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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------
FORM 8-K/A
AMENDMENT NO. 1
---------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 24, 2002
---------------------
PRG-SCHULTZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
---------------------
COMMISSION FILE NUMBER 000-28000
GEORGIA 58-2213805
(State or other jurisdiction of (IRS Employer
incorporation) Identification No.)
2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
Registrant's telephone number including area code (770) 779-3900
(Former name or former address, if changed since last report) N/A
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PRG-SCHULTZ INTERNATIONAL, INC.
On February 5, 2002, PRG-Schultz International, Inc. ("PRG-Schultz") filed
with the Securities and Exchange Commission (the "Commission") a Report on Form
8-K (the "Initial 8-K Report") with respect to its acquisition on January 24,
2002 of substantially all the assets and assumption of certain liabilities of
Howard Schultz & Associates International, Inc. ("HSA-Texas"), and its
acquisitions 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. In accordance with Item 7(a)(4) of Form 8-K, the Initial 8-K Report
did not include the historical HSA-Texas audited combined financial statements
or the unaudited pro forma combined financial information of PRG-Schultz
(collectively, the "Financial Information") and instead contained an undertaking
to file the Financial Information with the Commission in an amendment to the
Initial 8-K Report as soon as practicable, but not later than April 9, 2002.
This amendment is being filed for the purpose of satisfying the Registrant's
undertaking to file the Financial Information, and this amendment should be read
in conjunction with the Initial 8-K Report.
Additionally, on January 24, 2002, PRG-Schultz's Board of Directors
approved a proposal to retain Meridian VAT Reclaim, the Communications Services
business and the Ship & Debit business, each of which were formerly reported as
part of discontinued operations. As a result, beginning in the first quarter of
2002, the financial results of these three businesses have been classified as
part of PRG-Schultz's continuing operations and based on their anticipated size
with respect to PRG-Schultz's operations taken as a whole, will be reported in a
separate reportable segment called Other Ancillary Services. Pro Forma financial
information presenting the classification of these businesses as part of
continuing operations as of and for the three years ended December 31, 2001 has
been included in this Form 8-K/A.
In addition, PRG-Schultz is filing its Amended and Restated Bylaws as an
Exhibit to this Form 8-K/A. The Amended and Restated Bylaws filed herewith
supersede and replace those filed as Exhibit 3.2 to PRG-Schultz's Form 10-K for
the year ended December 31, 2001, which Exhibit was filed in error.
ITEM 5. OTHER EVENTS
PRG-Schultz's Amended and Restated Bylaws are filed as Exhibit 99.1 hereto.
In March 2001, PRG-Schultz formalized a strategic realignment initiative
designed to enhance PRG-Schultz'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-Schultz announced its
intent to divest the following non-core businesses: Meridian VAT Reclaim
("Meridian") within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable Services
segment. PRG-Schultz disposed of its Logistics Management Services segment in
October 2001. During the third quarter of 2001, PRG-Schultz concluded that one
of the units within the Communications Services business was no longer a viable
operation and closed the unit. Additionally, in December 2001, PRG-Schultz
disposed of its French Taxation Services business which had been part of
continuing operations until the time of disposal.
Meridian, the Communications Services business, and the Ship & Debit
business were originally offered for sale in the first quarter of 2001.
PRG-Schultz has concluded that the current negative market conditions are not
conducive to receiving terms acceptable to PRG-Schultz for these businesses. As
such, on January 24, 2002, PRG-Schultz's Board of Directors approved a proposal
to retain these three remaining discontinued operations. As a result, beginning
in the first quarter of 2002, the financial results of these three businesses
will be classified as part of the PRG-Schultz continuing operations and based on
their anticipated size with respect to PRG-Schultz's operations taken as a
whole, will be reported in a separate reportable segment called Other Ancillary
Services.
1
On pages 3 through 12 herein, PRG-Schultz has reclassified its historical
consolidated financial statements as of December 31, 2001 and for each of the
years in the three-year period ended December 31, 2001 on an unaudited pro forma
basis to reflect Meridian, the Communications Services business, and the Ship &
Debit business (collectively reported as Other Ancillary Services) as continued
operations.
The pro forma financial statements are set forth in this Form 8-K, as
indexed below:
PAGE
----
Introduction To Unaudited Pro Forma Combined Financial
Statements................................................ 3
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 2001.............................. 5
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 2000.............................. 6
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1999.............................. 7
Unaudited Pro Forma Combined Balance Sheet as of December
31, 2001.................................................. 8
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ 9
The unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 2001 also gives effect to the acquisitions of HSA-Texas and
affiliates as if the acquisitions had occurred on January 1, 2001. The unaudited
Pro Forma Combined Balance Sheet also gives effect to the acquisitions as if
they had occurred on December 31, 2001.
2
THE PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2001, 2000 AND 1999
In March 2001, PRG-Schultz International, Inc. ("PRG-Schultz"), f/k/a The
Profit Recovery Group International, Inc., formalized a strategic realignment
initiative designed to enhance PRG-Schultz'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-Schultz
announced its intent to divest the following non-core businesses: Meridian VAT
Reclaim ("Meridian") within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable Services
segment. PRG-Schultz disposed of its Logistics Management Services segment in
October 2001. During the third quarter of 2001, PRG-Schultz concluded that one
of the units within the Communications Services business was no longer a viable
operation and closed the unit. Additionally, in December 2001, PRG-Schultz
disposed of its French Taxation Services business which had been part of
continuing operations until the time of disposal.
Meridian, the Communications Services business, and the Ship & Debit
business were originally offered for sale in the first quarter of 2001.
PRG-Schultz has concluded that the current negative market conditions are not
conducive to receiving terms acceptable to the Company for these businesses. As
such, on January 24, 2002, PRG-Schultz's Board of Directors approved a proposal
to retain these three remaining discontinued operations. The pro forma
statements of operations information has been reclassified to reflect these
three retained businesses as part of PRG-Schultz's continuing operations in a
separate reportable segment called Other Ancillary Services. Grouping these
three businesses into a single reportable segment is based on their anticipated
size with respect to PRG-Schultz's operations taken as a whole.
On January 24, 2002, PRG-Schultz acquired substantially all the assets and
assumed certain liabilities of Howard Schultz & Associates International, Inc.
("HSA-Texas"), and 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, 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
acquisitions. 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. See "Item 7.
Financial Statements and Exhibits."
The following unaudited pro forma combined financial statements present
financial information giving effect to the reclassification of Other Ancillary
Services to PRG-Schultz's continuing operations and to the acquisitions of
HSA-Texas and affiliates under purchase accounting. The unaudited pro forma
combined balance sheet as of December 31, 2001 is presented as if
reclassification of Other Ancillary Services to PRG-Schultz's continuing
operations and the acquisitions had occurred as of that date. The unaudited pro
forma combined statement of operations for the year ended December 31, 2001 is
presented as if the reclassification of Other Ancillary Services to
PRG-Schultz's continuing operations and the acquisitions had been completed as
of January 1, 2001. The unaudited pro forma consolidated statements of
operations for the years ended December 31, 2000 and 1999 are presented as if
the reclassification of Other Ancillary Services to PRG-Schultz's continuing
operations had been completed as of the beginning of the year presented.
