view to resale or
distribution within the meaning of the Securities Act of 1933, as amended
(the "Securities Act") and the rules and regulations thereunder; and the
undersigned will not distribute the PRGX Shares in violation or
contravention of the Securities Act.
(b) The undersigned, if an individual, is a resident of the state of
Texas, or, if a trust, is a trust formed under the laws of the state of
Texas.
(c) The undersigned acknowledges that all of the PRGX Shares acquired
by the undersigned will be issued to it without registration and in
reliance upon certain exemptions under the Securities Act and in reliance
upon certain exemptions from registration requirements under applicable
state securities laws.
(d) The undersigned will make no distribution, transfer or assignment
of any of the PRGX Shares except in compliance with the Securities Act and
any other applicable securities laws.
(e) The undersigned consents, agrees and acknowledges that the
certificate or certificates representing the PRGX Shares may bear the
following legend, or another legend to the same effect and agrees to the
restrictions set forth therein:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended or under the securities
laws of any other jurisdiction, in reliance upon exemptions from the
registration requirements of such laws. The shares represented by this
certificate may not be sold or otherwise transferred, nor will an
assignee or endorsee hereof be recognized as an owner of these shares by
the issuer unless: (i) a registration statement under the Securities Act
of 1933, as amended and other applicable securities laws with respect to
the shares and the transfer shall then be in effect; or (ii) in the
opinion of counsel satisfactory to the issuer, the shares are
transferred in a transaction which is exempt from the registration
requirements of such laws.
(f) The undersigned is aware that no federal or state agency has made
any recommendation or endorsement of the PRGX Shares or any finding or
determination as to the fairness of the investment in such PRGX Shares.
(g) Neither PRGX nor any person acting on its behalf offered the PRGX
Shares to the undersigned by means of general or public solicitation or
general or public advertising, such as by newspaper or magazine
advertisements, by broadcast media, or at any seminar or meeting whose
attendees were solicited by such means.
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(h) The undersigned hereby acknowledges that the PRGX Shares are a
speculative investment. The undersigned represents that it can bear the
economic risks of such an investment for an indefinite period of time.
(i) The undersigned acknowledges, represents and warrants that the
undersigned has received and reviewed the following:
- A copy of this Agreement;
- A copy of all filings relating to PRGX on the web site of the
Securities and Exchange Commission (www.sec.gov), other than PRGX's
registration statement on form S-4 filed with the Commission on
September 7, 2001, which has not been used by PRGX to offer the PRGX
Shares to the undersigned;
- Disclosure Document dated as of November 15, 2001; and
- PRGX Private Offering Memorandum dated November 30, 2001 relating to
the Offering by PRGX of Convertible Subordinated Promissory Notes due
2006.
(j) The undersigned acknowledges, represents and warrants that the
undersigned has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an
investment in the PRGX Shares; that the undersigned has had reasonable
opportunity to ask questions of and receive answers from PRGX's officers
and directors and to obtain any additional information, documents or
instruments available from PRGX that the undersigned has reasonably
requested; and that the undersigned has consulted with its own legal, tax
and financial advisors with respect to the tax consequences of acquiring
the PRGX Shares and has not relied upon PRGX or its representatives as to
such matters.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PRGX
As an inducement to the Shareholders to enter into this Agreement, PRGX
represents and warrants to the Shareholders as follows:
3.1 Corporate Power and Authority; Due Authorization. PRGX has full
corporate power and authority to execute and deliver this Stock Purchase
Agreement and each of the other agreements, documents and instruments referenced
in this Stock Purchase Agreement to which PRGX is or will be a party
(collectively, the "PRGX Transaction Documents") and to consummate the
Transaction contemplated hereby and thereby. The Board of Directors of PRGX has
duly approved and authorized the execution and delivery of this Agreement and
each of the PRGX Transaction Documents and the consummation of the Transaction
contemplated hereby and thereby, and no other corporate proceedings on the part
of PRGX are necessary to approve and authorize the execution and delivery of
this Agreement and such PRGX Transaction Documents and the consummation of the
Transaction contemplated hereby and thereby. Assuming that this Agreement and
each of the PRGX Transaction Documents constitutes a valid and binding agreement
of Shareholders, this Agreement and each of the PRGX Transaction Documents
constitutes, or will constitute when executed and delivered, a valid and binding
agreement of PRGX, enforceable against PRGX in accordance with its terms.
3.2 No Conflict; Consents. The execution and delivery by PRGX of this
Agreement, the PRGX Transaction Documents and the consummation by PRGX of the
Transaction contemplated hereby and thereby do not and will not (a) require,
other than the Lenders' Consent, the consent, approval or action of, or any
filing or notice to, any Person (defined in Section 4.4 hereof) except as
disclosed on Schedule 3.2(a); (b) violate the terms of any instrument, document
or agreement to which PRGX is a party, or by which PRGX or the property of PRGX
is bound, or be in conflict with, result in a breach of or constitute (upon the
giving of notice or lapse of time, or both) a default under any such instrument,
document or agreement; (c) violate PRGX's Articles of Incorporation or Bylaws;
or (d) violate any order, writ, injunction, decree,
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judgment, ruling, law or regulation of any Governmental Entity applicable to
PRGX, or the business or assets of PRGX.
3.3 Broker's Fees and Expenses. PRGX has not retained or utilized the
services of any broker, finder, or intermediary or paid or agreed to pay any fee
or commission to any other Person for or on account of the Transaction
contemplated hereby, or had any communications with any Person which would
obligate Shareholders to pay any such fees or commissions.
ARTICLE IV
ADDITIONAL COVENANTS
4.1 Due Diligence Review.
(a) Due Diligence. Prior to the Closing Date, PRGX, its counsel and
representatives, including KPMG LLP (collectively, the "PRGX
Representatives") shall have conducted such due diligence investigation of
the Companies and the Shareholders as PRGX shall determine. The
Shareholders shall cause the Companies to provide such persons full access
during normal business hours to the offices, properties, books, records,
files and other documents and information regarding the Companies'
business, to the Companies' employees, independent contractors, associates,
officers, sales agents, project managers, contract service providers,
strategic partners, other representatives and customers and to all
materials, programs, data, reports, systems, practices, deliverables, and
other properties and assets and shall fully cooperate with PRGX and such
persons and provide full opportunity to said parties to make such
investigation and copy such documents as PRGX shall desire; provided,
however, that (i) no information with respect to any specific Clients will
be required to be disclosed pursuant to this Section prior to or in any
manner other than as set forth in the Schedules attached hereto (or to be
attached hereto) in accordance with Section 2.11, Section 2.12 (with
respect to information about Clients), or Section 2.14 hereof, (ii) no
information with respect to trade secrets relating to technology and/or
auditing methodologies of the Companies will be provided prior to obtaining
Shareholders' Representative consent, which consent will not be
unreasonably withheld, (iii) with respect to employees of the Companies,
PRGX will not communicate with such Persons without prior notice to
Shareholders' Representative and providing Shareholders' Representative an
opportunity to be present at any meetings with such employees, and (iv)
with respect to Associates, PRGX will not communicate with the Associates
without obtaining the consent of Shareholders' Representative, which will
not be unreasonably withheld. Such persons shall not contact employees or
customers of any of the Companies Shareholders' Representative's prior
consent. No investigation of the Companies by PRGX, its counsel and
representatives, including the PRGX Representatives, either prior to, on,
or after the date hereof shall affect PRGX's right to rely upon, or
Shareholders' responsibility for the accuracy of the representations and
warranties of Shareholders made herein.
(b) Historical Statements. As soon as practicable after the date
hereof but in no event later than thirty days after the date of this
Agreement, Shareholders, at their sole cost and expense, shall cause the
chief financial officer for each Company to prepare and provide to PRGX the
following for each Company:
(i) a separate, unaudited balance sheet (excluding the notes
thereto) prepared as of December 31, 2000, December 31, 1999, and
December 31, 1998;
(ii) a separate, unaudited statements of operations, changes in
shareholders' equity and statements of cash flows for the years then
ended, including in each case, the notes thereto; and
(iii) a separate balance sheet and income statement as of June 30,
2001, for the period from January 1, 2001 through June 30, 2001
(iv) a separate balance sheet and income statement as of September
30, 2001, for the period from January 1, 2001 thorough September 30,
2001 (items (i), (ii), (iii) and (iv) are hereinafter collectively
referred to as the "Historical Statements").
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(c) Interim Financials. Within twenty (20) days after the end of each
month beginning October 31, 2001, Shareholders, at their sole cost and
expense, shall cause the chief financial officer for each Company to
prepare and provide a separate balance sheet and income statement for each
Company as of the end of the preceding month (the "Interim Financials").
