<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 6, 1998
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Commission File Number 0-28000
<TABLE>
<S> <C>
GEORGIA 58-2213805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
</TABLE>
<TABLE>
<S> <C>
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number including area code (770) 779-3900
(Former name or former address, if changed since last report) NOT APPLICABLE
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 6, 1998, The Profit Recovery Group International, Inc., a Georgia
corporation (the "Company"), and its wholly owned subsidiary, The Profit
Recovery Group International I, Inc. ("PRGI"), acquired substantially all the
assets and assumed certain liabilities of Loder, Drew & Associates ("Loder
Drew"), pursuant to the terms of an Asset Purchase Agreement ("Agreement") dated
July 31, 1998, effective July 1, 1998, by and among the Company, PRGI, Loder
Drew and the shareholders of Loder Drew. Loder Drew is an international recovery
auditing firm primarily serving clients in the manufacturing, financial services
and other non-retail sectors.
Pursuant to the Agreement, the initial consideration paid for Loder Drew
consisted of $70.0 million in cash and 803,534 unregistered, restricted shares
of the Company's common stock. Additionally, Loder Drew will be eligible to
receive additional purchase price consideration up to a maximum of $70.0 million
in cash conditioned on the future financial performance of Loder Drew through
December 31, 1999. The consideration given to acquire substantially all the
assets and assume certain liabilities of Loder Drew was determined as a result
of arm's length negotiations among unrelated parties, and the acquisition will
be accounted for using the purchase method of accounting. The Company borrowed
$73.0 million from NationsBank N.A. under its $150.0 million senior credit
facility to fund the cash portion of the initial consideration and the direct
acquisition-related costs estimated at $3.0 million.
The description of the acquisition contained herein is qualified in its
entirety by reference to the Agreement dated July 31, 1998 by and among the
Company, PRGI, Loder Drew and the shareholders of Loder Drew attached hereto as
Exhibit 2.1 and incorporated herein by reference.
2
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of business acquired
LODER, DREW & ASSOCIATES
Independent Auditors' Report.............................. 4
Statements of Earnings for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997
and 1998............................................... 5
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998............................................... 6
Statements of Shareholders' Equity (Deficiency) for the
years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998............................ 7
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997
and 1998............................................... 8
Notes to Financial Statements............................. 9
(b) Pro Forma Financial Information
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information.... 14
Unaudited Pro Forma Consolidated Statement of Earnings for
the year ended December 31, 1997....................... 15
Unaudited Pro Forma Consolidated Statement of Earnings for
the three months ended March 31, 1998.................. 16
Notes to Unaudited Pro Forma Consolidated Statements of
Earnings............................................... 17
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of March 31, 1998................................... 18
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet.......................................... 19
(c) Exhibits.............................................. 20
Signature................................................. 21
</TABLE>
3
<PAGE> 4
(a) Financial statements of business acquired
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loder, Drew & Associates:
We have audited the accompanying balance sheets of Loder, Drew & Associates
as of December 31, 1996 and 1997 and the related statements of earnings,
shareholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Loder, Drew & Associates as
of December 31, 1996 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
May 29, 1998
4
<PAGE> 5
LODER, DREW & ASSOCIATES
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $10,878,099 $22,605,804 $4,623,809 $6,766,457
Cost of revenues.............................. 5,942,644 11,895,652 1,965,609 4,267,854
----------- ----------- ---------- ----------
Gross profit................................ 4,935,455 10,710,152 2,658,200 2,498,603
Selling, general and administrative
expenses.................................... 3,095,766 5,687,813 862,301 1,527,567
Nonrecurring litigation expense (note 8)...... 1,342,242 -- -- --
----------- ----------- ---------- ----------
Operating income............................ 497,447 5,022,339 1,795,899 971,036
Interest income (expense), net................ 56,129 131,489 (5,773) 35,244
----------- ----------- ---------- ----------
Earnings before income taxes................ 553,576 5,153,828 1,790,126 1,006,280
Income taxes.................................. 23,947 58,637 28,876 15,094
----------- ----------- ---------- ----------
Net earnings................................ $ 529,629 $ 5,095,191 $1,761,250 $ 991,186
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
LODER, DREW & ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 738,982 $2,852,111 $1,383,534
Marketable securities (note 2)........................... 55,000 22,500 40,620
Trade accounts receivable, less allowance for doubtful
accounts of $50,000 at December 31, 1996, $0 at
December 31, 1997 and $53,200 (unaudited) at March 31,
1998.................................................. 1,242,100 2,962,821 2,859,893
Other current assets..................................... 165,740 135,998 556,105
---------- ---------- ----------
Total current assets............................. 2,201,822 5,973,430 4,840,152
Property and equipment, net (note 4)....................... 282,768 489,528 483,089
Deposits and other assets.................................. 110,519 119,544 125,133
---------- ---------- ----------
$2,595,109 $6,582,502 $5,448,374
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 309,791 $ 640,774 $ 211,796
Accrued payroll.......................................... 1,449,240 589,687 1,275,921
Accrued legal............................................ 525,000 233,000 243,333
Shareholder distributions payable........................ -- 3,509,731 29,731
Loan due to shareholder(note 3).......................... -- -- 1,000,000
Accrued expenses......................................... 109,670 85,535 259,793
---------- ---------- ----------
Total current liabilities........................ 2,393,701 5,058,727 3,020,574
Accrued legal -- noncurrent................................ 525,000 342,000 239,029
---------- ---------- ----------
Total liabilities................................ 2,918,701 5,400,727 3,259,603
---------- ---------- ----------
Shareholders' equity (deficiency) -- (note 5):
Common stock, no par value. Authorized 100,000 shares;
issued and outstanding 8,571 shares at December 31,
1996, 8,928 shares at December 31, 1997 and 10,000
shares (unaudited) at March 31, 1998.................. 601,000 750,940 1,201,180
Retained earnings (accumulated deficit).................. (123,584) 1,064,343 2,055,529
Accumulated other comprehensive loss (note 2)............ (101,008) (133,508) (115,388)
Note receivable from shareholders........................ (700,000) (500,000) (952,550)
---------- ---------- ----------
Total shareholders' equity (deficiency).......... (323,592) 1,181,775 2,188,771
Commitments and contingencies (notes 6, 8 and 9)...........
Subsequent event (note 10).................................
---------- ---------- ----------
$2,595,109 $6,582,502 $5,448,374
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
LODER, DREW & ASSOCIATES
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
RETAINED ACCUMULATED NOTE TOTAL
COMMON STOCK EARNINGS OTHER RECEIVABLE SHAREHOLDERS'
------------------- (ACCUMULATED COMPREHENSIVE FROM EQUITY
SHARES AMOUNT DEFICIT) LOSS SHAREHOLDERS (DEFICIENCY)
------ ---------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................... 7,500 $ 1,000 $ 924,454 $ (53,508) $(399,996) $ 471,950
Unrealized loss on
investment.............. -- -- -- (47,500) -- (47,500)
Repayment of note
receivable from
shareholder............. -- -- -- -- 299,996 299,996
Issuance of common stock
for note................ 1,071 600,000 -- -- (600,000) --
Distributions to
shareholders............ -- -- (1,577,667) -- -- (1,577,667)
Net earnings.............. -- -- 529,629 -- -- 529,629
------ ---------- ----------- --------- --------- -----------
Balance at December 31,
1996.................... 8,571 601,000 (123,584) (101,008) (700,000) (323,592)
Unrealized loss on
investment.............. -- -- -- (32,500) -- (32,500)
Exercise of stock
option.................. 357 149,940 -- -- -- 149,940
Repayments on note
receivable from
shareholder............. -- -- -- -- 200,000 200,000
Distributions to
shareholders............ -- -- (3,907,264) -- -- (3,907,264)
Net earnings.............. -- -- 5,095,191 -- -- 5,095,191
------ ---------- ----------- --------- --------- -----------
Balance at December 31,
1997.................... 8,928 750,940 1,064,343 (133,508) (500,000) 1,181,775
Unrealized gain on
investment
(unaudited)............. -- -- -- 18,120 -- 18,120
Exercise of stock option
for note (unaudited).... 1,072 450,240 -- -- (450,240) --
Distributions to
shareholders
(unaudited)............. -- -- -- -- (2,310) (2,310)
Net earnings
(unaudited)............. -- -- 991,186 -- -- 991,186
------ ---------- ----------- --------- --------- -----------
Balance at March 31, 1998
(unaudited)............. 10,000 $1,201,180 $ 2,055,529 $(115,388) $(952,550) $ 2,188,771
====== ========== =========== ========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
LODER, DREW & ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................. $ 529,629 $ 5,095,191 $ 1,761,250 $ 991,186
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization........ 104,067 189,695 17,254 50,667
Increase in provision for bad
debts............................. -- -- -- 53,200
Change in assets and liabilities:
Trade accounts receivable......... (66,900) (1,720,721) (1,013,387) 49,728
Other current assets.............. (165,740) 29,742 75,868 (420,107)
Deposits and other assets......... (110,519) (9,025) (501) (5,589)
Accounts payable and accrued
expenses........................ 215,638 306,849 (21,745) (254,720)
Accrued payroll................... 200,351 (859,553) (862,864) 686,234
Accrued legal..................... 1,050,000 (475,000) (344,303) (92,638)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities......... 1,756,526 2,557,178 (388,428) 1,057,961
----------- ----------- ----------- -----------
Cash flows from investing
activities -- purchase of property and
equipment................................. (227,239) (396,455) (71,492) (44,228)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Distributions to shareholders............. (1,577,667) (397,534) (28,799) (3,482,310)
Payments on note receivable from
officer................................ 299,996 200,000 -- --
Exercise of stock options................. -- 149,940 -- --
Proceeds from shareholder loan............ -- -- 1,214,090 1,000,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities............ (1,277,671) (47,594) 1,185,291 (2,482,310)
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............ 251,616 2,113,129 725,371 (1,468,577)
Cash and cash equivalents at beginning of
period.................................... 487,366 738,982 738,982 2,852,111
----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 738,982 $ 2,852,111 $ 1,464,353 $ 1,383,534
=========== =========== =========== ===========
Supplemental disclosures of cash flow
information -- cash paid during the period
for income taxes.......................... $ 800 $ 40,135 $ 4,160 $ 20,199
=========== =========== =========== ===========
Supplemental disclosure of noncash
transactions:
Shareholder distribution payable.......... $ -- $ 3,509,730 $ -- $ --
=========== =========== =========== ===========
Note receivable from officer.............. $ 600,000 $ -- $ -- $ 452,550
=========== =========== =========== ===========
Change in valuation allowance for
unrealized holding losses (gains) on
available for sale marketable
securities............................. $ 47,500 $ 32,500 $ (25,000) $ (18,120)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL BUSINESS INFORMATION
Loder, Drew & Associates (the "Company") was incorporated in the State of
California in September 1986. The Company provides accounts payable and other
recovery audit services to major corporations throughout the United States and,
to a lesser extent Europe.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents for purposes of
the statements of cash flows.
REVENUE RECOGNITION
The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify (a) time periods covered by the audit, (b)
nature and extent of audit services to be provided by the Company, (c) client
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company expressed as a specified percentage of the amounts recovered by the
client resulting from liability 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. The Company recognizes revenue at the time it is notified of
collection by its clients from their vendors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the lease term or the estimated useful life of the related asset.
INCOME TAXES
Effective September 1986, the Company's shareholders elected to be taxed as
an S Corporation under the Internal Revenue Code. As an S Corporation, the
Company is subject to a 1.5% California state franchise tax on taxable income
and is not directly subject to Federal income taxes. State franchise taxes
amounted to $23,947 and $58,637 for the years ended December 31, 1996 and 1997,
respectively. Deferred income taxes are immaterial to the Company's financial
statements.
STOCK OPTIONS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize expense over the vesting period of the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
information of SFAS No. 123.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting
Comprehensive Income," which establishes standards for reporting and disclosures
of comprehensive income and its components (revenues, expenses,
9
<PAGE> 10
LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses) is a full set of general purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 16, 1997 and
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined the manner in
which it will present the information required by SFAS No. 130 in its financial
statements for the year ending December 31, 1998. The Company's total
comprehensive income for all periods presented herein was $482,129 for fiscal
1996 and $5,062,691 for fiscal 1997, and $1,009,306 (unaudited) for the first
quarter of fiscal 1998.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
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 to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of the Company as
of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
(2) MARKETABLE SECURITIES
At December 31, 1996 and 1997, the Company classified all of its
investments in securities which did not meet the definition of cash equivalents
as marketable securities available for sale.
The carrying values (cost) and estimated market values of investment
securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
GROSS
FAIR UNREALIZED
COST VALUE HOLDING LOSSES
-------- ------- --------------
<S> <C> <C> <C>
As of December 31, 1996............................... $156,008 $55,000 $101,008
As of December 31, 1997............................... $156,008 $22,500 $133,508
</TABLE>
All realized gains and losses are computed on the specific identification
basis.
10
<PAGE> 11
LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS
The Company made interest free loans during 1996 to the majority
shareholder, evidenced by unsecured promissory notes payable upon demand. These
notes were repaid during 1997.
From time to time, cash is advanced to the Company from the majority
shareholder during the normal course of business. Advances are noninterest
bearing and are due on demand. Amounts advanced at March 31, 1998 totaled
$1,000,000 (unaudited).
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Furniture and fixtures...................................... $120,296 $133,856
Computer and other equipment................................ 404,795 779,285
-------- --------
525,091 913,141
Less accumulated depreciation and amortization.............. 242,323 423,613
-------- --------
$282,768 $489,528
======== ========
</TABLE>
(5) SHAREHOLDERS' EQUITY (DEFICIENCY)
On May 5, 1996, the Company and one of its officers entered into a stock
purchase agreement whereby the officer agreed to purchase 1,071 newly issued
shares of the Company's common stock at an estimated fair market value of
$600,000. In exchange for the common stock, the officer issued a full recourse
promissory note, secured by the related common stock, equal to the purchase
price. On each May 5 before the maturity date of May 5, 2002, all accrued
interest and a principal installment of $100,000 is due and payable. Interest on
the note accrues at 6.36% per annum during the first year and 10% per annum in
years two through six.
In addition to the stock purchase agreement, the Company granted a stock
option on May 5, 1996 to the same officer with an exercise price of $420 per
share. The option authorizes the purchase of up to 1,429 shares of authorized
but unissued common stock. The stock option was granted with an exercise price
equal to the estimated fair market value at the date of grant. One sixteenth of
the shares under the option become exercisable every three months during the
four-year period after the grant date.
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OPTION
-----------------
EXERCISE
SHARES PRICE
------ --------
<S> <C> <C>
December 31, 1995........................................... -- $ --
Granted................................................... 1,429 420
-----
December 31, 1996........................................... 1,429 420
Exercised................................................. (357) 420
-----
December 31, 1997........................................... 1,072 $420
===== ====
</TABLE>
The aggregate exercise price of the options exercised in 1997 was $149,940.
Under the current ownership structure, the Company has an option to
repurchase the shares acquired under the aforementioned stock purchase and stock
option agreements if the officer's employment with the Company terminates.
11
<PAGE> 12
LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The per share fair value of the stock option on the date of grant was $95
using the Black Scholes option-pricing model with the following weighted-average
assumptions.
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Expected dividend yield.................................... 0.00% 0.00%
Risk-free interest rate.................................... 6.5% 6.4%
Expected life.............................................. 4 years 4 years
======== ========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock option
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Net earnings:
As reported............................................ $529,629 $5,095,191
======== ==========
Pro forma.............................................. $507,000 $5,061,318
======== ==========
</TABLE>
Pro forma net income reflects only options granted in 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net earnings amounts presented above
because compensation cost is reflected over the option's vesting period of four
years.
Stock options for 357 shares had been exercised as of December 31, 1997.
The number of shares under the option that were exerciseable and the remaining
contractual life of the options at December 31, 1997 were 178 and 4.4 years,
respectively. An agreement was made in 1997, such that if certain income targets
were met, the remaining options outstanding would have an accelerated vesting.
During 1998, the vesting of the remaining options was accelerated to March 31,
1998.
(6) LEASES
The Company leases certain office facilities and equipment under
noncancelable operating lease agreements with initial terms ranging from one to
five years. Future minimum lease payments under noncancelable operating leases
as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31:
1998................................................... $210,154
1999................................................... 173,464
2000................................................... 165,251
2001................................................... 159,185
2002................................................... 49,063
--------
$757,117
========
</TABLE>
Total rent expense for the years ended December 31, 1996 and 1997,
including month-to-month rentals, amounted to approximately $98,200 and
$171,266, respectively.
In January 1997, the Company subleased an office location. Income to be
received under the sublease for the year ending December 31, 1998 is $27,466.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, trade accounts receivable,
shareholder receivable, other assets, loan due to shareholder, accounts payable
and accrued liabilities approximate cost because of the
12
<PAGE> 13
LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
immediate or short-term maturity of these financial instruments. The fair value
of marketable securities is based on quoted market prices at the reporting date.
(8) LITIGATION COSTS
In February 1997, the Company settled a lawsuit filed by a former employee
and agreed to pay $1,050,000. The settlement agreement calls for an initial
principal payment of $350,000 and, commencing June 1, 1997, twelve quarterly
principal installments of $58,333 plus interest at 8.25% per annum. There is
also a stipulation of judgment agreement stating the Company would be liable for
an additional $1,500,000 should it default on its settlement obligation.
Included in accrued legal and nonrecurring litigation expense in the
accompanying financial statements as of and for the year ended December 31, 1996
is the settlement amount. Legal costs incurred to defend and settle the
aforementioned lawsuit are also included in nonrecurring litigation expense in
the accompanying statement of earnings for the year ended December 31, 1996.
(9) CONTINGENCIES
The Company is a defendant in various liability claims. Management believes
that the allegations in most of the claims are substantially without merit and
that others may be settled or lost, resulting in expenses incurred by the
Company. Management has accrued an estimate of the Company's eventual liability
related to these claims. In the opinion of management, any defense, judgment or
settlement of these claims will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(10) SALE OF COMPANY (UNAUDITED)
On August 6, 1998, The Profit Recovery Group International, Inc. ("PRG")
and its wholly owned subsidiary, The Profit Recovery Group International I, Inc.
("PRGI"), acquired substantially all the assets and assumed certain liabilities
of the Company, pursuant to the terms of an Asset Purchase Agreement
("Agreement") dated July 31, 1998, effective July 1, 1998, by and among PRG,
PRGI, the Company and the Company's shareholders.
Pursuant to the Agreement, the initial consideration paid for the Company
consisted of $70,000,000 in cash and 803,534 unregistered, restricted shares of
PRG's common stock. Additionally, the Company will be eligible to receive
additional purchase price consideration up to a maximum of $70,000,000
conditioned on the future financial performance of the Company through December
31, 1999.
13
<PAGE> 14
(b) Pro Forma Financial Information
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On August 6, 1998, The Profit Recovery Group International, Inc. (the
"Company"), and its wholly owned subsidiary, The Profit Recovery Group
International I, Inc. acquired substantially all the assets and assumed certain
liabilities of Loder, Drew & Associates ("Loder Drew"), an international
recovery auditing firm primarily serving clients in the manufacturing, financial
services and other non-retail sectors. The transaction was accounted for as a
purchase, effective as of July 1, 1998, with consideration of $70.0 million in
cash and 803,535 restricted, unregistered shares of the Company's common stock.
Approximately $3.0 million in direct acquisition-related costs were also
incurred and capitalized as part of this transaction. Additionally, Loder Drew
will be eligible to receive further purchase price consideration up to a maximum
of $70.0 million in cash conditioned on future financial performance of Loder
Drew through December 31, 1999.
The Company borrowed $73.0 million from NationsBank N.A. under its $150.0
million senior credit facility to pay the cash consideration and direct
acquisition-related expenses incurred in connection with the acquisition of
Loder Drew.
The following unaudited pro forma consolidated statements of earnings for
the year ended December 31, 1997 and the three months ended March 31, 1998
present the consolidated historical accounts of the Company, adjusted to give
effect to the acquisition of Loder Drew as of the beginning of the periods
presented. The following unaudited pro forma condensed consolidated balance
sheet as of March 31, 1998 presents the consolidated historical accounts of the
Company as of that date, adjusted to give effect to the acquisition of Loder
Drew as if the transaction had occurred on March 31, 1998.
The unaudited pro forma consolidated financial information and accompanying
notes should be read in conjunction with the consolidated financial statements
of the Company and related notes, as well as the financial statements and
related notes of Loder Drew. The Company believes that the assumptions set forth
in the notes on pages 17 and 19 provide a reasonable basis on which to present
the pro forma financial information, which is provided for informational
purposes only and should not be construed to be indicative of the Company's
financial condition or results of operations had the transactions and events
described above been consummated on the dates assumed. The unaudited pro forma
financial information is not intended to project the Company's financial
condition on any future date or results of operations for any future period.
14
<PAGE> 15
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
--------------- -------- ------------ ------------
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................................... $112,363 $22,606 $ -- $134,969
Cost of revenues................................. 57,726 11,896 -- 69,622
Selling, general and administrative expenses..... 37,254 5,688 3,377(A) 45,319
(1,000)(B)
Restructuring costs.............................. 1,208 -- -- 1,208
-------- ------- ------- --------
Operating income............................... 16,175 5,022 (2,377) 18,820
Interest income (expense), net................... (403) 132 (4,928)(C) (5,199)
-------- ------- ------- --------
Earning before income taxes.................... 15,772 5,154 (7,305) 13,621
Income taxes..................................... 6,149 59 (896)(D) 5,312
-------- ------- ------- --------
Net earnings................................... $ 9,623 $ 5,095 $(6,409) $ 8,309
======== ======= ======= ========
Earnings per share:
Basic.......................................... $ 0.52 $ 0.43
======== ========
Diluted........................................ $ 0.51 $ 0.42
======== ========
Weighted average shares outstanding:
Basic.......................................... 18,415 804(E) 19,219
======== ======= ========
Diluted........................................ 18,909 804(E) 19,713
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
15
<PAGE> 16
THE PROPERTY RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
--------------- ------- ------------ ------------
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................................... $33,144 $6,766 $ -- $39,910
Cost of revenues................................. 17,956 4,268 -- 22,224
Selling, general and administrative expenses..... 13,029 1,527 $ 844(A) 15,400
------- ------ ------- -------
Operating income............................ 2,159 971 (844) 2,286
Interest income (expense), net................... (324) 35 (1,232)(C) (1,521)
------- ------ ------- -------
Earning before income taxes.................... 1,835 1,006 (2,076) 765
Income taxes..................................... 715 15 (432)(D) 298
------- ------ ------- -------
Net earnings................................ $ 1,120 $ 991 $(1,644) $ 467
======= ====== ======= =======
Earnings per share:
Basic.......................................... $ 0.06 $ 0.02
======= =======
Diluted........................................ $ 0.06 $ 0.02
======= =======
Weighted average shares outstanding:
Basic.......................................... 19,540 804(E) 20,344
======= ======= =======
Diluted........................................ 20,000 804(E) 20,804
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
16
<PAGE> 17
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
The following explanations describe the assumptions used in determining the
unaudited pro forma adjustments necessary to present the historical results of
operations, giving effect to the acquisition of Loder Drew, as of the beginning
of each period presented.
(A) Adjustment relates to amortization of the estimated goodwill amounting
to $83.3 million over a 25-year period and the noncompete agreements with a
combined estimated fair value of $225,000 over a five-year period. Loder Drew is
also eligible to receive additional purchase price consideration up to a maximum
of $70.0 million in cash conditioned on the future financial performance of
Loder Drew through December 31, 1999. To the extent that additional purchase
price consideration, if any, becomes due, goodwill and related amortization
could be substantially increased.
(B) Adjustment relates to historical Loder Drew owner compensation in 1997
in excess of compensation levels to be paid prospectively to these former owners
pursuant to employment agreements.