The unaudited pro forma combined financial statements reflect certain
assumptions deemed probable by PRG-Schultz's management regarding the purchase.
The total estimated purchase cost of the 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-Schultz's audited Consolidated Financial Statements and
Notes thereto from PRG-Schultz's Annual Report on Form 10-K for the year
3
THE PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2001, 2000 AND 1999
ended December 31, 2001 and HSA-Texas' audited Combined Financial Statements and
Notes thereto included herein. 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-Schultz'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-Schultz's results of operations or
financial position for any future period or date.
On November 26, 2001, PRG-Schultz completed 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-Schultz received net proceeds from the offering
of approximately $121.1 million. The proceeds of the notes were used to pay down
PRG-Schultz's outstanding balance under its senior bank credit facility. The
coupon on the convertible notes of 4 3/4% is slightly favorable to the weighted
average interest rate incurred on PRG-Schultz's senior credit facility. The
effect of these notes upon the earnings per share calculations for the periods
presented is antidilutive and as such has not been included in the pro forma
adjustments.
4
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
PRG- PRG-
SCHULTZ SCHULTZ
ACCOUNTS OTHER PRO FORMA
PAYABLE ANCILLARY HSA- ---------------------------
SERVICES SERVICES (A) SUBTOTAL TEXAS ADJUSTMENTS COMBINED
-------- ------------- -------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues....................... $259,264 $54,761 $314,025 $143,108 $ -- $457,133
Cost of revenues............... 141,442 39,077 180,519 91,229 -- 271,748
Selling, general and
administrative expenses...... 101,915 14,385 116,300 48,028 (4,116)(B)(C) 160,212
Exit costs..................... -- -- -- 2,353 -- 2,353
-------- ------- -------- -------- -------- --------
Operating income............. 15,907 1,299 17,206 1,498 4,116 22,820
Interest (expense), net........ (4,980) (3,923) (8,903) (3,071) 734(D) (11,240)
Settlement of litigation....... -- -- -- 3,650 -- 3,650
Other income (expense), net.... -- -- -- 218 (218)(E) --
-------- ------- -------- -------- -------- --------
Earnings (loss) from
continuing operations
before income taxes........ 10,927 (2,624) 8,303 2,295 4,632 15,230
Income tax expense (benefit)... 4,808 (424) 4,384 123 3,108(F) 7,615
-------- ------- -------- -------- -------- --------
Earnings (loss) from
continuing operations...... $ 6,119 $(2,200) $ 3,919 $ 2,172 $ 1,524 $ 7,615
======== ======= ======== ======== ======== ========
Basic earnings per
share-earnings from
continuing operations........ $ 0.13 $ 0.08 $ 0.12
======== ======== ========
Diluted earnings per
share-earnings from
continuing operations........ $ 0.12 $ 0.08 $ 0.12
======== ======== ========
Denominator:
Denominator for basic
earnings per
share-weighted-average
shares outstanding......... 48,298 48,298 14,760 63,058
Effect of dilutive
securities -- employee
stock options.............. 435 435 525 960
-------- -------- -------- --------
Denominator for diluted
earnings.............. 48,733 48,733 15,285 64,018
======== ======== ======== ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
5
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2000
PRG-SCHULTZ PRG-SCHULTZ
ACCOUNTS PAYABLE OTHER ANCILLARY
SERVICES SERVICES(A) PRO FORMA
---------------- --------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.............................................. $255,110 $46,970 $302,080
Cost of revenues...................................... 139,430 38,293 177,723
Selling, general and administrative expenses.......... 100,435 5,600 106,035
-------- ------- --------
Operating income.................................... 15,245 3,077 18,322
Interest (expense), net............................... (5,270) (2,319) (7,589)
-------- ------- --------
Earnings from continuing operations before income
taxes............................................ 9,975 758 10,733
Income taxes.......................................... 4,389 1,407 5,796
-------- ------- --------
Earnings (loss) from continuing operations.......... $ 5,586 $ (649) $ 4,937
======== ======= ========
Basic earnings per share-earnings from continuing
operations.......................................... $ 0.11 $ 0.10
======== ========
Diluted earnings per share-earnings from continuing
operations.......................................... $ 0.11 $ 0.10
======== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding..... 48,871 48,871
Effect of dilutive securities:
Shares issuable for acquisition earnout.......... 201 201
Employee stock options........................... 737 737
-------- --------
Denominator for diluted earnings............... 49,809 49,809
======== ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
6
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
PRG- PRG-
SCHULTZ SCHULTZ
ACCOUNTS OTHER
PAYABLE ANCILLARY
SERVICES SERVICES(A) PRO FORMA
--------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................................... $246,378 $40,967 $287,345
Cost of revenues............................................ 132,115 23,211 155,326
Selling, general and administrative expenses................ 78,757 17,988 96,745
-------- ------- --------
Operating income (loss)................................... 35,506 (232) 35,274
Interest (expense), net..................................... (2,234) (2,096) (4,330)
-------- ------- --------
Earnings (loss) from continuing operations before income
taxes.................................................. 33,272 (2,328) 30,944
Income taxes................................................ 13,642 (336) 13,306
-------- ------- --------
Earnings (loss) from continuing operations................ $ 19,630 $(1,992) $ 17,638
======== ======= ========
Basic earnings per share-earnings from continuing
operations................................................ $ 0.41 $ 0.37
======== ========
Diluted earnings per share-earnings from continuing
operations................................................ $ 0.40 $ 0.36
======== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding........... 47,498 47,498
Effect of dilutive securities -- employee stock options... 1,882 1,882
-------- --------
Denominator for diluted earnings..................... 49,380 49,380
======== ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
7
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2001
PRG- PRG-
SCHULTZ SCHULTZ
ACCOUNTS OTHER PRO FORMA
PAYABLE ANCILLARY --------------------------
SERVICES SERVICES(G) SUBTOTAL HSA-TEXAS ADJUSTMENT COMBINED
-------- ----------- -------- --------- ---------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 28,488 $ 4,846 $ 33,334 $10,533 $(31,462)(H) $ 12,405
Receivables:
Contract receivables.............................. 48,374 4,477 52,851 22,972 -- 75,823
Employee advances and miscellaneous receivables... 4,013 (92) 3,921 882 -- 4,803
-------- -------- -------- ------- -------- --------
Total receivables............................. 52,387 4,385 56,772 23,854 -- 80,626
-------- -------- -------- ------- -------- --------
Funds held for client obligations................... -- 8,784 8,784 -- -- 8,784
Prepaid expenses and other current assets........... 2,073 2,787 4,860 1,620 -- 6,480
Deferred income taxes............................... 23,357 (2,086) 21,271 -- 7,000(I) 28,271
Net assets of discontinued operations............... 35,840 (35,840) -- -- -- --