(d) Estimated Financials. On or before seven business days prior to
the Closing Date, Shareholders shall prepare in accordance with Section
4.1(e) hereof, and PRGX and Shareholders' Representative shall agree upon
for each Company the following: (i) a separate, estimated balance sheet
which includes a detailed listing of the assets and liabilities of each
Company prepared as of the Closing Date (collectively, the "Estimated
Balance Sheets"), (ii) a separate, estimated income statement sheet which
includes a detailed listing of revenues, expenses and income of each
Company for the period from January 1, 2001 through the Closing Date
(collectively, the "Estimated Income Statements"), and (iii) a separate,
estimated statement of cash flows of each Company for the period from
January 1, 2001 through the Closing Date (collectively, the "Estimated
Statement of Cash Flows") (collectively, the Estimated Balance Sheets, the
Estimated Income Statement, the Estimated Statements of Cash Flows, being
the "Estimated Financials"), each of which statements will contain with
respect to any item which is not capable of determination at Closing, a
good faith estimate of such item as of the Closing Date, and which shall,
when delivered, be attached hereto as Schedule 4.1(d).
(e) Preparation of Estimated Financials. The Estimated Financials
shall be prepared in accordance with generally accepted accounting
principles for financial reporting in the United States ("GAAP") applied on
a basis consistent with the Historical Statements excluding the notes
thereto, shall include the same categories of assets and liabilities of the
Companies as of the Closing Date as were included on the December 31, 2000
balance sheet included in the Historical Statements and the same items of
revenues, expenses and income of the Companies as of the Closing Date as
were included on the income statement for the year ended December 31, 2000
included in the Historical Statements, and shall be consistent with each
Company's past accounting practices and procedures.
4.2 Conduct of the Companies Pending Closing Date. Shareholders covenant
and agree that, unless PRGX shall otherwise consent in writing or as otherwise
specifically contemplated herein, between the date hereof and the Closing Date,
they shall cause: (i) each Company to be operated only in, and each Company
shall not take any action except in, the ordinary course of its business and in
a manner consistent with such Company's past practices; and (ii) each Company to
use its best efforts to preserve substantially intact its business, to keep
available the services of its present officers, directors and employees, and to
preserve the present relationships of the each Company with its Clients and
other persons having business relationships with such Company. Shareholders
covenant and agree that between the date hereof and Closing, no Company shall
not materially diminish its assets or materially increase its liabilities
(except in the ordinary course of its business consistent with its past
practices). By way of amplification and not limitation, except as expressly
provided for in this Agreement, Shareholders covenant and agree that, between
the date hereof and the Closing, the Companies and Shareholders shall not,
directly or indirectly, do any of the following without the prior written
consent of PRGX, which consent will not be unreasonably withheld or delayed:
(a) (i) issue, sell, gift, pledge, transfer, dispose of, encumber,
authorize any shares of capital stock, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock of, or any other ownership interest in, any of the Companies
(including the Shares); (ii) amend the Articles of Incorporation or By-Laws
or other organizational documents of any Company; (iii) split, combine or
reclassify any outstanding share of any Company's capital stock or other
ownership interest, or declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect to
any Company's capital stock or other ownership interest (except
distributions from Canada to enable the Trust to pay its federal taxes on
the taxable income from such Company's operations in the ordinary course of
the business for the period from and after January 1, 2001 up to the
Closing Date, in each case consistent or with the Company's past practices
and as disclosed to PRGX in writing in advance of payment as more
particularly set forth in Section 4.7(c) below), or (iv) redeem, purchase
or otherwise acquire any shares of any Company's capital stock or other
ownership interest other than for no consideration as provided in Section
4.7 hereof;
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(b) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any interest in any Person; (ii) except in the ordinary course of
business and in a manner consistent with past practices, sell, pledge,
dispose of, or encumber any assets of any Company; (iii) enter into any
material contract or agreement, except for Client Contracts entered into in
the ordinary course of business; or (iv) authorize or consummate any single
capital expenditure in excess of $100,000 or capital expenditures in the
aggregate in excess of $200,000;
(c) take any action other than in the ordinary course of business and
in a manner consistent with past practice, none of which actions shall be
unreasonable or unusual, to increase the compensation or other remuneration
of any officer, director, Shareholder or materially increase compensation
or remuneration to any shareholder (including Shareholders), employee,
independent contractor or consultant of any Company, pay any bonuses to any
officer, director, shareholder (including Shareholders), employee,
independent contractor or consultant (except for bonuses earned in the
ordinary course of business and disclosed to PRGX in writing in advance of
payment), or to grant any severance or termination pay (other than pursuant
to policies of the Companies in effect on the date hereof and fully
disclosed to PRGX in writing prior to the date hereof) or to grant any
increase of benefits payable under its severance or termination pay
policies in effect on the date hereof;
(d) make any payments except in the ordinary course of business and in
amounts and in a manner consistent with past practice (none of which
payments shall be unreasonable or unusual), under any employee benefit plan
or otherwise to any employee of, or Associate, independent contractor or
consultant to, any Company, enter into any employee benefit plan, any
employment or consulting agreement, grant or establish any new awards under
any such existing employee benefit plan or agreement, or adopt or otherwise
amend any of the foregoing;
(e) take any action except in the ordinary course of business and in a
manner consistent with past practice with respect to, or make any change
in, its methods of management, distribution, marketing, accounting or
operating (including practices relating to payment of trade accounts or to
other payments) or relating to establishing or adjusting reserves, writing
down or failing to write down (in accordance with its past practices
consistently applied) or writing up the value of any assets of any Company;
(f) take any action or enter into any agreement or make any change in
the billing or collection of its accounts receivable and unbilled claims
(other than in the ordinary course of business and consistent with past
practices), including without limitation, discounting or writing off any of
the Companies' accounts receivable or work in progress, or granting any
other deduction or discount thereon or accelerating the collection thereof;
(g) take any action to incur, assume, increase or guarantee prior to
Closing any indebtedness for borrowed money from banks or other financial
institutions or cancel, without payment in full, any notes, loans or other
receivables;
(h) loan or advance monies to any Person under any circumstance
whatsoever except travel advances or other reasonable expense advances to
employees of any Company made in the ordinary course of business and
consistent with past practice;
(i) change any existing bank accounts or lock box arrangements of any
Company, except for deposits, withdrawals, or changes of signatories in the
ordinary course of business;
(j) waive any material rights of any Company or settle any material
claim involving any Company;
(k) sell, license, or otherwise dispose of any of its intellectual
property assets other than in the ordinary course of business consistent
with past practice;
(l) fail to make any Tax (defined in Section 4.7 hereof) filing or Tax
payment required to be made prior to the Closing Date;
(m) do any act or omit to do any act which would cause a breach of, or
inability to perform, any contract, commitment or obligation of any Company
or any Shareholder which breach has a Material
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Adverse Effect on any Company or the ability of any Company or any
Shareholder to perform its, his or her obligations under this Agreement or
any Shareholders' Transaction Document; or
(n) enter into any agreement, contract, commitment or arrangement to
take any of the actions prohibited in this Section 4.2.
4.3 Consents. Promptly after execution of this Stock Purchase Agreement,
Shareholders shall cause the Companies to apply for or otherwise seek, and use
the Companies' best efforts to obtain, all consents, releases and approvals
required from any Person with respect to the Companies and/or Shareholders for
consummation of the Transaction contemplated hereby (collectively, "Consents").
4.4 Notification.
(a) Shareholders shall give prompt notice to PRGX of the following:
(i) The occurrence or nonoccurrence of any event of which any
Shareholder obtains knowledge, the occurrence or nonoccurrence of which
would be reasonably likely to cause either (A) a material breach of any
representation or warranty of any Shareholder contained in this
Agreement at any time from the date hereof to the Closing Date, or (B)
directly or indirectly, any Material Adverse Effect on any of the
Companies. PRGX's knowledge of any facts obtained by PRGX prior to the
date hereof or disclosed herein that may give rise after the date hereof
to a Material Adverse Effect on any of the Companies shall not affect
whether or not a Material Adverse Effect on any of the Companies shall
have occurred; and/or
(ii) Any failure by any of the Shareholders to comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder.
(b) For purposes of this Agreement, "Material Adverse Effect" means
with respect to any Person, any change or effect that is materially adverse
to the financial condition, business results of operations, assets, or
prospects of such Person, taken as a whole.
Notwithstanding the foregoing, the delivery of any notice pursuant to this
Section 4.4 shall not limit or otherwise affect the remedies available hereunder
of the Person upon receiving such notice. The knowledge by a party to this
Agreement of any facts obtained by such party prior to the date hereof or
disclosed herein that may give rise after the date hereof to a Material Adverse
Effect shall not affect whether or not a Material Adverse Effect shall have
occurred.