(C) Adjustment relates to the $73.0 million of indebtedness, at an interest
rate of 6.75%, incurred in connection with the Loder Drew acquisition.
(D) Adjustment relates to the tax benefit derived from the deductibility of
the goodwill and interest expense assuming a combined Federal and state
effective income tax rate of 39%, and also reflects Loder Drew's results of
operations on a pro forma basis to include Federal and state income taxes at a
composite rate of 39% as if Loder Drew had been a C corporation throughout the
periods presented.
(E) Adjustment reflects the issuance of 803,585 shares in connection with
the Loder Drew acquisition.
17
<PAGE> 18
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
-------------- ------ ----------- -----------
(AMOUNTS IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 25,290 $1,384 $ (884)(A) $ 25,790
Marketable securities................................ -- 41 (41)(A) --
Receivables:
Billed contract receivables........................ 10,987 2,860 -- 13,847
Unbilled contract receivables...................... 47,392 -- -- 47,392
Employee and shareholder advances.................. 2,292 -- -- 2,292
-------- ------ ------- --------
Total receivables............................. 60,671 2,860 $ -- 63,531
-------- ------ ------- --------
Prepaid expenses and other current assets............ 1,349 556 -- 1,905
-------- ------ ------- --------
Total current assets.......................... 87,310 4,841 (925) 91,226
Property and equipment, net............................ 10,155 483 -- 10,638
Noncompete agreements, less accumulated amortization... 3,212 -- 225(B) 3,437
Goodwill, less accumulated amortization................ 49,358 -- 83,305(B) 132,663
Deferred income taxes.................................. 3,083 -- -- 3,083
Other assets........................................... 494 125 -- 619
-------- ------ ------- --------
$153,612 $5,449 $82,605 $241,666
======== ====== ======= ========
Current liabilities:
Note payable to bank................................. $ 153 $ -- -- $ 153
Current installments of long term-debt............... 159 -- -- 159
Accounts payable and accrued expenses................ 7,824 715 (258)(A) 8,281
Accrued payroll and related expenses................. 21,241 1,276 -- 22,517
Shareholder distributions payable.................... -- 30 (30)(A) --
Loan due to shareholder.............................. -- 1,000 (1,000)(A) --
Deferred income taxes................................ 9,917 -- -- 9,917
Deferred revenues.................................... 1,070 -- -- 1,070
-------- ------ ------- --------
Total current liabilities..................... 40,364 3,021 $(1,288) 42,097
Long-term debt, excluding current installments......... 846 -- 73,000(C) 73,846
Deferred compensation.................................. 2,714 -- -- 2,714
Other long-term liabilities............................ 471 239 (239)(A) 471
-------- ------ ------- --------
Total liabilities............................. 44,395 3,260 71,473 119,128
Shareholders' equity:
Preferred stock...................................... -- -- -- --
Common stock......................................... 22 1,201 (1,200)(D) 23
Additional paid-in capital........................... 93,990 -- 13,320(D) 107,310
Note receivable to shareholder....................... -- (953) 953(A) --
Accumulated other comprehensive loss................. -- (115) 115(A) --
Cumulative translation adjustments................... (1,922) -- -- (1,922)
Retained earnings.................................... 17,127 2,056 (2,056)(D) 17,127
-------- ------ ------- --------
Total shareholders' equity.................... 109,217 2,189 11,132 122,538
-------- ------ ------- --------
$153,612 $5,449 $82,605 $241,666
======== ====== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.
18
<PAGE> 19
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
The following describe the assumptions used in determining the unaudited
pro forma adjustments necessary to present the historical financial position,
giving effect to the acquisition of Loder Drew, as of March 31, 1998.
(A) Assets not acquired or liabilities not assumed.
(B) The acquisition is accounted for as a purchase in accordance with
Accounting Principles Board Opinion 16, "Business Combinations." The purchase
price is allocated first to the tangible and identifiable assets and liabilities
of the acquired company based on preliminary estimates of their fair value, with
the remainder allocated to goodwill. The following schedule presents the
goodwill computation (with amounts in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash paid................................................. $70,000
Fair value of restricted, unregistered shares issued...... 13,321
-------
83,321
Estimated direct acquisition-related costs.................. 3,000
Less net book value of net assets acquired from Loder Drew,
which approximates fair value............................. (2,791)
Less estimated value of noncompete agreements............... (225)
-------
Goodwill............................................... $83,305
=======
</TABLE>
(C) The Company incurred indebtedness of $73.0 million to finance the cash
paid and direct acquisition-related costs incurred in connection with the
acquisition of Loder Drew.
(D) The changes in components of shareholders' equity are a result of
recording the initial acquisition date equity in Loder Drew.
19
<PAGE> 20
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
2.1+* -- Asset Purchase Agreement dated as of July 31, 1998 among the
Company, The Profit Recovery Group International I, Inc.,
Loder, Drew & Associates, Inc., Ronald K. Loder and H.
Richard Byrne.
23.1+ -- Consent of KPMG Peat Marwick LLP.
</TABLE>
- ---------------
+ Filed herewith.
* The Company has applied for confidential treatment of portions of this
Agreement. Accordingly, portions thereof have been omitted and filed
separately with the Securities and Exchange Commission. In addition, in
accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of the
Exhibit. The Registrant will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
20
<PAGE> 21
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.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
By: /s/ DONALD E. ELLIS, JR.
------------------------------------
Donald E. Ellis, Jr.
Senior Vice President, Chief
Financial
Officer and Treasurer
Date: August 12, 1998
21
<PAGE> 1
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is executed and
delivered as of the _____ day of July, 1998, but dated as of July 1, 1998 (which
is the Effective Date referred to in Section 1.4 hereof), by and among THE
PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation
("Purchaser"), THE PROFIT RECOVERY GROUP INTERNATIONAL, INC., a Georgia
corporation ("PRGX"), LODER, DREW & ASSOCIATES, INC., a California corporation
("Seller"), RONALD K. LODER ("Loder") and H. RICHARD BYRNE ("Byrne"), each a
California resident and being the sole stockholders of Seller (collectively,
"Stockholders" and individually, a "Stockholder").
W I T N E S S E T H:
WHEREAS, Purchaser is in the business of auditing accounts payable,
expenses, capital expenditures, and various other payment arrangements or
obligations between its clients ("Clients") and their suppliers, vendors,
landlords and taxing authorities (the "Client Payees") for the purpose of
identifying and documenting overbilling by and refund, credit or chargeback
claims for overpayments to, the Client Payees (the "Audit Activities") and
rendering management advisory services associated with the Audit Activities
(collectively, the "Business of Purchaser");
WHEREAS, Seller is in the business (the "Business") of providing Audit
Activities in a manner which is complementary to and competitive with the
Business of Purchaser;
WHEREAS, the parties hereto desire that the Seller sell to Purchaser
and that the Purchaser purchase substantially all of the assets of Seller used
or held for use in the Business pursuant to the terms of this Agreement;
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the transactions contemplated herein and
certain additional agreements related thereto;
NOW, THEREFORE, in consideration of the mutual representations,
warranties and covenants herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE OF PURCHASED ASSETS
1.1 ASSETS TO BE ACQUIRED. Subject to and upon the terms and
conditions set forth herein, Purchaser agrees to purchase from Seller, and
Seller agrees to sell to Purchaser, effective as of the Effective Date (as
hereinafter defined), except as provided in Section 1.2 hereof, all right, title
and interest of Seller in and to all of the tangible and intangible assets of
Seller used or held for use by Seller in the conduct of the Business as of the
Closing Date (as hereinafter
<PAGE> 2
defined) free and clear of all claims, liens, encumbrances, security interests
and similar interests of any kind or nature whatsoever (except for any such
interests arising solely by virtue of the Assumed Liabilities), including,
without limitation, the following (collectively, the "Purchased Assets"):
(a) all of Seller's machinery, appliances, equipment,
including computer hardware and software to the extent assignable, tools,
supplies, leasehold improvements, construction in progress, furniture and
fixtures, used or held for use by Seller in connection with the Business as of
the Closing, including, without limitation, those items listed on Schedule
1.1(a) attached hereto (the "Fixed Assets");
(b) all of Seller's interest in and rights and benefits
owing to Seller under all customer contracts, employment agreements and
Contracts (as defined in Section 4.16 hereof) excluding (i) contracts required
to be listed on Schedule 4.16 which are not so listed and (ii) the Contracts
appearing at items 1, 2, 4 and 5 of Schedule 4.16 (collectively, the "Assigned
Contracts");
(c) all billed and unbilled accounts receivable, notes
receivable, employee advances, rights to receive payment from customers for
claims filed by or on behalf of customers of Seller outstanding as of the
Closing (collectively, "Accounts Receivable") and all work in progress and other
claims not yet billed by Seller as of the Closing (collectively, the "Work in
Progress");
(d) all of Seller's interest in and rights and benefits
accruing to Seller as lessor under the sublease identified in Schedule 4.18 and
as lessee under (i) the leases and/or subleases listed on Schedule 4.18 attached
hereto, (ii) the lease agreements for equipment used in the operation of the
Business, if any, listed on Schedule 4.18 attached hereto and (iii) leases
involving an aggregate annual expenditure by Seller of less than $12,000 or
having a term which extends for not more than one year from the date hereof
(collectively, the "Assigned Leases");
(e) all intellectual property of Seller including,
without limitation, all rights to the name "Loder, Drew & Associates," goodwill
and other intangible assets;
(f) all of Seller's licenses, consents, permits,
variances, certifications and approvals of governmental agencies used or held
for use in connection with the Business, to the extent assignable;
(g) all claims, security and other deposits, refunds,
prepaid expenses, causes of action, choses in action, rights of recovery,
warranty rights, rights of set off in respect of the Business and the Purchased
Assets, including, without limitation, those cash deposits listed on Schedule
1.1(g) attached hereto, together with the excess, if any, as of the Closing Date
of aggregate participant contributions for the current plan year under the
cafeteria plan referred to in Schedule 4.21 over the aggregate claims paid to
participants under such plan (the "Excess Cafeteria Plan Balance")
(collectively, the "Deposits");
-2-
<PAGE> 3
(h) all of Seller's customer and supplier lists, all
client files, all files related to employees and auditors, all computer data
bases and other records other than Seller's corporate minute books and stock
records;
(i) all of Seller's right, title and interest in and to
its telephone numbers and the directory advertising for such telephone numbers
to the extent assignable;
(j) Cash at Closing in the total aggregate amount (the
"Cash Assets") equal to the sum of (i) $500,000 plus (ii) the difference between
(A) the net increase in cash after payment of normal operating expenses (but
without any decrease in cash for Seller's Transaction Expenses, as hereinafter
defined, which shall be borne other than at the expense of Purchaser) provided
by the Business for the period from and after the Effective Date through the
Closing Date, less (B) the amount of federal and state income taxes (which shall
not include any taxes payable by the Stockholders or the Seller on the
acquisition by Purchaser from Seller of the Purchased Assets) payable by the
Stockholders and state franchise taxes payable by the Seller (based on an agreed
all inclusive effective tax rate of 49.62%) on the taxable income from the
Business for the period from and after the Effective Date through the Closing
Date plus (iii) an amount of cash equal to the accounts payable and accrued
expenses identified as reimbursable to Purchaser on Schedule 2.2 hereto plus
(iv) the amount of cash paid by the Seller from and after the Effective Date in
satisfaction of outstanding commission amounts payable that relate to
receivables collected by the Seller prior to the Effective Date; and
(k) all of Seller's right, title and interest in and to
all other tangible personal property relating to the Business.
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary
contained in Section 1.1 hereof, Purchaser shall not acquire and Seller shall
not transfer to Purchaser (a) Seller's corporate minute and stock books, (b) any
assets held under any pension, profit sharing or other Employee Benefit Plan (as
defined herein), except the Excess Cafeteria Plan Balance, (c) any notes
receivable from either of the Stockholders or John Drew or Staub Martinez, (d)
the "Delta Travel Account" described in the Monthly Statements (as hereafter
defined), (e) any tax refunds receivable and (f) any cash on hand, cash in bank
or other financial institution accounts and cash equivalents in excess of the
Deposits and Cash Assets.
1.3 CONVEYANCE OF ASSETS. The conveyance, transfer and delivery of
the Purchased Assets shall be made by Seller and accepted by Purchaser as of the
Closing Date as follows:
(a) Seller shall execute and deliver to Purchaser a bill
of sale in the form of Exhibit 1.3(a) attached hereto and made a part hereof
(the "Bill of Sale");
(b) Seller and Purchaser shall execute and deliver an
Assignment and Assumption Agreement in the form of Exhibit 1.3(b) attached
hereto and made a part hereof (the "Assignment and Assumption Agreement") with
respect to the Assumed Liabilities (as hereinafter defined);
-3-
<PAGE> 4
(c) Seller shall execute and deliver such additional
instruments of sale, transfer, conveyance and assignment as of the Closing Date
as counsel to Seller and counsel to Purchaser shall mutually deem necessary or
appropriate.
1.4 CLOSING. The closing of the transactions contemplated herein
(the "Closing") shall take place at the offices of Purchaser's counsel or by the
exchange of documents and instruments by mail, courier, telecopy and wire
transfer to the extent mutually acceptable to the parties hereto as soon as
practicable following compliance with the terms, conditions and contingencies
contained herein on a date and at a time selected by Purchaser upon notice to
Seller or such other date as is mutually agreed upon by the parties hereto (such
date to be herein referred to as the "Closing Date"). For accounting purposes,
the Closing shall be effective immediately after the close of business on June
30, 1998 (the "Effective Date").
ARTICLE 2
PURCHASE PRICE; ASSUMPTION OF LIABILITIES
2.1 PURCHASE PRICE.
2.1.1 Purchase Price Payment. Subject to the terms and
conditions of this Agreement, the Purchase Price to be paid to Seller for the
Purchased Assets (the "Purchase Price") will be cash and shares of common stock
of PRGX, payable as follows:
(a) At the Closing, Purchaser shall (i) pay to Seller in
cash the sum of $70,000,000 plus the product of $13,904 multiplied by the number
of days elapsed from and after June 30, 1998 through and including the Closing
Date ("Closing Cash Consideration"), and (ii) deliver to Seller, subject to
execution and delivery by Seller at the Closing of the Lock-up Agreements
pursuant to Section 3.8 hereof, 803,535 shares (the "PRGX Shares") of PRGX
Common Stock, no par value.
(b) The amount, if any, payable by Purchaser in
accordance with the Earn Out Agreement (the "Earn Out Agreement") to be entered
into by Purchaser, Seller and the Stockholders at Closing in the form attached
hereto at Exhibit 2.1(b).
2.1.2. Purchase Price Adjustment. The Cash Assets shall be
delivered by Seller to Purchaser at Closing by wire transfer to an account
designated by Purchaser. The amount of the Cash Assets set forth in clause (ii)
through (iv) of Section 1.1(j) hereof shall be determined at Closing based upon
an estimated cash flow statement (the "Cash Flow Statement") prepared by Seller
for the period including July 1, 1998 to and including the Closing Date. Seller
shall deliver the Cash Flow Statement to Purchaser the day immediately prior to
the Closing Date. Purchaser shall engage KPMG Peat Marwick LLP (the
"Accountants") to perform procedures as the Purchaser deems necessary related to
the Cash Flow Statement after the Closing. If the amount of the Cash Assets is
required to be adjusted based upon any differences identified during such
procedures applied to the Cash Flow Statement by the Accountants, any payment
resulting therefrom shall be made either by Seller (or, if any of the
-4-
<PAGE> 5
Closing Cash Consideration has been distributed by Seller to the Stockholders,
the Stockholders) or Purchaser to the other, as the case may be, within fifteen
days after completion of the review by the Accountants, together with interest
on such payment amount from the Closing Date to the date of such payment at the
Borrowing Rate (as defined in the Earn Out Agreement).
2.2 ASSUMPTION OF LIABILITIES. Purchaser agrees to assume, from
and after the Closing Date, only the following (the "Assumed Liabilities"): (i)
all obligations and liabilities of Seller arising from and after the Effective
Date under the Assigned Contracts, the Contract identified at item 2 of Schedule
4.16 hereof and Assigned Leases, except (A) with respect to employment
agreements Purchaser does not assume any liabilities arising after the Closing
Date and (B) Purchaser does not assume any liabilities identified on Schedule
6.1; (ii) Seller's normal trade payables incurred in the ordinary course of
business and outstanding as of the Effective Date or incurred thereafter and the
accounts payable (to the extent outstanding at the Effective Date or incurred
thereafter) and accrued expenses (to the extent outstanding at the Effective
Date) designated on Schedule 2.2 hereto; provided, however, that (A) Purchaser
shall not assume any of the Seller Transaction Expenses, as defined and provided
in Section 3.14 hereof, and (B) Purchaser shall not assume any accounts payable
or accrued expenses (other than for normal expense account reimbursements and
salary) due to the Stockholders or for commission amounts on accounts receivable
collected prior to the Effective Date; and (iii) commission amounts which will
be owed by the Business to its employees (other than the Stockholders) upon
collection of accounts receivable and work in progress outstanding at the
Effective Date. Except for the Assumed Liabilities, Purchaser shall not assume
any debts or liabilities of Seller of any kind or nature whatsoever. Except as
set forth in Section 3.2(b) hereof, Purchaser shall not be required to become a
party to any Employee Benefit Plan as a result of any of the transactions
contemplated by this Agreement.
ARTICLE 3
ADDITIONAL COVENANTS
3.1 DUE DILIGENCE REVIEW.
(a) Upon the execution and delivery hereof, Seller shall
concurrently deliver to Purchaser all Schedules required to be attached hereto
and make available to Purchaser true, correct and complete copies of all
documents, together with all amendments thereto through the date of execution
hereof, contemplated by this Agreement and required by the terms hereof to be
listed on the Exhibits or Schedules attached hereto not previously delivered to
Purchaser, including without limitation any Leases (as defined in Section 4.18
below), Contracts (as defined in Section 4.16 below), insurance policies, the
Historical Statements (as defined in Section 3.1 below) and Seller's tax
returns. Between the date of this Agreement and the Closing Date, Seller, its
employees, agents and representatives shall provide to Purchaser and its
employees, agents, counsel, accountants, financial consultants and other
representatives reasonable access during normal business hours to the offices,
properties, records, files and other documents and information regarding
Seller's assets and Business, and shall fully cooperate with the Purchaser in
order to verify the accuracy of the information delivered by Seller.
-5-
<PAGE> 6
(b) Seller and the Stockholders shall prepare and provide
to Purchaser financial statements of the Business as of December 31, 1997 and
December 31, 1996 and for each of the three years ended December 31, 1997
(collectively the "Audited Statements"), containing Seller's independent
auditor's unqualified audit report (the "Report") thereon, and financial
statements as of and for the interim periods ended March 31, 1997 and 1998
(collectively with the Audited Statements, the "Historical Statements"), and
such other financial information, including copies of books and records and
other materials, (i) sufficient to enable the Accountants to prepare such pro
forma financial statements as shall be necessary to enable Purchaser to timely
comply with its reporting responsibilities under the Securities Exchange Act of
1934, as amended, and (ii) in form and substance satisfying the requirements for
filing the Historical Statements and Report with the Securities and Exchange
Commission.
(c) As soon as practical, Seller will prepare and provide
Purchaser separate internal monthly balance sheets and income statements of the
Business (collectively referred to as the "Monthly Statements") from June 1,
1998 through the last day of the month immediately preceding the date hereof.
After the date hereof and until Closing, Seller shall continue to promptly
prepare and provide to Purchaser Monthly Statements through the last day of the
month immediately preceding the Closing.
(d) Except as may be either required by law or for the
enforcement by any party hereto of this Agreement, and except as otherwise
provided herein, each of Seller, the Stockholders, PRGX and Purchaser shall, and
shall cause their employees, agents, counsel, accountants, financial consultants
and other representatives to, (i) hold in strict confidence any and all
information obtained from the other parties hereto or their representatives or
the terms or conditions of the transactions contemplated herein or the fact that
such transactions are being contemplated and (ii) not disclose or use any such
information (unless such information is or becomes ascertainable from public
sources or public disclosure of such information is, in the good faith judgment
of the disclosing party (the "Disclosing Party"), required by law); provided,
however, that nothing contained herein shall limit the right of any such persons
to disclose any such information to their employees, agents, representatives,
counsel, accountants or financial advisors for the purpose of facilitating the
consummation of the transactions contemplated hereby so long as such other
persons are advised of the confidential nature of such information. In the event
a Disclosing Party is requested or required (by oral questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand or
similar process) to disclose any such information, Disclosing Party agrees (i)
to provide the other party(ies) (the "Nondisclosing Party") with prompt notice
of such request(s) and the information or documents requested thereby so as to
enable the Nondisclosing Party to timely consider seeking to obtain an
appropriate protective order and (ii) to consult with the Nondisclosing Party on
the advisability of taking legally available steps to resist or narrow such
request. The Non-Disclosing Party further agrees that if, in the absence of a
protective order or the receipt of a waiver hereunder, the Disclosing Party is
nonetheless, in the opinion of the Disclosing Party's counsel, compelled to
disclose such information to any court or governmental administrative authority
or else stand liable for contempt or suffer other material censure or penalty,
such information may be disclosed to such court or governmental authority
without liability hereunder; provided, however, that the Disclosing Party shall
give to the Nondisclosing Party
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written notice of the information to be so disclosed as soon as reasonably
practical, and shall cooperate with the Nondisclosing Party to obtain a
protective order or other reliable assurance that confidential treatment will be
accorded to such portion of the information required to be disclosed as the
Nondisclosing Party reasonably designates. All actions taken at the request of
the Nondisclosing Party shall be taken at the Nondisclosing Party's expense. The
terms of this subsection shall not survive the Closing.
3.2 EMPLOYMENT MATTERS.
(a) Concurrently with the Closing, Purchaser, on the one
hand, and Loder and Byrne, on the other hand, shall enter into separate
employment agreements and compensation agreements in substantially the form of
Exhibit 3.2A (for Loder) and 3.2B (for Byrne) attached hereto and made a part
hereof (the "Employment Agreement").
(b) Except with respect to the Stockholders, on or before
the Closing Date, but effective as of the Closing Date, Purchaser agrees to
offer to employ each full-time or regular part-time active employee of Seller,
and each employee on a leave of absence who notifies Purchaser in writing prior
to the Closing Date that they will be ready, willing and able to return to
active employment on or before the Closing Date (the "Transferred Employees") at
a wage rate that is substantially similar to the wage rate of the respective
Transferred Employees' employment with Seller; provided, however, that as a
condition of their employment with Purchaser, all Transferred Employees must
sign such customary documents and forms (including, without limitation, a Form
I-9) as Purchaser may reasonably require. Seller and the Stockholders shall
assist and cooperate with Purchaser in connection with such employment
objectives. Except as set forth on Schedule 3.2.B hereof, all Transferred
Employees have previously entered into forms of written employment agreements
with Seller as set forth on Schedule 3.2B hereof. Purchaser, Seller and the
Stockholders agree to jointly exercise their commercially reasonable efforts to
cause the Transferred Employees to sign the employee agreement (the "Employee
Agreement") customarily used by Purchaser. Purchaser agrees to continue in
effect with respect to such Transferred Employees the group health insurance
plan (which shall include Seller's dental and vision plan, and either, at
Purchaser's discretion, Seller's cafeteria plan or a substitute cafeteria plan
formed by Purchaser) maintained by Seller as of the date hereof for the balance
of the plan year with respect to such plan, and agrees to make available to the
employees of Seller who are then employees of Purchaser the opportunity to
enroll in Purchaser's (or its affiliates) 401(k) plan beginning at or about
September 1, 1998 and Purchaser's (or its affiliates) employee stock purchase
plan beginning at or about January 1, 1999.
(c) Purchaser shall have no liability for any of Seller's
employees who are offered a position with Purchaser but reject that employment
offer (the "Non-Transferred Employees"), and Seller shall retain liability for
all such Non-Transferred Employees.