-------- -------- -------- ------- -------- --------
Total current assets.......................... 142,145 (17,124) 125,021 36,007 (24,462) 136,566
-------- -------- -------- ------- -------- --------
Property and equipment:
Computer and other equipment........................ 44,321 8,078 52,399 14,367 (13,551)(I) 53,215
Furniture and fixtures.............................. 3,318 2,040 5,358 1,487 (912)(I) 5,933
Land and buildings.................................. -- -- -- 4,715 (4,715)(H)(I) --
Leasehold improvements.............................. 4,524 2,831 7,355 1,649 (1,489)(H)(I) 7,515
-------- -------- -------- ------- -------- --------
52,163 12,949 65,112 22,218 (20,667) 66,663
Less accumulated depreciation and amortization...... 31,921 8,662 40,583 10,102 (10,102) 40,583
-------- -------- -------- ------- -------- --------
Property and equipment, net....................... 20,242 4,287 24,529 12,116 (10,565) 26,080
-------- -------- -------- ------- -------- --------
Noncompete agreements................................ 120 68 188 -- -- 188
Deferred loan costs.................................. 875 -- 875 -- -- 875
Goodwill............................................. 160,248 36,572 196,820 40,425 155,143(I) 392,388
Intangible assets.................................... -- -- -- -- 39,310(I) 39,310
Deferred income taxes................................ 9,235 10,813 20,048 -- --(I) 20,048
Other assets......................................... 8,594 2,244 10,838 824 (7,979)(I) 3,683
-------- -------- -------- ------- -------- --------
Total assets.................................. $341,459 $ 36,860 $378,319 $89,372 $151,447 $619,138
======== ======== ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................... $ -- $ 11,564 $ 11,564 $ -- $ -- $ 11,564
Current installments of long-term debt.............. -- 20 20 16,740 (4,634)(H)(I) 12,126
Obligation for client payables...................... -- 8,784 8,784 -- -- 8,784
Lease obligations -- current........................ -- -- -- 718 800(I) 1,518
Accounts payable and accrued expenses............... 21,709 5,968 27,677 6,558 527(I)(J) 34,762
Accrued payroll and related expenses................ 26,465 5,943 32,408 11,962 1,500(I) 45,870
Accrued sales refund................................ -- -- -- 3,550 400 3,950
Accrued buydown liability........................... -- -- -- -- 7,650(I) 7,650
Deferred revenue.................................... -- 4,581 4,581 2,356 1,000(I) 7,937
Other current liabilities........................... -- -- -- 115 -- 115
-------- -------- -------- ------- -------- --------
Total current liabilities..................... 48,174 36,860 85,034 41,999 7,243 134,276
Long-term debt, excluding current installments....... -- -- -- 36,327 (23,342)(H)(I) 12,985
Convertible notes, net............................... 121,166 -- 121,166 -- -- 121,166
Lease obligations, excluding current installments.... -- -- -- 766 400(I) 1,166
Deferred income taxes................................ -- -- -- -- 15,000(I) 15,000
Deferred compensation................................ 4,024 -- 4,024 -- -- 4,024
-------- -------- -------- ------- -------- --------
Total liabilities............................. 173,364 36,860 210,224 79,092 (699) 288,617
-------- -------- -------- ------- -------- --------
Common stock put options............................. -- -- -- 2,566 (2,566) --
Shareholders' equity:................................ --
Preferred stock..................................... -- -- -- -- -- --
Common stock........................................ 51 -- 51 697 (682)(I) 66
Additional paid-in capital.......................... 320,126 -- 320,126 6,773 152,974(I) 479,873
Accumulated deficit................................. (123,746) -- (123,746) (132) 132(I) (123,746)
Accumulated other comprehensive loss................ (6,385) -- (6,385) 376 2,288(I)(J) (3,721)
Less treasury stock at cost......................... (21,024) -- (21,024) -- -- (21,024)
Unearned portion of restricted stock................ (927) -- (927) -- -- (927)
-------- -------- -------- ------- -------- --------
Total shareholders' equity.................... 168,095 -- 168,095 7,714 154,712 330,521
-------- -------- -------- ------- -------- --------
Total liabilities and shareholders' equity.... $341,459 $ 36,860 $378,319 $89,372 $151,447 $619,138
======== ======== ======== ======= ======== ========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
8
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations give effect to
the acquisitions of HSA-Texas and affiliates as if they had occurred at January
1, 2001 and the discontinued operations retained, as discussed in Note 1(A), as
if their operations had been a part of continuing operations since January 1,
1999 as applicable. The following adjustments have been reflected in the
unaudited pro forma combined statements of operations:
(A) Meridian, the Communications Services business, and the Ship &
Debit business were originally offered for sale in March 2001. PRG-Schultz
has concluded that the current negative market conditions are not conducive
to receiving terms acceptable to the Company for these businesses. As such,
on January 24, 2002, PRG-Schultz's Board of Directors approved a proposal
to retain these three remaining discontinued operations. The pro forma
combined statements of operations information has been reclassified to
reflect theses businesses as part of PRG-Schultz's continuing operations in
a separate reportable segment called Other Ancillary Services, based on
their anticipated size with respect to PRG-Schultz's operations taken as a
whole.
(B) Adjustment to remove depreciation and amortization expense in
order to reflect only the ongoing impact of assets acquired.
(C) To record the application of purchase accounting, and the
amortization of identifiable finite life intangible and tangible assets.
The pro forma adjustments assume that the estimated purchase price of
$170.3 million will be allocated to goodwill and other identifiable
intangible and tangible assets. In accordance with SFAS No. 142 guidance,
goodwill will not be amortized but instead 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 were determined at the date of closing of the
acquisitions based on the facts and circumstances existing at that date.
Pro forma adjustments B and C are as follows (in thousands):
YEAR ENDED
DECEMBER 31, 2001
-----------------
Adjustment B:
Depreciation on building and leasehold improvements not
acquired and reduction of depreciation expense for
write-down of fixed assets to their estimated fair
value.................................................. $(2,407)
Adjustment C:
Eliminate amortization of goodwill on HSA-Texas'
historical books....................................... (5,703)
Amortization of intangible assets with estimated useful
lives.................................................. 3,195
Other:
Addition of compensation expense for Howard Schultz.... 400
Incremental rental expense for HSA-Texas owned building
not acquired.......................................... 617
Reclassification for HSA-Texas financial statements to
conform with PRG-Schultz's financial statement
presentation format................................... (218)
-------
Total pro forma adjustments............................ $(4,116)
=======
(D) To eliminate interest expense related to the loans that were not
assumed by PRG-Schultz as a result of the acquisition.
9
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(E) To reflect reclassification of HSA-Texas' other income (expense)
to selling, general and administrative expenses to conform with
PRG-Schultz's financial statement presentation.