4.5 Public Announcements; Confidentiality.
(a) The parties hereto shall not make any public announcements, and
the terms and existence of this Stock Purchase Agreement shall remain
confidential, until such time as a public announcement is made regarding
the Asset Purchase Agreement in accordance with the terms of the Asset
Purchase Agreement.
(b) Between the date of this Agreement and the Closing Date, PRGX and
Shareholders will maintain in confidence to maintain in confidence any
written, oral or other information obtained in confidence from any other
party hereto in connection with this Agreement or the transactions
contemplated herein, unless (i) such information is already known to such
party or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party, (ii)
or use of such information is necessary or appropriate in making any filing
or obtaining any consent or approval required for the consummation of the
transactions contemplated herein, or (iii) the furnishing of such
information is required by, or is necessary or appropriate in connection
with, legal proceedings or any statute, regulation or rule of any
Governmental Entity. The parties hereto will hold any information obtained
pursuant to this Agreement in confidence in accordance with, and shall
otherwise be subject to the Confidentiality Agreement between HSA-Texas and
PRGX, which Confidentiality Agreement shall continue in full force and
effect. PRGX shall cause its directors, officers, employees, agents,
representatives and advisors, and Shareholders shall cause the Companies'
directors, officers, employees, agents, representatives and advisors to
observe the covenants of this Section 4.5(b).
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4.6 Transfer of Shares Held by Nominee Shareholder.
(a) Prior to the Closing and effective as of the Closing Date, the
Shareholders shall cause Nominee Shareholder to convey its equity interest in
Singapore to Singapore in consideration of $100, unless ownership by Nominee
Shareholder is required by the laws of Singapore, in which case, the
Shareholders shall cause Nominee Shareholder prior to the Closing and effective
as of the Closing Date (i) to reduce its equity interest in Singapore to equal
the minimum amount required to be held by Nominee Shareholder to satisfy
Singapore law regarding resident ownership and (ii) enter into a written
agreement, in substantially the form attached hereto as Exhibit 4.6 ("Agreement
Regarding Nominee Shareholder"), confirming that Nominee Shareholder is holding
such equity interest solely to satisfy a requirement of Singapore law and that
Nominee Shareholder agrees to transfer its interest in Singapore to any designee
of PRGX, without consideration, upon written request by PRGX at any time, after
the Closing.
(b) Prior to Closing, Shareholders shall take all necessary action to
prevent Nominee Shareholder from transferring (directly or indirectly) any
interest it has in Singapore to any other Person other than a Shareholder or
Singapore.
4.7 Tax Matters.
(a) Definitions. As used in this Agreement, the following terms have
the specified meanings:
(i) "Flow-Through Taxes" shall mean U.S. federal income Taxes
attributable to income and gains of Companies until the Closing Date
which are payable by Shareholders pursuant to Section 1366 of the Code
for Tax years or partial Tax years for which Canada is an S
corporations. The term "Flow-Through Taxes" shall also include any
foreign, state or local income Taxes attributable to income and gains of
any of the Companies which are payable by the Shareholders under
principles comparable to Section 1366 of the Code.
(ii) "Tax Authority" shall mean any federal, foreign, national,
state, county or municipal or other local government, any subdivision,
agency, commission or authority thereof, or any quasi-governmental body
exercising any taxing authority or any other authority exercising tax
regulatory authority.
(iii) "Tax Return" shall mean any return, amended return, estimated
return, information return, declaration, deposit, claim for refund or
statement (including any related or supporting information) filed or to
be filed with any Tax Authority in connection with the determination,
assessment, collection or administration of any Tax or filed by any
Company.
(iv) "Tax" or "Taxes" shall mean all taxes, charges, fees,
interest, fines, penalties, additions to tax or other assessments,
whether disputed or not, including without limitation, income, excise,
environmental, property, sales, gross receipts, gains, transfer,
occupation, privilege, employment (including social security and
unemployment), use, value added, capital stock or surplus, franchise
taxes, advance corporate tax and customs duties imposed by any Tax
Authority, payable by any Company or any Shareholder, or relating to or
chargeable against any Company's assets, revenues or income and payable
by any Company or any Shareholder.
(b) Tax Returns.
(i) Preparation and Filing of Tax Returns for Tax Periods Ending on
or Prior to the Closing Date. Shareholders shall prepare or cause to be
prepared, and file or cause to be filed, at the Shareholders' expense,
all Tax Returns required to be filed by the Companies and the
Shareholders for Tax periods which end on or prior to the Closing Date.
Such Tax Returns shall be prepared based on and consistent with tax
accounting methods and principles used by the Companies and
Shareholders, as the case may be, in preparing Tax Returns for prior Tax
periods.
(ii) Preparation and Filing of the Companies' Income Tax Returns
for the Stub Period. Within ninety (90) days after the Closing Date,
Shareholders shall cause to be prepared (at the Shareholders' expense)
and delivered to PRGX for its review and approval, which approval shall
not
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be unreasonably withheld, conditioned or delayed, income Tax Returns for
the Companies required by any Tax Authority for the period beginning on
January 1 and ending on the day prior to the Closing Date ("Stub
Period"), which Tax Return ("Stub Period Tax Returns") shall be prepared
based on and consistent with tax accounting methods and principles used
by the Companies in preparing Tax Returns for prior Tax periods for such
Tax Authorities. PRGX shall cooperate with the Shareholders in
connection with Shareholders' preparation of the Stub Period Tax
Returns, and shall make available to Shareholders such books, records
and other information necessary for the preparation of the Stub Period
Tax Returns, as well as provide to Shareholders the assistance and
cooperation of the Companies' former accounting personnel in connection
therewith. Shareholders shall permit PRGX to comment on the Stub Period
Tax Returns prior to the filing thereof, shall make such revisions
thereto as are reasonably requested by PRGX, and shall provide PRGX with
a revised copy of the Stub Period Tax Returns within 15 days of receipt
of comments from PRGX. Thereafter, Shareholders shall cause such Stub
Period Tax Return to be timely filed incorporating all revisions
reasonably requested by PRGX pursuant to the immediately preceding
sentence. Shareholders shall be solely responsible for, and shall pay,
all Flow-Through Taxes attributable to the Stub Period.
(iii) Preparation and Filing of Tax Returns for Tax Periods Ending
After the Closing Date. Except for the Stub Period Tax Return described
in Section 4.7(b)(ii) hereof, PRGX shall prepare or cause to be
prepared, and file or cause to be filed, all Tax Returns required to be
filed by the Companies for Tax periods which end after the Closing Date.
(iv) Methods of Allocating Tax Liabilities. For purposes of this
Agreement, any Tax for any Tax period which begins before the Closing
Date and ends after the Closing Date (an "Overlap Tax Period") shall be
allocated as follows: The portion of such Tax which relates to the
portion of such Taxable period ending on the Closing Date shall (A) in
the case of any Taxes other than Taxes based upon or related to income
or receipts, be deemed to be an amount of such Tax for the total number
of days in the Overlap Tax Period multiplied by a fraction the numerator
of which is the number of days in the Taxable period ending on the
Closing Date and the denominator is the total number of days in the
entire Overlap Tax Period, and (B) in the case of any Tax based upon or
related to income or receipts, be deemed to be equal to the amount which
would be payable if the relevant Taxable period ended on the Closing
Date. Any credits relating to a Taxable period that begins before and
ends after the Closing Date shall be taken into account as though the
relevant Taxable period ended on the Closing Date. All determinations
necessary to give effect to the foregoing allocations shall be made in a
manner consistent with the prior practice of the Companies.
(v) Cooperation of Parties. Except as otherwise provided in this
Agreement, the parties hereby agree that each of them shall cooperate
with the other in executing or causing to be executed any required
document and by making available to the other all work papers, records
and notes of any kind at all reasonable times for the purpose of
allowing the appropriate party to complete Tax Returns, participate in a
proceeding, obtain refunds, make any determination required under this
Agreement or defend or prosecute Tax claims.
(vi) Reorganization. Shareholders and PRGX hereby acknowledge and
agree that the Transaction shall be treated by the parties for all tax
purposes as (i) the acquisition by PRGX of the Shares solely for shares
of PRGX Common Stock, and (ii) as a tax-free reorganization under
Section 368(a)(1)(B) of the Code and any other applicable laws. It is
the intent of the parties that this Agreement shall constitute a "plan
of reorganization" for purposes of Section 368(a) of the Code. The
parties hereto shall use their best efforts to cause the Transaction be
recognized as a tax-free reorganization under Section 368(a)(1)(B) of
the Code and any other applicable state or federal law.