3.3 CONSENTS. Promptly after execution of this Agreement, Seller
and the Stockholders will apply for or otherwise seek, and use their
commercially reasonable efforts (which, except as provided in this Section,
shall not require the payment of money) to obtain,
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all consents and approvals required with respect to Seller and/or the
Stockholders for consummation of the transactions contemplated hereby, including
without limitation, those consents listed in Schedule 4.4 hereof (including
estoppels and consents from the lessors under the Assigned Leases and consents
in respect of the Assigned Contracts to the assignment thereof to Purchaser).
Any charges expressly provided in the Assigned Contracts or Assigned Leases by
virtue of the terms of the Assigned Contracts or Assigned Leases for such
estoppels and consents shall be borne by Seller, and Seller and the Stockholders
shall, jointly and severally, indemnify the Purchaser against any loss or
liability incurred by the Purchaser resulting from Seller and the Stockholders'
failure to pay such charges, in accordance with Article 6 hereof.
3.4 NONCOMPETITION AND NONSOLICITATION AGREEMENTS. Concurrently
with the Closing, in consideration of the acquisition of Purchased Assets as
contemplated herein, Seller and each of the Stockholders shall enter into a
noncompetition and nonsolicitation agreement with Purchaser, in the forms of
Exhibit 3.4A (for Seller) and Exhibit 3.4B (for the Stockholders), attached
hereto and made a part hereof (collectively, the "Noncompetition and
Nonsolicitation Agreements").
3.5 REGULATORY AUTHORIZATION. On July 6, 1998, Seller and
Purchaser filed with the United States Federal Trade Commission ("FTC") and the
United States Department of Justice (the "DOJ") the notification and report form
required for the transactions contemplated hereby pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Seller and Purchaser agree to file as promptly as practicable any
supplemental information requested. Any such notification and report form and
supplemental information will be in substantial compliance with the requirements
of the HSR Act. Each of Purchaser and Seller shall furnish to the other such
necessary information and reasonable assistance as the other may request in
connection with its preparation of any filing or submission which is necessary
under the HSR Act. Purchaser and Seller shall keep each other apprised of the
status of any communications with, and inquiries or requests for additional
information from, the FTC and the DOJ and shall promptly comply with any such
inquiry or request. Each party will use best efforts to obtain as promptly as
possible any clearance required under the HSR Act for the purchase and sale of
the Purchased Assets; provided, however, that such efforts shall not include any
requirement that the parties hereto (a) request accelerated treatment (unless
Purchaser desires accelerated treatment), (b) expend money (other than in
connection with the fees and expenses required to file under the HSR Act), (c)
commence any litigation, (d) defend or prosecute any governmental proceeding, or
(e) grant any accommodation (financial or otherwise) to any third party, but
shall include a requirement that the parties respond in good faith to any
request for information or inquiries by the FTC or the DOJ for information until
the earlier of (i) the expiration or termination of the waiting period under the
HSR Act or (ii) the delivery by the FTC or the DOJ of a "second request" for
information with respect to transactions contemplated hereby. The filing fees
required in connection with the filings with the FTC and DOJ described in this
Section 3.5 shall be borne by Purchaser.
3.6 CONDUCT OF BUSINESS BY SELLER PENDING PURCHASE. Seller and
each of the Stockholders covenant and agree that, unless Purchaser shall
otherwise consent in writing, between the Effective Date hereof and the Closing,
the Business of Seller shall be conducted
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<PAGE> 9
only in, and Seller shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice; and Seller will use its
commercially reasonable efforts to preserve substantially intact the Business of
Seller, to keep available the services of the present officers, employees,
auditors and consultants of Seller, and to preserve the present relationships of
Seller with customers, clients and other persons having business relationships
with Seller. By way of amplification and not limitation, except as expressly
provided for in this Agreement, Seller and each of the Stockholders covenant
that, between the date hereof and the Closing, Seller and the Stockholders shall
not, directly or indirectly, do any of the following without the prior written
consent of Purchaser:
(a) (i) issue, sell, gift, pledge, transfer, dispose of,
encumber, authorize any shares of capital stock, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock of, or any other ownership interest in, Seller (other than the
issuance of shares of capital stock in accordance with the requirements of any
options issued and outstanding prior to the date of this Agreement); (ii) amend
the Articles of Incorporation or By-Laws of Seller; (iii) split, combine or
reclassify any outstanding share of Seller's capital stock, or declare, set
aside or pay any dividend or distribution payable in cash, stock, property or
otherwise with respect to Seller's capital stock, except for (x) normal salary
and bonuses earned in the ordinary course of business (except that the
Stockholders shall be compensated by Seller only at the salary rate set forth in
their respective Employment Agreements beginning as of the Effective Date), (y)
quarterly distributions by Seller to enable the Stockholders to pay federal and
state income taxes generated by Seller's operations since December 31, 1997 to
the Effective Date (based on an agreed effective tax rate of 49.12%), and (z)
any amounts necessary to reduce the cash of the Company to the amount described
in Section 1.1(j) hereof, in each consistent with Seller's past practices and as
disclosed to Purchaser in writing in advance of payment; (iv) redeem, purchase
or otherwise acquire any shares of Seller's capital stock; or (v) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this Section 3.6(a);
(b) (i) acquire (by merger, consolidation, or acquisition
of stock or assets) any interest in any corporation, partnership or other
business organization or division thereof; (ii) except in the ordinary course of
business and in a manner consistent with past practices, sell, pledge, dispose
of, or encumber any assets of Seller; (iii) enter into any material contract or
agreement, except for client contracts in the ordinary course of business; (iv)
authorize any single capital expenditure in excess of $5,000 or capital
expenditures in the aggregate in excess of $50,000; or (v) enter into or amend
any contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this Section 3.6(b);
(c) take any action other than in the ordinary course of
business and in a manner consistent with past practice (none of which actions
shall be unreasonable or unusual) with respect to materially increasing the
compensation or other remuneration of any officer, director, stockholder or
employee of Seller, pay any bonuses to any of its employees (except for bonuses
earned in the ordinary course of business and disclosed to Purchaser in writing
in advance of payment), or with respect to the grant of any severance or
termination pay (otherwise than pursuant to policies of Seller in effect on the
date hereof and fully disclosed to Purchaser
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<PAGE> 10
in writing prior to the date hereof) or with respect to any increase of benefits
payable under its severance or termination pay policies in effect on the date
hereof;
(d) (i) make any payments except in the ordinary course
of business and in amounts and in a manner consistent with past practice (none
of which payments shall be unreasonable or unusual), under any Employee Benefit
Plan or otherwise to any employee of, or independent contractor or consultant
to, Seller; or (ii) except for actions taken in the ordinary course of business
and in a manner consistent with past practice (none of which actions shall be
unreasonable or unusual) enter into any Employee Benefit Plan, any employment or
consulting agreement, grant or establish any new awards under any such existing
Employee Benefit Plan or agreement, or adopt or otherwise amend any of the
foregoing;
(e) take any action except in the ordinary course of
business and in a manner consistent with past practice with respect to, or make
any change in, its methods of management, distribution, marketing, accounting or
operating (including practices relating to payment of trade accounts or to other
payments) or relating to writing down or failing to write down (in accordance
with its past practices consistently applied) or writing up the value of any
assets of Seller;
(f) take any action or enter into any agreement or make
any change in the billing or collection of its accounts receivable and unbilled
claims (other than in the ordinary course of business and consistent with past
practices), including without limitation, discounting or writing off any of
Seller's accounts receivable or work in progress for early payment, or granting
any other deduction or discount thereon or accelerating the collection thereof;
(g) take any action or make any change in the manner in
which Seller incurs or pays accounts payable (other than in the ordinary course
of business and consistent with past practices), including without limitation,
accelerating the accrual of accounts payable or delaying payments of accounts
payable accrued;
(h) except in the ordinary course of business or as
specifically permitted herein, take any action to incur, assume, increase or
guarantee prior to Closing any indebtedness for borrowed money from banks or
other financial institutions or cancel, without payment in full, any notes,
loans or other receivables except in the ordinary course of business;
(i) loan or advance monies to any person under any
circumstance whatsoever except travel advances or other reasonable expense
advances to employees of Seller made in the ordinary course of business and
consistent with past practice;
(j) change any existing bank accounts or lock box
arrangements of Seller, except for deposits, withdrawals, or changes of
signatories in the ordinary course of business;
(k) waive any material rights of Seller or settle any
material claim involving Seller; or
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(l) do any act or omit to do any act which would cause a
breach of, or inability to perform, any contract, commitment or obligation of
Seller or any of the Stockholders, which breach has a Material Adverse Effect
(as defined in Section 4.6 hereof) on Seller or the ability of Seller or any of
the Stockholders to perform his, her or its obligations under this Agreement or
any Transaction Document.
Notwithstanding the other provisions of this Section 3.6, Seller and
the Stockholders shall not be in breach of this Section to the extent any action
taken by Seller or the Stockholders would be permitted by the Earn Out
Agreement.
3.7 ALLOCATION OF PURCHASE PRICE AMONG PURCHASED ASSETS. The
Purchase Price shall be allocated for tax purposes among each item or class of
Purchased Assets and the Noncompetition and Nonsolicitation Agreements as
mutually agreed to by Purchaser and Seller and set forth on Schedule 3.7
attached hereto. Seller and Purchaser agree that they will prepare and file any
notice or other filing required pursuant to Section 1060 of the Code, and that
any such notices or filings will be prepared based upon such tax allocation of
the Purchase Price. Purchaser agrees to send to Seller a completed copy of its
Form 8594 ("Asset Acquisition Statement under Section 1060") with respect to
this transaction prior to filing such form with the Internal Revenue Service.
3.8 PRGX SHARES. The PRGX Shares will be unregistered, restricted
securities, issued pursuant to customary investment representations contained
herein and may not be resold except in accordance with applicable federal and
state securities laws. The PRGX Shares will be subject to resale restrictions
during the period from the Closing Date until the first anniversary of the
Closing Date in accordance with Rule 145 or other applicable rules promulgated
by the Securities and Exchange Commission ("SEC"). In addition, at the Closing,
the Seller shall execute and deliver a lock-up agreement (the "Lock-up
Agreement") in respect of the PRGX Shares (together with any additional shares
of PRGX Common Stock issued by way of stock split or stock dividend) in the form
of Exhibit 3.8A attached hereto. Notwithstanding the foregoing, the parties
acknowledge that Seller may distribute the PRGX Shares to the Stockholders
following the Closing, and such transfer will be exempt from the transfer
restrictions contemplated by this Section 3.8 subject to the conditions of the
Lock-up Agreement.
3.9 PUBLIC ANNOUNCEMENTS.
(a) Except for any public announcement relating to the
transactions contemplated herein as may be required by law or as provided in
this Section, each of the Seller, the Stockholders, PRGX and Purchaser agrees
that until the consummation of the transactions contemplated herein, each of
such parties will not, and will direct its directors, officers, employees,
representatives and agents who have knowledge of the transactions not to,
disclose to any person who is not a participant in discussions concerning the
transactions (other than persons whose consent is required to be obtained
hereunder), any of the terms, conditions or other facts with respect to the
transactions contemplated herein, including, without limitation, the fact that
negotiations are taking place.
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(b) Seller and the Stockholders shall obtain the prior
written consent of Purchaser before issuing any press release or otherwise
making any public statements with respect to the transactions contemplated
herein and shall not issue any such press release or make any such public
statement prior to receiving such consent. Except for PRGX's press releases
issued July 7, 1998 and July 21, 1998, which have been approved by Seller, PRGX
and the Purchaser shall not issue any press release or otherwise make any
written announcements with respect to the transactions contemplated herein
without providing Seller a reasonable opportunity to comment upon the content
thereof; provided, that, PRGX and Purchaser may issue such press releases and
make such disclosures as counsel may advise is required by law or stock exchange
rule. The parties acknowledge and agree that PRGX expects to issue a press
release with respect to the transactions contemplated herein immediately after
the execution of this Agreement by all parties hereto.
3.10 NO NEGOTIATIONS. Each of the Stockholders and Seller covenant
that, subject to the termination provisions contained herein, from and after the
date hereof until Closing, Seller will not offer the Purchased Assets for sale
to any person other than Purchaser, and neither Seller, nor the Stockholders,
nor anyone acting on behalf of Seller or such persons, shall, directly or
indirectly, solicit, initiate or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale or transfer of substantial
assets, sale of any shares of capital stock or similar transaction involving
Seller or the Purchased Assets, or otherwise engage in the negotiation toward
discussions concerning, or provide any non-public information to any person,
relating to any such potential transaction.
3.11 COVENANT RE: TAX MATTERS.
(a) As used in this Agreement, the following terms have
the specified meanings:
(i) "Tax Authority" shall mean any United States
federal, foreign, national, state, county or municipal or other local
government, any subdivision, agency, commission or authority thereof,
or any quasi-governmental body exercising any taxing authority or any
other authority exercising tax regulatory authority.
(ii) "Tax Return" shall mean any return, amended
return, estimated return, information return and statement (including
any related or supporting information) filed or to be filed with any
Tax Authority in connection with the determination, assessment,
collection or administration of any Tax.
(iii) "Taxes" shall mean all taxes, charges, fees,
interest, fines, penalties, additions to tax or other assessments,
including without limitation, income, excise, environmental, property,
sales, gross receipts, gains, transfer, occupation, privilege,
employment (including social security and unemployment), use, value
added, capital stock or surplus, franchise taxes, advance corporate tax
and customs duties
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<PAGE> 13
imposed by any Tax Authority, payable by Seller or relating to or
chargeable against Seller's assets, revenues or income.
(b) Except as otherwise provided in this Agreement, the
parties hereby agree that each of them shall cooperate with the other in
executing or causing to be executed any required document and by making
available to the other all work papers, records and notes of any kind at all
reasonable times for the purpose of allowing the appropriate party to complete
Tax Returns, participate in a proceeding, obtain refunds, make any determination
required under this Agreement or defend or prosecute Tax claims. Notwithstanding
anything to the contrary contained herein, Seller and the Stockholders shall
have sole and exclusive authority to prepare and file all Tax Returns concerning
Seller related activities occurring prior to the Closing, including, without
limitation, its operation of the Business and its use of the Purchased Assets
and all matters under agreements not being assumed by Purchaser (regardless of
when such return is filed).
3.12 NONQUALIFIED STOCK OPTIONS. At the Closing, in consideration
of their employment with Purchaser, PRGX shall, pursuant to a stock option
agreement the form of which is attached hereto as Exhibit 3.12, grant to the
persons identified on Schedule 3.12 a nonqualified stock option to purchase the
number of shares of PRGX Common Stock up to that amount respectively set forth
opposite each such person's name on such Schedule; provided, that, Purchaser and
PRGX may condition such grant upon the prior execution and delivery by such
grantee of the Employee Agreement. Such options will be granted under the PRGX
Stock Incentive Plan in accordance with the terms of such stock option agreement
and the Stock Incentive Plan at an exercise price equal to the closing price per
share of PRGX Common Stock (as reported in The Wall Street Journal) for the
Closing Date. All such options shall vest over a five (5) year period at the
rate of twenty (20%) per year. If there is any conflict between the terms of the
separate stock option agreement and this Agreement, the terms of the stock
option agreement shall govern and control.
3.13 OTHER COVENANTS OF STOCKHOLDERS. Each of the Stockholders
shall have executed and delivered to PRGX prior to the execution hereof an
Investor Information Questionnaire in substantially the form attached hereto as
Exhibit 3.13(a). Each of the Stockholders who is a resident of a state which is
a community property jurisdiction shall cause his or her spouse to execute and
deliver at Closing a spousal consent in substantially the form attached hereto
as Exhibit 3.13(b).
3.14 TRANSACTION EXPENSES. Except as otherwise specifically
provided herein, all of the expenses incurred by Purchaser in connection with
the authorization, negotiation, preparation, execution and performance of this
Agreement and other agreements referred to herein and the consummation of the
transactions contemplated hereby, including, without limitation, all fees and
expenses of agents, representatives, brokers, counsel and accountants for
Purchaser, shall be paid by Purchaser ("Purchaser Transaction Expenses"). Except
as otherwise specifically provided herein, all expenses incurred by the Seller
or the Stockholders in connection with the authorization, negotiation,
preparation, execution and performance of this Agreement and the other
agreements referred to herein and the consummation of the transactions
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<PAGE> 14
contemplated hereby, including without limitation, all fees and expenses of
agents, representatives, brokers, counsel and accountants, shall be paid by the
Seller or the Stockholders ("Seller Transaction Expenses").
3.15 CORPORATE NAME. As soon as practicable following the Closing,
Seller shall change its corporate name and Seller and the Stockholders shall
cooperate with Purchaser at Purchaser's sole cost in any efforts undertaken by
Purchaser to secure and protect its rights in any name used by Seller in the
conduct of the Business prior to Closing.
3.16 ACCESS TO BOOKS AND RECORDS. After the Closing, Seller and the
Stockholders shall preserve all of the records and books, customer records, and
any other records of Seller until the fifth anniversary of the Closing Date,
and, until such time, make them available, during normal business hours, to
Purchaser and its designees, counsel, accountants, and others authorized by them
for inspection and the making of copies thereof.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
SELLER AND THE STOCKHOLDERS
In order to induce the Purchaser and PRGX to enter into this Agreement
and consummate the transactions contemplated hereby, Seller and each of the
Stockholders jointly and severally represent and warrant to the Purchaser and
PRGX as follows, each of which warranties and representations is material to and
relied upon by the Purchaser and PRGX.
4.1 ORGANIZATION AND AUTHORITY OF SELLER. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California. Seller is duly qualified as a foreign corporation in all
jurisdictions in which the conduct of its business or the ownership of its
properties requires such qualification (except where the failure to do so would
not have a Material Adverse Effect (as defined in Section 4.6 hereof) on Seller)
and Schedule 4.1 lists all the jurisdictions where Seller is so qualified.
Seller has all necessary corporate power and authority to own, lease and operate
its properties and conduct its business as it is currently being conducted.
Except for immaterial investments in liquid securities of public entities,
Seller does not own, directly or indirectly, any equity interest in any
corporation, partnership, joint venture, or other entity.
4.2 CORPORATE POWER AND AUTHORITY; DUE AUTHORIZATION. Seller has
full corporate power and authority, and each Stockholder has full power and
authority, to execute and deliver this Agreement and each of the Transaction
Documents to which Seller or any of the Stockholders is or will be a party and
to consummate the transactions contemplated hereby. "Transaction Documents"
means each of the agreements, documents and instruments referenced in this
Agreement to be executed and delivered by Seller and/or any of the Stockholders.
The directors and the Stockholders of Seller have duly approved and authorized
the execution and delivery of this Agreement and each of the Transaction
Documents to which Seller is or will be a party and the consummation of the
transactions contemplated hereby and thereby. Assuming
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that this Agreement and each of the Transaction Documents which are also
Purchaser's Transaction Documents (as defined in Section 5.2 herein) constitutes
a valid and binding agreement of the Purchaser, this Agreement and each of the
Transaction Documents constitutes, or will constitute when executed and
delivered, a valid and binding agreement of Seller and/or the Stockholders, as
the case may be, in each case enforceable in accordance with its terms, subject
to laws of general application in effect affecting creditors' rights and subject
to the exercise of judicial discretion in accordance with general equitable
principles. The duly elected directors and officers of Seller are set forth on
Schedule 4.2 attached hereto.
4.3 TITLE TO ASSETS. Seller has good, valid and marketable title
to all of its assets (and a valid and enforceable leasehold interest in all of
its assets subject to Leases), free and clear of any mortgages, liens (except
for liens for Taxes not yet due and payable), pledges, security interests,
encumbrances, claims or similar rights of every kind and nature except as set
forth on Schedule 4.3 hereto.
4.4 NO CONFLICT; REQUIRED CONSENTS. Schedule 4.4 includes (y) all
Contracts required to be included on Schedule 4.16 and all Leases required to be
included on Schedule 4.18 that require consent or approval to the assignment of
such Contract or Lease hereunder and (z) all contracts (except customer
contracts and employment contracts) or leases that require consent or approval
to the assignment of such contract or lease where the absence of such consent
would result in a Material Adverse Effect. Assuming compliance with the
applicable requirements of the HSR Act, if any, and assuming all consents,
approvals, authorizations and other actions listed on Schedule 4.4 hereto have
been obtained or taken prior to Closing, the execution and delivery by Seller
and the Stockholders of this Agreement and the Transaction Documents, and the
consummation by Seller and each of the Stockholders of the transactions
contemplated hereby and thereby do not and will not (a) require the consent,
approval or action of, or any filing with or notice to, any corporation, firm,
person or other entity or any public, governmental or judicial authority (except
for consents and approvals under contracts or leases not required to be listed
on Schedule 4.4); (b) violate the terms of any instrument, document or agreement
to which Seller or the Stockholders is a party, or by which Seller or either of
the Stockholders or the property of Seller or either of the Stockholders is
bound, or be in conflict with, result in a breach of or constitute (upon the
giving of notice or lapse of time or both) a default under any such instrument,
document or agreement, or result in the creation of any lien upon any of the
property or assets of Seller or either of the Stockholders (except for such
contracts and leases that are not required to be listed on Schedule 4.4); (c)
violate Seller's Articles of Incorporation or Bylaws; or (d) violate any order,
writ, injunction, decree, judgment, ruling, law, rule or regulation of any
federal, state, county, municipal, or foreign court or governmental authority
applicable to Seller or either of the Stockholders, or the Business or assets of
Seller. Neither Seller nor the Stockholders shall be deemed in violation of
clauses (a), (b), or (d) of this Section for purposes of Section 6.1 hereof so
long as any inaccuracy with respect to such clauses does not result in a
Material Adverse Effect. Neither Seller nor the Stockholders is subject to, or
is a party to, any mortgage, lien, lease, agreement, contract, instrument,
order, judgment or decree or any other restriction of any kind or character
which would prevent or hinder the continued operation of the Business of Seller
after the Closing on substantially the same basis as theretofore operated.
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4.5 CAPITALIZATION OF SELLER. Schedule 4.5 attached hereto is a
true, correct and complete list of the authorized capital stock, par value per
share, number of issued and outstanding shares of capital stock and number of
treasury shares for Seller. All outstanding shares of Seller's capital stock
have been duly authorized, and are validly issued, fully paid and nonassessable
and are owned of record and beneficially solely by the persons and in the
amounts set forth on Schedule 4.5. No one other than the Stockholders or their
respective spouses has any beneficial or record interest in the capital stock of
Seller. Each of the Stockholders warrants and represents that he is the lawful
owner of, and has good and marketable title to, the number of shares of Seller's
outstanding capital stock as shown on Schedule 4.5 as being owned by him, free
and clear of any mortgage, pledge, claim, lien, charge, encumbrance or other
right in any third party (including any right to purchase, vote or direct the
voting of, any shares thereof). Except as set forth on Schedule 4.5, Seller has
not issued any convertible securities, options, warrants, or entered into any
contracts, commitments, agreements, understandings, arrangements or restrictions
by which it is bound to issue any additional shares of its capital stock or
other securities.
4.6 COMPLIANCE WITH LAWS. Seller is in compliance with all
applicable laws, orders, rules and regulations of all governmental bodies and
agencies, except where such noncompliance has and will have, individually or in
the aggregate, no Material Adverse Effect on the Business or assets of Seller.
Neither Seller nor any of the Stockholders has received written notice of any
noncompliance with the foregoing. The term "Material Adverse Effect" means any
change in or effect on the Business of Seller that is or will be materially
adverse to the Business, operations, properties (including intangible
properties), condition (financial or otherwise), assets, liabilities, customer
relations or regulatory status of Seller.