(F) 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 2001 period.
NOTE 2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following adjustments were reflected in the unaudited pro forma
combined balance sheet:
(G) Meridian, the Communications Services business, and the Ship &
Debit business were originally offered for sale in March 2001. PRG-Schultz
has concluded that the current negative market conditions are not conducive
to receiving terms acceptable to the Company for these businesses. As such,
on January 24, 2002, PRG-Schultz's Board of Directors approved a proposal
to retain these three remaining discontinued operations. The pro forma
combined balance sheet gives effect to the reclassification of theses
businesses as part of PRG-Schultz's continuing operations in a separate
reportable segment called Other Ancillary Services, based on their
anticipated size with respect to PRG-Schultz's operations taken as a whole.
(H) To eliminate HSA-Texas assets not acquired and HSA-Texas
liabilities not assumed and to reflect cash paid at closing to retire
certain HSA-Texas debt.
(I) To record common stock and options issued to HSA-Texas and the
application of purchase accounting. The total purchase price consists of
approximately 14.8 million shares of PRG-Schultz's common stock with an
estimated fair value of approximately $154.8 million, 1.1 million fully
vested options to purchase PRG-Schultz's common stock with an estimated
fair value of approximately $5.0 million, and estimated direct transaction
costs of approximately $10.6 million. The fair value of PRG-Schultz's
common stock was determined in accordance with EITF No. 99-12 guidance as
the average closing price per share from July 24, 2001 to July 28, 2001,
which was $10.482. PRG-Schultz announced the transaction on July 26, 2001.
The fair value of fully vested PRG-Schultz 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................................ 159,747
Transaction costs......................................... 10,570
--------
Total estimated purchase price.................... $170,332
========
The allocation of the estimated purchase price is as follows (in
thousands):
Tangible assets acquired.................................... $ 38,923
Liabilities assumed......................................... (103,469)
---------
Net liabilities assumed................................... (64,546)
Allocation of purchase price to:
Intangible assets......................................... 39,310
Goodwill.................................................. 195,568
---------
Total estimated purchase price.................... $ 170,332
=========
10
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The identified tangible and intangible assets likely to be recognized are
as follows (in thousands):
Tangible assets:
Cash...................................................... $ 4,073
Total receivables......................................... 22,972
Net current deferred tax asset............................ 7,000
Property and equipment.................................... 1,551
Other..................................................... 3,327
-------
Total tangible assets............................. $38,923
=======
ESTIMATED
VALUE USEFUL LIFE
-------------- -----------
(IN THOUSANDS)
Intangible assets:
Customer relationships.................................... $27,700 20 years
Trade name................................................ 9,600 Indefinite
Unrecognized customer revenue............................. 1,610 2 months
Employee agreements....................................... 400 2 years
-------
Total intangible assets........................... $39,310
=======
Customer Relationships: The value of the customer relationships represents
the present value of the future cash flows attributable to HSA-Texas' existing
customers based on historical margins.
The average remaining life was derived from the historical attrition rate
of HSA-Texas' 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.
HSA-Texas and its affiliates were industry pioneers in providing recovery
audit services, and their trade names of "Howard Schultz & Associates
International" and "Howard Schultz & Associates" had worldwide recognition. In
an effort to leverage this worldwide trade name recognition, effective with the
acquisitions of HSA-Texas and affiliates on January 24, 2002, The Profit
Recovery Group International, Inc., changed its name to PRG-Schultz
International, Inc. The combined organization expects to enjoy an increase in
trade name recognition with the inclusion of a derivation of the former
HSA-Texas trade names. The expectation is that the combined business leveraging
this trade name will continue indefinitely as a going concern. There are no
current plans to change or modify the name; therefore, the trade name has 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, PRG-Schultz
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
11
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The adjustments to computer and other equipment, leasehold improvements and
accumulated depreciation noted in adjustment I to the unaudited pro forma
combined balance sheet are to retire assets which will not be utilized by the
Company and to record the remaining assets that will be used by the Company 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, obligations owed to
HSA-Texas independent contractors, and a provision for lease payments for
duplicate HSA-Texas facilities that will be closed. Additionally, adjustments to
liabilities include an estimate of costs incurred to complete the acquisitions,
the payments of which were conditional upon the successful closing of the
acquisitions.
The number of shares to be issued was calculated at an average price per
share of PRG-Schultz's common stock of $9.036 pursuant to the acquisition
agreement.
Pursuant to EITF No. 99-12, the transaction was valued at a per share
amount of $10.482, the average closing price per share of PRG-Schultz's 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 was allocated to the
acquired assets based upon their fair values. PRG-Schultz 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-Schultz expects to amortize intangible assets with finite
useful lives over their respective estimated useful lives to their estimated
residual values, and review them for impairment in accordance with SFAS No. 121.
PRG-Schultz expects to amortize tangible assets over their estimated useful
lives.
(J) To record the legal dissolution of certain operating companies that
were part of PRG-Schultz's French Taxation Services business.
12
PRG-SCHULTZ INTERNATIONAL, INC.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
PAGE
----
(a) HSA-Texas Audited Financial Statements:
Index to Audited Financial Statements....................... F-1
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of December 31, 2001 and 2000.... F-3
Combined Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... F-4
Combined Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999.................... F-5
Combined Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... F-6
Notes to Combined Financial Statements...................... F-7
(b) Pro Forma Financial Information:
The required pro forma financial information is incorporated
by reference to the Unaudited Pro Forma Combined Statement
of Operations for the year ended December 31, 2001 and the
Unaudited Pro Forma Combined Balance Sheet as of December
31, 2001 and Notes thereto contained in Item 5 above.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Agreement and Plan of Reorganization, dated as of December
11, 2001, among The Profit Recovery Group International,
Inc., Howard Schultz & Associates International, Inc.,
Howard Schultz, Andrew H. Schultz and certain trusts
(incorporated by reference to Annex A to the Registrant's
definitive proxy statement filed on December 20, 2001).
2.2* Agreement and Plan of Reorganization pursuant to Section
368(a)(1)(B) of the Internal Revenue Code dated as of
December 11, 2001 among The Profit Recovery Group
International, Inc., Howard Schultz, Andrew H. Schultz,
Andrew H. Schultz Irrevocable Trust and Leslie Schultz
(incorporated by reference to Annex B to the Registrant's
definitive proxy statement filed on December 20, 2001).
23.1** Consent of KPMG LLP
99.1** Amended and Restated Bylaws of the Registrant.
---------------
* In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is contained at the end
of the Exhibit. PRG-Schultz will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
** Filed herewith.
13
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, 2001 and 2000.... F-3
Combined Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... F-4
Combined Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999.................... F-5
Combined Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... F-6
Notes to Combined Financial Statements...................... F-7
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, 2001 and 2000,
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,
2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 1 to the combined financial statements, effective July
1, 2001, Howard Schultz & Associates International, Inc. adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and certain provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, as required for goodwill and intangible assets resulting from
business combinations consummated after June 30, 2001.