(c) Certain Distributions to the Trust for Income Taxes. Prior to the
Closing Date, A. Schultz, in his capacity as trustee of the Trust, and PRGX
shall agree on a good faith estimate (the "Estimate") of the amount which
shall be distributed to the Trust by Canada and to enable the Trust to pay
its federal
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income taxes on the taxable income from such Company's operations in the
ordinary course of the business for the period from and after January 1,
2001 up to the Closing Date (the "Sub-S Taxes"). The aggregate amount of
such Estimate shall be distributed by Canada on the day immediately prior
to the Closing Date. Within forty-five (45) days after the Closing Date,
the Trust and PRGX shall jointly determine whether the Estimate was greater
than or less than the amount actually owed by the Trust for the Sub-S
taxes. If the amount actually owed by the Trust for the Sub-S Taxes is less
than the Estimate, then the Trust shall immediately pay to the applicable
Company an amount equal to such surplus together with accrued interest at
the applicable Federal rate (the "Surplus"). The payment due under the
immediately preceding sentence shall not be subject to the any limitations
(including the Base Amount or the Cap provided for in the Indemnification
Agreement.) If the amount actually owed by the Trust for Sub-S Taxes is
greater than the Estimate, then the Trust shall pay such shortfall at its
sole cost and expense, and neither the Companies nor PRGX shall have any
liability or obligation therefor.
4.8 Transaction Expenses. Except as otherwise specifically provided
herein, all of the expenses incurred by PRGX in connection with the
authorization, negotiation, preparation, execution and performance of this
Agreement and the consummation of the Transaction, including, without
limitation, all fees and expenses of agents, representatives, brokers, counsel
and accountants for PRGX shall be paid by PRGX ("PRGX Transaction Expenses").
Except as otherwise specifically provided herein, all expenses incurred by
Shareholders in connection with the authorization, negotiation, preparation,
execution and performance of this Agreement and the consummation of the
Transaction, including without limitation, all fees and expenses of agents,
representatives, brokers, counsel and accountants, shall be paid by Shareholders
("Shareholders' Transaction Expenses").
4.9 Commission Buy-Down Payments. Prior to the Closing, PRGX and
Shareholders' Representative may agree upon a plan pursuant to which each
Company will negotiate with certain of its independent contractors to accept a
Commission Buy-Down Payment. All Commission Buy-Down Payments to independent
contractors of the Companies, if any, will be made in accordance with and be
governed by the provisions of Section 4.17 of the Asset Purchase Agreement.
4.10 Waiver of Claims.
(a) Waiver of Claims. Shareholders, on behalf of themselves and all
of their respective heirs, successors and assigns, do hereby remise,
release, acquit, satisfy and forever discharge each Company and all of each
Company's past, present and future officers, directors, employees, agents,
attorneys, representatives, participants, successors and assigns from any
and all manner of debts, accountings, bonds, warranties, representations,
covenants, promises, contracts, controversies, agreements, liabilities,
obligations, expenses, damages, judgments, executions, actions, claims,
demands and causes of action of any nature whatsoever, whether known or
unknown, and whether at law or in equity, either now accrued or hereafter
maturing, which Shareholders now have or hereafter can, shall or may have
by reason of any matter, cause or thing, from the beginning of the world to
and including the date of this Agreement.
(b) Covenant Not to Sue. Shareholders, for themselves and all of
their respective heirs, successors and assigns, hereby covenant and agree
never to institute or cause to be instituted or continue prosecution of any
suit or other form of action or proceeding of any kind or nature whatsoever
against any Company, or any Company's past, present or future officers,
directors, employees, agents, attorneys, representatives, participants,
heirs, successors or assigns, by reason of or in connection with any of the
foregoing matters, claims or causes of action.
4.11 Delivery of Schedules. As soon as practicable but no later than
November 19, 2001, Shareholders shall deliver to PRGX all of the Schedules
referenced in this Agreement (other than Schedule 3.2(a) which is to be
delivered by PRGX).
4.12 Repayment of Shareholder Loans. Effective upon the Closing,
Shareholders shall cause all of the shareholders of each Company (including
those other than the Shareholders) to repay in full all amounts owed by such
shareholders to any of the Companies.
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4.13 Resignations. Effective upon the Closing, each of the Shareholders
shall resign, and cause all other persons to resign, in writing from all offices
and directorships held by such Shareholder or other person in each of the
Companies.
ARTICLE V
CONDITIONS TO CLOSING
5.1 Conditions to Each Party's Obligations. The respective obligations of
PRGX and Shareholders to consummate Transaction are subject to the satisfaction
or waiver, by both PRGX and Shareholders, on or prior to the Closing Date of all
of the following conditions:
(a) No Injunctions or Restraints, Illegality. No Laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by any Governmental Entity of
competent jurisdiction shall be in effect, having the effect of making the
Transaction illegal or otherwise prohibiting consummation of such
Transaction. No action seeking such an order or injunction shall be pending
or threatened.
(b) Consents. Each of the consents and approvals that are described
on Schedule 3.2 shall have been duly obtained and shall be in full force
and effect on the Closing Date. With respect to PRGX, PRGX shall have
obtained either (i) the consent of its principal lenders, a syndicate led
by Bank of America, N.A., to the acquisitions contemplated herein, the
Asset Acquisition, the Other Acquisitions, including an agreement by such
lenders to loan to PRGX any and all amounts required to satisfy any of the
Acquisition-Related Notes (as defined in the Asset Agreement), to repay the
Assumed Schultz Loan, to pay any obligations assumed or to be paid by PRGX
relating to the Other Acquisitions and any other transactions contemplated
hereby (collectively, the "Contemplated Transactions" or (ii) if such
consent is not obtained, PRGX shall have entered into a new or amended
credit facility which makes the consent of its lenders unnecessary and
which does not prohibit the Contemplated Transactions (in either event, the
"Lenders' Consent").
(c) Closing of Asset Purchase Agreement. Prior to or concurrently
with the Closing, the Asset Purchase Agreement shall have been consummated.
5.2 Additional Conditions to Obligations of Shareholders. The obligation
of Shareholders to consummate the Transaction is subject to the satisfaction, or
waiver by Shareholders' Representative, on or prior to the Closing Date of all
of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of PRGX set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (except to the
extent that such representations and warranties speak as of another date,
in which case such representations and warranties shall be true and correct
as of such other date), and Shareholders shall have received a certificate
of a senior executive officer or a senior financial officer of PRGX to such
effect.
(b) Performance of Obligations of PRGX. PRGX shall have performed or
complied with all agreements and covenants required to be performed by it
under this Agreement at or prior to the Closing Date, and Shareholders
shall have received a certificate of a senior executive officer or a senior
financial officer of PRGX to such effect.
(c) Closing Deliveries. PRGX shall have delivered to Shareholders
each of the following in form and substance reasonably satisfactory to
Shareholder's Representative:
(i) the Consideration;
(ii) a certificate from the corporate secretary of PRGX certifying
the resolutions of the board of directors of PRGX authorizing and
approving the Transaction, certifying that the shareholders of PRGX have
authorized and approved the Transaction, and certifying the incumbency
of the officers of PRGX executing documents or instruments on behalf of
PRGX; and
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(iii) the Registration Rights Agreement, substantially in the form
attached hereto as Exhibit 5.2(c)(iii), duly executed by PRGX; and
(iv) any other documents or agreements, as reasonably requested
Shareholders' Representative, contemplated hereby and/or necessary to
consummate the Transaction contemplated hereby.
5.3 Additional Conditions to Obligations of PRGX. The obligation of PRGX
to consummate the Transaction is subject to the satisfaction, or waiver by PRGX,
on or prior to the Closing Date all of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Shareholders and the Trust set forth in this Agreement
(including, without limitation, those representations and warranties that
are made as of the Closing Date), shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except to the extent that such
representations and warranties speak as of another date, in which case such
representations and warranties shall be true and correct as of such other
date); and PRGX shall have received a certificate of Shareholders'
Representative to such effect, together with a complete set of the
Schedules and Revised Schedules as of the Closing Date.
(b) Performance of Obligations of Shareholders. Shareholders shall
have performed or complied with all agreements and covenants required to be
performed by it under this Agreement at or prior to the Closing Date that
are qualified as to materiality or Material Adverse Effect, and
Shareholders shall have performed or complied in all material respects with
all other material agreements and covenants required to be performed by it
under this Agreement at or prior to the Closing Date that are not so
qualified, and PRGX shall have received a certificate of Shareholders'
Representative to such effect.
(c) Closing Deliveries. At the Closing, Shareholders shall have
delivered to PRGX each of the following in form and substance reasonably
satisfactory to PRGX:
(i) the original certificates representing the Shares, free and
clear of any Share Encumbrances, duly endorsed for transfer to PRGX;
(ii) each Company's original minute book which shall contain
minutes and consents of all Board and shareholders' actions and
meetings, cancelled stock certificates of all previously issued, but no
longer outstanding, stock certificates of such Company, copies of the
organizational documents of each Company and any amendments thereto, and
the stock ledger with all issued or previously issued stock certificates
accounted for.