4.7 LICENSES AND PERMITS. Other than with respect to the matters
described in Section 4.1 hereof and customary business licenses generally
required of all businesses, there are no licenses, permits, approvals or
authorizations necessary or required for the use or ownership of Seller's assets
and the operation of Seller's Business (collectively, the "Licenses and
Permits"). Neither Seller nor any of the Stockholders has received written
notice of any violations in respect of any such licenses, permits, approvals or
authorizations except for any such violations which would not in the aggregate
result in a Material Adverse Effect. No proceeding is pending or, to the
knowledge of Seller or any of the Stockholders, is threatened, which seeks
revocation or limitation of any such licenses, permits, concessions, grants,
franchises, approvals or authorizations.
4.8 FINANCIAL INFORMATION. Attached hereto as Schedule 4.8 are
true, correct and complete copies of the Historical Statements and the Monthly
Statements for periods through the last day of the month preceding the date
hereof (all as defined in Section 3.1 hereof) which include a balance sheet as
of June 30, 1998. All such Historical Statements and Monthly Statements, and all
financial information provided by Seller or the Stockholders to Purchaser or the
Accountants, have been prepared on the accrual basis of accounting (except where
otherwise noted) in accordance with generally accepted accounting principles
("GAAP"), fairly present the financial condition of the Business at the
respective dates thereof and the results of its operations for the periods then
ended (and, in the case of interim statements, subject to normal year-end
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<PAGE> 17
adjustments) in each case in accordance with past practice and GAAP consistently
applied during the periods presented (except as otherwise disclosed in the notes
thereto.) On the Effective Date, there were no material liabilities or
obligations of Seller of any nature, whether liquidated, unliquidated, accrued,
absolute, contingent or otherwise except for those (i) that are specifically
reflected or reserved against as to amount in the June 30, 1998 balance sheet
contained in the Monthly Statements, or (ii) that are specifically set forth on
Schedule 4.8 attached hereto. For purposes of the preceding sentence, a
liability or obligation of Seller shall be deemed material if, individually or
in the aggregate with other liabilities or obligations, any such liability or
obligation exceeds $25,000. Seller is not, nor has Seller been during the 12
months immediately preceding the execution of this Agreement, insolvent within
the meaning of 11 U.S.C. ss.101(31). Seller has and is paying its debts as they
become due. All claims for refunds for clients and customers on the books of
Seller are bona fide.
4.9 SUFFICIENCY OF ASSETS. The Purchased Assets constitute all of
the material assets and rights of any nature with which Seller has conducted the
Business for the twelve month period prior to the Closing Date, subject only to
additions and deletions in the ordinary course of business. The Purchased Assets
are held solely by, and all agreements, obligations, expenses and transactions
related to Seller's Business have been entered into, incurred and conducted
solely by, Seller.
4.10 DEPOSITS. Attached as Schedule 1.1(g) is a true, correct and
complete list of all cash Deposits of Seller in excess of $1,000 as of the
Effective Date, setting forth the amount of each such Deposit.
4.11 TRADE PAYABLES; ACCRUED EXPENSES; OTHER DEBT. Schedule 4.11A
is a true, correct and complete list of the trade payables, accounts payable and
accrued expenses of Seller outstanding as of the Effective Date. All such trade
payables, accounts payable and accrued expenses were incurred in the ordinary
course of business and no material portion thereof is overdue. Schedule 4.11B is
a true, correct and complete list of all other debts, obligations, guaranties,
liabilities and other indebtedness of Seller outstanding as of the date of this
Agreement, stating the origin of the obligation, the security therefor and the
amount owed as of date hereof and the terms of payment.
4.12 TAX MATTERS. No state, federal or local tax liens exist with
respect to Seller or any of the Stockholders or any of Seller's assets, other
than liens, if any, for taxes not yet due and payable.
4.13 FIXED ASSETS AND VEHICLES. The Fixed Assets include all of the
furniture, fixtures, equipment and vehicles owned and used by Seller in the
operation of its Business. A true, correct and complete list of the Fixed Assets
as of the date hereof and the location thereof is attached as Schedule 1.1(a)
4.14 ACCOUNTS RECEIVABLE. Schedule 4.14 attached hereto is a true,
correct and complete list of all Accounts Receivable of Seller as of the
Effective Date showing the aging of such Accounts Receivable, and all such
Accounts Receivable listed thereon are bona fide, arose
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<PAGE> 18
in the ordinary course of business, and to the knowledge of Seller are not
subject to any disputes or offsets in excess of the reserve therefor, except as
set forth on Schedule 4.14. The amount of such Accounts Receivable, net of the
reserve for uncollectibility, as each are set forth on Schedule 4.14 hereof,
have been recorded in accordance with GAAP. After the Effective Date and prior
to Closing, any Accounts Receivable of Seller arising during such period shall
be bona fide, shall have arisen in the ordinary course of business, shall be set
forth in Seller's books and records and in any financial statements prepared
pursuant to the terms of this Agreement.
4.15 BANK ACCOUNTS. Schedule 4.15 contains a true, complete and
correct list showing the name and location of each bank or other institution in
which Seller has any deposit account or safe deposit box, together with a
listing of account numbers and names of all persons authorized to draw thereon
or have access thereto.
4.16 CONTRACTS. Schedule 4.16 sets forth a true and complete list
of all legally binding written or oral (a) contracts, independent contractor
agreements and all other agreements and other instruments to which Seller is a
party or to which Seller's assets are subject or bound involving an aggregate
annual expenditure by Seller of $12,000 or more or which is not cancelable by
Seller without cost on 60 days or less notice, except for customer contracts,
employment agreements and Leases, and (b) contracts which restrict or regulate
in any manner the conduct of business by Seller anywhere in the world, require
the referral of any business by Seller, or require or purport to require the
payment of money or the acceleration of performance of any obligations of Seller
by virtue of the Closing. Such contracts so identified in Schedule 4.16 and
Contracts involving an annual expenditure of less than $12,000 or cancelable by
Seller on less than 60 days notice are herein referred to as the "Contracts."
Prior to execution of this Agreement, Seller and the Stockholders have provided
or made available to Purchaser true, correct and complete copies of the
Contracts, including any and all amendments and waivers thereto. Assuming the
Contracts constitute the valid and binding agreements of the parties thereto
other than Seller, such Contracts are valid, legally binding and enforceable
against the parties thereto subject to laws of general application in effect
affecting creditors' rights and subject to the exercise of judicial discretion
in accordance with general equitable principles. Neither Seller nor, to the best
knowledge of Seller and the Stockholders, any other party to any of the
Contracts, is in breach of, or in default under, any of the Contracts, and no
event has occurred which, with the giving of notice or lapse of time, or both,
would constitute a default by Seller or, to the best knowledge of Seller and the
Stockholders, any other party to any of the Contracts, except in such instance
where such breach or default would not individually or in the aggregate have a
Material Adverse Effect. Except as specifically set forth on Schedule 4.4
attached hereto, the assignment of any of the Contracts to the Purchaser in
accordance with this Agreement will not constitute a breach or violation of such
Contract.
4.17 INTELLECTUAL PROPERTY. Schedule 4.17 hereto lists the
corporate name, all tradenames, trademarks, service marks and registered
copyrights used by Seller in the operation of its Business (collectively,
"Intellectual Property") and Seller owns and/or has the sole and exclusive right
to use all of the Intellectual Property. Upon the consummation of the
transactions contemplated hereby and compliance with applicable laws as to the
assignment of such Intellectual Property, the Purchaser will have the sole and
exclusive right to own and use
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<PAGE> 19
the Intellectual Property. No claims have been asserted and no claims are
pending or, to Seller's or the Stockholders' knowledge, threatened by any person
or entity, as to the use of any such Intellectual Property or challenging or
questioning the validity or effectiveness of any state or federal registration
of the Intellectual Property and neither Seller nor any of the Stockholders
knows of any valid basis for such claim. To Seller's and Stockholders'
knowledge, Seller's use of the Intellectual Property, and the Purchaser's
continued use of the Intellectual Property following the Closing in the same
manner as heretofore used by Seller, does not and will not infringe on the
rights of any person or entity.
4.18 LEASES. Schedule 4.18 attached hereto is a true, correct and
complete list of all legally binding written and oral leases to which Seller is
a party, including without limitation all real property and equipment leases,
except any lease involving an aggregate annual expenditure by Seller of less
than $12,000 or having a term which extends for not more than one year from the
date hereof (collectively, "Leases"). Seller has delivered or made available to
Purchaser true, correct and complete copies of the Leases listed in Schedule
4.18, together with all amendments, addenda and supplements thereto. With
respect to each Lease listed in Schedule 4.18:
(a) the Lease is legal, valid, binding and enforceable
against Seller and in full force and effect, subject to laws of general
application in effect affecting creditors' rights and subject to the exercise of
judicial discretion in accordance with general equitable principles;
(b) subject to obtaining any necessary consent in respect
of the transactions contemplated hereunder, the Lease will continue to be legal,
valid, binding and enforceable against the Seller and in full force and effect
on identical terms following the Closing;
(c) neither Seller, nor, to Seller's or the Stockholders'
knowledge, any other party to the Lease is in breach or default, and no event
has occurred which, with the giving of notice or lapse of time, would constitute
a breach or default by Seller or permit termination, modification or
acceleration thereunder by any other party thereto;
(d) neither Seller nor, to Seller's or the Stockholders'
knowledge, any other party to the Lease has repudiated in writing any provision
thereof;
(e) there have been and there are no disputes, oral
agreements or forebearances in effect as to the Lease; and
(f) Seller has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold and
neither Seller nor either of the Stockholders is aware of any such assignment,
transfer, conveyance, mortgage, deed in trust or encumbrance of any interest in
the leasehold.
4.19 LITIGATION; JUDGMENTS. Except as set forth on Schedule 4.19
hereto, there is no action, proceeding or investigation pending or, to Seller's
or any of the Stockholders' knowledge, threatened against or involving Seller or
any of the Stockholders relating to the
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<PAGE> 20
Purchased Assets or the operation of Seller's Business, nor is there any action
or proceeding pending or, to the knowledge of Seller or any of the Stockholders,
threatened before any court, tribunal or governmental body seeking to restrain
or prohibit or to obtain damages or other relief in connection with the
consummation of the transactions contemplated by this Agreement, or which might
adversely affect Seller's Business or the Purchased Assets, or Seller's or the
Stockholders' ability to consummate the transactions contemplated by this
Agreement and the Transaction Documents to which Seller or any Stockholder is a
party. Except as set forth in Schedule 4.19, neither Seller nor any of the
Stockholders is subject to any judgment, order or decree entered in any lawsuit
or proceeding relating to the Purchased Assets or the operation of Seller's
Business.
4.20 INSURANCE. Schedule 4.20 lists all of the insurance policies
maintained by Seller as of the Effective Date, which schedule includes the name
of the insurance company, the policy number, a description of the type of
insurance covered by such policy, the dollar limit of the policy, and the annual
premiums for such policy. Seller shall maintain such insurance policies in full
force and effect through the Closing Date.
4.21 BENEFIT PLANS AND ERISA.
(a) Schedule 4.21 sets forth a true and complete list of
each "employee benefit plan" (as defined by Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), and any other
material bonus, profit sharing, pension, incentive compensation, deferred
compensation, stock option, stock purchase, severance, post-retirement, health
benefit, retention, or other plan, agreement, policy, trust fund or arrangement
(each such plan, agreement, policy, trust fund or arrangement is referred to
herein as an "Employee Benefit Plan", and collectively, the "Employee Benefit
Plans") that is currently in effect, or which has been approved before the date
hereof but is not yet effective, for the benefit of current or former directors
or employees of Seller or any other persons currently or formerly performing
services for Seller, and/or beneficiaries of any such persons (collectively,
"Business Employees") or with respect to which Seller or any "ERISA Affiliate"
(hereby defined to include any trade or business, whether or not incorporated,
other than Seller, which has employees who are or have been at any date of
determination occurring within the preceding six (6) years, treated pursuant to
Section 4001(a)(14) of ERISA and/or Section 414 of the Code as employees of a
single employer which includes Seller) has or has had any obligation on behalf
of any Business Employee. No Employee Benefit Plan is subject to Title IV of
ERISA or is intended to qualify under Sections 401(a) or 501(c)(9) of the Code.
(b) Seller has delivered or made available to Purchaser,
with respect to each Employee Benefit Plan, true and complete copies of the
documents embodying and relating to the plan, including, without limitation, the
current plan documents and documents creating any trust maintained pursuant
thereto, all amendments, investment management agreements, administrative
service contracts, group annuity contracts, insurance contracts, collective
bargaining agreements, the most recent summary plan description with each
summary of material modification, if any, and employee handbooks.
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<PAGE> 21
(c) Seller has no obligation to contribute to or provide
benefits pursuant to, and has no other liability of any kind with respect to,
(i) a "multiple employer welfare arrangement" (within the meaning of Section
3(40) of ERISA), (ii) a "plan maintained by more than one employer" (within the
meaning of Section 413(c) of the Code), or (iii) a "multiemployer plan" (within
the meaning of Section 3(37) of ERISA.
(d) Seller is not liable for, and neither Purchaser nor
Seller will be liable for, any contribution, tax, lien, penalty, cost, interest,
claim, loss, action, suit, damage, cost, assessment or other similar type of
liability or expense of any ERISA Affiliate (including predecessors thereof)
with regard to any Employee Benefit Plan maintained, sponsored or contributed to
by an ERISA Affiliate (if a like definition of Employee Benefit Plan were
applicable to the ERISA Affiliate in the same manner as it applies to Seller),
including, without limitation, withdrawal liability arising under Title IV,
Subtitle E, Part 1 of ERISA, liabilities to the PBGC, or liabilities under
Section 412 of the Code or Section 302(a)(2) of ERISA.
(e) Seller, each ERISA Affiliate, each Employee Benefit
Plan and each Employee Benefit Plan "sponsor" or "administrator" (within the
meaning of Section 3(16) of ERISA) has complied in all respects with the
applicable requirements of Section 4980B of the Code and Section 601 et seq. of
ERISA (such statutory provisions and predecessors thereof are referred to herein
collectively as "COBRA"). Schedule 4.21 lists the name of each Business Employee
who has experienced a "Qualifying Event" (as defined in COBRA) with respect to
an Employee Benefit Plan who is eligible for "Continuation Coverage" (as defined
in COBRA) and whose maximum period for Continuation Coverage required by COBRA
has not expired. Included in such list are the current address for each such
individual, the date and type of each Qualifying Event, whether the individual
has already elected Continuation Coverage and, for any individual who has not
yet elected Continuation Coverage, the date on which such individual was
notified of his or her rights to elect Continuation Coverage. Schedule 4.21 also
lists the name of each Business Employee who is on a leave of absence (whether
or not pursuant to the Family and Medical Leave Act of 1993, as amended
("FMLA")) and is receiving or entitled to receive health coverage under an
Employee Benefit Plan, whether pursuant to FMLA, COBRA or otherwise.
(f) With respect to each Employee Benefit Plan and except
as otherwise set forth on Schedule 4.21 attached hereto:
(i) all payments required by the Employee
Benefit Plan, any collective bargaining agreement or by law (including
all contributions, insurance premiums, premiums due the PBGC or
intercompany charges) with respect to all periods prior to and
including the date hereof have been made;
(ii) there are no material violations of or
failures to comply with ERISA and the Code with respect to the filing
of applicable reports, documents, and notices regarding the Employee
Benefit Plan with the DOL, the IRS, the PBGC or any other governmental
authority, or any of the assets of the Employee Benefit Plan or any
related trust;
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<PAGE> 22
(iii) no claim, lawsuit, arbitration or other
action has been asserted or instituted or threatened in writing against
the Employee Benefit Plan, any trustee or fiduciaries thereof, Seller
or any ERISA Affiliate, any director, officer or employee thereof, or
any of the assets of the Employee Benefit Plan or any related trust,
other than claims for benefits due in the ordinary course;
(iv) all amendments required to bring the
Employee Benefit Plan into conformity with applicable law, including,
without limitation, ERISA and the Code, have been or will be timely
adopted;
(v) the Employee Benefit Plan complies with and
has been maintained and operated in accordance with its respective
terms and the terms and the provisions of applicable law, including,
without limitation, ERISA and the Code (including rules and regulations
thereunder);
(vi) no "prohibited transaction" (within the
meaning of Section 4975 of the Code and Section 406 of ERISA) has
occurred or is expected to occur with respect to the Employee Benefit
Plan (and the transactions contemplated by this Agreement will not
constitute or directly or indirectly result in such a "prohibited
transaction") which has subjected or could subject Seller, any ERISA
Affiliate, the Purchaser or any officer, director or employee of
Seller, any ERISA Affiliate, the Purchaser or the Employee Benefit Plan
trustee, administrator or other fiduciary, to a tax or penalty on
prohibited transactions imposed by either Section 502 of ERISA or
Section 4975 of the Code or any other material liability with respect
thereto;
(vii) Seller has received no oral or written
notification that the Employee Benefit Plan is under audit or
investigation by the IRS or the DOL or any other governmental authority
and no such completed audit, if any, has resulted in the imposition of
any tax, interest or penalty; and
(viii) if the Employee Benefit Plan purports to
provide benefits which qualify for tax-favored treatment under Sections
79, 105, 106, 117, 120, 125, 127, 129 or 132 of the Code, the Employee
Benefit Plan satisfies the requirements of said Section(s); and
(ix) the Employee Benefit Plan may be
unilaterally amended or terminated on no more than 90 days notice.
(g) Seller is not subject to any liens, and excise or
other taxes under ERISA, the Code or other applicable law relating to any
Employee Benefit Plan.
(h) The consummation of the transactions contemplated by
this Agreement will not give rise to any liability for any employee benefits,
including, without limitation, liability for severance pay, unemployment
compensation, termination pay or withdrawal liability, or
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accelerate the time of payment or vesting or increase the amount of compensation
or benefits due to any Business Employee, except as contemplated in Section 3.2
hereof.
(i) Except as set forth on Schedule 4.21, no Employee
Benefit Plan in any way provides for any benefits of any kind whatsoever (other
than under COBRA or benefits that are currently fully funded and paid) to any
Business Employee who, at the time the benefit is to be provided, is a former
director or former employee of, or other former provider of services to, Seller
or an ERISA Affiliate (or a beneficiary of any such person), or any other former
Business Employee, nor have any representations, agreements, covenants or
commitments been made to provide such benefits.
(j) From December 31, 1997 and through the date hereof,
except as set forth on Schedule 4.21, neither Seller nor any ERISA Affiliate
has, nor from the date hereof to the Closing will it have, instituted or agreed
to institute any new employee benefit plan or practice, made or agreed to make
any change in any Employee Benefit Plan, made or agreed to make any increase in
the compensation payable or to become payable by Seller or any ERISA Affiliate
to any Business Employee, or except pursuant to this Agreement and except for
contributions required to provide benefits pursuant to the provisions of the
Employee Benefit Plans, paid or accrued or agreed to pay or accrue any bonus,
percentage of compensation, or other like benefit to, or for the credit of, any
Business Employee.
(k) Any contribution, insurance premium, excise tax,
interest charge or other liability or charge imposed or required with respect to
any Employee Benefit Plan which is attributable to any period or any portion of
any period prior to the Closing is or shall be reflected as a liability on
Seller's Historical Statements and/or Monthly Statements, as applicable.
(l) Attached hereto as a part of Schedule 4.21 is a true,
correct and complete list by employee of the number of days and amount of
accrued unpaid vacation, sick pay and other paid leave for each employee of
Seller ("Accrued Vacation Obligations").
4.22 BROKER'S FEES. Except for Sequoia Partners, Inc. (whose fee
will be paid by Seller), neither Seller nor any of the Stockholders has retained
or utilized the services of any broker or finder, or paid or agreed to pay any
fee or commission for or on account of the transactions contemplated hereby, or
had any communications with any person or entity with respect thereto, which
would obligate the Purchaser to pay any such fees or commissions.
4.23 ABSENCE OF MATERIAL CHANGES. Except as set forth in Schedule
4.23 attached hereto, from December 31, 1997 to the date of this Agreement:
(a) there has not been any Material Adverse Effect (as
defined in Section 4.6 hereof) on the condition (financial or otherwise) of the
Business or the Purchased Assets;
(b) there has been no deterioration in Seller's relations
with any customers or clients which would result in a Material Adverse Effect.
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<PAGE> 24
(c) Seller has operated its Business in the ordinary
course and has not sold, assigned, or transferred any of its assets except in
the ordinary course of business consistent with past practice;
(d) neither Seller nor any of the Stockholders has
mortgaged, pledged or subjected to any lien, pledge, mortgage, security
interest, conditional sales contract, or other encumbrance of any nature
whatsoever, any of the Purchased Assets or affected any of the Stockholders'
ownership of Seller's issued and outstanding equity securities;
(e) there has been no amendment, termination, or waiver
of any right of any Seller under any contract, governmental license or permit
that may materially adversely affect the Purchased Assets, the Business or any
of the Stockholders' ownership of Seller's issued and outstanding equity
securities;
(f) Seller has not:
(i) paid any judgment resulting from any suit,
proceeding, arbitration, claim or counterclaim in respect of its assets
or Business in excess of $50,000 (provided that all such excluded
payments do not aggregate to more than $250,000);
(ii) made any such payment to any party in
settlement of any such suit, proceeding, arbitration, claim or
counterclaim in excess of $50,000 (provided that all such excluded
payments do not aggregate to more than $250,000);
(iii) written down, or failed to write down (in
accordance with its past practices consistently applied) or written up
the value of any assets of Seller, except as may occur in the ordinary
course of Seller's Business;
(iv) except as otherwise disclosed, made any
material changes in the customary methods of operation of Seller's
Business, including practices and policies relating to purchasing,
marketing, selling, accounting, payment of trade creditors or
collection of accounts receivable;
(v) (except in respect of ordinary trade
payables) incurred any indebtedness or guaranteed any indebtedness,
except for borrowings under existing loans or lines of credit in the
ordinary course of business consistent with past practice;
(vi) issued or sold any of its stock, notes,
bonds or other securities, or any option, warrant or other rights to
purchase the same;
(vii) taken any action other than in the ordinary
course of business and in a manner consistent with past practices (none
of which actions has been unreasonable or unusual) with respect to
increasing the compensation of any officer, director, member or
employee of Seller, paid bonuses to any employees (except for bonuses
earned in the ordinary course of business), or with respect to the
grant of any severance or termination
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<PAGE> 25
pay (otherwise than pursuant to policies of Seller in effect on the
date hereof fully disclosed to Purchaser in writing prior to the date
hereof) or with respect to any increase of benefits payable under its
severance or termination pay policies in effect on the date hereof;
(viii) declared, set aside or paid any non-cash
dividend or distribution; or
(ix) agreed, whether in writing or otherwise, to
take any of the actions specified in this Section 4.23.
4.24 CERTAIN ARRANGEMENTS.
(a) Schedule 4.24 is a true, correct and complete list of
any material direct or indirect transaction (other than in respect of
compensation or travel or expense account reimbursement in the ordinary course
of business consistent with past practice) arising during the year ended
December 31, 1997 that any Stockholder, director, officer, employee or other
affiliate (for purposes of this Agreement, "affiliate" means any individual,
partnership, corporation, trust, joint venture or other entity controlled by,
controlling or under common control with Seller) or any relative of any
Stockholder, director, officer, employee or other affiliate has or had with
Seller and contains a brief description of each transaction, including without
limitation:
(i) any material contract, agreement,
understanding, commitment or other arrangement providing for the
furnishing of services, or the rental or the use of real or personal
property from or otherwise requiring payments to any such person
(outside of his or her capacity as such Stockholder, director, officer,
employee or other affiliate) or to any such relative of such person;
and
(ii) any material loans or advances to or from
Seller (exclusive of travel advances, expense advances, and normal
salary advances in connection with vacation periods, or compensation,
or travel or expense account reimbursement all in the ordinary course
of business), giving for each the principal amount outstanding,
interest rate, maturity date and security therefor.