KPMG LLP
March 1, 2002
F-2
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
2001 2000
------- ------
ASSETS
Current assets:
Cash and cash equivalents................................. $10,533 2,179
Accounts receivable, net.................................. 22,972 16,794
Commission advances, net.................................. 882 2,058
Principal associate advance............................... -- 550
Prepaid expenses and other current assets................. 1,620 1,512
------- ------
Total current assets.............................. 36,007 23,093
Property and equipment, net (notes 4 and 7)................. 12,116 11,781
Goodwill, net (notes 3 and 5)............................... 40,425 25,226
Other assets................................................ 824 768
------- ------
Total assets...................................... $89,372 60,868
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 771 3,529
Accrued compensation...................................... 1,106 1,868
Accrued commissions and royalties......................... 10,856 9,543
Accrued sales refunds..................................... 3,550 1,150
Deferred revenue.......................................... 2,356 --
Other accrued expenses.................................... 5,787 3,506
Notes payable, current portion (note 6)................... 16,740 6,422
Capital lease obligations, current portion (note 7)....... 718 620
Other current liabilities................................. 115 124
------- ------
Total current liabilities......................... 41,999 26,762
Notes payable, net of current portion (note 6).............. 36,327 30,074
Capital lease obligations, net of current portion (note
7)........................................................ 766 1,388
------- ------
Total liabilities................................. 79,092 58,224
------- ------
Common stock put options (note 11).......................... 2,566 2,458
------- ------
Stockholders' equity (note 11):
Common stock.............................................. 7,470 2,102
Accumulated deficit....................................... (132) (2,129)
Accumulated other comprehensive income.................... 376 213
------- ------
Total stockholders' equity........................ 7,714 186
Commitments and contingencies (notes 7 and 16)
Total liabilities and stockholders' equity........ $89,372 60,868
======= ======
See accompanying notes to combined financial statements.
F-3
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
2001 2000 1999
-------- ------- -------
Revenues, net............................................... $143,108 138,708 133,789
Cost of revenues............................................ 91,229 91,222 94,071
Selling, general, and administrative expenses............... 48,028 48,324 37,760
Exit costs (note 17)........................................ 2,353 -- --
-------- ------- -------
Operating income (loss)................................... 1,498 (838) 1,958
-------- ------- -------
Interest income............................................. 244 425 462
Interest expense............................................ (3,315) (3,363) (2,705)
Settlement of litigation (note 16).......................... 3,650 -- --
Other income (expense), net (note 9)........................ 218 47 (33)
-------- ------- -------
Interest and other income (expense), net.................. 797 (2,891) (2,276)
-------- ------- -------
Income (loss) before income taxes......................... 2,295 (3,729) (318)
Income tax expense (note 8)................................. (123) -- --
-------- ------- -------
Net income (loss)......................................... $ 2,172 (3,729) (318)
======== ======= =======
See accompanying notes to combined financial statements.
F-4
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
RETAINED ACCUMULATED
EARNINGS OTHER TOTAL
COMMON (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK DEFICIT) INCOME EQUITY
------- ------------ ------------- -------------
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
Comprehensive income:
Net income................................. -- 2,172 -- 2,172
Foreign currency translation adjustment.... -- -- 163 163
------
Total comprehensive income......... 2,335
Distributions to stockholders................ -- (175) -- (175)
Issuance of common stock..................... 5,368 -- -- 5,368
------ ------ ---- ------
Balance at December 31, 2001................. $7,470 (132) 376 7,714
====== ====== ==== ======
See accompanying notes to combined financial statements.
F-5
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
2001 2000 1999
------- ------ ------
Cash flows from operating activities:
Net income (loss).......................................... $ 2,172 (3,729) (318)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 8,892 8,074 5,494
Noncash interest expense................................. 265 637 570
Noncash stock compensation expense....................... 108 1,247 1,211
Exit costs............................................... 2,353 -- --
Changes in assets and liabilities, net of working capital
from acquisitions:
Accounts receivable, net............................... 428 (3,751) 7,350
Prepaid expenses and other current assets.............. (1,251) (38) 318
Principal associate advances........................... 550 (550) --
Commission advances.................................... 1,176 (587) (789)
Other assets........................................... (58) 1,143 (2,133)
Accrued sales refunds.................................. 2,400 1,150 200
Accounts payable and other accrued expenses............ (8,009) 4,646 (127)
Accrued commissions and royalties...................... 1,313 2,149 (2,779)
Accrued compensation................................... (822) 856 1,012
Other current liabilities.............................. (9) (138) 262
Deferred revenue....................................... 2,356 -- --
------- ------ ------
Net cash provided by operating activities............ 11,864 11,109 10,271
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment......................... (1,825) (5,858) (2,181)
Acquisitions of businesses................................. (96) (617) (1,123)
Other...................................................... 24 (476) (376)
------- ------ ------
Net cash used in investing activities................ (1,897) (6,951) (3,680)
------- ------ ------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net............... 5,457 3,272 2,336
Principal payments on notes payable........................ (6,338) (7,027) (7,065)
Principal payments on capital lease obligations............ (548) (404) --
Distributions to stockholders.............................. (175) (1,470) --
Net loans repaid by (provided to) stockholders............. (9) (260) 68
------- ------ ------
Net cash used in financing activities................ (1,613) (5,889) (4,661)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents.......................................... 8,354 (1,731) 1,930
Cash and cash equivalents at beginning of the year.......... 2,179 3,910 1,980
------- ------ ------
Cash and cash equivalents at the end of the year............ $10,533 2,179 3,910
======= ====== ======
Supplemental disclosures of noncash investing and financing
activities:
In conjunction with the acquisition of businesses:
Fair value of assets acquired............................ $32,119 10,220 8,612
Liabilities assumed...................................... 10,076 -- --
Cash paid................................................ 96 617 1,123
Notes payable to seller.................................. 16,579 9,320 7,489
Common stock issued...................................... 5,368 -- --
Release of funds escrowed in 1999........................ -- 400 --
Other notes payable to third parties..................... -- -- 981
Issuance of capital lease obligation for the purchase of
equipment................................................ $ 24 1,975 437
======= ====== ======
Cash paid for -- interest.................................. $ 2,269 2,553 2,208
======= ====== ======
See accompanying notes to combined financial statements.
F-6
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(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. (HS&A), 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), HS&A Acquisition-U.K., Inc. (HS&A UK), and
companies that were under majority common control and ownership by the
controlling stockholders/family members of HS&A, 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. (HS&A
Canada), Howard Schultz & Associates (Australia) Inc. (HS&A Australia), HS&A
International Pte Ltd. (Singapore), and Howard Schultz & Associates (Asia)
Limited (HS&A 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 approximately 16 other countries.
Certain reclassifications have been made to 2000 and 1999 amounts to
conform to the presentation in 2001.
(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. A material estimate
that is particularly susceptible to change is the estimation of accrued sales
refunds.