(iii) a certificate of good standing, or equivalent certificate,
for each Company, dated no more than fifteen (15) days prior to the
Closing Date, issued by the Secretary of State, or equivalent authority,
for each jurisdiction in which each Company is organized and from each
jurisdiction in which each Company conducts business;
(iv) a certificate duly executed and delivered by Shareholders'
Representative certifying which (if any) shares held by Nominee
Shareholders have been redeemed by any of the Companies (the form of
such certificate being attached hereto as Exhibit 5.3(c)(iv)) and the
Agreement Regarding Nominee Shareholders duly executed and delivered by
each Nominee Shareholder whose shares have not been so redeemed by a
Company;
(v) an affidavit, duly executed and delivered by the chief
executive officers of Asia and Singapore certifying that such Companies
are not United States real property holding corporations; and
(vi) any other documents or agreements, as reasonably requested by
PRGX, contemplated hereby and/or necessary to consummate the
Transaction.
(d) No Investigations of the Companies. As of the Closing Date, there
shall be no pending or threatened investigation by any Governmental Entity
of any Company which in the reasonable judgment of PRGX would have a
Material Adverse Effect on such Company.
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(e) No Material Adverse Effect. Since December 31, 2000, no Company
shall have been subject to a Material Adverse Effect.
(f) Revised Schedules. Shareholders shall have provided PRGX with
revised Schedules dated as of the Closing Date (collectively, the "Revised
Schedules"), with all changes through such date duly noted thereon,
provided however, that in the event the Revised Schedules contain any
disclosure or change which (i) should have been but was not shown on the
Schedules attached hereto at the date hereof, or (ii) individually or in
the aggregate is material to any warranty or representation contained
herein, or (iii) arose outside the ordinary course of business, the
condition contained in this Section shall be deemed unsatisfied unless PRGX
has agreed in writing to such disclosures or changes.
(g) Repayment of Shareholder Loans. Each shareholder of the Companies
including the Shareholders, shall have repaid in full at or prior to the
Closing all amounts owed by such shareholder to any of the Companies.
ARTICLE VI
INDEMNIFICATION; SURVIVAL
6.1 Indemnification by Shareholders and the Companies. In addition to any
other indemnification obligation of Shareholders under any other provision
hereof, H. Schultz and A. Schultz and the Trust, jointly and severally,
(together with each of the Companies solely for indemnification claims asserted
by PRGX prior to the Closing) indemnify and hold PRGX, and its subsidiaries,
affiliates, directors, officers, employees and agents (collectively, the "PRGX
Indemnified Parties"), harmless from and against all claims, liabilities,
lawsuits, losses, costs, damages or expenses (together with reasonable
attorneys' fees and expenses incurred in litigation or otherwise are hereinafter
collectively referred to as "Losses") arising out of and sustained by any of the
PRGX Indemnified Parties due to or relating to, the following (collectively,
"Section 6.1 Indemnified Claims"):
(a) any misrepresentation or breach of any representation or warranty,
or breach, nonfulfillment of, or failure to perform, any covenant,
obligation or agreement of any Shareholder contained in this Agreement or
any of the Shareholders' Transaction Documents; and/or
(b) any liability or obligation suffered by the PRGX Indemnified
Parties (whether or not the existence or assertion of such liability or
obligation would constitute a breach of any representation, warranty,
covenant, obligation or agreement contained in this Agreement or in any
Shareholder Transaction Document) relating to or arising out of the (x)
operation of the business of any Company or the ownership or use of the
assets of any Company prior to the Closing Date and was not specifically
disclosed herein or the Schedules; and/or
(c) the treatment, as employees, for any period prior to the Closing
Date, by any Governmental Entity, including any Tax Authority, of any
Associates, auditors, consultants or other service providers whom any
Company treated for such period as independent contractors, and not as
employees, and for any liability, foreign, federal, state or local taxes,
including any withholding for any state, federal or foreign income tax,
FICA or FUTA amounts, state, federal or foreign unemployment insurance
contributions, payments in respect of workers' compensation insurance, the
provision of benefits under the Employee Benefit Plans, or payments under
The Fair Labor Standards Act or regulations promulgated thereunder; and/or
(d) any failure by any Company to obtain prior to Closing any required
consent to the Transactions; and/or
(e) the amount in excess of $100,000 of any Vendor Payback (less any
payback reserve applicable) in respect of any Inactive Audit provided the
aggregate Vendor Payback to such Client is in excess of $350,000; and/or
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(f) all severance liabilities or obligations, if any, to all employees
and all Associates of any Company who voluntarily resign employment within
9 30 days after the Closing Date; and/or =
(g) any litigation, arbitrations and mediations that existed on or at
any time prior to the Closing Date; and/or
(h) any Surplus due pursuant to Section 4.7(c).
6.2 Indemnification by PRGX. In addition to any other indemnification
obligation of PRGX hereunder, PRGX hereby indemnifies and holds each Shareholder
harmless from and against all Losses arising out of and sustained by any of them
due to or relating to (a) any misrepresentation or breach of any representation,
warranty, covenant or agreement of PRGX in this Agreement or any of the PRGX
Transaction Documents; and (b) any liability or obligation incurred by any
Shareholder relating to the operation or ownership of any Company by PRGX, or
the ownership or use of and Company's assets by PRGX, from and after the Closing
Date, other than Section 7.1 Indemnified Claims (collectively, "Section 6.2
Indemnified Claims").
6.3 Procedure Regarding Indemnification. All claims for indemnification
under this Stock Purchase Agreement (including, without limitation, the
procedures for indemnification, the survival period and certain limitations on
indemnification) shall be governed exclusively by the Indemnification Agreement.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Elective Termination. This Agreement may be terminated at any time
before the Closing Date as follows:
(a) by mutual written consent of Shareholders' Representative and
PRGX;
(b) by either Shareholders' Representative or PRGX if the Transaction
has not been consummated on or before March 31, 2002 ("Termination Date")
provided that the party seeking to exercise the right to terminate this
Agreement under this Section 7.1(b) is not then in breach in any material
respect of any of its representations, warranties, covenants or other
agreements under this Agreement;
(c) by either PRGX or Shareholders' Representative, if any
Governmental Entity of competent jurisdiction (i) shall have issued an
order, decree or ruling or taken any other action (which the parties shall
have used their reasonable best efforts to resist, resolve or lift, as
applicable) permanently restraining, enjoining or otherwise prohibiting the
Transaction, and such order, decree, ruling or other action shall have
become final and non-appealable, or (ii) shall have failed to issue an
order, decree or ruling or to take any other action, and such denial of a
request to issue such order, decree or ruling or to take such other action
shall have become final and non-appealable (which order, decree, ruling or
other action the parties shall have used their reasonable best efforts to
obtain); or
(d) by Shareholders' Representative, if PRGX shall have materially
breached its representations or warranties contained in this Agreement or
failed to perform in any material respect any of its covenants or other
agreements contained in this Agreement, which breach would result in the
failure to satisfy the conditions set forth in Sections 5.2(a) and (b)
hereof, and in such case, such breach is incapable of being cured, or, if
capable of being cured, shall not have been cured on or before the
Termination Date and within 10 days after written notice thereof shall have
been received by PRGX provided that none of the Shareholders are then in
breach in any material respect of any of its representations, warranties,
covenants or other agreements under this Agreement;
(e) by PRGX, (i) if any of the Shareholders shall have materially
breached its representations or warranties contained in this Agreement or
failed to perform in any material respect any covenants or other agreements
contained in this Agreement, which breach would result in the failure to
satisfy the conditions set forth in Sections 5.3(a) and (b) hereof and in
any such case such breach is incapable of being cured, or if capable of
being cured, shall not have been cured on or before the Termination Date
and within 10 days after written notice thereof shall have been received by
Shareholders' Representative;
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or (ii) upon the occurrence of an event or development that has a Material
Adverse Effect on any of the Companies, regardless of whether the
conditions set forth in Section 8.3(a) and (b) are capable of being
satisfied on or before the Termination Date, in either case, provided PRGX
is not then in breach in any material respect of any of its
representations, warranties, covenants or other agreements under this
Agreement; or
(f) by PRGX, within 30 days after receipt of all of the Schedules as
provided in Section 4.11; or
(g) notwithstanding anything in Section 7.1 to the contrary, by PRGX
or Shareholders' Representative, if PRGX has not received the Lenders'
Consent described in Section 3.2(a) hereof on or before March 31, 2002.