(b) Except as set forth in Schedule 4.24, there have been
no transactions of the nature described in Section 4.24(a) between (i) Seller
and (ii) any of the Stockholders, director, officers, employees, or other
affiliates of Seller since December 31, 1997 to the date of this Agreement.
4.25 INVESTMENT INTENT.
(a) Seller and each of the Stockholders covenants,
warrants, represents and agrees that the PRGX Shares to be acquired by Seller at
the Closing (which shall be distributed thereafter to the Stockholders) are
being acquired solely for the Seller's or the Stockholder's,
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<PAGE> 26
as applicable, own account for investment purposes and not with a view to or in
connection with any sale or other distribution thereof, within the meaning of
the Securities Act of 1933, as amended (the "Act"), except to the extent that
such PRGX Shares may be sold under an effective registration statement under the
Act and any applicable state securities law, or in the opinion of counsel
reasonably acceptable to PRGX, pursuant to an exemption under the Act and any
applicable state securities law.
(b) Seller and each of the Stockholders understand and
acknowledge that all of the PRGX Shares acquired by it or him are to be issued
and sold to Seller and such Stockholder without registration and in reliance
upon certain exemptions under the Act, and in reliance upon certain exemptions
from registration requirements under applicable state securities laws.
(c) Seller and each of the Stockholders represent and
warrant to Purchaser and PRGX that it or he will make no transfer or assignment
of any of the PRGX Shares except in compliance with the Act and any other
applicable securities laws.
(d) Seller and each of the Stockholders covenant and
agree that, prior to any transfer or disposition not registered under the Act of
any of the PRGX Shares, or any shares received from PRGX on account of such PRGX
Shares pursuant to a stock dividend, stock split, or similar event, Seller
and/or such Stockholder will give written notice to PRGX, expressing the
Stockholder's intention to effect such transfer or disposition and describing
the proposed transfer or disposition. Such notice shall be accompanied by an
opinion of counsel for the Stockholder, reasonably acceptable to PRGX, that the
proposed transfer is exempt under the Act and applicable state securities laws.
(e) Seller and each of the Stockholders understand and
acknowledge that the PRGX Shares will be inscribed with the following legends,
or another legend to the same effect and agrees to the restrictions set forth
therein:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
under the securities laws of any other jurisdiction, in
reliance upon exemptions from the registration requirements of
such laws. The shares represented by this certificate may not
be sold or otherwise transferred, nor will an assignee or
endorsee hereof be recognized as an owner of the shares by the
issuer unless (i) a registration statement under the
Securities Act of 1933 and other applicable securities laws
with respect to the shares and the transfer shall then be in
effect, or (ii) in the opinion of counsel reasonably
satisfactory to the issuer, the shares are transferred in a
transaction which is exempt from the registration requirements
of such laws."
"The shares represented by this certificate are subject to a
Lock-Up Agreement dated ________________, 1998, which
restricts the transfer
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of the shares. A copy of such Agreement may be inspected at
the principal office of The Profit Recovery Group
International, Inc."
(f) Seller and each of the Stockholders understand and
acknowledge that it or he is aware that no federal or state agency has made any
recommendation or endorsement of the PRGX Shares or any finding or determination
as to the fairness of the investment in such PRGX Shares.
(g) Seller and each of the Stockholders represent and
warrant to PRGX that no offer in respect of the PRGX Shares was made to them by
PRGX or any person acting on PRGX's behalf by means of general or public
solicitation or general or public advertising, such as by newspaper or magazine
advertisements, by broadcast media, or at any seminar or meeting whose attendees
were solicited by such means.
(h) Seller and each of the Stockholders acknowledge and
agree that Purchaser has made available all information concerning Purchaser and
PRGX and their respective businesses, assets, liabilities, and rights which the
undersigned has requested to obtain, which information includes, and has been
limited to, the following: the Articles of Incorporation and the Bylaws of
Purchaser and PRGX, PRGX Report on Form 10-K for the year ended December 31,
1997, as amended, PRGX Annual Report to Shareholders for the year ended December
31, 1997 and Proxy Statement for the 1998 Annual Meeting of Shareholders, PRGX
Report on Form 10-Q for the quarter ended March 31, 1998, Prospectus dated March
16, 1998 contained in the PRGX Registration Statement on Form S-3 (Reg. No.
333-46225) (the "Prospectus") and copies of all press releases issued by PRGX
since December 31, 1997 (collectively, the "PRGX/Purchaser Disclosure"). Seller
and each Stockholder acknowledge and agree that Seller and the Stockholders have
received all information it, he or she requires in order to make it, his or her
respective investment decision herein.
(i) Seller and each of the Stockholders represent and
warrant that it or he has such knowledge and experience in financial and
business matters, and particularly the business conducted by PRGX, and is
capable of evaluating the risk of the investment in PRGX Shares contemplated by
this Agreement.
(j) Seller and each of the Stockholders represent and
warrant that it or he has carefully read this Agreement and discussed its
requirements and other applicable limitations (including those set forth in Rule
144 under the Securities Act of 1933, as amended) with respect to the transfer
or other disposition of the PRGX Shares with legal counsel.
4.26 FULL DISCLOSURE. The statements, representations and
warranties made by Seller and the Stockholders in this Agreement and in the
Schedules and Exhibits attached hereto do not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF PRGX AND THE PURCHASER
In order to induce Seller and the Stockholders to enter into this
Agreement and consummate the transactions contemplated hereby, each of PRGX and
the Purchaser represents and warrants to Seller and the Stockholders as follows,
each of which representations and warranties is material to and relied upon by
Seller and the Stockholders:
5.1 ORGANIZATION OF PRGX AND THE PURCHASER. Each of PRGX and the
Purchaser is a corporation duly organized and validly existing under the laws of
the State of Georgia and has the corporate power and authority to own its
property and to carry on its business as now being conducted by it. Purchaser
is, or prior to the Closing will be, duly qualified to transact business as a
foreign corporation in California.
5.2 CORPORATE POWER AND AUTHORITY; DUE AUTHORIZATION. Each of PRGX
and the Purchaser has full corporate power and authority to execute and deliver
this Agreement and each of the other agreements, documents and instruments
referenced in this Agreement to which the Purchaser and/or PRGX is or will be a
party (the "Purchaser's Transaction Documents") and to consummate the
transactions contemplated hereby and thereby. The Board of Directors of PRGX and
the Purchaser has duly approved and authorized the execution and delivery this
Agreement and each of the Purchaser's Transaction Documents and the consummation
of the transactions contemplated hereby and thereby, and no other corporate
proceedings on the part of the Purchaser or PRGX are necessary to approve and
authorize the execution and delivery of this Agreement and such Purchaser's
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby. Assuming that this Agreement and each of the Purchaser's
Transaction Documents constitutes a valid and binding agreement of Seller and/or
the Stockholders, as the case may be, this Agreement and each of the Purchaser's
Transaction Documents constitutes, or will constitute when executed and
delivered, a valid and binding agreement of PRGX and the Purchaser, enforceable
against PRGX and the Purchaser in accordance with its terms, subject to laws of
general application in effect affecting creditors' rights and subject to the
exercise of judicial discretion in accordance with general equitable principles.
5.3 NO CONFLICT; CONSENTS. The execution and delivery by PRGX and
the Purchaser of this Agreement, the Purchaser's Transaction Documents and the
consummation by PRGX and the Purchaser of the transactions contemplated hereby
and thereby do not and will not (a) require, other than compliance with
applicable requirements of the HSR Act, if any, and the consent of NationsBank,
N.A., the consent, approval or action of, or any filing or notice to, any
corporation, firm, person or other entity or any public, governmental or
judicial authority; (b) violate the terms of any instrument, document or
agreement to which PRGX or the Purchaser is a party, or by which PRGX or the
Purchaser or the property of PRGX or the Purchaser is bound, or be in conflict
with, result in a breach of or constitute (upon the giving of notice or lapse of
time, or both) a default under any such instrument, document or agreement; (c)
violate PRGX's or the Purchaser's Articles of Incorporation or Bylaws; or (d)
violate any order, writ,
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injunction, decree, judgment, ruling, law or regulation of any federal, state,
county, municipal, or foreign court or governmental authority applicable to PRGX
or the Purchaser, or the business or assets of PRGX or the Purchaser, and
relating to the transactions contemplated herein.
5.4 SHARES TO BE DELIVERED. The PRGX Shares, when issued and
delivered to the Seller pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock of PRGX,
free of liens and encumbrances created by PRGX except as set forth in this
Agreement.
5.5 PRGX/PURCHASER DISCLOSURE. As of the date hereof, PRGX has
made all necessary filings pursuant to the applicable requirements of the Act
and the Securities Exchange Act of 1934, as amended (collectively, the "PRGX
Public Reports"). The PRGX Public Reports contained in the PRGX/Purchaser
Disclosure (as defined in Section 4.26(h) hereof) comply, or did comply at the
respective times of the filing thereof, in all material respects with the
applicable requirements of the Act (as defined in Section 4.26(a) hereof) and
the Securities Exchange Act of 1934, as amended, and, as of the dates thereof,
to Purchaser's knowledge, did not contain any untrue statement of any material
fact or omit to state a material fact required therein to be stated or omit to
state a material fact in order to make the statements therein not misleading.
All financial statements set forth in the PRGX Public Reports present fairly the
consolidated financial condition of PRGX and its affiliates as of (or for the
years ending on) their respective dates. Notwithstanding the foregoing, in
respect of the Private Securities Litigation Reform Act of 1995, statements made
by PRGX in its PRGX Public Reports which are not historical facts, including
projections, statements of plans, objectives, expectations, or future economic
performance, are forward looking statements that involve risks and uncertainties
and are subject to the safe harbor created by the Private Securities Litigation
Reform Act of 1995. PRGX's future financial performance could differ
significantly from that set forth in the PRGX Public Reports, and from the
expectation of management. Important factors that could cause the PRGX Public
Reports' financial performance to differ materially from past results and from
those expressed in any forward looking statements include, without limitation,
seasonality of Purchaser's business, fluctuations in its quarterly operating
results, dependence on key clients, Purchaser's ability to replace revenues from
clients who discontinue engagements with Purchaser with revenues from new or
existing clients, client bankruptcies, uncertainty of revenue recognition
estimates and collection of contract receivables, risks associated with
acquisitions and Purchaser's management of expanding operations, and risks
associated with international operations. For further information and other risk
factors, refer to PRGX's Report on Form 10- K for the year ended December 31,
1997, including the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section thereof, as well as the Risk Factors section
of the Prospectus, and other PRGX/Purchaser Disclosure.
5.6 AUTHORIZED CAPITAL STOCK. As of the date hereof, the
authorized capital stock of PRGX consists of 60,000,000 shares of Common Stock,
no par value per share, and 1,000,000 shares of preferred stock, no par value
per share. As of June 30, 1998, there were 21,965,982 shares of Common Stock of
PRGX issued and outstanding; there were 4,500,000 shares of Common Stock
reserved for issuance pursuant to PRGX's Stock Incentive Option Plan,
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<PAGE> 30
2,811,293 of which have been granted and were outstanding as of June 30, 1998,
of which 524,306 were exercisable; and there were no shares of preferred stock
outstanding.
5.7 BROKERS FEES AND EXPENSES. Except for BancAmerica Robertson
Stephens (whose fee will be paid by Purchaser), the Purchaser has not retained
or utilized the services of any broker or finder or paid or agreed to pay any
fee or commission for or on account of the transactions contemplated hereby, or
had any communications with any person or entity which would obligate Seller or
the Stockholders to pay any such fees or commissions.
5.8 NO ADVERSE CHANGES. Except as may be set forth in any of the
PRGX Public Reports or the PRGX/Purchaser Disclosure, from December 31, 1997 to
the date of this Agreement, PRGX has not suffered any material adverse change in
its business, operations, properties (including intangible properties),
condition (financial or otherwise), assets, liabilities or regulatory status.
5.9 FINANCING COMMITMENT. Purchaser has provided to Seller a true
and correct copy of Purchaser's financing commitment (the "Commitment Letter")
dated July 17, 1998, with respect to certain credit facilities expected to be
provided to PRGX.
ARTICLE 6
INDEMNIFICATION
6.1 INDEMNIFICATION BY THE SELLER AND THE STOCKHOLDERS.
(a) In addition to any other indemnification obligation
of Seller or the Stockholders under any other provision hereof, Seller and each
of the Stockholders hereby jointly and severally indemnify and hold the
Purchaser, and its affiliates, directors, officers, employees and agents,
harmless from and against all claims, liabilities, lawsuits, costs, damages or
expenses (including, without limitation, reasonable attorneys' fees and expenses
incurred in litigation or otherwise) arising out of and sustained by any of them
due to or relating to (i) any misrepresentation or breach of any representation
or warranty, or breach, nonfulfillment of, or failure to perform, any covenant,
obligation or agreement of Seller or any of the Stockholders contained in this
Agreement or any Transaction Document (without regard to any qualification
contained herein or therein with respect to the absence of a Material Adverse
Effect and as if the threshold for disclosure under Section 4.8 hereof for
undisclosed liabilities was $5,000); and (ii) any liability or obligation
suffered by the Purchaser, whether or not the existence or assertion of such
liability or obligation would constitute a breach of any representation,
warranty, covenant, obligation or agreement contained herein or in any
Transaction Document relating to the operation of the Business, or the ownership
or use of the Purchased Assets (including, by way of illustration but not
limitation, any and all known or unknown, fixed or contingent, claims or
liabilities; income, payroll, sales or other Tax liabilities of Seller or the
Business (including, without limitation, any Taxes on the sale by Seller to
Purchaser of the Purchased Assets); obligations owed by Seller to its auditors
or other service providers in respect of commissions for cash receipts of
clients accrued prior to the Effective Date; debts, contracts, agreements,
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obligations, damages, costs and expenses claimed or demanded by third parties
against the Purchaser; and the matters referred to in Schedule 6.1 hereof)
arising out of the operation of the Business or the ownership or use of the
Purchased Assets prior to the Effective Date other than the Assumed Liabilities
(collectively, "Section 6.1 Indemnified Claims").
(b) In the event (i) Purchaser shall be required to
refund or repay to any client or customer any fee or portion thereof received by
Seller prior to the Effective Date, or (ii) any client or customer is entitled
to repayment of any fee or portion thereof paid to Seller prior to the Effective
Date and such client or customer offsets such repayment from amounts due
Purchaser after Closing or Seller after the Effective Date, Seller and each
Stockholder agree jointly and severally to indemnify and hold Purchaser harmless
from and against the entire amount of such refund, repayment or offset.
6.2 INDEMNIFICATION BY THE PURCHASER. In addition to any other
indemnification obligation of the Purchaser hereunder, the Purchaser hereby
indemnifies and holds the Seller and each of the Stockholders and the
Stockholders' and Seller's affiliates, directors, officers, employees and agents
harmless from and against all claims, liabilities, lawsuits, costs, damages or
expenses (including without limitation reasonable attorneys fees and expenses
incurred in litigation or otherwise) arising out of and sustained by any of them
due to or relating to (a) any misrepresentation or breach of any representation,
warranty, covenant or agreement of the Purchaser in this Agreement or any of the
Purchaser's Transaction Documents; and (b) any Assumed Liabilities and any
liability or obligation incurred by any of the Stockholders relating to the
operation of Seller's Business by the Purchaser, or the ownership or use of the
Purchased Assets by the Purchaser, from and after the Closing Date, other than
any Section 6.1 Indemnified Claims (collectively, "Section 6.2 Indemnified
Claims").
6.3 PROVISIONS REGARDING INDEMNIFICATION. The indemnified party
(or parties) shall promptly notify the indemnifying party (or parties) of any
claim, demand, action or proceeding for which indemnification will or may be
sought under Section 6.1 or 6.2 of this Agreement (which notice shall state with
reasonable specificity the subject matter of and basis for such claim, and a
good faith estimate of the amount in dispute) and provide all pleading and other
documentation relating to such claim, demand, action or proceeding, and, if such
claim, demand, action or proceeding is a third party claim, demand, action or
proceeding, the indemnifying party will have the right, at its expense, to
assume the defense thereof using counsel reasonably acceptable to the
indemnified party. At its own expense, the indemnified party shall have the
right to participate in, but not control, the defense of any such third party
claim, demand, action or proceeding. In connection with any such third party
claim, demand, action or proceeding, Seller, the Stockholders and the Purchaser
shall cooperate with each other. No such third party claim, demand, action or
proceeding shall be settled without the prior written consent of the indemnified
party; provided, however, that if a firm, written offer is made to settle any
such third party claim, demand, action or proceeding and the indemnifying party
proposes to accept such settlement and the indemnified party refuses to consent
to such settlement, then: (i) the indemnifying party shall be excused from, and
the indemnified party shall be solely responsible for, all further defense of
such third party claim, demand, action or proceeding; and (ii) the maximum
liability of the indemnifying party relating to such third party
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claim, demand, action or proceeding shall be the amount of the proposed
settlement if the amount thereafter recovered from the indemnified party on such
third party claim, demand, action or proceeding is greater than the amount of
the proposed settlement.
6.4 SURVIVAL. All representations and warranties contained in this
Agreement shall survive the execution and delivery of this Agreement, any
examination by or on behalf of the party or parties to whom they were made, the
Closing and the completion of the transactions contemplated herein for a period
ending on date (which shall not be later than March 31, 2000) on which
Purchaser's independent accountants shall issue an unqualified audit report on
Purchaser's financial statement at and for the period ended December 31, 1999
and shall thereafter cease to be of any force and effect, except for (a) claims
as to which notice has been given in accordance with Section 6.3 hereof prior to
such date and which are pending on such date and (b) representations,
warranties, covenants and agreements relating to title to the Purchased Assets,
ownership of stock of Seller or by the Stockholders, Taxes, and Employee Benefit
Plans, each of which shall survive until the end of the statute of limitations
applicable to the underlying claim for which indemnification is sought. All
covenants and agreements contained in this Agreement and in the Transaction
Documents and the Purchaser's Transaction Documents shall survive the execution,
delivery and closing of this Agreement and the consummation of the transactions
contemplated herein.
6.5 RIGHT OF SET-OFF. Without limiting other remedies available to
Purchaser, Purchaser shall have the right to set-off any amounts payable by
Seller or the Stockholders to Purchaser pursuant to the indemnification
provisions in this Article 6 against any payment due under the Earn Out
Agreement or any Stockholder's respective employment agreements, consulting
agreements or compensation agreements with Purchaser.
6.6 LIMITATIONS. (a) Notwithstanding anything to the contrary
contained herein, Purchaser will not assert a claim against Seller or the
Stockholders with respect to a Section 6.1 Indemnified Claims until the total of
all Section 6.1 Indemnified Claims (except claims in respect of payroll and
other tax liabilities; compliance with laws and regulations relating to employee
benefit plans; the matter identified in Schedule 6.1 hereof; and existing
litigation, arbitrations and mediations, which shall not be subject to this
limitation, but may be asserted without regard to the Base Amount) equals or
exceeds in the aggregate $200,000 (the "Base Amount"), at which time all Section
6.1 Indemnified Claims, including such Base Amount, may be claimed in full and,
if indemnifiable under this Article 6, shall be indemnified in full.
(b) Notwithstanding anything to the contrary contained
herein, in no event will (i) Seller be liable for indemnification pursuant to
Section 6.1 for any amount exceeding $45,000,000, (ii) Loder be liable for
indemnification pursuant to Section 6.1 for any amount exceeding $33,750,000, or
(iii) Bryne be liable for indemnification pursuant to Section 6.1 for any amount
exceeding $11,250,000.
6.7 ARBITRATION. Except for disputes, controversies or claims
under this Article 6 which involve a consolidation, cross claim or like
proceeding in connection with any third party claim, demand, action or
proceeding, and except for disputes, controversies or claims where a
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<PAGE> 33
party is seeking specific performance or other equitable relief, all disputes,
controversies or claims arising out of or relating to this Article 6 shall be
resolved through binding arbitration in accordance with the procedures set forth
in Section 5.1 of the Earn Out Agreement.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF
PRGX AND THE PURCHASER TO CLOSE
Each and every obligation of PRGX and the Purchaser under this
Agreement to be performed on or prior to the Closing shall be subject to the
fulfillment, on or prior to the Closing, of each of the following conditions
unless and to the extent any such condition is expressly waived in writing by
PRGX and the Purchaser:
7.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties made by Seller and the Stockholders in or
pursuant to this Agreement or given on their behalf hereunder shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made or given on
and effective as of the Closing Date.
7.2 OBLIGATIONS PERFORMED. Seller and the Stockholders shall have
performed and complied in all material respects with all agreements, conditions
and obligations required by this Agreement to be performed or complied with by
them prior to or at the Closing.
7.3 CONSENTS. Seller shall have obtained and delivered to
Purchaser written consents of all persons or entities described in Schedule 4.4.
7.4 HSR ACT. The parties shall have complied with the HSR Act, and
any waiting period (and any extension thereof) under the HSR Act applicable to
the transaction contemplated hereby shall have expired or been terminated.
7.5 CLOSING DELIVERIES Seller and the Stockholders shall have
delivered to Purchaser each of the following, together with any additional items
which Purchaser may reasonably request to effect the transactions contemplated
herein:
(a) possession of the Purchased Assets;
(b) a certified copy of the corporate resolutions of the
directors of Seller and the Stockholders authorizing the transactions
contemplated herein and the execution, delivery and performance of this
Agreement and the Transaction Documents by Seller, together with an incumbency
certificate with respect to officers of Seller executing documents or
instruments on behalf of Seller;
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(c) a certificate of the President of Seller certifying
as to the matters set forth in Sections 7.1 and 7.2 hereof and as to the
satisfaction of all other conditions set forth in this Article 7;
(d) the Bill of Sale, the Assignment and Assumption
Agreement and the other documents described in Section 1.3 hereof;
(e) the Earn Out Agreement duly executed by Seller and
Stockholders;
(f) the Noncompetition and Nonsolicitation Agreements
duly executed by Seller and the Stockholders;
(g) an opinion of independent counsel to Seller and the
Stockholders substantially in the form of Exhibit 7.5(g) attached hereto;
(h) the Employment Agreement duly executed by and with
respect to each Stockholder;
(i) the Lock-up Agreement referred to in Section 3.8 duly
executed by Seller;
(j) any spouses of the Stockholders shall have executed
and delivered the spousal consents referred to in Section 3.13; and
(k) any other documents or agreements contemplated hereby
and/or necessary or appropriate to consummate the transactions contemplated
hereby.
7.6 NO CHALLENGE. There shall not be pending or threatened any
action, proceeding or investigation before any court or administrative agency by
any government agency or any pending action by any other person, challenging, or
seeking material damages in connection with, the acquisition by the Purchaser of
the Purchased Assets or the ability of Purchaser, PRGX or any of their
affiliates to own and operate Seller's Business or otherwise materially
adversely affecting the Business, assets, prospects, financial condition or
results of operations of Seller.
7.7 NO INVESTIGATIONS OF SELLER OR BUSINESS. As of the Closing
Date there shall be no, and neither Seller nor any of the Stockholders shall
have any knowledge of or reason to know of any, pending or threatened,
investigation by any municipal, state or federal government agency or regulatory
body with respect to Seller, the Purchased Assets or Seller's Business which
would result in a Material Adverse Effect.
7.8 NO MATERIAL ADVERSE EFFECT. From the date of this Agreement to
the Closing, there shall not have occurred any Material Adverse Effect (as
defined in Section 4.6 hereof) on the Business, financial condition, results of
operation and/or Purchased Assets (without giving effect to the consequences of
the transaction contemplated by this Agreement) of Seller, whether reflected in
financial statements, the Schedules attached hereto or otherwise.
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7.9 LEGALITY. No federal or state statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the transactions contemplated herein illegal
or otherwise prohibiting the consummation of the transactions contemplated
herein.