(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.
F-7
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For new recovery audit services for which there is significant uncertainty
as to the realization of amounts invoiced, revenues are deferred until final
approval by both the Company's clients and the vendors involved. For all other
recovery audit operations, the Company recognizes revenue when it invoices
clients for its fees.
(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 $4,024,000 and $86,000 at December 31, 2001 and 2000,
respectively.
(E) COMMISSIONS 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 3 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 the
Company's auditors who are employees, 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 nonheadquarters
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 recorded as of December 31,
2001 related to acquisitions on or before June 30, 2001 is being amortized on a
straight-line basis over estimated useful lives ranging from five to seven
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.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, effective July 1, 2001, and
certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as
required for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001. Goodwill acquired in a business combination
completed after June 30, 2001 is not amortized. Goodwill acquired in business
combinations completed before July 1, 2001 continued to
F-8
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
be amortized. The effect of adopting these provisions was to reduce amortization
of goodwill by $789,000 for the year ended December 31, 2001.
(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.
(J) INCOME TAXES
HS&A, HS&A 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 entities included in the combined
financial statements of the Company 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.
(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 of America. 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) STOCK-BASED COMPENSATION
Stock-based compensation expense is recorded on the date of grant only if
the fair value of the underlying stock exceeds the exercise price on that date.
The Company discloses the pro forma impact as if the stock-based compensation
were issued at fair value.
(2) MERGER
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 HS&A through the issuance of 3,716 shares of HS&A 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 using an "as if" pooling-of-interests method of
accounting, which combines the entities at historical cost.
(3) ACQUISITIONS
In 2000 and 2001, the Company made a significant number of acquisitions of
businesses that provide similar services as the Company. The majority of these
businesses served as either independent contractors or licensees to the Company.
The acquisitions were accounted for using the purchase method of accounting and,
F-9
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 and intangible assets acquired
based on the estimated fair market values at the dates of acquisition.
Additionally, certain seller notes issued in connection with the
acquisitions were at below-market rates of interest, which were discounted to
record them at fair value. The discount effectively decreased the total purchase
price of each acquisition. The Company incurred no significant direct costs of
acquisition. The acquisitions were made to consolidate these businesses and to
gain synergies and economies of scale related to the sharing of resources,
customers, intellectual capital, and systems. A summary of the businesses
acquired follows (dollars in thousands):
YEARS ENDED
DECEMBER 31,
-----------------
2001 2000
-------- ------
Number of businesses acquired............................... 4 3
Aggregate purchase price:
Cash...................................................... $ 96 900
Notes payable............................................. 16,579 9,320
Common stock.............................................. 5,368 --
-------- ------
Total purchase price.............................. $ 22,043 10,220
======== ======
Purchase price allocation:
Net tangible assets....................................... $ 10,360 477
Liabilities assumed....................................... (10,076) --
Goodwill.................................................. 21,759 9,743
-------- ------
$ 22,043 10,220
======== ======
Unaudited pro forma operating results as though the acquisitions discussed
above had occurred at the beginning of each period presented, 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,
------------------
2001 2000
-------- -------
Revenues.................................................... $167,173 160,942
Operating income............................................ 3,061 295
Net income (loss)........................................... 3,026 (3,642)
F-10
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment, which includes assets under capital leases, at
December 31, 2001 and 2000 consists of the following (in thousands):
2001 2000
------- ------
Land........................................................ $ 1,045 1,045
Building.................................................... 3,670 3,670
Leasehold improvements...................................... 1,649 1,336
Equipment................................................... 13,385 11,087
Furniture and fixtures...................................... 1,487 618
Software.................................................... 982 938
------- ------
22,218 18,694
Less accumulated depreciation and amortization.............. 10,102 6,913
------- ------
Net property and equipment........................ $12,116 11,781
======= ======
Depreciation expense for the years ended December 31, 2001, 2000, and 1999
was approximately $3,408,000, $2,556,000, and $1,176,000, 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, 2001 and 2000 (in
thousands):
2001 2000
------- ------
Goodwill.................................................... $60,212 39,907
Less accumulated amortization............................. 19,787 14,681
------- ------
$40,425 25,226
======= ======
Amortization expense for the years ended December 31, 2001, 2000, and 1999
was approximately $5,703,000, $5,518,000 and $4,318,000, respectively.
(6) NOTES PAYABLE
Notes payable at December 31, 2001 and 2000 are summarized as follows (in
thousands):
2001 2000
------- ------
Notes payable -- acquisition related........................ $26,602 17,516
Notes payable -- acquisition related, due to current
employees................................................. 12,256 9,026
Notes payable -- banks...................................... 3,334 3,427
Note payable -- stockholder................................. 10,350 5,050
Notes payable -- other...................................... 525 1,477
------- ------
Total notes payable............................... 53,067 36,496
Less current portion........................................ 16,740 6,422
------- ------
$36,327 30,074
======= ======
F-11
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Acquisition-related notes payable, including those due to current
employees, are due in varying installments through 2006. In connection with
certain of these notes, the Company recorded a discount from the face of the
notes payable to reflect an effective market interest rate. At December 31, 2001
and 2000, the unamortized discount was $1,118,000 and $1,402,000, respectively,
on face amounts of $23,723,000 and $27,020,000, respectively. The effective
interest rates range from 7.75% to 8.5%, with a weighted average effective
interest rate of 8.3% at December 31, 2001 and 2000.
Notes payable to banks bear interest at 8.25% per annum and are due in
installments through 2005. The notes are collateralized by land and building and
are guaranteed by a principal stockholder of the Company.
Note payable to stockholder bears interest at 5.59% per annum and is due in
March 2003. The note is unsecured.
Maturities of notes payable at December 31, 2001 are as follows (in
thousands):
Year ending December 31:
2002...................................................... $17,195
2003...................................................... 21,335
2004...................................................... 5,923
2005...................................................... 5,541
2006...................................................... 1,012
Thereafter................................................ 3,179
-------
Total future maturities........................... 54,185
Less unamortized discount................................. 1,118
-------
Total notes payable............................... $53,067
=======
(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 48 months. Future minimum lease
payments under noncancelable capital leases having terms in excess of one year
are as follows (in thousands):
Year ending December 31:
2002...................................................... $ 878
2003...................................................... 736
2004...................................................... 95
------
Total minimum lease payments...................... 1,709
Less amount representing interest......................... 225
------
Present value of minimum lease payments................... 1,484
Less current portion...................................... 718
------
Capital lease obligations -- long-term............ $ 766
======
F-12
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Included in property and equipment at December 31, 2001 and 2000 are the
following assets under capital leases (in thousands):
2001 2000
------ -----
Equipment................................................... $2,355 2,412
Less accumulated depreciation............................. 862 466
------ -----
$1,493 1,946
====== =====
(B) OPERATING LEASES
The Company is committed under various noncancelable operating lease
arrangements for facilities and equipment. Rent expense for 2001, 2000, and 1999
was $1,819,000, $938,000, and $722,000, respectively. The future minimum annual
lease payments under these leases for the next five years are summarized as
follows (in thousands):
Year ending December 31:
2002...................................................... $2,221
2003...................................................... 1,795
2004...................................................... 1,186
2005...................................................... 666
2006...................................................... 278
(8) INCOME TAXES
At December 31, 2001, the Company had foreign operating loss carryforwards
available to offset future foreign taxable income of approximately $3,002,000.