7.2 Automatic Termination. This Agreement shall automatically terminate
upon the termination of the Asset Purchase Agreement.
7.3 Effect of Termination. If this Agreement is terminated by either PRGX
or Shareholders' Representative as provided in Section 7.1 or Section 7.2
hereof, this Agreement shall forthwith become void and have no further effect,
without any liability or obligation on the part of PRGX (its shareholders,
officers or directors) and Shareholders, other than with respect to the
provisions of Section 9.2 of the Asset Purchase Agreement which will govern all
payments between the parties as a result of such termination.
ARTICLE VIII
SHAREHOLDERS' REPRESENTATIVE
8.1 Irrevocable Appointment of Shareholders' Representative. By the
execution and delivery of this Agreement, including counterparts hereof, each
Shareholder hereby irrevocably constitutes and appoints H. Schultz, and any
successor to the foregoing person appointed pursuant to Section 8.3 hereof, as
the true and lawful agent and attorney-in-fact (referred to in this Agreement as
the "Shareholders' Representative") of such Shareholder with full power of
substitution and with full power and authority to act in the name, place and
stead of such Shareholder with respect to the terms and provisions of this
Section 8.1, as the same may be from time to time amended, and to do or refrain
from doing all such further acts and things, and to execute all such documents,
as the Shareholders' Representative shall deem necessary or appropriate in
connection with the following powers granted under this Section 8.1:
(a) to approve any action hereunder which requires the consent,
approval or the waiver of the Shareholders, including, without limitation,
any action under Section 7.1 hereof;
(b) to settle all claims, matters, disputes or disagreements under
this Agreement and the Indemnification Agreement; and
(c) to extend the Closing Date or change the location of the Closing.
8.2 Acts of Shareholders' Representative.
(a) The appointment of the Shareholders' Representative in Section 8.1
hereof shall be deemed coupled with an interest and shall be irrevocable,
and PRGX and any other Person may conclusively and absolutely rely, without
inquiry, upon any action of the Shareholders' Representative as the act of
each of the Shareholders in all matters referred to in Section 8.1 hereof.
Each Shareholder hereby ratifies and confirms all that the Shareholders'
Representative shall do or cause to be done by virtue of Shareholders'
Representative's appointment as Shareholders' Representative of such
Shareholder. The Shareholders' Representative shall act for the
Shareholders on all of the matters set forth in Section 8.1 hereof in the
manner the Shareholders' Representative believes to be in the best interest
of the Shareholders and consistent with Shareholders' Representative's
obligations under this Agreement, but the Shareholders' Representative
shall not be responsible to any Shareholder for any loss or damage any
Shareholder may suffer by reason of the performance by the Shareholders'
Representative of Shareholders' Representative's duties under this
Agreement, including any loss or damage resulting from any error of
judgment, mistake of fact or law, or any act done or omitted to be done in
good faith, other than loss or damage
B-30
arising from willful violation of law or gross negligence in the
performance of Shareholders' Representative's duties under this Agreement.
(b) Each Shareholder hereby expressly acknowledges and agrees that the
Shareholders' Representative is authorized to act on behalf of such
Shareholder notwithstanding any dispute or disagreement among the
Shareholders, and that the PRGX shall be entitled to rely on any and all
action taken by the Shareholders' Representative under this Agreement
without liability to, or obligation to inquire of, any of the Shareholders.
PRGX is hereby expressly authorized to rely on the authority and
genuineness of the signature of the Shareholders' Representative on any
instrument, certificate or document. Upon receipt of any writing which
reasonably appears to have been signed by the Shareholders' Representative,
PRGX may act upon the same without any further duty of inquiry as to the
genuineness of the writing.
8.3 Replacement of Shareholders' Representative. If the Shareholders'
Representative resigns or ceases to function in Shareholders' Representative's
capacity for any reason whatsoever, then A. Schultz shall become the Shareholder
Representative and if A. Schultz shall cease to serve, then a
majority-in-interest of the Shareholders shall appoint a successor; provided,
however, that, if for any reason no successor has been appointed within thirty
(30) days, then any Shareholder or PRGX shall have the right to petition a court
of competent jurisdiction for appointment of a successor. A
"majority-in-interest" means those Shareholders entitled to receive a majority
of the Consideration under this Agreement.
8.4 Indemnification of Shareholders' Representative. Shareholders do
hereby jointly and severally agree to indemnify and hold the Shareholders'
Representative harmless from and against any and all liability, loss, cost,
damage or expense (including without limitation fees and expenses of legal
counsel) reasonably incurred or suffered as a result of the performance of
Shareholders' Representative's duties under this Agreement except for actions
constituting gross negligence or willful misconduct.
8.5 Proof of Authority. Each Shareholder shall execute and deliver to the
Shareholders' Representative such further documents requested by the
Shareholders' Representative, if any, as may be necessary to the efficient proof
of his authority to act and to exercise the powers granted the Shareholders'
Representative under this Article VIII.
8.6 Survivability of Power. EACH SHAREHOLDER INTENDS FOR THE
AUTHORIZATIONS AND AGREEMENTS IN THIS ARTICLE VIII TO REMAIN IN FORCE AND NOT BE
AFFECTED IF SUCH SHAREHOLDER SUBSEQUENTLY BECOMES MENTALLY OR PHYSICALLY
DISABLED OR INCOMPETENT.
ARTICLE IX
GENERAL PROVISIONS
9.1 Severability. If any provision of this Agreement is prohibited by the
laws of any jurisdiction as those laws apply to this Agreement, that provision
shall be ineffective to the extent of such prohibition and/or shall be modified
to conform with such laws, without invalidating the remaining provisions hereto.
9.2 Amendment; Modification; Extension; Waiver.
(a) This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto. No party to this
Agreement is obligated to execute any amendments to this Agreement.
(b) At any time prior to the Closing, the parties may (a) extend the
time for the performance of any of the obligations or other acts of the
other parties, (b) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered
pursuant to this Agreement or (c) waive compliance with any of the
agreements or conditions contained in this Agreement. Any such extension or
waiver shall be valid only if set forth in an instrument in writing signed
by each of the parties hereto. No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude
any other or further exercise
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thereof or the exercise of any other right, power or privilege. The rights
and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
9.3 Assignment, Survival and Binding Agreement. This Agreement (a) may not
be assigned by PRGX on or prior to the Closing without the prior written
Shareholders' Representative (except for an assignment to a wholly owned
subsidiary of PRGX, which may be made without the prior consent of, but with
notice to, Shareholders' Representative provided that, in such event, the
assignor shall remain obligated hereunder in the same manner as if such
assignment had not been effected); (b) may not be assigned by PRGX after the
Closing without the prior written consent of Shareholders' Representative,
except for (i) an assignment to an affiliate of PRGX, which may be made without
the prior consent of, but with notice to, Shareholders' Representative; provided
that, in such event, the assignor shall remain obligated hereunder in the same
manner as if such assignment had not been effected, and (ii) in the event of a
merger, consolidation, reorganization or similar transaction of PRGX with a
Person where such other Person is the surviving entity of such transaction, this
Agreement may be assigned by PRGX without the prior written consent of, but with
notice to, Shareholders' Representative; and (c) may not be assigned by any of
the Shareholders at any time, without the prior written consent of PRGX (which
consent may be granted or withheld in its sole discretion). The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, personal representatives,
successors and assigns.
9.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.5 Notices. All notices, requests, demands, claims or other
communications hereunder will be in writing and shall be deemed duly given if
personally delivered, sent by telefax, sent by a recognized overnight delivery
service which guarantees next-day delivery ("Overnight Delivery") or mailed by
certified mail, return receipt requested, postage prepaid and addressed to the
intended recipient, as set forth below:
If to any of the Shareholders
or Companies: Howard Schultz & Associates International, Inc.
9241 LBJ Freeway
Dallas, TX 75243
Attention: Mr. Howard Schultz
Telefax: (972) 690-7584
with a copy to: Malouf Lynch Jackson & Swinson
600 Preston Commons East
8115 Preston Road
Dallas, TX 75225
Attention: Curtis Swinson, Esq.
Telefax: (214) 273-0567
with a copy to: Howard Schultz & Associates International, Inc.
9241 LBJ Freeway
Dallas, TX 75243
Attention: Michael Glazer, Esq.
Telefax: (972) 690-7584
If to PRGX: The Profit Recovery Group International, Inc.
2300 Windy Ridge Parkway
Suite 100 North
Atlanta, GA 30339-8426
Attention: Clinton McKellar, Jr.
Senior Vice President & General Counsel
Telefax: (770) 779-3034
B-32
with a copy to: Arnall Golden Gregory LLP
1201 West Peachtree Street, Suite 2800
Atlanta, Georgia 30309-3400
Attention: Jonathan Golden, Esq.