7.10 TAX CLEARANCE LETTERS. Seller shall obtain tax clearance
letters in respect of Seller from applicable state authorities in respect of
Seller's outstanding income, employment, withholding, sales and use, and similar
tax liabilities, if any.
7.11 KEY MAN LIFE INSURANCE. Purchaser shall be able to obtain key
man life insurance policies on Loder and Byrne in the respective amounts of
$30,000,000 and $10,000,000 from an insurance company rated at least A++ by A.M.
Best.
7.12 FUNDING ON COMMITMENT LETTER. Purchaser shall have received
funding under the Commitment Letter to the extent necessary to consummate the
transactions contemplated by this Agreement.
ARTICLE 8
CONDITIONS TO SELLER'S
AND THE STOCKHOLDERS' OBLIGATIONS
Each and every obligation of Seller and the Stockholders under this
Agreement to be performed on or prior to the Closing, shall be subject to the
fulfillment, on or prior to the Closing, of each of the following conditions
unless and to the extent any such condition is specifically waived in writing by
Seller and the Stockholders:
8.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The
representations and warranties made by PRGX and the Purchaser in or pursuant to
this Agreement or given on its behalf hereunder shall be true and correct in all
material respects, on and as of the Closing Date with the same effect as though
such representations and warranties had been made or given on and effective as
of the Closing Date.
8.2 OBLIGATIONS PERFORMED. PRGX and the Purchaser shall have
performed and complied in all material respects with all agreements, conditions
and obligations required by this Agreement to be performed or complied with by
it prior to or at the Closing.
8.3 HSR ACT. The parties shall have complied with the HSR Act, and
any waiting period (and any extension thereof) under the HSR Act applicable to
the transaction contemplated hereby shall have expired or been terminated.
8.4 CLOSING DELIVERIES. PRGX and/or the Purchaser shall have
delivered to the Stockholders each of the following, together with any
additional items which the Stockholders may reasonably request to effect the
transactions contemplated herein:
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(a) certified copies of the corporate resolutions of the
Board of Directors of the Purchaser and the Board of Directors of PRGX
authorizing the transactions contemplated herein and the execution, delivery and
performance of this Agreement and the Purchaser's Transaction Documents by PRGX
and the Purchaser, as applicable, together with incumbency certificates with
respect to the respective officers of the Purchaser executing documents or
instruments on behalf of the Purchaser, and, in respect of PRGX, authorizing the
issuance of the PRGX Shares to Seller;
(b) a certificate of a duly authorized officer of the
Purchaser and a duly authorized officer of PRGX certifying as to the matters set
forth in Sections 8.1 and 8.2 hereof and as to the satisfaction of all other
conditions set forth in this Article 8;
(c) the Closing Cash Consideration and written
confirmation from Purchaser's transfer agent that stock certificates
representing the Closing PRGX Shares have been issued in the name of Seller;
(d) the Earn Out Agreement, duly executed by Purchaser
and PRGX;
(e) the documents and instruments described in Section
1.3 hereof;
(f) the respective Employment Agreements for and with
respect to the Stockholders, duly executed by Purchaser;
(g) the Noncompetition and Nonsolicitation Agreements
referred to in Section 3.4 hereof duly executed by the Purchaser; and
(h) any other documents or agreements contemplated hereby
and/or necessary or appropriate to consummate the transactions contemplated
hereby.
8.5 NO CHALLENGE. There shall not be pending or threatened any
action, proceeding or investigation before any court or administrative agency by
any government agency or any pending action by any other person, challenging or
seeking material damages in connection with, the acquisition by the Purchaser of
the Purchased Assets pursuant to the transactions contemplated herein or the
ability of PRGX or the Purchaser or any of its affiliates to own and operate the
Business or otherwise materially adversely affecting the Business, assets,
prospects, financial condition or results of operations of Seller.
8.6 NO INVESTIGATIONS OF PRGX OR THE PURCHASER. As of the Closing
Date there shall be no pending or threatened investigation by any municipal,
state or federal government agency or regulatory body with respect to PRGX or
the Purchaser, the Purchaser's assets or the Purchaser's business which would
result in a material adverse effect on Purchaser's business, operations,
properties (including intangible properties), condition (financial or otherwise)
assets, liabilities or regulatory status of PRGX or the Purchaser.
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8.7 LEGALITY. No federal or state statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the transactions contemplated herein illegal
or otherwise prohibiting the consummation of the transactions contemplated
herein.
8.8 CONSENTS. Purchaser shall have obtained and delivered to
Seller written consents of all persons or entities whose consent is required to
consummate the transactions contemplated herein, if any, and all of such
consents shall remain in full force and effect at and as of the Closing.
8.9 FUNDING ON COMMITMENT LETTER. Purchaser shall have received
funding under the Commitment Letter to the extent necessary to consummate the
transactions contemplated by this Agreement.
ARTICLE 9
TERMINATION
9.1 TERMINATION. This Agreement may be terminated at any time
before the Closing Date:
(a) by mutual written consent of PRGX, the Purchaser,
Seller and the Stockholders;
(b) by PRGX or Purchaser, if there occurs a Material
Adverse Effect as described in Section 7.8 hereof;
(c) by any nonbreaching party hereto if there has been a
material breach of any representation, warranty, covenant or agreement contained
in this Agreement on the part of any nonterminating party hereto and, in the
case of any such breach which is curable by the non-terminating party, which the
non-terminating party has failed to either promptly commence and proceed with
all due diligence to cure and shall not have in fact cured such breach within
thirty (30) days following notice of such breach by the nonbreaching party to
the non-terminating party; or
(d) by either Purchaser or Seller if the Closing is not
consummated on or before the Outside Date (as defined below) unless such failure
of consummation is due to the failure of the terminating party to observe or
perform in any material respect the covenants, agreements and conditions hereof
to be performed or observed by it at or before the Closing Date. As used herein,
the "Outside Date" shall mean July 31, 1998, unless the condition set forth in
Sections 7.4 and 8.3 shall not have been satisfied by such date, in which case
the Outside Date shall be August 31, 1998.
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9.2 EFFECTS OF TERMINATION. In the event this Agreement is
terminated pursuant to Section 9.1(a), 9.1(b) or 9.1(d) above, no party shall
have any obligations to the others hereunder except for those obligations in
respect of confidentiality and the return of confidential information set forth
in Section 3.1(d) hereof and as set forth in the certain Nondisclosure
Agreements between Seller and Purchaser dated April 14, 1998 and April 26, 1998
(collectively, the "Nondisclosure Agreements"). If this Agreement is terminated
pursuant to Section 9.1(c), the obligations in respect of confidentiality and
the return of confidential information set forth in Section 3.1(d) hereof and
set forth in that certain Nondisclosure Agreements shall remain in effect and
each party hereto may exercise all remedies available to it under this
Agreement, at law or in equity.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 SEVERABILITY. If any provision of this Agreement is prohibited
by the laws of any jurisdiction as those laws apply to this Agreement, that
provision shall be ineffective to the extent of such prohibition and/or shall be
modified to conform with such laws, without invalidating the remaining
provisions hereto.
10.2 MODIFICATION. This Agreement may not be changed or modified
except in writing specifically referring to this Agreement and signed by each of
the parties hereto.
10.3 ASSIGNMENT, SURVIVAL AND BINDING AGREEMENT. This Agreement and
the Transaction Documents and the Purchaser's Transaction Documents (a) may not
be assigned by PRGX or the Purchaser on or prior to the Closing without the
prior written consent of Seller and the Stockholders (except that Purchaser may
so assign this Agreement to a wholly owned subsidiary of Purchaser or PRGX
without the prior consent of, but with notice to, Seller), (b) may not be
assigned by PRGX or Purchaser after the Closing, except to an affiliate of PRGX,
without the prior written consent of Seller and Stockholders, and (c) may not be
assigned by Seller or any of the Stockholders at any time, without the prior
written consent of Purchaser. The terms and conditions hereof shall survive the
Closing as provided herein and shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, personal representatives,
successors and assigns.
10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.5 NOTICES. All notices, requests, demands, claims or other
communications hereunder will be in writing and shall be deemed duly given if
personally delivered, sent by telefax, sent by a recognized overnight delivery
service which guarantees next day delivery
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<PAGE> 39
("Overnight Delivery") or mailed by registered or certified mail, return receipt
requested, postage prepaid and addressed to the intended recipient as set forth
below:
If to Seller or the Stockholders: Loder, Drew & Associates, Inc.
31831 Camino Capistrano
Suite 200
San Juan Capistrano, CA 92675
Attn: Ronald K. Loder
Telefax: (949) 487-0125
with a copy to: Skadden, Arps, Slate, Meagher
& Flom LLP
300 South Grand Avenue
Suite 3400
Los Angeles, CA 90071-3144
Attn: Joseph J. Giunta, Esq.
Telefax: (213) 687-5600
If to PRGX or the Purchaser: The Profit Recovery Group
International I, Inc.
2300 Windy Ridge Parkway
Suite 100 North
Atlanta, GA 30339-8426
Attention: Clinton McKellar, Jr.,
Senior Vice President and
General Counsel
Telefax: (770) 779-3034
with a copy to: Arnall Golden & Gregory, LLP
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3400
Attention: Jonathan Golden, Esq.
Telefax: (404) 873-8701
or at such other address as any party hereto notifies the other parties hereof
in writing. The parties hereto agree that notices or other communications that
are sent in accordance herewith (i) by personal delivery or telefax, will be
deemed received on the day sent or on the first business day thereafter if not
sent on a business day, (ii) by Overnight Delivery, will be deemed received on
the first business day immediately following the date sent, and (iii) by U.S.
mail, will be deemed received three (3) business days immediately following the
date sent. For purposes of this Agreement, a "business day" is a day on which
Purchaser is open for business and shall not include a Saturday or Sunday or
legal holiday. Notwithstanding anything to the contrary in this Agreement, no
action shall be required of the parties hereto except on a business day and in
the event
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<PAGE> 40
an action is required on a day which is not a business day, such action shall be
required to be performed on the next succeeding day which is a business day.
10.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. Except for the
Nondisclosure Agreements which remain in full force and effect in accordance
with the terms thereof, this Agreement, together with the Exhibits and Schedules
attached hereto, constitutes the entire agreement and supersedes any and all
other prior agreements and undertakings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof and, except
as otherwise expressly provided herein, is not intended to confer upon any
person other than Seller, PRGX, the Purchaser and the Stockholders, any rights
or remedies hereunder.
10.7 FURTHER ASSURANCES. The parties to this Agreement agree to
execute and deliver, both before and after the Closing, any additional
information, documents or agreements contemplated hereby and/or necessary or
appropriate to effect and consummate the transactions contemplated hereby. Each
of the Stockholders and Seller agree to provide to PRGX and the Purchaser, both
before and after the Closing, such information as PRGX and the Purchaser may
reasonably request in order to consummate the transactions contemplated hereby
and to effect an orderly transition of the Business following Closing. Each of
PRGX and the Purchaser agree to provide to the Stockholders and Seller, both
before and after the Closing, such information as the Stockholders and Seller
may reasonably request in order to consummate the transactions contemplated
hereby and to effect an orderly transition of the Business following Closing.
10.8 GOVERNING LAW. Except as otherwise expressly provided herein,
this Agreement shall be governed by and construed under the laws of the state of
Georgia.
10.9 PRONOUNS. All personal pronouns in this Agreement, whether
used in the masculine, feminine or neuter gender shall include all other
genders, and the singular shall include the plural and the plural shall include
the singular.
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<PAGE> 41
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
PRGX:
The Profit Recovery Group
International, Inc.
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
PURCHASER:
The Profit Recovery Group
International I, Inc.
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
SELLER:
Loder, Drew & Associates, Inc.
By:
--------------------------------
Name:
------------------------------
Its: President
STOCKHOLDERS:
-----------------------------------
Ronald K. Loder
-----------------------------------
H. Richard Byrne
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<PAGE> 42
LIST OF SCHEDULES AND EXHIBITS
Schedule 1.1(a) Fixed Assets
Schedule 1.1(g) Deposits
Schedule 2.2 Accounts Payable and Accrued Expenses to be Assumed
Schedule 3.2B Seller's Employment Agreements
Schedule 3.7 Allocation of the Purchase Price
Schedule 3.12 Option Recipients
Schedule 4.1 Jurisdictions in which Seller is Qualified to do business
Schedule 4.2 Seller's Directors and Officers
Schedule 4.3 Permitted Encumbrances
Schedule 4.4 Consents
Schedule 4.5 Capitalization
Schedule 4.8 Financial Information
Schedule 4.11A Trade Payables and Accrued Expenses as of Date of Agreement
Schedule 4.11B Other Debts, Obligations Guaranties and Liabilities as of Date
of Agreement
Schedule 4.14 Accounts Receivable
Schedule 4.15 Bank Accounts
Schedule 4.16 Contracts
Schedule 4.17 Intellectual Property
Schedule 4.18 Leases
Schedule 4.19 Litigation
Schedule 4.20 Insurance
Schedule 4.21 Benefit Plans, Employees, etc., and List of Accrued Vacation
Obligations
Schedule 4.23 Material Changes
Schedule 4.24 Certain Arrangements
Schedule 6.1 Indemnification Matter
Exhibit 1.3(a) Form of Bill of Sale
Exhibit 1.3(b) Form of Assignment and Assumption Agreement
Exhibit 2.1(b) Earn Out Agreement
Exhibit 3.2A
and 3.2B Form of Employment Agreements
Exhibit 3.4A
and 3.4B Forms of Noncompetition and Nonsolicitation Agreements with
Seller and each Stockholder
Exhibit 3.8A Form of Lock-Up Agreements
Exhibit 3.12 Form of Stock Option Agreement
Exhibit 3.13(a) Investor Information Questionnaire
Exhibit 3.13(b) Form of Spousal Consent
Exhibit 7.5(g) Form of Opinion of Seller's and the Stockholders' Counsel
<PAGE> 43
EXHIBIT 2.1
CONFIDENTIAL TREATMENT REQUESTED
CONFIDENTIAL PORTIONS OF THIS AGREEMENT WHICH HAVE BEEN REDACTED ARE
MARKED WITH BRACKETS ("[ ]"). THE OMITTED MATERIAL HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 2.1(B)
EARN OUT AGREEMENT
THIS AGREEMENT is made and entered into as of the 6th day of August,
1998, but effective as of July 1, 1998, by and among THE PROFIT RECOVERY GROUP
INTERNATIONAL I, INC., a Georgia corporation (the "Company"), LODER, DREW &
ASSOCIATES, INC., a California corporation ("Seller"), RONALD K. LODER ("Loder")
and H. RICHARD BYRNE ("Byrne"), each a California resident and being the sole
stockholders of Seller (collectively, "Stockholders" and individually, a
"Stockholder").
RECITALS:
A. Concurrently with the date of this Agreement, Seller has sold
to the Company substantially all of Seller's assets in accordance with that
certain Asset Purchase Agreement (the "Purchase Agreement") dated effective as
of July 1, 1998 among the Company, The Profit Recovery Group International,
Inc., a Georgia corporation ("PRGX"), Seller and the Stockholders.
B. Prior to the date hereof, Seller has been engaged in the
business (the "Business") of auditing accounts payable, expenses, capital
expenditures, and various payment arrangements or obligations between its
clients ("Clients") and their suppliers, vendors, landlords and taxing
authorities (the "Client Payees") for the purposes of identifying and
documenting overbilling by and refund, credit or chargeback claims for
overpayments to, the Client Payees (the "Audit Activities") and rendering
management advisory services associated with the Audit Activities.
C. The Company is also engaged in the Business and intends to
continue to conduct the Business previously conducted by Seller as a division
(the "Division") of the Company.
D. In accordance with the terms of the Purchase Agreement, the
parties hereto desire to enter into this Agreement to provide for the
calculation and payment of any additional "Purchase Price" which may become
payable by the Company in consideration of the acquisition of the assets of
Seller which the Company has acquired as provided by the Purchase Agreement.
NOW, THEREFORE, in consideration of the covenants herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
<PAGE> 44
1. Defined Terms. As used in this Agreement, the following terms
shall have the following meanings:
"ACCOUNTANTS" shall mean KPMG Peat Marwick LLP, or such other
independent accounting firm from time to time engaged as the principal
accountant to audit the consolidated financial statements of the Company.
"ACCOUNTING PRINCIPLES" shall mean the accrual method of accounting
under GAAP using the accounting policies adopted by Seller in connection with
the preparation of Seller's audited financial statements at December 31, 1997
and for the year then ended, as certified by KPMG Peat Marwick LLP, except (a)
income from ship and debit Business shall be accounted for under the accrual
method at the time such income is invoiced to clients for their immediate
payment, and (b) recoverable draws paid to employees will be recorded as
receivables as opposed to expensed.
"BORROWING RATE" for any fiscal quarter shall mean the lowest interest
rate per annum available to PRGX for borrowed funds under the senior credit
facility being maintained by the Company at the commencement of such fiscal
quarter.
"COMPANY" shall mean the Company together with its affiliates
including, without limitation, PRGX.
"EARN OUT PAYMENTS" means those payments, if any, by the Company to the
Seller referred to in Section 3 of this Agreement.
"EARN OUT PERIOD" or "EARN OUT PERIODS" means either or both of the
First Earn Out Period or the Second Earn Out Period, as the context may require.
"FIRST BREAK POINT" is defined in Section 3.2 of the Memorandum of
Understanding.
"FIRST EARN OUT PERIOD" shall mean the period commencing on July 1,
1998 and ending on December 31, 1998.
"FISCAL YEAR" means the twelve month period commencing on January 1 of
each calendar year and ending on December 31 of such calendar year. To the
extent this Agreement refers to a quarter within a Fiscal Year, such reference
shall mean each of the four calendar quarters ending on March 31, June 30,
September 30 and December 31 of each Fiscal Year. To the extent any computation
or other provision hereof provides for an action to be taken on the basis of a
Fiscal Year or a period within a Fiscal Year, an appropriate proration or other
adjustment shall be made in respect of any period less than a full Fiscal Year
to reflect such partial period.
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<PAGE> 45
"GAAP" means United States generally accepted accounting principles in
effect July 1, 1998, applied consistently throughout the period involved.
"MEMORANDUM OF UNDERSTANDING" means the Memorandum of Understanding
contained in Exhibit A attached to and incorporated into this Agreement by
reference.
"OPERATING PROFIT" means the income before state and federal income
taxes of the Division computed as set forth in this Agreement. For the Earn Out
Periods, such Operating Profit shall be determined by the Pro Forma Income
Statements or as otherwise determined in accordance with this Agreement. For
periods other than Earn Out Periods, such Operating Profit shall be determined
based on the Company's internally prepared financial statements using the
Accounting Principles.
"PRG" means the Company and its affiliates exclusive of the Division.
"PRO FORMA INCOME STATEMENT" shall mean the statements of operations of
the Division reported upon by the Accountants in accordance with this Agreement.
"REMEDY EVENT" shall mean (a) that the Division fails to achieve (i)
the Remedy Event Profit for the First Earn Out Period, (ii) the Remedy Event
Profit for the quarter ended March 31, 1999, or (iii) the Remedy Event Profit
for any periods ended subsequent to the quarter ended March 31, 1999, or (b)
both of the Stockholders shall no longer be employed by the Company for reasons
other than a termination of such employment of either of the Stockholders (i) by
the Company without "cause," or (ii) by the Stockholders for "good reason," as
"cause" and "good reason" are each defined in any agreement with respect to
employment between the Company and the Stockholders from time to time in effect.
"REMEDY EVENT PROFIT" shall have the meaning set forth in Exhibit B
attached hereto and incorporated herein by reference.
"SECOND BREAK POINT" is defined in Section 3.2 of the Memorandum of
Understanding.
"SECOND EARN OUT PERIOD" means Fiscal Year 1999.
2. Business Operations.
2.1 Operations. Subject to the other terms of this
Agreement including, without limitation, the Memorandum of Understanding,
throughout the Earn Out Periods, the scope of operations of the Division shall
be substantially consistent with the Business conducted by Seller prior to the
date of this Agreement. Such operations of the Division shall in all material
respects comply with any applicable legal requirements. Subject to the terms and
provisions of this Agreement and any other written agreements of the
Stockholders with the
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<PAGE> 46
Company, the Stockholders shall have full and complete authority to manage the
regular operations of the Division. The Company and the Division shall jointly
exercise their respective commercially reasonable efforts to hire a new
accounting manager and a divisional chief financial officer as soon as
practicable. In so managing the Division, subject to the other provisions of
this Agreement, the Stockholders shall operate under the guidance and
supervision of the Board of Directors, Chief Executive Officer ("CEO") and
President ("President") of the Company. In connection with the operation of the
Division:
2.1.1 The Company may, in the sole discretion of
the CEO or President, incur expenses of the Division different from or in excess
of those authorized by the Stockholders; provided, that, such different or
excess expenses (other than those incurred following the occurrence of a Remedy
Event) shall be excluded from the calculation of Operating Profit under this
Agreement.
2.1.2 Upon the reasonable request of the
Stockholders, the Company may, in its sole discretion, provide the Division with
such services and goods and shall provide to the Division such capital as
requested by the Stockholders, and the cost of such services, goods or capital
so provided by the Company to the Division shall be accounted for as provided in
Sections 3.3.4 and 3.3.5 hereof.
2.1.3 The Company may, subject to the approval of
the Stockholders, which approval shall not be unreasonably withheld, place
additional personnel to work within the Division to facilitate reporting,
transition, management succession and other objectives deemed appropriate by the
Company, and expenses (other than expenses incurred following the occurrence of
a Remedy Event) incurred with respect to such personnel shall be accounted for
as provided in Section 3.3.2 hereof.
2.1.4 By way of clarification, but not in
limitation, of the actions which may not be taken on behalf of the Division
without the prior approval of the Board of Directors, CEO or President (which
will not be unreasonably withheld), the Stockholders shall have no authority to
(a) borrow funds or encumber assets, (b) invest cash (except that the Division
may invest cash not swept by PRG in investments approved by PRG, which approval
shall not be unreasonably withheld), (c) commence or settle any legal actions,
(d) enter into any contract or agreement (including, without limitation,
employment agreements) having a term in excess of one year or severance
arrangements providing for payments in excess of twelve months salary, or (e)
eliminate expenses, other than expenses which would not, in the good faith
judgment of the Stockholders, cause the Company to fail to operate in a prudent
and lawful manner consistent with the operations of the Division prior to the
date hereof.
2.1.5 Except in accordance with the Memorandum of
Understanding, the first textual paragraph of Section 2.1 hereof, or as may be
approved in writing in advance by the CEO or President, which approval shall not
be unreasonably withheld, neither Seller, the
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<PAGE> 47
Stockholders nor the Division shall directly or indirectly incur any expenses
(including, by way of illustration but not limitation, payments to employees of
the Division) which would, under United States generally accepted accounting
principles as then currently in effect, be recorded as an expense of the Company
on its consolidated statement of operations. Without limiting other remedies
available to the Company for any violation of this Section 2.1.5, the Company
shall be entitled to recover damages from any of the Seller or the Stockholders
being responsible for breach of this Section 2.1.5 and to reduce or recover any
Earn Out Payments attributable to expenses incurred in violation of this
Section.
2.1.6 In conducting the operations of the
Division, the Stockholders shall not take any actions or enter into any
transactions which deliberately and inappropriately seek short-term benefits to
the detriment of profits for periods after expiration of the Earn Out Periods.
By way of illustration, but not in limitation, of the foregoing, without the
prior written approval of the CEO or President, the Division shall not enter
into any arrangements which deliberately increase profits during the Earn Out
Periods at the expense of depressing future operating margins or deferring
expenses to periods occurring subsequent to the Earn Out Periods or reduce staff
in a manner which impairs projected growth of the Division after expiration of
the Earn Out Periods.
2.1.7 Except for such amount of cash the
Stockholders deem necessary for purposes of the Division's working capital, the
Company may sweep all net cash generated by the Division for use by the Company,
which shall be accounted for as provided in Section 3.3.7 hereof.