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 Company's deferred tax assets relating to the operating losses have been
fully offset by a valuation allowance of $1,119,000. Accordingly, no income tax
benefit has been recorded related to the foreign operating loss carryforwards.
These operating loss carryforwards begin to expire in 2004 based on local tax
laws and regulations.
The Company had income tax expense of $123,000 for the year ended December
31, 2001 primarily due to the acquisition and results of operations of HS&A UK
for the period subsequent to its acquisition on November 21, 2001.
(9) OTHER INCOME
During the third quarter of 2001, the Company collected $512,000 from the
United Kingdom Inland Revenue related to withholding tax on royalties due to the
Company by its licensee in the United Kingdom. The refund was a result of
inquires made by the Company, which caused Inland Revenue to reverse its
position on the taxability of royalties remitted by the licensee. The refund is
included in other income in 2001.
(10) 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. The Company matches
employee contributions, dollar for dollar, up to 5% per participant. The Company
may also
F-13
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $452,000, $475,000, and $291,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
(11) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
The authorized, issued, and outstanding common stock of the Company at
December 31, 2001 is summarized as follows:
NUMBER OF SHARES
---------------------------------------
ISSUED AND COMMON
AUTHORIZED OUTSTANDING STOCK
---------- ----------- ------------
(IN 000'S)
HS&A voting..................................... 2,500,000 2,307,482 $5,709
HS&A nonvoting.................................. 9,500,000 6,435,383 1,080
HS&A Canada..................................... 10,000,000 1,000 1
HS&A Australia.................................. 10,000,000 1,000 674
HS&A Singapore.................................. 100,000 100 --
HS&A Asia....................................... 100 100 6
---------- --------- ------
32,100,100 8,745,065 $7,470
========== ========= ======
Effective July 2, 2001, HS&A amended its Articles of Incorporation to
change the number of its voting shares of common stock from 2,000,000 to
2,500,000 shares and to change the number of its nonvoting shares of common
stock from 10,000,000 to 9,500,000 shares.
Effective as of March 24, 1999, HS&A 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.
On January 1, 2001, HS&A issued approximately 30,638 shares of its
nonvoting common stock to Charles Schembri and an immaterial number of
fractional shares of its nonvoting 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.
On July 3, 2001, HS&A issued 307,482 shares of its voting common stock in
connection with its acquisition of substantially all of the assets of Lowery,
Inc. On August 3, 2001, HS&A issued a total of approximately 23,179 shares of
its nonvoting common stock to five employees.
(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 nonvoting 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
F-14
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of options granted, beginning on the third year after the date of grant. 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 options at a
price per share equal to the fair market value of the common shares.
Accordingly, under APB Opinion 25 for options issued to employees, a measurement
date does not occur until the options are exercised and the Company uses
variable accounting for the outstanding options and measures compensation
expense based upon the intrinsic value of the options.
During the years ended December 31, 2001, 2000, and 1999, the Company
granted options to employees to purchase 433,740 shares, 358,099 shares, and
251,530 shares of the common stock of HS&A, respectively. These options were
granted at an exercise price of $9.06, $9.06, and $8.16, respectively. The
estimated intrinsic value of the options granted was $3,691,000, $5,470,000, and
$2,752,000 at December 31, 2001, 2000, and 1999, respectively. The intrinsic
value of unvested options is recognized as compensation expense over the vesting
period. Compensation expense (benefit) related to such employer options was
$(410,000), $949,000, and $1,117,000 for the years ended December 31, 2001,
2000, and 1999, respectively.
During the years ended December 31, 2001, 2000, and 1999, the Company also
issued options to nonemployees to acquire 37,638 shares, 210,125 shares, and
32,170 shares, respectively, of HS&A common stock at an exercise price of $9.06.
The estimated fair value of the options granted was $2,816,000, $3,454,000, and
$369,000 at December 31, 2001, 2000, and 1999, respectively. 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 4.6% to 6.3%,
expected option life of ten years; expected volatility ranging from 53% to 89%,
and no dividend yield. The vesting period is the same as options issued to
employees. In accordance with EITF 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services, a measurement date does not occur until the options
vest. The fair value of unvested options is recognized as expense over the
vesting period. Expense related to such nonemployee options was $459,000,
$298,000, and $94,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
The cumulative intrinsic value of employee and cumulative fair value of
nonemployee unvested options recognized as of December 31, 2001 and 2000 of
$2,566,000 and $2,458,000, 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-15
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity (employees and
nonemployees) for the years ended December 31, 2001, 2000, and 1999 follows:
$9.06 OPTIONS $8.16 OPTIONS TOTAL
------------- ------------- ---------
Outstanding, 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
Granted........................................ 471,378 -- 471,378
Exercised...................................... -- -- --
Forfeited...................................... (69,408) (47,388) (116,796)
------- ------- ---------
Outstanding, December 31, 2001................... 929,585 206,594 1,136,179
======= ======= =========
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 HS&A 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. Of the 2001 grants, options to acquire 374,878 shares of HS&A common stock
begin to vest at the rate of one third per year beginning January 1, 2004 and
expire on December 31, 2011, options to acquire 17,500 shares of HS&A common
stock begin to vest at the rate of one third per year beginning August 3, 2004
and expire on August 2, 2011, and options to acquire 79,000 shares of HS&A
common stock begin to vest at the rate of one third per year beginning August
22, 2004 and expire on August 21, 2011. Accordingly, no options are vested at
December 31, 2001, 2000, or 1999.
During the year ended December 31, 2001, the Company issued stock
appreciation rights, at a grant price of $9.06 per stock appreciation right, to
certain employees in international markets. The Company recorded compensation
expense of $59,000 during the year ended December 31, 2001.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options granted to employees and nonemployee 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, 2001, 2000, and 1999
(in thousands):
2001 2000 1999
------ ------ ----
Net income (loss):
As reported............................................... $2,172 (3,729) (318)
Pro forma................................................. 107 (4,422) (580)
F-16
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of stock options granted in 2001, 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:
2001 2000 1999
------ -------- -----
Weighted average fair value............................... $12.58 17.42 17.42
Risk free interest rates.................................. 4.56% 5.8%-6.3% 4.7%
Weighted average expected life of option years............ 10 10 10
Volatility factor of expected market price................ 0.89 0.72 0.53
(12) RELATED-PARTY TRANSACTIONS
As of December 31, 2001 and 2000, the Company owed $10,350,000 and
$5,050,000, respectively, to Howard Schultz, a principal shareholder (note 6).