Telefax: (404) 873-8701
or at such other address as any party hereto notifies the other parties hereof
in writing. The parties hereto agree that notices or other communications that
are sent in accordance herewith (i) by personal delivery or telefax, will be
deemed received on the day sent or on the first business day thereafter if not
sent on a business day (with written confirmation of receipt), (ii) by Overnight
Delivery, will be deemed received on the first business day immediately
following the date sent, and (iii) by certified U.S. Mail, return receipt
requested, will be deemed received three (3) business days immediately following
the date sent. For purposes of this Agreement, a "business day" is a day on
which U.S. national banks are open for business and shall not include a Saturday
or Sunday or legal holiday. Notwithstanding anything to the contrary in this
Agreement, no action shall be required of the parties hereto except on a
business day and in the event an action is required on a day which is not a
business day, such action shall be required to be performed on the next
succeeding day which is a business day.
9.6 Entire Agreement; No Third Party Beneficiaries. Except for the
Nondisclosure Agreement, which remains in full force and effect in accordance
with the terms thereof, this Agreement, together with the Exhibits and
Schedules, constitutes the entire agreement and supersedes any and all other
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof and, except as otherwise
expressly provided herein, is not intended to confer upon any Person, other than
PRGX and the Shareholders, any rights or remedies hereunder.
9.7 Further Assurances. The parties to this Agreement agree to execute and
deliver, both before and after the Closing, any additional information or
documents or agreements contemplated hereby and/or necessary or appropriate to
effect and consummate the transactions contemplated hereby. Shareholders and
Companies agree to provide to PRGX, both before and after the Closing, such
information as PRGX may reasonably request in order to consummate the
transactions contemplated hereby and to effect an orderly transition of the
business following the Closing Date.
9.8 Choice of Law. This Agreement and all documents executed in connection
therewith shall be governed by, and construed in accordance with, the laws of
the State of Georgia, regardless of the laws that might otherwise govern under
applicable principles of conflict of laws thereof.
9.9 Consent to Jurisdiction. Each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any federal court located in the
Northern District of Georgia or, if there is not a basis for federal court
jurisdiction, a Superior Court of Cobb County, Georgia in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, and (c)
agrees that it will not bring any action relating to this Agreement or any of
the transactions contemplated by this Agreement in any court other than a
federal court sitting in the Northern District of Georgia or a Cobb County
Superior Court.
9.10 Dispute Resolution.
(a) Financial Matters. Notwithstanding any provision of this
Agreement to the contrary, all disputes, controversies or claims arising
out of or relating to this Agreement or the transactions contemplated
hereby relating to financial matters shall be resolved by agreement among
the parties, or, if not so resolved within forty-five (45) days following
written notice of dispute given by either party hereto to the other, by
arbitration in accordance with Title 9 of the United States Code (the
United States Arbitration Act), the Commercial Arbitration Rules of the
American Arbitration Association, and its Optional Rules for Emergency
Measures of Protection (the "Optional Rules"), all as amended from time to
time (collectively, the "Rules") and the provisions of this Section;
provided, however, that the provisions of this Section shall prevail in the
event of any conflict with such Rules. The parties agree that
B-33
they shall use their best efforts to cause the matter to be presented to
the arbitral tribunal as soon as possible in light of the complexity of the
dispute. The arbitral tribunal, except as provided under the Optional
Rules, shall consist of three neutral arbitrators experienced in the
industry related to the dispute, one of whom shall be chosen by the
claimant and one chosen by respondent, and the two so chosen shall choose
the third arbitrator who shall act as chairperson. The parties shall be
entitled to engage in discovery in connection with arbitration, which
discovery shall be conducted in accordance with Georgia rules of Civil
Procedure and Evidence. Additionally, there shall be no evidence by
affidavit allowed, and each party shall disclose a list of all documentary
evidence to be used, a list of all witnesses and experts to be called by
the party at least twenty (20) days prior to the arbitration hearing. The
decision of a majority of the arbitration panel with respect to the matters
referred to them pursuant hereto shall be final and binding upon the
parties to the dispute, and confirmation and enforcement thereof may be
rendered thereon by any court having jurisdiction upon application of any
Person who is a party to the arbitration proceeding. The arbitral tribunal
shall assess fees, expenses, compensation, and attorney's fees in the award
as provided in the Rules. The arbitral tribunal shall have no power or
authority under this Agreement or otherwise to award or provide for the
award of punitive or consequential damages against any party. Any
arbitration shall be conducted in Atlanta, Georgia.
(b) Other Matters. Notwithstanding any provision of this Agreement to
the contrary, in respect of all disputes, controversies or claims arising
out of or relating to this Agreement or the transactions contemplated
relating to any matters other than financial matters the parties may
exercise any and all rights and remedies available at law or in equity.
Without limiting the generality of the foregoing, in the event of a breach
or threatened breach by any party hereto of any of its covenants or other
obligations hereunder, including, without limitation, the parties'
respective obligations to close the transactions contemplated hereby, each
of the parties hereby consents and agrees that the non-breaching party
shall be entitled to an injunction or similar equitable relief restraining
the breaching party(s) from committing or continuing any such breach or
threatened breach or granting specific performance of any act required to
be performed by the breaching party(s) under any such provision, without
the necessity of showing any actual damage or that money damages would not
afford an adequate remedy and without the necessity of posting any bond or
other security. The right of the non-breaching party to injunctive relief
shall be in addition to any and all other remedies available to it and
shall not be construed to prevent it from pursuing, either consecutively or
concurrently, any and all other legal or equitable remedies available to
them including the recovery of monetary damages.
9.11 Schedules, Revised Schedules and Exhibits. All Schedules, Revised
Schedules and Exhibits referenced in this Agreement shall be deemed to be a part
of this Agreement. All Schedules delivered to PRGX in connection with this
Agreement shall be updated prior to the Closing so as to be true, correct and
complete and "brought-down" as of the Closing Date, and shall, when delivered,
be accompanied by a certificate of a duly authorized officer of the applicable
Company certifying that they are delivered pursuant to the applicable Section of
this Agreement, as referenced in such certificate, and shall, when delivered, be
attached to this Agreement and for all intents and purposes, be deemed Schedules
hereto. All Schedules and Revised Schedules shall be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in applicable
Article hereof and shall provide information thereon separately in respect of
each Company, as applicable.
9.12 Definition of Shareholders' Knowledge. As used herein, the terms "to
the Shareholders' knowledge" "and words of similar import shall mean the actual
knowledge after reasonable investigation of the following individuals on the
date hereof and on the Closing Date: H. Schultz, A. Schultz, Charles Schembri,
Mac Martirossian and Michael Glazer.
9.13 Reliance. Each party hereto acknowledges and represents (i) that this
Agreement is executed without reliance on any agreement, promise, statement, or
representation by or on behalf of any person, except as set forth specifically
herein or in the Shareholders' Transaction Documents and/or the PRGX Transaction
Documents or referred to herein or therein, (ii) that no person, and no agent or
attorney of any person, has made any promises, representations, or warranties
whatsoever, whether expressed or implied, which are not
B-34
expressly contained herein, and (iii) that he or its authorized officer has read
this Agreement and is fully aware of its contents and legal effect.
9.14 Marital Property Rights. The Persons signing in their individual
capacities below, whether as a party or as a "spouse" of a party, acknowledge
and agree that: (i) each is individually joining in and assenting to this
Agreement, (ii) each consents to and approves of the transactions contemplated
by this Agreement, and (iii) each intends individually to be legally bound by
this Agreement and each of the Shareholders' Transaction Documents to which such
individual or his or her spouse is a party (the "Transaction Agreements"). Each
such individual Person also acknowledges that he or she will directly and
personally benefit from the transactions contemplated by the Transaction
Agreements to which such individual or his or her spouse is a party, that he or
she has had an opportunity to review all such agreements and consult with
independent legal counsel, and that PRGX is entering into this Agreement and the
PRGX Transaction Documents in reliance upon the agreements set forth in this
paragraph.
9.15 Section Headings; Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. Unless otherwise expressly provided, all references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
B-35
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereof written.