2.2 Records, Reports and Accounting Matters.
2.2.1 As a part of its regular operations, the
Division shall continue to maintain records and prepare and circulate reports
consistent with the policies and guidelines of the Company, GAAP and good
business practices. Without limiting the generality of the foregoing, the
Division shall prepare and timely provide all such information as may be
necessary for the Company to comply with its reporting obligations or as
otherwise required by the Company from time to time in accordance with the
Company's policies and procedures (which currently require monthly reporting
with sufficient lead time to allow consolidated reporting of actual operating
results and financial condition as of the end of any month by not later than the
10th of the following month). The Division will cooperate with the Company in
the preparation of financial reports which include a comparison of actual
results with the comparable line items of the Division's operating budget then
being maintained by the Company. Subject to the terms of this Agreement with
respect to the preparation of Pro Forma Income Statements, the Company shall
have absolute control over all matters related to accounting and reporting
obligations.
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<PAGE> 48
2.2.2 Attached hereto as Exhibit D is the
unaudited balance sheet of the Division as of the Effective Date (as defined in
the Purchase Agreement), as such balance sheet is restated for the purchase by
the Company from the Seller of the Purchased Assets in accordance with the
Purchase Agreement (the "Opening Balance Sheet"). The Company, Seller and the
Stockholders agree that the Opening Balance Sheet shall be used solely as a
basis from which to determine Operating Profit under this Agreement.
2.2.3 The Company, the Seller and the Stockholders
agree to cooperate and cause the respective personnel of PRG and the Division to
cooperate in connection with the preparation of any financial statements under
or in connection with this Agreement and the application by the Accountants of
procedures to any such financial statements (including, without limitation, any
audits of the financial statements of the Division). Such cooperation shall
include, without limitation, the preparation of such preliminary financial
statements and related financial schedules, financial reports, organization and
availability of records and the completion and execution of normal and customary
management representation letters, in each case as the Accountants may
reasonably request.
2.3 Competition.
2.3.1 The Company, the Seller and the Stockholders
agree that the respective businesses of PRG and the Division shall be conducted
during the Earn Out Periods consistent with the understandings set forth in the
Memorandum of Understanding; provided, that, following any occurrence of a
Remedy Event, (a) the Company shall no longer be restricted by the operational
restrictions set forth in the Memorandum of Understanding or the terms of this
Section 2.3.1, and (b) revenues from and (except as otherwise specifically
provided in this Agreement) expense allocations for the Government, Healthcare,
Industrial and Retail/Wholesale Markets (as such terms are defined in the
Memorandum of Understanding) shall continue to be allocated between the Division
and PRG as set forth in the Memorandum of Understanding for purposes of
determining Operating Profit.
2.3.2 The parties hereto acknowledge that
circumstances may arise where the operations of the Division and the other
operations of the Company may compete for the same clients or other business
opportunities. At such times as the Stockholders or the President become aware
of any such circumstances or other factors which are likely to lead to such
competition, the Stockholders and the appropriate officers of the Company shall
consult with each other in good faith. To the extent such competitive
circumstances are not otherwise addressed in the Memorandum of Understanding,
the Company and the Stockholders shall endeavor in good faith to resolve such
competitive or potential competitive circumstances. Absent any such other
specific agreement reached by the Stockholders and the Company in good faith,
the Division and the Company shall be free to compete without regard to the
effect of such competition on the Company or the Earn Out Payments.
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<PAGE> 49
2.4 Remedy Event. Upon the occurrence of a Remedy Event,
the terms of Section 2.1 of this Agreement and of the Memorandum of
Understanding relative to the autonomous operations of the Division shall no
longer be of any force or effect. Without limiting the generality of the
foregoing, after the occurrence of a Remedy Event, the Company may take such
actions ("Remedy Actions") to increase the level of control over the Division,
increase the level of supervision and control over management (including,
without limitation, management by the Stockholders) of the Division, take other
actions with respect to hiring and firing, modify compensation of employees and
consultants, increase, eliminate or reduce operating expenses, incur capital
expenditures, determine the rate and other terms and conditions of engagements
with Clients, and take other actions in such manner as any of the CEO or
President deems appropriate in their respective sole discretion. Any Remedy
Actions taken by or on behalf of the Company shall not result in any liability
or obligation of the Company (including, without limitation, PRGX and its
officers and directors) to the Seller or the Stockholders, including without
limitation, any liability or obligation with respect to matters set forth in
this Agreement such as, by way of illustration but without limitation, any
liability for payment of any Earn Out Payments. Notwithstanding the foregoing,
following a Remedy Event (a) this Earn Out Agreement shall remain in full force
and effect, (b) the Seller shall remain eligible to receive the Earn Out
Payments subject to and in accordance with all of the terms and provisions of
this Agreement, (c) revenues from and expense allocations for the Government,
Healthcare, Industrial and Retail/Wholesale Markets shall continue to be
allocated between the Division and PRG as set forth in the Memorandum of
Understanding for purposes of determining Operating Profit and (d) the pro forma
adjustments in connection with the calculation of Operating Profit shall
continue to be made subject to all of the terms and provisions of this Agreement
(including, without limitation, such provisions of this Agreement providing for
modification of such pro forma adjustments following the occurrence of a Remedy
Event.)
2.5 Operational Violations.
2.5.1 As a condition to the Stockholders or the
Seller asserting any claim in connection with this Agreement that the Company
has violated any of the obligations of the Company under this Section 2 or the
Memorandum of Understanding, the Stockholders shall notify the Company in
writing of such claim (which notice shall state with reasonable specificity the
basis for such claim) promptly after either of the Stockholders have actual
knowledge of such claim and (if such violation is curable) allow the Company
thirty days following the Company's receipt of such notice to cure such
violation. To the extent the Stockholders either fail to give such notice or
(having given such notice of an alleged violation which is curable) fail to
allow the Company such opportunity to cure such alleged violation which is
curable, the Stockholders and the Seller shall be estopped from asserting any
such claim against the Company.
2.5.2 As a condition to the Company asserting any
claim in connection with this Agreement that the Stockholders or the Seller have
violated any of their respective
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<PAGE> 50
[ ] - Confidential Treatment Requested
obligations under this Section 2 or the Memorandum of Understanding, the Company
shall notify the Stockholders in writing of such claim (which notice shall state
with reasonable specificity the basis for such claim) promptly after the CEO or
President has actual knowledge of such claim and (if such violation is curable)
allow the Stockholders or the Seller thirty days following the Stockholders'
receipt of such notice to cure such violation. To the extent the Company either
fails to give such notice or (having given such notice of an alleged violation
which is curable) fails to allow the Stockholders or the Seller such opportunity
to cure such alleged violation which is curable, the Company shall be estopped
from asserting any such claim against the Stockholders and the Seller.
2.6 Term. The limitations set forth in this Section 2
concerning the Company's managerial control over the Division shall expire at
the end of the Earn Out Periods unless sooner terminated under Section 2.4
hereof.
3. Earn Out Payments.
3.1 First Earn Out Period. If the Division has Operating
Profit for the First Earn Out Period which is less than or equal to $[ ] no Earn
Out Payments will be paid by the Company under this Agreement for the First Earn
Out Period. If the Division has Operating Profit for the First Earn Out Period
which is greater than $[ ] but less than or equal to $[ ], the Company will pay
to the Seller an Earn Out Payment equal to $30,303 for each $1.00 by which such
Operating Profit for the First Earn Out Period exceeds $[ ]. If the Division has
Operating Profit for the First Earn Out Period of greater than $[ ], the Company
will pay to the Seller an Earn Out Payment of $20,000,000 plus $3.788 for each
$1.00 by which Operating Profit for the First Earn Out Period exceeds $[ ]. In
no event shall amounts payable under this Agreement for the First Earn Out
Period exceed $30,000,000.
3.2 Second Earn Out Period. If the Division has Operating
Profit for the Second Earn Out Period of less than or equal to the First Break
Point, no Earn Out Payments will be paid by the Company for the Second Earn Out
Period. If the Division has Operating Profit for the Second Earn Out Period of
greater than the First Break Point but less than or equal to the Second Break
Point, the Company will pay to the Seller an Earn Out Payment equal to the
quotient of $20,000,000 divided by twenty percent (20%) of the Second Break
Point for each $1.00 by which such Operating Profit for the Second Earn Out
Period exceeds the First Break Point. If the Division has Operating Profit for
the Second Earn Out Period of greater than the Second Break Point, the Company
will pay to the Sellers an Earn Out Payment equal to $20,000,000 plus the
quotient of $20,000,000 divided by forty percent (40%) of the Second
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[ ] - Confidential Treatment Requested
Break Point for each $1.00 by which such Operating Profit for the Second Earn
Out Period exceeds the Second Break Point. In no event will amounts payable
under this Agreement for the Second Earn Out Period exceed $40,000,000. For
purposes of calculating Earn Out Payments under this Section 3.2 (but not for
purposes of determining Remedy Event Profit), Operating Profit of the Division
during the First Earn Out Period in excess of $[ ] shall be deemed Operating
Profit of the Division for the Second Earn Out Period.
3.3 Pro Forma Income Statements. The Company shall engage
the Accountants to apply procedures to report upon a pro forma statement of
operations of the Division (the "Pro Forma Income Statement") for each of the
First Earn Out Period and the Second Earn Out Period in accordance with the
Accounting Principles subject to the following adjustments:
3.3.1 To the extent of any underpayments of
compensation from those regular (including commission based) compensation
expenses of the Division, such adjustments as are necessary to reflect regular
(including commission based) compensation expenses including, without
limitation, the regular compensation of the Stockholders during the Earn Out
Periods; provided, that, the parties acknowledge that the amounts payable under
any employment or compensation agreement between the Company, on the one hand,
and either of the Stockholders, on the other hand, is regular compensation. By
way of illustration (but not in limitation) of the foregoing, any waiver of
regular salary of any employee of the Division shall be disregarded for purposes
of preparing the Pro Forma Income Statement.
3.3.2 Such adjustments as are necessary to reduce
operating expenses to the amount of such expenses which the Division would have
incurred (after appropriate recognition of the effect of revenue growth on
expenses, increases in costs of operating expenses and any other adjustments
appropriate to fairly reflect such adjusted operating expenses) if it operated
as a separate entity, to the extent that any such operating expenses of the
Division are incurred during either of the Earn Out Periods (a) at the specific
and express direction (such as, by way of illustration but not limitation,
expenses incurred under Section 2.1.3) of the CEO or President prior to any
occurrence of a Remedy Event (so that such expenses incurred prior to the
occurrence of a Remedy Event shall not reduce Operating Profit and such expenses
incurred after the occurrence of a Remedy Event shall reduce Operating Profit)
or (b) as a necessary incident of being a division of the Company when compared
to operation as a separate entity (such as, by way of illustration but not
limitation, expenses of employee benefit plans). The Stockholders and the
Company agree that for purposes of the preceding clause (b), the additional
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expenses of the Division for intercompany financial reporting shall not be
encompassed by such clause (b) and shall be an expense of the Division in
determining Operating Profit.
3.3.3 The exclusion of any expenses for (a)
federal and state income taxes, (b) expenses related to the consummation of the
transactions contemplated by the Purchase Agreement, (c) interest incurred by
the Company in connection with the transactions contemplated by the Purchase
Agreement, (d) amortization expenses for the goodwill and other intangible
assets recorded as a result of the transactions contemplated by the Purchase
Agreement, (e) additional incremental expenses incurred as a result of the
implementation, administration or enforcement of this Agreement (such as, by way
of illustration and not limitation, expenses of preparing Pro Forma Income
Statements) which would not have otherwise been incurred as a division of the
Company, and (f) any allocation of general corporate overhead expenses of the
Company except as otherwise provided in Sections 3.3.4, 3.3.5 or 3.3.6 hereof.
3.3.4 Subject to Section 3.3.2(b), including as an
expense (which expense may include depreciation expense for the period of use of
capital items) of the Division the cost of services, goods or capital items
provided by the Company to the Division based on a reasonable estimate of the
actual cost of such services, goods or capital items to the extent such expenses
are incurred (a) at the request of the Stockholders, (b) in order to comply with
this Agreement, or (c) after the occurrence of a Remedy Event.
3.3.5 To the extent that in a fiscal quarter the
Division uses any cash provided by PRG, including as an expense of the Division
the Borrowing Rate or the investment rate (whichever would be applicable in such
quarter under Section 3.3.7 hereof) on such use of cash.
3.3.6 The adjustments set forth in paragraphs 3.3,
6, and 7 of the Memorandum of Understanding.
3.3.7 If, during a majority of days in any fiscal
quarter the Company maintains a net borrowing position with respect to its
senior revolving line of credit facility, including as income of the Division an
amount equal to the Borrowing Rate with respect to all cash balances of the
Division swept by the Company under Section 2.1.7 hereof based upon the average
of daily amounts of such cash balances over such fiscal quarter (which shall
include cash balances as carried over from quarter to quarter). If, during a
majority of the days in any fiscal quarter the Company does not maintain a net
borrowing position with respect to its senior revolving line of credit facility,
including as income of the Division an amount equal to the investment rate
earned by the Company with respect to all cash balances of the Division swept by
the Company under Section 2.1.7 hereof determined based upon such average
investment rate and the average of daily amounts of such cash balances over such
fiscal quarter (which shall include cash balances as carried over from quarter
to quarter).
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3.3.8 Excluding as an expense of the Division the
difference between the actual wage rate and bonus of the accounting manager and
the divisional chief financial officer for the Division (both of whom shall be
subject to the reasonable prior approval of PRG) and the wage rate and bonus for
the controller of the Division at July 1, 1998.
3.3.9 With respect to any sales and audit
employees of the Division hired subsequent to September 30, 1999, excluding as
an expense of the Division normal salary, cost of benefits and other direct
expenses (including, without limitation, travel and training) for each such new
employee incurred during the last quarter of the Second Earn Out Period with
respect to the first ninety days of such employees' employment.
3.3.10 Excluding as an expense of the Division the
professional fees to the Accountants for annual audits of the Division's
financial statements to the extent such cost exceeds $35,000.
3.3.11 Excluding as income of the Division any
income which results solely from the reversal of the accounts receivable reserve
recorded on the Opening Balance Sheet.
3.3.12 Excluding as an expense of the Division (a)
any liability of the Division which is neither assumed by the Company in
connection with the Purchase Agreement nor paid by the Company, (b) any expenses
for which the Company receives an indemnification payment under the Purchase
Agreement to the extent such payment reduces expenses which would otherwise be
recorded on the Company's consolidated statement of operations during the Earn
Out Periods, and (c) any discretionary bonuses paid to the Stockholders in
addition to normal bonuses.
3.3.13 Excluding as an expense of the Division any
reserves for accounts receivable of the Division established after the date
hereof in excess of amounts calculated on an account-by-account basis in
accordance with GAAP.
An example of a Pro Forma Income Statement is attached to this
Agreement at Exhibit E, which the parties shall use as a basis to prepare the
Pro Forma Income Statements. In the event of any conflict between Exhibit E and
this Agreement, this Agreement shall control. The Company (including, without
limitation, the Stockholders and the other personnel of the Division), shall
assist and cooperate with the Accountants in the application of such procedures
to issue the Accountants' report upon the Pro Forma Income Statements. The Pro
Forma Income Statements shall set forth the pro forma adjustments included
therein. The engagement of the Accountants shall provide for the completion of
such report and delivery of such report with the Pro Forma Income Statement to
the Company and the Seller within 120 days following the expiration of each
applicable Earn Out Period.
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3.4 Payment. The Pro Forma Income Statements, as
delivered by the Accountants to the Company and the Seller in accordance with
Section 3.3 hereof, shall be deemed conclusive and binding on the parties for
purposes of determining any payments coming due under this Agreement, unless
either of the Seller, on the one hand, or the Company, on the other hand,
notifies (the "Dispute Notice") the other in writing within 45 days after
receipt of the Pro Forma Income Statement of any disagreements therewith, which
notice shall state with reasonable specificity the reasons for any such
disagreements and identify the items and amounts in dispute. If any such Dispute
Notice is given, the recipient(s) of such notice shall have a period of 30 days
following receipt of such notice to give a Dispute Notice in accordance with the
requirements of the previous sentence. If the parties are not able to resolve
any dispute as among themselves (which said resolution shall be set forth in a
written acknowledgement of the resolution of such dispute by all of the parties
to such dispute), such dispute may be submitted to arbitration in accordance
with the provisions of Section 5 of this Agreement. Only the amounts subject to
such dispute shall be submitted to arbitration. To the extent any payment has
accrued under Sections 3.1 or 3.2 for amounts which are not in dispute under the
Pro Forma Income Statement, the Company and the Seller shall be deemed to have
conclusively accepted such Pro Forma Income Statement (subject only to any
adjustments to such Pro Forma Income Statement which would be required in
connection with the discovery of any facts previously not known to the CEO or
President resulting from fraudulent actions of the Stockholders or the Seller).
Within 30 days following the deemed acceptance or written acceptance of amounts
not in dispute under the Pro Forma Income Statement, the Company shall pay to
the Seller the Earn Out Payment accrued under Sections 3.1 or 3.2 of this
Agreement with respect to such amounts not in dispute under the Pro Forma Income
Statement plus interest on such amount at the Borrowing Rate from the latter of
March 1 of the year following the Earn Out Period for which such payment has
accrued or the date of receipt by the Company of the certificate from the
Stockholders referred to in Section 3.5 hereof.
3.5 Condition to Payments. Notwithstanding anything to
the contrary contained herein, as a condition to the payment by the Company to
the Seller of any Earn Out Payment, the Stockholders shall each execute and
deliver to the Company a certificate in the form of Exhibit C attached hereto
and incorporated herein by reference.
4. No Fiduciary Obligations. Except to the extent expressly set
forth in this Agreement, none of the parties hereto shall be liable solely by
virtue of this Agreement to any of the other parties hereto on the basis of any
fiduciary or other similar relationship of special trust and confidence, and the
parties hereto expressly intend that no such relationship shall arise solely by
virtue of this Agreement.
5. Arbitration.
5.1 Arbitration Process. All disputes, controversies or
claims arising out of or relating to this Agreement shall be resolved by
agreement among the parties, or, if notice is
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given by any of the parties as provided below and the matter is not otherwise
resolved as set forth in Section 3.4 hereof, by resort to arbitration in
accordance with Title 9 of the United States Code (the United States Arbitration
Act) and the Commercial Arbitration Rules, as amended from time to time (the
"Rules") by the American Arbitration Association and the following provisions;
provided, however, that the provisions of this Section shall prevail in the
event of any conflict with such Rules. Within thirty days after the giving of
notice by a party to the other parties of its desire to refer the matter in
dispute to arbitration, the parties to the dispute agree that the matter shall
be presented to a panel of three arbitrators to be selected from a list of
potential arbitrators who are members of the Large, Complex Case Dispute
Resolution Panel obtained for this purpose from the American Arbitration
Association. Such selection of arbitrators shall be made in accordance with the
Rules, except that any party may preempt the selection of an arbitrator who
resides in California or Georgia. Any such arbitration proceeding shall be held
at a location to be determined by the arbitrators. Any provisional remedy that
would be available from a court of law shall be available from the arbitrator to
the parties to this Agreement pending arbitration. The written decisions and
conclusions of a majority of the arbitration panel with respect to the matters
referred to them pursuant hereto shall be final and binding upon the parties to
the dispute, and confirmation and enforcement thereof may be rendered thereon by
any court having jurisdiction upon application of any person who is a party to
the arbitration proceeding. The costs and expenses incurred in the course of
such arbitration shall be borne by the party against whose favor the decisions
and conclusions of the arbitration panel are rendered; provided, however, that
if the arbitration panel determines that its decisions are not rendered wholly
against the favor of one party or the other, the arbitration panel shall be
authorized to apportion such costs and expenses in the manner that it deems fair
and just in light of the merits of the dispute and its resolution.
5.2 Awards. The arbitration panel shall have no power or
authority under this Agreement or otherwise to award or provide for the award of
punitive or (with respect to this Agreement only) consequential damages against
any party and (except as set forth in the sentence of Section 5.1 hereof) the
sole monetary award to be made by the arbitrators under this Agreement shall be
with respect to the determination of the appropriate amount of any Earn Out
Payment (including, without limitation, any interest accrual with respect to any
awarded Earn Out Payments) affected by such dispute.
6. Miscellaneous Provisions.
6.1 Modification. This Agreement may not be changed or
modified except in writing specifically referring to this Agreement and signed
by all of the parties to this Agreement.
6.2 Assignments; Successors and Assigns. This Agreement
may not be assigned by the Company, the Seller or either of the Stockholders at
any time. The terms and
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provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, heirs, legal representatives
and estates.
6.3 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.4 Notices. All notices, requests, demands, claims or
other communications hereunder will be in writing and shall be deemed duly given
if personally delivered, sent by telefax, sent by recognized overnight delivery
service which guaranties next business day delivery ("Overnight Delivery") or
mailed by registered or certified mail, return receipt requested, postage
prepaid and addressed to the intended recipient as follows:
If to the Company:
The Profit Recovery Group International I, Inc.
2300 Windy Ridge Parkway
Suite 100 North
Atlanta, GA 30339-8426
Attn: Clinton McKellar, Jr.
Senior Vice President and General Counsel
Telefax: (770) 779-3034
With a copy to:
The Profit Recovery Group International I, Inc.
2300 Windy Ridge Parkway
Suite 100 North
Atlanta, GA 30339-8426
Attn: Donald E. Ellis, Jr.
Chief Financial Officer
Telefax: (770) 779-3042
And with a copy to:
Arnall Golden & Gregory, LLP
2800 One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309-3400
Attn: Jonathan Golden
Telefax: (404) 873-8701
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<PAGE> 57
If to Seller or Loder:
Loder, Drew & Associates, Inc.
31831 Camino Capistrano
Suite 200
San Juan Capistrano, CA 92675
Attn: Ronald K. Loder
Telefax: (949) 487-0125
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Suite 3400
Los Angeles, CA 90071-3144
Attn: Joseph J. Giunta, Esq.
Telefax: (213) 687-5600
If to Byrne:
Loder, Drew & Associates, Inc.
31831 Camino Capistrano
Suite 200
San Juan Capistrano, CA 92675
Attn: H. Richard Byrne
Telefax: (949) 487-0125
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Suite 3400
Los Angeles, CA 90071-3144
Attn: Joseph J. Giunta, Esq.
Telefax: (213) 687-5600
or at such other address as any party hereto notifies the other parties hereof
in writing. The parties hereto agree that notices or other communications that
are sent in accordance herewith (1) by personal delivery or telefax, will be
deemed to be received on the day sent or on the first business day thereafter if
not sent on a business day, (2) by Overnight Delivery, will be deemed received
on the first business day immediately following the date sent, and (3) by US
mail, will be deemed received three business days following the date sent. For
purposes of this
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Agreement, a "business day" is a day on which the Company is open for business
and shall not include a Saturday, Sunday or legal holiday. Notwithstanding
anything to the contrary in this Agreement, no action shall be required of the
parties hereto except on a business day and in the event an action is required
on a day which is not a business day, such action shall be required to be
performed on the next succeeding day which is a business day.
6.5 Set Off. As provided in the Purchase Agreement,
amounts payable by the Company under this Agreement are subject to set off in
full or partial satisfaction of amounts payable to the Company under the
Purchase Agreement.
6.6 Entire Agreement. This Agreement, together with the
Exhibits attached hereto, constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof, and supersedes any and all prior
agreements and undertakings, both written and oral, among the parties, or any of
them, with respect to the subject matter hereof.
6.7 Governing Law. Except as otherwise expressly provided
herein, this Agreement shall governed by and construed under the laws of the
State of Georgia.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
THE PROFIT RECOVERY GROUP
INTERNATIONAL I, INC.
By:
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
SELLER:
LODER, DREW & ASSOCIATES, INC.