The Company paid Mr. Schultz interest in the amounts of $451,000, $168,000 and
$168,000 during the years ended December 31, 2001, 2000, and 1999, respectively.
In 1998, HS&A Australia borrowed funds from the Schultz Trust in connection
with the acquisition. The outstanding borrowings of $618,000, including
cumulative unpaid interest, were paid in full on December 20, 2001. The
outstanding borrowings, including cumulative unpaid interest, were $584,000 at
December 31, 2000.
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, 2001, 2000, and 1999, respectively.
As of December 31, 2001 and 2000, stockholders of HS&A owed the Company
$399,000 and $390,000, respectively. Amounts are noninterest bearing and due on
demand and are included in other current assets.
The Company leased certain software from Howard Schultz under a lease
agreement dated December 1999. The Company made total payments of approximately
$53,000 in 2001, including approximately $15,000 in interest and $38,000 in
principal, and $115,000 in 2000, including $37,000 in interest and $78,000 in
principal. The Company purchased this software for the outstanding lease balance
of $313,406 on June 26, 2001.
(13) MAJOR CLIENTS
During 2001, two clients accounted for 10% and 12%, respectively, of the
Company's combined revenues. During 2000, two clients accounted for 13% and 10%,
respectively, of the Company's combined revenues, and the same two clients
accounted for 12% and 10%, respectively, of the Company's combined revenues
during 1999.
(14) OPERATING SEGMENTS 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 of
America, Canada, Mexico, Australia, and throughout Europe and Asia, including
the United Kingdom, France, Spain, and Hong Kong.
F-17
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Geographical information for the years ended December 31, 2001, 2000, and
1999 is a follows (in thousands):
2001 2000 1999
-------- ------- -------
United States of America............................... $126,718 127,836 122,560
Europe................................................. 9,173 4,359 4,150
Mexico................................................. 835 756 207
Australia.............................................. 1,488 1,936 2,987
Canada................................................. 3,422 2,464 3,533
Asia................................................... 1,472 1,357 352
-------- ------- -------
Net revenues................................. $143,108 138,708 133,789
======== ======= =======
Geographical information as of December 31, 2001 and 2000 is as follows (in
thousands):
2001 2000
------- ------
United States of America.................................... $11,922 11,855
Europe...................................................... 582 146
Mexico...................................................... 95 91
Australia................................................... 86 140
Canada...................................................... 90 118
Asia........................................................ 165 199
------- ------
Total long-lived assets........................... $12,940 12,549
======= ======
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.
(15) 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, 2001
and 2000 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.
(16) 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 commissions to those
F-18
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
contractors, which amounted to $3.7 million at the date of settlement. The
settlement was recorded as other income in 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.
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 December 31, 2001 and 2000,
respectively.
(17) EXIT COSTS
In December 2001, management of the Company made a decision to exit its
imaging business. In connection with this decision, the Company recorded a
charge to expense of $2,353,000 to write down the assets of the business to
their net realizable value and to record certain exit-related costs (primarily
related to future lease commitments). The business was sold in January 2002.
(18) SUBSEQUENT EVENTS
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). PRG purchased substantially all the assets of HS&A
and all stock of its affiliated companies in the transaction, which closed on
January 24, 2002. Under the terms of the agreement, PRG issued approximately
14.8 million shares of PRG common stock, and assumed vested "in-the-money" stock
options of HS&A which are equivalent to approximately 1.1 million additional
shares of PRG common stock.
Effective with the January 24, 2002 closing of the Company's transaction
with PRG, the Company elected to dispose of its previously granted options to
purchase shares of the Company's nonvoting common stock, no par value, pursuant
to its stock option plan (see note 11(b)), by either converting such options to
fully vested options to purchase shares of the capital stock of PRG or paying
the optionholder a cash amount in satisfaction and discharge of those options.
In each case, the amount of "converted" options distributed, or the amount of
cash paid to an optionholder, was determined pursuant to a formula that resulted
in the determination of the "spread" in value between the value of HS&A shares
and that of PRG shares on a date determined in accordance with the provisions of
the transaction agreements between HS&A and PRG. In either case, the previously
awarded HS&A options were cancelled upon delivery of the "replacement"
consideration, being either the converted and vested PRG options distributed in
respect of, or the cash paid for, the cancelled HS&A options. Options held by
individuals who became employees of PRG were converted into vested PRG options.
A total of $1.96 million was paid in cash to the HS&A optionholders who did not
become PRG employees. On January 8, 2002, the Company adopted the Amended and
Restated Plan, in contemplation of its then-proposed transaction with PRG which,
as amended, permitted the Company to discharge its obligations in the manner
described above.
On January 2, 2002, HS&A acquired 98% of the outstanding stock of Howard
Schultz & Partner (Deutschland) GmbH (Deutschland), a licensee of HS&A that
provides recovery audit services in Germany and Austria, for a purchase price of
approximately $2.0 million at December 31, 2001 exchange rates. The remaining 2%
of Deutschland is owned by Howard Schultz.
In January 2002, the Company entered into agreements with a majority of its
independent contractor auditors to amend their respective "Associate Agreements"
with the Company to implement revisions to the
F-19
HOWARD SCHULTZ AND ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
compensation arrangements with such independent contractors. Pursuant to these
agreements, the rate of compensation paid to such auditors in connection with
audits performed by them after December 28, 2001 was reduced and the Company
agreed to pay to the auditors, in respect of audit services that had been
performed prior to December 28, 2001, an amount equal to the difference between
the previous compensation rate paid to such auditors and the new reduced
compensation rate, as adjusted for certain contingencies (the Buy-Down Amount).
Each Buy-Down Amount is payable to each independent contractor that entered into
such an agreement on or before the date that is 110 days following the closing
of the Company's transaction with PRG, or April 18, 2002. The aggregate amount
of all Buy-Down Amounts is $8.1 million and was assumed by PRG in connection
with the acquisition of the Company. The aggregate Buy-Down Amount was offset
with $522,000 of advances previously provided to the independent contractors who
received the Buy-Down.
In January 2002, certain independent contractors of HS&A UK terminated
their relationship with HS&A and began their own audit recovery operation.
Subsequent to that event, a major client of HS&A UK has notified the Company of
its intention to transfer its business to that new operation of the former HS&A
independent contractors. Revenue from this major client comprised 12% of the
total UK revenues reflected in the combined financial statements, which only
include revenues from HS&A UK subsequent to its acquisition on November 21,
2001.
In January 2002, the Company distributed $4.5 million of cash to
shareholders of record on December 31, 2001.
F-20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PRG-SCHULTZ INTERNATIONAL, INC.
By: /s/ DONALD E. ELLIS, JR.
------------------------------------
Donald E. Ellis, Jr.,
Executive Vice President --
Finance, Chief Financial
Officer and Treasurer
(Principal Financial
Officer)
Date: April 3, 2002