PRGX:
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
By:
------------------------------------
John M. Cook
Chairman of the Board and
Chief Executive Officer
SHAREHOLDERS:
--------------------------------------
Howard Schultz
--------------------------------------
Leslie Schultz, signing individually
as a Shareholder in respect of Asia
and signing for the purpose of
acknowledging the provisions of
Section 9.14 hereof in respect of
shares held by H. Schultz in Asia and
Singapore
--------------------------------------
Andrew H. Schultz
Andrew H. Schultz Irrevocable Trust
u/a dated May 1, 1997
By:
------------------------------------
Andrew H. Schultz
Sole Trustee
--------------------------------------
Nicole Malkoff Schultz, signing solely
for the purpose of acknowledging the
provisions of Section 9.14 hereof
LIST OF SCHEDULES AND EXHIBITS
Schedule 1.2 Allocation of Consideration
Schedule 2.1(a) Jurisdictions in which each Company is Organized
Schedule 2.1(b) Jurisdictions in which each Company is qualified as a
foreign corporation to do business
Schedule 2.2 Directors and Officers of Each Company
Schedule 2.3(a) Exceptions to Title to Assets
Schedule 2.5(a) Ownership of Capital Stock and Options
Schedule 2.7 Licenses and Permits
Schedule 2.8 Historical Statements
Schedule 2.9A Trade Payables and Accrued Expenses
Schedule 2.9B Other Debts, Obligation Guaranties and other Liabilities
Schedule 2.10 Subchapter S Effective Date and Status
Schedule 2.11(a) Information on Audits
Schedule 2.12(a) Material Contracts
Schedule 2.12(b)(1) Certain Representations re: Contracts
Schedule 2.13 Material Leases
Schedule 2.13(i) Equipment Leases and Location
Schedule 2.14(a-1)-(a-5) Key Clients Preliminary Information
Schedule 2.14(b-1)-(b-5) Key Clients Supplemental Information
Schedule 2.15(a)-(a)(iii) Employees
Schedule 2.15(b) Associates
Schedule 2.23 Litigation; Judgments
Schedule 2.24 Insurance
Schedule 2.27 Absence of Material Changes
Schedule 2.28 Certain Arrangements
Schedule 2.29 Bank Accounts
Schedule 3.2(a) PRGX Consents
Schedule 4.1(d) Estimated Financials
Exhibit 4.6 Agreement Regarding Nominee Shareholder
Exhibit 5.2(c)(iii) Registration Rights Agreement (See Asset Agreement Exhibits)
Exhibit 5.3(c)(iv) Certificate Regarding Redeemed Shares Held by Nominee
Shareholder
ANNEX C
(MERRILL LYNCH LETTERHEAD)
August 3, 2001
Board of Directors
The Profit Recovery Group International, Inc.
2300 Windy Ridge Parkway
Suite 100
Atlanta, Georgia 30339
Members of the Board of Directors:
The Profit Recovery Group International, Inc. (the "Acquiror"), Howard
Schultz & Associates International, Inc. ("HSAI" and, collectively with its
international affiliates referred to below, the "Company"), Howard Schultz ("H.
Schultz"), Andrew H. Schultz ("A. Schultz") and certain trusts identified on the
signature pages thereto have entered into an Agreement and Plan of
Reorganization, dated as of August 3, 2001 (the "Asset Purchase Agreement"), and
the Acquiror, H. Schultz, A. Schultz, Andrew H. Schultz Irrevocable Trust and
Leslie Schultz have entered into an Agreement and Plan of Reorganization, dated
as of August 3, 2001 (the "Stock Purchase Agreement" and, together with the
Asset Purchase Agreement, the "Agreements"). Pursuant to the Agreements, the
Acquiror will purchase substantially all of the assets of HSAI (the "Asset
Acquisition") and substantially all of the capital stock of certain
international affiliates of HSAI (the "Stock Purchase Acquisition") in exchange
for approximately 15.35 million shares of the common stock, no par value per
share, of the Acquiror (the "Acquiror Shares"), subject to adjustment as
provided in the Asset Purchase Agreement. The Asset Acquisition and the Stock
Purchase Acquisition, taken together, are referred to as the "Transaction," and
the aggregate consideration to be paid by the Acquiror pursuant to the
Transaction is referred to as the "Consideration." The terms of the Transaction
are more fully set forth in the Agreements.
You have asked us whether, in our opinion, the Consideration to be paid by
the Acquiror pursuant to the Transaction is fair from a financial point of view
to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror, as well as the amount and timing
of the cost savings and related expenses and synergies expected to result
from the Transaction (the "Expected Synergies") furnished to us by the
Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Acquiror concerning the matters described in clauses
1 and 2 above, as well as their respective businesses and prospects before
and after giving effect to the Transaction and the Expected Synergies;
(4) Reviewed the market prices and valuation multiples for the
Acquiror Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror
and compared them with those of certain publicly traded companies that we
deemed to be relevant;
C-1
(6) Participated in certain discussions and negotiations among
representatives of the Acquiror and their legal advisor;
(7) Reviewed the potential pro forma impact of the Transaction;
(8) Reviewed each of the Agreements, except for the disclosure
schedules thereto, which disclosure schedules have not been completed; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
As you are aware, we were not given the opportunity to conduct discussions
with the Company concerning any of the foregoing matters.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the Company
or the Acquiror. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the Acquiror, we have
assumed that they have been reasonably prepared and reflect the best currently
available estimates and judgment of the Acquiror's management as to the expected
future financial performance of the Company and the Acquiror and the Expected
Synergies. We have also assumed that the final forms of the disclosure schedules
to the Agreements will not contain any information materially adverse to our
analysis.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Transaction, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Transaction.
We are acting as financial advisor to the Acquiror in connection with the
Transaction and will receive a fee from the Acquiror for our services, a portion
of which is payable upon delivery of this opinion and the balance of which is
contingent upon the consummation of the Transaction. In addition, the Acquiror
has agreed to indemnify us for certain liabilities arising out of our
engagement. We have, in the past, provided financial advisory and financing
services to the Acquiror and/or its affiliates and may continue to do so and
have received, and may receive, fees for the rendering of such services. In
addition, in the ordinary course of our business, we may actively trade the
Acquiror Shares and other securities of the Acquiror, for our own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror in its evaluation of the Transaction and shall not be used for any
other purpose. Our opinion does not address the merits of the underlying
decision by the Acquiror to engage in the Transaction and does not constitute a
recommendation to any shareholder of the Acquiror as to how such shareholder
should vote on the proposed Transaction or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Transaction.
C-2
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be paid by the Acquiror pursuant to
the Transaction is fair from a financial point of view to the Acquiror.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
C-3
PROXY
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE SPECIAL MEETING ON JANUARY 24, 2002
The undersigned shareholder hereby appoints John M. Cook, Donald E. Ellis,
Jr., Clinton McKellar, Jr., or any of them, with full power of substitution, to
act as proxy for, and to vote the stock of, the undersigned at the Special
Meeting of Shareholders of The Profit Recovery Group International, Inc. ("PRG")
to be held on January 24, 2002, and any adjournments thereof. The undersigned
acknowledges receipt of this Notice of Special Meeting of Shareholders and Proxy
Statement, each dated December 19, 2001, and grants authority to said proxies,
or their substitutes, and ratifies and confirms all that said proxies may
lawfully do in the undersigned's name, place and stead. The undersigned
instructs said proxies to vote as indicated hereon.
THE PROXIES SHALL VOTE AS SPECIFIED ON THE REVERSE, OR IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSED SHARE AND OPTION ISSUANCES AND
EACH OF THE DIRECTOR NOMINEES.
Please Vote, Sign, Date and Return This Proxy Card Promptly Using the
Enclosed Envelope.
SEE REVERSE (Continued on the Reverse Side) SEE REVERSE
SIDE SIDE
[X] PLEASE MARK YOUR VOTE AS IN THIS SAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED SHARE
AND OPTION ISSUANCES AND
EACH OF THE DIRECTOR NOMINEES.
1. Approval of the proposed issuance by PRG of an aggregate of up to 15,353,846
shares of its common stock and options to purchase an indeterminate number of
shares of its common stock, not to exceed 1,678,826 shares, in connection
with the proposed acquisition by PRG of substantially all of the assets of
Howard Schultz & Associates International, Inc. ("HSA-Texas") and the
concurrent acquisition by PRG of substantially all of the outstanding stock
of HS&A International Pte Ltd. and all of the outstanding stock of Howard
Schultz & Associates (Asia) Limited, Howard Schultz & Associates (Australia),
Inc. and Howard Schultz & Associates (Canada), Inc., each an affiliated
foreign operating company of HSA-Texas; and pursuant to the terms of the
proposed acquisitions, the election of Howard Schultz and Andrew Schultz as
Class II directors, Nate Levine as a Class I director and Arthur Budge, Jr.
as a Class III director, conditioned upon closing of the proposed
acquisitions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Upon such other matters as may properly come before the meeting or any
adjournment or postponements thereof.
Dated:
--------------------------
--------------------------
Signature
--------------------------
Signature (if held
jointly)
--------------------------
Title(s)
(Shareholders should sign
exactly as name appears on
stock. Where there is more
than one owner, each
should sign. Executors,
Administrator, Trustees
and others signing in a
representative capacity
should so indicate.)