By:
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
[Signatures Continued on Following Page]
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STOCKHOLDERS:
--------------------------
RONALD K. LODER
--------------------------
H. RICHARD BYRNE
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<PAGE> 60
EXHIBIT A
MEMORANDUM OF UNDERSTANDING
In connection with that certain Earn Out Agreement (the "Agreement")
among The Profit Recovery Group International I, Inc., a Georgia corporation
(the "Company"), Loder, Drew & Associates, Inc., a California corporation
("Seller"), and the Stockholders identified therein, PRG, the Division and the
Stockholders agree as follows:
1. Defined Terms. In addition to terms defined in the Agreement,
the following terms shall have the following meanings for purposes of this
Memorandum of Understanding:
"ANCILLARY SERVICES" shall mean Audit Activities by PRG within any
Markets related to lease compliance audits, telecommunications, utilities, and
air, ground and ocean freight.
"EXISTING BUSINESS" shall mean (a) with respect to the Division, (i)
the existing Clients of the Division in Retail/Wholesale, Healthcare and
Government Markets, and (ii) any Audit Activities of the Division resulting from
those firm written proposals containing pricing information delivered prior to
July 1, 1998 to prospective Clients in the Retail/Wholesale, Healthcare and
Government Markets, but only to the extent any such existing Clients and such
proposals are scheduled on Exhibit A-1, attached hereto and incorporated herein
by reference, and such proposals are accepted by October 30, 1998; and (b) with
respect to PRG, (i) the existing Clients of PRG in Industrial, Healthcare and
Government Markets, and (ii) any Audit Activities of PRG resulting from those
firm written proposals containing pricing information delivered prior to July 1,
1998 to prospective Clients in the Industrial, Healthcare and Government
Markets, but only to the extent such existing Clients and proposals are
scheduled on Exhibit A-2 attached hereto and incorporated herein by reference,
and such proposals are accepted by October 30, 1998. Existing Business shall
also include the renewal of contracts with any Clients otherwise included within
Existing Business provided such renewal occurs within one year following the
completion of any Audit Activities with respect to such Client.
"GOVERNMENT" shall mean clients or prospective clients which are a part
of the Federal or state governments of the United States of America.
"HEALTHCARE" shall mean Clients or prospective Clients which are
primarily engaged in the business of providing or administering patient or
healthcare services.
"INDUSTRIAL" shall mean Clients or prospective Clients (other than food
service distributors) which are primarily engaged in manufacturing,
transportation, utility, telecommunication, consumer products, business and
professional services, financial services or
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restaurant operations or the distribution of products to companies primarily
engaged in such operations.
"MAINTENANCE" shall mean the rendering of services with respect to
Existing Business. Maintenance shall explicitly exclude any selling and
marketing efforts and any other activities to generate new business, except for
(i) normal and customary selling and marketing efforts associated with (A) the
follow-up of proposals included within the definition of Existing Business and
(B) seeking to provide additional Audit Activities to existing Clients within
each parties' respective Existing Business, and (ii) the performance of Audit
Activities with respect to Existing Business. Notwithstanding the foregoing,
Maintenance with respect to PRG shall include Ancillary Services.
"MANUFACTURING DIVISION" shall mean the operations of PRG in Industrial
Markets existing during Fiscal Year 1998, subject to the restrictions set forth
in this Agreement.
"MARKETS" shall mean the worldwide markets for the businesses of PRG
and the Division such as without limitation, the Government, Healthcare,
Industrial and Retail/Wholesale markets.
"OPERATING PROFIT ADJUSTMENT" is defined in paragraph 3.2 of this
Memorandum of Understanding.
"PRG" shall mean the Company and its affiliates exclusive of the
Division.
"PROTECTED CLIENTS" shall mean (a) with respect to the Division, those
Clients or prospective Clients of the Division listed as "Protected Clients" on
Exhibit A-1 hereof and (b) with respect to PRG, those Clients or prospective
Clients of PRG listed as "Protected Clients" on Exhibit A-2 hereof.
"RETAIL/WHOLESALE" shall mean Clients or prospective Clients which are
primarily engaged in the sale of goods (other than distributors to Industrial
Markets) whether at the retail or wholesale levels including, by way of
illustration but not limitation, department stores, specialty stores, wholesale
supply, discount stores, drug stores and suppliers, drug wholesalers and
distributors (excluding affiliated pharmaceutical operations which shall be
deemed to be in Industrial Markets) and grocery stores and food suppliers (other
than restaurants).
2. Retail/Wholesale. Except for activities of the Division
limited to Maintenance in the Retail/Wholesale Markets, PRG shall have sole and
exclusive rights as between the Division and PRG to exploit the Retail/Wholesale
Markets.
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[ ] - Confidential Treatment Requested
3. Industrial.
3.1 Except for activities of PRG limited to Maintenance
in Industrial Markets during the First Earn Out Period, the Division shall have
sole and exclusive rights as between the Division and PRG to exploit the
Industrial Markets.
3.2 The total revenues of PRG's Manufacturing Division
during Fiscal Year 1998 (the "Revenues") shall adjust certain performance
objectives of the Division for the Second Earn Out Period. The product (the
"Operating Profit Adjustment") of (A) 80% of such Revenues multiplied by (B) 30%
shall be added to $[ ] to establish the "Second Break Point," and the "First
Break Point" shall be an amount equal to 80% of the Second Break Point.
3.3 Beginning January 1, 1999, the Division shall have
sole and exclusive responsibility with respect to Industrial Markets including,
without limitation, the management of PRG's Manufacturing Division; provided,
that, PRG may continue to provide Ancillary Services with respect to the
Industrial Markets. For such purposes, upon reasonable advance notice to PRG,
PRG shall exercise its commercially reasonable efforts to make available to the
Division on an as-needed basis the services of a reasonable number of auditing
personnel employed and selected by PRG to work in PRG's Manufacturing Division.
Subject to the terms of this Section 3.3, the Division shall remain responsible
for the expense of such auditing personnel for a reasonable period of time
following notice from the Division to PRG that such personnel are no longer
required by the Division. The Division's Pro Forma Income Statement and related
Operating Profit shall be adjusted by (i) including as an operating expense of
the Division the expenses incurred for each such auditor so used by the Division
and for sales personnel based upon the Division's expenses for comparable
auditing and sales personnel of the Division, and (ii) excluding as an operating
expense of the Division the other direct operating and selling, general and
administrative expenses incurred in connection with PRG's Manufacturing
Division.
4. Healthcare Markets. Neither PRG nor the Division shall
interfere with the Existing Business of the other party in the Healthcare
Market. Except for the respective Existing Business of PRG and the Division in
the Healthcare Market, PRG and the Division shall not be restricted from
competing with one another in the operation of their respective businesses in
the Healthcare Market. PRG and the Division each agree to take reasonable
precautions to protect against the disclosure to their respective selling and
marketing staffs of the terms of proposals (including, without limitation,
products and services to be provided, pricing data and other pricing
information) made by the other to potential Clients within the Healthcare
Market,
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except to the extent such information is otherwise generally known or available
to the public. Neither PRG nor the Division shall disparage the other in
connection with such competitive activities or otherwise.
5. Government Markets.
5.1 Neither PRG nor the Division shall interfere with the
Existing Business of the other party in the federal Government Market. Except
for the Existing Business of PRG and the Division in the federal Government
Market, PRG and the Division shall not be restricted from competing with one
another in the operation of their respective businesses in the federal
Government Market; provided, that, each party shall comply with all laws,
regulations and contractual restrictions imposed by third parties in so
competing. The Division shall provide to the President a copy of any proposal to
be made by the Division to the federal Government prior to the issuance of any
such proposal in order to conduct a compliance review to ensure that such
proposal would not result in a violation of any such laws, regulations or
restrictions; provided, that, no action taken by the Company under the foregoing
sentence shall be deemed to create any liability of the Company or eliminate any
expenses of the Division otherwise resulting from a violation of any such laws,
regulations or restrictions. PRG and the Division each agree to take reasonable
precautions to protect against the disclosure to their respective selling and
marketing staff the terms of proposals (including, without limitation, products
and services to be provided, pricing data and other pricing information) made by
the other to potential Clients within federal Government Markets, except to the
extent such information is otherwise generally known or available to the public.
Neither PRG nor the Division shall disparage the other in connection with such
competitive activities or otherwise.
5.2 Except for activities of PRG limited to Maintenance
in state Government Markets, the Division shall have sole and exclusive rights
as between the Division and PRG to exploit the state Government Markets.
6. International Markets. Subject to the limitations set forth in
this Memorandum of Understanding relative to the agreement of the Division not
to compete with certain business of PRG, the Division may in its sole discretion
use the staff (other than the auditing staff and training staff) and facilities
of PRG located outside the United States to develop new business and provide
services. In the event the Division elects to so use such staff or facilities of
PRG, an amount equal to 20% (the "Overhead Charge") of the revenues (other than
revenues of the Division from the Division's Existing Business) thereafter
accruing from the country being serviced by such staff or facilities of PRG
shall be treated as an operating expense of the Division for purposes of the
calculation of Operating Profits. To the extent PRG and the Division agree in
their respective sole discretion to make available to the Division the services
of only a limited portion of the staff and facilities of PRG located outside the
United States, PRG and the Division may in their respective sole discretion
agree in writing on a lower Overhead Charge.
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7. Referrals. In the event that (a) the Division refers to PRG
new business in the Markets of lease compliance audits, telecommunications or
utilities from Clients of the Division for which the Division is then conducting
Audit Activities and (b) PRG in its sole discretion accepts such business
resulting from such referrals, then the Operating Profit of the Division shall
be adjusted to increase the Division's income by 20% of the revenue resulting
from such new business referred to PRG. PRG may in its sole discretion also
receive referrals from the Division in the area of freight, but the Division
shall make no such referrals unless it has first qualified the referral with PRG
in advance. PRG may in its sole discretion prospectively terminate the referral
arrangements set forth in this paragraph at any time in its discretion; however,
such termination shall not eliminate the adjustments to income of the Division
for revenue resulting from such referral business.
8. Ancillary Services. Notwithstanding anything to the contrary
contained in this Memorandum of Understanding, PRG may (and the Division may
not) provide Ancillary Services within any Market at any time without
restriction by reason of this Memorandum of Understanding.
9. Protected Clients. Notwithstanding anything to the contrary
contained in Paragraphs 2, 3, 4 and 5 of this Memorandum of Understanding, (a)
PRG shall not provide any Audit Activities (other than providing Ancillary
Services) to any Protected Clients of the Division and (b) the Division shall
not provide any Audit Activities to any Protected Clients of PRG.
10. Agreement on Division Expenditures. For so long as a Remedy
Event shall not have occurred, subject to the terms and provisions of the
Agreement, (a) the Stockholders shall have authority to incur such operating
expenses of the Division as they deem necessary and appropriate to improve
operating results, and (b) the Stockholders shall have authority to make such
capital expenditures on behalf of the Division as they deem necessary and
appropriate to improve operating results, except that the Stockholders shall
obtain the prior written approval of the CEO or President (which approval shall
not be unreasonably withheld) prior to incurring any capital expenditures in
excess of $250,000 in the First Earn Out Period or in excess of $750,000 in the
Second Earn Out Period.
11. Quarterly Reconciliations. The parties agree to have the
appropriate representatives of the Division and PRG knowledgeable about such
matters meet during the Earn Out Periods on a quarterly basis to endeavor in
good faith to reconcile any and all period-to-date adjustments to Operating
Profit which are required to be made by the Agreement (including, without
limitation, this Memorandum of Understanding) to facilitate the completion of
the Pro Forma Income Statement at the end of each Earn Out Period. To the extent
that the Stockholders and PRG agree in writing on such period-to-date
adjustments to Operating Profit, such parties shall be estopped from asserting
any claims at variance to such agreement.
-5-
<PAGE> 65
[ ] - Confidential Treatment Requested
EXHIBIT A-1
EXISTING CLIENTS* FIRM PROPOSALS OUTSTANDING*
RETAIL/WHOLESALE: RETAIL/WHOLESALE:
[ ] [ ]
HEALTHCARE: HEALTHCARE
[ ] [ ]
FEDERAL GOVERNMENT MARKETS**: FEDERAL GOVERNMENET MARKET**:
[ ] [ ]
* EXISTING CLIENTS INCLUDE BUT MAY NOT BE LIMITED TO THOSE LISTED
ABOVE
** THE DIVISION SHALL HAVE EXCLUSIVE RIGHTS TO EXPLOIT THE STATE
GOVERNMENT MARKETS
<PAGE> 66
[ ] - Confidential Treatment Requested
EXHIBIT A-2
EXHIBIT TO EARN OUT AGREEMENT DATED AS OF JULY 1, 1998
BETWEEN THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. AND
LODER, DREW & ASSOCIATES, INC., RONALD D. LODER AND H. RICHARD BYRNE
I. EXISTING CLIENTS
A. UNITED STATES (NON-RETAIL)
- HEALTHCARE
[ ]
1
<PAGE> 67
[ ] - Confidential Treatment Requested
[ ]
2
<PAGE> 68
[ ] - Confidential Treatment Requested
[ ]
3
<PAGE> 69
[ ] - Confidential Treatment Requested
[ ]
4
<PAGE> 70
[ ] - Confidential Treatment Requested
[ ]
5
<PAGE> 71
[ ] - Confidential Treatment Requested
[ ]
6
<PAGE> 72
[ ] - Confidential Treatment Requested
[ ]
- INDUSTRY
[ ]
7
<PAGE> 73
[ ] - Confidential Treatment Requested
[ ]
- GOVERNMENT
[ ]
B. AUSTRALIA (NON-RETAIL)
[ ]
C. BRAZIL (NON-RETAIL)
[ ]
D. CANADA (NON-RETAIL)
[ ]
8
<PAGE> 74
[ ] - Confidential Treatment Requested
[ ]
E. NEW ZEALAND (NON-RETAIL)
[ ]
F. SINGAPORE (NON-RETAIL)
[ ]
G. UNITED KINGDON (NON-RETAIL)
[ ]
II. PROPOSALS
A. UNITED STATES (NON-RETAIL)
- HEALTHCARE
[ ]
B. FRANCE (NON-RETAIL)
[ ]
9
<PAGE> 75
[ ] - Confidential Treatment Requested
[ ]
C. GERMANY (NON-RETAIL)
[ ]
D. MEXICO (NON-RETAIL)
[ ]
III. PROTECTED CLIENTS
A. UNITED STATES (NON-RETAIL)
- DRUG WHOLESALERS
[ ]
10
<PAGE> 76
[ ] - Confidential Treatment Requested
GOVERNMENT*
[ ]
* ALTHOUGH SUCH CLIENTS ARE AND SHALL REMAIN A PROTECTED CLIENT OF PRG,
SUBJECT TO OBTAINING THE PRIOR APPROVAL OF THE CHAIRMAN OF PRG, THE
DIVISION MAY MAKE A PROPOSAL TO OR OTHERWISE SOLICIT SUCH CLIENT.
11
<PAGE> 77
[ ] - Confidential Treatment Requested
EXHIBIT B
REMEDY EVENT PROFIT
<TABLE>
<CAPTION>
===============================================================================
PERIOD REMEDY EVENT PROFIT
- -------------------------------------------------------------------------------
<S> <C> <C>
3RD QUARTER, 1998 $[ ]
4TH QUARTER, 1998 $[ ]
FIRST EARN OUT PERIOD $[ ]
- -------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 1999 $[ ]
SIX MONTHS ENDED JUNE 30, 1999 $[ ]
NINE MONTHS ENDED SEPTEMBER 30, 1999 $[ ]
===============================================================================
</TABLE>
12
<PAGE> 78
EXHIBIT C
CERTIFICATE
With reference to that certain Earn Out Agreement (the "Agreement")
dated as of ________________, 1998, among The Profit Recovery Group
International I, Inc., a Georgia corporation (the "Company"), Loder, Drew &
Associates, Inc., a California corporation ("Seller"), and the Stockholders
identified therein, the undersigned hereby certifies to the Company and PRGX as
follows:
1. Except as otherwise defined herein, initially capitalized
terms used in this Certificate are used with the same meaning ascribed to such
terms in the Agreement.
2. The undersigned issues in this Certificate in his capacity as
the ______________ of Seller and as one of the Stockholders referred to in the
Agreement.
3. This Certificate is executed and delivered by the undersigned
in accordance with Section 3.5 of the Agreement with respect to the Earn Out
Period ended December 31, 199_ (the "Subject Earn Out Period").
4. The undersigned acknowledges that he is aware that expenses
(including, without limitation, compensation expenses to existing or former
employees of the Division) directly or indirectly incurred by the Seller,
Stockholders or the Division may be, under United States generally accepted
accounting principles as currently in effect ("GAAP"), recorded as an expense of
the Company on the Company's or PRGX's Consolidated Statement of Operations and
therefore reduce the Company's profits. Such reduction of the Company's profit
may have a multiplier impact on the market price of shares of PRGX common stock
based on the price/earnings ratio for the PRGX common stock. In addition, the
undersigned acknowledges that he is aware that any payment made by or at the
direction of the undersigned to existing or former employees of the Division
may, under GAAP, be so recorded as an expense of the Company regardless of the
fact that such payment may not be made directly by the Company or the Division.
5. The undersigned has not made and shall not make any payment,
grant, award or other transfer of property, or direct, authorize or permit any
other person (including, without limitation, Seller) to make any payment, grant,
award, or other transfer of property either on the undersigned's or Seller's
behalf or otherwise in the nature of incentive compensation to any current or
former employee of the Division or Seller (except normal periodic payroll
expenses) without obtaining the prior written approval of the President. The
Company may, without limitation, condition such approval on the receipt of
written advice to PRGX of the Accountants that such payment, grant, award or
other transfer of property would not be recorded as an expense of the Company.
1
<PAGE> 79
6. The undersigned acknowledges that a breach of the
representations set forth in this Certificate would directly result in damages
of the nature described in paragraph 4 of this Certificate and, without limiting
other remedies as may be available to the Company, the Company may (a) seek to
recover any and all damages which the Company is able to prove as having been
suffered by the Company by reason of such breach of representation and (b)
reduce or recover any Earn Out Payments attributable to any expenses incurred in
connection with any breach of the representations set forth in this Certificate.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Certificate on the ____ day of _________________, _____.
-------------------------------------
, individually
-----------------------
and as the of Seller
------------------
2
<PAGE> 80
EXHIBIT "D"
OPENING
<TABLE>
<CAPTION>
BALANCE SHEET RETAINED BY OPENING
30-JUN-98 LDA, INC. BALANCE SHEET NOTES
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
MERRILL-LYNCH CHECKING GENERAL $ 4,292,309.99 $ -- $ --
ROYAL BANK CANADA $ 75,125.63
BARCLAYS BANK UK $ 48,012.20
SWISS BANK CORP SWITZERLAND $ 1,814.82
MERRILL-LYNCH DIRECT DEP. $ 22,718.54
----------------------------------------------------
TOTAL CASH $ 4,439,981.18 $ (3,939,981.18) $ 500,000.00 A
====================================================
ACCOUNTS RECEIVABLE $ 1,842,987.95 $ 1,842,987.95
ALLOWANCE FOR SALES WRITE-OFFS $ (96,423.73) $ (96,423.73) B
OTHER RECEIVABLE $ 24,998.24 $ (24,998.24) $ -- C
DELTA TRAVEL ACCOUNT $ 44,205.32 $ (44,205.32) $ 34,363.79 D
EMPLOYEE ADVANCES $ 51,555.43 $ (17,191.64) $ -- E
SHAREHOLDER ADVANCES $ 492,646.22 $ (492,646.22) $ -- E
----------------------------------------------------
TOTAL CURRENT ASSETS $ 6,799,950.61 $ (4,519,022.60) $ 2,280,928.01
====================================================
PROPERTY AND EQUIPMENT
FURNITURE AND FIXTURES $ 184,628.02 $ -- $ 184,628.02
COMPUTERS AND EQUIPMENT $ 910,542.42 $ 910,524.42
ACCUM. DEPRECIATION-FURNITURE $ (71,358.84) $ (71,358.84)
ACCUM. DEPRECIATION-COMPUTERS $ (518,891.00) $ (518,891.00)
----------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT $ 504,902.60 $ -- $ 504,902.60
====================================================
OTHER ASSETS
PREPAIDS $ -- $ -- $ --
EMPLOYEE DRAW $ 95,901.01 $ 95,901.01
DEPOSITS $ 25,682.58 $ 25,682.58
INVESTMENTS $ 32,500.00 $ (32,500.00) $ -- F
----------------------------------------------------
TOTAL OTHER ASSETS $ 154,083.59 $ (32,500.00) $ 121,583.59
====================================================
TOTAL ASSETS $ 7,458,936.80 $ (4,551,522.60) $ 2,907,414.20
====================================================
</TABLE>
NOTE A: CASH IN EXCESS OF $500, ADJUSTED FOR JULY RESULTS, RETAINED BY LDA,
INC.
NOTE B: INCREASED BAD DEBT RESERVE IN RESPONSE TO DUE DILIGENCE FEEDBACK
NOTE C: SHAREHOLDER RELATED TAX RECEIVABLE RETAINED BY LDA, INC.
NOTE D: CASH EQUIVALENT IN EXCESS OF $500,000; RETAINED BY LDA, INC.
NOTE E: ADVANCES UNRELATED TO THE BUSINESS RETAINED BY LDA, INC.
NOTE F: NON-AUDIT RELATED INVESTMENT RETAINED BY LDA, INC.
<PAGE> 81
OPENING
<TABLE>
<CAPTION>
BALANCE SHEET RETAINED BY OPENING
30-JUN-98 LDA, INC. BALANCE SHEET NOTES
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 295,656.90 $ (37,777.00) $ 257,879.90 G
ACCRUED COMMISSION - LDA, INC. $ 884,910.44 $ (884,910.44) $ -- H
ACCRUED COMMISSION/PAYROLL $ 790,136.71 $ 790,136.71
ACCRUED EXPENSES $ 3,697,147.22 $ (3,460,347.51) $ 236,799.71 I
OTHER PAYROLL TAXES $ 1,968.07 $ 1,968.07
PAYROLL CLEARING $ 260.06 $ 260.06
125 LIABILITY $ (1,593.42) $ (1,593.42)
----------------------------------------------------
TOTAL CURRENT LIABILITIES $ 5,668,485.98 $ (4,363,034.95) $ 1,285,451.03
====================================================
----------------------------------------------------
TOTAL LIABILITIES $ 5,668,485.98 $ (4,363,034.95) $ 1,285,451.03
====================================================
CAPITAL
SECURITIES VALUATION ALLOWANCE $ (123,508.00)
COMMON STOCK $ 1,201,180.00
RETAINED EARNINGS $ 1,083,067.47
NOTE RECEIVABLE OFFICER $ (400,000.00)
NET INCOME $ 30,055.42
EGOL $ (344.07)
----------------
TOTAL CAPITAL $ 1,790,450.82
================
TOTAL LIABILITIES & CAPITAL $ 7,458,936.80
================
</TABLE>
NOTE G: FRANCHISE TAXES PAYABLE RETAINED BY LDA, INC.
NOTE H: COMMISSIONS PAYABLE ON COLLECTIONS PRIOR TO JUNE 30, RETAINED BY LDA,
INC.
NOTE I: ACCRUED SPECIAL BONUS PAYMENTS RETAINED BY LDA, INC.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Loder, Drew & Associates:
We consent to the inclusion of our report dated May 29, 1998, with respect to
the balance sheets of Loder, Drew & Associates as of December 31, 1996 and 1997,
and the related statements of earnings, shareholders' equity (deficiency), and
cash flows for each of the years in the two-year period ended December 31, 1997,
which report appears in the Form 8-K of The Profit Recovery Group International,
Inc. dated August 6, 1998.
KPMG PEAT MARWICK LLP
Orange County, California
August 12, 1998
